Amkor Technology, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Amkor provides outsourced semiconductor packaging and test services. Its financial results for 2015 include J-Devices under the equity method; Amkor acquired the remaining interest on December 30, 2015, and will consolidate J-Devices’ operating results beginning in 2016.
Financial performance
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Net sales | $2,884.6 million | $3,129.4 million | Down 7.8% |
| Gross profit / margin | $479.3 million / 16.6% | $552.8 million / 17.7% | Margin down 1.1 percentage points |
| Operating income / margin | $164.8 million / 5.7% | $221.5 million / 7.1% | Lower than prior year |
| Net income attributable to Amkor | $56.8 million | $130.4 million | Diluted EPS: $0.24 vs. $0.55 |
| Operating cash flow | $577.9 million | $613.9 million | Decrease attributed mainly to lower sales and patent-litigation settlement payments |
| Capital expenditures | $538.0 million | $681.1 million | 2015 spending included $154.3 million for the K5 facility |
| Free cash flow (non-GAAP) | $40.0 million | $(67.2) million | Operating cash flow less capital expenditures |
| Cash and cash equivalents | $523.2 million | $449.9 million | $435.5 million held offshore |
| Total debt | $1,595.9 million | $1,530.8 million | $76.8 million due in 2016; covenants were met at year-end |
| Working capital | $299.3 million | $497.4 million | Declined year over year |
Gross margin pressure reflected lower sales, higher factory compensation and increased depreciation, partly offset by favorable currency movements and lower gold costs. SG&A declined 8.7% to $232.4 million, while R&D increased 6.7% to $82.0 million. The effective tax rate rose to 41.5% from 24.9%, primarily because losses in certain jurisdictions did not generate corresponding tax benefits.
Fourth-quarter results
For the quarter ended December 31, 2015, sales were $670.6 million, gross profit was $102.6 million and operating income was $20.9 million. Amkor reported a net loss attributable to the company of $9.7 million, or $(0.04) per diluted share. Sales were below the prior-year fourth quarter’s $853.1 million; the filing cites weak demand and customer supply-chain changes affecting a major account.
Material changes and unusual items
- Sales declined amid soft semiconductor-market conditions, a lack of compelling new mobile products, weakness in high-end smartphones and changes in a major customer’s supply chain. Growth in advanced SiP and Greater China sales partly offset the decline.
- Amkor acquired the remaining 34.3% of J-Devices for $105.4 million, bringing ownership to 100%. The step acquisition resulted in a net one-time loss of $13.9 million, including a $30.0 million foreign-currency translation loss partly offset by a $16.1 million remeasurement gain. J-Devices reported 2015 sales of $812.9 million, but those sales are not included in Amkor’s 2015 consolidated sales.
- Amkor settled its Tessera patent-license litigation for $155.0 million, payable in 16 quarterly installments through the fourth quarter of 2018. The remaining obligation was $116.3 million at year-end. A $87.1 million charge was recorded in the fourth quarter of 2014.
- Amkor redeemed its $345.0 million 7.375% notes in 2015, recording a $9.6 million debt-retirement loss. It also borrowed under new credit facilities and repaid other debt.
Outlook, liquidity and key risks
- Management expected mobile-device conditions to remain sluggish in the first half of 2016 as customers cautiously managed inventories. It cited macroeconomic uncertainty and a cautious business climate as constraints on revenue growth.
- Amkor expected 2016 capital expenditures of approximately $650 million, including about $170 million for K5 construction. The filing cautions that actual spending depends on demand, business performance, project timing, cash availability and financing.
- Management believed operating cash flow, existing cash and available credit would cover working capital, capital spending, debt service and other requirements for at least the next 12 months. At year-end, $64.3 million was available under Amkor’s revolving facility, with additional borrowing availability at foreign subsidiaries.
- Key risks include semiconductor cyclicality, high fixed costs and utilization sensitivity, pricing pressure, short-term and uncommitted customer demand, customer concentration, competition and substantial debt. The ten largest customers represented 63% of 2015 sales; two customers each exceeded 10%.
- Other material exposures include the $143.0 million unfunded Korean severance obligation, foreign-exchange sensitivity, tax-holiday expirations, supplier concentration, facility and systems integration risks, and potential litigation or product-quality claims. A 10% adverse currency movement was estimated to reduce operating income by approximately $96 million.
- Amkor reported effective disclosure controls and internal control over financial reporting; the assessment excluded J-Devices, which represented 14.8% of year-end assets and no 2015 consolidated revenue. The independent auditor issued an unqualified opinion on the financial statements and controls.
Investor verification points
- Confirm the 2016 revenue and margin trajectory against management’s stated weak first-half mobile outlook and actual customer inventory trends.
- Track conversion of the $538.0 million 2015 capital program and planned $650 million 2016 spend into utilization, cash flow and returns, particularly at K5.
- Review J-Devices’ post-acquisition sales, profitability, integration progress, debt and foreign-currency exposure once its results are consolidated.
- Monitor liquidity and debt maturities alongside the Tessera installments, Korean severance obligations and capital commitments.
- Assess customer concentration and the impact of major customers’ sourcing decisions, including changes in smartphone supply chains.