Amkor Technology, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016. Amkor provides outsourced semiconductor packaging and test services. Results include J-Devices on a consolidated basis following Amkor’s acquisition of its remaining ownership on December 30, 2015; 2015 comparatives include only Amkor’s equity-method earnings from J-Devices, limiting comparability.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $917.3 million | $736.7 million | $1,786.0 million | $1,479.6 million |
| Gross profit / margin | $131.6 million / 14.3% | $115.1 million / 15.6% | $254.5 million / 14.2% | $250.0 million / 16.9% |
| Operating income / margin | $30.5 million / 3.3% | $38.6 million / 5.2% | $52.6 million / 2.9% | $92.6 million / 6.3% |
| Net income attributable to Amkor | $4.7 million | $7.3 million | $3.8 million | $33.9 million |
| Diluted EPS | $0.02 | $0.03 | $0.02 | $0.14 |
For the six months, operating cash flow was $273.2 million, capital expenditures were $356.0 million, and company-defined free cash flow was negative $82.8 million. Cash and cash equivalents were $499.3 million at June 30, down from $523.2 million at year-end 2015. Total debt was $1.6367 billion, including $96.2 million classified as current; cash less debt was approximately $1.137 billion. Current assets were $1.363 billion and current liabilities $1.037 billion.
Changes versus prior comparable periods
Q2 sales increased 24.5%, while six-month sales rose 20.7%, principally because of J-Devices, which contributed $205.6 million and $422.6 million of sales, respectively. Excluding J-Devices, sales declined in both periods amid soft conditions and mobile-market weakness. Q2 gross profit rose $16.5 million, but gross margin fell 1.3 percentage points; six-month gross margin declined 2.7 points. Q2 operating income declined $8.1 million, and six-month operating income declined $40.0 million.
Operating expenses increased, including higher research and development spending and J-Devices expenses. Interest expense declined versus 2015 following the repayment of higher-cost senior notes in June 2015. Six-month operating cash flow increased from $228.3 million, with J-Devices contributing $40.3 million.
Outlook, risks, contingencies, and unusual items
- Management expects 2016 capital expenditures of approximately $650 million, including about $170 million for the K5 factory in Korea. First-half capital spending was $356.0 million, including $152.7 million for K5.
- Management reported some Q2 demand recovery, including in high-end Android smartphones and automotive, and expects market conditions to improve in the second half as new devices launch. It cautioned that semiconductor demand is cyclical and customer orders are not materially backed by firm commitments.
- Management believes operating cash flow, cash on hand, and available credit facilities will fund requirements for at least the next 12 months; it cautions that funding beyond that horizon is subject to business and market conditions. Amkor reported compliance with debt covenants at June 30.
- April 2016 earthquakes damaged the Kumamoto, Japan factory. Production was restored; the disruption reduced Q2 sales by approximately $15 million and caused $13.3 million of costs. Management expects about ¥3 billion (approximately $30 million) of insurance payments later in 2016 and expects minimal net full-year impact; actual costs and insurance recovery may differ.
- Amkor revised previously reported financial information after identifying a J-Devices tax-provision error affecting periods from 2012 through 2015. It says the cumulative $8.0 million overstatement of equity-method earnings was not material to Amkor for the affected periods; 2015 comparatives shown here are revised.
- Other obligations include $96.9 million remaining under the Tessera patent-license settlement, payable through 2018, and an estimated $140.7 million Korean severance liability. Gross unrecognized tax benefits were $26.2 million at June 30.
- Key risks include semiconductor cyclicality, high fixed costs and capacity utilization, customer concentration, substantial debt and capital spending, foreign-exchange exposure, tax-holiday expirations, and natural-disaster and integration risks. A 10% adverse currency movement was estimated to reduce income before taxes by about $26 million and six-month operating income by about $42 million, under the filing’s sensitivity assumptions.
Important facts for investors to verify
- Whether second-half smartphone and automotive demand improves as management expects, and whether sales excluding J-Devices recover.
- Progress, total cost, customer demand, and expected utilization and returns for the K5 facility and other planned capital investment.
- Actual earthquake-related repair costs and timing and amount of insurance proceeds.
- Debt repayment and refinancing capacity, credit availability, covenant compliance, and cash accessibility given that $366.8 million was held offshore.
- Effects of the J-Devices tax correction, post-acquisition integration, and future tax and pension/severance obligations.