Year 2008 Highlights:
Acquired Zetex plc in June;
Gross profit increased to a record $132.5 million;
Non-GAAP net income was $44.8 million, or $1.04 per share;
Generated $90.4 million of EBITDA;
Generated $57 million in cash flow from operations.
Fourth Quarter Highlights:
Revenue was $87.1 million, which includes a $1.7 million reduction as part of the company’s strategic effort to consolidate Asian distributors;
GAAP net income was $14.6 million, or $0.35 per share, including a $22.8 million gain related to the repurchase of convertible notes and a $4.1 million restructuring charge related to future headcount reductions;
Non-GAAP EPS was $0.04 per share;
Generated $25.8 million of EBITDA;
Generated $21 million in cash flow from operations;
Increased cash by $20.8 million and reduced debt by $11.2 million over the third quarter.
For the fiscal year 2008, gross profit was $132.5 million, or 30.6% of revenue, compared to $130.4 million, or 32.5% of revenue in 2007.
The non-GAAP net income, which excluded a $22.8 million gain related to the repurchase of convertible notes, $4.0 million of net share-based compensation, $17.5 million in non-cash acquisition related charges and adjustments and $4.1 million in restructuring charges in 2008, was $44.8 million, or $1.04 per share, compared to $64.9 million, or $1.50 per share, in the prior year.
Revenue for the fourth quarter of 2008 was $87.1 million, compared to $134.0 million in the third quarter of 2008 and $107.6 million in the fourth quarter of 2007. The decline in revenue was primarily due to the decrease in demand caused by the continued deterioration of the global economic environment. Additionally, revenue was reduced by about $1.7 million as part of the Company’s strategic effort to consolidate Asian distributors.
Gross profit for the fourth quarter of 2008 was $22.9 million, or 26.3% of revenue, compared to $38.1 million, or 28.4% of revenue, in the third quarter. The decrease in gross margin was primarily due to lower capacity utilization in the company’s packaging and manufacturing operations due to weaker global demand.
Keh-Shew Lu, president and chief executive officer of Diodes, said, “In further response to the weakness in the global economy, we continued to make incremental changes to the organizational structure in order to maximize efficiencies, reduce costs and conserve cash. We have implemented in the fourth quarter a number of cost savings initiatives that included, among other things, the shut-down of our 4-inch fab line in Oldham, U.K., a 30% headcount reduction in our Kansas City wafer fab along with the realignment of our product development and wafer fabrication organizations, mandatory time-off, a reduction of authorizations for capital expenditures to a maintenance level and the implementation of strict controls over discretionary spending. Moving forward, we are taking a number of additional cost saving measures, including further headcount reductions across our entire organization, temporary site shut-downs, compensation and hiring freezes, additional mandatory time-off, accelerating the integration of the Zetex products into our manufacturing facilities, continued reduction of manufacturing process and raw material costs, and the consolidation of wafer output.”
Lu continued, “During the quarter, we took advantage of our ‘no net cost’ loan obtained in our settlement with UBS and collateralized by our $320.6 million auction rate securities portfolio and repurchased $46.5 million of our $230 million 2.25% Convertible Senior Notes for about $23.2 million in cash, which reduces our convertible debt to $183.5 million. As a result of our debt reduction and cost containment measures, we generated $21 million of net cash flow during the fourth quarter.”
Fourth quarter GAAP net income was $14.6 million, or $0.35 per diluted share, which included a $22.8 million gain related to the repurchase of convertible notes and a $4.1 million restructuring charge related to headcount reductions.
Net income computed on a non-GAAP basis for the fourth quarter of 2008, which excluded the gain on the convertible notes, restructuring charges and $1.1 million in Zetex purchase price accounting was $1.7 million, or $0.04 per share. As noted last quarter, Diodes changed its policy regarding SFAS 123R net stock option expenses, which the Company now includes in non-GAAP net income. SFAS 123R stock option expense was $0.7 million in the fourth quarter.
As of December 31, 2008, Diodes had about $103.5 million in total cash, $320.6 million of par-value auction rate securities, which will be converted to cash on June 30, 2010 under the UBS settlement ($289 million market value in long-term investments) and $401 million in long-term debt (including the convertible notes).
Business Outlook:
“Looking at the first quarter of 2009, we expect that the economy and global demand will continue to deteriorate and well beyond the typical seasonality associated with the quarter. As a result of these factors, we estimate that the first quarter revenue will decrease about 20% sequentially,” said Lu. “Furthermore, as a result of the weakened demand, we will reduce our 2009 capital authorizations to a maintenance level of about 2% of revenue, and we plan to reduce inventory, which will further reduce loading at our manufacturing facilities. As a result, we expect first quarter gross margin to be about 16 to 20% and expect to generate positive cash flow from operations as well as positive free cash flow for the quarter. Also, beginning in 2009 the adoption of FSP APB 14-1 requires us to change how we account for our Convertible Senior Notes. APB 14-1 will require us to separately account for a liability and equity component, which will reflect an estimated non-convertible notes borrowing rate. We therefore expect to record an additional pre-tax, non-cash interest expense of about $8 to 9 million for 2009.”
Lu added, “We are implementing further cost reductions while working to maintain strong cash flow. In addition to the 7% headcount reductions initiated in the fourth quarter, we will be reducing headcount by an additional 17% in the first quarter, primarily at our manufacturing operations. In the third quarter of 2008, operating expenses (excluding purchase price accounting adjustments) totaled about $28 million. Once all of the cost reduction actions that have been announced since that time are fully implemented, we estimate that the quarterly run rate will range between $21 and $23 million, which represents a reduction of about 20%. Going forward, we will continue to carefully monitor the market conditions and take decisive actions as needed to sustain cash flow. We also remain focused on new product development and design wins in order to create additional revenue sources for future quarters and to position the Company for rapid growth when the economy improves.”
