Diodes Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Diodes manufactures standard discrete, logic, and analog semiconductors for consumer, computing, communications, industrial, and automotive markets.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $219.5 million | $223.2 million | $425.6 million | $433.2 million |
| Gross profit | $69.4 million | $70.3 million | $133.4 million | $131.9 million |
| Gross margin | 31.6% | 31.5% | 31.3% | 30.4% |
| Operating income | $22.0 million | $23.1 million | $38.9 million | $37.5 million |
| Net income attributable to common stockholders | $15.1 million | $17.4 million | $26.2 million | $27.6 million |
| Diluted EPS | $0.31 | $0.36 | $0.53 | $0.57 |
- Q2 sales rose 6.4% sequentially from Q1, but declined 1.7% year over year. The year-over-year decrease reflected 3.7% lower unit volume, partly offset by a 2.0% higher average selling price; management cited computing-market softness.
- For the first half, operating cash flow was $53.0 million, down from $80.1 million. Investing activities used $66.8 million, including $46.9 million of cash purchases of property and equipment and $35.1 million of short-term investment purchases, partly offset by investment sales. Financing activities used $33.1 million, including $41.1 million of long-term debt repayments.
- Cash and cash equivalents were $194.6 million at June 30, down from $243.0 million at year-end; short-term investments were $25.8 million. Working capital was $508 million, versus $538 million at year-end.
- Debt included $98 million outstanding under the $300 million revolving facility, approximately $2 million of foreign long-term debt, and about $1 million of short-term borrowings. The revolving facility matures January 2018.
Changes, outlook, and management commentary
- Q2 gross margin improved 10 basis points year over year and 60 basis points sequentially. First-half margin increased 90 basis points year over year. Management attributed improvement to product mix and cost reductions, despite pricing pressure in computing.
- Management cited ongoing strength in industrial and automotive demand, particularly in Europe, while computing remained weak. Q2 sales increased 8% sequentially in Europe after a 14% increase in Q1, notwithstanding currency headwinds.
- For Q3 2015, management forecast revenue of $209–$225 million, a sequential change of negative 4.8% to positive 2.5%. At the midpoint, total revenue was expected to decline about 1%, partly because of lower assembly-test manufacturing-services revenue; revenue excluding those services was expected to grow about 3%. Forecast gross margin was 31.5%, plus or minus 2%; operating expenses about 22.2% of revenue, plus or minus 1%; tax rate 26%, plus or minus 3%; and diluted share count approximately 49.6 million.
- Management expected cash, operating cash generation, investments, and available credit to cover working-capital and capital needs for at least 12 months. First-half capital expenditures were approximately $66 million, or 15.5% of sales, above the 5%–9% target range, primarily due to the Chengdu expansion.
Liquidity, commitments, and risks
- Foreign subsidiaries held approximately $211 million of cash, cash equivalents, and investments; about $160 million could be subject to tax if repatriated. The company intends to permanently reinvest most foreign earnings overseas.
- The U.K. defined-benefit pension plan was underfunded by $35.0 million at June 30. A revised contribution plan requires approximately GBP 2 million annually through 2030, raising total required contributions from GBP 8 million to GBP 33 million (about $52 million at period-end exchange rates).
- Non-cancelable capital-expenditure purchase commitments were approximately $39 million. The filing also reports approximately $19 million of gross unrecognized tax benefits; potential changes within 12 months were possible, but the range could not be estimated.
- A securities class action had been dismissed with prejudice; plaintiffs appealed, with oral argument scheduled for September 3, 2015. A related derivative action was stayed pending the class-action proceedings. Management believed pending proceedings would not materially affect results, while noting litigation uncertainty.
- China accounted for 59% of Q2 customer sales. Key risks include semiconductor cyclicality and competition, customer pricing pressure and cancellable orders, concentration in China and foreign-currency exposure, manufacturing and supplier disruption, tax incentives and transfer-pricing scrutiny, and pension funding volatility.
Other notable items
- On July 21, 2015, CEO Keh-Shew Lu entered a new employment agreement extending through May 2022. Related stock units had an estimated fair value of approximately $16 million, subject to service and performance vesting.
- Management estimated a 2015 annual tax rate of approximately 25%, excluding discrete items. The six-month effective tax rate was 25.8%, compared with 22.5% a year earlier; tax holidays reduced first-half tax expense by approximately $2 million.
- Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Q3 revenue and margin guidance was achieved, especially excluding manufacturing-services revenue.
- Whether weaker computing demand, product mix, pricing, and foreign-exchange movements continue to affect sales and margins.
- Cash conversion and investment needs, including the Chengdu expansion, revolving-facility borrowing, and the U.K. pension contribution schedule.
- Tax exposure on potential repatriation, the uncertain unrecognized-tax-benefit balance, and the status of the securities appeal and derivative action.
- Effects of the CEO stock-unit award and related-party supplier relationships on future expenses and governance.