Diodes Incorporated — Q1 2020 Form 10-Q
Business context and reporting period: Diodes designs and manufactures standard semiconductor products for consumer, computing, communications, industrial and automotive markets. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Amounts below are in U.S. dollars, millions, except per-share data.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $280.7 | $302.3 | Down 7.1% |
| Gross profit / margin | $95.8 / 34.1% | $112.4 / 37.2% | Profit down 14.7%; margin down 3.1 points |
| Operating income | $25.9 | $42.1 | Down 38.6% |
| Net income attributable to common stockholders | $20.2 | $31.7 | Down 36.4% |
| Diluted EPS | $0.38 | $0.62 | Down $0.24 |
| Cash from operations | $53.7 | $69.9 | Down $16.2 |
- Cost of goods sold fell only 2.6% as sales declined. Management cited a 13% increase in average unit cost, partly due to manufacturing disruption following China’s extended Chinese New Year period.
- Operating expenses were nearly flat at $70.0 million. SG&A decreased about $1.5 million, while R&D increased about $1.5 million.
- The effective tax rate was 18.3%, versus 24.5%. The lower rate reflected reduced non-U.S. withholding taxes and increased favorable U.S. permanent differences.
- Q1 cash from operations was $53.7 million; capital expenditures were $14.2 million. Cash, cash equivalents and restricted cash increased $11.4 million, including net long-term debt repayments of $16.6 million.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $269.5 million and short-term investments were $2.9 million. Management reported total cash, cash equivalents and short-term investments of $272.4 million.
- Current assets were $796.4 million and current liabilities $264.1 million; working capital was $532.3 million.
- Reported debt comprised a $13.4 million line of credit, $34.7 million current long-term debt and $46.0 million long-term debt, net of current portion. The U.S. revolving facility had no borrowings, with $250 million of capacity available.
- Management said operating cash generation, cash and available facilities should cover working capital and capital expenditure needs for at least 12 months. The U.S. credit facility matures in October 2021 and contains financial and other covenants.
Material changes, outlook and risks
- Management attributed lower sales to the global slowdown related to COVID-19 and seasonality. China production restarted after a delayed reopening; U.K. wafer fabrication facilities were temporarily closed late in March. Both locations had resumed full production by the report date. Automotive and computing markets continued to grow; automotive represented 11% of sales.
- The filing provides no numerical earnings or revenue guidance. Management said the pandemic’s duration and financial effects could not be reasonably estimated. COVID-19 may disrupt operations, demand, suppliers, customers, production and shipping; customer order cancellations or reduced orders are also identified as risks.
- Diodes expected to complete its acquisition of Lite-On Semiconductor (LSC) in the second half of 2020, subject to remaining conditions and approvals. Estimated consideration was approximately $426 million at March 31 exchange rates, expected to be funded primarily through new bank financing.
- In March, Diodes acquired an initial 33.6% interest in Savitech for $5.6 million. A further payment, currently valued at $7.3 million and contingent on revenue targets, is expected in 2021 and would raise ownership to at least 51%. Purchase accounting remained preliminary.
- Commitments included approximately $38.7 million of non-cancelable capital expenditure contracts and $52.5 million of wafer purchases during 2020. The U.K. defined-benefit plan had an unfunded liability of approximately $14.0 million; a funding review was underway.
- Gross unrecognized tax benefits were approximately $38.4 million; the company could not estimate the range of possible changes over the next 12 months. The company reported no material pending litigation.
Important facts for investors to verify
- Whether COVID-19-related demand, production or supply-chain interruptions recur, and how they affect sales, unit costs and margins.
- Progress, final consideration and financing terms for the LSC acquisition, including remaining regulatory and closing conditions.
- Availability of revolving credit and compliance with facility covenants as debt maturities approach.
- Final Savitech purchase accounting and whether the agreed revenue conditions for the second tranche are met.
- Potential tax exposure, including changes in unrecognized tax benefits, and the outcome of the U.K. pension funding review.