Diodes Incorporated — Q1 2023 Form 10-Q
Business context and reporting period: The company manufactures standard semiconductor products for industrial, automotive, computing, consumer and communications markets. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise stated. Diodes reports one operating segment.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $467.2 million | $482.1 million; down 3.1% |
| Gross profit / margin | $194.5 million / 41.6% | $196.7 million / 40.8% |
| Operating income | $86.4 million | $93.1 million |
| Net income attributable to common stockholders | $71.2 million | $72.7 million |
| Diluted EPS | $1.54 | $1.59 |
| Operating cash flow | $99.8 million | $72.3 million |
| Capital expenditures | $48.0 million | $38.5 million |
Gross margin improved by 80 basis points year over year. Operating expenses rose 4.2% to $108.0 million, chiefly due to a $4.6 million increase in R&D; R&D was 7.1% of sales versus 5.9%. The effective tax rate was 18.8%, compared with 18.3%.
At March 31, cash and cash equivalents were $323.1 million, restricted cash $2.8 million, and short-term investments $8.8 million. Working capital was $731.4 million. Debt included $34.7 million of short-term borrowings and approximately $90.8 million of gross long-term debt, before debt costs; the company reported $60.8 million of net debt reduction during the quarter. Its $200 million U.S. revolving facility was undrawn, and management said available liquidity was sufficient for at least the next 12 months.
Cash and restricted cash decreased $15.2 million during the quarter. Investing used $48.1 million, principally for capital spending tied to expansion of a wafer fabrication facility in Taiwan; financing used $70.3 million, mainly for debt reduction and taxes on net share settlements.
Material changes and business trends
- Management attributed lower sales to an economic slowdown and weaker product demand, partly offset by improved product mix. Sales also fell 5.8% sequentially from Q4 2022.
- Weighted-average selling price increased 16.8% year over year, while average unit cost increased approximately 15.2%. Management cited cost increases from subcontractors and foundries, as well as product-mix changes.
- Automotive and industrial together represented 47% of product revenue, up from 39% a year earlier. Computing declined to 22% from 27%.
- Asia shipment-based sales were $324.2 million versus $364.8 million; Europe was $77.0 million versus $64.8 million; and the Americas were $66.1 million versus $52.5 million. Sales shipped to China were $179.7 million, down from $230.4 million.
- Two customers each represented at least 10% of Q1 2023 sales; neither did so in Q1 2022. The filing says these customers were broad-based global distributors.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects cash from operations, existing liquidity and credit facilities to cover working capital, capital expenditures and acquisitions for at least 12 months. It said 2023 capital expenditures are expected to be within its target model, without specifying a figure.
- Management cited semiconductor cyclicality, possible further demand weakness, order cancellations, pricing pressure, supply-chain disruption, manufacturing interruptions, and dependence on suppliers as risks. It also noted that variable-rate debt could make financing more expensive if rates rise.
- The company had approximately $71.3 million in non-cancelable capital-expenditure commitments and $117.7 million of wafer purchase commitments through 2025. The U.K. defined-benefit plan was underfunded by approximately $5.4 million.
- Gross unrecognized tax benefits were approximately $49.2 million; the company said the potential change over the next 12 months could not be estimated. No litigation was considered material, and management reported no material change in risk factors from the 2022 Form 10-K.
- Q1 included approximately $2.1 million of incremental SG&A expense from accelerated vesting of 54,525 awards for two retiring officers. Other income included a $3.9 million unrealized investment gain; foreign currency results shifted to a $1.9 million loss from a $1.7 million gain a year earlier.
- In April 2023, the company purchased $13.9 million of preferred stock in a privately held wafer-design company; a further investment option of up to $4 million was available under the agreement.
Important facts for investors to verify
- Whether demand weakness and the sales decline continue, and how customer orders and cancellations develop.
- Whether improved mix and higher selling prices can sustain margins amid higher unit costs and increased R&D spending.
- How the $48.0 million quarterly capital expenditure and stated 2023 investment plans affect cash generation and capacity utilization.
- Debt repayment, variable-rate exposure, available revolver capacity, and the company’s ability to maintain liquidity as commitments come due.
- Exposure to China and other international operations, foreign-exchange movements, tax positions, supplier concentration and the wafer commitments.