Diodes Incorporated — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars unless noted. Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $323.7 million | $320.9 million | $948.0 million | $899.5 million |
| Gross profit / margin | $122.0 million / 37.7% | $115.2 million / 35.9% | $356.4 million / 37.6% | $321.1 million / 35.7% |
| Operating income | $48.7 million | $45.8 million | $139.4 million | $110.6 million |
| Net income attributable to common stockholders | $38.1 million | $30.9 million | $106.1 million | $74.5 million |
| Diluted EPS | $0.73 | $0.61 | $2.05 | $1.46 |
| Operating cash flow | $67.2 million, per MD&A | Not stated here | $177.7 million | $123.9 million |
- Q3 sales increased 0.8% year over year; nine-month sales rose 5.4%. Q3 gross margin improved 1.8 percentage points year over year, while nine-month margin improved 1.9 points.
- Cash and cash equivalents were $218.3 million at September 30, 2019, down from $241.1 million at year-end 2018; short-term investments were $7.9 million. Working capital was $465.3 million.
- Balance-sheet debt carrying amounts comprised a $17.1 million line of credit, $31.5 million current long-term debt and $87.9 million long-term debt, net of current portion. The filing’s debt table reports $120.5 million of total long-term debt before current classification and issuance costs.
- For the first nine months, investing cash outflow was $110.2 million, including $76.1 million of property and equipment purchases and $33.0 million for the Greenock facility acquisition. Financing cash outflow was $87.0 million, mainly reflecting net long-term debt repayments.
Changes, management commentary and outlook
- Management attributed growth to market-share gains, continued automotive demand and serial-connectivity products. Automotive and industrial together represented 38% of Q3 sales and 38.7% for the first nine months. Nine-month European sales and automotive and industrial end-market sales reached records, according to the company.
- Higher-margin automotive, industrial and serial-connectivity sales supported gross-margin expansion. Average unit costs nevertheless increased 8.0% in Q3 and 6.7% for the first nine months, year over year. Q3 operating expenses rose 5.7%, faster than sales, mainly due to SG&A.
- Management said existing cash, operating cash generation and available credit facilities should cover working-capital and capital-expenditure needs for at least 12 months. Capital expenditures were about 8% of nine-month sales, within the company’s 5%–9% target range. No specific revenue or earnings guidance was provided.
- On April 1, 2019, Diodes acquired the Greenock, Scotland wafer fabrication facility for $33.2 million to expand wafer capacity.
- Diodes agreed to acquire Lite-On Semiconductor Corporation (LSC) for approximately $428 million in cash, subject to exchange-rate changes, customary conditions and regulatory approvals. LSC shareholders approved the deal on October 25, after quarter-end; Diodes anticipated closing in April 2020 and expected to fund it primarily with new bank financing.
- Non-cancelable commitments included $26.1 million for capital expenditures and $72.7 million for wafer purchases scheduled in 2019 and 2020. A U.K. defined-benefit plan had an unfunded liability of approximately $33.0 million; a review could change future required contributions.
Risks and unusual items
- The company cited semiconductor cyclicality, competition and pricing pressure, order cancellations, supplier and manufacturing risks, and exposure to foreign exchange and interest rates. It also highlighted uncertainty from U.S.–China tariffs and potential trade restrictions; most products are manufactured in China, and the ultimate impact was unclear.
- Diodes disclosed a September malware infection and brute-force password attack. Internal IT staff restored operations; management did not believe confidential information was exposed or production materially affected. The company engaged an outside security firm and was enhancing controls.
- Unrecognized tax benefits were approximately $33.8 million, and the company could not estimate the range of possible changes over the next 12 months. It reported no pending litigation considered material.
- Q3 income-tax expense was lower year over year, partly because previously unrecognized tax benefits were recognized following the lapse of the statute of limitations for the 2015 tax year.
Investor verification points
- Track LSC acquisition approvals, closing timing, final consideration, financing terms and resulting leverage.
- Assess tariff and trade-policy developments, particularly their effects on China-based manufacturing, U.S. imports and customer demand.
- Monitor gross-margin sustainability, average unit costs, market mix, and capital spending relative to sales.
- Review cash conversion and debt repayment needs alongside acquisition funding and wafer and capital-expenditure commitments.
- Follow the U.K. pension funding review, tax-position developments and cybersecurity remediation. The filing does not provide a clear quantified estimate of their potential future cash or earnings impact.