“Lastly, we ended the year with a stronger balance sheet, reducing debt by $36 million, generated $125 million in net cash from operations and returned approximately 15% of that to our stockholders. We maintained CapEx at approximately 6% of revenue, which is at the low end of our 5-9% model. We are continuing to make solid progress on process development at our 8” fab in Shanghai (SFAB2), which we expect to complete by the end of first quarter 2017. Our collective achievements throughout the year position the Company for continued growth, market share gains and margin expansion as we aim to reach our goal of $1 billion in annual revenue.”
Update on Lee’s Summit Wafer Fab (KFAB)
As previously announced, Diodes experienced a fire on November 18, 2016 in the wet etch wafer fabrication area at its wafer fab in Lee’s Summit, Mo. This fire resulted in a temporary suspension of production. The cleanup and repair cost, coupled with the fab idle capacity expenses in the fourth quarter, was approximately $7.5 million before tax, which was partially offset by a $1.5 million initial insurance payment. The Company received the necessary approvals from the fire department to commence production on January 20, and, after tool qualification, normal production resumed on January 23, 2017. Diodes is working diligently to recover lost output in order to fully support customers’ requirements in a timely manner.
In addition, Diodes has been notified that the landlord has decided not to renew the lease of the KFAB wafer fabrication plant, which expires on December 31, 2017. KFAB has leased this facility since 1994.
In light of the landlord’s decision not to renew the lease, Diodes has begun activities to transfer the KFAB wafer manufacturing operations to other Diodes’ wafer fabrication plants and external foundries. The Company expects to cease operations there late in third quarter 2017 and to vacate the premises no later than November 15, 2017. Employees will be offered retention and standard severance packages.
Total KFAB shutdown costs are expected to be approximately $10 million to $12 million, on a pretax basis, which will be expensed and paid throughout 2017. Expenses to be incurred include cash costs of approximately $4 million for employee retention and severance, $2 million for contract termination costs, $2 million for equipment and building decommissioning costs as well as non-cash costs of $2 million for equipment impairment and $1 million of inventory write-off. Because of lower costs and improved utilization at its internal wafer fabs, Diodes expects the annual savings to be $11 million to $13 million once the equivalent volume has been fully transferred to other production sites.
The Company estimates the quarterly shutdown charges in 2017 to be: approximately $1.1 million ($0.7 million after tax, or approximately $0.01 per diluted share) in first quarter 2017; approximately $1.1 million ($0.7 million after tax, or approximately $0.01 per diluted share) in second quarter 2017; approximately $2.9 million ($1.9 million after tax, or approximately $0.04 per diluted share) in third quarter 2017; and approximately $5.7 million ($3.7 million after tax, or approximately $0.07 per diluted share) in fourth quarter 2017.
Fourth Quarter 2016
Revenue for fourth quarter 2016 was $232.1 million, a decrease of 7.4 percent from the $250.7 million in third quarter 2016 and an increase of 8.3 percent from the $214.4 million in fourth quarter 2015. Revenue in the quarter declined sequentially due to the KFAB fire combined with typical seasonality.
GAAP gross profit for fourth quarter 2016 was $67.3 million, or 29.0 percent of revenue, compared to third quarter 2016 of $80.6 million, or 32.2 percent of revenue and fourth quarter 2015 of $53.6 million, or 25.0 percent of revenue. The sequential decrease in gross profit margin was due primarily to the decline in revenue and the impact on utilization from the KFAB fire.
GAAP operating expenses for fourth quarter 2016 were $61.9 million, or 26.7 percent of revenue, and $56.5 million, or 24.3 percent of revenue, on a non-GAAP basis, which excludes $5.4 million of retention and amortization of acquisition-related intangible asset expenses. This compares to GAAP operating expenses of $60.7 million, or 24.2 percent of revenue, in third quarter 2016, or 22.0 percent on a non-GAAP basis.
Fourth quarter 2016 GAAP net income was $1.3 million, or $0.03 per diluted share, compared to $10.6 million, or $0.21 per diluted share, in third quarter 2016 and a net loss of $4.8 million, or ($0.10) per share, in fourth quarter 2015.
Fourth quarter 2016 non-GAAP adjusted net income was $7.7 million, or $0.15 per diluted share, which excluded, net of tax, $4.1 million of non-cash acquisition-related intangible asset amortization costs and $2.1 million of non-cash impairment related to a non-operating investment. This compares to non-GAAP adjusted net income of $15.1 million, or $0.30 per diluted share, in third quarter 2016 and $6.7 million, or $0.14 per diluted share, in fourth quarter 2015.
The following is an unaudited summary reconciliation of GAAP net income to non-GAAP adjusted net income and per share data, net of tax (in thousands, except per share data):
| Three Months Ended | |||||
| December 31, 2016 | |||||
| GAAP net income | $ | 1,268 | |||
| GAAP diluted earnings per share | $ | 0.03 | |||
| Adjustments to reconcile net income to non-GAAP net income: | |||||
| M&A Activities | |||||
| Pericom | 2,900 | ||||
| Retention costs | 179 | ||||
| Amortization of acquisition-related intangible assets | 2,721 | ||||
| Others | 1,410 | ||||
| Amortization of acquisition-related intangible assets | 1,410 | ||||
| Impairment of non-operating investment | 2,092 | ||||
| Non-GAAP net income | $ | 7,670 | |||
| Non-GAAP diluted earnings per share | $ | 0.15 | |||
