Diodes Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unless otherwise stated, financial amounts below are in U.S. dollars. Diodes manufactures and supplies standard discrete, logic and analog semiconductors for consumer, computing, communications, industrial and automotive markets.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Net sales | $177.0 million | $144.7 million | Up 22%; included one month of BCD revenue |
| Gross profit / margin | $46.2 million / 26% | $33.7 million / 23% | Profit up 37%; margin improved 3 percentage points |
| Operating income / margin | $3.8 million / 2% | $5.5 million / 4% | Operating income down 31% |
| Net income (loss) attributable to common stockholders | $(1.9) million; $(0.04) per diluted share | $4.9 million; $0.10 per diluted share | Turned to a loss, principally amid higher expenses and taxes |
| Cash from operations | $31.3 million | $13.4 million | Increased $17.9 million |
| Cash and cash equivalents | $200.2 million at March 31 | $157.1 million at December 31, 2012 | Quarter-end cash increased $43.1 million |
| Debt and credit availability | About $210 million outstanding on the $300 million revolver; $90 million available | — | Revolver financed the BCD acquisition; foreign facilities had $4 million drawn |
Net cash used in investing was $133.3 million, including $124.9 million for BCD net of cash acquired. Net cash provided by financing was $145.3 million, primarily reflecting $180 million of revolver borrowings, partly offset by debt and credit-line repayments. Current assets were $611.9 million and current liabilities $158.9 million; reported working capital was $453 million. Restricted cash of $10 million was pledged as collateral.
Material changes and significant transactions
- Revenue growth reflected a 6% increase in units sold and one month of BCD revenue, partly offset by a 14% decline in average selling price. Management reported average unit cost declined 11%.
- Gross margin improved year over year, supported by higher-margin North American and European sales, lower gold prices and product mix. Management said acquisition accounting adjustments partly offset sequential margin improvement.
- Operating expenses rose substantially: reported SG&A was $30.4 million versus $22.1 million, and R&D was $10.1 million versus $7.2 million. The filing attributes higher costs to recent acquisitions and acquisition-related amortization; Q1 2012 included a $2 million gain on sale of an intangible asset.
- On March 5, Diodes completed its approximately $155 million acquisition of BCD Semiconductor Manufacturing Limited, funded with cash and credit-facility borrowings. BCD contributed approximately $15 million in revenue and a $1 million loss for the period included in Q1, including purchase-accounting adjustments. Purchase-price allocation remained preliminary.
- Acquired inventory was increased by approximately $5 million for purchase accounting; about $2 million was expensed in Q1. The filing’s Q2 outlook separately refers to approximately $4 million of inventory valuation adjustment, while the acquisition note says approximately $3 million remained to be expensed. Investors should reconcile these disclosures.
Outlook, risks and contingencies
- Q2 2013 guidance: Net sales of $206–$218 million; gross margin of 27%, plus or minus 2 percentage points; operating expenses of 23.6% of sales, plus or minus 1 percentage point; tax rate of 14%–20%; and approximately 47 million shares for EPS calculations. Guidance includes the first full quarter of BCD and anticipated amortization, restructuring costs and BCD retention-bonus accruals.
- Management expected continued growth and margin improvement, citing Q1 record quarterly revenue, design-win momentum and a smooth initial BCD integration. It said the acquisition, excluding purchase-accounting adjustments, was immediately accretive to earnings.
- Second-quarter restructuring plans concern primarily the U.K. development team and closure of the New York sales office. Expected costs were approximately $2 million, primarily severance, with anticipated future cost savings.
- Income-tax expense was $6.6 million and the effective rate 153%, including approximately $6 million of discrete items, principally related to a China tax audit. The company disclosed that China authorities notified it of an additional $5 million tax due for 2011; the relevant subsidiary retained HNTE status for 2012–2014. Unrecognized tax benefits were approximately $28 million, with the possible range of near-term changes not estimable.
- The company expected operating cash, existing cash and available facilities to cover working capital and capital spending for at least 12 months. It was obligated to contribute at least $48 million to its Chengdu joint venture by December 31, 2013; approximately $25 million had been contributed by quarter-end.
- BCD brought foreign-currency forward contracts with $61 million notional, of which $56 million remained outstanding at quarter-end; contracts were scheduled to settle from April through December 2013. The company also reported a U.K. defined-benefit pension plan underfunded by $17.8 million.
- Two lawsuits were disclosed: a shareholder derivative action related to historical CEO stock-option grants and a putative securities class action concerning statements about China labor conditions. The company said it intended to defend both; outcomes remain uncertain.
- Key risks include semiconductor cyclicality, price and demand pressure, customer order cancellations, execution and integration of acquisitions, China and other international exposure, foreign-exchange and interest-rate movements, debt and litigation. Management reported disclosure controls effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether BCD integration delivers the expected product, customer-channel and manufacturing synergies, and how final purchase-price allocations affect future earnings.
- Q2 sales, margin and expense performance against guidance, including the treatment and timing of acquired-inventory valuation charges and restructuring costs.
- The ongoing impact of the China tax audit, the 2011 tax assessment and changes in unrecognized tax benefits.
- Debt repayment capacity, revolver availability, acquisition-related borrowing costs, and funding needs for the Chengdu joint venture.
- Developments in both lawsuits, the BCD-related foreign-exchange contracts, and the funding status of the U.K. pension plan.