DIODES INC annual report, FY2014

Diodes Incorporated — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are noted below. Diodes designs, manufactures and supplies discrete, logic and analog semiconductor products. It operates as one reporting segment and serves consumer electronics, computing, industrial, communications and automotive markets.

Financial performance

Metric	FY2014	FY2013
Net sales	$890.7 million	$826.8 million
Gross profit / margin	$277.3 million / 31.1%	$237.8 million / 28.8%
Operating income / margin	$84.5 million / 9.5%	$42.3 million / 5.1%
Net income attributable to common stockholders	$63.7 million	$26.5 million
Diluted EPS	$1.31	$0.56
Cash from operations	$134.3 million	$109.9 million
Capital expenditures	$57.8 million in cash-flow statement; approximately $59 million as described by management	$47.1 million in cash-flow statement; approximately $44 million as described by management

FY2014 sales rose 8%, primarily on an approximately 8% increase in units; average selling prices were flat. Gross margin improved mainly from lower gold prices, better product mix, copper-wire conversion and cost reductions. Management reported SG&A at 15.0% of sales versus 16.0% in 2013. The effective tax rate was approximately 23.7% (about 24%), down from 37.5%; 2013 included approximately $5 million of additional China tax-audit expense.

Q4 2014: Sales were $223.7 million, gross profit $70.7 million, and net income attributable to common stockholders $16.7 million; diluted EPS was $0.34. In Q4 2013, sales were $211.0 million, gross profit $60.8 million, common-stockholder net income $6.2 million and diluted EPS $0.13.

Cash, debt and liquidity

• Cash and cash equivalents were $243.0 million at year-end, versus $196.6 million in 2013; short-term investments were $11.7 million, versus $22.9 million.
• Working capital was $537.5 million, up from $493.2 million. Operating cash flow increased to $134.3 million. Cash increased by $46.4 million during the year.
• Long-term debt, net of current portion, was $140.8 million; $139 million was outstanding on the $300 million revolving facility, maturing January 2018. The company reported compliance with its covenants and approximately $89 million of available foreign credit lines, in addition to unused revolver capacity.
• Management said cash, operating cash flow and available facilities should meet working-capital, capital-spending and other needs for at least the next 12 months. Debt is secured by substantially all assets of the borrowers and certain subsidiaries.
• Total contractual obligations were $227.2 million, including $34.9 million of purchase obligations due within one year and $12.5 million of defined-benefit obligations.

Material changes and operating context

• Profitability improved substantially year over year as sales grew and gross margin expanded by 2.3 percentage points. Operating income approximately doubled; common-stockholder net income rose 140%.
• BCD, acquired in March 2013 for approximately $155 million, was included for a full year in 2014 versus ten months in 2013. BCD’s margins improved, but management said they still reduced consolidated gross margin by about 160 basis points in 2014, compared with about 120 basis points in 2013.
• There was no goodwill impairment or restructuring charge in 2014; 2013 included a $5.3 million Eris goodwill impairment and $1.5 million restructuring charge. 2014 included a $1.0 million gain on sale of a Taiwan building and approximately $2 million of currency gains within other income.
• China accounted for 62% of sales by customer shipping destination. Consumer electronics represented 34% of sales, computing 20%, industrial 20%, communications 22% and automotive 4%. No customer represented 10% or more of sales.
• The company invested approximately $65 million cumulatively in its Chengdu manufacturing project by year-end. The facility was expected to be fully production-capable in the second half of 2015.

Outlook, risks and contingencies

• Management’s stated long-term goal is $1 billion in annual sales and model gross margins of 35%; acquisitions remain part of its growth strategy. It cited a pipeline of designs and expanded customer relationships but provided no specific FY2015 revenue or earnings guidance.
• Management expected 2015 capital expenditures to be toward the high end of its reduced 5%–9% of sales range, partly because some assembly and test equipment deliveries shifted into 2015. R&D spending was expected to continue increasing.
• Key risks include semiconductor cyclicality, pricing pressure and uncertain customer orders: orders can be cancelled or modified, often without penalty. The company also faces product qualification and inventory-obsolescence risks, manufacturing and supplier disruptions, and concentration of manufacturing and sales exposure in Asia and China.
• China tax incentives reduced FY2014 tax expense by approximately $2 million; one Shanghai facility no longer qualified for the 15% high-tech rate for 2014 and is subject to the 25% statutory rate. Loss of other preferential tax status could increase taxes. The company reported approximately $408 million of undistributed foreign earnings and estimated about $109 million of additional U.S. federal and state tax if repatriated.
• The U.K. defined-benefit plan was underfunded by approximately $36.9 million at year-end (benefit obligation $159.7 million; assets $122.8 million). The company was negotiating a new recovery-payment plan with trustees.
• Legal matters included a derivative-action settlement requiring a $1.1 million payment, a securities class action dismissed with prejudice but under appeal, and another derivative action stayed pending the class-action appeal. Management believed current proceedings were not expected to materially affect financial position, cash flows or results, while acknowledging litigation uncertainty.
• Management and the auditor concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

• Whether margin gains persist as pricing pressure, product mix and BCD integration affect profitability.
• Actual Chengdu ramp timing, utilization, capital spending and returns on the manufacturing expansion.
• Cash accessibility: the amount held overseas, potential repatriation taxes and the company’s permanent-reinvestment position.
• Debt levels, covenant headroom, variable-rate exposure and the ability to service debt while funding investment or acquisitions.
• Developments in the U.K. pension recovery negotiations and the underfunded plan’s future cash contributions.
• Outcomes of the pending legal matters and China tax incentives, audits and unrecognized tax positions.