Diodes Incorporated — Q1 2011 Form 10-Q
Business context and period: Semiconductor manufacturer and supplier serving consumer electronics, computing, communications, industrial, and automotive markets. This summary covers the three months ended March 31, 2011, compared with Q1 2010; balance-sheet figures compare March 31, 2011 with December 31, 2010. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $161.6 | $136.8 | +18% |
| Gross profit / margin | $57.4 / 35.5% | $47.8 / 34.9% | Profit +20%; margin +0.6 percentage points |
| Operating income / margin | $28.3 / 17.5% | $18.9 / 13.8% | Income +50% |
| Net income attributable to common stockholders | $19.7 | $15.0 | +32% |
| Diluted EPS | $0.42 | $0.33 | +$0.09 |
| Operating cash flow | $15.7 | $23.9 | Down $8.1 |
Sales growth reflected a 17% increase in units and approximately 1% higher average selling prices. Operating expenses were nearly flat at $29.1 million, while operating margin improved as sales grew. Other expense was $3.2 million, versus $0.1 million of other income in Q1 2010; management cited the prior-year intellectual-property sale gain and favorable foreign-exchange gains among the factors affecting comparability. The effective tax rate was 19%, versus 18%, primarily below the U.S. statutory rate because more income was earned in lower-tax jurisdictions.
Financial position and liquidity
- Cash and cash equivalents were $278.7 million, up from $270.9 million at year-end. Working capital was $314 million, compared with $289 million.
- Current assets were $569.0 million and current liabilities $255.1 million. Accounts receivable rose to $145.1 million from $129.2 million; inventory was $123.1 million, up from $120.7 million.
- Operating cash flow was lower year over year, primarily because accounts receivable increased by approximately $16 million. Capital expenditures were $19 million, including $1 million related to the Chengdu project.
- Convertible notes had a $130.2 million net carrying amount and $134.3 million principal; they are classified as current because holders may require repayment at par on October 1, 2011. The company also reported $3.3 million of long-term debt and $1.3 million of long-term capital lease obligations.
- Credit facilities had no outstanding borrowings, although $3 million of foreign facilities was used for import/export guarantees. Management said available cash, operating cash generation, and credit facilities should cover working capital and capital needs for at least 12 months, but a note put would require available funds or alternative financing.
Material changes, outlook, and risks
- Sequentially, sales declined 1% and gross profit declined 8% from Q4 2010; diluted EPS fell from $0.52 to $0.42. Management said Q1 demand was stronger than typical seasonal patterns, especially in Asia and Europe, with demand from tablets, notebooks, smartphones, and LED TVs.
- China packaging facilities experienced labor shortages and reduced equipment utilization, lowering output and fixed-cost coverage. Diodes shipped from finished-goods inventory and reduced contract assembly commitments; management expected hiring and training to address the issue during Q2.
- For Q2 2011, management forecast revenue of $170–$178 million, 5%–10% sequential growth; gross margin comparable to Q1; operating expenses slightly lower as a percentage of revenue; a 17%–23% tax rate; and approximately 47.5 million shares for EPS calculations. For 2011, it expected continued demand and order-rate improvement, production ramps from design wins, and new applications.
- The $230 million principal amount of 2.25% convertible notes carries an October 1, 2011 holder put. The filing does not specify how much holders may require the company to repurchase.
- The company had approximately $28 million of non-cancelable capital-expenditure purchase commitments. It expected to invest approximately $48 million in the Chengdu joint venture over its first three years; approximately $1 million had been invested by March 31, 2011.
- The U.K. and German defined-benefit plan was underfunded by $18.3 million. Tax authorities may change approximately $9 million of unrecognized tax benefits; the company could not estimate the range of possible outcomes.
- Risks include semiconductor cyclicality, order cancellations and pricing pressure, production or supply disruptions, international and foreign-currency exposure, and reliance on related parties. Lite-On Semiconductor (a significant shareholder) supplied about 6% of net sales in products purchased for resale and was the company’s largest supplier. The filing reports no pending litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether convertible-note holders exercised the October 2011 put, and how any repayment was funded.
- Whether China labor constraints eased and Q2 revenue, margins, and production ramps tracked management’s forecast.
- Whether receivables converted to cash and operating cash flow recovered as sales grew.
- Progress, total funding needs, and execution risks for the Chengdu joint venture and other manufacturing investments.
- Changes in the defined-benefit plan funding position, unrecognized tax benefits, and related-party supplier or customer exposure.