Amkor Technology, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amkor provides outsourced semiconductor packaging and test services. Results include fully consolidated J-Devices, after Amkor acquired the remaining ownership on December 30, 2015; 2015 comparatives include only Amkor’s equity-method earnings from J-Devices.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,086.0 million | $734.4 million | $2,872.0 million | $2,214.0 million |
| Gross profit / margin | $213.8 million / 19.7% | $126.6 million / 17.2% | $468.3 million / 16.3% | $376.6 million / 17.0% |
| Operating income / margin | $114.6 million / 10.6% | $51.3 million / 7.0% | $167.3 million / 5.8% | $143.9 million / 6.5% |
| Net income attributable to Amkor | $60.1 million | $27.7 million | $63.9 million | $61.7 million |
| Diluted EPS | $0.25 | $0.12 | $0.27 | $0.26 |
- Q3 sales rose 47.9%; J-Devices contributed $257.1 million. Excluding J-Devices, sales increased $94.5 million, driven by mobile communications. Nine-month sales rose 29.7%, but excluding J-Devices were down $21.7 million, reflecting soft conditions and weakness in mobile early in the year.
- Q3 gross margin improved 2.5 percentage points; nine-month margin declined 0.7 points, primarily because J-Devices has lower gross margins. Fixed factory costs make utilization an important driver of margin.
- Nine-month operating cash flow was $491.6 million, versus $430.4 million. Investing cash outflow was $470.2 million, including $481.7 million of capital expenditures; financing cash outflow was $16.7 million. Company-defined free cash flow was $23.6 million, down from $83.0 million.
- At September 30, cash and equivalents were $549.8 million, including $348.9 million held offshore. Debt was $1.579 billion; cash less debt was approximately $1.029 billion. Current assets were $1.487 billion and current liabilities $1.075 billion. Available borrowing included $99.5 million under the U.S. revolving facility and $196.5 million under foreign facilities and term-loan commitments.
Material changes and unusual items
- J-Devices contributed $679.8 million of nine-month sales, $81.2 million of gross profit, and $85.5 million of operating cash flow. Its consolidation materially affects comparisons with 2015.
- Foreign-exchange results shifted to losses: a $7.1 million Q3 loss and an $11.5 million nine-month loss, versus gains in the comparable 2015 periods. Nine-month interest expense, including related-party interest, decreased 8.6% to $62.2 million; Q3 interest expense increased as K5 construction interest was no longer capitalized.
- Amkor revised previously reported J-Devices-related financial information after identifying an income-tax provision error covering 2012 through 2015. The company said the error was not material to the affected periods; the revision reduced cumulative equity-method earnings by $8.0 million and adjusted purchase accounting.
- April 2016 earthquakes damaged the Kumamoto factory. Production resumed in Q2; the disruption reduced Q2 sales by approximately $15 million, and earthquake-related costs were $16.4 million. Management expected about $30 million of insurance proceeds and anticipated minimal net liquidity impact.
- After quarter-end, Amkor agreed to sell its K1 factory land and buildings for approximately $142 million. Closing is expected in Q2 2017, with an anticipated pretax gain of about $100 million.
Outlook, risks, and contingencies
- Management expected 2016 capital expenditures of approximately $650 million, including about $170 million for the K5 factory; $481.7 million had been spent through September. Capital spending is subject to demand, business performance, and financing availability.
- Management believed operating cash flow, existing cash, and available credit would fund working capital, capital expenditures, debt service, and other requirements for at least 12 months. It cautioned that funding beyond that period is less certain. Debt covenants were met at September 30, and management expected continued compliance for at least 12 months.
- Key risks include semiconductor cyclicality, limited customer commitments and backlog, customer concentration, pricing pressure, utilization and fixed-cost exposure, substantial capital needs and debt, foreign-exchange movements, and the execution and integration of J-Devices. A 10% adverse currency movement was estimated to reduce pretax income by approximately $28 million and nine-month operating income by approximately $61 million, under the filing’s sensitivity assumptions.
- Tax holidays in Korea, Malaysia, the Philippines, and Taiwan expire at various times through 2024; management expects tax expense to rise as they expire. Gross unrecognized tax benefits were $24.7 million at quarter-end. U.S. net deferred tax assets remained fully valuation-allowed.
- Contractual obligations totaled $2.404 billion, including $1.582 billion of scheduled debt principal, $406.2 million of interest, $152.8 million of Korean severance obligations, and $87.2 million remaining on the Tessera settlement, payable through 2018. The company reported no off-balance-sheet arrangements and expected pending legal matters, individually and in aggregate, not to have a material adverse impact, while noting outcomes remain uncertain.
Most important facts for investors to verify
- How much of sales and cash-flow growth reflects J-Devices consolidation rather than underlying business growth, and whether mobile and automotive demand sustains utilization and margins.
- Actual 2016 capital expenditures and returns from K5 and advanced packaging investments relative to customer demand and available liquidity.
- Debt repayment and refinancing capacity, covenant headroom, and cash accessibility given substantial offshore balances and scheduled obligations.
- Completion, proceeds, timing, and realized gain from the K1 sale, and final earthquake insurance recoveries and costs.
- Effects of expiring tax holidays, the J-Devices tax revision, and foreign-currency exposure on future earnings and cash flows.