Diodes Incorporated — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless stated otherwise. Diodes makes standard discrete, logic and analog semiconductors and reports as one segment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $160.6 | $163.1 | $491.9 | $449.1 |
| Gross profit | $45.2 | $61.0 | $158.2 | $162.2 |
| Gross margin | 28.1% | 37.4% | 32.2% | 36.1% |
| Operating income | $13.4 | $29.8 | $67.1 | $72.7 |
| Net income attributable to common stockholders | $10.0 | $21.2 | $47.6 | $52.8 |
| Diluted EPS | $0.21 | $0.46 | $1.02 | $1.16 |
- Q3 sales fell about 2% year over year and 5% sequentially from Q2's $170 million. The company attributed the annual decline to global market weakness, particularly in consumer and computing, and lower average selling prices; units sold rose 6% while average selling price fell about 7%.
- Q3 gross margin contracted to 28.1% from 37.4%. Management cited a lower-margin product mix, higher direct manufacturing costs, reduced subcontractor activity and higher gold prices. Nine-month sales rose 10%, but gross profit fell 2% as margin declined.
- Q3 income tax expense was $0.4 million (reported effective rate 3%); nine-month tax expense was $9.9 million, with a 17% effective rate. Management cited income earned in lower-tax jurisdictions, foreign tax credits and other adjustments.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $124.9 million at September 30, down from $270.9 million at year-end 2010. Working capital was $311 million, versus $289 million at year-end.
- Nine-month operating cash flow was $65.1 million, compared with $90.0 million a year earlier. Investing activities used $83.2 million, including $69.8 million for property, plant and equipment and $13.5 million for investments. Financing activities used $130.7 million.
- Inventories increased to $139.1 million from $120.7 million at year-end, and accounts receivable rose to $139.4 million from $129.2 million.
- The company used approximately $136 million, including accrued interest, to repurchase approximately $134 million principal of convertible notes under the September put. About $0.2 million principal remained at quarter-end; the company gave notice to redeem the remainder on December 1, 2011. No lines of credit were drawn at September 30. Long-term debt was $2.9 million, excluding capital leases.
- Management said cash, operating cash generation and available facilities should cover working capital and capital spending needs for at least 12 months. The U.S. $10 million revolving facility matured in November 2011, and renewal discussions were ongoing. Foreign facilities had approximately $45 million of borrowing capacity, with no borrowings; $14 million was used for import/export guarantees.
Material developments and outlook
- Fourth-quarter 2011 guidance: revenue of $140–$150 million (down 7%–13% sequentially), gross margin of 25% plus or minus 1.5 percentage points, operating expenses approximately flat with Q3 in dollars, tax rate of 17%–23%, and approximately 47 million shares for GAAP EPS calculations.
- Management said market weakness that began in May continued into Q4, especially in consumer and computing. It shifted mix toward lower-margin products to use capacity, increased R&D investment, and implemented cost controls including delayed capital spending, hiring freezes, lower factory overtime and reduced travel.
- Capital expenditures were $74 million for the first nine months, including $15 million for the Chengdu project. The company had invested about $15 million of an expected approximately $48 million commitment over the project’s first three years; separate risk disclosure describes a minimum contribution of $47.5 million.
- Diodes paid approximately $14 million for a roughly 30% stake in Eris Technology in September and intended to buy additional shares over the following year. The stake was marked to market under the fair value option; a $1.3 million fair-value loss was recorded in Q3.
- The U.K. and German defined-benefit plan was underfunded by $22.6 million at quarter-end. The company’s annual payment arrangement called for approximately £1.0 million through 2012; later contributions had not been determined.
- Related-party matters include Lite-On Semiconductor, which held 18.4% of Diodes and was its largest external supplier, and Keylink, a joint-venture partner and provider of manufacturing-related services. The filing reports no material litigation and no material change in disclosed risk factors.
Key investor checks
- Monitor whether Q4 revenue and gross-margin guidance is achieved, and whether margin pressure from mix, pricing, utilization and input costs persists.
- Review inventory and receivables growth against demand and cash generation; nine-month operating cash flow was below the prior-year period.
- Verify completion of the remaining convertible-note redemption and the status and terms of renewal of the U.S. credit facility.
- Assess the Eris investment’s subsequent fair value, intended additional purchases and related-party transactions, including reliance on Lite-On as a supplier.
- Track Chengdu investment commitments, capital spending, and the underfunded pension plan and future contribution requirements.