AMKOR TECHNOLOGY, INC. Overview
Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Our financial goals are sales growth and improved profitability. To achieve these goals, we are focused on generating increased value from our investments in advanced technologies, improving utilization of existing assets, executing our balanced growth strategy and selectively growing our scale and scope through strategic investments. We are an industry leader in developing and commercializing cost-effective advanced packaging and test technologies. These advanced technology solutions provide increased value to our customers. This is particularly true in the mobile communications market, where growth generally outpaces the semiconductor industry rate. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. Interest in advanced packages for automotive applications is growing as well, largely due to new, data-intensive applications, which require increased pin count and performance. We believe that our technology leadership and this technology transition create significant growth opportunities for us. - 18-
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We typically look for opportunities in the advanced packaging and test area where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies. We also focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms. In addition, we are seeking to add new customers and to deepen our engagement with existing customers. This includes an expanded emphasis on the automotive market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies. From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve through joint ventures, acquisitions and other strategic investments. For example, inMay 2017 we acquired Nanium, which has strengthened our position in the market for wafer-level fan-out packaging, and inDecember 2015 , we completed the acquisition of ourJapan operations. We believe that taking advantage of these opportunities helps diversify our revenue streams, improve our profits, broaden our portfolio of services and maintain our technological leadership. As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors. Historically, there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past. We believe that the smartphone inventory correction that impacted the first half of 2019 had recovered and that, prior to the Covid-19 outbreak, the general semiconductor market was nearing stabilization and likely to resume growth going forward. Covid-19 began to affect our business in the three months endedMarch 31, 2020 . Customer demand for our services was strong throughout the quarter, and we experienced only minor disruptions to our operations, principally as a result of isolated supply chain constraints. In the final two weeks of the period, our operations inthe Philippines andMalaysia were curtailed by government efforts in both countries to reduce the spread of Covid-19, efforts which had the effect of reducing the number of employees available for work. Facilities in those two countries are returning to operations at pre-Covid-19 levels, but there can be no assurance as to when those operations will return fully to pre-Covid-19 operating levels or if those levels can be maintained once reached. The Covid-19 pandemic did not have a material adverse effect on our results of operations during the quarter endedMarch 31, 2020 , but the Covid-19 pandemic will affect our results of operations in at least the next quarter. The full effect of the Covid-19 pandemic is unknown and there is significant uncertainty related to the ultimate impact that the Covid-19 pandemic will have on our business, results of operations and financial condition. See Part II, Item 1A, including, "The Covid-19 outbreak could impact the supply chain and consumer demand for our customers' products and services, which may adversely affect our business, results of operations, and financial condition" and "Dependence on the Highly Cyclical Semiconductor Industry - Our Packaging and Test Services Are Used inVolatile Industries and Industry Downturns, and Declines in Global Economic and Financial Conditions Could Harm Our Performance." We operate in a capital-intensive industry and have a significant level of debt. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without firm customer commitments. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other considerations, the performance of our business, our capital expenditure levels, our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings and our investment strategy. During the three months endedMarch 31, 2020 , as a proactive, precautionary measure in light of the uncertainties caused by the Covid-19 pandemic, we elected to draw down approximately$200 million from select lines of credit, including our senior secured revolving credit facility in the amount of$150 million . As ofMarch 31, 2020 , we had cash and cash equivalents and short-term investments of$941.4 million and$58.3 million , respectively. Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. - 19-
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Table of Contents Financial Summary Our net sales increased$257.7 million or 28.8% to$1,152.6 million for the three months endedMarch 31, 2020 from$895.0 million for the three months endedMarch 31, 2019 . This increase was due to higher sales of advanced products in the consumer and communications end markets. Gross margin for the three months endedMarch 31, 2020 increased to 16.4% from 13.5% for the three months endedMarch 31, 2019 . The increase in gross margin was primarily due to the increase in net sales, partially offset by changes in the mix of products sold with higher material content during the period. Our capital expenditures totaled$55.9 million for the three months endedMarch 31, 2020 , compared to$203.2 million for the three months endedMarch 31, 2019 . The decrease in spending is primarily due to our initiative during the prior year to reduce spending on further capacity expansion. Net cash provided by operating activities was$96.6 million for the three months endedMarch 31, 2020 , compared to$52.1 million for the three months endedMarch 31, 2019 . This increase was primarily due to higher net sales and higher operating profit, partially offset by changes in our working capital.
