What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-21 compared with 2024-02-16 · 73 added, 70 removed, 229 unchanged (38% of the section changed)

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For discussion of 2023 results in comparison with 2022 results refer to “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 16, 2024.

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services.

Our financial goal is profitable sales growth.

To achieve this goal, we are focused on leveraging our leadership position in services for advanced technologies, providing our customers with a geographically diverse manufacturing footprint, growing within the industry secular growth markets of 5G, automotive, HPC and IoT, optimizing utilization of existing assets, and selectively growing our scale and scope through strategic investments.

Amkor is the world’s largest US headquartered OSAT (outsourced semiconductor assembly and test) service provider.

We are an industry leader in developing and commercializing advanced packaging and test technologies, which we believe provide substantial value to our customers.

Advanced packages, which account for a significant portion of mobile phone semiconductor value, are the preferred choice in the high-end smartphone market.

The use of advanced packages in automotive applications is also growing, largely due to new, data-intensive applications which require increased pin count and performance.

With the continuing trend towards cloud-based computing and the expanding use of artificial intelligence, innovative advanced packaging solutions are needed to achieve the increased performance and power consumption requirements for this market.

In consumer devices, further miniaturization and increasing functionality within IoT devices also require advanced packaging.

Our primary financial objective is profitable sales growth.

To achieve this goal, we are focused on leveraging our leadership position in services for advanced technologies, providing our customers with a geographically diverse manufacturing footprint, growing within the industry secular growth markets of HPC, automotive, IoT and mobile communications, selectively growing our scale and scope through strategic investments and optimizing utilization of existing assets.

We believe that demand for advanced packaging services will continue to grow as our customers and leading electronics OEMs strive for smaller device geometries, higher levels of integration and performance and lower power consumption.

We intend to continue to leverage our investments in advanced technology to meet the demand for these services in high growth markets.

Our broad geographic footprint, including our manufacturing presence in Portugal and our headquarters in the United States, are key differentiators for us and position us to continue to support global supply chains and to participate in initiatives to regionalize supply chains.

We are preparing to deliver advanced SiP modules and other advanced packages from our Vietnam Facility beginning in the second half of 2024, which we believe will provide customers with a cost-competitive high-volume manufacturing location that offers additional supply chain diversification.

High performance computing supporting artificial intelligence and increasing demand for improved networking speed and storage within data centers, cloud computing, PCs and laptops, are driving demand for more semiconductors and advanced packaging in the computing end market.

Increasing semiconductor content in automobiles is driving increased demand for advanced packaging to enable the proliferation of safety features such as ADAS and radar and digital cockpit features such as infotainment displays and telematics.

The IoT wearables within our consumer end market are evolving in multiple applications, such as hearables, watches and augmented reality and virtual reality devices.

Integration of multiple functions into small form factors, such as processors, sensors and connectivity devices, relies on innovation in advanced packaging.

Within our communications end market, we have a strong position across multiple device functionalities within premium and high tier smartphones.

We are collaborating with industry leaders as smartphones transition to include artificial intelligence and drive semiconductor growth through integration of a broad range of applications, enhanced features and higher performance requirements to support increased data processing.

Our broad geographic footprint, including our manufacturing presence in multiple countries across Asia, in Portugal and our headquarters in the United States, is a key differentiator and positions us well to support evolving global supply chains, including initiatives to regionalize supply chains.

We began delivering advanced packages from the Vietnam Facility in the third quarter of 2024.

In addition, we are progressing plans to build an advanced packaging and test facility in Arizona and were awarded up to $407 million in direct funding by Commerce pursuant to the CHIPS Act to support the facility, conditioned on, among other things, the achievement of certain construction and production milestones.

We acquired the land for the Arizona Facility in 2024 and expect to begin construction in the second half of 2025.

We believe our broad geographic footprint provides customers with multiple options to mitigate risk and diversify their supply chains.

Another key factor in our success is the optimization of asset utilization.

