Diodes Incorporated — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Diodes manufactures standard discrete, logic and analog semiconductors for consumer, computing, communications, industrial and automotive markets. Financial amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $214.4m | $159.2m | $391.3m | $303.9m |
| Gross profit / margin | $61.3m / 28.6% | $41.0m / 25.8% | $107.5m / 27.5% | $74.7m / 24.6% |
| Operating income / margin | $10.2m / 4.8% | $8.3m / 5.2% | $14.0m / 3.6% | $13.8m / 4.5% |
| Net income attributable to common stockholders | $8.6m | $6.7m | $6.7m | $11.5m |
| Diluted EPS | $0.18 | $0.14 | $0.14 | $0.25 |
| Income tax provision | $1.5m | $0.9m | $8.0m | $1.5m |
- Q2 sales increased 35% year over year and 21% sequentially; management attributed the increase chiefly to a full quarter of BCD revenue. Units sold rose 43% year over year while average selling price fell 6%.
- For the six-month period, sales rose 29%; management cited four months of BCD revenue, unit growth of 24% and average selling price growth of approximately 4%.
- Gross margin improved year over year, which management attributed to lower gold prices, better product mix, copper-wire conversion and cost reductions. Operating expenses increased materially, primarily reflecting BCD and other recent acquisitions.
- Six-month common-stockholder income fell year over year despite higher sales and gross profit. The period included a $5m discrete tax charge related principally to a Chinese tax audit; 2012 also benefited from a gain on asset sales. The six-month effective tax rate was 54%, versus 10% a year earlier; management estimated a 2013 annual rate of approximately 20%, excluding discrete items.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $61.2m, up from $30.3m. Investing cash outflow was $145.0m, including $124.9m for the BCD acquisition, net of cash acquired, and $23.8m of property, plant and equipment purchases. Financing cash inflow was $143.2m.
- Cash and cash equivalents were $213.5m at June 30, 2013, up from $157.1m at year-end 2012. Restricted cash of $9m was included in prepaid expenses and other assets.
- Working capital was $466.8m, compared with $377.9m at year-end; management said the increase primarily reflected BCD’s consolidated net assets. Current assets were $642.9m and current liabilities $176.1m.
- Long-term debt was $209.3m and lines of credit were $4.5m at June 30. Approximately $205m was outstanding under the new $300m, five-year revolving facility, maturing January 2018. The company also reported foreign credit facilities with approximately $149m of capacity and about $5m outstanding.
- Management expected cash, operating cash generation and available credit to cover working-capital and capital-expenditure needs for at least the next 12 months. Capital expenditures excluding the Chengdu joint venture were expected to remain below the historical 10%–12% of sales model, at 5%–9% of sales for the rest of 2013.
Material developments, outlook and risks
- BCD acquisition: Completed March 5, 2013 for approximately $155m, excluding acquisition costs; funded through the credit facility. BCD contributed approximately $60m of revenue and a $1m loss through June 30, including purchase-accounting adjustments. Purchase-price allocation remained preliminary. Inventory valuation adjustments added approximately $3m to Q2 cost of goods sold, following approximately $2m in Q1. Management cited strategic opportunities in analog and power-management products, Asian market reach and manufacturing efficiencies.
- Q3 outlook: Management forecast revenue of $220m–$230m, up 3%–7% sequentially; gross margin of 30.3%, plus or minus 2%; operating expenses of 22.5% of revenue, plus or minus 1%; and an 18%–24% tax rate. Expected diluted share count for EPS calculations was approximately 48.3m.
- Manufacturing interruption: A July 26 power-station incident disrupted a Shanghai wafer-fabrication facility, scrapped some work-in-progress and caused approximately half a month of lost output. Power was restored; the expected effect was included in Q3 gross-margin guidance.
- Commitments: The company was obligated to contribute approximately $48m to the Chengdu joint venture by December 31, 2013 to qualify for incentives; it had contributed approximately $25m by June 30. It also reported $12m of non-cancelable capital-expenditure purchase contracts.
- Contingencies and exposures: The company disclosed a derivative action concerning historic executive option grants and a putative securities class action alleging misleading statements about China labor-market conditions. It intended to defend both; outcomes and potential costs were uncertain. The China tax audit resulted in a $5m charge, and the IRS had begun examining the 2010 federal return without proposing adjustments as of the filing.
- Other notable risks include semiconductor-industry cyclicality, customer order cancellations and pricing pressure, international and currency exposure, dependence on China operations and incentives, acquisition integration, debt and interest costs, and related-party supplier reliance. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether BCD integration delivers the expected revenue, cost and product-mix benefits, and how final purchase accounting affects reported results.
- Whether Q3 revenue and margin guidance is achieved, including the actual financial effect of the Shanghai facility outage.
- Cash conversion and working-capital needs as inventory and receivables expand; confirm remaining acquisition-related and capital commitments.
- The progression of debt, borrowing availability and financing costs following the BCD-funded revolver draw.
- Resolution and financial implications of the China tax assessment, ongoing tax examinations and the disclosed litigation matters.