Diodes Incorporated — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Diodes makes standard semiconductor products for consumer, computing, communications, industrial and automotive markets. It reports one operating segment. Unless noted, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $309.5m | $323.7m | $878.8m | $948.0m |
| Gross profit / margin | $111.1m / 35.9% | $122.0m / 37.7% | $308.4m / 35.1% | $356.4m / 37.6% |
| Operating income | $37.9m | $48.7m | $94.6m | $139.4m |
| Net income attributable to common stockholders | $27.2m | $38.1m | $68.4m | $106.1m |
| Diluted EPS | $0.51 | $0.73 | $1.30 | $2.05 |
| Operating cash flow | $39.7m | Not stated for quarter | $126.4m | $177.7m |
Q3 sales rose 7.2% from Q2 2020. Q3 net income attributable to common stockholders was $27.2m; the filing’s MD&A describes this as net income.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $587.6m and short-term investments were $3.0m. Restricted cash of $52.2m was reported in other current assets; cash, equivalents and restricted cash totaled $639.8m.
- Working capital was $893.2m, versus $524.6m at December 31, 2019. Total current assets were $1,214.7m and current liabilities were $321.5m.
- Balance-sheet debt comprised $70.7m of line-of-credit borrowings, $15.0m current long-term debt and $330.8m long-term debt, net of current portion and debt costs. The company also reported $318.8m outstanding under its term loan and revolver in the debt schedule. Debt is primarily floating-rate.
- The amended credit agreement provides $670m of total commitments, with term loans and a $150m revolver maturing May 29, 2023. The company had drawn $305m under the facility as a partial currency hedge for the planned Lite-On Semiconductor acquisition. Management said $150m of U.S. revolver capacity remained available.
- Nine-month investing cash outflow was $51.8m, including $48.5m of property and equipment purchases. Financing cash inflow was $294.7m, principally reflecting net debt proceeds. Cash and cash equivalents increased $329.3m from year-end; including restricted cash, the increase was $380.3m.
Material changes versus comparable periods
- Q3 sales declined 4.4% year over year, while nine-month sales declined 7.3%. Management attributed the declines to the COVID-19-related economic slowdown and, for the year-to-date period, delayed China production and temporary U.K. facility closures. Both regions had resumed full production by the filing date.
- Gross margin contracted year over year in both periods. Management cited lower sales and, for the nine-month period, higher average unit costs and lower manufacturing utilization.
- Nine-month operating cash flow fell to $126.4m from $177.7m, alongside lower net income and inventory investment. Nine-month capital spending fell from $76.1m to $48.5m.
- Debt and cash balances increased significantly as the company borrowed ahead of the proposed Lite-On acquisition. Interest expense rose to $3.7m in Q3 from $2.0m and to $7.6m for nine months from $6.2m.
- Q3 foreign currency loss was $2.6m, versus $0.8m a year earlier; nine-month foreign currency loss was $6.1m, versus $1.4m.
Outlook, risks and unusual items
- Outlook: No specific revenue, earnings or margin guidance is provided. Management expected operating cash, existing cash and investments, and available credit to cover working capital, capital expenditures and acquisitions for at least 12 months. Capital spending target was 5%–9% of sales; nine-month spending was approximately 5.4% of sales.
- Lite-On acquisition: The proposed acquisition consideration was approximately $451.4m at September 30 exchange rates, subject to currency changes. Regulatory approvals described in the filing had been obtained; closing was anticipated by the end of November 2020, subject to customary conditions. It had not closed as of September 30.
- COVID-19: Management could not estimate the pandemic’s ultimate financial impact. Further facility closures, supply or customer disruption, order changes, transport limitations, and customer payment difficulties could adversely affect results. China and U.K. operations were then at full production.
- Credit and currency risks: Credit agreement covenants include leverage and fixed-charge coverage tests and restrictions on specified transactions. Some foreign credit lines are unsecured, uncommitted, repayable on demand and terminable by lenders. Foreign exchange and interest-rate movements affect results; the company uses derivatives but cautions that hedging may not succeed.
- Unusual items and contingencies: The credit agreement amendment resulted in a $0.7m loss on extinguishment and third-party fees in the first half of 2020. A board member’s modified restricted-stock awards generated approximately $1.7m of additional expense in Q2. The U.K. defined-benefit plan had an unfunded liability of approximately $30.7m and scheduled deficit contributions. Gross unrecognized tax benefits were approximately $37.5m; the possible 12-month change could not be estimated. The company reported no material pending litigation.
Most important facts for investors to verify
- Whether and when the Lite-On acquisition closed, its final consideration, financing and integration effects.
- Post-acquisition debt, covenant headroom, interest costs and available liquidity, including the distinction between restricted cash and usable cash.
- Whether sales and gross margins recover, and whether manufacturing utilization and costs improve after the COVID-19 disruptions.
- Subsequent cash generation, inventory levels and capital spending relative to management’s stated target.
- Potential effects of ongoing COVID-19 disruption, foreign exchange movements, tax positions and U.K. pension obligations.