Business context and reporting period
Amkor Technology, Inc. is a provider of outsourced semiconductor packaging and test services. This Form 10-K reports the fiscal year ended December 31, 2013; it is an annual filing, with selected fourth-quarter figures noted below. Amkor reported one operating segment beginning in the quarter ended December 31, 2013.
Services span advanced packaging and test and mainstream packaging. Advanced-product sales were $1.452 billion, or 49.1% of sales, versus $1.302 billion, or 47.2%, in 2012. Amkor serves semiconductor manufacturers and fabless companies; its ten largest customers generated 62.9% of 2013 sales.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $2,956.5 million | $2,759.5 million |
| Gross profit / margin | $544.5 million / 18.4% | $423.8 million / 15.4% |
| Operating income / margin | $232.1 million / 7.9% | $152.7 million / 5.5% |
| Net income attributable to Amkor | $109.3 million; diluted EPS $0.50 | $41.8 million; diluted EPS $0.24 |
| Operating cash flow | $557.5 million | $389.1 million |
| Capital expenditures | $566.3 million | $533.5 million |
| Free cash flow (company-defined) | $(8.7) million | $(144.4) million |
Revenue increased 7.1% year over year. Management attributed the improvement to demand for wafer-level processing, wirebond memory and flip-chip services for mobile communications, and the acquired Malaysia power-discrete business; consumer-market weakness partly offset growth. Gross margin improved 3.0 percentage points, helped by higher sales, product mix and lower gold costs. Patent-license litigation charges reduced gross margin by 0.4 percentage points in 2013, compared with 1.8 points in 2012.
For fourth-quarter 2013, net sales were $754.9 million, gross profit $150.2 million, operating income $74.6 million and net income attributable to Amkor $40.8 million (diluted EPS $0.18). Sales were lower than third-quarter sales of $768.0 million.
At year-end, cash and cash equivalents were $610.4 million, working capital $541.5 million, total assets $3.427 billion and total debt $1.653 billion, including $61.4 million current. Debt was $1.545 billion at year-end 2012. The company had $149.7 million available on its $150 million first-lien revolver, plus reported foreign subsidiary facility availability. Cash included $292.5 million held offshore. Scheduled principal repayments include $61.4 million in 2014 and $345 million in 2018; $995 million is due thereafter. Amkor reported compliance with debt covenants at year-end.
Material changes versus 2012
- Sales, operating income and Amkor-attributable net income increased; gross margin rose from 15.4% to 18.4%.
- Operating cash flow rose by $168.5 million, while capital expenditures remained high. Free cash flow was still negative, though improved by $135.7 million.
- Amkor increased its J-Devices ownership from 30% to 60% for $67.4 million. Governance restrictions mean it continued equity-method accounting; it planned to pursue ownership of up to 80% and eventual consolidation.
- Amkor acquired Toshiba’s Malaysian power-discrete packaging and test operation on July 31, 2013, for approximately $60 million; $18 million remained payable by March 31, 2014.
- Amkor issued $225 million of additional 6.375% senior notes due 2022 and exchanged $193.7 million of 6.0% convertible notes for 64.0 million common shares plus $11.6 million cash.
- Research and development expense rose to $64.6 million from $54.1 million; selling, general and administrative expense rose to $247.8 million from $217.0 million.
Outlook, commentary, risks and contingencies
Management expected 2014 capital expenditures of approximately $450 million, primarily to support mobile-communications demand. It planned construction of a new Korean factory and research and development center beginning in late 2014, with work extending into early 2016; schedule, cost and benefits are uncertain. Management stated that cash, operating cash flow and available revolver capacity were expected to cover working capital, capital expenditures and debt service for at least the next 12 months. This is not a specific revenue or earnings forecast.
Key risks include semiconductor-industry cyclicality, high fixed costs and utilization sensitivity, pricing pressure, limited committed customer demand, customer concentration, substantial debt and capital needs, foreign-exchange exposure, supply constraints, international operating risks, tax-holiday expirations, and execution risks from acquisitions and systems integration. One customer accounted for 23.7% of 2013 sales and another 10.5%; the filing identifies Qualcomm and Toshiba as each exceeding 10%.
The most prominent contingency is the Tessera patent-license dispute. Amkor estimated possible royalties in the main arbitration at $60 million to $135 million before interest, recorded a $60 million charge, and had accrued $43.3 million at year-end after $16.7 million in prior payments. The company disputed Tessera’s claims; the final amount and outcome remained uncertain. Other patent proceedings include Amkor’s action against Carsem.
Amkor reported effective disclosure controls and internal control over financial reporting; the independent auditor expressed an unqualified opinion. The assessment and audit excluded the acquired Malaysian subsidiary, which represented approximately 4% of year-end assets and 2% of 2013 sales.
Investor verification priorities
- Review the Tessera arbitration, related interest exposure, accrued royalty balance and subsequent procedural developments.
- Verify customer concentration and order trends, especially dependence on the largest customer and mobile-communications demand.
- Assess whether projected 2014 capital spending, utilization and operating cash generation can support debt service while managing negative free cash flow.
- Confirm the debt maturity and refinancing plan, covenant headroom, and availability and terms of subsidiary credit facilities.
- Track J-Devices option exercise, governance constraints, purchase-price requirements and timing of any consolidation.
- Monitor the Korean facility project’s commitments and timeline, tax-holiday expirations, and integration and control procedures for the Malaysia acquisition.