Amkor Technology, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amkor provides outsourced semiconductor packaging and test services. Management cited a smartphone inventory correction and a broader cyclical semiconductor-market correction.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $895.3 | $1,065.7 | $1,790.3 | $2,091.0 |
| Gross profit / margin | $123.5 / 13.8% | $169.7 / 15.9% | $244.2 / 13.6% | $327.5 / 15.7% |
| Operating income | $22.5 | $53.9 | $35.9 | $90.1 |
| Net income (loss) attributable to Amkor | $(9.5) | $32.6 | $(32.3) | $42.1 |
| Diluted EPS | $(0.04) | $0.14 | $(0.14) | $0.18 |
- Sales and margins: Q2 sales declined 16.0% year over year; first-half sales declined 14.4%. Gross margin fell 2.1 percentage points in both comparisons. Management attributed the margin decline mainly to lower revenue and utilization, partly offset by product mix and foreign exchange effects.
- Cash flow and investment: First-half operating cash flow was $168.9, versus $206.4 a year earlier. Capital expenditures were $273.7, versus $389.6; reported free cash flow was negative $95.0, compared with negative $182.6.
- Liquidity and debt: June 30 cash and cash equivalents were $551.4; including restricted cash, cash totaled $556.9. Debt carrying value was $1,308.2, including $198.2 classified as current. Management said cash, operating cash flow and available credit were expected to fund requirements for at least 12 months. The company reported covenant compliance.
Material changes and unusual items
- Advanced-product sales were $432.6 in Q2, down from $496.2; mainstream-product sales were $462.7, down from $569.4. Communications’ share of sales declined to 37% from 42%, while automotive, industrial and other increased to 29% from 26%.
- Amkor issued $525 million of 6.625% senior notes due 2027 and redeemed $525 million of 6.375% notes due 2022. The early redemption produced an $8.4 million loss on debt retirement.
- First-half income tax expense included a $14.9 million non-cash discrete charge, primarily from establishing a valuation allowance on foreign deferred tax assets. First-half results also included a net loss despite positive operating income.
- Operating lease accounting was adopted effective January 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet; prior-year comparisons were not restated.
Outlook, commentary and risks
- Management expected 2019 capital expenditures of approximately $475 million; it had spent $273.7 million in the first half and said it was reducing incremental-capacity spending amid softer demand.
- Management described advanced packaging, automotive demand and expanding customer relationships in China and Taiwan as growth opportunities, while emphasizing that demand recovery timing and strength were uncertain.
- Key risks include semiconductor cyclicality, limited customer commitments and no material backlog, high fixed costs and utilization sensitivity, customer concentration, substantial debt, foreign-exchange and interest-rate exposure, and the risk that capital investments precede or exceed customer demand.
- Other noted exposures include tax examinations and tax-holiday expirations, an unfunded Korean severance obligation of $131.0 million, and continued implementation of enterprise resource planning systems. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether semiconductor and smartphone demand stabilizes and factory utilization improves enough to recover margins.
- Whether the planned 2019 capital spending level and related customer demand support returns on investment and liquidity.
- Debt maturities, refinancing capacity, variable-rate exposure and the effect of the 2027 notes on future interest costs.
- The realization of deferred tax assets, future valuation allowances, tax-holiday changes and outcomes of open tax examinations.
- Customer concentration and the effect of the Kim family’s approximately 59% ownership on governance and share liquidity.