Amkor Technology, Inc. — Q1 2018 Form 10-Q
Business context and period: Amkor provides outsourced semiconductor packaging and test services. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017, retrospectively adjusted for adoption of ASC 606 revenue recognition.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,025.3 million | $899.3 million | +14.0% |
| Gross profit / margin | $157.8 million / 15.4% | $136.2 million / 15.1% | Margin +0.3 percentage points |
| Operating income / margin | $36.1 million / 3.5% | $18.4 million / 2.0% | Operating income nearly doubled |
| Net income (loss) attributable to Amkor | $9.5 million; $0.04 per share | $(14.8) million; $(0.06) per share | Returned to profitability |
| Operating cash flow | $147.6 million | $102.7 million | +$45.0 million |
| Capital expenditures | $230.6 million | $88.3 million | +$142.3 million |
| Free cash flow | $(82.6) million | $16.2 million | Turned negative |
Sales growth was attributed to increased participation in major smartphone ecosystems and gains in computing and automotive. Advanced products generated $475.8 million of sales versus $375.9 million; mainstream products generated $549.6 million versus $523.4 million. Communications accounted for 42% of sales, automotive/industrial/other 26%, computing 19%, and consumer 13%.
Gross margin improved mainly on higher sales and fixed-cost operating leverage, with benefits from 2017 Japan factory consolidation partly offset by currency movements. Management cited an unfavorable 120-basis-point gross-margin effect from U.S. dollar weakening versus the prior-year period. Other expense declined to $23.4 million from $33.7 million, including lower interest expense following the July 2017 redemption of $200 million of senior notes and lower foreign-currency losses.
Financial position and liquidity
- At March 31, 2018, cash and cash equivalents were $495.2 million, down from $596.4 million at year-end; cash, cash equivalents and restricted cash totaled $500.8 million. Cash held offshore was $390.9 million.
- Total debt was $1,345.6 million, including $105.5 million classified as current. Long-term debt was $1,240.1 million. Management reported compliance with debt covenants and expects to remain compliant for at least 12 months.
- Current assets were $1,491.6 million and current liabilities $1,168.1 million. The company reported $199.5 million available under its U.S. revolving facility and additional foreign facility capacity.
- Management believes operating cash flow, existing cash and available credit will fund working capital, capital expenditures, debt service and other needs for at least the next 12 months.
- Scheduled debt principal payments include $102.6 million for the remainder of 2018, $174.3 million in 2019, $327.3 million in 2020, $211.3 million in 2021 and $531.1 million in 2022.
Material changes, outlook and risks
- Capital spending rose substantially as Amkor expanded production facilities and invested in advanced packaging and test equipment. Management expects 2018 capital expenditures of approximately $600 million.
- ASC 606 was adopted effective January 1, 2018 using full retrospective application. Revenue is generally recognized over time as services are performed rather than at shipment. Adoption changed reported historical revenue, profit and balance-sheet amounts but did not affect cash flows.
- Management identifies the semiconductor cycle, customer demand and utilization, pricing pressure, customer concentration, competition, and large fixed costs as key risks. Customer forecasts are short-term and generally not binding; weak utilization can materially reduce margins.
- Foreign-exchange movements remain significant: the filing estimates that a hypothetical 10% appreciation of foreign currencies against the U.S. dollar would reduce quarterly operating income by about $31 million. Currency translation contributed $15.1 million to other comprehensive income.
- Tax holidays in Malaysia and certain Philippine operations expire in 2018; Taiwan’s holiday expired at year-end 2017. Expiration may increase the effective tax rate. Tax Act accounting remained provisional, with no adjustment to prior provisional estimates in Q1.
- Amkor had $29.1 million remaining under a patent-license litigation settlement, payable through Q4 2018. Management said other legal matters were not expected to have a material adverse impact, while noting outcomes are uncertain.
- The Korean subsidiary’s unfunded severance plan liability was $154.5 million. A significant workforce reduction could require lump-sum payments and adversely affect liquidity.
- Management reported effective disclosure controls as of March 31, 2018. It also disclosed ongoing multi-year ERP implementation and integration of acquired operations.
Important facts for investors to verify
- Whether revenue growth and improved utilization persist, particularly in smartphone-related advanced packaging and the computing and automotive markets.
- Whether planned 2018 capital expenditures of about $600 million produce sufficient customer demand, utilization and returns; Q1 free cash flow was negative $82.6 million.
- Liquidity and debt-service capacity against the 2022 maturity concentration, ongoing capital needs and the Korean severance obligation.
- The effect of currency changes, expiring tax holidays and final Tax Act accounting on margins, earnings and cash flows.
- Whether customer concentration, nonbinding demand forecasts, supply constraints or industry cyclicality cause sales or capacity utilization to weaken.
- Settlement payments remaining in 2018 and developments in legal proceedings; the filing does not provide a clear estimate of potential exposure beyond disclosed accrued amounts.