Amkor Technology, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $736.7 million | $767.5 million | $1,479.6 million | $1,463.5 million |
| Gross profit / margin | $115.1 million / 15.6% | $150.7 million / 19.6% | $250.0 million / 16.9% | $279.5 million / 19.1% |
| Operating income / margin | $38.6 million / 5.2% | $61.0 million / 7.9% | $92.6 million / 6.3% | $106.3 million / 7.3% |
| Net income attributable to Amkor | $9.6 million | $49.5 million | $38.4 million | $70.2 million |
| EPS, diluted | $0.04 | $0.21 | $0.16 | $0.30 |
- Cash flow: First-half operating cash flow was $228.3 million, versus $235.3 million. Capital expenditures were $194.4 million, versus $230.4 million. Company-defined free cash flow was $33.9 million, compared with $4.9 million.
- Balance sheet at June 30: Cash and cash equivalents were $442.3 million; total debt was $1,490.5 million; total liabilities were $2,475.0 million. Current assets were $1,152.4 million and current liabilities $717.4 million. Cash included $285.8 million held offshore.
- Debt and liquidity: Amkor had $49.6 million available under its $200 million revolving facility and reported additional foreign subsidiary facility availability of $201 million. Debt principal maturities were $100 million in 2018, $300 million in 2019 and $1,085 million thereafter. The company said it expected liquidity to cover requirements for at least 12 months and was in compliance with debt covenants.
Material changes versus prior comparable periods
- Q2 sales fell 4.0%; first-half sales increased 1.1%. Management attributed the quarterly decline partly to the 2014 sale of its Japanese subsidiary, as well as soft demand from its largest customer and weakness in mobile and other markets.
- Q2 gross margin declined 4.0 percentage points and first-half margin declined 2.2 points. Lower-than-expected sales, increased depreciation from investment and higher factory compensation costs weighed on margins; favorable foreign exchange and lower gold costs partly offset the pressure.
- Q2 operating income fell to $38.6 million from $61.0 million, and Amkor-attributable net income fell to $9.6 million from $49.5 million. Other expense included costs associated with early retirement of the 7.375% senior notes due 2018; the prior-year comparison included a gain on the Japanese subsidiary sale.
- Equity earnings from J-Devices fell 62.2% in Q2 and 46.5% for the first half, including the absence of the prior-year transaction-related gain and a lower settlement under a manufacturing services agreement. Amkor increased its J-Devices ownership from 60% to 65.7% in January 2015, but continued equity-method accounting due to governance restrictions.
Outlook, risks and unusual items
- Management expected mobile-market conditions to remain sluggish in Q3 2015 as excess inventory was depleted. Macroeconomic uncertainty and cautious business conditions were expected to constrain normal seasonal revenue growth. No specific Q3 revenue or earnings guidance is provided in the filing text.
- Amkor expected 2015 capital expenditures of approximately $550 million, including about $150 million for its new K5 Korea facility. It planned approximately $350 million of K5 construction spending in 2015 and 2016. First-half capital expenditures were $194.4 million.
- The company expected to seek an increase in its J-Devices ownership to 80% in Q4 2015, subject to conditions; if completed, closing was expected by early 2016, followed by consolidation of J-Devices’ results.
- A January 2015 Tessera patent-license settlement requires $155 million in 16 quarterly payments through Q4 2018. At June 30, $135.6 million remained payable, including $19.4 million scheduled for the remainder of 2015.
- Korean severance-plan obligations were $152.7 million. Amkor expected to introduce defined benefit and defined contribution plans in the second half of 2015 and did not expect a significant funding obligation from the change; most existing severance liability would remain unfunded.
- Key risks include semiconductor-cycle and customer-demand volatility, high fixed costs and capacity utilization sensitivity, substantial capital spending and debt, customer and mobile-market concentration, foreign-exchange exposure, expiring tax holidays, and execution risks for K5 and J-Devices. A 10% adverse currency movement was estimated to reduce first-half operating income by about $50 million and pre-tax income from monetary remeasurement by about $21 million.
- Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting outcomes and estimates could change. Disclosure controls were assessed as effective at June 30, 2015.
Important facts for investors to verify
- Whether weak largest-customer and mobile demand persisted into Q3, and whether margins recovered as utilization and product mix changed.
- Progress and total funding needs for the $550 million 2015 capital program and K5 construction, relative to customer demand and available liquidity.
- Debt repayment, refinancing and covenant headroom, including the effect of the June 2015 debt refinancing and future maturities.
- Timing, purchase price and accounting consequences of any further J-Devices ownership increase and eventual consolidation.
- Cash payments under the Tessera settlement, the Korean severance-plan transition, and the impact of foreign exchange and expiring tax holidays.
- The filing reports a debt-retirement loss of $9.35 million in the note-level detail, while the cash-flow statement separately reports a $2.53 million noncash debt-retirement adjustment; investors should confirm the reconciliation and presentation.