UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[
X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended March
31, 2006
Or
[
]
Transition Report Pursuant to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
For
the
transition period from _______ to ________.
Commission
file number: 1-5740
DIODES
INCORPORATED
(Exact
name of registrant as specified in its charter)
Delaware
|
|
95-2039518
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
|
|
|
3050
East Hillcrest Drive
|
|
91362
|
Westlake
Village, California
|
|
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
|
|
|
|
(805)
446-4800
|
|
|
(Registrant’s
telephone number, including area code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
[ X
] No
[
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one)
Large
accelerated filer [ ] Accelerated
filer [ X ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[
] No
[X
]
The
number of shares of the registrant’s Common Stock outstanding as of May 5, 2006
was 25,529,788.
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
ASSETS
|
|
December
31, 2005
|
|
December
31, 2006
|
|
CURRENT
ASSETS
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
73,288,000
|
|
$
|
53,671,000
|
|
Short-term
investments
|
|
|
40,348,000
|
|
|
45,806,000
|
|
Total
cash and short-term investments
|
|
|
113,636,000
|
|
|
99,477,000
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Customers
|
|
|
48,348,000
|
|
|
54,611,000
|
|
Related
parties
|
|
|
6,804,000
|
|
|
6,107,000
|
|
|
|
|
55,152,000
|
|
|
60,718,000
|
|
Less:
Allowance for doubtful receivables
|
|
|
(534,000
|
)
|
|
(568,000
|
)
|
|
|
|
54,618,000
|
|
|
60,150,000
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
24,611,000
|
|
|
36,877,000
|
|
Deferred
income taxes, current
|
|
|
2,541,000
|
|
|
5,301,000
|
|
Prepaid
expenses and other current assets
|
|
|
5,326,000
|
|
|
5,978,000
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
200,732,000
|
|
|
207,783,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, at
cost, net of accumulated depreciation and
amortization
|
|
|
68,930,000
|
|
|
76,391,000
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non
current
|
|
|
8,466,000
|
|
|
7,547,000
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Equity
investment
|
|
|
5,872,000
|
|
|
-
|
|
Goodwill
|
|
|
5,090,000
|
|
|
24,383,000
|
|
Other
|
|
|
425,000
|
|
|
2,854,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
289,515,000
|
|
$
|
318,958,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
December
31,
|
|
March
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Line
of credit
|
|
$
|
3,000,000
|
|
$
|
4,712,000
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
18,619,000
|
|
|
29,047,000
|
|
Related
parties
|
|
|
7,921,000
|
|
|
11,145,000
|
|
Accrued
liabilities
|
|
|
19,782,000
|
|
|
21,635,000
|
|
Current
portion of long-term debt
|
|
|
|
|
|
|
|
Related
party
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
4,621,000
|
|
|
1,937,000
|
|
Current
portion of capital lease obligations
|
|
|
138,000
|
|
|
139,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
54,081,000
|
|
|
68,615,000
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net
of current portion
|
|
|
|
Related
party
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
4,865,000
|
|
|
4,679,000
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,618,000
|
|
|
1,568,000
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST IN JOINT VENTURE
|
|
|
3,477,000
|
|
|
3,728,000
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Class
A convertible preferred stock - par
value $1.00 per share; 1,000,000 shares
authorized; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock - par value $0.66 2/3 per share;
30,000,000
shares authorized; 25,258,119 and 25,516,788
shares
issued at December 31, 2005
and
March 31, 2006, respectively
|
|
|
16,839,000
|
|
|
17,007,000
|
|
Additional
paid-in capital
|
|
|
94,664,000
|
|
|
100,106,000
|
|
Retained
earnings
|
|
|
114,659,000
|
|
|
123,971,000
|
|
|
|
|
226,162,000 |
|
|
241,084,000
|
|
Less:
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
(688,000
|
)
|
|
(716,000
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
225,474,000
|
|
|
240,368,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
289,515,000
|
|
$
|
318,958,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
48,600,000
|
|
$
|
73,589,000
|
|
Cost
of goods sold
|
|
|
32,004,000
|
|
|
49,375,000
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,596,000
|
|
|
24,214,000
|
|
|
|
|
|
|
|
|
|
Selling
and general administrative
expenses
|
|
|
6,692,000
|
|
|
11,284,000
|
|
Research
and development expenses
|
|
|
900,000
|
|
|
1,966,000
|
|
Loss
(gain) on fixed assets
|
|
|
(105,000
|
)
|
|
120,000
|
|
Total
operating expenses
|
|
|
7,487,000
|
|
|
13,370,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
9,109,000
|
|
|
10,844,000
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,000
|
|
|
734,000
|
|
Interest
expense
|
|
|
(159,000
|
)
|
|
(140,000
|
)
|
Other
|
|
|
(42,000
|
)
|
|
(207,000
|
)
|
|
|
|
(197,000
|
)
|
|
387,000
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
8,912,000
|
|
|
11,231,000
|
|
Income
tax provision
|
|
|
(1,433,000
|
)
|
|
(1,690,000
|
)
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
7,479,000
|
|
|
9,541,000
|
|
|
|
|
|
|
|
|
|
Minority
interest in joint veture earnings
|
|
|
(239,000
|
)
|
|
(229,000
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,240,000
|
|
$
|
9,312,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
0.31
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation
|
|
|
|
|
|
Basic
|
|
|
21,326,865
|
|
|
25,348,986
|
|
Diluted
|
|
|
23,525,022
|
|
|
27,679,070
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2005
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
7,240,000
|
|
$
|
9,312,000
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,910,000
|
|
|
4,673,000
|
|
Minority
interest earnings
|
|
|
239,000
|
|
|
229,000
|
|
Share-based
compensation
|
|
|
-
|
|
|
1,891,000
|
|
Loss
(gain) on fixed assets
|
|
|
(105,000
|
)
|
|
120,000
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(800,000
|
)
|
|
5,961,000
|
|
Inventories
|
|
|
1,011,000
|
|
|
(5,216,000
|
)
|
Prepaid
expenses and others
|
|
|
1,932,000
|
|
|
(127,000
|
)
|
Deferred
income taxes
|
|
|
315,000
|
|
|
(1,841,000
|
)
|
Changes
in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
564,000
|
|
|
2,893,000
|
|
Accrued
liabilities
|
|
|
(2,162,000
|
)
|
|
(1,364,000
|
)
|
Income
tax payable
|
|
|
(402,000
|
)
|
|
438,000
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
11,742,000
|
|
|