We build and utilize manufacturing lines which support multiple customers, and we increase factory utilization through sophisticated planning processes and intensive efficiency improvement activities.

From time to time, we identify attractive opportunities to strengthen our leadership position and market share through expansion of our operations, joint ventures, acquisitions and other strategic investments.

We believe that selective growth through these strategic actions can further strengthen customer relationships, help to maintain and enhance our technological leadership, diversify our revenue streams and improve our profits.

Our customers include most of the world’s largest semiconductor companies, and over the last five decades we have developed long-standing relationships with many of these companies.

We believe that our production excellence, including high quality, reliability and predictability, has been a key factor in our success in attracting and retaining customers.

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.

We believe that the general semiconductor market is currently going through a cyclical correction.

The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past.

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, recession or subsequent economic recovery.

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.

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 expected 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 of December 31, 2024, we had cash and cash equivalents and short-term investments of $1,133.6 million and $513.0 million, respectively.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter due to many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part 1, Item 1A of this Form 10-K.

We expect macroeconomic conditions to be challenging in the first half of 2024.

To prepare for future growth, we will continue to make prudent investments, and we will closely manage capacity expansion and control costs in response to changes in market conditions.

We will continue to make prudent investments, and we will closely manage capacity expansion and control costs in response to any changes in market conditions.

2024 Financial Summary

Our net sales decreased $185.4 million or 2.9% to $6,317.7 million in 2024 from $6,503.1 million in 2023.

The decrease was primarily due to lower sales in our consumer and computing end markets, partially offset by growth in our communications end market.

Gross margin decreased to 14.5% in 2023 compared to 18.8% in 2022.

The decrease in gross margin was primarily due to an increase in the mix of products sold with higher material content, the decrease in net sales and resulting lower factory utilization.

Operating income margin decreased 550 basis points to 7.2% in 2023 from 12.7% in 2022.

The decrease in our operating income margin was due to the decrease in our gross margin discussed above along with an increase in research and development expenses, primarily due to additional equipment and overhead costs to support development projects in advanced packaging technologies, partially offset by projects that moved into production.

Operating income margin was also impacted by an increase in selling, general and administrative expenses, primarily due to costs associated with the opening of the Vietnam Facility and increased bad debt expense, partially offset by a reduction in employee compensation costs.

The decrease was primarily due to lower sales in our automotive and industrial and communications end markets, partially offset by growth in the computing and consumer end markets.

Gross margin increased to 14.8% in 2024 compared to 14.5% in 2023.

The increase was primarily due to the extension of the estimated useful life of our test equipment from five years to seven years and net favorable foreign currency exchange rate movements, offset by the decrease in net sales and resulting lower factory utilization.

Operating income margin decreased to 6.9% in 2024 from 7.2% in 2023.

The decrease in our operating income margin was primarily due to increased employee compensation costs and costs incurred during start-up at the Vietnam Facility, partially offset by the increase in our gross margin discussed above and a reduction in bad debt expense.

In 2024, our capital expenditures totaled $743.8 million, or 11.8% of net sales, compared to $749.5 million, or 11.5% of net sales in 2023.

Our spending was primarily focused on investments in advanced packaging and test equipment and the Vietnam Facility.

Our spending was primarily focused on investments in advanced packaging and test equipment.

Net cash provided by operating activities was $1,088.9 million for the year ended December 31, 2024, compared to $1,270.0 million for the year ended December 31, 2023.

This increase was primarily due to changes in working capital, offset by lower net sales and operating profits.

This decrease was primarily due to changes in working capital and lower operating profits.

In November 2024, our Board of Directors approved a quarterly dividend of $0.08269 per share, a 5% increase from the rate set in November 2023.

In 2023, we paid total quarterly cash dividends of $74.7 million.

The Board of Directors also approved a special cash dividend of $0.40546 per share.

In 2024, we paid total cash dividends of $178.6 million.

