Amkor Technology, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Amkor provides outsourced semiconductor packaging and test services, with operations across six Asian countries. Its 2016 results include a full year of consolidated J-Devices results for the first time; 2015 included equity-method earnings rather than J-Devices’ consolidated revenue and expenses. This substantially limits direct year-over-year comparability.
Financial performance and liquidity
- Revenue: $3.894 billion, up 35.0% from $2.885 billion. J-Devices contributed $913.7 million; excluding J-Devices, revenue rose $95.3 million, driven principally by automotive and mobile communications.
- Profitability: Gross profit was $695.5 million, with a 17.9% gross margin, versus $479.3 million and 16.6% in 2015. Operating income was $293.9 million (7.5% margin), versus $164.8 million (5.7%). Net income attributable to Amkor was $164.2 million, or $0.69 per diluted share, versus $51.1 million, or $0.22. The effective tax rate was 22.2%, compared with 41.3%.
- Q4: Revenue was $1.022 billion, gross profit $227.2 million, operating income $126.7 million, and net income attributable to Amkor $100.3 million. Q4 2015 revenue was $670.6 million and Amkor reported a $10.6 million net loss. The 2016 quarterly improvement reflects, in part, J-Devices consolidation.
- Product mix: Advanced Products generated $1.680 billion (43.1% of sales), down from 49.7% of sales in 2015; Mainstream Products generated $2.214 billion. J-Devices contributed substantially to mainstream sales.
- Cash flow and investment: Operating cash flow was $729.4 million, including $120.0 million from J-Devices. Capital expenditures were $650.0 million. Company-defined free cash flow was $140.2 million, including proceeds from asset sales and insurance recoveries; this is a non-GAAP measure.
- Balance sheet and liquidity: Cash and equivalents were $549.5 million; working capital was $404.0 million. Debt carrying value was $1.475 billion, including $35.2 million current. The filing reports $199.5 million available on the U.S. revolving facility, plus foreign credit availability. The company said cash, operating cash flow and available facilities should fund requirements for at least 12 months. Cash included $401.6 million held offshore.
- Debt and obligations: Scheduled principal maturities are $35.2 million in 2017, $126.5 million in 2018, $135.0 million in 2019, $256.0 million in 2020, $400.0 million in 2021 and $525.0 million thereafter. Amkor was in covenant compliance at year-end. Other significant obligations include $136.2 million for the Korean unfunded severance plan and $77.5 million remaining under the Tessera settlement.
Material changes and unusual items
- J-Devices consolidation drove most of the reported revenue increase. Excluding it, revenue growth was considerably more modest.
- Amkor revised previously reported J-Devices-related financial information after identifying an income-tax provision error affecting periods from 2012 through Q4 2015. The company said the error was not material for the affected periods; the revision reduced cumulative equity-method earnings by $8.0 million.
- An April 2016 earthquake damaged the Kumamoto factory. Production resumed in Q2; the disruption reduced Q2 sales by approximately $15 million. Amkor recorded $20.0 million of earthquake-related costs and $26.9 million of insurance proceeds, recognized as a reduction to cost of sales.
- In November 2016, Amkor agreed to sell its K1 factory land and buildings for approximately $135 million. Closing was expected in Q2 2017, with an anticipated pretax gain of approximately $100 million; neither closing nor the gain was realized in FY2016.
- On February 1, 2017, Amkor entered into a definitive agreement to acquire NANIUM S.A., a wafer-level fan-out packaging provider. Closing was expected in Q1 2017, subject to customary conditions and regulatory approvals.
- The 2015 Tessera patent-license settlement requires $155.0 million in 16 quarterly payments through Q4 2018; $77.5 million remained at year-end 2016.
Outlook, commentary and risks
Management forecast approximately $500 million of capital expenditures for 2017. It emphasized advanced packaging investment, better factory utilization, broader customer and end-market exposure, and growth in automotive and Greater China. Management noted a recovery in mobile communications in the second half of 2016 and a return to normal seasonality.
Key risks include semiconductor cyclicality, high fixed costs and sensitivity to utilization, customer concentration and lack of committed backlog, pricing pressure, substantial debt and capital requirements, dependence on Asian operations and suppliers, foreign-exchange exposure, tax-holiday expirations, and execution risks from facility consolidation and acquisitions. The ten largest customers represented 67% of 2016 sales; Toshiba and Qualcomm each exceeded 10%. The filing also highlights natural-disaster exposure, including the Kumamoto disruption, and restrictive debt covenants.
Most important facts for investors to verify
- How much of reported growth and margin improvement is attributable to J-Devices, and whether comparable underlying growth continues.
- Whether the K1 sale closes on schedule and produces the projected approximately $100 million pretax gain.
- The timing, funding, integration costs and expected returns of the NANIUM acquisition.
- Debt repayment capacity, upcoming maturities, covenant headroom and the sustainability of cash flow after planned capital spending.
- Customer concentration, mobile-market exposure, and progress diversifying into automotive and other end markets.
- The effects of the J-Devices tax revision, expiring tax holidays, and any further developments in tax examinations or legal contingencies.