16,969,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(2,786,000
|
)
|
|
(11,616,000
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
27,000
|
|
Purchase
of available-for-sale securities
|
|
|
-
|
|
|
(5,458,000
|
)
|
Acquisitions,
net of cash acquired
|
|
|
|
|
|
(18,747,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(2,786,000
|
)
|
|
(35,794,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments
of line of credit, net
|
|
|
(2,032,000
|
)
|
|
(1,052,000
|
)
|
Net
proceeds from the issuance of common stock
|
|
|
763,000
|
|
|
1,246,000
|
|
Excess
tax benefits associated with share-based compensation
|
|
|
624,000
|
|
|
2,473,000
|
|
Proceeds
from long-term debt
|
|
|
1,170,000
|
|
|
-
|
|
Repayments
of long-term debt
|
|
|
(875,000
|
)
|
|
(3,382,000
|
)
|
Repayments
of capital lease obligations
|
|
|
(51,000
|
)
|
|
(49,000
|
)
|
Management
incentive reimbursement from LSC
|
|
|
375,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used by financing activities
|
|
|
(26,000
|
)
|
|
(764,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
|
|
|
22,000
|
|
|
(28,000
|
)
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
|
|
8,952,000
|
|
|
(19,617,000
|
)
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
18,970,000
|
|
|
73,288,000
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
27,922,000
|
|
$
|
53,671,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2005
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
Interest
|
|
$
|
472,000
|
|
$
|
451,000
|
|
Income
taxes
|
|
$
|
1,070,000
|
|
$
|
915,000
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefits related to stock options credited to paid-in
capital
|
|
$
|
1,312,000
|
|
$
|
2,473,000
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
48,000
|
|
$
|
(1,690,000
|
)
|
|
|
|
|
|
|
|
|
The
Company purchased 99.81% of capital stock of Anachip
Corporation
for approximately $31 million (including approximately
$5.8
million paid in 2005). In conjunction with the acquisition,
liabilities
assumed were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
-
|
|
$
|
47,042,000
|
|
Cash
paid for capital stock
|
|
$
|
-
|
|
$
|
(28,516,000
|
)
|
Increase
in accounts payable related to business acquisition
|
|
$
|
-
|
|
$
|
(2,488,000
|
)
|
Total
liabilities assumed
|
|
$
|
-
|
|
$
|
16,038,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
A -
Basis
of Presentation
Unless
the context otherwise requires, the words “Diodes,” “we,” “us” and “our” refer
to Diodes Incorporated and its subsidiaries. The accompanying unaudited
consolidated condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q. They
do not include all information and footnotes necessary for a fair presentation
of financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America for
complete financial statements. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
related notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2005. In the opinion of management, all adjustments (consisting
of
normal recurring adjustments and accruals) considered necessary for a fair
presentation of the results of operations for the period presented have been
included in the interim period. Operating results for the three months ended
March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. The consolidated financial
data
at December 31, 2005 is derived from audited financial statements included
in
our Annual Report on Form 10-K for the year ended December 31,
2005.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
The
consolidated financial statements include the accounts of Diodes-North America
and its wholly-owned foreign subsidiaries, Diodes Taiwan Corporation, Ltd.
(“Diodes-Taiwan”), Diodes Hong Kong Ltd. (“Diodes-Hong Kong”), and Anachip
Corporation (Diodes-Anachip), the accounts of Shanghai KaiHong Electronics
Co.,
Ltd. (“Diodes-China”) and Diodes Shanghai Co., Ltd. (“Diodes-Shanghai”) in which
we have a 95% interest, and the accounts of its wholly-owned United States
subsidiary, FabTech Incorporated (“FabTech” or “Diodes-FabTech”). All
significant intercompany balances and transactions have been
eliminated.
NOTE
B - Functional Currencies, Comprehensive Gain/Loss and Foreign Currency
Translation
Through
our subsidiaries, we maintain operations in Taiwan, Hong Kong and China. We
believe the New Taiwan (“NT”) dollar as the functional currency at our Taiwan
subsidiaries most appropriately reflects the current economic facts and
circumstances of the operations. We continue to use the U.S. dollar as the
functional currency at our subsidiaries in China and Hong Kong, as substantially
all monetary transactions are made in that currency, and other significant
economic facts and circumstances currently support that position. As these
factors may change in the future, we will periodically assess our position
with
respect to the functional currency of our foreign subsidiaries. Included in
net
income are foreign currency exchange losses of approximately $292,000 and
$43,000 for the three-month period ending March 31, 2006 and 2005, respectively.
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities
are reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive income.
The
components of other comprehensive income include foreign currency translation
adjustments. Accumulated other comprehensive loss at December 31, 2005 and
March
31, 2006 was $688,000 and $716,000, respectively.
NOTE
C -
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined principally
by the first-in, first-out method.
|
|
December
31,
|
|
March
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
14,722,000
|
|
$
|
23,899,000
|
|
Work-in-progress
|
|
|
3,002,000
|
|
|
6,938,000
|
|
Raw
materials
|
|
|
9,534,000
|
|
|
11,137,000
|
|
|
|
|
27,258,000
|
|
|
41,974,000
|
|
Less:
reserves
|
|
|
(2,647,000
|
)
|
|
(5,097,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
24,611,000
|
|
$
|
36,877,000
|
|
NOTE
D - Income Tax Provision
We
recognized income tax expense of $1.7 million for the first quarter of 2006,
resulting in an effective tax rate of 15.0%, as compared to 16.1% in the same
period last year, due primarily to an increase in profits earned in lower tax
rate jurisdictions. We continue to take advantage of available strategies to
optimize our tax rate across the jurisdictions in which we operate. In 2005
we
had recorded approximately $1.1 million in deferred taxes for earnings of its
foreign subsidiaries, primarily Diodes-Hong Kong. For the three months ended
March 31, 2006, we have accrued an additional $548,000 for taxes on a future
dividend from our foreign subsidiaries.
Our
global presence requires us to pay income taxes in a number of jurisdictions.
