Diodes Incorporated — Q1 2017 Form 10-Q
Business context and reporting period
Diodes manufactures application-specific standard semiconductor products for consumer electronics, computing, communications, industrial and automotive markets. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Unless noted, dollar amounts are in millions.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $236.3 | $222.7 |
| Gross profit / margin | $73.9 / 31.3% | $64.2 / 28.8% |
| Operating income | $9.4 | $1.5 |
| Net income (loss) attributable to common stockholders | $1.2 | $(1.7) |
| Diluted EPS | $0.02 | $(0.04) |
| Cash flow from operations | $45.6 | $25.5 |
| Capital expenditures | $19.1 | $13.6 |
Sales increased 6.1% year over year. Gross margin improved 2.5 percentage points; operating expenses were $64.6 million, including $2.2 million of restructuring expense. Foreign-currency expense was $3.8 million, versus $1.3 million, and interest expense rose to $3.5 million from $2.5 million. The tax provision was $0.6 million, compared with a $0.6 million benefit in Q1 2016.
At March 31, cash and cash equivalents were $265.1 million and short-term investments were $32.5 million. Working capital was $551.4 million. Balance-sheet debt was $416.4 million, including current and long-term debt; management reported $417.3 million outstanding under the U.S. credit facility and approximately $1.5 million under a Taiwan bank loan. The U.S. facility includes a $250 million revolver and a $250 million term loan, matures in October 2021, and is subject to financial and other covenants. The company reported $67.2 million of available foreign credit lines and expects cash, operating cash flow and available facilities to cover working capital and capital needs for at least 12 months.
Material changes and management commentary
- Growth came from communications and automotive, partly offset by consumer weakness. Automotive sales rose 25% year over year; management also cited stronger North American demand and increased European industrial sales sequentially.
- Management attributed margin improvement to better utilization and pricing, as well as lower average unit costs, which declined 18.1% year over year. Cost of goods sold also benefited from $3.7 million of business-interruption insurance proceeds related to the KFAB facility fire.
- Operating cash flow increased to $45.6 million, supported by net income, depreciation and amortization, share-based compensation and working-capital movements. Investing activities used $20.4 million; financing activities used $10.3 million, primarily for debt repayment. Cash increased $17.3 million during the quarter.
- Management said potential future net-income improvement would depend principally on higher sales volume, better product mix and manufacturing cost reductions to offset possible average selling-price declines. No specific revenue or earnings guidance was provided.
Outlook, risks, contingencies and unusual items
- Diodes plans to shut down its Lee’s Summit, Missouri wafer fab (KFAB), transfer production to other company facilities and external foundries, and cease operations late in Q3 2017. It expects $10–$12 million of pretax shutdown costs, expensed and paid during 2017. Q1 recorded approximately $2.8 million of related costs. The plant, which resumed production after a November 2016 fire, reached stabilized output in March.
- Foreign subsidiaries held approximately $290.0 million in cash, cash equivalents and investments; approximately $217.1 million could be subject to U.S. tax if repatriated. The company intends to permanently reinvest foreign earnings, subject to stated exceptions.
- The U.K. defined-benefit plan had an unfunded liability of approximately $27.2 million. Annual contributions of about £2 million are scheduled through December 2029; future funding requirements may change following periodic reviews.
- Unrecognized tax benefits were approximately $29.7 million; the company said changes within the next 12 months are reasonably possible but it could not estimate a range. It reported no material pending litigation and no material changes to previously disclosed risk factors or market risks.
- Key disclosed risks include semiconductor cyclicality and competition, customer price pressure and order cancellations, manufacturing or supplier disruptions, foreign-exchange and interest-rate exposure, substantial debt and related covenants, China and other international-market risks, and tax and benefit-plan uncertainties.
- The company adopted new share-based payment accounting guidance in Q1; adoption increased retained earnings and deferred tax assets by $4.8 million for the income-tax portion, with additional forfeiture-related adjustments. It is still evaluating the impact of the new revenue-recognition standard, due for adoption in Q1 2018, and the lease standard, due in 2019.
Most important facts for investors to verify
- Whether KFAB production transfers proceed on schedule and whether total shutdown costs remain within the $10–$12 million estimate.
- How much of the gross-margin improvement is sustainable after the $3.7 million insurance benefit and as utilization, pricing and product mix change.
- Debt balances, floating-rate interest costs, covenant headroom and the availability and terms of foreign credit lines.
- Cash generation and capital spending needs, including the location and potential tax consequences of overseas cash.
- Exposure to foreign-currency movements, particularly given the increased Q1 currency loss, and developments in the company’s unrecognized tax positions and U.K. pension funding.