Diodes Incorporated — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a Q4-only filing; quarterly figures below are unaudited. Diodes manufactures standard semiconductor products for consumer electronics, computing, communications, industrial and automotive markets.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,249.1 million | $1,214.0 million | +2.9% |
| Gross profit / margin | $465.8 million / 37.3% | $435.3 million / 35.9% | Profit +7.0%; margin +140 bps |
| Operating income / margin | $200.6 million / 16.1% | $154.5 million / 12.7% | +29.9% |
| Net income attributable to common stockholders | $153.3 million | $104.0 million | +47.3% |
| Diluted EPS | $2.96 | $2.04 | +$0.92 |
| Operating cash flow | $229.8 million | $185.6 million | +$44.2 million |
| Capital expenditures | $98.5 million | $87.5 million | +$11.0 million |
FY2019 sales growth was driven by industrial and automotive markets and frequency-control products. Industrial represented 28% of sales (26% in 2018) and automotive 10% (9%); consumer electronics, communications and computing declined as shares of revenue. China accounted for 51% of sales shipped to customers, down from 55% in 2018. Q4 sales were $301.2 million, gross profit $109.4 million, net income attributable to common stockholders $47.2 million, and diluted EPS $0.90. Q4 2018 comparables were $314.4 million, $114.2 million, $29.5 million and $0.58, respectively.
Profit-quality item: Operating expenses benefited from a $24.4 million gain on sale of land in Q4, acquired previously for a planned headquarters that the company no longer considered necessary. The gain materially contributed to the year-over-year increase in operating income. The effective tax rate fell to 22.3% from 29.7%; management attributed the decrease primarily to favorable U.S. permanent book-tax differences. Chinese tax holidays reduced 2019 tax expense by approximately $3.1 million.
Cash, debt and liquidity
- Cash and cash equivalents were $258.4 million, with $4.8 million of short-term investments; cash, cash equivalents and restricted cash totaled $259.5 million. Working capital was $524.6 million, versus $480.8 million a year earlier.
- Operating cash flow of $229.8 million funded $98.5 million of capital expenditures. Investing cash outflow was $100.4 million, including $33.0 million for acquisitions and partly offset by $29.4 million from asset sales. Financing cash outflow was $112.4 million, largely reflecting $117.3 million of net long-term debt repayment. Cash including restricted cash increased $17.7 million.
- Long-term debt was $98.6 million, including $33.1 million current; foreign credit-line borrowings were $13.3 million. The U.S. facility had $75.2 million outstanding, all under the term loan, and its $250 million revolver was undrawn. The U.S. facility matures in October 2021, is secured by substantially all company assets and includes financial covenants. Foreign credit facilities had $111.8 million of unused availability, but are generally uncommitted and may be repayable on demand.
- Management said cash, operating funds and available credit should cover working capital, capital expenditures and other needs for at least the next 12 months. The company has never paid common-stock dividends and said it does not intend to do so in the foreseeable future.
Material developments and outlook
- Diodes completed its acquisition of the Greenock, Scotland wafer-fabrication facility (GFAB) on April 1, 2019 for $33.2 million, expanding wafer capacity, particularly for automotive products. Capital expenditures were approximately $96.2 million under the MD&A presentation; the cash-flow statement reports $98.5 million of property, plant and equipment purchases.
- The company agreed to acquire Lite-On Semiconductor Corporation (LSC), which held approximately 15.2% of Diodes’ shares at year-end. The stated consideration was approximately $437 million at year-end exchange rates, subject to currency changes; completion was anticipated in the second half of 2020, subject to regulatory and other conditions. Diodes expected to fund the purchase primarily with new bank financing.
- Management reaffirmed its 2025 targets of $2.5 billion in revenue and 40% gross margin, equivalent to $1.0 billion of gross profit. It cited a pipeline of designs and expanded customer relationships but provided no specific near-term revenue or earnings guidance.
- On February 5, 2020, the company agreed to invest up to approximately $14.2 million for up to 51% of Savitech Corporation in two tranches, with the second dependent on revenue targets and expected in mid-2021.
- Backlog was $278.7 million at December 31, 2019, down from $394.2 million a year earlier. Management cautioned that orders may be cancelled or changed without penalty and that backlog is not a reliable measure of future sales.
Risks, contingencies and other notable disclosures
- Key risks include semiconductor cyclicality, demand weakness, pricing pressure, order cancellations, customer qualification delays, manufacturing disruptions, supplier dependence and inventory obsolescence. A single distributor accounted for approximately 10% of revenue in each of 2017–2019.
- Operations and customer shipments are concentrated in Asia and China. The filing discusses U.S.–China tariffs and trade uncertainty, foreign-exchange exposure, political and regulatory risks, and the risk of a Chinese economic slowdown. It notes the January 2020 Phase One U.S.–China trade deal but says impacts remained uncertain. The filing also identifies the then-recent coronavirus outbreak in Wuhan as a potential source of disruption.
- The U.K. defined-benefit pension plan was underfunded by $26.1 million at year-end (obligations $158.7 million; assets $132.6 million). A revised recovery plan targeting 2029 rather than 2030 was under discussion and had not been finalized.
- Unrecognized tax benefits were $35.7 million; approximately $33.5 million would affect the effective tax rate if recognized. Potential changes over the next 12 months could not be estimated clearly. Distributing $425 million of China subsidiary earnings could trigger approximately $46 million of Chinese withholding tax.
- The company disclosed a September 2019 malware infection and brute-force password attack. It reported no known exposure of confidential or proprietary information and no material production impact, and said it had engaged outside cybersecurity support and enhanced controls.
- The EPA matter concerning potential Clean Air Act violations at KFAB was resolved in February 2019 for approximately $0.2 million, accrued in 2018. The company said it was not party to any pending litigation it considered material and believed current proceedings were unlikely to materially affect its financial position, cash flows or operating results.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified the distributor ship-and-debit reserve as a critical audit matter; the reserve was approximately $40.0 million at December 31, 2019.
Investor verification priorities
- Assess how much FY2019 operating-income growth depended on the one-time $24.4 million land-sale gain, and compare underlying margins.
- Track execution and financing terms for the approximately $437 million LSC acquisition, including resulting debt, covenants and integration costs.
- Verify the sustainability of margin improvement, inventory and backlog trends, and the effect of cancellable orders and distributor incentives.
- Monitor China exposure, tariffs and supply-chain continuity, including any actual financial or operational effects from the coronavirus outbreak discussed in the filing.
- Review pension funding negotiations, unrecognized tax positions, and the potential tax cost of distributing foreign earnings.