In
general, earnings in the United States and Taiwan are currently subject to
tax
rates of 39.0% and 35.0%, respectively. Earnings of Diodes-Hong Kong are
currently subject to a 17.5% tax for local sales or local source sales; all
other sales are foreign income tax-free. Earnings at Diodes-Taiwan and
Diodes-Hong Kong are also subject to U.S. taxes with respect to those
earnings that are derived from product manufactured by our China subsidiaries
and sold to customers outside of Taiwan and Hong Kong, respectively. The
U.S. tax rate on these earnings is computed as the difference between the
foreign effective tax rates and the U.S. tax rate. In accordance with
U.S. tax law, we receive credit against our U.S. federal tax liability
for income taxes paid by our foreign subsidiaries.
As
an
incentive for establishing Diodes-China in 1996, and in accordance with the
current taxation policies of China, Diodes-China received preferential tax
treatment for the years ended December 31, 1996 through 2005 and the three
months ended March 31, 2006.
Diodes-China
is located in the Songjiang district, where the standard central government
tax
rate is 24.0%. However, as an incentive for establishing Diodes-China, the
earnings of Diodes-China were subject to a 0% tax rate by the central
government from 1996 through 2000, and to a 12.0% tax rate from 2001 through
2005. For 2006 and future years, Diodes-China’s earnings will continue to be
subject to a 12.0% tax rate provided it exports at least 70.0% of its net
sales. In addition, due to a $18.5 million permanent re-investment of
Diodes-China earnings in 2004, Diodes-China has applied to the Chinese
government for additional preferential tax treatment on earnings that are
generated by this $18.5 million investment. If approved, those earnings
will be exempted from central government income tax for two years, and then
subject to a 12.0% tax rate for the following three years.
In
addition, the earnings of Diodes-China would ordinarily be subject to a standard
local government tax rate of 3.0%. However, as an incentive for establishing
Diodes-China the local government waived this tax from 1996 through the first
quarter of 2006. Management expects this tax to be waived for at least the
remainder of 2006; however, the local government can re-impose this tax at
any
time in its discretion.
In
2004,
we established Diodes-Shanghai located in the Songjiang Export Zone of Shanghai,
China. In the Songjiang Export Zone, the central government’s standard tax rate
is 15.0%. There is no local government tax. During 2004, Diodes-Shanghai
earnings were subject to the standard 15.0% central government tax
rate.
As
an
incentive for establishing Diodes-Shanghai, for 2005 and 2006, the earnings
of
Diodes-Shanghai are exempted from central government income tax, and for the
years 2007 through 2009 its earnings will be subject to a 7.5% tax rate. From
2010 onward, provided that Diodes-Shanghai exports over 70.0% of its net sales,
the earnings will be subject to a 10.0% tax rate. We currently intend to
maintain this volume of exports in the future.
As
an
incentive for the formation of Anachip, earnings of Anachip are subject to
a
five-year tax holiday. We are currently evaluating the optimal year to begin
this tax holiday. The Taiwanese statutory tax rate for Anachip earnings is
35%.
NOTE
E - Share-based Compensation
Stock
Options.
We
maintain share-based compensation plans for our Board of Directors (the Board),
officers, and key employees, which provide for non-qualified and incentive
stock
options. The plans are described more fully in Note 9 of our audited financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2005. Through March 31, 2006, substantially all stock options
granted vest in equal annual installments over a three-year period and expire
ten years after the grant date.
Prior
to
January 1, 2006, we accounted for those plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
“Accounting
for Stock Issued to Employees,” and
related Interpretations. No compensation cost was reflected in net income for
stock options, as all options granted under those plans have an exercise price
equal to or greater than the market value of the underlying common stock on
the
date of the grant.
Effective
in January 1, 2006, we adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, “Share-Based Payments” (SFAS 123R) using the modified
prospective method. Under SFAS 123R, we are required to select a valuation
technique or option-pricing model that meets the criteria as stated in the
standard, which includes a binomial model and the Black-Scholes model. At the
present time, the Company is continuing to use the Black-Scholes model. The
adoption of SFAS 123R, applying the “modified prospective method,” as elected by
the Company, requires the Company to value stock options prior to its adoption
of SFAS 123 under the fair value method and expense these amounts over the
stock
options remaining vesting period. This resulted in the Company expensing $1.6
million in the first quarter of fiscal 2006, which was recorded within cost
of
good sold, general and administrative expense and research and development
expense on the Company’s condensed consolidated income statement. In addition,
SFAS 123R requires the Company to reflect any tax savings resulting from tax
deductions in excess of expense reflected in its financial statements as a
financing cash inflow in its statement of cash flows rather than as an operating
cash flow as in prior periods.
The
Company’s valuations are based upon a single option valuation approach using the
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options, which
have
no vesting restrictions and are fully transferable and negotiable in a free
trading market. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and
expected life of the option. Because the Company’s stock options have
characteristics significantly different from those of freely traded options,
and
changes in the subjective input assumptions can materially affect the Company’s
fair value estimate of those stock options, in the Company’s opinion, existing
valuations models, including Black-Scholes, are not reliable single measures
and
may misstate the fair value of the Company’s stock options. Because Company
stock options do not trade on a secondary exchange, recipients can receive
no
value nor derive any benefit from holding stock options under these plans
without an increase, above the grant price, in the market price of the Company’s
stock. Such an increase in stock price would benefit all stockholders
commensurately.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model using the assumptions noted in the
following table. Expected volatility is based on the historical volatility
of
the Company’s stock and other factors while considering changes in capital
structure, changes in market capitalization and management's future
expectations. The Company uses historical data to estimate option exercises,
expected term and employee terminations (forfeitures). Each group of employees
that have similar historical exercise behavior are considered separately for
valuation purposes. The expected term of options granted represents the period
of time that options granted are expected to be outstanding. The risk-free
interest rate is based on the Constant Maturity Treasury (CMT) Index for periods
corresponding with the expected term of the options at the time of grant.
