Diodes Incorporated — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
- Q2 revenue: $264.2 million, up 11.7% year over year and 11.8% sequentially. Management attributed growth to strength across target markets and geographies, Pericom product growth and market-share gains. Industrial, automotive and communications each reached quarterly revenue records.
- Q2 profitability: Gross profit was $90.1 million, up 20.5%; gross margin was 34.1%, versus 31.6%. Operating income was $23.8 million, versus $11.3 million. Net income attributable to common stockholders was $13.2 million, versus $5.8 million; diluted EPS was $0.26, versus $0.12.
- First half: Revenue was $500.5 million, up 9.0%; gross profit was $164.1 million, up 18.0%, with gross margin of 32.8%, versus 30.3%. Operating income was $33.2 million, versus $12.7 million. Common-stockholder net income was $14.4 million, versus $4.0 million; diluted EPS was $0.29, versus $0.08.
- Costs and margins: Q2 cost of goods sold was 66% of sales, versus 68%; average unit cost declined 16.3% year over year, which management attributed to lower China manufacturing costs. Margin gains also reflected improved utilization, pricing and product mix, including higher North American, European and Pericom contributions. R&D spending rose, while SG&A declined.
- Cash flow and investment: First-half operating cash flow was $65.4 million, versus $41.9 million. Investing cash outflow was $29.5 million, including $43.9 million of capital expenditures, versus $29.1 million of capex a year earlier. Financing cash outflow was $23.4 million, including $34.4 million of long-term debt repayments.
- Liquidity and debt: At June 30, cash and cash equivalents were $266.6 million and short-term investments were $16.4 million. Working capital was $541.4 million. Balance-sheet current and long-term debt totaled about $401.2 million. The company separately reported $401.6 million owed under its U.S. credit facility and $0.4 million on foreign credit lines; the filing also reports a $1.4 million Taiwan bank loan. Available foreign credit lines were approximately $69.5 million. Management said available cash, operations and credit facilities should cover working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook and notable items
- Revenue and operating profitability improved substantially from the prior-year quarter and first half. First-half foreign-currency losses increased to $5.4 million from $0.6 million; Q2 recorded a $1.6 million currency loss versus a $0.7 million gain, which management linked primarily to a stronger Taiwan dollar against the U.S. dollar.
- The company is shutting down and relocating its Lee’s Summit, Missouri wafer-fabrication operation (KFAB), with closure expected late in Q3 2017 and vacating planned by November 15. Estimated pretax shutdown costs are $10–12 million during 2017; $4.1 million was expensed in the first half, including $1.8 million in Q2. The company received $6.0 million of insurance proceeds in Q1 related to 2016 fires at the facility.
- Management provided no quantified revenue or earnings forecast. It said any future net-income improvement would depend primarily on sales volume, product mix and manufacturing cost reductions offsetting average selling-price declines. Capital spending was 8.8% of first-half sales, within the company’s stated 5–9% target range.
- Other items to monitor include a $30.6 million gross balance of unrecognized tax benefits, with possible significant changes over the next 12 months but no estimable range; an approximately $30.3 million unfunded U.K. defined-benefit liability; and $31.2 million of non-cancelable capital-expenditure purchase commitments. Foreign subsidiaries held $269.0 million of cash and investments; $157.8 million could be subject to tax if repatriated.
- One customer represented 10% of Q2 revenue ($26.6 million), but not 10% or more of first-half revenue or quarter-end receivables. LSC, a related party and the company’s largest shareholder, owned approximately 16.7% of common stock. The filing reports no material pending litigation and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
- The company adopted the new stock-compensation accounting standard in Q1 2017, recording a $4.8 million increase to retained earnings and deferred tax assets from its income-tax provisions. Revenue standard adoption was planned for Q1 2018 using the modified-retrospective method; the company was still evaluating variable consideration and other effects.
Important facts for investors to verify
- Whether higher sales, utilization and favorable mix persist, and whether price reductions offset unit-cost improvements.
- Actual total KFAB shutdown costs, timing of closure and relocation, and the effect on manufacturing capacity and customer supply.
- Debt balances and repayment pace, floating-rate exposure, credit-facility covenant headroom and the distinction between facility borrowings and balance-sheet debt.
- Foreign-currency exposure and the potential impact of China-related revenue concentration, tax incentives and any repatriation of overseas cash.
- Potential outcomes of tax audits and the $30.6 million unrecognized-tax-benefit balance, along with pension funding requirements and capital commitments.
- Revenue-recognition implementation findings and the effect of stock-based compensation, including the modified CEO performance award, on future expenses and dilution.