AMKOR TECHNOLOGY, INC. annual report, FY2018

Amkor Technology, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Amkor provides outsourced semiconductor packaging and test services, with manufacturing operations across Asia and Europe. Prior-period revenue and financial data reflect retrospective adoption of ASC 606.

Financial performance

MetricFY 2018FY 2017
Net sales$4.316 billion$4.207 billion
Gross profit / margin$710.6 million / 16.5%$761.1 million / 18.1%
Operating income / margin$258.1 million / 6.0%$405.5 million / 9.6%
Net income attributable to Amkor$127.1 million; $0.53 diluted EPS$263.6 million; $1.10 diluted EPS
Operating cash flow$663.4 million$618.3 million
Capital expenditures$547.1 million$550.9 million
Free cash flow (company-defined, non-GAAP)$120.5 million$208.9 million

Fourth-quarter 2018 sales were $1.081 billion, gross profit $182.4 million, operating income $75.4 million, and net income attributable to Amkor $28.3 million. In fourth-quarter 2017, the corresponding figures were $1.150 billion, $224.3 million, $109.0 million, and $100.1 million; the prior-year quarter included a $41.6 million estimated Tax Act benefit.

Liquidity, debt and capital

  • Year-end cash and cash equivalents were $681.6 million, including $603.0 million held offshore; working capital was $512.8 million.
  • Total debt was approximately $1.33 billion, including $114.6 million due in 2019. Amkor reported compliance with debt covenants and said it expected to remain compliant for at least 12 months.
  • Available borrowing capacity included $250 million under the Singapore revolver; foreign subsidiaries also had other available revolving and term-loan capacity.
  • Amkor refinanced and redeemed $200 million of 6.625% notes in 2018 using a yen-denominated term loan; it expects approximately $11 million of annualized net interest savings.
  • Management expects 2019 capital expenditures of approximately $475 million. Amkor has never paid a dividend and has no current plan to do so.

Changes and management commentary

  • Sales rose 2.6%, reflecting higher communications, computing and automotive sales. Gross profit fell $50.5 million, principally because of product mix with higher material content; materials increased to 38.7% of sales from 36.4%.
  • Advanced Products sales increased to $2.119 billion, or 49.1% of sales, from $1.966 billion, or 46.7%. Mainstream Products sales declined to $2.198 billion from $2.241 billion.
  • Automotive, industrial and other markets represented 26% of sales; communications represented 44%. The ten largest customers contributed 62% of sales, and one customer accounted for 10.2%.
  • Operating cash flow improved mainly due to working-capital changes, but free cash flow decreased, reflecting lower operating cash flow after capital spending and substantially lower property-sale proceeds than in 2017.
  • The 2018 effective tax rate was 30.3%, versus 12.9% in 2017. Amkor recorded a $22.3 million tax expense to finalize its Tax Act accounting, reducing the previously estimated 2017 net benefit of $41.6 million.

Outlook, risks and unusual items

  • Management reported a smartphone inventory correction underway in the first quarter of 2019 and a broader, normal semiconductor-cycle correction. It cautioned that the timing and duration were uncertain; the filing provides no specific revenue or earnings guidance.
  • Key exposures include semiconductor cyclicality, high fixed costs and utilization sensitivity, declining service prices, short-term customer commitments, customer concentration, competition from Asian providers and customers’ in-house or foundry capacity.
  • Amkor’s substantial capital requirements, debt and covenants, foreign-exchange exposure, reliance on overseas factories and suppliers, and potential disruptions from geopolitical events or natural disasters are material risks. The Korean unfunded severance plan liability was $142.1 million.
  • Tax holidays in Taiwan expired at year-end 2017 and certain Malaysia and Philippines holidays expired in 2018, potentially raising future tax expense. Adoption of ASC 606 changed revenue timing to recognition over time; the company used the full retrospective method.
  • The company reported an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2018. Ordinary-course legal matters were not expected by management to have a material adverse impact; the prior patent settlement was fully paid by year-end.

Investor verification priorities

  • Assess whether the 2019 smartphone and semiconductor inventory correction affects orders, utilization and margins, particularly given the lack of material backlog.
  • Track material costs and product mix against the 2018 decline in gross margin, and determine whether advanced-product growth improves profitability.
  • Compare actual 2019 capital spending with the approximately $475 million expectation and operating cash generation; review free cash flow alongside debt service needs.
  • Review the debt maturity profile, refinancing terms, covenant headroom, offshore cash accessibility and potential costs of repatriation.
  • Monitor customer concentration and tax-holiday expirations, including their effects on sales stability and the effective tax rate.