The
following is the weighted average of the data used to calculate the estimated
fair value of the options that comprise the $1.6 million share-based expense
for
the three-months period ended March 31, 2006:
|
|
2003
|
|
2004
|
|
2005
|
|
March
31, 2006
|
|
Expected
volatility
|
|
|
66.18
|
%
|
|
68.36
|
%
|
|
60.00
|
%
|
|
50.71
|
%
|
Expected
term (in years)
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
|
4.8
|
|
Risk-free
rate
|
|
|
3.31
|
%
|
|
3.64
|
%
|
|
3.85
|
%
|
|
4.39
|
%
|
Expected
forfeitures
|
|
|
2.77
|
%
|
|
2.64
|
%
|
|
2.54
|
%
|
|
2.56
|
%
|
A
summary
of the stock option plans as of March 31, 2006 follows:
Stock
options
|
|
Shares
(000)
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (yrs)
|
|
Aggregate
Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
4,095
|
|
$
|
10.45
|
|
|
|
|
|
|
|
Granted
|
|
|
73
|
|
|
34.73
|
|
|
|
|
|
|
|
Exercised
|
|
|
(239
|
)
|
|
5.41
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(21
|
)
|
|
17.48
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
3,908
|
|
$
|
11.19
|
|
|
6.8
|
|
$
|
118,435
|
|
Exercisable
at March 31, 2006
|
|
|
2,335
|
|
$
|
6.61
|
|
|
5.5
|
|
$
|
81,462
|
|
The
weighted-average grant-date fair value of options granted during the first
quarter of 2006 was $16.79. The total intrinsic value (actual gain) of options
exercised during the first quarter of 2006 was approximately $7.2 million.
Cash
received from option exercise under all share-based payment arrangements for
the
three months ended March 31, 2006 was $1.3 million and the actual tax benefit
realized for the tax deductions from option exercise of the share-based payment
arrangements totaled $2.5 million for the same reporting period.
Share
Grants. On
May
31, 2005, our Board appointed Dr. Keh-Shew Lu as the President and the
Chief Executive Officer of Diodes Incorporated effective as of June 1,
2005. Dr. Lu received an inducement restricted stock grant of 270,000 shares
(split adjusted) of our Common Stock under our Incentive Bonus Plan. On May
31,
2005, C.H. Chen, who had served as the President and the Chief Executive
Officer of Diodes Incorporated since March 2000, resigned from those
positions, and was appointed as the Vice Chairman of Diodes Incorporated’s
Board, effective as of June 1, 2005. Mr. Chen received a restricted stock grant
of 60,000 shares (split adjusted) of our Common Stock under our Incentive Bonus
Plan. Under the terms of the Incentive Bonus Plan, 50% of the shares will become
salable and transferable on the day following the third anniversary of their
appointment, and 50% will become salable and transferable on the day following
the fourth anniversary of such appointment. If they voluntarily leave the
employment of the Company or are terminated for good cause, they will forfeit
any stock not yet released to them. The
restricted stock grants will be recorded each quarter as a non-cash operating
expense item. As of March 31, 2006, there was $3.7 million of total unrecognized
compensation cost related to non-vested share-based compensation. That cost
is
expected to be recognized over a weighted-average period of 3.3 years. In the
first quarter of 2006, an expense of $296,000 was recorded. In addition to
the
expense, the effect of the above restricted stock grants are included in the
diluted shares outstanding calculation.
Under
the
modified prospective application method, results for periods prior to January
1,
2006, have not been restated to reflect the effects of implementing SFAS 123R.
The following pro forma information, as required by SFAS No. 148,
“Accounting
for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB
statement No.123,”
is
presented for comparative purposes and illustrates the pro forma effect on
net
income and earnings per share for the period ended March 31, 2005, as if we
had
applied the fair value recognition provisions of SFAS No. 123 to the stock-based
compensation for that period:
|
|
Three
Months
Ended
March
31, 2005
|
|
Net
income, as reported
|
|
$
|
7,240,000
|
|
Deduct:
Total stock-based compensation expense determined under fair value
based
method for all awards, net of tax benefits
|
|
|
(516,000
|
)
|
Pro
forma net income
|
|
$
|
6,724,000
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic
|
|
|
|
|
-
as reported
|
|
$
|
0.34
|
|
-
pro forma
|
|
$
|
0.31
|
|
Diluted
|
|
|
|
|
-
as reported
|
|
$
|
0.31
|
|
-
pro forma
|
|
$
|
0.29
|
|
NOTE
F -Segment
Information
An
operating segment is defined as a component of an enterprise about which
separate financial information is available that is evaluated regularly by
the
chief decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. Our chief decision-making group consists
of the President and Chief Executive Officer, Chief Financial Officer, Senior
Vice President of Sales and Marketing, and Senior Vice President of Operations.
We operate in a single segment, semiconductor devices, through our various
manufacturing and distribution facilities.
Our
operations include the domestic operations (Diodes-North America and
Diodes-FabTech) located in the United States, and the Far East operations
(Diodes-Taiwan located in Taipei, Taiwan; Anachip Corporation located in Taipei,
Taiwan; Diodes-China and Diodes-Shanghai, both located in Shanghai, China;
and
Diodes-Hong Kong located in Hong Kong, China). For reporting purposes, European
operations, which accounted for approximately 3.3% of total sales for the three
months ended March 31, 2006 (2.5% for the first quarter of 2005), are
consolidated into the domestic (North America) operations.
The
accounting policies of the operating segments are the same as those described
in
the summary of significant accounting policies. Revenues are attributed to
geographic areas based on the location of the market producing the
revenues.
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
March
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
52,715,000
|
|
$
|
21,370,000
|
|
$
|
74,085,000
|
|
Inter-company
sales
|
|
|
(21,834,000
|
)
|
|
(3,651,000
|
)
|
|
(25,485,000
|
)
|
Net
sales
|
|
$
|
30,881,000
|
|
$
|
17,719,000
|
|
$
|
48,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
47,315,000
|
|
$
|
12,128,000
|
|
$
|
59,443,000
|
|
Assets
|
|
$
|
124,722,000
|
|
$
|
47,963,000
|
|
$
|
172,685,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Consolidated
Segments
|
|
March
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
80,331,000
|
|
$
|
27,116,000
|
|
$
|
107,447,000
|
|
Inter-company
sales
|
|
|
(29,208,000
|
)
|
|
(4,650,000
|
)
|
|
(33,858,000
|
)
|
Net
sales
|
|
$
|
51,123,000
|
|
$
|
22,466,000
|
|
$
|
73,589,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
65,669,000
|
|
$
|
10,722,000
|
|
$
|
76,391,000
|
|
Assets
|
|
$
|
192,748,000
|
|
$
|
126,210,000
|
|
$
|
318,958,000
|
|
Geographic
Information
Revenues
were derived from (invoiced to) customer located in the following countries
(All
Others represents countries with less than 10% of total revenues
each):
|
|
Net
Sales
for
the three months
ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
12,684
|
|
$
|
25,569
|
|
|
26.1
|
%
|
|
34.7
|
%
|
Taiwan
|
|
|
16,563
|
|
|
18,271
|
|
|
34.1
|
%
|
|
24.8
|
%
|
United
States
|
|
|
12,072
|
|
|
17,591
|
|
|
24.8
|
%
|
|
23.9
|
%
|
All
Others
|
|
|
7,281
|
|
|
12,158
|
|
|
15.0
|
%
|
|
16.6
|
%
|
Total
|
|
$
|
48,600
|
|
$
|
73,589
|
|
|
100.0
|
%
|
|
100.0
|
%
|
NOTE
G - Business Acquisition
On
December 20, 2005, the Company entered into a definitive stock purchase
agreement to acquire Anachip Corporation, a Taiwanese fabless analog IC
company.
