Diodes Incorporated — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Diodes manufactures and supplies discrete, logic and analog semiconductor products for consumer, computing, communications, industrial and automotive markets.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
- Q2 revenue: $149.2 million, up 43.6% year over year and 9.1% sequentially. Management attributed annual growth to 38.9% more units and a 3.4% increase in average selling prices.
- Q2 gross profit and margin: $53.5 million and 35.8%, versus $27.4 million and 26.3% a year earlier. Management cited higher manufacturing and wafer-fabrication utilization and favorable product mix.
- Q2 earnings: Operating income was $24.0 million, versus $5.9 million. Net income attributable to common stockholders was $16.6 million, or $0.37 diluted EPS, versus a $3.0 million loss, or $(0.07) per share.
- First-half revenue: $286.0 million, up 57.2% year over year, reflecting 49.1% unit growth and a 5.4% increase in average selling prices.
- First-half earnings: Gross profit was $101.3 million and gross margin was 35.4%, compared with $41.9 million and 23.0%. Operating income was $42.9 million versus an operating loss of $2.2 million. Common-stockholder net income was $31.6 million, or $0.70 diluted EPS, versus a $13.7 million loss, or $(0.33) per share.
- Cash flow: First-half operating cash flow was $46.9 million, versus $24.6 million a year earlier. Capital spending was reported as $47.2 million, primarily for manufacturing expansion in China. Cash and cash equivalents ended June at $245.6 million, up from $242.0 million at year-end.
- Liquidity and debt: Working capital was $373.1 million. Current liabilities were $114.0 million; the balance sheet reported $1.6 million of lines of credit and short-term debt, $124.3 million carrying value of convertible senior notes, and $3.3 million of long-term debt. The notes have a 2.25% coupon and are due 2026.
- Other balance-sheet items: Total assets were $772.7 million, down from $1,018.0 million at year-end, largely reflecting liquidation of short-term investments and repayment of the related borrowing. Inventory rose to $101.8 million from $89.7 million; accounts receivable rose to $117.3 million from $99.1 million.
Changes versus the prior comparable period
- Results rebounded sharply from the 2009 downturn: revenue, gross margin and earnings improved substantially in both Q2 and the first half of 2010.
- Operating cash flow increased, while first-half investing cash flow of $257.5 million was driven mainly by $296.6 million of proceeds from short-term investments. Financing cash outflow of $296.3 million primarily reflected repayment of credit lines using those proceeds.
- On June 30, the company exercised its UBS settlement put, liquidated auction-rate securities at par and used the proceeds to repay the related “no net cost” loan. Management expected lower interest income for the remainder of 2010, but also lower interest expense after repayment of that loan.
- Capital investment increased materially: first-half capex was approximately 16.5% of sales, above the company’s historical 10%–12% range.
Outlook, risks and unusual items
- Outlook: Management expected continued revenue growth and gross-profit improvement in Q3 2010. For full-year 2010, it anticipated higher demand than in 2009 and capex slightly above its historical proportion of sales. SG&A and R&D were expected to rise in dollars but remain broadly comparable as a percentage of sales.
- Margins and pricing: Management noted ongoing customer and competitor pressure to lower selling prices; future profitability depends on volume, product mix and manufacturing cost reductions. Results also depend on capacity utilization and demand.
- Tax: The first-half effective tax rate was approximately 16%, below the U.S. statutory rate, reflecting income in lower-tax jurisdictions and a noncash benefit from reversing U.K. deferred-tax valuation allowances. The company reported $8.5 million of gross unrecognized tax benefits; the possible 12-month change could not be estimated.
- Pension: The U.K. and Germany defined-benefit plan was underfunded by $33.4 million at June 30. The company’s payment plan called for annual contributions of approximately £1.0 million through 2012.
- Related parties and concentration: Lite-On Semiconductor (LSC), a shareholder owning approximately 18.9%, was the company’s largest external supplier. LSC products purchased for resale represented 11.3% of first-half sales. The company also has transactions with Keylink, its Shanghai manufacturing joint-venture partner.
- Key risks: Semiconductor cyclicality, order cancellations, pricing pressure, manufacturing or supply interruptions, foreign-exchange movements, China labor-cost increases, international operations, customer/supplier concentration, and pension funding and actuarial assumptions. The company quantified a potential quarterly currency transaction impact of about $0.2 million for a 1% yuan move and about $0.3 million for a 1% move in several other currencies, assuming balances remain constant.
- Unusual/legal items: First-half other income included a $1.7 million gain on sale of non-core intellectual property. A patent infringement suit was dismissed with prejudice on June 29, 2010, with no material financial impact reported. Management said disclosure controls were effective and no material control changes occurred during the quarter.
Important facts for investors to verify
- Whether Q3 growth and margin improvement materialized, and whether strong first-half demand and capacity utilization were sustainable.
- Whether higher capital spending in China converts into productive capacity and cash returns; note the $22.2 million of noncancelable capital-expenditure purchase commitments.
- The quality and sustainability of margin expansion, including product mix, utilization, selling-price pressure and unit-cost trends.
- Exposure to LSC as both a significant supplier and related party, along with the company’s other related-party arrangements.
- Potential changes in tax reserves, foreign-exchange impacts and the funding status of the defined-benefit plan.