Diodes Incorporated — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Diodes manufactures and supplies discrete, logic and analog semiconductor products for consumer, computing, communications, industrial and automotive markets. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $206.2 | $210.0 |
| Gross profit / margin | $63.9 / 31.0% | $61.6 / 29.3% |
| Operating income | $16.9 | $14.3 |
| Net income | $11.8 | $10.4 |
| Net income attributable to common stockholders | $11.1 | $10.2 |
| Diluted EPS | $0.23 | $0.21 |
| Operating cash flow | $38.6 | $46.1 |
| Capital expenditures | Approximately $34 | Approximately $12 |
Sales fell 1.8% year over year and 7.8% sequentially from Q4 2014. Operating expenses were nearly flat at $47.0 million. Other expense was $0.9 million, down from $1.4 million, mainly reflecting lower interest expense partly offset by foreign-currency losses. The effective tax rate was 26.2%, versus 19.6% a year earlier.
At March 31, cash and cash equivalents were $222.1 million and short-term investments were $26.7 million. Working capital was $516 million, compared with $538 million at December 31, 2014. Total debt included $116 million outstanding on the U.S. revolving facility, approximately $1 million of foreign short-term borrowings, and approximately $2 million of foreign long-term debt; the balance sheet reported $117.7 million of long-term debt and $1.0 million of current debt. The $300 million revolver matures January 2018.
Changes and operating trends
- Gross margin improved 1.7 percentage points year over year, which management attributed to cost reductions and a better product mix; average unit cost declined 3.7%.
- Sales softness in Asia’s computing market and the stronger U.S. dollar versus the euro contributed to the revenue decline. Units sold decreased 0.5% and average selling price decreased 1.3% year over year.
- Europe revenue grew almost 14% sequentially, with management citing traction in industrial and automotive products; North America also performed well. China accounted for 59% of sales, down from 61% a year earlier.
- Operating cash flow decreased $7.6 million year over year. Investing cash use increased to $38.2 million, principally due to purchases of short-term investments and property, plant and equipment. Cash declined $20.9 million during the quarter, including a $3.7 million adverse foreign-exchange effect.
- Long-term debt declined from $140.8 million at year-end to $117.7 million at March 31. Capital spending was unusually high relative to the company’s stated 5%–9% of sales target, partly because about $6 million of assembly and test equipment arrived later than planned.
Outlook, risks and contingencies
For Q2 2015, management forecast revenue of $212–$228 million, gross margin of 31.5% plus or minus 2 percentage points, operating expenses of approximately 22.4% of revenue plus or minus 1 percentage point, and a tax rate of 25% plus or minus 3 percentage points. It anticipated approximately 49.3 million diluted shares. Management said existing cash, investments, operating cash generation and available credit should cover working capital and capital spending needs for at least the next 12 months.
- Approximately $231 million of cash, cash equivalents and investments were held by foreign subsidiaries; approximately $178 million could be subject to U.S. tax if repatriated. The company intends to permanently reinvest foreign earnings, subject to stated exceptions.
- The U.K. defined-benefit plan was underfunded by $37.0 million at quarter-end. A revised contribution plan extends annual payments of approximately GBP 2 million through 2030, increasing total required contributions from $13 million to $49 million.
- Non-cancelable capital-expenditure purchase commitments were approximately $16 million. Management did not expect pending legal proceedings to materially affect financial position, cash flows or results, but noted litigation uncertainty. A securities class action dismissal was on appeal; a related derivative action remained stayed.
- Key risks include semiconductor cyclicality and demand, pricing pressure, foreign-currency movements, China concentration and operating risks, supplier dependence, customer order cancellations, manufacturing disruptions, debt and interest-rate exposure, tax matters, and pension funding. Management reported no material changes to previously disclosed risk factors.
- The company was evaluating the effect and transition method for the new revenue-recognition standard; no impact estimate was provided. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q2 revenue and margin guidance was achieved, and whether computing-market softness and currency effects persisted.
- Whether gross-margin gains from product mix and cost reductions continued as sales and average selling prices changed.
- How elevated capital spending, equipment timing, and investment purchases affected cash conversion and liquidity.
- Progress on debt repayment and the U.K. pension plan’s funding status and revised contribution schedule.
- Developments in the class-action appeal, derivative litigation, and approximately $19 million of gross unrecognized tax benefits, for which the company could not estimate a range of possible changes over the next 12 months.