Headquartered
in the Hsinchu Science Park in Taiwan, Anachip’s main product focus is Power
Management ICs. Anachip's products are widely used in LCD monitor/TV's, wireless
802.11 LAN access points, brushless DC motor fans, portable DVD players, datacom
devices, ADSL modems, TV/satellite set-top boxes, and power
supplies.
The
selling shareholders of Anachip stock included Lite-On Semiconductor Corporation
(LSC) (which owned approximately 60% of Anachip’s outstanding capital stock),
and two Taiwanese venture capital
firms
(together owning approximately 20% of Anachip’s stock), as well as current and
former Anachip employees.
At
December 31, 2005, the Company had purchased an aggregate of 9,433,613 shares
(or approximately 18.9%) of the 50,000,000 outstanding shares of the capital
stock of Anachip. On January 10, 2006, (the closing date of the
acquisition) the Company purchased an additional 40,470,212 shares and
therefore, the Company holds approximately 99.81% of the Anachip capital stock.
At December 31, 2005, the investment in Anachip is recorded under the equity
method; however, the Company did not record income from the investment on the
consolidated financial statements for the ten days ending December 31, 2005,
as
the amount was not material. As of result of the additional Anachip interest
acquired during 2006, Anachip was consolidated beginning the first fiscal
quarter of 2006.
The
purchase price of the acquisition was NT$20 per share (approximately US$31
million). The following table summarizes management’s preliminary estimates of
the fair values of the assets acquired and liabilities assumed at the date
of
acquisition. The allocation of the purchase price is subject to refinement
for
final determination of fair value.
|
|
Original
Amount Disclosed in 2005 Form 10-K
|
|
Purchase
Adjustments
|
|
Total
Allocation
|
|
|
|
(unaudited)
|
|
|
|
|
|
Current
assets
|
|
$
|
23,752,000
|
|
$
|
(724,000
|
)
|
$
|
23,028,000
|
|
Fixed
assets/non-current
|
|
|
2,045,000
|
|
|
(11,000
|
)
|
|
2,034,000
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
0
|
|
Patents
and trademarks
|
|
|
2,269,000
|
|
|
167,000
|
|
|
2,436,000
|
|
Computer
cost
|
|
|
246,000
|
|
|
4,000
|
|
|
250,000
|
|
Goodwill
|
|
|
19,541,000
|
|
|
(247,000
|
)
|
|
19,294,000
|
|
Total
assets acquired
|
|
|
47,853,000
|
|
|
(811,000
|
)
|
|
47,042,000
|
|
Current
liabilities
|
|
|
(16,829,000
|
)
|
|
1,457,000
|
|
|
(15,372,000
|
)
|
Non-current
liabilities
|
|
|
(655,000
|
)
|
|
(11,000
|
)
|
|
(666,000
|
)
|
Total
liabilities assumed
|
|
|
(17,484,000
|
)
|
|
1,446,000
|
|
|
(16,038,000
|
)
|
Total
purchase price
|
|
$
|
30,369,000
|
|
$
|
635,000
|
|
$
|
31,004,000
|
|
Purchase
adjustments primarily relate to acquisition costs and refinement to estimated
fair values of assets acquired and liabilities assumed.
The
acquired intangible assets include patents and trademarks of $2.4 million with
an approximately 10-year weighted-average useful life, and computer costs of
$246,000 with a weighted-average useful life of approximately 3-7 years. The
recorded goodwill was assigned primarily to the analog IC segment.
The
following unaudited table summarizes the supplemental pro forma information
for
the three months ended March 31, 2005 as though the acquisition had been
completed as of the beginning of that reporting period.
|
|
Three
months ended March 31, 2005
|
|
|
|
As
reported
|
|
Pro
forma
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
48,600,000
|
|
$
|
59,163,000
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
7,240,000
|
|
|
7,506,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.31
|
|
$
|
0.32
|
|
NOTE
H - Commitments
In
April
2006, the Company signed an agreement to purchase a new building with a contract
price of approximately $6.0 million. This facility will be used to consolidate
and expand our sales, administrative, and warehousing offices in Taipei,
Taiwan.
NOTE
I - Follow-on Public Offering
During
2005, we sold 3.2 million (stock split adjusted) shares of our Common Stock
in a
follow-on public offering, raising approximately $71.7 million (net of
commissions and expenses). We used approximately $30 million of the net proceeds
in connection with the Anachip acquisition and we
intend
to use the remaining net proceeds from this offering for working capital and
other general corporate purposes, including acquisitions.
NOTE
J - Reclassifications
In
the
first quarter of 2006, we adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, “Share-Based Payments” using the modified prospective method.
SFAS 123R requires that the excess tax benefit associated with an individual
share-based payment award be included in the statement of cash flows as a cash
inflow from financing activities and a cash outflow from operating activities.
The 2005 amounts presented in the accompanying financial statements have been
reclassified to conform to 2006 financial statement presentation. These
reclassifications had no impact on previously reported net income or
stockholders’ equity.
NOTE
K - Recently Issued Accounting Pronouncements
In
May
2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
“Accounting Changes and Error Corrections, A Replacement of APB Opinion No.
20
and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior
periods’ financial statements for changes in accounting principles, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that retrospective application
of a
change in accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes
and
corrections of errors made in fiscal years beginning after the date this
Statement is issued.
The
Company does not anticipate a material impact on the financial statements from
the adoption of this consensus.
In
March
2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for
Conditional Asset Retirement Obligations, An Interpretation of FASB Statement
No. 143,” which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability’s
fair value can be reasonably estimated. The adoption of this Interpretation
did
not have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.
In
December 2004, the FASB also issued SFAS No. 151, “Inventory
Costs, an amendment of ARB No. 43, Chapter 4.”
