Amkor Technology, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amkor provides outsourced semiconductor packaging and test services. Unless otherwise stated, amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,083.9 million | $1,144.2 million | $2,874.2 million | $3,235.2 million |
| Gross profit / margin | $182.2 million / 16.8% | $200.7 million / 17.5% | $426.5 million / 14.8% | $528.2 million / 16.3% |
| Operating income / margin | $78.9 million / 7.3% | $92.7 million / 8.1% | $114.8 million / 4.0% | $182.8 million / 5.6% |
| Net income attributable to Amkor | $54.1 million | $56.7 million | $21.7 million | $98.8 million |
| Diluted earnings per share | $0.23 | $0.24 | $0.09 | $0.41 |
- Q3 sales declined 5.3% year over year; nine-month sales fell 11.2%. Management attributed the decline primarily to a cyclical semiconductor-market correction.
- Q3 gross margin contracted 0.7 percentage points and nine-month gross margin 1.5 points year over year, mainly due to lower revenue and reduced capacity utilization; manufacturing cost controls partly offset the pressure.
- Nine-month operating cash flow was $283.3 million, down from $427.2 million. Capital expenditures were $328.5 million, versus $478.0 million. Reported free cash flow was negative $35.1 million, compared with negative $49.2 million.
- At September 30, cash and cash equivalents were $598.8 million; current assets were $1,663.0 million and current liabilities $992.3 million. Total debt was approximately $1,298.0 million, including $103.0 million classified as current. Cash less reported debt was approximately $699 million.
Business mix and material changes
- Q3 advanced-product sales were $589.0 million, up from $582.2 million; mainstream-product sales were $494.9 million, down from $562.0 million.
- Q3 end-market mix shifted year over year: communications 41% versus 47%, consumer 18% versus 11%, computing 15% versus 17%, and automotive, industrial and other 26% versus 25%.
- Amkor issued $525 million of 6.625% senior notes due 2027 in March and redeemed $525 million of 6.375% notes due 2022 in April. The redemption resulted in an $8.4 million loss on debt extinguishment. Nine-month interest expense declined, partly offset by interest on the new notes.
- Nine-month tax expense included an $11.8 million discrete charge, primarily from a valuation allowance on certain deferred tax assets. The filing reports $36.4 million of tax expense for the period, compared with $27.4 million a year earlier.
- Amkor adopted lease accounting Topic 842 on January 1, 2019 without restating prior periods, recognizing operating lease right-of-use assets and liabilities.
Outlook, risks and other matters
- Management expected 2019 capital expenditures of approximately $475 million; spending was being reduced on incremental capacity amid lower demand.
- Management believed operating cash flow, cash on hand and available credit would fund working capital, capital expenditures, debt service and other requirements for at least the next 12 months. This depends on business performance, financing access and other conditions.
- Management cited a smartphone inventory correction and a broader cyclical semiconductor correction, with timing and duration uncertain. High fixed costs make margins sensitive to revenue and utilization; customer commitments and backlog are limited.
- Other material risks include customer and end-market concentration, pricing pressure, substantial debt and covenant restrictions, foreign-exchange exposure, international operations, and capital investments made ahead of firm customer demand. Foreign-currency sensitivity analysis estimated that a 10% appreciation of foreign currencies against the U.S. dollar would reduce nine-month operating income by approximately $78 million.
- Amkor reported compliance with debt covenants at quarter-end. It expected continued compliance for at least 12 months. The company had no present dividend plans and had not repurchased shares under its buyback program since 2012.
- Management concluded disclosure controls were effective as of September 30, 2019. The company said ordinary-course legal matters were not expected, individually or in aggregate, to have a material adverse impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether demand and factory utilization recover, and how that affects revenue and gross margin.
- Actual 2019 capital expenditures versus the approximately $475 million expectation, and the effect on cash and free cash flow.
- Debt maturities, refinancing needs, available credit and covenant compliance; also note $537.7 million of cash was held offshore.
- The effects of deferred-tax valuation allowances, tax holidays and open tax examinations on future tax expense and cash taxes.
- Customer orders, product mix and the sustainability of advanced-product growth amid the reported market correction.