Results of Operations

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Net sales 100.0 % 100.0 % 100.0 %

Cost of sales:

Materials 55.1 % 55.1 % 51.4 %

Labor 9.9 % 9.9 % 10.0 %

Depreciation 8.5 % 8.9 % 8.0 %

Other manufacturing costs 11.7 % 11.6 % 11.8 %

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Net sales $ 6,317,692 $ 6,503,065 $ 7,091,585 $ (185,373) (2.9) % $ (588,520) (8.3) %

The $588.5 million decrease in net sales in 2023 compared to 2022 was primarily due to lower sales in our consumer and computing end markets, partially offset by growth in our communications end market.

The consumer and computing end markets decreased 38% and 11%, respectively, in 2023 compared to 2022.

These end markets were impacted by the cyclical correction of the semiconductor market, product lifecycle changeovers and weaker demand.

Despite this cyclical correction, communications, our largest end market, grew 4% in 2023 compared to 2022, due to market share gains and the increase in silicon content within premium tier smartphones.

The $185.4 million decrease in net sales in 2024 compared to 2023 was primarily due to lower sales in our automotive and industrial and communications end markets, partially offset by growth in the computing and consumer end markets.

The automotive and industrial end market decreased 16% in 2024 compared to 2023 primarily driven by elevated customer inventories and weaker demand.

The communications end market decreased 7% in 2024 compared to 2023 primarily due to lower supported content mix in premium tier smartphones.

The computing and consumer end markets grew 16% and 10%, respectively, in 2024 compared to 2023 primarily driven by strong demand for ARM-based PCs, AI devices and IoT wearables.

Gross Profit and Gross Margin

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As we continue to increase production of these higher material cost products, there could be an impact on our profitability, depending on overall utilization.

Gross profit and gross margin decreased for 2023 compared to 2022 primarily due to an increase in the mix of products sold with higher material content, the decrease in net sales and resulting lower factory utilization.

While gross profit decreased for 2024 compared to 2023, gross margin increased primarily due to the extension of the estimated useful life of our test equipment from five years to seven years and net favorable foreign currency exchange rate movements, offset by the decrease in net sales and resulting lower factory utilization.

Selling, General and Administrative

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Selling, general and administrative expenses increased in 2024 compared to 2023.

The increase was primarily due to costs associated with the opening of the Vietnam Facility and increased bad debt expense, partially offset by a reduction in employee compensation costs.

The increase was primarily due to increased employee compensation costs and costs incurred during start-up at the Vietnam Facility, partially offset by a reduction in bad debt expense.

In 2024, the costs incurred during start-up at the Vietnam Facility increased approximately $16 million compared to 2023.

Research and Development

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The costs related to our technology and product development projects are included in research and development expense until the project moves into production.

production begins, the costs relating 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 increased in 2023 compared to 2022 primarily due to additional equipment and overhead costs to support development projects in advanced packaging technologies, partially offset by projects that moved into production.

Once production begins, the costs relating 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 decreased in 2024 compared to 2023 primarily due to the utilization mix of assets shared with manufacturing and projects moving into production, partially offset by new development projects in packaging technologies.

Other Income and Expense

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Total other expense, net $ 7,439 $ 26,446 $ 40,254 $ (19,007) (71.9) % $ (13,808) (34.3) %

Interest income increased in 2023 compared to 2022, primarily due to higher interest rates on our cash and cash equivalents and available-for-sale debt investment balances.

The changes in foreign currency (gain) loss, net for the 2023 compared to the 2022 were primarily due to the higher costs associated with our derivative instruments, which are used to reduce our exposure to foreign currency gains and losses.

Interest expense increased in 2024 compared to 2023, primarily due to a decrease in capitalized interest for the Vietnam Facility and an increase in our finance lease obligation balance.

Interest income increased in 2024 compared to 2023, primarily due to increases in our cash and cash equivalent and available-for-sale debt investment balances and higher interest rates.

The changes in foreign currency (gain) loss, net for the 2024 compared to the 2023 were primarily due to the lower net costs associated with foreign exchange forward contracts.

