Amkor Technology, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amkor provides outsourced semiconductor packaging and test services. Interim statements are unaudited.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,135.0 million | $1,086.0 million | $3,038.1 million | $2,872.0 million |
| Gross profit / margin | $216.6 million / 19.1% | $213.8 million / 19.7% | $531.8 million / 17.5% | $468.3 million / 16.3% |
| Operating income | $98.2 million | $114.6 million | $291.2 million | $167.3 million |
| Net income attributable to Amkor | $54.4 million | $60.1 million | $159.9 million | $63.9 million |
| Diluted EPS | $0.23 | $0.25 | $0.67 | $0.27 |
For the first nine months, operating cash flow was $413.9 million, versus $491.6 million in 2016. Investing cash flow was negative $326.0 million; financing cash flow was negative $126.9 million. Capital expenditures were $414.0 million, compared with $481.7 million. Company-defined free cash flow, which includes proceeds from property sales, was $133.3 million, versus $23.6 million.
At September 30, cash and cash equivalents were $519.4 million; total debt was $1,361.7 million, including $118.0 million classified as current. Cash less total debt implies net debt of approximately $842.2 million. Current assets were $1,566.5 million and current liabilities $1,355.7 million. The company reported $199.5 million available under its U.S. revolving facility and additional borrowing availability at foreign subsidiaries. Debt covenants were met.
Material changes and notable items
- Q3 sales increased 4.5%, with demand rising in nearly all end markets. Q3 gross margin fell 0.6 percentage points, mainly due to higher factory employee compensation and factory consolidation in Japan. Q3 operating income and attributable net income declined year over year.
- Nine-month sales rose 5.8% and gross margin improved 1.2 percentage points, supported by higher sales, product mix and operating leverage. Nine-month attributable earnings include a $108.1 million pretax gain from the May sale of the K1 factory; the gain is a significant contributor to the year-over-year earnings increase.
- Amkor acquired Nanium, a wafer-level fan-out packaging provider, on May 22, 2017; its results are included from that date. Research and development expense increased 52.9% for the first nine months, principally due to K5 development and other costs.
- In July, the company redeemed $200 million of 6.625% senior notes due 2021 using cash on hand and recorded a $4.4 million loss on debt retirement. Total debt was $1,361.7 million at quarter-end.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of approximately $550 million; $414.0 million had been spent through September. Management believed operating cash flow, cash and available credit would fund requirements for at least the next 12 months, while noting uncertainty beyond that period.
- Key risks include semiconductor-industry cyclicality, limited customer commitments and backlog, customer concentration, pricing pressure, fixed costs and utilization sensitivity, substantial capital needs and leverage, and foreign-exchange exposure. Management estimated that a 10% appreciation of foreign currencies against the U.S. dollar would have reduced nine-month operating income by approximately $60 million under its sensitivity analysis.
- Tax holidays in several countries expire at different dates through 2025; management expects tax expense to rise as they expire. Nine-month income tax expense was $51.8 million. Gross unrecognized tax benefits were $25.2 million at September 30.
- The company had $48.4 million remaining under a patent-license litigation settlement, payable through 2018. It said the outcome of other legal matters was uncertain but did not expect them, individually or collectively, to have a material adverse effect. Its Korean subsidiary had $142.4 million of unfunded severance obligations.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Nanium integration and a multi-year ERP implementation remain relevant execution and control considerations.
Important facts for investors to verify
- How much of the nine-month earnings increase reflects ongoing operations versus the $108.1 million K1 sale gain, and what were the effects of the legal settlement and other non-recurring items?
- Whether demand and capacity utilization support the $550 million 2017 capital-spending plan and sustain margins, particularly as K5 and Nanium are integrated.
- Whether working-capital requirements, contractual obligations, and debt maturities remain manageable; verify cash availability, borrowing access and covenant compliance.
- How tax-holiday expirations, foreign-exchange movements, customer concentration and semiconductor-cycle conditions may affect future earnings and cash flow.