Diodes Incorporated — Q2 2018 Form 10-Q
Business context and reporting period. Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $304.1 | $264.2 | $578.6 | $500.5 |
| Gross profit / margin | $107.3 / 35.3% | $90.1 / 34.1% | $205.9 / 35.6% | $164.1 / 32.8% |
| Operating income | $37.8 | $23.8 | $64.8 | $33.2 |
| Net income attributable to common stockholders | $25.1 | $13.2 | $43.6 | $14.4 |
| Diluted EPS | $0.49 | $0.26 | $0.86 | $0.29 |
- Q2 sales rose 15.1% year over year and 10.8% from Q1 2018; six-month sales increased 15.6%. Management reported record quarterly revenue and gross profit.
- Q2 gross margin improved 1.2 percentage points year over year. Management attributed the improvement to favorable product mix, greater contribution from Pericom products and better capacity utilization. Operating expenses rose 4.7%, slower than sales growth.
- For the six months, operating cash flow was $88.4, versus $65.4 in 2017. Investing used $53.6, including $53.0 of property, plant and equipment purchases; financing used $83.4, primarily reflecting long-term debt repayments. Cash and cash equivalents fell to $152.4 from $203.8 at year-end 2017; cash, cash equivalents and restricted cash totaled $153.8 at June 30.
- At June 30, current assets were $618.5 and current liabilities $237.7; reported working capital was $380.8. Short-term investments were $7.2.
- Balance-sheet debt comprised $23.7 current and $162.1 long-term debt, plus $4.3 drawn on lines of credit. Management reported $182.9 outstanding under the U.S. credit facility and $4.7 on foreign credit lines. Available foreign credit lines were approximately $112.2; the U.S. facility includes a $250 revolving commitment and a $250 term loan.
Changes, outlook and notable items
- Management linked sales growth primarily to automotive and industrial demand, with record revenue across regions in Q2. China accounted for 55% of Q2 sales by customer shipping destination; most products are manufactured in China.
- Management expected growth momentum to continue in Q3, with strength across target geographies and end markets. The filing provides no numerical Q3 revenue or earnings guidance.
- U.S. tariffs already imposed on certain China-origin goods, and proposed additional tariffs, could affect Diodes. Approximately 10% of its products were imported into the U.S. in Q2; management was still assessing the impact. The filing says the outcome and timing of proposed duties were uncertain.
- The 2018 estimated annual effective tax rate was 29.9%; the reported rates were 29.5% for Q2 and 29.6% year to date. The company had not finalized its accounting for the Tax Act’s 2017 effects and expected to do so by Q4 2018. Gross unrecognized tax benefits were approximately $32.3, with possible significant changes over the next 12 months but no estimable range.
- Q2 included $2.9 of insurance proceeds related to the prior KFAB facility fire, recorded in other income during the first half. Six-month SG&A included approximately $2.6 of officer-retirement costs, including $1.8 of accelerated share-based compensation expense.
- In July, 60%-owned ERIS acquired a 60% stake in Yea Shin for approximately $6.4 and agreed to purchase its manufacturing facility for approximately $25.5, with completion expected by December 31, 2020. ERIS leased the facility pending purchase.
- Other obligations and exposures include $20.8 of non-cancelable capital purchase contracts, additional purchase obligations of $91.3, and a U.K. defined-benefit plan with a $25.2 unfunded liability. Annual plan contributions through December 2029 were approximately GBP 2 million, subject to review.
- Management said cash, operations and available facilities should cover working capital and capital expenditure needs for at least 12 months. First-half capital expenditures were 8.2% of sales, near the high end of its 5%–9% target range, to support anticipated growth.
Key investor verification points
- Assess the actual product exposure, cost pass-through and potential margin impact from U.S.–China tariffs, including any subsequent changes to the proposals.
- Track Q3 demand and whether reported growth, gross-margin improvement and capacity additions are sustained; the filing gives no numerical guidance.
- Review cash conversion, inventory (which rose to $222.8 from $216.5 at year-end), capital spending and debt repayments alongside liquidity and credit-facility covenant headroom.
- Monitor completion, financing and integration of the Yea Shin acquisition and facility purchase, as well as the related expansion of wafer capacity.
- Follow resolution of the Tax Act accounting, tax audits and unrecognized tax positions; also consider the defined-benefit funding obligation.
- Consider customer and geographic concentration: one distributor represented 10.9% of Q2 sales, and China represented 55% of Q2 sales by shipping destination. The filing also describes related-party supplier and joint-venture relationships.