Diodes Incorporated — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial, and automotive markets. Unless noted otherwise, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $285.2 | $250.7 | $785.8 | $710.1 |
| Gross profit | $96.3 | $80.6 | $260.4 | $219.7 |
| Gross margin | 33.8% | 32.2% | 33.1% | 30.9% |
| Operating income | $23.7 | $20.0 | $56.9 | $32.7 |
| Net income attributable to common stockholders | $14.5 | $10.6 | $28.8 | $14.7 |
| Diluted EPS | $0.29 | $0.21 | $0.58 | $0.30 |
- Q3 sales grew 13.8% year over year and 8.0% from Q2 2017, reaching a company record, according to management. Nine-month sales increased 10.7% year over year.
- Management attributed growth to gains across regions and end markets, continued Pericom growth, and improved product mix and manufacturing utilization. Automotive and industrial each grew 30% year over year; automotive represented 8% of Q3 revenue. Computing and communications also achieved record revenue.
- Q3 gross margin improved year over year on utilization and mix, despite $2.7 million of KFAB-related inventory expense and other inventory scrapping. Q3 operating expenses rose 19.7% year over year to $72.6 million, including restructuring and impairment costs. Nine-month foreign-currency losses increased to $6.7 million from $2.0 million.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $106.3 million, versus $74.9 million in 2016. Capital expenditures were $81.9 million versus $47.1 million; investing cash outflow was $64.4 million.
- Financing cash outflow was $97.8 million, primarily reflecting $109.6 million of long-term debt repayments and $5.8 million of distributions to noncontrolling interests. Cash declined $46.6 million during the period to $201.2 million; short-term investments were $12.7 million.
- Working capital was $476.3 million, down from $547.4 million at December 31, 2016. Management said cash, operating cash flow, investments, and available credit were expected to cover working-capital and capital-expenditure needs for at least 12 months.
- Balance-sheet debt was approximately $325.8 million, including $19.1 million current and $306.7 million long-term. The company reported $326.5 million outstanding under its U.S. credit facility and $1.9 million on foreign credit lines, plus a $1.3 million Taiwan bank loan. U.S. facility borrowings bear floating rates and are subject to financial and other covenants.
- Capital spending was 10.4% of nine-month sales, above the company’s 5%–9% target range, due to Asian capacity expansion and Shanghai wafer-fabrication equipment upgrades.
Material changes, outlook, and risks
- KFAB closure: The company ceased production at its Lee’s Summit, Missouri wafer fab late in Q3 and planned to vacate by November 15, 2017, transferring production to other facilities and external foundries. Nine-month restructuring expense was $6.1 million and fixed-asset impairment was $2.0 million; management estimated total pretax shutdown costs of $10–$12 million. The company also received $6.0 million of insurance proceeds in Q1 related to 2016 fires.
- Outlook: No quantified revenue or earnings guidance is provided in the filing. Management said any future net-income improvement, if achieved, would primarily depend on higher sales volume, better product mix, and manufacturing cost reductions to offset potential average selling-price declines.
- Tax and contingencies: The nine-month effective tax rate was 27.9%, compared with 26.5%. The company reported $31.5 million of gross unrecognized tax benefits and said the possible change over the next 12 months could not be estimated. The U.K. defined-benefit plan had an unfunded liability of approximately $32.3 million, with annual contributions of about GBP 2 million through December 2029, subject to funding reviews.
- Other exposures: Foreign subsidiaries held $203.8 million of cash, cash equivalents, and investments; approximately $129.6 million could be subject to tax if repatriated. Foreign-currency hedges of approximately $40.2 million were intended to offset about 25% of estimated exposure; the filing cautions that hedging does not eliminate currency risk. Interest-rate swaps had a $220 million notional amount.
- One customer represented 10.3% of Q3 revenue. China generated 55% of Q3 sales. The company cited semiconductor cyclicality, pricing pressure, customer order cancellations, manufacturing and supplier disruption, China and other international risks, debt and interest-rate exposure, and competition among its principal risks. No pending litigation was considered material; $36.8 million of noncancelable capital-expenditure purchase commitments remained at quarter-end.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth, margin improvement, and end-market gains continue, and how pricing pressure and product mix affect profitability.
- Actual KFAB closure costs and production-transfer execution relative to the $10–$12 million estimate.
- Capital-spending pace, resulting capacity utilization, and the effect on operating cash flow and liquidity.
- Debt repayment progress, floating-rate exposure, credit-facility covenant headroom, and currency-hedging effectiveness.
- Resolution and potential cash or earnings effects of unrecognized tax positions, the defined-benefit funding obligation, and any repatriation-related taxes.