Diodes Incorporated — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Diodes designs, manufactures and sells standard discrete, logic, analog and mixed-signal semiconductors. It reports as one operating segment.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,214.0 million | $1,054.2 million |
| Gross profit / margin | $435.3 million / 35.9% | $356.8 million / 33.8% |
| Operating income / margin | $154.5 million / 12.7% | $79.4 million / 7.5% |
| Net income (loss) attributable to common stockholders | $104.0 million | $(1.8) million |
| Diluted EPS | $2.04 | $(0.04) |
| Cash from operating activities | $185.6 million | $181.1 million |
FY 2018 sales rose 15.2%, and gross profit increased 22.0%. Management attributed growth to market-share gains, automotive, industrial and communications demand, and Pericom products. Gross margin improved by 210 basis points. The 2017 net loss chiefly reflected $45.9 million of tax expense related to the Tax Cuts and Jobs Act; 2018 tax expense was $44.6 million, including a $2.8 million final adjustment to the prior-year Tax Act estimate.
Fourth quarter: Sales were $314.4 million, gross profit $114.2 million, net income attributable to common shareholders $29.5 million, and diluted EPS $0.58. In Q4 2017, sales were $268.4 million and the common-stockholder loss was $30.7 million, including the Tax Act impact.
Cash, liquidity and debt
- Cash and cash equivalents were $241.1 million at year-end; including restricted cash, the cash-flow statement reports $241.8 million. Short-term investments were $7.5 million.
- Working capital was $480.8 million, up from $415.2 million in 2017. Total current assets were $734.8 million and current liabilities $254.0 million.
- Cash from operations of $185.6 million was offset by $88.9 million used in investing and $51.9 million used in financing; cash, cash equivalents and restricted cash increased $36.6 million.
- Cash purchases of property, plant and equipment were $87.5 million. The filing separately reports capital expenditures of approximately $79.7 million; the excerpt does not explain the difference in these measures.
- At year-end, $210.0 million was outstanding under the U.S. credit facility, including a $124.5 million term loan and $85.5 million revolver draw. A further $10.3 million was outstanding on foreign credit lines; the balance sheet also reports $5.2 million of foreign long-term notes. The U.S. facility matures in October 2021 and includes financial covenants. Management said cash, operations and available credit should meet liquidity needs for at least 12 months.
Material changes, outlook and risks
- Operating income more than doubled as sales increased and gross margin improved. Operating expenses rose modestly overall; SG&A and R&D increased, while KFAB-related restructuring expense fell from $10.1 million in 2017 to $0.2 million in 2018. The KFAB shutdown was completed, with no further shutdown costs expected.
- Management’s stated 2025 objectives are $2.5 billion in revenue and a 40% gross margin. These are long-term goals, not near-term earnings guidance. Management cited a favorable long-term outlook but identified global demand, customer order changes and cancellations, pricing pressure, and end-market conditions as important uncertainties.
- Automotive represented 9% of sales, up from 8% in 2017. Industrial rose to 26% from 23%, while consumer electronics declined to 25% from 26%. China accounted for 55% of sales shipped to customers in 2018. One distributor accounted for 10% of revenue.
- Diodes had a $117.8 million commitment to purchase wafers during 2019–2020 amid a reported supply shortage of epitaxial wafers. It also disclosed substantial planned Chengdu investments and purchase commitments.
- In February 2019, Diodes announced a proposed acquisition of Texas Instruments’ Greenock, Scotland wafer facility, expected to close by the end of Q1 2019, subject to customary conditions. It was not completed as of the filing date.
- Key exposures include semiconductor cyclicality, selling-price declines, customer cancellations, reliance on manufacturing and suppliers in China, U.S.–China tariffs and trade uncertainty, foreign-exchange and interest-rate movements, and acquisition execution. The U.K. defined-benefit plan was underfunded by $23.9 million at year-end; annual contributions of about £2 million were planned through 2029.
- Environmental matters were settled for approximately $0.2 million each: an EPA matter in February 2019 relating to KFAB and a Shanghai matter paid in Q4 2018. The filing says other pending legal proceedings were not expected to have a material adverse effect. Auditors issued an unqualified opinion on the financial statements and internal controls; management concluded controls were effective.
Important facts for investors to verify
- Progress toward the 2025 revenue and gross-margin goals, including the sustainability of 2018’s margin improvement and sales growth.
- Whether the Greenock acquisition closed, its cost and financing, integration needs, and contribution to capacity and automotive growth.
- Availability and cost of epitaxial wafers, and execution of the $117.8 million wafer commitments and planned Chengdu investments.
- Exposure to China-related demand, production and tariffs, and the effect of customer cancellations or distributor inventory adjustments.
- Debt balances, covenant headroom, cash conversion and capital spending; also monitor the U.K. pension funding position and tax exposures, including unrecognized tax benefits.