Amkor Technology, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amkor provides outsourced semiconductor packaging and test services. Financial statements are unaudited; 2017 comparisons were retrospectively adjusted for adoption of ASC 606.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,065.7m | $1,008.4m | $2,091.0m | $1,907.7m |
| Gross profit / margin | $169.7m / 15.9% | $176.6m / 17.5% | $327.5m / 15.7% | $312.9m / 16.4% |
| Operating income | $53.9m | $172.7m | $90.1m | $191.0m |
| Net income attributable to Amkor | $32.6m | $119.0m | $42.1m | $104.2m |
| Diluted EPS | $0.14 | $0.50 | $0.18 | $0.44 |
| Operating cash flow | Not separately stated | Not separately stated | $206.4m | $200.0m |
| Capital expenditures | Not separately stated | Not separately stated | $389.6m | $271.7m |
| Free cash flow | Not separately stated | Not separately stated | $(182.6)m | $59.3m |
Amounts are in U.S. dollars. Q2 sales increased 5.7%; first-half sales increased 9.6%. Advanced-product sales rose to $496.2m from $445.1m in Q2, while mainstream-product sales were $569.4m versus $563.3m. Communications represented 42% of first-half sales; automotive, industrial and other markets represented 26%.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $380.3m; total debt was $1,329.6m, including $115.1m current. Approximate debt less cash was $949.3m.
- Current assets were $1,458.2m and current liabilities were $1,161.7m. Total liabilities were $2,611.5m and equity was $1,770.2m.
- Operating cash flow was offset by heavy investment: capital expenditures were $389.6m, producing reported free cash flow of $(182.6)m. Cash, cash equivalents and restricted cash declined $217.1m during the first half to $385.8m.
- Management said cash flow from operations, cash balances and credit availability should fund working capital, capital expenditures, debt service and other needs for at least the next 12 months. It cautioned that funding beyond that period is not assured.
Material changes and unusual items
- Q2 gross margin fell 1.6 percentage points year over year, primarily due to product mix with higher material content; higher sales and benefits from prior factory consolidation partly offset the pressure.
- Q2 2017 operating income included a $108.1m gain on sale of the K1 factory. This one-time gain is a major reason reported operating income and net income were much lower in Q2 2018; the prior-period comparison is not like-for-like.
- First-half 2018 sales growth was attributed to greater participation in major smartphone ecosystems and gains in computing and automotive. First-half gross margin declined 0.7 percentage points.
- ASC 606 was adopted retrospectively from January 1, 2018; revenue is generally recognized over time as packaging and test services are performed rather than at shipment. The adoption changed reported revenue, receivables, inventory and deferred-revenue balances, but did not affect cash flows.
Outlook, risks and contingencies
- Management expected 2018 capital expenditures of approximately $600m, focused mainly on advanced packaging and test equipment and production capacity. First-half spending had already reached $389.6m.
- In July 2018, Amkor borrowed approximately $230m through a five-year yen-denominated term loan at a fixed 1.30% rate to fund redemption of $200m of 6.625% senior notes due 2021. Redemption was scheduled for August; management expected approximately $11m of net annualized interest savings. A new revolving facility increased availability from $200m to $250m and extends to July 2023.
- Key risks include semiconductor-industry cyclicality, customer demand and pricing volatility, limited customer commitments, high fixed costs and utilization sensitivity, substantial capital needs and indebtedness, foreign-exchange exposure, concentrated international operations, and customer and supplier concentration. A 10% appreciation of foreign currencies against the U.S. dollar was estimated to reduce first-half operating income by approximately $59m.
- Tax holidays in certain jurisdictions have expired or are due to expire; management said expiration may raise the effective tax rate. Accounting for Tax Act effects remained provisional, with no adjustments to the 2017 provisional amounts in the first half.
- At June 30, scheduled debt principal repayments totaled $1,330.5m, including $530.8m in 2022. The Korean unfunded severance liability was $145.3m; $19.4m remained payable under a patent-license settlement, scheduled to be completed in 2018. The company reported compliance with debt covenants and no off-balance-sheet arrangements as defined by SEC rules.
- Management believed ordinary-course legal matters would not have a material adverse impact, while noting outcomes are uncertain. Disclosure controls were concluded effective as of June 30, 2018.
Important facts for investors to verify
- Whether sales growth and advanced-product demand persist, and whether product mix and capacity utilization stabilize gross margins.
- Whether the planned $600m capital program converts into sufficient customer demand and returns, given negative first-half free cash flow.
- Completion and actual savings from the August 2018 note redemption and terms and availability of the replacement credit facility.
- Debt maturities, refinancing capacity, covenant headroom and liquidity needs beyond management’s 12-month assessment.
- Effects of foreign-exchange movements, tax-holiday expirations and finalization of Tax Act accounting.
- Potential changes in customer forecasts, semiconductor-cycle conditions, supplier availability, and legal or settlement obligations.