This
standard clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted material should be expensed as incurred and not
included in overhead. In addition, this standard requires that the allocation
of
fixed production overhead costs to inventory be based on the normal capacity
of
the production facilities. The provisions of this standard are effective for
the
fiscal years beginning after June 15, 2005. The Company is currently evaluating
the potential impact of this standard on its financial position and results
of
operations, but does not believe the impact of the change will be
material.
Item
2 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Except
for the historical information contained herein, the matters addressed in this
Item 2 constitute “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are subject
to
a variety of risks and uncertainties, including those discussed below under
the
heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that
could cause actual results to differ materially from those anticipated by the
Company’s management. The Private Securities Litigation Reform Act of 1995 (the
“Act”) provides certain “safe harbor” provisions for forward-looking statements.
All forward-looking statements made on this Quarterly Report on Form 10-Q are
made pursuant to the Act. The Company undertakes no obligation to publicly
release the results of any revisions to their forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unexpected events. Unless
the context otherwise requires, the words “Diodes”, “we”, “us” and “our” refer
to Diodes Incorporated and its subsidiaries.
This
management discussion should be read in conjunction with the management
discussion included in the Company’s fiscal 2005 annual report on Form 10-K
previously filed with Securities and Exchange Commission.
Overview
We
are a
global supplier of discrete and analog semiconductor products. We design,
manufacture and market these semiconductors focused on diverse end-use
applications in the consumer electronics, computing, industrial, communications
and automotive sectors. Our semiconductors, which provide electronic signal
amplification and switching functions, are basic building-block electronic
components that are incorporated into almost every electronic device. We believe
that our product focus provides us with a meaningful competitive advantage
relative to broadline semiconductor companies that provide a wider range of
semiconductor products.
We
are
headquartered in Westlake Village, California, near Los Angeles. Our two
manufacturing facilities are located in Shanghai, China; our wafer fabrication
facility is in Kansas City, Missouri; our sales and marketing and logistical
centers are located in Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong
Kong, and our newly acquired fabless IC design company, Anachip, is located
in
Hsinchu, Taiwan. We also have regional sales offices or representatives in:
Derbyshire, England; Toulouse, France; Frankfurt, Germany; and various cities
in
the United States.
In
1998,
we began to transform our business from the distribution of discrete
semiconductors manufactured by others to the design, manufacture and marketing
of discrete semiconductor products using our internal manufacturing
capabilities. The key elements of our strategy of transforming our business
from
a distribution-based model to one primarily based on the design and manufacture
of proprietary products are:
|
Ø
|
expanding
our manufacturing capacity, including establishing integrated
state-of-the-art packaging and testing facilities in Asia, in 1998
and
2004, and acquiring a wafer foundry in the United States in
2000;
|
|
Ø
|
expanding
our sales and marketing organization in Asia in order to address
the shift
of manufacturing of electronics products from the United States to
Asia;
|
|
Ø
|
establishing
our sales and marketing organization in Europe commencing in 2002;
and
|
|
Ø
|
expanding
the number of our field application engineers to design our products
into
specific end-user applications.
|
In
implementing this strategy, the following factors have affected, and, we
believe, will continue to affect, our results of operations:
|
Ø
|
Since
1998, we have experienced increases in the demand for our products,
and
substantial pressure from our customers and competitors to reduce
the
selling price of our products. We expect future increases in net
income to
result primarily from increases in sales volume and improvements
in
product mix in order to offset reduced average selling prices of
our
products.
|
|
Ø
|
As
part of our growth strategy, in December 2005, we announced the
acquisition of Anachip, a fabless Taiwanese semiconductor company
focused
on the standard analog markets. The acquisition, which closed
on January
10, 2006, fits in the center of our long-term strategy. Anachip’s main
product focus is Power Management ICs. The analog devices they
produce are
used in LCD monitor/TV's, wireless LAN 802.11 access points,
brushless DC
motor fans, portable DVD players, datacom devices, ADSL modems,
TV/satellite set-top boxes, and power supplies. Anachip brings
a design
team with strong capabilities in a range of targeted analog and
power
management technologies. This acquisition also shows our disciplined
approach to making acquisitions. We paid approximately $31 million
to
acquire Anachip, which had power management IC revenues of approximately
$35 million in 2005. The acquisition was accretive to our first
quarter
2006 earnings, and is expected to be accretive to our full-year
2006
earnings.
|
|
Ø
|
In
2005 and first three months ended March 31, 2006, 15.3% and 23.3%,
respectively, of our net sales were derived from products introduced
within the last three years, which we term “new products,” compared to
14.3% in 2004. The significant increase in new products primarily
resulted
from the Anachip acquisition. New products generally have gross
profit
margins that are higher than
the margins of our standard products. We expect net sales derived
from new
products to increase in absolute terms, although our net sales
of new
products as a percentage of our net sales will depend on the
demand for
our standard products, as well as our product
mix.
|
|
Ø
|
Our
gross profit margin was 32.9% in the first quarter of 2006, compared
to
34.1% in the same period of 2005. As expected, our gross margin
percentage
was lower as we are in the early stages of our manufacturing
integration
of the analog product line. With the addition of Anachip, we
can now
pursue adjacent product categories that significantly expand
our growth
opportunities as well as gross margin
potential.
|
|
Ø
|
As
of March 31, 2006, we had invested approximately $105.3 million
in our Asian manufacturing facilities. During the first quarter
of 2006,
we invested approximately $10 million primarily in our Asian
manufacturing facilities, and we expect to invest an additional
$20 to $24
million in theses facility for the remainder of 2006. This
was in line
with our objective of meeting increased demand and investing
in equipment
to increase our manufacturing efficiencies, as well as purchases
required
to integrate the analog
manufacturing.
|
|
Ø
|
During
the first quarter of 2006, the percentage of our net sales
derived from
our Asian subsidiaries was 69.5%, compared to 65.4% in 2005
and 59.1% in
2004. We expect our net sales to the Asian market to continue
to increase
as a percentage of our total net sales for 2006 and beyond
as a result of
the continuing shift of the manufacture of electronic products
from the
United States to Asia.
|
|
Ø
|
We
have increased our investment in research and development
from $900,000,
or 1.9% in the first quarter of 2005 to $2.0 million, or 2.7% of net
sales in the first quarter of 2006, as we completed integrating
the
Anachip acquisition and continued investing in enhancing
current product
features and developing new products. We continue to seek
to hire
qualified engineers who fit our focus on proprietary discrete
processes
and packaging technologies. Our goal is to expand research
and development
expenses to approximately 2-3% of net sales as we bring
additional
proprietary devices to the market.
