Amkor Technology, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; comparison is with Q1 2016 unless noted. Amkor provides outsourced semiconductor packaging and test services.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $913.6 million | $868.7 million | Up 5.2%, primarily from higher sales in most end markets |
| Gross profit / margin | $142.9 million / 15.6% | $122.9 million / 14.1% | Margin up 1.5 percentage points; higher sales and fixed-cost operating leverage |
| Operating income / margin | $24.7 million / 2.7% | $22.1 million / 2.5% | Operating income increased |
| Net income (loss) attributable to Amkor | $(10.0) million; $(0.04) per share | $(0.9) million; approximately $0.00 per share | Loss widened |
| Operating cash flow | $102.7 million | $138.1 million | Down $35.4 million, mainly due to working-capital changes |
| Capital expenditures | $88.3 million | $198.8 million | Lower chiefly because the initial K5 construction phase was completed in 2016 |
| Free cash flow | $16.2 million | $(60.6) million | Company-defined non-GAAP measure: operating cash flow less capital expenditures, plus asset-sale proceeds |
Other expense increased to $33.4 million from $20.6 million. Interest expense, including related-party interest, rose to $22.5 million from $17.4 million; foreign-currency losses rose to $11.4 million from $3.6 million. These items contributed to the quarterly net loss despite improved sales and gross margin. R&D expense increased 53% to $41.6 million, primarily due to costs associated with the K5 facility, partly offset by projects entering production.
Balance sheet and liquidity
- At March 31, 2017, cash and cash equivalents were $614.0 million; restricted cash totaled $6.3 million. Cash and restricted cash together were $620.2 million.
- Total debt was $1.523 billion, including $36.9 million classified as current. The filing reports $1.523 billion of debt; related-party long-term debt was $35.0 million. Debt increased from $1.475 billion at December 31, 2016.
- Current assets were $1.495 billion and current liabilities $1.039 billion. Amkor reported $165.5 million available under its $200 million senior secured revolver, plus stated availability under foreign credit facilities.
- Management said cash from operations, existing cash and available credit were expected to fund working capital, capital expenditure, debt service and other requirements for at least the next 12 months. It cautioned that funding beyond that period is subject to risks.
- Scheduled debt principal repayments were $33.5 million for the remainder of 2017, $127.8 million in 2018, $183.0 million in 2019, $256.0 million in 2020, $400.0 million in 2021 and $525.0 million thereafter. Amkor reported covenant compliance at quarter-end and expected to remain compliant for at least 12 months.
Material changes, outlook and notable items
- 2017 capital spending: Management expected capital expenditures of approximately $500 million, mainly for advanced packaging and test equipment. Actual spending depends on demand, business performance, investment needs and financing availability.
- Acquisition: Amkor agreed in February 2017 to acquire all shares of NANIUM, S.A., a wafer-level fan-out packaging provider. Closing was expected in Q2 2017, subject to customary conditions and regulatory approvals.
- K1 factory sale: As part of the Korea factory-consolidation plan, Amkor sold the K1 land and buildings in May 2017 for approximately $142.4 million and recognized a subsequent-event pre-tax gain of $108.1 million. At March 31, $34.3 million was classified as assets held for sale.
- Debt transaction after quarter-end: In April 2017, Amkor borrowed $75 million under a Korean revolver and repaid an $80 million term loan balance.
- Business drivers: Management highlighted advanced packaging opportunities, mobile-device demand, expansion among Chinese and Taiwanese fabless customers, and efforts to grow automotive and analog business. Results remain sensitive to semiconductor cyclicality, capacity utilization, product mix and pricing.
- Taxes: Foreign tax holidays supported a generally lower effective tax rate, but holidays expire in whole or in part through 2025; management expects tax rates to rise as they expire. Gross unrecognized tax benefits increased to $24.7 million from $23.1 million at year-end.
- Foreign exchange: The filing reports a $11.4 million quarterly net foreign-currency loss. Sensitivity analysis estimated that a 10% appreciation of foreign currencies against the U.S. dollar would reduce quarterly operating income by approximately $22 million.
- Commitments and contingencies: Contractual obligations totaled $2.328 billion, including $67.8 million remaining under a patent-license litigation settlement payable through 2018 and a $142.6 million Korean severance-plan liability. Amkor said pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Other risks: The filing emphasizes industry cyclicality, limited customer purchase commitments, high fixed costs and utilization sensitivity, customer concentration, substantial debt, capital spending made ahead of firm demand, international and supply-chain exposures, and potential tax and technology risks.
Important facts for investors to verify
- Whether sales growth and improved gross margin persist, and whether higher R&D and financing costs continue to pressure earnings.
- Progress and final terms of the NANIUM acquisition, and the financial and operational effects of the K1 sale and Korea consolidation.
- Whether expected 2017 capital expenditures of approximately $500 million are supported by customer demand and operating cash flow.
- Debt maturities, covenant headroom, refinancing capacity, and the ability to meet settlement and Korean severance obligations.
- Exposure to foreign-exchange movements, tax-holiday expirations and customer demand changes; the filing does not provide a clear numerical full-year earnings or revenue forecast.