Diodes Incorporated: FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also discusses fourth-quarter performance. Diodes designs, manufactures and sells standard discrete, logic and analog semiconductors for consumer electronics, computing, communications, industrial and automotive applications. BCD Semiconductor, acquired in March 2013, contributed ten months of results.
Financial results and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $826.8 million | $633.8 million |
| Gross profit / margin | $237.8 million / 29% | $161.6 million / 25% |
| Operating income / margin | $42.3 million / 5.1% | $24.9 million / 3.9% |
| Net income attributable to common stockholders | $26.5 million; diluted EPS $0.56 | $24.2 million; diluted EPS $0.51 |
| Operating cash flow | $109.9 million | $64.2 million |
| Capital expenditures | $44 million | $60 million |
| Working capital | $493.2 million | $377.9 million |
| Cash and cash equivalents | $196.6 million | $157.1 million |
| Long-term debt, net of current portion | $182.8 million | $44.1 million |
- Sales increased 31%, reflecting approximately 25% more units, a 5% increase in average selling price and BCD’s contribution. BCD contributed about $155 million of revenue and $6 million of earnings, including acquisition accounting adjustments.
- Gross margin improved four percentage points, which management attributed to lower gold prices, improved mix, stable pricing, copper-wire conversion and cost reductions. Average unit cost was relatively flat.
- Common-stockholder earnings rose 10%, although consolidated net income declined to $24.1 million from $26.0 million. The difference reflects a $2.4 million loss attributable to noncontrolling interests in 2013, compared with $1.8 million of income attributable to noncontrolling interests in 2012.
- Net cash used in investing was $186.4 million, including $124.9 million for acquisitions, $47.1 million for property and equipment and $22.9 million for short-term investments. Financing provided $112.4 million, primarily through Revolver borrowings.
- At year-end, the $300 million Revolver had $179 million outstanding, maturing January 2018. The company reported $5.8 million outstanding on foreign lines of credit and $7 million used for guarantees. It stated approximately $121 million remained available under the Revolver and $99 million under foreign lines.
Material changes and fourth-quarter performance
- BCD’s acquisition substantially expanded revenue and the analog and power-management portfolio, but was funded with debt. Interest expense rose to $5.6 million from $0.9 million.
- In Q4, revenue was $211.0 million, down from $224.5 million in Q3; common-stockholder net income was $6.2 million, versus $13.6 million in Q3. Management cited greater-than-usual seasonality, PC weakness and distributor inventory management. Channel inventory remained below three months.
- Distributor sales rose to 65% of annual revenue from 53% in 2012, primarily because most BCD sales were through distributors. OEM and EMS sales fell to 35% from 47%.
- R&D spending increased to $48.3 million, or 6% of sales, from $33.8 million, or 5%, largely due to BCD. SG&A increased 30% to $132.1 million, including acquired-company costs.
Outlook, risks and unusual items
- Management’s stated goal is $1 billion in annual revenue with “model profitability.” It cited a solid design pipeline and expanded customer relationships, but gave no specific near-term revenue or earnings guidance. For 2014, it expected capital expenditures of 5%–8% of sales, excluding Chengdu building expenditures, and anticipated further R&D investment.
- Tax expense rose to $14.5 million, with an effective tax rate of 37.5% versus 15.7%. Factors included a $5 million Chinese tax-audit assessment paid in 2013 and a changed mix of pretax earnings. One Shanghai facility lost preferential tax status for 2014 onward, increasing its applicable rate to 25%; tax holidays reduced 2013 tax expense by about $2 million.
- Diodes recorded a $5.3 million goodwill impairment for Eris and $1.5 million of restructuring charges related mainly to its U.K. development team and New York sales office; restructuring was completed in Q3. The BCD acquisition also generated about $5 million of inventory valuation expense as acquired inventory was sold.
- The U.K. defined-benefit pension plan was underfunded by $32.7 million at year-end, up from $17.9 million. Required contributions under the recovery plan are about £2 million annually through 2019.
- Key exposures include semiconductor cyclicality, pricing pressure, customer order cancellations, manufacturing utilization and supply interruptions, reliance on China and other international markets, foreign exchange, acquisition integration, tax incentives and debt covenants. China represented 63% of sales based on shipment destination.
- Three legal matters were disclosed: a derivative action concerning prior CEO stock-option grants, a securities class action concerning 2011 statements about China labor conditions, and a derivative action filed in February 2014 related to similar allegations. Management said it believed pending matters would not materially affect financial position, cash flows or results, while noting litigation uncertainty.
- The auditor reported fairly presented financial statements and effective internal control over financial reporting. No cash dividends had been paid, and none were planned for the foreseeable future.
Important facts for investors to verify
- Whether BCD integration delivers expected synergies and whether its contribution supports profitable growth after acquisition costs and debt service.
- Quarterly trends in orders, distributor point-of-sale and inventory, especially given Q4 weakness and customer cancellation rights.
- Gross-margin sustainability amid pricing pressure, product-mix changes, gold and other input costs, and manufacturing utilization.
- Debt availability, covenant compliance, interest expense and the company’s capacity to fund capital spending and acquisitions.
- Tax-audit and unrecognized-tax-benefit developments, loss of preferential tax rates, and the implications of potentially repatriating foreign earnings.
- Developments in the disclosed lawsuits and pension-plan funding, including changes in actuarial assumptions.