Amkor Technology, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,354.0m | $1,083.9m | $3,679.5m | $2,874.2m |
| Gross profit / margin | $241.1m / 17.8% | $182.2m / 16.8% | $622.3m / 16.9% | $426.5m / 14.8% |
| Operating income / margin | $127.5m / 9.4% | $78.9m / 7.3% | $298.1m / 8.1% | $114.8m / 4.0% |
| Net income attributable to Amkor | $92.2m | $54.1m | $211.5m | $21.7m |
| Diluted EPS | $0.38 | $0.23 | $0.87 | $0.09 |
| Operating cash flow | Not presented by quarter | $434.0m | $283.3m | |
| Capital expenditures | Not presented by quarter | $275.5m | $328.5m | |
| Free cash flow (company-defined) | Not presented by quarter | $161.2m | $(35.1)m |
Amounts are in U.S. dollars. Q3 sales grew 24.9% year over year; nine-month sales grew 28.0%. Q3 gross profit increased $58.8m, while nine-month net income attributable to Amkor rose from $21.7m to $211.5m.
Balance sheet and liquidity
- At September 30, 2020, cash and cash equivalents were $566.7m and short-term investments were $356.2m. Total cash, cash equivalents and restricted cash were $570.8m.
- Total debt was $1,319.1m, including $136.5m current and $1,182.6m long-term; debt was $1,450.2m at December 31, 2019. Cash and short-term investments together exceeded reported debt by about $396m.
- Total current assets were $2,268.6m versus current liabilities of $1,375.4m. Capital expenditures payable increased to $328.2m from $77.0m at year-end 2019.
- Operating cash flow increased by $150.7m year over year for the first nine months, which management attributed primarily to higher sales and operating profit, partly offset by working-capital changes. Investing cash outflow was $611.3m, including substantial short-term investment purchases; financing cash outflow was $153.2m, primarily reflecting net debt repayments.
- Management stated available operating cash flow, cash, short-term investments and credit facilities were expected to fund requirements for at least the next 12 months. It reported $346m available under foreign subsidiary revolving facilities and $56m available under term-loan facilities for working capital and capital expenditures; the $250m Singapore revolver was undrawn.
Drivers and changes versus prior periods
- Growth primarily reflected higher advanced-product sales in communications and consumer markets. Advanced-product sales were $899.3m in Q3 versus $589.0m a year earlier; mainstream-product sales declined to $454.7m from $494.9m.
- Management cited smartphone-market recovery following the prior-year inventory correction and a new high-volume consumer product. Automotive sales were weaker; automotive, industrial and other markets represented 17% of Q3 sales versus 26% a year earlier.
- Gross margin improved as higher sales supported utilization, partly offset by a sales mix shift toward products with higher material content. Fixed factory costs make margins sensitive to revenue, product mix and capacity utilization.
- Nine-month interest expense declined to $49.5m from $54.9m, principally due to refinancing higher-rate debt and lower rates on variable-rate loans. Nine-month 2019 tax expense included an $11.8m discrete charge, contributing to the lower comparison-period earnings.
Outlook, commentary and risks
- Management expected 2020 capital expenditures of approximately $550m, focused mainly on advanced packaging and test equipment. Actual spending depends on demand, project timing, liquidity and financing.
- Amkor reported only minor COVID-19-related operational disruptions to date, but said the pandemic’s future effects were uncertain. Automotive demand had been particularly affected; restrictions, supply-chain interruptions, labor constraints and weaker customer demand could weigh on results.
- In October 2020, the board approved a regular quarterly dividend of $0.04 per share, with the first payment expected to total about $9.7m on January 7, 2021. Future dividends remain subject to board discretion and financial, cash and debt considerations.
- Japan factory-consolidation restructuring charges were $9.5m for the first nine months of 2020, including $5.7m in Q3. Amkor estimated a further $13m of charges and expected to complete the actions in the first half of fiscal 2021.
- In October, some Korean employees accepted conversion from the severance plan to a defined-contribution plan, expected to convert approximately $30m of obligations and require funding in Q4. The Korean unfunded severance liability was $119.1m at September 30.
- Gross unrecognized tax benefits were $30.0m at September 30, up from $26.2m at year-end 2019. Management said a valuation allowance on an interest-expense carryforward might be releasable within 12 months if sufficient positive evidence emerges; such a release would reduce tax expense.
- Key risks include semiconductor-industry cyclicality, customer concentration and lack of binding backlog, high fixed costs and capacity utilization, substantial capital needs and debt, international operations, supply and equipment availability, foreign-exchange exposure, tax uncertainty and COVID-19. Amkor reported compliance with debt covenants and no material adverse impact expected from ordinary-course legal matters, while noting outcomes could change.
Most important facts for investors to verify
- Whether strong advanced-product demand and Q3 margins persist, and how much growth is concentrated in communications and consumer customers or products.
- Whether the approximately $550m 2020 capital-spending plan is completed as expected and produces adequate utilization and returns; monitor capital-expenditure payables.
- Whether operating cash generation remains sufficient to fund investment, debt service and the newly initiated dividend, particularly if end-market demand weakens.
- Debt maturities include $266.6m in 2022 and $252.1m in 2023; assess refinancing, interest-rate and covenant risks alongside available facility capacity.
- Progress and remaining costs of Japan restructuring, the Korean severance-plan conversion and any change in tax valuation allowances or tax-audit exposures.
- Management’s assertion that liquidity covers at least 12 months is forward-looking; results may differ with demand, capacity utilization, working capital, COVID-19 impacts and financing conditions.