Diodes Incorporated — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; compared with the corresponding 2018 periods unless otherwise noted. Dollar figures below are in millions, except per-share amounts. Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $322.0 | $304.1 | $624.3 | $578.6 |
| Gross profit | $122.0 | $107.3 | $234.4 | $205.9 |
| Gross margin | 37.9% | 35.3% | 37.6% | 35.6% |
| Operating income | $48.5 | $37.8 | $90.6 | $64.8 |
| Net income attributable to common stockholders | $36.3 | $25.1 | $68.0 | $43.6 |
| Diluted EPS | $0.70 | $0.49 | $1.32 | $0.86 |
| Cash flow from operations | $40.6 | Not stated for Q2 | $110.5 | $88.4 |
- Growth and margins: Q2 sales increased 5.9% year over year and 6.5% sequentially; first-half sales rose 7.9%. Management attributed growth to market-share gains and strength in Europe, North America, automotive and industrial markets. Higher automotive, industrial and serial-connectivity product mix supported margin expansion.
- Costs and earnings: Q2 operating expenses increased 5.8% year over year, with SG&A up about $5.2 million. The first-half effective tax rate was 23.9%, compared with 29.6% in 2018; management cited higher estimated full-year pretax income and fewer unfavorable U.S. permanent differences.
- Cash flow and investment: First-half investing cash outflow was $82.5 million, including $50.7 million of property and equipment purchases and the $33.2 million GFAB acquisition. First-half financing cash outflow was $33.0 million, including net long-term debt repayments. Cash and cash equivalents were $235.4 million at June 30, versus $241.1 million at year-end 2018; cash, equivalents and restricted cash totaled $236.8 million.
- Debt and liquidity: June 30 debt included $15.5 million of foreign credit-line borrowings and $173.1 million of gross long-term debt, before $1.2 million of unamortized issuance costs. Working capital was $481.2 million. The U.S. credit facility matures in October 2021 and includes financial and other covenants. Management expects operating cash, existing liquidity and available facilities to cover working capital and capital expenditures for at least the next 12 months.
- Other balance-sheet items: Total assets were $1.614 billion and total equity was $1.051 billion. The company adopted lease accounting in January 2019, recording $68.3 million of right-of-use assets and $50.4 million of lease liabilities at adoption. At June 30, operating lease liabilities were $45.8 million.
Material developments, outlook and risks
- GFAB acquisition: Diodes completed its purchase of a wafer fabrication facility in Greenock, Scotland, on April 1 for $33.2 million, funded through the revolving credit facility. The company is installing its processes to use the added 8-inch wafer capacity. Acquisition costs of approximately $0.6 million were expensed; pro forma historical financial data was unavailable.
- Capital spending: First-half capital expenditures were approximately 8.4% of sales, within the company’s stated 5%–9% target range. No specific revenue or earnings guidance is provided in the filing.
- Trade-policy exposure: The filing highlights uncertainty from U.S.–China tariffs, given that most products are manufactured in China and some are imported into the U.S. The report notes a proposed additional 10% U.S. tariff on $300 billion of Chinese goods, announced August 1, 2019, and warns that tariffs, customer pass-throughs or China’s semiconductor self-sufficiency efforts could harm results.
- Contingencies and commitments: The company reported no pending litigation it considers material. It had $18.5 million of non-cancelable capital-expenditure purchase commitments and an $83.7 million commitment to purchase wafers during 2019–2020. The U.K. defined-benefit plan had an unfunded liability of approximately $27.7 million and requires annual contributions of about £2 million through 2029; the result of its latest funding review was expected in Q3 2019.
- Tax uncertainty: Gross unrecognized tax benefits were approximately $35.9 million; the company could not estimate the range of potential changes over the next 12 months.
- Other risks: The filing cites semiconductor cyclicality, pricing pressure, order cancellations, supplier and production disruptions, foreign-exchange and interest-rate exposure, debt and covenant constraints, and international operating risks. Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and improved margins continue, particularly in automotive, industrial and serial-connectivity products.
- The actual impact of U.S.–China tariffs and the effectiveness and cost of mitigation measures.
- GFAB integration progress, capacity utilization, related spending and contribution to earnings and cash flow.
- Debt repayments, floating-rate exposure, credit-facility covenant compliance and liquidity needs as capital spending continues.
- The outcome of the U.K. pension funding review and developments in uncertain tax positions.
- Whether the planned sale of approximately 16 acres of Plano land closes within the expected 12 months; the land was reported as held for sale at $4.9 million with no impairment recorded.