Diodes Incorporated — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; financial amounts below are in millions of dollars unless stated otherwise. Diodes manufactures standard semiconductor products for industrial, automotive, computing, consumer and communications markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net sales | $467.2 | $501.0 | -6.8% |
| Gross profit / margin | $195.4 / 41.8% | $206.5 / 41.2% | Profit -5.4%; margin +0.6 points |
| Operating income | $89.6 | $106.2 | -15.7% |
| Net income attributable to common stockholders | $82.0 | $80.2 | +2.3% |
| Diluted EPS | $1.77 | $1.75 | +1.1% |
| Operating cash flow | $92.6 | Not stated for Q2 comparison | — |
For the first six months, sales were $934.4 million (-5.0% year over year), gross profit was $389.8 million with a 41.7% margin (versus 41.0%), operating income was $176.0 million, and common-stockholder net income was $153.2 million (versus $152.8 million). Diluted EPS was $3.31 versus $3.33.
Six-month operating cash flow was $192.4 million, compared with $157.3 million. Investing cash outflow was $97.5 million, including $85.0 million of property, plant and equipment purchases; financing cash outflow was $106.7 million, principally reflecting $95.2 million of net debt reduction and $10.6 million of taxes on net share settlements. Cash capital expenditures less operating cash flow implies approximately $107.4 million of cash flow after capital expenditures; this is a simple calculation, not a company-defined measure.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $321.6 million, restricted cash $3.1 million, and short-term investments $9.0 million. Combined cash, restricted cash and investments were approximately $333.8 million.
- Working capital was $747.4 million, versus $729.1 million at year-end 2022. Current assets were $1,160.4 million and current liabilities $413.0 million.
- Short-term borrowings were $33.7 million; total long-term debt before debt costs was $56.9 million. The company reported $54.6 million of long-term debt net of current portion and debt costs. The U.S. revolving facility is $225 million, had no borrowings at quarter-end, and matures in May 2028. Asia credit facilities had $106.6 million available.
- Management said cash, operating cash flow and available credit were expected to cover working capital, capital expenditures and acquisitions for at least the next 12 months. Approximately $252.1 million of cash, cash equivalents and investments were held by foreign subsidiaries; $52.9 million could be subject to non-U.S. withholding tax if distributed outside the country where held.
Changes, outlook and notable items
- Management attributed lower sales to economic slowdown and weaker product demand, partly offset by improved mix. Weighted-average selling price increased 9.9% in Q2 and 13.3% for the first half, while average unit costs rose 8.8% and 11.9%, respectively, reflecting supplier/foundry costs and mix.
- Automotive and industrial together accounted for 48% of Q2 product revenue (47% for the first half). In Q2, automotive rose to 19% of product revenue from 14% a year earlier; communications declined to 12% from 16%.
- Q2 operating expenses rose 5.5% year over year, including higher R&D spending. The quarter’s $12.2 million net unrealized investment gain supported other income; the filing also describes a $15.3 million upward valuation adjustment on a privately held wafer-design company investment. Net income therefore should be considered alongside operating income and these investment-related items.
- The company invested an additional $13.9 million in that company in May; its reported investment and maximum exposure to loss were $44.4 million at June 30. Capital spending supported expansion of a Taiwan wafer fabrication facility. Management said 2023 capital expenditures were expected to remain within its target model but gave no specific amount or revenue/EPS guidance.
- On May 26, Diodes amended and restated its credit agreement, retaining a $225 million revolver and adding covenant requirements, including leverage and interest-coverage tests and restrictions on certain actions. The agreement permits restricted payments only under specified conditions.
- Other commitments included approximately $49.3 million of non-cancelable capital expenditure purchase contracts and $92.8 million of wafer purchase commitments scheduled through 2025. The U.K. defined-benefit plan was underfunded by approximately $6.8 million.
- Two customers each represented at least 10% of sales in Q2 and the first half of 2023; both were global distributors. No customer represented at least 10% of receivables. The company reported no material pending litigation and no material change to previously disclosed risk factors.
Key risks and investor checks
- Verify whether demand weakness, semiconductor cyclicality, order cancellations and lower volumes persist, and whether improved automotive/industrial mix can sustain margins.
- Track operating expenses, R&D, unit costs and the degree to which reported earnings depend on investment valuation gains rather than core operations.
- Monitor the new credit agreement’s covenants, variable-rate exposure, debt paydown and availability of revolving/foreign credit facilities.
- Assess customer and distributor concentration, China exposure, supply-chain availability, foreign-exchange movements and potential effects of higher interest rates.
- Review the valuation and liquidity of private equity investments, including the wafer-design company, as well as the company’s stated maximum exposure to loss.
- Confirm the fulfillment and timing of capital expenditure and wafer purchase commitments, and monitor tax-audit uncertainty: gross unrecognized tax benefits were approximately $49.9 million, with the possible 12-month outcome range not estimable in the filing.