Diodes Incorporated — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Diodes manufactures standard semiconductor products for consumer electronics, computing, communications, industrial, and automotive markets. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $236.6 | $219.5 | $459.4 | $425.6 |
| Gross profit | $74.8 | $69.4 | $139.0 | $133.4 |
| Gross margin | 31.6% | 31.6% | 30.3% | 31.3% |
| Operating income | $11.3 | $22.0 | $12.7 | $38.9 |
| Net income attributable to common stockholders | $5.8 | $15.1 | $4.0 | $26.2 |
| Diluted EPS | $0.12 | $0.31 | $0.08 | $0.53 |
| Operating cash flow | — | $41.9 | $53.0 |
- Q2 sales increased 7.8% year over year, including approximately $32.1 million from Pericom. Six-month sales rose 7.9%, including approximately $63.8 million from Pericom.
- Q2 operating expenses rose 33.9% to $63.5 million, reflecting approximately $15.1 million of Pericom expenses. Acquisition-related intangible amortization was $5.1 million in Q2.
- Cash and cash equivalents were $192.6 million and short-term investments were $44.2 million at June 30, 2016. Working capital was $538.1 million, down from $570.9 million at year-end 2015.
- Long-term debt was $399.9 million, plus $10.3 million current debt. The company reported $410.5 million drawn under its U.S. credit facility. Six-month debt repayments were $55.6 million; cash declined $25.9 million from year-end.
- Six-month capital expenditures were $29.1 million in the cash-flow statement; management reported total capital expenditures of $31.0 million, or 6.7% of sales.
Changes versus prior comparable periods
- Despite higher reported sales, management said sales excluding Pericom declined, citing weaker consumer-market demand and weak domestic demand in China.
- Q2 gross margin was unchanged at 31.6%; six-month gross margin fell from 31.3% to 30.3%. Management reported higher average unit costs, including an 8.1% increase excluding Pericom for the first half.
- Profitability weakened substantially: Q2 operating income fell to $11.3 million from $22.0 million, and first-half net income attributable to common stockholders fell to $4.0 million from $26.2 million.
- Q2 interest expense increased to $3.7 million from $0.8 million; first-half interest expense rose to $6.2 million from $1.8 million, primarily due to debt incurred for the Pericom acquisition.
- Operating cash flow fell by $11.1 million year over year in the first half. Investing cash use was lower, in part because of reduced capital spending and net proceeds from short-term investment maturities.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management expects future net-income improvement primarily from higher sales volume, improved product mix, and manufacturing cost reductions to offset selling-price pressure. It cited new consumer products and emerging virtual-reality-market growth.
- Management expected cash, operating cash flow, investments, and available credit to cover working-capital and capital-expenditure needs for at least the next 12 months. Its capital-spending target was 5%–9% of sales.
- Key risks include semiconductor cyclicality, price and demand pressure, China market weakness, customer order cancellations, foreign-currency movements, supplier dependence, acquisition integration, debt and credit-facility covenants, and Brexit-related uncertainty.
- The Pericom purchase-price allocation remained preliminary and could still change materially; recorded measurement-period adjustments had no impact on current-period earnings. The acquisition contributed substantial amortization and borrowing costs.
- The U.K. defined-benefit plan was underfunded by $30.5 million at June 30, 2016. The company had $27.8 million of gross unrecognized tax benefits; possible changes over the next 12 months could not be estimated.
- Non-cancelable capital-expenditure purchase commitments were approximately $12.6 million. The company reported that pending legal matters were not expected to materially affect its financial position or results; a shareholder derivative case was voluntarily dismissed without prejudice in June 2016.
- A July 2016 credit-agreement amendment added a foreign subsidiary as a loan party and permitted specified restructuring and one-time loans. Other material credit-agreement terms remained unchanged.
- Management stated disclosure controls were effective at the reasonable-assurance level. A previously reported material weakness related to Pericom equity awards and change-in-control accounting was addressed with remediation implemented in Q1 2016.
Important facts for investors to verify
- How much of reported sales growth and future performance is attributable to Pericom versus the legacy business, and whether underlying demand improves.
- Whether gross margins recover as management targets manufacturing cost reductions and improved product mix amid pricing pressure.
- Debt balances, credit-facility covenants, repayment pace, and the impact of acquisition-related interest expense on earnings and liquidity.
- Final Pericom purchase accounting, including any material changes to acquired asset values, goodwill, or amortization periods.
- Cash-flow conversion, capital-spending levels, foreign cash availability and repatriation taxes, and developments in the pension and tax exposures.