Amkor Technology, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. Amkor provides outsourced semiconductor packaging and test services. Financial statements are unaudited. The company adopted Topic 606 retrospectively, changing revenue recognition generally from shipment-based recognition to recognition over time as services are performed.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,144.2 million | $1,148.9 million | $3,235.2 million | $3,056.6 million |
| Gross profit / margin | $200.7 million / 17.5% | $223.9 million / 19.5% | $528.2 million / 16.3% | $536.7 million / 17.6% |
| Operating income | $92.7 million | $105.5 million | $182.8 million | $296.5 million |
| Net income attributable to Amkor | $56.7 million | $59.3 million | $98.8 million | $163.5 million |
| Diluted EPS | $0.24 | $0.25 | $0.41 | $0.68 |
| Operating cash flow | Not separately presented | Not separately presented | $427.2 million | $413.9 million |
| Capital expenditures | Not separately presented | Not separately presented | $478.0 million | $414.0 million |
| Free cash flow (company-defined) | Not separately presented | Not separately presented | $(49.2) million | $133.3 million |
Q3 sales declined 0.4% year over year; nine-month sales increased 5.8%. Q3 and nine-month gross margins fell 2.0 and 1.3 percentage points, respectively. Management attributed the pressure primarily to product mix with higher material content, partly offset by benefits from Japan factory consolidation. Nine-month 2018 operating income also compares against 2017 results that included a $108.1 million gain on sale of the K1 factory.
Balance sheet, debt and liquidity
- At September 30, 2018, cash and cash equivalents were $547.7 million; total debt was $1,365.6 million, including $97.6 million current. Cash held offshore was $491.1 million.
- Total current assets were $1,611.2 million and current liabilities $1,171.3 million. Total liabilities were $2,673.6 million; total equity was $1,821.8 million.
- Amkor reported $250 million available under its new senior secured revolver and $269 million available under foreign-subsidiary secured revolving facilities overall, plus $4.4 million available under secured term-loan facilities. It was in compliance with debt covenants.
- Scheduled debt principal payments include $436.3 million in 2020 and $576.4 million in 2022. The company says cash from operations, existing cash and facility availability should fund requirements for at least the next 12 months, while noting funding beyond that period is uncertain.
- Investing activities used $473.3 million in the first nine months, mainly reflecting capital spending. Cash, cash equivalents and restricted cash decreased $48.7 million to $554.1 million.
Material developments, outlook and risks
- Debt refinancing: Amkor borrowed ¥26.0 billion (about $233.2 million) through a J-Devices term loan and redeemed the remaining $200 million of 6.625% Senior Notes due 2021 in August. Management expects approximately $11 million of net annualized interest savings. The new revolver increased availability from $200 million to $250 million and extends to July 2023.
- Investment outlook: 2018 capital expenditures were expected to be approximately $600 million, focused mainly on advanced packaging and test equipment and production expansion. Nine-month spending had reached $478.0 million.
- Business commentary: Nine-month sales growth reflected greater participation in major smartphone ecosystems and demand in computing and automotive markets. Advanced products generated $1,554.2 million of nine-month sales, compared with $1,681.0 million from mainstream products.
- Tax and accounting: The company had not finalized its accounting for the Tax Act provisional estimates. Certain tax holidays expired or were due to expire, which could increase the effective tax rate. Amkor planned to adopt the new lease standard in Q1 2019 and was evaluating its impact.
- Contingencies: Amkor said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain. Contractual obligations included $9.7 million of settlement payments related to patent-license litigation. It also disclosed $141.3 million of estimated Korean severance-plan obligations.
- Principal risks: Semiconductor cyclicality, customer demand and concentration, limited committed backlog, fixed costs and utilization, pricing and product mix, substantial capital requirements and debt, foreign currency exposure, tax changes, international operations and supply disruptions. A 10% appreciation of foreign currencies against the U.S. dollar was estimated to reduce nine-month operating income by approximately $88 million under the filing’s sensitivity assumptions.
Important facts for investors to verify
- Whether demand and capacity utilization support the planned capital spending and improve gross margins despite higher-material-content product mix.
- Whether the expected $11 million annualized refinancing savings are realized and whether debt maturities, especially in 2020 and 2022, remain manageable.
- How much cash generation is available after capital expenditures; reported company-defined free cash flow was negative $49.2 million for the first nine months.
- The eventual tax impact of expiring tax holidays and finalization of Tax Act accounting estimates.
- Whether customer demand, foreign-exchange movements, and legal or severance obligations materially change from the assumptions and estimates disclosed.