Amkor Technology, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Amkor provides outsourced semiconductor packaging and test services. Results include J-Devices, consolidated after Amkor acquired the remaining ownership on December 30, 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $868.7 million | $742.9 million |
| Gross profit / margin | $122.9 million / 14.1% | $134.9 million / 18.2% |
| Operating income / margin | $22.1 million / 2.5% | $54.0 million / 7.3% |
| Net income (loss) attributable to Amkor | $(0.9) million | $28.8 million |
| Operating cash flow | $138.1 million | $165.0 million |
| Capital expenditures | $198.8 million | $106.1 million |
| Free cash flow, as defined by Amkor | $(60.7) million | $58.9 million |
Sales rose 16.9%, primarily because J-Devices contributed $217.0 million of revenue and $29.1 million of gross profit. Excluding J-Devices, sales declined amid soft economic conditions and weakness in mobile communications, partly offset by stronger automotive sales. Gross margin fell 4.1 percentage points; lower sales and weaker utilization weighed on results. SG&A increased 17.0% to $73.6 million, and R&D increased 50.6% to $27.2 million, with J-Devices consolidation contributing to both increases. Interest expense, including related-party interest, declined to $17.4 million from $25.0 million, while foreign currency losses contributed to $3.2 million of other expense.
Liquidity, debt and financial position
- Cash and cash equivalents were $413.5 million at March 31, down from $523.2 million at year-end 2015. Current assets were $1.220 billion and current liabilities $940.1 million.
- Total debt was $1.535 billion, including $26.2 million classified as current; total debt fair value was estimated at $1.500 billion. Amkor reported compliance with debt covenants.
- Available borrowing capacity included $55.3 million under the parent revolving facility, $129.0 million under foreign subsidiary revolving facilities, and $110.0 million under secured term loan facilities.
- Management believed operating cash flow, cash on hand and available facilities would fund requirements for at least the next 12 months, while cautioning that funding beyond that period is not assured.
- Operating cash flow was below capital expenditures, producing negative free cash flow. Investing cash outflow was $199.1 million, and financing cash outflow was $56.9 million, mainly reflecting subsidiary debt repayments.
- Cash includes $336.3 million held offshore. The company uses non-recourse receivables factoring; receivables sold during the quarter totaled $139.1 million, and $122.5 million of sold receivables remained outstanding at quarter-end.
Outlook, risks and unusual items
- Capital spending: Amkor expected 2016 capital expenditures of approximately $650 million, including about $170 million for the K5 facility in Korea. Q1 spending included $105.5 million for K5. Investments support advanced packaging and test capacity but are made ahead of firm customer commitments.
- Demand: Management described overall demand as constrained by soft economic conditions and a lack of compelling new mobile products. The filing expected sluggish mobile conditions in the first half of 2016, with customers cautiously managing inventories. Amkor cited advanced packaging, Chinese and Taiwanese customers, and automotive as areas of opportunity.
- Kumamoto earthquakes: April 2016 earthquakes damaged Amkor’s Japan facility, which was operating on a limited basis. The company expected roughly $35 million of lower Q2 sales and about $20 million of incremental Q2 costs for damaged inventory and repairs. It estimated approximately $25 million of insurance payments later in 2016 and characterized the expected full-year net impact as modest. The damage is a subsequent event, not a Q1 operating result.
- Commitments: Contractual obligations totaled $2.409 billion, including $1.538 billion of debt, $440.0 million of scheduled interest, $143.5 million of Korean severance obligations, and $106.6 million of remaining Tessera settlement payments. The Tessera settlement is payable through Q4 2018.
- Key exposures: Cyclical semiconductor demand, customer concentration and limited order commitments, fixed-cost sensitivity to capacity utilization, substantial debt and capital needs, foreign currency and interest-rate movements, tax-holiday expirations, and execution/integration risks related to J-Devices and ERP changes. A 10% adverse currency movement was estimated to reduce pretax income by about $31 million through balance-sheet remeasurement and quarterly operating income by about $20 million through operating exposure.
- Amkor said ordinary-course legal matters were not expected to have a material adverse impact, though outcomes remain uncertain. It maintained valuation allowances on all U.S. net deferred tax assets and noted that Korean deferred tax asset realization depends on future taxable income.
Important facts for investors to verify
- How much of future sales and margin performance reflects J-Devices consolidation versus underlying business trends, especially mobile demand and automotive growth.
- Whether utilization and gross margins recover while the company executes its approximately $650 million 2016 capital expenditure plan and K5 construction.
- Actual Kumamoto recovery timing, lost sales, repair and inventory costs, and timing and adequacy of insurance proceeds.
- Cash generation, facility availability, debt maturities, covenant compliance, and ability to meet settlement and Korean severance obligations.
- Progress integrating J-Devices and ERP systems, and the effect of foreign exchange changes, tax-holiday expirations, and customer demand fluctuations.