Amkor Technology, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amkor provides outsourced semiconductor packaging and test services. Financial statements are unaudited; comparisons are with Q1 2013 unless noted.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $696.0 million | $687.5 million; up 1.2% |
| Gross profit / margin | $128.8 million / 18.5% | $115.0 million / 16.7% |
| Operating income / margin | $45.4 million / 6.5% | $41.1 million / 6.0% |
| Net income attributable to Amkor | $20.6 million | $13.4 million |
| EPS attributable to Amkor | $0.09 basic; $0.09 diluted | $0.09 basic; $0.07 diluted |
| Cash from operating activities | $131.9 million | $98.7 million |
| Capital expenditures | $96.0 million | $112.5 million |
| Free cash flow (company-defined, non-GAAP) | $35.9 million | $(13.9) million |
Cash and cash equivalents were $628.6 million at March 31, including $283.4 million held offshore. Total debt was $1.653 billion, implying net debt of approximately $1.024 billion. Current assets were $1.281 billion and current liabilities $741.7 million. Amkor reported compliance with all debt covenants.
Material changes and management commentary
- Sales growth reflected the acquired Malaysia power-discrete business, stronger NAND memory demand for mobile communications, and automotive and industrial products. These gains were partly offset by lower sales of other mobile products.
- Gross margin improved primarily from better capacity utilization and lower gold costs, partly offset by higher depreciation and manufacturing overhead.
- Research and development expense increased 47.1% to $21.0 million, reflecting expanded work on 20-nanometer chipsets, compensation costs and depreciation. SG&A rose 4.8% to $62.4 million, partly due to Malaysia acquisition costs and compensation.
- Equity earnings from J-Devices increased to $5.8 million from $0.1 million, reflecting higher earnings and Amkor’s increased ownership from 30% to 60% in April 2013. Amkor continues to account for the investment under the equity method because governance arrangements limit its control.
- Operating cash flow improved by $33.3 million, which management attributed primarily to improved profitability. Investing cash outflow was $95.5 million; financing cash outflow was $18.4 million, primarily including the $18.8 million final payment for the Malaysia acquisition.
Outlook, liquidity and risks
- Management forecast 2014 capital expenditures of approximately $575 million, primarily to support customer demand and mobile-communications growth. Q1 spending was $96.0 million. The planned Korea factory and R&D facility was expected to begin construction in the second half of 2014, with work continuing through 2015 and early 2016; timing, scope, costs and completion were uncertain.
- Management believed cash from operations, existing cash and available credit would fund working capital, capital expenditures and debt service for at least the next 12 months. This outlook depends on business performance, industry conditions, investment spending and potential litigation payments.
- After quarter-end, holders converted $56.4 million of 6.0% convertible notes into 18.6 million common shares, and Amkor prepaid $60.0 million of a Korean term loan. Scheduled principal repayments at March 31 included $61.4 million for the remainder of 2014 and $995.0 million thereafter.
- Tessera litigation: Amkor expected an arbitration award of $113 million plus interest, while estimating a possible royalty range of $11 million to $113 million, excluding interest. It maintained a $43.3 million royalty accrual and had accrued $4.9 million of related interest. The outcome remained uncertain and an adverse result could materially affect results, financial condition and cash flows. A patent review hearing was scheduled for May 2014.
- Carsem litigation: In April 2014, after quarter-end, the ITC issued a limited exclusion order barring importation of certain infringing products. Separately, the U.S. PTO had maintained rejection of all claims of Amkor’s relevant patent; Amkor contested that determination.
- Key operating risks include semiconductor-industry cyclicality, limited customer commitments and order visibility, high fixed costs and utilization sensitivity, pricing pressure, customer concentration, substantial debt and capital needs, foreign-exchange exposure, supply constraints, and execution and control risks from acquisitions and system implementations.
- Tax holidays in Korea, Malaysia, the Philippines and Taiwan expire at various dates through 2022; management expects the effective tax rate to rise as they expire. The Korean severance obligation was $147.0 million. Gross unrecognized tax benefits fell from $27.1 million at year-end to $6.7 million at March 31, primarily due to a tax-law change and settlement of a foreign examination.
- Disclosure controls were assessed as effective at March 31. Amkor was integrating acquired Malaysian operations and continuing its ERP implementation; a new shop-floor system was implemented in certain factories on April 1, with controls to be evaluated further.
Important facts for investors to verify
- Whether improved utilization, lower gold costs and stronger product demand persist, and how planned $575 million capital spending affects returns and free cash flow.
- Developments in the Tessera arbitration and patent review, including any final award, interest, court confirmation and cash-payment timing relative to the $43.3 million accrual.
- Post-quarter debt and share changes from the convertible-note conversion and $60.0 million loan prepayment, along with upcoming maturities and covenant compliance.
- Progress and total funding needs for the Korea facility, and whether customer demand supports the capacity investments.
- J-Devices earnings and potential ownership-option obligations, plus tax-holiday expirations and the Korean severance plan’s cash and tax implications.