Diodes Incorporated — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; financial amounts below are in U.S. dollars unless noted. Diodes manufactures standard semiconductor products for consumer, computing, communications, industrial and automotive markets. Q1 2021 included the first full quarter of revenue from its November 2020 acquisition of Lite-On Semiconductor Corporation (LSC).
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $413.1 million | $280.7 million | +47.2% |
| Gross profit / margin | $138.6 million / 33.6% | $95.8 million / 34.1% | Profit +44.7%; margin down 0.5 percentage points |
| Operating income | $47.4 million | $25.9 million | +83.4% |
| Net income attributable to common stockholders | $39.5 million | $20.2 million | +95.6% |
| Diluted EPS | $0.87 | $0.38 | +$0.49 |
| Operating cash flow | $68.2 million | $53.7 million | +$14.5 million |
- Operating expenses rose 30.4% to $91.2 million, but declined to 22.1% of sales from 24.9% a year earlier. SG&A and R&D increased mainly due to higher selling costs, wages and benefits.
- Cash, cash equivalents and short-term investments totaled $284.6 million; a further $54.8 million was restricted at quarter-end. Total cash including restricted cash was $331.1 million. Working capital was $617.5 million, versus $514.2 million at December 31, 2020.
- Quarter-end debt was approximately $413.0 million on a carrying-value basis, including $67.6 million of lines of credit. The company had a $150 million revolving credit facility and reported $127.9 million of unused Asia credit capacity. Net debt reduction during the quarter was $37.2 million.
- Investing cash outflow was $10.4 million, including $17.2 million of cash capital expenditures. Financing cash outflow was $45.4 million. Cash, including restricted cash, increased by $10.6 million.
- Consolidated gross margin was 33.6%; management separately reported a 36.3% margin for Diodes excluding acquired LSC operations.
Material changes and business developments
- Sales increased 47.2% year over year and 17.9% from Q4 2020. Management described Q1 sales as a record both organically and on a consolidated basis, while noting that the quarter also included the first full quarter of LSC revenue.
- Management attributed growth to Asia and Europe, computing demand—particularly serial-connectivity products—and strong organic automotive growth. Computing rose to 30% of sales from 17%; industrial, communications and consumer shares declined year over year. Asia accounted for $335.0 million of sales by shipment geography.
- Gross margin slipped year over year, with cost of goods sold at 66.4% of sales versus 65.9%; management cited a 1.9% increase in average unit cost.
- Other income included a $3.7 million unrealized investment gain and $2.3 million of other income. Interest expense increased to $2.9 million from $1.2 million, reflecting acquisition-related debt and higher rates on floating-rate debt.
Outlook, risks and contingencies
- Management stated that operating cash generation, cash and investments, and available credit were expected to cover working capital, capital expenditures and acquisitions for at least the next 12 months. It did not provide specific revenue or earnings guidance.
- Capital expenditures, including accrued amounts, were $25.1 million, or 11.5% of sales, in Q1. Although above the company’s 5%–9% target range, management expected full-year 2021 capital spending to fall within that range.
- Management said LSC integration was progressing well and cited manufacturing synergies and the global footprint as advantages amid industry supply and capacity constraints. COVID-19 could still disrupt facilities, suppliers or customer demand; future impacts were uncertain.
- In March, Diodes agreed to sell a manufacturing subsidiary in China for approximately $18 million in cash and equity, subject to closing conditions and working-capital adjustments. The transaction was expected to close within 12 months; preliminary held-for-sale net assets were $17.6 million, with no gain or loss recorded on reclassification.
- Key risks include semiconductor cyclicality, pricing pressure, supply constraints, manufacturing interruptions, acquisition integration, foreign currency and floating-rate debt exposure, international operations, and COVID-19. The company reported no material pending litigation and no material changes to its previously disclosed risk factors.
- Purchase commitments included $58.6 million for capital expenditures and approximately $40.4 million for wafers for use in 2021 and 2022. The U.K. defined-benefit plan was underfunded by approximately $25.1 million. Gross unrecognized tax benefits were approximately $43.9 million; the company could not estimate the range of possible changes over the next 12 months.
- After quarter-end, $50 million of restricted cash was released following repayment of the applicable loans. Credit Agreement covenants restrict certain activities, including dividends and share repurchases, subject to specified conditions.
Important facts for investors to verify
- How much of the sales and earnings growth reflects LSC versus organic growth, and whether reported demand and margins persist.
- Whether cost pressures, supply constraints and the lower consolidated gross margin affect future profitability.
- Debt repayment, floating-rate exposure, covenant headroom and the availability of the stated revolving capacity.
- Timing, final consideration and any gain or loss from the China subsidiary sale; the reported assets and liabilities held for sale are preliminary.
- Capital spending against the 5%–9% full-year target, and the cash impact of acquisition, wafer and pension commitments.
- Potential effects of COVID-19, tax examinations and unrecognized tax benefits; actual outcomes may differ from management’s estimates.