Diodes Incorporated — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results; amounts below are U.S. dollars. Diodes manufactures standard discrete, logic and analog semiconductors for consumer electronics, computing, communications, industrial and automotive markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $166.6 million | $160.6 million | $470.5 million | $491.9 million |
| Gross profit | $43.6 million | $45.2 million | $118.3 million | $158.2 million |
| Gross margin | 26% | 28% | 25% | 32% |
| Operating income | $7.5 million | $13.4 million | $21.3 million | $67.1 million |
| Net income attributable to common stockholders | $8.6 million | $10.0 million | $20.1 million | $47.6 million |
| Diluted EPS | $0.18 | $0.21 | $0.43 | $1.02 |
| Operating cash flow | $18 million, per MD&A | Not stated for quarter | $47.9 million | $65.1 million |
Q3 sales rose 4% year over year and 5% sequentially, while nine-month sales declined 4%. For the nine-month period, management attributed lower sales to an approximately 11% decline in average selling price, partly offset by 7% higher unit volume. Margin pressure reflected weaker pricing and product mix, higher manufacturing costs—including raw-material costs, particularly gold—and lower equipment utilization. Management reported slight sequential margin improvement from cost reductions and manufacturing efficiencies.
For the first nine months, cash used in investing was $46.7 million, including $42.9 million for property, plant and equipment; financing provided $35.4 million. Cash increased by $38.8 million to $168.3 million. Working capital was $385 million. At September 30, total assets were $923.2 million and total equity was $710.6 million.
Debt included $43.1 million of long-term debt and $7.1 million of current lines of credit on the balance sheet. The company reported a $40 million term loan maturing January 2015, and foreign credit facilities with approximately $56 million capacity and $11 million of borrowings. The filing says available cash, operating cash generation and credit facilities are expected to cover working-capital and capital-expenditure needs for at least 12 months.
Material changes and notable items
- On August 31, 2012, Diodes acquired control of Eris Technology Corporation and began consolidating it on September 1. Eris contributed approximately $1 million of consolidated revenue in the quarter. The step acquisition generated an approximately $2 million noncash gain and recorded $8 million of goodwill and $18 million of intangible assets; purchase-price allocation remained preliminary.
- Diodes completed its acquisition of Power Analog Microelectronics (PAM) on October 29, after quarter-end, for $16 million; $3 million is subject to holdback and payment over two years, subject to conditions.
- Other income in Q3 included the approximately $2 million noncash Eris remeasurement gain. Nine-month operating expenses included an approximately $4 million gain on asset sales.
- The nine-month effective tax rate was approximately 8%, compared with 17% in 2011. Tax holidays reduced nine-month tax expense by approximately $5 million, or about $0.11 per share. Gross unrecognized tax benefits were approximately $12 million; the company could not estimate the range of possible changes over the next 12 months.
- The U.K. defined-benefit pension plan was underfunded by $16.7 million at September 30. Diodes adopted a payment plan for approximately £2 million (about $3 million) annually from 2012 through 2019.
Outlook, risks and contingencies
For Q4 2012, management expected revenue of $160 million to $167 million, including $3.5 million from PAM and Eris, or down 4% to flat sequentially. Expected gross margin was 25%, plus or minus 2%; operating expenses were expected at 23.5% of revenue, plus or minus 1%; and the expected tax rate was 7% to 13%. Management described the quarter as seasonally down and remained cautious because of global economic uncertainty, weak demand and pricing, and uncertain customer production ramps.
Diodes had approximately $16 million in non-cancelable capital-expenditure purchase commitments. Under its Chengdu investment agreement, it was obligated to contribute approximately $48 million by December 14, 2012; approximately $33 million had been contributed by September 30. The remaining contribution depended on Chinese government approval of a corporate restructuring, and the company expected to request a one-year extension.
Key disclosed risks include semiconductor cyclicality and global demand, pricing pressure, customer order cancellations, manufacturing interruptions, supply availability, competition, acquisition integration and financing, foreign currency and interest-rate exposure, China operations and incentives, and the pension plan’s sensitivity to actuarial assumptions. One Shanghai facility’s preferential 15% tax rate depended on maintaining high-tech status; loss of status could raise its rate to 25%. The filing reported no material litigation and no material changes in market risks from the prior annual report. Management judged disclosure controls effective; Eris was excluded from the 2012 internal-control effectiveness assessment as permitted for an acquired business.
Important facts for investors to verify
- Whether the Q4 revenue, margin, expense and tax-rate guidance was achieved, and how much revenue came from PAM and Eris.
- Whether pricing, product mix, utilization and raw-material costs continued to pressure margins; the nine-month gross margin is 25% in the financial statements and MD&A highlights, although one MD&A passage cites 26%.
- Final Eris purchase-price allocation, subsequent share purchases and acquisition integration; also PAM’s contribution and the conditions on its $3 million holdback.
- Chinese government approval and any extension for the remaining Chengdu contribution, and the status of Shanghai high-tech tax incentives.
- Cash conversion, capital spending, debt maturities and facility availability, alongside the pension funding schedule and potential tax-audit outcomes.