Results of Operations
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
For the Three Months Ended March 31,
2020 2019
Net sales 100.0 % 100.0 %
Materials 45.3 % 38.0 %
Labor 14.2 % 17.4 %
Other manufacturing costs 24.1 % 31.1 %
Gross margin 16.4 % 13.5 %
Operating income 7.3 % 1.5 %
Net income (loss) attributable to Amkor 5.5 % (2.6 )%
Net Sales
For the Three Months Ended March 31,
2020 2019 Change
(In thousands, except percentages)
Net sales
The increase in net sales for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was due to higher sales of advanced products in the consumer and communications end markets. Sales increased in the consumer market due to the introduction of a new high volume consumer product. The communications market benefitted from the recovery of the prior year inventory correction in the smartphone market. - 20-
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Gross Margin
For the Three Months Ended March 31,
2020 2019 Change
(In thousands, except percentages)
Gross profit $ 188,908 $ 120,761 $ 68,147
Gross margin 16.4 % 13.5 % 2.9 %
Our cost of sales consists principally of materials, labor, depreciation and
manufacturing overhead. Since a substantial portion of the costs at our
factories is fixed, there tends to be a strong relationship between our revenue
levels and gross margin. Accordingly, relatively modest increases or decreases
in revenue can have a significant effect on margin, depending upon product mix,
utilization and seasonality.
Gross margin increased for the three months ended March 31, 2020 compared to the
three months ended March 31, 2019 , primarily due to the increase in net sales,
partially offset by changes in the mix of products sold with higher bill of
materials cost during the period.
Selling, General and Administrative
For the Three Months Ended March 31,
2020 2019 Change
(In thousands, except percentages)
Selling, general and administrative $ 72,582 $ 71,587 Selling, general and administrative expenses for the three months endedMarch 31, 2020 increased compared to the three months endedMarch 31, 2019 , primarily due to increased employee compensation costs and our factory consolidation efforts inJapan . These increases were partially offset by our efforts to control expenses, specifically professional fees and travel. Research and Development For the Three Months Ended March 31, 2020 2019 Change (In thousands, except percentages) Research and development$ 32,253 $ 35,754 $ (3,501 ) (9.8 )% Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. The costs related to our technology and product development projects are included in research and development expense until the project moves into production. Once production begins, the costs related to production become part of the cost of sales, including ongoing depreciation for the equipment previously held for research and development activities. Research and development expenses for the three months endedMarch 31, 2020 decreased compared to the three months endedMarch 31, 2019 due to projects that moved into production, partially offset by new development projects, primarily at our research and development facility inKorea . - 21-
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Other Income and Expense
For the Three Months Ended March 31,
2020 2019 Change
(In thousands, except percentages)
Interest expense $ 17,045 $ 19,273 $ (2,228 ) (11.6 )%
Interest income (2,258 ) (2,064 ) (194 ) 9.4 %
Foreign currency (gain) loss, net (229 ) (2,013 ) 1,784 (88.6 )%
Loss on debt retirement 428 - 428 -
Other (income) expense, net (256 ) (488 ) 232 (47.5 )%
Total other expense, net $ 14,730 $ 14,708 $ 22 0.1 %
Interest expense decreased for the three months ended March 31, 2020 compared to
the three months ended March 31, 2019 , primarily due to the timing of the
redemption of $525 million aggregate principal amount of our 6.375% Senior Notes
due 2022 in April 2019 . This redemption was funded with proceeds from our 6.625%
Senior Notes due 2027 which were issued in March 2019 .
The changes in foreign currency (gain) loss, net for the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 were due to
foreign currency exchange rate movements and the associated impact on our net
monetary exposure at our foreign subsidiaries.
Income Tax Expense
For the Three Months Ended March 31,
2020 2019 Change
(In thousands)
Income tax expense $ 4,846 $ 21,380 $ (16,534 )
Income tax expense, which includes foreign withholding taxes and minimum taxes,
reflects the applicable tax rates in effect in the various countries where our
income is earned and is subject to volatility depending on the relative mix of
earnings in each location. Income tax expense for the three months ended March
31, 2019 also includes a $14.9 million non-cash discrete tax expense primarily
for the recognition of a valuation allowance for certain deferred tax assets.
During the three months ended March 31, 2020 and 2019, our subsidiaries in
Korea , the Philippines and Singapore operated under various tax holidays. As
these tax holidays expire, income earned in these jurisdictions will be subject
to higher statutory income tax rates, which may cause our effective tax rate to
increase.
