Diodes Incorporated — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative periods ended June 30, 2013. Diodes makes standard discrete, logic and analog semiconductors for consumer, computing, communications, industrial and automotive markets. Financial amounts below are in USD millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $223.2 | $214.4 | $433.2 | $391.3 |
| Gross profit / margin | $70.3 / 31.5% | $61.3 / 28.6% | $131.9 / 30.4% | $107.5 / 27.5% |
| Operating income | $23.1 | $10.2 | $37.5 | $14.0 |
| Net income attributable to common stockholders | $17.4 | $8.6 | $27.6 | $6.7 |
| Diluted EPS | $0.36 | $0.18 | $0.57 | $0.14 |
| Operating cash flow | Not separately provided | Not separately provided | $80.1 | $61.2 |
Q2 sales rose 4% year over year and 6% sequentially; six-month sales rose 11%. Q2 units sold fell 2% year over year, while average selling price increased 6%. For the first half, units and average selling price each increased about 5%. Management attributed improved gross margin mainly to better wafer-fabrication performance and product mix. North America and Europe contributed to sales growth, with higher average selling prices; first-half growth also reflected six months of BCD revenue versus four months in the prior-year period.
Cash and cash equivalents were $235.5 million at June 30, up from $196.6 million at year-end; short-term investments were $17.7 million. Working capital was $520 million. Total assets were $1.186 billion and total liabilities were $404.9 million. Balance-sheet long-term debt was $162.7 million, with $2.5 million in current lines of credit. The company reported $160 million outstanding on its $300 million U.S. revolving facility, plus approximately $2 million of foreign-facility borrowings and $3 million of foreign long-term debt. First-half capital expenditures were $23.7 million in the cash-flow statement; MD&A reports approximately $26 million, including amounts purchased on accounts payable.
Changes and management commentary
- Q2 gross margin reached its highest level since Q2 2011, aided by improved fab performance, product mix and capacity utilization. Q2 operating expenses fell about $3.9 million year over year, including lower SG&A and other operating expenses; R&D increased.
- Six-month operating cash flow increased $18.9 million year over year. Investing cash use was $17.4 million versus $145.0 million, largely because the prior-year period included the BCD acquisition. Financing used $21.2 million, mainly for debt repayments; cash increased $38.8 million.
- Six-month effective tax rate was approximately 22%, versus 54% a year earlier, including a $2 million discrete benefit, primarily from concluding a tax audit. The prior period included a $6 million discrete charge, primarily related to a China tax audit. Management estimated a 2014 annual tax rate of approximately 28%, excluding discrete items.
Outlook, risks and unusual items
- For Q3 2014, management forecast revenue of $228–$238 million, up 2.1%–6.6% sequentially; gross margin of 31.8%, plus or minus 2%; operating expenses of about 21.0% of revenue, plus or minus 1%; and a tax rate of 22%, plus or minus 3%. Management expected continued revenue growth to support increased profits and cash generation.
- After quarter-end, Diodes paid $4 million on July 7 to raise its ownership of Zetex (Chengdu) Electronics to 95%; it planned to consolidate the business from July 1 and account for the purchase as a staged business combination.
- The U.K. defined-benefit pension plan was underfunded by $34.7 million at June 30. The company was discussing future contributions with trustees; changes in markets or actuarial assumptions, or failure to agree contributions, could increase required funding. The filing describes an existing annual payment plan of approximately £2 million through 2019.
- Pending matters included a securities class action alleging misleading statements about China labor-market conditions and two stockholder derivative actions, including one concerning historical option grants. The company said it intended to defend the cases and did not then expect pending proceedings to materially affect its financial position or results, while noting litigation uncertainty.
- Other disclosed exposures include approximately $21 million of gross unrecognized tax benefits, $17 million of non-cancelable capital-expenditure purchase commitments, and dependence on related-party suppliers, including Lite-On Semiconductor. The company identified semiconductor cyclicality, pricing pressure, China concentration and labor costs, foreign currency, debt, supply/manufacturing disruptions and pension funding as risks.
Important facts for investors to verify
- Whether margin improvement and revenue growth persist, especially given Q2’s lower unit volume and reliance on pricing, product mix and fab performance.
- Progress against Q3 guidance and the expected annual tax rate, including the effect of discrete tax items and lower-tax jurisdictions.
- Debt repayment, revolver availability and planned capital spending; reconcile the different capital-expenditure figures cited in the filing.
- Outcome of the U.K. pension funding review, the plan’s funded status and potential contribution requirements.
- Developments and potential costs from the securities and derivative litigation, tax examinations, and the ZCEL consolidation.
- Exposure to China and related-party suppliers, including the operational and financial impact of supplier, customer-demand, currency or regional-market changes.