Amkor Technology, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services, with operations concentrated in Asia.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $767.5 million | $746.1 million | $1,463.5 million | $1,433.6 million |
| Gross profit / margin | $150.7 million / 19.6% | $138.4 million / 18.5% | $279.5 million / 19.1% | $253.3 million / 17.7% |
| Operating income / margin | $61.0 million / 7.9% | $58.5 million / 7.8% | $106.3 million / 7.3% | $99.5 million / 6.9% |
| Net income attributable to Amkor | $49.5 million | $29.7 million | $70.2 million | $43.1 million |
| Amkor diluted EPS | $0.21 | $0.14 | $0.30 | $0.21 |
Q2 sales rose 2.9% year over year; six-month sales rose 2.1%. Management attributed growth mainly to the acquired Malaysian power-discrete business, high-volume ramp of a fingerprint sensor, and demand for wafer services and NAND memory for mobile devices. Some other mobile-related services declined.
Gross margin improved by 1.1 percentage points in Q2 and 1.4 points for the first half. Better product mix, lower material costs as a share of sales, and lower gold costs helped; higher manufacturing overhead and depreciation partly offset those benefits. Research and development expense increased 54.3% in Q2 to $22.1 million, reflecting development work for 20-nanometer chipsets, depreciation, and compensation.
Q2 results included a combined $18.0 million gain related to the sale of the Japanese subsidiary to J-Devices: Amkor recorded a $9.2 million sale gain and $8.8 million of additional equity-method earnings from J-Devices’ transaction gain. First-half equity earnings also benefited from an $8.1 million take-or-pay settlement and improved J-Devices operating results. These items make reported earnings less representative of recurring operations.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was $235.3 million, versus $200.9 million a year earlier. Capital expenditures were $230.4 million, up from $222.7 million. Company-defined free cash flow was $4.9 million, compared with negative $21.8 million.
- Cash and cash equivalents were $525.9 million at June 30, down from $610.4 million at year-end 2013. Cash included $295.9 million held offshore; repatriation would incur foreign withholding taxes.
- Total debt was $1,536.1 million. Current debt was $10.0 million; long-term debt, including related-party debt, was $1,526.1 million. The filing reports $149.7 million available under the parent revolving facility, plus availability at foreign subsidiaries under revolving and term facilities.
- Amkor said it was in compliance with debt covenants and believed cash, operating cash flow, and available facilities would fund working capital, capital spending, and debt service for at least the next 12 months. It cautioned that longer-term liquidity depends on business performance, investment needs, refinancing access, and potential litigation payments.
- Debt actions included conversion of the remaining $56.4 million of 6.0% convertible notes into 18.6 million common shares and repayment of $60.0 million of a Korean subsidiary term loan. Debt principal repayments scheduled include $345 million in 2018 and $995 million thereafter.
Outlook, risks, and unusual items
- Capital investment: 2014 capital expenditure forecast was increased to approximately $675 million, primarily to support mobile communications demand and growth opportunities. A new Korea factory and R&D facility was expected to begin construction in the second half of 2014, with approximately $300–$350 million of spending over several years; completion and returns are uncertain.
- J-Devices: Amkor expected to exercise options to increase ownership from 60% to 66% in 2014 and to 80% in 2015, subject to conditions. Exercising the options requires cash; reaching 80% is expected to allow consolidation of J-Devices’ results.
- Tessera litigation: An arbitration panel awarded Tessera $113 million plus interest in May 2014, amended in June. Court confirmation is required before enforcement; Amkor is challenging the award and related proceedings remain pending. Amkor estimated possible royalties in the arbitration at $11–$113 million, excluding interest, and accrued $43.3 million for royalties plus $5.4 million for interest. An adverse outcome could materially affect results, liquidity, and cash flows.
- Other legal matter: Amkor settled its patent dispute with Carsem in May 2014 after an ITC exclusion order; the parties agreed to cross-license relevant patents.
- Tax: First-half tax expense was $17.4 million, compared with a $6.2 million benefit in 2013, when discrete tax benefits were recorded. Tax holidays in several countries expire through 2022, and management expects the effective tax rate to rise as they expire. Gross unrecognized tax benefits fell to $6.9 million from $27.1 million at year-end.
- Key operating risks: Semiconductor industry cyclicality, customer demand and pricing volatility, high fixed costs and utilization sensitivity, customer concentration, substantial capital requirements and debt, foreign-exchange exposure, execution risks in new technology and system implementations, and Korean severance obligations of $152.3 million. Management also reported implementation of a new shop-floor system; disclosure controls were considered effective at quarter-end, while evaluation of related internal-control changes was ongoing.
Most important facts for investors to verify
- Whether the improved margins and earnings persist after excluding the J-Devices-related gains and other non-recurring benefits.
- Progress and returns on the increased 2014 capital expenditure plan and the planned Korea facility.
- Final outcome, interest accrual, and cash impact of the Tessera proceedings and whether the recorded accrual remains adequate.
- Ability to sustain positive free cash flow while servicing debt and funding investment; verify debt maturities, facility availability, and covenant compliance.
- Actual timing and cash cost of any J-Devices ownership increases, and effects of potential consolidation.
- Exposure to tax-holiday expirations, the Korean severance liability, and foreign-exchange movements; management estimated a 10% adverse currency move could reduce first-half operating income by about $46 million.