Amkor Technology, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amkor provides outsourced semiconductor packaging and test services. Financial statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $812.8 million | $768.0 million | $2,276.3 million | $2,201.6 million |
| Gross profit / margin | $153.2 million / 18.8% | $141.0 million / 18.4% | $432.8 million / 19.0% | $394.3 million / 17.9% |
| Operating income | $75.2 million | $58.0 million | $181.5 million | $157.6 million |
| Net income attributable to Amkor | $47.1 million | $25.3 million | $117.3 million | $68.5 million |
| Diluted EPS | $0.20 | $0.11 | $0.50 | $0.33 |
- Q3 sales rose 5.8%; nine-month sales rose 3.4%. Growth drivers included mobile communications, automotive, Malaysia power-discrete operations, NAND memory and wafer services.
- Q3 gross margin improved 0.4 percentage point year over year; nine-month margin improved 1.1 points. Q3 benefited from advanced packaging mix and absence of the prior-year $10 million patent-litigation charge, but was pressured by wirebond weakness, underutilized infrastructure and foreign-exchange losses in manufacturing costs.
- Nine-month operating cash flow was $405.7 million, versus $375.2 million a year earlier. Capital expenditures were $442.3 million, producing negative free cash flow of $36.6 million, compared with negative $26.8 million in 2013.
- Cash and equivalents were $485.6 million at September 30, down from $610.4 million at year-end 2013. Current assets were $1.270 billion and current liabilities $929.2 million. Total debt was approximately $1.536 billion; $10 million was current. The company reported covenant compliance.
Changes, outlook and management commentary
- Sales growth was partly offset by the June 2014 sale of Amkor’s Japanese subsidiary to J-Devices; the divested business contributed about $19 million of Q3 2013 sales. Amkor recognized a $9.2 million gain on sale, and J-Devices’ gain contributed a further $8.8 million to Amkor’s equity earnings. Nine-month equity earnings from J-Devices were $29.2 million, versus $4.7 million.
- Management expected 2014 capital expenditures of approximately $675 million, primarily for mobile-related packaging and test capacity. Construction began in September on a new Korea factory and R&D center, planned at approximately $350 million through completion in 2016.
- Management believed operating cash flow, cash on hand and available credit would cover working capital, capital expenditures and debt service for at least the next 12 months, while cautioning that cash generation and financing beyond that period were uncertain. No specific revenue or earnings guidance is provided in the filing text.
- Management expected to exercise its option to raise its J-Devices ownership from 60% to 66% in Q4 2014, and potentially to 80% in Q4 2015, subject to conditions. At 80%, Amkor expected to consolidate J-Devices, subject to governance provisions and approvals.
- Amkor faces substantial Tessera litigation risk. In October 2014, after quarter-end, a California court confirmed a $113 million arbitration award plus $15 million prejudgment interest, with 10% annual post-judgment interest. Amkor appealed and posted a bond to stay execution. At September 30, it had accrued $43.3 million of royalties and $6.5 million of related interest; it said an adverse outcome could materially exceed the accrual. Other Tessera proceedings remained unresolved and damages could not be reasonably estimated.
- Other key risks include semiconductor-cycle volatility, customer concentration and lack of committed backlog, fixed manufacturing costs and utilization sensitivity, high debt and capital needs, foreign-currency exposure, and a $150.4 million Korean severance obligation. Tax holidays are set to expire at various dates through 2022, which management expects could increase the effective tax rate. A new ERP module and shop-floor system were implemented; disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Developments in Tessera appeals and arbitration, including total potential royalties, interest, timing and funding needs.
- Whether customer demand and capacity utilization support the planned $675 million annual capital expenditure program and Korea facility investment.
- Cash conversion, working-capital needs and continued availability of credit and factoring arrangements.
- Debt maturities, covenant headroom, foreign-currency sensitivity and the funding or tax consequences of the Korean severance plan.
- J-Devices option exercise terms, cash cost, governance changes and conditions for eventual consolidation.