|
|
Ø
|
During
2005, we sold 3.2 million (split adjusted) shares of
our Common Stock in a
follow-on public offering, raising approximately $71.7
million (net of
commissions and expenses). We
used $31 million of the net proceeds to acquire Anachip
and will use the
remaining net proceeds from this offering for working
capital and other
general corporate purposes, including other potential
acquisitions.
|
Related
Parties
We
conduct business with two related party companies, Lite-On Semiconductor
Corporation (LSC) (and its subsidiaries and affiliates) and Keylink
International (formerly Xing International) (and its subsidiaries). LSC is
our
largest stockholder and owned 23.5% of our outstanding Common Stock as of March
31, 2006. Keylink International is our 5% joint venture partner in Diodes-China
and Diodes-Shanghai. C.H. Chen, our previous President and Chief Executive
Officer, and Vice Chairman of our Board of Directors, is also Vice Chairman
of
LSC. M.K. Lu, a member of our Board of Directors, is President of LSC, while
Raymond Soong, the Chairman of our Board of Directors, is the Chairman of
Lite-On Technology Corporation, a significant shareholder of LSC, as well as
Chairman of LSC.
The
Audit
Committee of our Board of Director reviews all related party transactions for
potential conflict of interest situations, and approves all such transactions,
in accordance with such procedures as it may adopt from time to time. We believe
that all related party transactions are on terms no less favorable to us than
would be obtained from unaffiliated third parties.
For
the
first three months ended March 31, 2006, we sold silicon wafers to LSC totaling
7.3% (9.6% in 2005 and 11.1% in 2004) of our sales, making LSC our largest
customer. Also during first quarter of 2006, 14.0% (14.7% in 2005 and 17.2%
in
2004) of our sales were from discrete semiconductor products purchased from
LSC
for subsequent sale by us, making LSC our largest outside supplier. In addition,
companies affiliated with LSC, which we refer to collectively as The Lite-On
Group, accounted for 3.3%, 4.2% and 2.3% of our net sales, respectively, in
2004, 2005 and first three months of 2006. We also rent warehouse space in
Hong
Kong from a member of The Lite-On Group, which also provides us with warehousing
services at that location. For 2004, 2005 and first three months end March
31,
2006 we reimbursed this entity in aggregate amounts of $190,000, $288,000 and
$90,000, respectively, for these items. We believe such transactions are on
terms no less favorable to us than could be obtained from unaffiliated third
parties. The Audit Committee of the Board of Directors has approved the
arrangements we have with these related party transactions.
In
December 2000, we acquired a wafer foundry, FabTech, Inc., from LSC. As part
of
the purchase price, LSC received a subordinated, interest-bearing note
receivable in a principal amount of $13.5 million, of which approximately
$2.5 million and $0, respectively, was outstanding as of December 31, 2004
and December 31, 2005. In connection with the acquisition, LSC entered into
a volume purchase agreement to purchase wafers from FabTech. In addition, in
accordance with the terms of the acquisition, we also entered into several
management incentive agreements with members of FabTech’s management. The
agreements provided members of FabTech’s management with guaranteed annual
payments as well as contingent bonuses based on the annual profitability of
FabTech, subject to a maximum annual amount. Any portion of the guaranteed
and
contingent liability paid by FabTech was reimbursed by LSC. The final year
of
the management incentive agreements was 2004, with final payment made on
March 31, 2005. LSC reimbursed us in the amount of $375,000 for each of
2002, 2003 and 2004, for amounts paid by us under these management incentive
agreements.
During
the first three months of 2006, we sold silicon wafers to companies owned by
Keylink International totaling 0.6% (0.6% in 2005 and 0.9% in 2004) of our
sales. Also for the first three months of 2006, 2.7% (3.0% in 2004 and 3.5%
in
2004) of our sales were from discrete semiconductor products purchased from
companies owned by Keylink International. In addition, Diodes-China and
Diodes-Shanghai lease their manufacturing facilities from, and subcontract
a
portion of their manufacturing process (metal plating and environmental
services) to, Keylink International. We also pay a consulting fee to Keylink
International. In 2004 , 2005 and first three months of 2006 we paid Keylink
International an aggregate of $4.8 million, $6.6 million and
$1.7 million respectively, with respect to these items. We believe such
transactions are on terms no less favorable to us than could be obtained from
unaffiliated third parties. The Audit Committee of the Board of Directors has
approved the contracts associated with these related party
transactions.
On
December 20, 2005, we entered into a definitive stock purchase agreement to
acquire Anachip Corporation, a Taiwanese fabless analog IC company, and
headquartered in the Hsinchu Science Park in Taiwan. The selling shareholders
included LSC (which owned approximately 60% of Anachip’s outstanding capital
stock), and two Taiwanese venture capital firms (together owning approximately
20% of Anachip’s stock), as well as current and former Anachip
employees.
At
December 31, 2005, we had purchased an aggregate of 9,433,613 shares (or
approximately 18.9%) of the 50,000,000 outstanding shares of the capital stock
of Anachip. On January 10, 2006, (the closing date of the acquisition) we
purchased an additional 40,470,212 shares and therefore, we now hold
approximately 99.81% of the Anachip capital stock.
Concurrent
with the acquisition, Anachip entered into a wafer purchase agreement with
LSC,
pursuant to which LSC will sell to Anachip, according to Anachip's requirements,
during the two year period ending on December 31, 2007, wafers of the same
or
similar type, and meeting the same specifications, as those wafers currently
being purchased from LSC by Anachip. Anachip will purchase such wafers on terms
(including purchase price, delivery schedule, and payment terms) no less
favorable to Anachip than those terms on which Anachip currently purchases
such
wafers from LSC; provided, however, that the purchase price will be the lower
of
the current price or the most favorable customer pricing. If the price of raw
wafers increases by more than 20% within any six-month period, Anachip and
LSC
will renegotiate in good faith the price of wafers to reflect the cost
increase.
Available
Information
Our
Internet address is http://www.diodes.com.