Liquidity
We assess our liquidity based on our current expectations regarding sales,
operating expenses, capital spending, debt service requirements and other
funding needs. Based on this assessment, we believe that our cash flow from
operating activities, together with existing cash and cash equivalents,
short-term investments and availability under our credit facilities, will be
sufficient to fund our working capital, capital expenditure, debt service and
other financial requirements for at least the next twelve months. During the
three months ended March 31, 2020 , as a proactive, precautionary measure in
light of the uncertainties caused by the Covid-19 pandemic, we elected to draw
down approximately $200 million in select lines of credit, including our senior
secured revolving credit facility in the amount of $150 million . Our liquidity
is affected by, among other factors, volatility in the global economy and credit
markets, the performance of our business, our capital expenditure levels, other
uses of our cash including any purchases of stock under our stock repurchase
program, any acquisitions or investments in joint ventures and our ability to
either repay debt out of operating cash flow or refinance it at or prior to
maturity with the proceeds of debt or equity offerings. There can be no
assurance that we will generate the necessary net income or operating cash
flows, or be able to borrow sufficient funds, to meet the funding needs of our
business
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beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional debt or equity financings. We refer you to Note 7 and Note 11 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information on our investments and borrowings, respectively. As ofMarch 31, 2020 , we had cash and cash equivalents and short-term investments of$941.4 million and$58.3 million , respectively. Included in our cash and short-term investments balances as ofMarch 31, 2020 , is$848.7 million and$42.6 million , respectively, held offshore by our foreign subsidiaries. We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations. Due to the changes in theU.S. tax law under the Tax Cuts and Jobs Act ("Tax Act"), distributions of cash to theU.S. as dividends generally will not be subject toU.S. federal income tax. If we were to distribute this offshore cash to theU.S. as dividends from our foreign subsidiaries, we may be subject to foreign withholding and state income taxes. The borrowing base under our$250.0 million first lien senior secured revolving credit facility entered into by our subsidiary,Amkor Technology Singapore Holding Pte, Ltd. (the "Singapore Revolver"), is limited to the amount of eligible accounts receivable. As ofMarch 31, 2020 , we had outstanding borrowings of$150.0 million , additional availability of$100.0 million , and no outstanding standby letters of credit. As ofMarch 31, 2020 , our foreign subsidiaries had$115.0 million available to be drawn under revolving credit facilities, including the Singapore Revolver, and$86.5 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures. As ofMarch 31, 2020 , we had$1,513.0 million of debt. Our scheduled principal repayments on debt include$113.4 million due over the remainder of 2020,$114.5 million due in 2021,$264.5 million due in 2022,$332.1 million due in 2023,$121.9 million due in 2024, and$576.4 million due thereafter. We were in compliance with all debt covenants atMarch 31, 2020 , and we expect to remain in compliance with these covenants for at least the next twelve months. For certain accounts receivable, we use non-recourse factoring arrangements with third-party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. These factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers. For the three months endedMarch 31, 2020 and 2019, we sold accounts receivable totaling$170.5 million and$155.7 million , net of discounts and fees of$1.0 million and$1.2 million , respectively. In order to reduce our debt and future cash interest payments, we may from time to time repurchase or redeem our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market, through privately negotiated transactions or otherwise and is subject to the terms of our indentures and other debt agreements, market conditions and other factors. Certain debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities. These restrictions are determined in part by calculations based upon cumulative net income or borrowing availability. We have never paid a dividend to our stockholders, and we do not have any present plans for doing so. From time to time,Amkor Technology, Inc. andAmkor Technology Singapore Holding Pte, Ltd. also guarantees certain debt of our subsidiaries. We operate in a capital-intensive industry. Servicing our current and future customers may require that we incur significant operating expenses and make significant investments in equipment and facilities, which are generally made in advance of the related revenues and without firm customer commitments. Our Board of Directors previously authorized the repurchase of up to$300.0 million of our common stock, exclusive of any fees, commissions or other expenses. AtMarch 31, 2020 , approximately$91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and - 23-
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investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the program since 2012.
Capital Resources
We make significant capital expenditures in order to service the demand of our customers, which is primarily focused on investments in advanced packaging and test equipment. We expect 2020 capital expenditures to be approximately$550 million . During the three months endedMarch 31, 2020 , our capital expenditures totaled$55.9 million . Ultimately, the amount of our 2020 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing. In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected."
