Diodes Incorporated — Q1 2018 Form 10-Q
Business and period: Global supplier of discrete, logic, analog and mixed-signal semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $274.5 million | $236.3 million | +16.2% |
| Gross profit / margin | $98.6 million / 35.9% | $73.9 million / 31.3% | Profit +33.4%; margin +4.6 pts |
| Operating income / margin | $26.9 million / 9.8% | $9.4 million / 4.0% | Improved |
| Net income attributable to common stockholders | $18.5 million; diluted EPS $0.37 | $1.2 million; diluted EPS $0.02 | Substantially higher |
| Cash from operations | $54.0 million | $45.6 million | +$8.3 million |
| Cash and cash equivalents at quarter-end | $182.4 million | $203.8 million at Dec. 31, 2017 | Down $21.4 million |
Operating cash flow was offset by $29.4 million of net investing outflow and $49.8 million of net financing outflow; financing included $46.5 million of net long-term debt repayments and $7.3 million of taxes on net share settlement. Cash capital-expenditure purchases were $31.6 million. Working capital was $393.9 million, down from $415.2 million at year-end. Inventory increased to $236.5 million from $216.5 million.
At March 31, balance-sheet current and long-term debt totaled $221.8 million, with a further $4.5 million reported as line-of-credit borrowings. Management reported $223.6 million outstanding under the U.S. credit facility, including $83.5 million revolving and $140.1 million term borrowings; foreign facilities had $91.9 million in outstanding loans, with $86.7 million of available Asian credit lines reported. These facility disclosures should not be added together without reconciling their scope to the balance sheet. Management said existing cash, operating cash flow and available facilities should cover working capital and capital expenditure needs for at least 12 months.
Changes, commentary and outlook
- Management attributed year-over-year sales growth to consumer, automotive and industrial demand, with European revenue reaching a record. Automotive sales represented 9% of net sales, versus 7% a year earlier. Sales were up 2.3% sequentially from Q4 2017; gross margin was unchanged sequentially at 35.9%.
- Margin improvement reflected favorable product mix, greater contribution from Pericom products and improved capacity utilization. Average unit cost rose approximately 12% year over year, while cost of goods sold as a share of sales fell to 64% from 69%.
- Operating expenses rose 11.0%. SG&A included approximately $2.6 million of officer-retirement-related costs, including $1.8 million of incremental share-based compensation expense from accelerated vesting modifications.
- Other income was $4.6 million versus a $0.3 million expense a year earlier. The company recorded $2.9 million of insurance proceeds related to the 2016 KFAB facility fire in other income; the filing does not clearly reconcile the full other-income balance to individual items.
- Management expected growth momentum to continue in Q2 2018, with strength across target geographies and end markets; no numerical guidance was provided. Q1 capital spending was about 9% of sales, at the high end of the 5%–9% target range, to prepare capacity for expected growth.
- The 2018 estimated annual effective tax rate was 28.7%; the Q1 effective rate was 29.6%, with the filing citing discrete stock-compensation items and a Taiwan tax-rate increase. Accounting for the Tax Act’s 2017 effects remained provisional; the company expected to finalize it by Q4 2018. Unrecognized tax benefits were approximately $31.3 million, and the company could not estimate the range of potential changes over the next 12 months.
Risks and contingencies
- The filing added a risk that proposed U.S. and Chinese tariffs or other restrictions could disrupt China operations or sales and adversely affect profitability. Other highlighted exposures include semiconductor cyclicality, pricing pressure, customer order cancellations, supplier and manufacturing disruption, competition, foreign exchange and interest rates, debt and covenant restrictions, and international and tax risks.
- The U.K. defined-benefit plan had an unfunded liability of approximately $34.0 million. The company is obligated to contribute about GBP 2 million annually through December 2029, subject to periodic funding reviews.
- Non-cancelable capital-expenditure purchase commitments were approximately $28.9 million. The company said it was not party to material pending litigation and believed current proceedings would not materially affect its financial position or results.
- Revenue-standard adoption on January 1, 2018 did not materially affect reported revenue or financial statements. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether sales growth and the improved gross margin persist, particularly given rising average unit costs and semiconductor-market cyclicality.
- How the $4.6 million other-income line reconciles, including the $2.9 million insurance recovery, and how much of Q1 earnings is recurring.
- Debt-facility balances, availability, covenant headroom and the reconciliation between facility disclosures and balance-sheet debt.
- Inventory growth, planned capacity spending and conversion of operating cash flow into cash after investment and debt service.
- Developments in U.S.–China trade restrictions and the final accounting and cash-tax effects of the Tax Act and unrecognized tax positions.