Diodes Incorporated — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Diodes manufactures standard discrete, logic, analog and mixed-signal semiconductor products. Figures below are in USD millions except per-share amounts; comparisons are year over year unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $440.4 | $288.7 | $853.6 | $569.4 |
| Gross profit | $159.8 | $101.5 | $298.4 | $197.3 |
| Gross margin | 36.3% | 35.2% | 35.0% | 34.7% |
| Operating income | $65.4 | $30.9 | $112.7 | $56.7 |
| Net income attributable to common stockholders | $55.4 | $21.0 | $94.8 | $41.2 |
| Diluted EPS | $1.22 | $0.40 | $2.09 | $0.78 |
| Operating cash flow | $93.9* | Not stated | $162.1 | $86.7 |
- Q2 sales increased 52.6% year over year and 6.6% sequentially. Management attributed the year-over-year increase to 27.5% organic growth and 25.1% from Lite-On Semiconductor (LSC). Sales rose across regions; computing represented 30% of Q2 sales and automotive 12%.
- Q2 operating expenses rose 33.7%, slower than sales growth; expenses declined to 21.4% of sales from 24.5%. Management cited higher wages, benefits and selling costs. Average unit costs increased about 5% in Q2, reflecting higher subcontractor and foundry costs.
- Q2 net income includes a $5.3 million unrealized investment gain; first-half investment gains were $8.9 million. This is a non-operating item and contributed to the improvement in reported earnings.
- *The $93.9 million Q2 operating cash flow is stated in MD&A. The cash-flow statement presents the six-month figure, not a quarterly comparative figure.
Liquidity, debt and cash flows
- At June 30, cash and cash equivalents were $292.7 million, short-term investments $7.4 million and restricted cash $2.3 million. Cash, cash equivalents and restricted cash totaled $294.9 million, down from $320.5 million at year-end 2020.
- Working capital was $582.3 million, versus $514.2 million at December 31, 2020. Current assets were $1,042.5 million and current liabilities $460.2 million.
- Balance-sheet debt comprised $60.2 million of lines of credit, $18.3 million current long-term debt and $222.7 million long-term debt, net of current portion. The $150 million revolving facility was undrawn. Debt balances declined substantially from year-end; the filing reports $151.5 million of net debt reductions in first-half financing activity.
- First-half investing cash outflow was $36.7 million, including $45.0 million of property and equipment purchases. Financing cash outflow was $156.3 million. Capital expenditures, including accrued amounts, were $53.7 million, or about 6.3% of sales.
- Management said cash generated from operations, existing liquidity and available credit were expected to cover working capital, capital expenditures and acquisitions for at least the next 12 months.
Material changes, outlook and risks
- The November 2020 LSC acquisition contributed to reported growth. Management said integration was progressing and cited manufacturing synergies from improved factory loading. LSC’s computing-market contribution was about 47% of Q2 computing sales.
- No formal revenue or earnings forecast is provided in the supplied filing text. Management’s capital-spending target is 5%–9% of net sales; first-half spending was within that range.
- Management highlighted industry supply and capacity constraints and said its global manufacturing footprint was an advantage. COVID-19 could still disrupt production; a prior temporary facility closure was noted. Other stated risks include semiconductor cyclicality, pricing pressure, dependence on suppliers, manufacturing interruptions, foreign-exchange and interest-rate exposure, debt covenants, international operations and acquisition integration.
- Diodes agreed to sell a China manufacturing subsidiary for approximately $18.0 million in cash and equity, subject to closing conditions and working-capital adjustments. The preliminary disposal group had $16.5 million of net assets held for sale; no gain or loss was recorded on classification.
- In July 2021, after quarter-end, the company invested $10.0 million in preferred stock and made a $5.0 million convertible promissory note investment in an early-stage fabless wafer-design company.
- Other items to monitor include $66.8 million of non-cancelable capital-expenditure purchase contracts, a $28.7 million wafer-purchase commitment, a $19.9 million underfunded UK defined-benefit liability and $45.9 million of gross unrecognized tax benefits. The company said material litigation was not pending.
Important facts for investors to verify
- Separate organic growth from LSC’s contribution and assess the sustainability of the rapid sales growth and margin improvement.
- Evaluate the effect of the $5.3 million Q2 unrealized investment gain on earnings quality.
- Confirm debt balances, facility availability and compliance with credit-agreement covenants, including restrictions on restricted payments.
- Track supply availability, rising manufacturing costs, capital spending and operating cash conversion.
- Review the China subsidiary sale’s final consideration, closing status and any adjustments, and assess the July investment’s terms and risks.