Diodes Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are to Q3 2020 unless stated otherwise. Diodes manufactures standard semiconductor products serving automotive, industrial, consumer, communications and computing markets. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $471.4 million | $309.5 million | $1,325.0 million | $878.8 million |
| Gross profit | $181.2 million | $111.1 million | $479.7 million | $308.4 million |
| Gross margin | 38.4% | 35.9% | 36.2% | 35.1% |
| Operating income | $77.2 million | $37.9 million | $190.0 million | $94.6 million |
| Net income attributable to common stockholders | $68.4 million | $27.2 million | $163.3 million | $68.4 million |
| Diluted EPS | $1.50 | $0.51 | $3.59 | $1.30 |
Margins and expenses: Q3 operating expenses were $104.0 million, or 22.1% of sales, versus 23.7% a year earlier. Management attributed margin improvement to growth in higher-margin markets and improved loading at LSC facilities. It also reported higher subcontractor and foundry costs; average unit cost rose 10.7% year over year in Q3.
Cash flow and investment: Nine-month operating cash flow was $261.0 million, compared with $126.4 million. Investing used $89.3 million, including $86.2 million of property and equipment purchases. Financing used $210.3 million, principally reflecting net debt reduction. Management reported Q3 operating cash flow of $98.9 million and capital expenditures of $41.1 million; Q3 net cash flow was negative $10.1 million after capital expenditures and debt reduction.
Liquidity and debt: At September 30, cash and cash equivalents were $280.5 million, restricted cash $4.3 million and short-term investments $7.4 million. Working capital was $619.3 million, up from $514.2 million at year-end 2020. Reported debt included $15.7 million under foreign credit lines, $18.4 million current long-term debt and $218.0 million long-term debt, net of current portion. The company had $150.0 million available under its revolving facility. Management said available liquidity and expected operating cash flow should cover working capital, capital expenditures and acquisitions for at least 12 months.
Changes versus comparable periods
- Q3 sales increased 52.3% year over year and 7.0% sequentially; nine-month sales increased 50.8%. Management attributed Q3 growth to 27.8% legacy-business organic growth and 24.6% from LSC.
- Q3 sales grew across regions. Computing represented 30% of Q3 revenue versus 19% a year earlier; consumer fell to 18% from 27%. Automotive was 12%, compared with 11%.
- Q3 gross margin improved 2.5 percentage points year over year. Nine-month operating expenses declined as a share of sales to 21.9% from 24.3%.
- Debt and cash flows shifted from the acquisition-related financing pattern of 2020: the company used $210.3 million in financing in the first nine months of 2021, including substantial debt repayments, versus $294.7 million of financing inflows in the prior-year period.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited semiconductor supply and capacity constraints, while noting that its global manufacturing footprint and LSC integration were supporting customer service and growth.
- Management described LSC integration as progressing well and reported manufacturing synergies. The acquisition closed in November 2020; the filing states purchase accounting remained preliminary and adjustments could be material.
- Q3 included a $5.9 million unrealized investment gain; the nine-month gain was $14.8 million. Management linked investment income to an investment acquired in the LSC transaction. The nine-month operating cash flow reconciliation excluded a $15.1 million noncash investment gain.
- Risk factors include COVID-19 disruptions, supply constraints and supplier cost increases, semiconductor cyclicality, foreign exchange and interest-rate exposure, and China electricity rationing that could raise costs or curtail manufacturing. The company also reported approximately $47.3 million of gross unrecognized tax benefits; outcomes within 12 months could change materially, but the range was not estimable.
- Commitments included $83.1 million of non-cancelable capital expenditure contracts and $53.3 million of wafer purchase commitments. A China manufacturing subsidiary was classified as held for sale, with approximately $18.0 million in net assets and expected consideration of about $18.0 million; closing was anticipated by March 2022, subject to conditions. The company reported no material pending litigation.
Important facts for investors to verify
- Reconcile the Credit Agreement maturity date: the debt note lists May 2024, while MD&A says May 2023.
- Assess how much of sales and margin growth is sustainable organic performance versus LSC contribution, product mix and capacity availability.
- Review the quality and recurrence of earnings, including the unrealized investment gains and the preliminary LSC purchase accounting.
- Monitor cash conversion, inventory and receivables growth, elevated capital spending, debt repayment capacity and remaining revolver availability.
- Track China power availability, supply-chain cost pressures, the held-for-sale subsidiary transaction and the uncertain tax positions.