Amkor Technology, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; interim financial statements are unaudited. The filing’s table of contents contains a conflicting June 30, 2015 quarter-end reference, but the statements and filing body identify September 30, 2015.
Business context and results
Amkor provides outsourced semiconductor packaging and test services. Results were affected by soft demand in mobile communications and weakness in computing, consumer and networking markets. The company highlighted advanced packaging, customer diversification and better utilization of existing assets as strategic priorities.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $734.4 million | $812.8 million | $2,214.0 million | $2,276.3 million |
| Gross profit / margin | $126.6 million / 17.2% | $153.2 million / 18.8% | $376.6 million / 17.0% | $432.8 million / 19.0% |
| Operating income / margin | $51.3 million / 7.0% | $75.2 million / 9.2% | $143.9 million / 6.5% | $181.5 million / 8.0% |
| Net income attributable to Amkor | $28.2 million | $47.1 million | $66.5 million | $117.3 million |
| Diluted EPS | $0.12 | $0.20 | $0.28 | $0.50 |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $423.4 million versus $405.7 million a year earlier. Capital expenditures were $352.6 million versus $442.3 million; company-defined free cash flow was $70.7 million versus negative $36.6 million.
- Cash and cash equivalents were $430.4 million at September 30, 2015, including $277.9 million held offshore. Current assets were $1,104.8 million and current liabilities were $752.2 million.
- Total debt, including related-party debt, was $1,440.4 million. Scheduled principal maturities were $100 million in 2018, $230 million in 2019 and $1,105 million thereafter. The filing reports covenant compliance at quarter-end.
- Available borrowing capacity included $118.3 million under the $200 million revolving facility, $41.0 million under foreign revolving facilities and $140.0 million under foreign term-loan facilities.
- In June, Amkor redeemed $345 million of 7.375% senior notes due 2018, funded with cash and credit-facility borrowings. The company recorded an $8.9 million debt-retirement loss for the nine-month period.
Changes versus prior period
Q3 sales fell 9.7% and nine-month sales fell 2.7% year over year. Q3 gross margin declined 1.6 percentage points; nine-month gross margin declined 2.0 points. Lower sales and factory utilization weighed on margins, while favorable foreign-exchange movements and lower gold costs provided partial offsets. Nine-month margin was also pressured by higher depreciation and factory compensation costs. Lower SG&A and interest expense partly offset weaker operating performance.
Nine-month earnings also reflected lower equity-method earnings from J-Devices: $15.5 million versus $29.2 million. The prior-year comparison included earnings from the J-Devices acquisition of Amkor’s Japanese subsidiary and a settlement under a manufacturing services agreement.
Outlook, commentary and notable items
- Management expected mobile-device market conditions to remain sluggish in Q4 2015 as customers managed inventories amid soft end-market demand. The filing gives no specific numerical revenue or earnings guidance.
- Management expected 2015 capital expenditures of approximately $525 million, including about $150 million for the new K5 factory and R&D facility in Korea. K5 construction spending was planned at approximately $325 million across 2015 and 2016.
- Amkor believed cash from operations, cash on hand and available credit would fund working capital, capital spending, debt service and other obligations for at least 12 months, while warning that future funding depends on business performance and access to financing.
- The Tessera patent-license litigation was settled for $155 million payable in 16 quarterly installments through Q4 2018. At September 30, $125.9 million remained payable.
- Amkor owned 65.7% of J-Devices but continued equity-method accounting due to governance restrictions. It expected to consider exercising an option to increase ownership to 80%; if completed, the company expected to begin consolidating J-Devices’ results.
- Risk factors include semiconductor cyclicality, customer concentration and limited committed backlog, high fixed costs, significant debt and capital spending, foreign-exchange exposure, tax-holiday expirations, Korean severance obligations and execution risks for K5 and advanced technology investments. Legal proceedings were described as not expected to have a material adverse impact, though outcomes remain uncertain.
Important facts for investors to verify
- Whether weak mobile and other end-market demand persists and further affects sales, utilization and gross margins.
- Actual 2015 capital expenditures and K5 spending, timing, total cost and customer demand supporting the investment.
- Debt balances, borrowing availability, covenant compliance and capacity to meet scheduled debt service and Tessera settlement payments.
- Whether the J-Devices ownership option is exercised, its cash cost and the timing and effects of any consolidation.
- Exposure to foreign-exchange movements, tax-holiday expirations, deferred-tax valuation allowances and the unfunded Korean severance liability of approximately $143.1 million.