Diodes Incorporated — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions. Diodes makes standard discrete, logic and analog semiconductors for consumer, computing, communications, industrial and automotive markets. It reports as one operating segment.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $159.2 | $169.8 | $303.9 | $331.4 |
| Gross profit | $41.0 | $55.6 | $74.7 | $113.0 |
| Gross margin | 26% | 33% | 25% | 34% |
| Operating income | $8.3 | $25.4 | $13.8 | $53.7 |
| Net income attributable to common stockholders | $6.7 | $18.0 | $11.5 | $37.7 |
| Diluted EPS | $0.14 | $0.38 | $0.25 | $0.80 |
- Q2 sales fell 6% year over year but rose 10% sequentially from Q1 2012; Q2 gross profit increased 22% sequentially. For the first half, sales declined 8% year over year.
- Management attributed the revenue decline mainly to market weakness in consumer and computing, with lower average selling prices partly offset by higher unit volumes. First-half ASP fell about 15%, while units rose 8%.
- Margins weakened primarily from pricing pressure and increased manufacturing costs. In Q2, ASP declined about 9% year over year; management also cited lower utilization and product mix effects.
- Operating cash flow was $30.3 million for the first half, down from $48.1 million. Investing cash use was $25.7 million, including $24.2 million of capital expenditures; financing provided $33.9 million, including a $40 million term-loan draw and $8 million of line-of-credit repayments.
Financial position and liquidity
- At June 30, cash and equivalents were $168.3 million, versus $129.5 million at year-end 2011; working capital was $373 million, versus $317 million.
- Total assets were $859.8 million and total liabilities $193.0 million. Balance-sheet debt included $42.7 million of long-term debt and $1.0 million of lines of credit; capital lease obligations were $0.9 million.
- The company drew a $40 million term loan in February, maturing January 2015. It also disclosed U.S. revolving and uncommitted facilities and foreign credit facilities. Management said cash, operations and available facilities should cover working capital and capital expenditures for at least 12 months.
Outlook, risks and notable items
- For Q3 2012, management forecast revenue of $162–$170 million, gross margin of 28%, plus or minus 2 percentage points, operating expenses of 21.4% of revenue, plus or minus 1 percentage point, and an effective tax rate of 7%–13%. It estimated about 47.2 million shares for GAAP EPS calculations.
- Management expected continued Q3 growth but noted demand had moderated in June and China growth was softer than expected. It cited uncertainty in the global economy, pricing pressure and the cyclical semiconductor market.
- The company held approximately 41% of Eris Technology; shares were carried at fair value of $19.9 million. It purchased about $5.7 million of additional Eris shares in the first half.
- The Chengdu joint-venture commitment requires approximately $48 million of invested capital by December 14, 2012; approximately $33 million had been contributed by June 30. The filing also disclosed about $29 million in non-cancelable capital-expenditure purchase commitments.
- The U.K. defined-benefit pension plan was underfunded by $16.7 million. A recovery arrangement calls for payments of approximately £2 million annually from 2012 through 2019.
- The first-half effective tax rate was 10%; Chinese tax holidays reduced tax expense by about $4 million, or roughly $0.08 per share. Continued preferential tax treatment depends on maintaining high-tech enterprise status at Shanghai facilities. The filing reports approximately $11 million of unrecognized tax benefits, with the possible 12-month outcome not estimable.
- No material litigation was reported. Management stated disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the forecast Q3 revenue and margin improvement materialized, particularly given June demand moderation and softer-than-expected China growth.
- Whether pricing, utilization, manufacturing costs and product mix continue to pressure gross margins.
- Progress on the Chengdu capital contribution and committed manufacturing spending, alongside cash generation and debt repayment capacity.
- Shanghai facilities’ eligibility for preferential tax treatment and any changes in tax exposures or unrecognized tax benefits.
- Related-party dealings and dependencies involving Lite-On, Keylink and Eris, including transactions and outstanding receivables and payables.
- The filing’s MD&A contains an apparent inconsistent six-month cost-of-goods-sold figure; the financial statements report $229.2 million, which reconciles to gross profit and sales.