Amkor Technology, Inc. — Q1 2020 10-Q
Business and reporting period: Amkor provides outsourced semiconductor packaging and test services. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019. Results reflect strong demand during the quarter, before the full effects of the Covid-19 pandemic were known.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1,152.6 million | $895.0 million; up 28.8% |
| Gross profit / margin | $188.9 million / 16.4% | $120.8 million / 13.5% |
| Operating income / margin | $84.1 million / 7.3% | $13.4 million / 1.5% |
| Net income (loss) attributable to Amkor | $63.9 million; diluted EPS $0.26 | $(22.9) million; diluted EPS $(0.10) |
| Interest expense | $17.0 million | $19.3 million |
| Operating cash flow | $96.6 million | $52.1 million |
| Capital expenditures | $55.9 million | $203.2 million |
| Free cash flow (non-GAAP) | $42.6 million | $(149.4) million |
Sales growth was driven by advanced products in consumer and communications markets. Advanced-product sales increased to $705.2 million from $422.4 million; mainstream-product sales declined to $447.5 million from $472.5 million. Management attributed the margin improvement principally to higher sales, partly offset by product mix with higher material content. Q1 2019 tax expense included a $14.9 million non-cash discrete charge, primarily from a deferred-tax valuation allowance; Q1 2020 tax expense was $4.8 million.
At March 31, 2020, cash and cash equivalents were $941.4 million and short-term investments were $58.3 million. Current assets totaled $2,153.7 million versus current liabilities of $1,047.7 million. Reported debt was $1,513.0 million, including $141.5 million current debt; scheduled principal repayments totaled $1,522.8 million. Amkor drew approximately $200 million on credit lines during the quarter as a precaution amid Covid-19 uncertainty. It reported $100 million available on its Singapore revolver and $115 million available under foreign revolving facilities, plus $86.5 million of term-loan availability for working capital and capital expenditures. The company was in compliance with debt covenants.
Changes, outlook, and risks
- Operating trends: Consumer sales benefited from a new high-volume product; communications sales benefited from recovery from the prior-year smartphone inventory correction. Consumer rose to 24% of sales from 14%; automotive, industrial and other fell to 23% from 28%, and computing to 15% from 20%. Communications remained 38%.
- Cash investment: Lower capital spending drove the year-over-year improvement in investing cash flow. Management expected 2020 capital expenditures of approximately $550 million, focused on advanced packaging and test equipment; actual spending depends on demand, projects, and funding availability.
- Covid-19: The company reported strong customer demand and only minor operational disruption during the quarter, but Philippine and Malaysian operations were curtailed in the final two weeks by government measures and workforce constraints. Management expected the pandemic to affect at least the next quarter and said the ultimate impact was uncertain. Risks include facility and supply-chain disruption, labor availability, weaker customer demand, and broader economic deterioration.
- Liquidity outlook: Management believed operating cash flow, existing cash and investments, and available credit would cover working capital, capital spending, debt service, and other needs for at least 12 months. It cautioned that funding beyond that period is not assured, particularly if industry conditions worsen.
- Debt and subsequent events: Debt service, variable interest rates, refinancing access, and covenant restrictions remain material considerations. After quarter-end, Amkor borrowed $123 million under a new Korean term loan, drew additional amounts under certain facilities, and increased available-for-sale investments by $130 million in April.
- Other items: Japan consolidation restructuring charges were $1.9 million in Q1; management estimated $19 million of additional charges and expected completion in the first half of fiscal 2021. Legal proceedings were described as ordinary-course matters not expected to have a material adverse impact, though outcomes remain uncertain. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Covid-19-related restrictions, staffing, supply constraints, and customer demand affect production, sales, and margins after Q1.
- Whether expected 2020 capital expenditures of approximately $550 million remain appropriate and can be funded without weakening liquidity.
- Debt maturities, post-quarter borrowing and investment activity, facility availability, and continued covenant compliance.
- Whether advanced-product growth and consumer-market demand persist, and how product mix, utilization, and material costs affect gross margin.
- Potential additional restructuring costs, foreign tax and valuation-allowance changes, and outcomes of tax examinations or legal matters.