Income Tax Expense

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During 2024, 2023 and 2022, our subsidiaries in Korea and Singapore operated under various conditional reduced tax rates.

The conditional reduced tax rates granted to certain operations in the Philippines expired during 2021.

Beginning in 2024, our subsidiary in Vietnam also operated under a conditional reduced tax rate.

As these conditional reduced tax rates expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase.

In addition, the conditional reduced tax rates granted to certain operations are expected to be adversely impacted by the enactment of the Pillar Two Model Rules effective in 2025.

We believe the short-term impact will result in an increase to the overall effective tax rate of approximately 2 to 3 percentage points, before any discrete tax items, depending on the amount and relative mix of earnings in each location, among other factors.

See Note 4 to our Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information about our income tax expense.

We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments, stock and debt 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, debt repurchases and other financial requirements for at least the next twelve months.

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, debt repurchases and other financial requirements for at least the next 12 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 or debt under any repurchase program, any acquisitions, joint ventures or other investments and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds from 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 I, Item 1A of this Form 10-K.

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 12 months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part I, Item 1A of this Form 10-K.

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.

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We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations.

If we were to distribute this offshore cash to the U.S.

as dividends from our foreign subsidiaries, the dividends generally would not be subject to U.S.

If we were to distribute this offshore cash to the United States as dividends

from our foreign subsidiaries, the dividends generally would not be subject to U.S.

federal income tax, but the distributions may be subject to foreign withholding and state income taxes.

For the year ended December 31, 2024, we estimate that repatriation of this foreign cash and short-term investments would generate withholding taxes and state income taxes of approximately $48 million.

As of December 31, 2023, our net liability associated with unrecognized tax benefits is $27.5 million.

Due to the uncertainty regarding the amount and timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and timing of ultimate settlement, if any, with the various taxing authorities.

For certain accounts receivable, we use non-recourse factoring arrangements with third party financial institutions to manage our working capital and cash flows.

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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.

In December 2024, we signed a Direct Funding Agreement with the U.S.

Department of Commerce for the award of up to $407 million in government incentives pursuant to the CHIPS Act, and no funds have been received to date.

The award requires us to achieve construction and production milestones over the next several years.

In addition, we receive a 25% investment tax credit on qualified investments in U.S.

semiconductor manufacturing under the CHIPS Act.

For additional information, please refer to Note 1 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

The maximum borrowing capacity under our $600.0 million senior secured revolving credit facility (“2022 Singapore Revolver”) is limited to a base amount equal to the lesser of:

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As of December 31, 2024, we had availability of $600.0 million.

As of December 31, 2023, our foreign subsidiaries had $615.0 million available for future borrowings under revolving credit facilities, including the 2022 Singapore Revolver, and $69.7 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures.

As of December 31, 2024, our foreign subsidiaries also had $60.0 million available to be borrowed under term loan credit facilities.

For additional information regarding the 2022 Singapore Revolver, please refer to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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Interest payment obligations payable within 12 months is $49.9 million.

We were in compliance with all debt covenants as of December 31, 2023, and we expect to remain in compliance with these covenants for at least the next twelve months.

We were in compliance with all debt covenants as of December 31, 2024, and we expect to remain in compliance with these covenants for at least the next 12 months.

For additional information regarding our debt arrangements, please refer to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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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 in Korea maintains an unfunded severance plan that covers certain employees who were employed prior to August 1, 2015.

As of December 31, 2023, the severance liability was $47.8 million, with $7.9 million payable within 12 months.

Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date.

For service periods subsequent to August 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 us to fund the converted portion of the liability.

In addition, as of December 31, 2023, we had foreign pension plan obligations of $47.1 million, for which the timing and actual amount of impact on our future cash flow is uncertain.

For additional information regarding our pension and severance plans, please refer to Note 12 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

We lease certain machinery and equipment, office space and manufacturing facilities.

