Amkor Technology, Inc. — Q1 2019 10-Q
Business context and reporting period: Amkor provides outsourced semiconductor packaging and test services. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018. Management attributed weaker results to smartphone inventory correction and a broader semiconductor market cyclical correction.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $895.0 million | $1,025.3 million |
| Gross profit / margin | $120.8 million / 13.5% | $157.8 million / 15.4% |
| Operating income / margin | $13.4 million / 1.5% | $36.1 million / 3.5% |
| Net income (loss) attributable to Amkor | $(22.9) million; $(0.10) per share | $9.5 million; $0.04 per share |
| Net cash provided by operating activities | $52.1 million | $147.6 million |
| Capital expenditures | $203.2 million | $230.6 million |
| Free cash flow | $(149.4) million | $(82.6) million |
- Revenue fell 12.7% year over year. Advanced-products sales were $422.4 million versus $475.8 million; mainstream-products sales were $472.5 million versus $549.6 million.
- Lower revenue, reduced factory utilization and product mix drove the gross-margin decline. Operating expenses decreased to $107.3 million from $121.7 million.
- Income tax expense rose to $21.4 million from $2.5 million and included a $14.9 million non-cash discrete charge, primarily for a valuation allowance on certain deferred tax assets.
- At March 31, cash and cash equivalents were $1,055.4 million; current assets were $2,002.9 million and current liabilities $1,467.6 million. Total debt was approximately $1,854.0 million, including $638.7 million classified as short-term/current. Cash included $470.5 million held offshore.
- Operating cash flow declined by $95.6 million, primarily due to lower net income and working-capital changes. Investing cash outflow was $202.1 million; financing provided $523.7 million, principally from the new notes issuance.
Material changes and unusual items
- In March, Amkor issued $525 million of 6.625% senior notes due 2027. It used the proceeds, together with cash, to redeem $525 million of 6.375% notes due 2022 in April 2019. The March 31 debt and cash balances precede completion of that redemption; the company expected an approximately $8 million early-extinguishment charge in Q2.
- Debt maturities included $624.2 million due during the remainder of 2019. Amkor reported compliance with all debt covenants at March 31 and expected to remain compliant for at least the next 12 months.
- Amkor adopted the new lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; prior-year comparative balance-sheet amounts were not restated. The March 31 balance sheet included a $123.0 million operating lease asset and $73.9 million long-term operating lease liability.
- Foreign-currency movements shifted from a $4.7 million loss in Q1 2018 to a $2.0 million gain in Q1 2019, within other income and expense.
Outlook, management commentary and risks
- Management expects 2019 capital expenditures of approximately $475 million; Q1 spending was $203.2 million. Spending is being reduced on incremental capacity amid weaker demand.
- Management believes operating cash flow, existing cash and available credit facilities will fund working capital, capital spending, debt service and other needs for at least the next 12 months. This outlook is subject to business performance, market conditions, financing access and other uncertainties.
- The filing gives no specific revenue or earnings forecast. Management described the market as undergoing a smartphone inventory correction and a typical semiconductor cyclical correction, whose timing, depth and duration are uncertain.
- Key risks include semiconductor cyclicality, high fixed costs and utilization-sensitive margins, limited customer commitments and customer concentration, pricing pressure, substantial debt and scheduled repayments, large capital needs, foreign-exchange and interest-rate exposure, tax uncertainty, and disruptions to international operations or supply chains.
- The Korean subsidiary has an unfunded severance-plan liability of $135.7 million; significant workforce reductions could require lump-sum payments. The company stated that pending legal matters were not expected to have a material adverse impact, while noting outcomes remain uncertain.
- Disclosure controls and procedures were assessed as effective at March 31, 2019. No material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether demand and capacity utilization improve after the reported smartphone and semiconductor market corrections, and the resulting effect on gross margin.
- Actual 2019 capital spending versus the approximately $475 million outlook, and whether operating cash flow can support investment and debt service.
- Post-April debt and liquidity following redemption of the 2022 notes, including near-term maturities and refinancing requirements.
- Further changes to deferred-tax-asset valuation allowances, tax-holiday benefits and the effective tax rate.
- Customer order trends, concentration and reliance on receivables factoring; receivables sold in Q1 were $155.7 million, down from $225.5 million a year earlier.