Diodes Incorporated — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Diodes manufactures standard semiconductor products serving consumer electronics, computing, communications, industrial and automotive markets. It reports as one segment. The company said pandemic-related demand weakness and temporary manufacturing disruptions affected first-half results; operations in China and the U.K. had resumed full production by the report date.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $288.7m | $322.0m | $569.4m | $624.3m |
| Gross profit | $101.5m | $122.0m | $197.3m | $234.4m |
| Gross margin | 35.2% | 37.9% | 34.7% | 37.5% |
| Operating income | $30.9m | $48.5m | $56.7m | $90.6m |
| Net income attributable to common stockholders | $21.0m | $36.3m | $41.2m | $68.0m |
| Diluted EPS | $0.40 | $0.70 | $0.78 | $1.32 |
| Operating cash flow | $33.1m | Not stated here | $86.7m | $110.5m |
Q2 sales fell 10.4% year over year, while gross profit declined 16.8%; the company attributed margin pressure to lower sales and manufacturing utilization, as well as higher unit costs. First-half sales decreased 8.8%. Computing and serial-connectivity products were Q2 growth areas, despite the overall decline.
At June 30, cash and cash equivalents were $503.2m, short-term investments $3.7m, and working capital $801.2m. Cash, cash equivalents and short-term investments totaled $506.9m; a further $51.4m of restricted cash supported bank loans and guarantees. First-half operating cash flow was $86.7m, down from $110.5m; capital expenditures were $30.7m in cash-flow reporting, while accrued capital expenditures were $28.3m.
Reported debt included $63.7m of short-term credit-line borrowings and $282.3m of long-term debt, net of current portion and debt costs. The company reported $271.0m outstanding under the new term-loan and revolver arrangement. Total credit commitments under the amended facility are $670m, including a $150m revolver; management cited $150m of additional U.S. revolver availability and expected liquidity to cover working capital, capital expenditures and acquisitions for at least 12 months.
Material changes and notable items
- Q2 operating expenses declined 3.9% year over year, but increased as a proportion of sales to 24.5% from 22.8%. First-half operating expenses declined 2.2% but rose to 24.7% of sales from 23.0%.
- Q2 foreign-currency loss was $3.6m versus $0.5m a year earlier. Q2 interest expense rose 31.9% to $2.7m, reflecting acquisition-related borrowing, partly offset by lower floating rates.
- The effective tax rate was 17.9% in Q2 versus 23.3%; for the first half it was 18.1% versus 23.9%. The filing attributes the lower rates mainly to reduced non-U.S. withholding taxes and favorable U.S. permanent differences.
- Comprehensive income was affected by a $16.6m after-tax unrealized loss on the defined benefit plan in Q2. A director’s retirement-related restricted-stock modification generated approximately $1.7m of additional compensation expense.
- On May 29, Diodes amended its credit agreement, increasing aggregate facilities from $500m to $670m, with maturity on May 29, 2023. It drew $200m as a partial currency hedge for the planned Lite-On Semiconductor acquisition. A debt extinguishment and related fees produced a $0.7m expense.
- The company completed an initial $5.6m investment in Savitech and recorded total purchase consideration of $13.9m; a further payment, contingent on revenue levels, is expected in 2021 and is intended to bring ownership to at least 51%.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management expected cash from operations, existing liquidity and available credit to meet needs for at least the next 12 months. It anticipated completing the approximately $444.4m Lite-On acquisition in the second half of 2020, subject to customary closing conditions and remaining regulatory approval in China; the purchase price is exchange-rate sensitive.
Management said the duration and financial effects of COVID-19 could not be estimated. Risks include further facility closures or production constraints, customer and supplier disruption, changing demand and order cancellations, logistics and employee-travel limitations, and customers’ ability to pay. The filing also identifies semiconductor cyclicality, competitive pricing, supply dependence, foreign-currency and interest-rate exposure, acquisition integration, debt covenants, and international operating and tax risks.
Commitments included $26.8m of non-cancelable capital-expenditure purchase contracts and $29.8m of wafer purchases expected during 2020. The U.K. defined benefit plan had an unfunded liability of approximately $28.7m. The company reported no pending litigation it considered material. Gross unrecognized tax benefits were approximately $39.6m; the possible range of changes over the next 12 months could not be estimated.
Investor verification priorities
- Verify the Lite-On acquisition’s final regulatory approvals, closing timing, purchase price and funding, including currency effects and resulting debt.
- Track whether COVID-19 disruptions, lower utilization and demand shifts continue to pressure sales, margins, inventory and cash generation.
- Review debt balances, revolver availability, floating-rate exposure and compliance with the amended facility’s financial covenants.
- Assess Savitech’s contingent consideration and the final acquisition accounting, which the company expected to complete in Q3 2020.
- Monitor the defined benefit plan deficit and contributions, as well as potential changes in unrecognized tax benefits.