As of December 31, 2023, our total remaining operating lease obligations and finance lease obligations were $105.2 million and $118.0 million, respectively, with $36.9 million and $62.3 million payable within 12 months, respectively.

As of December 31, 2024, our total remaining operating lease obligations and finance lease obligations were $98.5 million and $204.4 million,

respectively, with $30.9 million and $65.7 million payable within 12 months, respectively.

The lease obligations represent our future minimum lease payments including interest payments.

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Capital Returns

In 2023, we paid total quarterly cash dividends of $74.7 million, and we currently anticipate that we will continue to pay quarterly cash dividends in the future.

In November 2022, we announced our intention to return 40 percent to 50 percent of cumulative free cash flow generated over time, beginning 2022.

This return may be in the form of dividends and stock repurchases, subject to a variety of factors, including strategic investments, other capital allocation priorities and Board of Directors’ approval.

In 2024, we paid total cash dividends of $178.6 million, and 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.

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We make significant capital expenditures in order to service the demand of our customers.

In 2023, our capital expenditures totaled $749.5 million or approximately 11.5% of net sales, which are primarily focused on investments in advanced packaging and test equipment and the Vietnam Facility.

We expect that our 2024 capital expenditures will be approximately $750 million.

Ultimately, the amount of our 2024 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.

We expect that our 2024 capital expenditures related to our planned advanced packaging and test facility in Arizona will be primarily for the design and construction planning.

In 2024, our capital expenditures totaled $743.8 million or approximately 11.8% of net sales, which are primarily focused on investments in advanced packaging and test equipment.

We expect that our 2025 capital expenditures will be approximately $850 million, approximately 5% to 10% of which we expect to spend on the construction of the Arizona Facility.

Ultimately, the amount of our 2025 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, including the commencement of construction for the Arizona Facility, 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.

The primary sources of funds for our capital expenditures 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.

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Operating activities:

Our cash flow provided by operating activities for the year ended December 31, 2023 increased by $171.3 million compared to the year ended December 31, 2022, primarily due to changes in working capital, offset by lower net sales and operating profits.

Our cash flow provided by operating activities for the year ended December 31, 2024 decreased by $181.2 million compared to the year ended December 31, 2023, primarily due to changes in working capital and lower operating profits.

Investing activities:

Our cash flow used in investing activities for the year ended December 31, 2023 decreased by $55.3 million compared to the year ended December 31, 2022, primarily due to decreased payments related to property, plant and equipment and decreased net payments for foreign exchange forward contracts, offset by higher net payments for short-term investments.

Payments for property, plant and equipment can fluctuate based on the timing of purchase, receipt and acceptance of equipment.

Our cash flow used in investing activities for the year ended December 31, 2024 decreased by $151.6 million compared to the year ended December 31, 2023, primarily due to lower net payments for short-term investment activity.

Financing activities:

The net cash used in financing activities for the year ended December 31, 2023 was primarily due to the payments of our quarterly dividends and finance lease obligations.

The net cash provided by financing activities for the year ended December 31, 2022 was primarily due to net debt borrowings, offset by the payments of our quarterly dividends and finance lease obligations.

The net cash used in financing activities for the year ended December 31, 2024 and 2023 was primarily due to the payments of our dividends, payments of finance lease obligations and net debt repayments.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources.

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Payments for property, plant and equipment (743,796) (749,467) (908,294)

Proceeds from sale of, insurance recovery for and grants for property, plant and equipment 13,032 3,148 3,261

Proceeds from sale of and grants for property, plant and equipment 14,203 13,032 3,148

Free cash flow $ 359,275 $ 533,585 $ 193,610

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We have valuation allowances on certain U.S.

federal net operating losses and U.S.

foreign tax credit carryforwards expected to expire unused and on select deferred tax assets in certain foreign jurisdictions.

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Recently Issued Standards

For information regarding recently adopted and recently issued accounting standards, see Note 1 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

For information regarding recently adopted and recently issued accounting standards, please refer to Note 1 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis