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 advanced packaging and test technologies. We believe these advanced technology solutions provide substantial value to our customers, particularly in the mobile communications market, where growth generally outpaces the overall semiconductor industry. 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. 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 end 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. We believe that taking advantage of these opportunities helps to 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. Historical trends indicate there has been a strong correlation between worldwide 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 cannot predict the timing, strength or duration of any correction, economic slowdown or subsequent economic recovery. The full potential effect of the ongoing Covid-19 pandemic is unknown, and there remains uncertainty related to the ultimate impact that the Covid-19 pandemic will have on the global economy and our business, results of operations and financial condition. See Part II, Item 1A, including, "The Covid-19 Outbreak Has Impacted and May Continue to 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. 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. As ofMarch 31, 2021 , we had cash and cash equivalents and short-term investments of$650.3 million and$163.7 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 -19-
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nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. Financial Summary Our net sales increased$173.5 million or 15.1% to$1,326.2 million for the three months endedMarch 31, 2021 from$1,152.6 million for the three months endedMarch 31, 2020 . The increase was generally attributable to higher sales in the communications, computing and automotive and industrial end markets. Gross margin for the three months endedMarch 31, 2021 increased to 20.0% from 16.4% for the three months endedMarch 31, 2020 . The increase in gross margin was primarily due to the increase in net sales and improved factory utilization as well as a change in the mix of products sold toward products with a lower material content, partially offset by unfavorable changes in foreign currency exchange rates. Our capital expenditures totaled$110.4 million for the three months endedMarch 31, 2021 , compared to$55.9 million for the three months endedMarch 31, 2020 . Our spending was primarily focused on investments in advanced packaging and test equipment. Net cash provided by operating activities was$176.8 million for the three months endedMarch 31, 2021 , compared to$96.6 million for the three months endedMarch 31, 2020 . This increase was primarily due to higher net sales, higher operating profit, and changes in working capital. Results of Operations The following table sets forth certain operating data as a percentage of net sales for the periods indicated: For the Three Months Ended March 31, 2021 2020 Net sales 100.0 % 100.0 % Materials 43.2 % 45.3 % Labor 13.8 % 14.2 % Other manufacturing costs 23.0 % 24.1 % Gross margin 20.0 % 16.4 % Operating income 10.9 % 7.3 % Net income attributable to Amkor 9.0 % 5.5 % Net Sales For the Three Months Ended March 31, 2021 2020 Change (In thousands, except percentages) Net sales$ 1,326,150 $ 1,152,616 $ 173,534 15.1 % The increase in net sales for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was due to higher sales in the communications, computing and automotive and industrial end markets. The increase in the communications end market was driven primarily by the further adoption of 5G smartphones. The automotive and industrial market recovered during the latest quarter from the weakened demand relating to the Covid-19 pandemic in the prior year. -20-
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Gross Margin
For the Three Months Ended March 31,
2021 2020 Change
(In thousands, except percentages)
Gross profit $265,534 $188,908 $76,626
Gross margin 20.0 % 16.4 % 3.6 %
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 and on labor and other
manufacturing costs as a percentage of revenue, depending upon product mix,
utilization and seasonality.
Gross margin increased for the three months ended March 31, 2021 compared to the
three months ended March 31, 2020 , primarily due to the increase in net sales
and improved factory utilization as well as a change in the mix of products sold
toward products with a lower material content, partially offset by unfavorable
changes in foreign currency exchange rates.
Selling, General and Administrative
For
the Three Months Ended
2021 2020 Change
(In thousands, except percentages)
Selling, general and administrative $ 76,768 $ 72,582 $ 4,186 5.8 %
Selling, general and administrative expenses for the three months ended March
31, 2021 increased compared to the three months ended March 31, 2020 , primarily
due to increased employee compensation costs and professional fees.
Research and Development
For the Three Months Ended March 31,
2021 2020 Change
(In thousands, except percentages)
Research and development $ 44,318 $ 32,253 $ 12,065 37.4 %
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 ended March 31, 2021 increased
compared to the three months ended March 31, 2020 due to new development
projects in advanced technologies, primarily advanced System-in-Package modules.
Other Income and Expense
For
the Three Months Ended
2021 2020 Change
(In thousands, except percentages)
Interest expense $ 12,673 $ 17,045 $ (4,372) (25.6) %
Interest income (279) (2,258) 1,979 (87.6) %
Foreign currency (gain) loss, net 619 (229) 848 >(100)%
Loss on debt retirement - 428 (428) (100.0) %
Other (income) expense, net (251) (256) 5 (2.0) %
Total other expense, net $ 12,762 $ 14,730 $ (1,968) (13.4) %
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Interest expense decreased for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , primarily due to the overall decrease in our outstanding debt. Interest income decreased for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , primarily due to lower interest rates in the overall market. Income Tax Expense For the Three Months Ended March 31, 2021 2020 Change (In thousands) Income tax expense$ 11,667 $ 4,846 $ 6,821 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 increased for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , primarily due to the increase in income before tax. During the three months endedMarch 31, 2021 and 2020, our subsidiaries inKorea ,the Philippines andSingapore 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 and operating expenses, capital spending, dividend payments, stock repurchases, 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 expenditures, dividend payments, debt service and other financial requirements for at least the next twelve months. 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 dividends and purchases of stock under any 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 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, 2021 , we had cash and cash equivalents and short-term investments of$814.0 million . Included in our cash and short-term investments balances as ofMarch 31, 2021 , is$664.8 million 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. 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 -22-
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conditions and changes in the credit worthiness of customers. For the three months endedMarch 31, 2021 and 2020, we sold accounts receivable totaling$106.3 million and$170.5 million , net of discounts and fees of$0.2 million and$1.0 million , respectively. 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. 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, 2021 , we had availability of$250.0 million and no outstanding standby letters of credit. As ofMarch 31, 2021 , our foreign subsidiaries had$316.0 million available to be drawn under revolving credit facilities, including the Singapore Revolver, and$62.0 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures. As ofMarch 31, 2021 , we had$1.1 billion of debt. Our scheduled principal repayments on debt include$103.2 million due over the remainder of 2021,$131.2 million due in 2022,$163.0 million due in 2023,$120.3 million due in 2024,$26.0 million due in 2025, and$553.3 million due thereafter. We were in compliance with all debt covenants atMarch 31, 2021 , and we expect to remain in compliance with these covenants for at least the next twelve months. Certain of our debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities. These restrictions are determined in part by our covenant compliance and on calculations based upon cumulative net income or, in the case of our Singapore Revolver, borrowing availability and do not currently have a material impact on our ability to make dividend payments or stock repurchases. The debt ofAmkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. From time to time,Amkor Technology, Inc. andAmkor Technology Singapore Holding Pte, Ltd. also guarantee certain debt of our subsidiaries. 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 would be subject to the terms of our indentures and other debt agreements, market conditions and other factors. Our subsidiary inKorea maintains an unfunded severance plan that covers certain employees that were employed prior toAugust 1, 2015 . As ofMarch 31, 2021 , the severance liability was$95.1 million . Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. For service periods subsequent toAugust 1, 2015 , employees participate in either a defined benefit pension plan or a defined contribution pension plan. From time to time, we may offer employees the option to convert from the severance plan to the defined contribution plan, which would require the company to fund the converted portion of the liability. InOctober 2020 , our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock. We paid a quarterly dividend of$0.04 per share representing a dividend payment of$9.7 million in the aggregate, onMarch 15, 2021 to stockholders of record as ofFebruary 23, 2021 . We currently anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment, amount and timing of future dividends remain within the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, debt restrictions and other factors. 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, 2021 , 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 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. -23-
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Capital Resources We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment. We expect 2021 capital expenditures to be approximately$700 million . During the three months endedMarch 31, 2021 , our capital expenditures totaled$110.4 million . Ultimately, the amount of our 2021 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, equipment lead times 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 endedMarch 31, 2021 and 2020, was as follows: For the Three Months Ended March 31, 2021 2020 (In thousands) Operating activities $ 176,788$ 96,589 Investing activities (164,372) (104,592) Financing activities (49,444) 55,095 Operating activities: Our cash flow provided by operating activities for the three months endedMarch 31, 2021 increased by$80.2 million compared to the three months endedMarch 31, 2020 , primarily due to higher net sales, higher operating profit, and changes in working capital. Investing activities: Our cash flow used in investing activities for the three months endedMarch 31, 2021 increased by$59.8 million compared to the three months endedMarch 31, 2020 , primarily due to increases in purchases of property, plant, and equipment, purchases of investments and net payments on foreign exchange forward contracts, partially offset by proceeds from sales and maturities of investments. Payments for property, plant and equipment can fluctuate based on timing of purchase, receipt and acceptance of equipment. Financing activities: The net cash used in financing activities for the three months endedMarch 31, 2021 was primarily due to net debt repayments inJapan and the payment of our quarterly dividends. The net cash provided by financing activities for the three months endedMarch 31, 2020 was primarily due to the draw downs of ourSingapore andTaiwan revolvers, partially offset by net repayment of debt inKorea . 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 byU.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, our ability to fund capital expenditures and our ability to pay dividends and the amount of dividends to be paid. 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 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. -24-
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For the Three Months Ended March 31,
2021 2020
(In thousands)
Net cash provided by operating activities $ 176,788 $ 96,589
Payments for property, plant and equipment (110,351) (55,888)
Proceeds from sale of and insurance recovery for property, plant
and equipment 547 1,887
Free cash flow $ 66,984 $ 42,588
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2021 and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods.
Payments Due for Year Ending December 31,
2021 -
Total Remaining 2022 2023 2024 2025 Thereafter
(In thousands)
Total debt $ 1,096,897 $ 103,162 $ 131,151 $ 163,011 $ 120,313 $ 25,975 $ 553,285
Scheduled interest payment
obligations (1) 250,552 24,034 42,098 39,464 37,241 36,231 71,484
Purchase obligations (2) 476,447 440,593 13,202 13,025 4,678 1,907 3,042
Operating lease obligations (3) 139,700 43,423 41,553 20,284 9,790 7,639 17,011
Finance lease obligations (3) 24,107 9,922 6,396 3,787 1,038 969 1,995 Severance obligations (4) 95,124 8,128 9,453 8,403 7,469 6,652 55,019
Total contractual obligations
(1)Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable atMarch 31, 2021 , for variable rate debt. (2)Represents off-balance sheet purchase obligations for capital expenditures, long-term supply contracts and other contractual commitments outstanding atMarch 31, 2021 . (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, 2021 include: •$61.5 million of foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain. •$30.0 million net liability associated with unrecognized tax benefits. Due 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 ofMarch 31, 2021 , we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K. Contingencies, Indemnifications and Guarantees We refer you to Note 15 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. -25-
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Critical Accounting Policies Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . During the three months endedMarch 31, 2021 , there were no significant changes in our critical accounting policies as reported in our 2020 Annual Report on Form 10-K.
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