Diodes Incorporated — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. Diodes designs, manufactures and sells standard semiconductor products for consumer electronics, computing, communications, industrial and automotive markets. Pericom Semiconductor was acquired on November 24, 2015; its results are included from that date. Diodes reports one operating segment.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $848.9 million | $890.7 million |
| Gross profit / margin | $248.6 million / 29.3% | $277.3 million / 31.1% |
| Operating income / margin | $42.1 million / 5.0% | $84.5 million / 9.5% |
| Net income attributable to common stockholders | $24.3 million | $63.7 million |
| Diluted earnings per share | $0.49 | $1.31 |
| Cash from operating activities | $118.1 million | $134.3 million |
| Capital expenditures | $133.2 million in cash-flow statement; approximately $138 million reported in MD&A | $57.8 million in cash-flow statement; approximately $59 million reported in MD&A |
Management attributed weaker results to softer demand across several end markets and geographies, lower average selling prices, lower factory utilization and product mix. Sales included approximately $15 million from Pericom. The effective tax rate rose to 34.7% from 23.7%, principally reflecting a greater share of earnings in higher-tax jurisdictions and lower pretax income.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $218.4 million, short-term investments were $64.7 million, working capital was $570.9 million and total assets were $1.60 billion.
- Long-term debt, including the current portion, was approximately $466.2 million, compared with $141.1 million in 2014. Approximately $464.5 million was outstanding under the U.S. revolving and term facilities, which mature January 8, 2018. The facilities are secured and include financial and other covenants.
- Cash from investing activities was negative $459.4 million, including $348.9 million for acquisitions, net of cash acquired, and $133.2 million of capital spending. Financing activities provided $321.4 million, principally reflecting borrowing for Pericom. Cash declined by $24.6 million during the year.
- Management stated that operating cash flow, existing cash and investments, and available credit facilities should cover operating, capital and other liquidity needs for at least the next 12 months. Approximately $83 million of foreign credit lines was available at year-end.
Material changes and unusual items
- Pericom was acquired for aggregate consideration of approximately $403.2 million, primarily cash-funded through borrowings and existing cash. Preliminary purchase accounting recorded $54.3 million of goodwill and $156.7 million of intangible assets; the allocation remained subject to adjustment. Acquisition-related employee awards and change-in-control costs contributed to 2015 expenses.
- Fourth-quarter 2015 net sales were $214.4 million, gross profit was $53.6 million and net income attributable to common stockholders was a loss of $4.8 million, or a loss of $0.10 per diluted share. The filing identifies Pericom-related costs and inventory purchase-accounting charges among the items affecting results.
- Capital spending rose substantially, mainly for the Chengdu, China manufacturing expansion; that facility became fully production capable in the second half of 2015. Diodes reported approximately $120 million invested in the Chengdu project by year-end.
- The company repurchased 466,010 shares for approximately $11 million under a newly authorized $100 million program. It has not paid cash dividends and does not expect to do so in the foreseeable future.
Outlook, risks and contingencies
Management’s stated long-term goal is $1 billion in annual revenue and model gross margins of 35%; acquisitions remain part of its growth strategy. Management cited a pipeline of design opportunities and expanded customer relationships, while noting that demand, order cancellations or deferrals, customer credit, global economic conditions, pricing, product mix and manufacturing utilization could affect results. The filing does not provide specific near-term revenue or earnings guidance.
- Internal controls: Management and the auditor identified a material weakness in controls over accounting for equity awards and change-in-control agreements in business combinations, due to inadequate accounting resources. Disclosure controls and internal control over financial reporting were deemed ineffective at December 31, 2015. Pericom was excluded from the annual control assessment. Management described remediation steps; the auditor’s opinion on the financial statements was not affected.
- Pension: The U.K. defined-benefit plan was underfunded by approximately $28.6 million at year-end. A revised recovery plan calls for annual contributions of about GBP 2 million through 2030, with total required contributions increased from GBP 8 million to GBP 33 million.
- Tax and geographic exposure: Approximately $536 million of foreign earnings were intended to remain permanently reinvested; estimated additional U.S. federal and state taxes on repatriation were approximately $146 million. Chinese tax incentives reduced 2015 tax expense by about $3 million and depend on continued qualification. Unrecognized tax benefits were approximately $26.5 million, and the company could not estimate the range of possible changes over the next 12 months.
- Other key risks: Semiconductor cyclicality and competition, ongoing pricing pressure, cancellable customer orders, customer qualification requirements, manufacturing and supplier disruptions, acquisition integration and impairment, foreign currency movements, and concentration of manufacturing and sales exposure in Asia—particularly China. Litigation was described as not expected to have a material effect, though outcomes remain uncertain; a securities class action dismissal was affirmed on appeal in January 2016, and a related derivative action remained stayed.
Important facts for investors to verify
- Whether demand, pricing and capacity utilization recover enough to improve gross margin from 29.3% toward management’s 35% model goal.
- Pericom’s post-acquisition contribution, integration progress, final purchase-price allocation and any further acquisition-related costs.
- Debt covenant headroom, refinancing plans before the January 2018 facility maturity, and the company’s ability to fund elevated capital spending while servicing debt.
- Progress and auditor assessment of remediation for the material weakness, including integration of Pericom’s financial controls.
- Cash conversion and working-capital trends, including inventory growth and distributor-related sales allowances, which were approximately $113 million in 2015.
- U.K. pension funding requirements and potential tax exposure from unrecognized tax positions or any change in foreign-earnings reinvestment plans.