Cash Flows
Net cash provided by (used in) operating, investing and financing activities for
the three months ended
For the Three Months Ended March 31,
2020 2019
(In thousands)
Operating activities $ 96,589 $ 52,057
Investing activities (104,592 ) (202,067 )
Financing activities 55,095 523,708
Operating activities: Our cash flow provided by operating activities for the
three months ended March 31, 2020 increased by $44.5 million compared to the
three months ended March 31, 2019 , primarily due to higher net sales and higher
operating profit, partially offset by changes in our working capital.
Investing activities: Our cash flows used in investing activities for the three
months ended March 31, 2020 decreased by $97.5 million compared to the three
months ended March 31, 2019 , primarily due to lower payments for reduced
purchases of property, plant and equipment resulting from our initiative during
the prior year to reduce spending on further capacity expansion. This decrease
was partially offset by purchases of short-term investments.
Financing activities: The net cash provided by financing activities for the
three months ended March 31, 2020 was primarily due to the draw downs of our
Singapore and Taiwan revolvers, partially offset by net repayment of debt in
Korea . The net cash provided by financing activities for the three months ended
March 31, 2019 was primarily due to our issuance of our 6.625% Senior Notes due
2027.
We provide the following supplemental data to assist our investors and analysts
in understanding our liquidity and capital resources. We define free cash flow
as net cash provided by operating activities less payments for property, plant
and equipment, plus proceeds from the sale of and insurance recovery for
property, plant and equipment, if applicable. Free cash flow is not defined by
U.S. GAAP. We believe free cash flow to be relevant and useful information to
our investors because it provides them with additional information in assessing
our liquidity, capital resources and financial operating results. Our management
uses free cash flow in evaluating our liquidity, our ability to service debt and
our ability to fund capital expenditures. However, free cash flow has certain
limitations, including that it does not represent the residual cash flow
available for discretionary expenditures since other, non-discretionary
expenditures, such as mandatory debt service, are not deducted from the measure.
The amount of mandatory versus discretionary expenditures can vary significantly
between periods. This measure should be considered in addition to, and not as a
substitute for, or superior to, other measures
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of liquidity or financial performance prepared in accordance withU.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. For the Three Months Ended March 31, 2020 2019 (In thousands) Net cash provided by operating activities$ 96,589 $ 52,057 Payments for property, plant and equipment (55,888 ) (203,216 ) Proceeds from sale of and insurance recovery for property, plant and equipment 1,887 1,718 Free cash flow$ 42,588 $ (149,441 ) Contractual Obligations The following table summarizes our contractual obligations atMarch 31, 2020 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Payments Due for Year Ending March 31, 2020 - Total Remaining 2021 2022 2023 2024 Thereafter (In thousands) Total debt$ 1,522,833 $ 113,392 $ 114,516 $ 264,509 $ 332,126 $ 121,861 $ 576,429 Scheduled interest payment obligations (1) 340,721 35,495 56,837 52,976 46,487 39,709 109,217 Purchase obligations (2) 237,804 225,871 3,488 3,150 1,983 1,251 2,061 Operating lease obligations (3) 146,956 36,097 40,032 24,231 12,043 9,986 24,567 Finance lease obligations (3) 23,516 7,533 9,076 2,130 971 965 2,841 Severance obligations (4) 120,837 8,394 9,946 9,074 8,263 7,512 77,648 Total contractual obligations$ 2,392,667 $ 426,782 $ 233,895 $ 356,070 $ 401,873 $ 181,284 $ 792,763
(1) Represents interest payment obligations calculated using stated coupon
rates for fixed rate debt and interest rates applicable at
for variable rate debt.
(2) Represents off-balance sheet purchase obligations for capitalexpenditures, long-term supply contracts and other contractual commitments
outstanding at
(3) Represents future minimum lease payments including interest payments.
(4) Represents estimated benefit payments for our Korean subsidiary severance
plan.
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet atMarch 31, 2020 include: •$68.2 million of foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain.
•
to the uncertainty regarding the amount and the timing of any future cash
outflows associated with our unrecognized tax benefits, we are unable to
reasonably estimate the amount and period of ultimate settlement, if any,
with the various taxing authorities.
Off-Balance Sheet Arrangements
As of
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Contingencies, Indemnifications and Guarantees
We refer you to Note 14 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our contingencies related to litigation and other legal matters.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . During the three months endedMarch 31, 2020 , there were no significant changes in our critical accounting policies as reported in our 2019 Annual Report on Form 10-K.
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