Diodes Incorporated — Q3 2015 Form 10-Q
Business and period. Diodes designs, manufactures, and sells standard semiconductor products for consumer electronics, computing, communications, industrial, and automotive markets. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $208.9 | $233.8 | $634.5 | $667.0 |
| Gross profit | $61.6 | $74.7 | $195.0 | $206.6 |
| Gross margin | 29.5% | 32.0% | 30.7% | 31.0% |
| Operating income | $10.0 | $25.0 | $48.9 | $62.5 |
| Net income attributable to common stockholders | $2.8 | $19.4 | $29.0 | $47.0 |
| Diluted EPS | $0.06 | $0.40 | $0.59 | $0.97 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $98.5 | $107.3 |
- Q3 sales fell 10.6% year over year and 4.8% sequentially. Management attributed the sequential decline to a 56% reduction in assembly-test manufacturing-services revenue and distributor inventory reductions; excluding those services, revenue declined 1.5% sequentially.
- Q3 unit volume fell 16.1% year over year, partly offset by a 6.5% increase in average selling price. Lower capacity utilization and product mix pressure reduced gross margin; management also cited sales of lower-margin smartphone products.
- Q3 operating expenses were $51.7 million, up 3.9% year over year. The $1.4 million fixed-asset loss was primarily an impairment related to transitioning the China wafer plant from six-inch to eight-inch production.
- For the first nine months, sales declined 4.9%, reflecting a 7.0% decrease in units partly offset by a 2.3% higher average selling price. Gross margin was down 0.3 percentage points.
Financial position and liquidity
- At September 30, cash and cash equivalents were $188.8 million and short-term investments were $24.6 million, versus cash of $243.0 million at December 31, 2014. Management reported working capital of $475 million, down from $538 million.
- Total debt was approximately $93.8 million: $0.3 million current and $93.5 million long-term, compared with approximately $141.9 million at year-end 2014. The company reported $92 million outstanding on its revolving facility. Its amended credit agreement provides a $400 million revolver and a conditional $100 million term loan facility, both maturing January 8, 2018.
- Nine-month operating cash flow was $98.5 million. Investing activities used $109.3 million, including $95.0 million of cash purchases of property, plant, and equipment and $13.6 million net purchases of short-term investments. Financing activities used $39.4 million, primarily for debt repayments.
- Management reported capital expenditures of $120 million for the nine months, or 18.9% of sales, above its 5%–9% target range, mainly due to the Chengdu site expansion. It expects cash, operating cash flow, investments, and available credit to cover working capital and capital expenditures for at least the next 12 months.
- Inventory was $197.7 million, up from $182.0 million at year-end. Foreign subsidiaries held approximately $200 million of cash, cash equivalents, and investments; approximately $154 million could be subject to tax if repatriated to the U.S.
Outlook, significant events, and risks
- Management lowered its full-year income forecast during Q3, citing a weaker market, particularly in Asia. It estimated a 2015 annual effective tax rate of approximately 35%, excluding discrete items; the nine-month effective rate was 34.1%, versus 22.9% in 2014. Q3 tax expense included a $4 million adjustment for the first half, contributing to a 64% effective rate for the quarter. No specific revenue or earnings guidance was provided.
- On September 2, 2015, Diodes agreed to acquire Pericom Semiconductor for approximately $400 million, or $17 per share in cash, subject to closing conditions. The proposed acquisition was expected to be funded with cash and credit-facility borrowings. The filing does not report completion of the acquisition.
- A revised U.K. pension funding plan extended annual contributions of approximately GBP 2 million through 2030, increasing total required contributions from GBP 8 million to GBP 33 million (approximately $50 million at September 30, 2015). The plan was underfunded by $32.2 million at quarter-end.
- After quarter-end, on November 3, the board authorized up to $100 million of share repurchases. Purchases are discretionary and subject to credit-facility covenants and capital needs.
- Approximately $30 million of non-cancelable capital-expenditure purchase commitments remained at September 30. The company disclosed a securities class-action appeal pending in the Fifth Circuit and a related derivative action stayed pending the appeal; management did not expect pending proceedings to materially affect results, while noting litigation uncertainty.
- Key operating exposures include semiconductor cyclicality, weak end-market demand and distributor inventory adjustments, pricing pressure, China and other international risks, foreign exchange, dependence on suppliers (including related parties), and acquisition, debt-covenant, pension, and tax risks. The filing reported no material changes to previously disclosed risk factors or market risks.
Facts investors should verify
- Whether the Pericom acquisition closed, its final financing mix, and resulting leverage and integration costs.
- Whether demand, distributor inventories, and assembly-test services improved after Q3, especially in Asia and China, and whether margins recovered as capacity utilization and product mix changed.
- Actual full-year tax rate and any further effect from geographic income mix, tax holidays, or tax-audit outcomes; approximately $20 million of gross unrecognized tax benefits was disclosed.
- Actual capital spending and cash generation relative to the elevated Chengdu expansion program, and the company’s ability to maintain liquidity while funding acquisition and pension obligations.
- Any share repurchases and their effect on cash, debt covenants, and diluted share count; the authorization does not require purchases.
- Developments in the securities appeal and derivative litigation, and progress against the revised U.K. pension funding schedule.