Diodes Incorporated — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. Diodes makes standard semiconductor products serving consumer, computing, communications, industrial, and automotive markets. Its November 2015 Pericom acquisition contributed to 2016 results; 2015 reported results do not include Pericom. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $250.7 | $208.9 | $710.1 | $634.5 |
| Gross profit / margin | $80.6 / 32.2% | $61.6 / 29.5% | $219.7 / 30.9% | $195.0 / 30.7% |
| Operating income | $20.0 | $10.0 | $32.7 | $48.9 |
| Net income attributable to common stockholders | $10.6 | $2.8 | $14.7 | $29.0 |
| Diluted EPS | $0.21 | $0.06 | $0.30 | $0.59 |
| Cash from operations | Not separately provided | Not separately provided | $74.9 | $98.5 |
- Q3 sales rose 20.0%, including approximately $31.0 million from Pericom and higher discrete-market revenue. Nine-month sales rose 11.9%, including approximately $94.8 million from Pericom; excluding Pericom, the filing cites weaker consumer and domestic China demand.
- Q3 gross margin improved with increased capacity utilization and lower wafer-fab underutilization costs. Management reported average unit cost down 12.6% excluding Pericom in the quarter; including Pericom, it was down 4.5%. Nine-month operating expenses rose 28.0%, exceeding sales growth, driven largely by Pericom and higher acquisition-related amortization.
- Nine-month operating income and common-stockholder earnings declined despite higher sales. Interest expense increased to $9.9 million from $2.6 million for the nine months, primarily due to borrowing for the Pericom acquisition. The nine-month effective tax rate was 26.5%, versus 34.1%; tax holidays reduced 2016 nine-month tax expense by approximately $5.1 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $220.5 million and short-term investments were $34.8 million. Working capital was $566.9 million, down from $570.9 million at December 31, 2015. Current assets were $739.5 million against current liabilities of $172.6 million.
- Long-term debt, including current portion, was approximately $417.4 million on the balance sheet. Management reported $417.5 million drawn under the U.S. facility, plus approximately $1.6 million of foreign long-term debt. Total assets were $1.55 billion.
- Nine-month operating cash flow was $74.9 million; investing cash use was $19.8 million and financing cash use was $54.3 million. Cash increased $2.1 million during the period. The cash flow statement reports $47.1 million of cash purchases of property, plant and equipment; MD&A cites capital expenditures of $39.6 million, so the filing does not clearly reconcile these measures.
- On October 26, 2016, after quarter-end, the company amended and restated its credit agreement, establishing a $250 million revolver and $250 million term loan, each maturing October 26, 2021, with potential commitment increases of up to $200 million subject to lender approval. The agreement includes leverage and fixed-charge covenants and restrictions on certain activities.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management expects future net-income improvement to depend primarily on sales volume, product mix, and manufacturing cost reductions to offset selling-price pressure. Automotive reached a record 7% of Q3 revenue; management also noted early growth in virtual reality products.
- Management said existing cash, operating cash generation, investments and available credit should cover working-capital and capital-expenditure needs for at least 12 months. It targets capital spending of 5%–9% of sales. Approximately $247.6 million of cash and investments were held by foreign subsidiaries; about $172.5 million could be subject to tax if repatriated.
- Key risks include semiconductor cyclicality and weaker consumer/China demand, ongoing customer pricing pressure, foreign-exchange movements and Brexit uncertainty, acquisition integration, debt and interest costs, reliance on suppliers (including related parties), and Chinese tax incentives. No material pending litigation was identified; the company had $14.5 million in non-cancelable capital-expenditure purchase commitments.
- The U.K. defined-benefit pension plan was underfunded by $39.2 million at quarter-end. Pericom purchase accounting remained preliminary, and the company cautioned that final valuation or amortization-period adjustments could be material. Gross unrecognized tax benefits were approximately $28.5 million, with possible changes over the next 12 months not estimable.
- Disclosure controls were assessed as effective at September 30, 2016. Management had previously concluded internal control over financial reporting was ineffective at December 31, 2015 due to accounting errors involving Pericom equity awards and change-in-control agreements; remediation steps were implemented in Q1 2016.
Investor verification priorities
- Separate organic performance from Pericom contributions and assess whether demand outside the acquisition is recovering.
- Track operating-expense growth, acquisition amortization, interest expense and the effect of debt refinancing on earnings and covenant headroom.
- Reconcile reported capital expenditures with cash PP&E purchases and monitor operating cash flow and working-capital trends.
- Review final Pericom purchase-price allocation, the pension funding position, tax exposures, and the potential cost of repatriating overseas funds.
- Assess exposure to customer price reductions, China and consumer-market demand, currency shifts, Brexit-related uncertainty, and key supplier relationships.