Amkor Technology, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $768.0m | $695.4m | $2,201.6m | $2,036.9m |
| Gross profit / margin | $141.0m / 18.4% | $116.8m / 16.8% | $394.3m / 17.9% | $311.1m / 15.3% |
| Operating income / margin | $58.0m / 7.6% | $54.0m / 7.8% | $157.6m / 7.2% | $110.3m / 5.4% |
| Net income attributable to Amkor | $25.3m | $22.3m | $68.5m | $34.7m |
| Basic / diluted EPS | $0.12 / $0.11 | $0.14 / $0.11 | $0.38 / $0.33 | $0.21 / $0.19 |
- Q3 sales rose 10.4% year over year; nine-month sales rose 8.1%. Growth reflected increased packaging and test demand, especially for mobile communications, NAND memory and wafer-level processing, plus the acquired Malaysia operation.
- At September 30, cash and cash equivalents were $591.3m; total debt was approximately $1,650.9m, including an unamortized premium. Current liabilities were $779.7m and current assets $1,288.8m. The company reported compliance with all debt covenants.
- Nine-month operating cash flow was $375.2m, versus $284.4m in 2012. Capital equipment purchases were $402.0m, producing negative free cash flow of $26.8m, an improvement from negative $95.9m. Free cash flow is a non-GAAP measure defined by Amkor.
- Property, plant and equipment additions were $380.2m for the nine months. Cash used in investing activities was $476.9m; financing activities provided $277.9m.
Material changes versus the prior period
- Q3 gross margin improved 1.6 percentage points and nine-month gross margin improved 2.6 points. Management attributed the gains mainly to higher sales of wafer-level processing, NAND memory and test services. Q3 margin nevertheless included a $10.0m Tessera-related charge.
- Test sales grew 41.9% in Q3 and 33.8% year to date; packaging sales grew 6.4% and 4.8%, respectively. Q3 test gross margin increased to 31.6% from 25.5%.
- Q3 SG&A increased 30.5% year over year to $64.3m, and R&D increased 38.4% to $18.6m. Management cited higher compensation and, for SG&A, acquisition- and litigation-related professional fees.
- Interest expense increased with higher debt. Nine-month results included an $11.6m debt-retirement charge following the exchange of $193.7m of 2014 convertible notes for 64.0m common shares and a cash payment.
Outlook, management commentary and risks
- Management expected 2013 capital additions of approximately $450m, plus $100m for land for a planned Korean factory and R&D center. It anticipated construction beginning in late 2014 and continuing through 2015 into early 2016; the project is conditional on meeting various requirements, and costs, timing and benefits are uncertain.
- Management stated that cash, operating cash flow and available credit were expected to fund working capital, capital spending and debt service for at least the next 12 months. It cautioned that longer-term liquidity depends on industry conditions, business performance, investment needs, Tessera payments and access to financing.
- On July 31, 2013, Amkor acquired Toshiba Electronics Malaysia’s power-discrete packaging and test operation for an estimated $61.9m: $42.4m paid at closing and $19.5m payable by March 31, 2014. Amkor also increased its J-Devices ownership from 30% to 60% for $67.4m. It expected to exercise options to reach 80% over time and then consolidate J-Devices, subject to applicable conditions and approvals.
- Tessera arbitration remains a significant contingency. Amkor accrued $43.3m at September 30; its estimated remaining royalty range was $43.3m–$98.3m, excluding future interest. Tessera had stated it would seek more than $150m. The final award could exceed amounts accrued or paid, and Amkor may record further charges.
- Key risks include semiconductor cyclicality, utilization and fixed-cost exposure, customer concentration and limited binding order commitments, substantial debt and capital requirements, foreign-exchange exposure, acquisition integration, Korean severance obligations, tax-holiday expirations and intellectual-property litigation. One customer represented 24.4% of nine-month sales; the ten largest customers represented approximately 63%.
Important facts for investors to verify
- Updated Tessera arbitration rulings, the final damages and interest calculation, and any resulting cash payments or additional accruals.
- Actual capital additions and Korean facility land/construction spending versus management’s estimates, and whether customer demand supports the added capacity.
- Cash generation, debt maturities and refinancing needs; September 30 debt included $56.4m classified as current, with scheduled principal payments of $61.4m in 2014 and $105.0m in 2015.
- Progress and costs integrating the Malaysia acquisition and J-Devices, including any later ownership increase and consolidation.
- Trends in customer concentration, mobile-related demand, capacity utilization, margins and the expiration of foreign tax holidays.