Diodes Incorporated — Q1 2019 Form 10-Q
Business context and period. Diodes manufactures standard semiconductor products for consumer electronics, computing, communications, industrial and automotive markets. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Comparison / change |
|---|---|---|
| Net sales | $302.3 million | +10.1% year over year; -3.9% versus Q4 2018 |
| Gross profit / margin | $112.4 million / 37.2% | $98.6 million / 35.9% in Q1 2018; 36.3% in Q4 2018 |
| Operating expenses | $70.3 million | -1.9% year over year |
| Operating income / margin | $42.1 million / approximately 13.9% | $26.9 million in Q1 2018 |
| Net income attributable to common stockholders | $31.7 million | $18.5 million in Q1 2018; record quarterly net income per management |
| Diluted EPS | $0.62 | $0.37 in Q1 2018; $0.58 in Q4 2018 |
| Operating cash flow | $69.9 million | $54.0 million in Q1 2018 |
| Cash and cash equivalents | $301.2 million | $241.1 million at December 31, 2018 |
| Working capital | $524.8 million | $480.8 million at December 31, 2018 |
| Debt | $217.1 million long-term debt before issuance costs, plus $12.3 million short-term credit-line borrowings | Balance-sheet long-term debt, net of current portion and issuance costs, was $187.4 million |
Gross margin improved on greater revenue contribution from automotive and industrial markets and serial-connectivity products, which typically carry higher margins. SG&A declined to $43.7 million from $47.2 million, while R&D increased to $22.2 million from $20.2 million. The effective tax rate was 24.5%, down from 29.6%.
Cash increased by $60.5 million including restricted cash. Investing activities used $17.2 million, including $18.6 million of property, plant and equipment purchases. Financing activities provided $9.6 million, including $85.0 million of long-term debt proceeds and $83.1 million of repayments. Management said existing cash, operating cash generation and available credit were expected to cover working-capital and capital-expenditure needs for at least 12 months. The company’s capital-spending target was 5%–9% of sales; MD&A reports Q1 capital expenditures of $16.3 million, while the cash-flow statement reports $18.6 million of property, plant and equipment purchases.
Material changes and management commentary
- Management attributed year-over-year sales growth to continued market-share gains. Automotive sales rose 23%; automotive and industrial together represented 39% of sales. Those markets were 10% and 29% of sales, respectively. China accounted for 50% of total sales, compared with 54% a year earlier.
- Q1 sales declined sequentially from $314.4 million in Q4 2018, while gross margin and net income were higher than in Q4, according to management.
- Net foreign-currency loss fell to $0.1 million from $3.0 million in Q1 2018, which management said reflected effective currency hedges. Other income declined to $1.2 million from $4.6 million.
- On April 1, 2019, the company closed its acquisition of Texas Instruments’ 200mm wafer fabrication facility and operations in Greenock, Scotland. Management expects the added capacity and capability to support growth and cost-reduction initiatives.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s stated liquidity outlook covers at least the next 12 months; its capital-expenditure target is 5%–9% of sales.
- Key disclosed risks include semiconductor-industry cyclicality, demand shifts and order cancellations, pricing pressure, supply availability, manufacturing disruptions, competition, acquisition integration, and exposure to foreign exchange and floating interest rates. The company also cites international operating risks, including China-related economic and regulatory uncertainty, trade restrictions and Brexit uncertainty.
- At March 31, the company had $36.3 million of non-cancelable capital-expenditure purchase commitments and approximately $103.0 million of wafer-purchase commitments scheduled for 2019 and 2020.
- The U.K. defined-benefit plan had an unfunded liability of approximately $29.8 million. Annual contributions of about GBP 2 million were scheduled through December 2029; the result of an April 2019 funding review was expected in June.
- Gross unrecognized tax benefits were approximately $34.0 million; the company said amounts could significantly increase or decrease within 12 months but could not estimate the range. No litigation was identified as material, and management stated pending matters were not expected to have a material adverse effect.
- The company adopted lease accounting on January 1, 2019, recognizing operating-lease right-of-use assets of $64.3 million and operating-lease liabilities of $46.6 million at quarter-end. Adoption initially recorded $68.3 million of right-of-use assets and $50.4 million of liabilities.
- Related-party transactions include purchases from LSC, whose group owns approximately 15% of Diodes, and transactions with Keylink, a joint-venture partner. The filing reports no material changes to risk factors and no material changes in market-risk disclosures from the prior annual report.
Important facts for investors to verify
- Confirm the post-quarter Greenock facility acquisition’s purchase price, integration progress, capacity ramp, and expected costs or benefits; those details are not quantified here.
- Reconcile MD&A capital expenditures of $16.3 million with $18.6 million of property, plant and equipment purchases in the cash-flow statement.
- Monitor sales and margin trends after the sequential sales decline, particularly automotive and industrial demand, China exposure, and market-share gains.
- Review debt terms, floating-rate exposure, covenant headroom and repayment schedule; the U.S. credit facility matures in October 2021 and is secured by substantially all company assets.
- Track the U.K. pension funding review, the uncertain tax positions, and the company’s purchase commitments and related-party dealings.