Diodes Incorporated — Q3 2018 Form 10-Q
Business context and period: Global supplier of discrete, logic, analog and mixed-signal semiconductors serving consumer electronics, computing, communications, industrial and automotive markets. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $320.9 million | $285.2 million | $899.5 million | $785.8 million |
| Gross profit / margin | $115.2 million / 35.9% | $96.3 million / 33.8% | $321.1 million / 35.7% | $260.4 million / 33.1% |
| Operating income | $45.8 million | $23.7 million | $110.6 million | $56.9 million |
| Net income attributable to common stockholders | $30.9 million | $14.5 million | $74.5 million | $28.8 million |
| Diluted EPS | $0.61 | $0.29 | $1.46 | $0.58 |
| Operating cash flow | $35.5 million | Not stated for quarter | $123.9 million | $106.3 million |
Q3 sales increased 12.5%; gross profit rose 19.6%. Management attributed margin improvement to favorable product mix, better capacity utilization and continued conversion to eight-inch wafer production at the Shanghai facility. Nine-month sales increased 14.5%; growth was attributed to design wins and market-share gains, with strong automotive and industrial demand. The filing reports automotive revenue growth of 27% for Q3; the stated industrial growth figure is “325” and its unit is unclear in the filing text.
For the first nine months, investing cash flow was negative $74.1 million, principally reflecting $72.2 million of property, plant and equipment purchases; financing cash flow was negative $98.0 million, mainly due to debt repayments. Cash, cash equivalents and restricted cash declined $54.2 million, including a $6.0 million adverse foreign-exchange effect. Q3 MD&A reports net cash flow of negative $2.7 million, including $19.2 million of capital expenditures and $21.7 million of long-term debt paydown.
Financial position and material changes
- At September 30, 2018, cash and cash equivalents were $150.3 million and short-term investments were $7.3 million, versus cash of $203.8 million at December 31, 2017. Working capital was $385.6 million, down from $415.2 million.
- Total assets were $1.468 billion; total liabilities were $515.3 million. The balance sheet reported $12.3 million of line-of-credit borrowings, $26.3 million of current long-term debt and $140.0 million of long-term debt.
- Management reported $162.2 million outstanding under the U.S. credit facility, including $31.5 million drawn on its revolving portion and $130.7 million of term debt, plus $12.3 million on foreign credit lines. The U.S. facility includes a $250 million revolving commitment and a $250 million term loan, matures October 2021 and is subject to financial and other covenants.
- Nine-month operating cash flow rose by $17.6 million year over year. Long-term debt repayments exceeded proceeds from new long-term borrowings, contributing to the decrease in reported debt balances.
- Operating expenses were $69.4 million in Q3, down 4.5% year over year; nine-month operating expenses increased 3.4% to $210.5 million. Nine-month SG&A included costs related to officer retirements, including accelerated share-based vesting.
Outlook, risks and notable items
- Management expected continued growth momentum in Q4 2018, with strength across target geographies and end markets; no numerical Q4 guidance was provided.
- U.S.-China tariffs and possible additional trade restrictions pose uncertainty. Most products are manufactured in China, and some are imported into the U.S.; mitigation or passing costs to customers could affect competitiveness, sales and profitability.
- Revenue is geographically concentrated: China represented 54% of Q3 sales. One global distributor accounted for 10.2% of Q3 revenue and 10.5% of nine-month revenue.
- The company had approximately $130.0 million of wafer-purchase commitments for 2018–2020 and $11.9 million of non-cancelable capital expenditure purchase contracts. It also had a $25.5 million agreement for ERIS to purchase a Taiwanese wafer-fab property by December 2020.
- The U.K. defined-benefit plan had an unfunded liability of approximately $25.1 million; annual contributions of about GBP 2 million are scheduled through December 2029, subject to funding reviews.
- The company received a proposed EPA civil penalty exceeding $100,000 concerning potential Clean Air Act violations at its closed Lee’s Summit facility. Management did not expect a settlement to have a material adverse effect. No other pending litigation was considered material.
- The 2018 estimated annual effective tax rate was 30.4%; Q3 effective rate was 29.7%. The Tax Act’s GILTI provision contributed to a higher rate versus 2017. Accounting for the Tax Act’s 2017 effects remained provisional, with finalization expected by Q4 2018; unrecognized tax benefits were approximately $33.1 million.
- Diodes adopted ASC 606 in 2018 with no material effect on reported revenue or results. It planned to adopt the new lease standard on January 1, 2019; the financial impact was not quantified in the filing.
Important facts for investors to verify
- Whether Q4 growth momentum materialized and how sales, margins and demand evolved by end market and geography.
- The actual effect of U.S.-China tariffs and any mitigation, pricing changes or customer losses.
- Cash generation and capital spending relative to the planned 5%–9% of sales range, and progress on debt repayment and credit-facility covenants.
- Execution and funding of the ERIS acquisition/property purchase, wafer commitments and related capacity plans.
- Updates on the Tax Act accounting, the unrecognized tax-benefit exposure, defined-benefit funding and EPA matter.