We make
available, free of charge through our Internet website, our Annual Reports
on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission (the “SEC”). To support our global customer-base,
particularly in Asia and Europe, our website is language-selectable into
English, Chinese, Japanese, Korean and German, giving us an effective marketing
tool for worldwide markets. With its extensive online Product (Parametric)
Catalog with advanced search capabilities, our website facilitates quick and
easy product selection. Our website provides easy access to worldwide sales
contacts and customer support, and incorporates a distributor-inventory check
to
provide component inventory availability and a small order desk for overnight
sample fulfillment. Our website also provides access to investor financial
information, including SEC filings and press releases, as well as stock quotes
and information on corporate governance compliance.
Financial
Operations overview
Net
Sales
We
generate a substantial portion of our net sales through the sale of discrete
semiconductor products, designed and manufactured by us or third parties. We
also generate a portion of our net sales from outsourcing manufacturing capacity
to third parties and from the sale of silicon wafers to manufacturers of
discrete semiconductor components. We serve customers across diversified
industry segments, including the consumer electronics, computing, industrial,
communications and automotive markets.
We
recognize revenue from product sales when title to and risk of loss of the
product have passed to the customer, there is persuasive evidence of an
arrangement, the sale price is fixed or determinable and collection of the
related receivable is reasonably assured. These criteria are generally met
upon
shipment to our customers. Net sales is stated net of reserves for pricing
adjustments, discounts, rebates and returns.
The
principal factors that have affected or could affect our net sales from period
to period are:
|
Ø
|
the
condition of the economy in general and of the semiconductor industry
in
particular;
|
|
Ø
|
our
customers’ adjustments in their order
levels;
|
|
Ø
|
changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
|
|
Ø
|
the
termination of key supplier
relationships;
|
|
Ø
|
the
rate of introduction to, and acceptance of new products by, our
customers;
|
|
Ø
|
our
ability to compete effectively with our current and future
competitors;
|
Ø our
ability to enter into and renew key corporate and strategic relationships with
our customers, vendors and strategic alliances;
|
Ø
|
changes
in foreign currency exchange rates;
|
|
Ø
|
a
major disruption of our information technology
infrastructure; and
|
|
Ø
|
unforeseen
catastrophic events, such as armed conflict, terrorism, fires, typhoons
and earthquakes.
|
Cost
of Goods Sold
Cost
of
goods sold includes manufacturing costs for our semiconductor products and
our
wafers. These costs include raw materials used in our manufacturing processes
as
well as the labor costs and overhead expenses. Cost of goods sold is also
impacted by yield improvements, capacity utilization and manufacturing
efficiencies. In addition, cost of goods sold includes the cost of products
that
we purchase from other manufacturers and sell to our customers. Cost of goods
sold is also affected by inventory obsolescence if our inventory management
is
not efficient.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses relate primarily to compensation and
associated expenses for personnel in general management, sales and marketing,
information technology, engineering, human resources, procurement, planning
and
finance, and sales commissions, as well as outside legal, accounting and
consulting expenses, share-based compensation expenses, and other operating
expenses. We expect our selling, general and administrative expenses to increase
in absolute dollars as we hire additional personnel and expand our sales,
marketing and engineering efforts and information technology
infrastructure.
Research
and Development Expenses
Research
and development expenses consist of compensation and associated costs of
employees engaged in research and development projects, as well as materials
and
equipment used for these projects. Research and development expenses are
primarily associated with our wafer facility in Kansas City, Missouri, our
analog IC facilities in Taipei, Taiwan, and our manufacturing facilities in
China, as well as our engineers at our U.S. headquarters. All research and
development expenses are expensed as incurred, and we expect our research and
development expenses to increase in absolute dollars as we invest in new
technologies and product lines.
Interest
Income / Expense
Interest
income consists of interest earned on our cash and investment balances. Interest
expense consists of interest payable on our outstanding credit facilities.
Income
Tax Provision
We
recognized income tax expense of $1.7 million for the first quarter of 2006,
resulting in an effective tax rate of 15.0%, as compared to 16.1% in the same
period last year, due primarily to an increase in profits earned in lower tax
rate jurisdictions. We continue to take advantage of available strategies to
optimize our tax rate across the jurisdictions in which we operate.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, allowance for doubtful accounts,
inventory reserves and income taxes, among others. Our estimates are based
upon
historical experiences, market trends and financial forecasts and projections,
and upon various other assumptions that management believes to be reasonable
under the circumstances and at that certain point in time. Actual results may
differ, significantly at times, from these estimates under different assumptions
or conditions.
We
believe the following critical accounting policies and estimates affect the
significant estimates and judgments we use in the preparation of our
consolidated financial statements, and may involve a higher degree of judgment
and complexity than others.
Revenue
Recognition
We
recognize revenue when there is persuasive evidence that an arrangement exists,
when delivery has occurred, when our price to the buyer is fixed or determinable
and when collectibility of the receivable is reasonably assured. These elements
are met when title to the products is passed to the buyers, which is generally
when our product is shipped.
We
reduce
revenue in the period of sale for estimates of product returns, distributor
price adjustments and other allowances, the majority of which are related to
our
North American operations. Our reserve estimates are based upon historical
data
as well as projections of revenues, distributor inventories, price adjustments,
average selling prices and market conditions. Actual returns and adjustments
could be significantly different from our estimates and provisions, resulting
in
an adjustment to revenues.
Inventory
Reserves
Inventories
are stated at the lower of cost or market value. Cost is determined principally
by the first-in, first-out method. On an on-going basis, we evaluate our
inventory, both finished goods and raw material, for obsolescence and
slow-moving items. This evaluation includes analysis of sales levels, sales
projections, and purchases by item, as well as raw material usage related to
our
manufacturing facilities. Based upon this analysis, as well as an inventory
aging analysis, we accrue a reserve for obsolete and slow-moving inventory.
If
future demand or market conditions are different than our current estimates,
an
inventory adjustment may be required, and would be reflected in cost of goods
sold in the period the revision is made.
Accounting
for Income Taxes
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the tax jurisdictions in which
we operate. This process involves using an asset and liability approach whereby
deferred tax assets and liabilities are recorded for differences in the
financial reporting bases and tax bases of our assets and liabilities.
Significant management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities. Management continually
evaluates its deferred tax asset as to whether it is likely that the deferred
tax assets will be realized. If management ever determined that our deferred
tax
asset was not likely to be realized, a write-down of the asset would be required
and would be reflected as an expense in the accompanying period.
Allowance
for Doubtful Accounts
Management
evaluates the collectability of our accounts receivable based upon a combination
of factors, including the current business environment and historical
experience. If we are aware of a customer’s inability to meet its financial
obligations to us, we record an allowance to reduce the receivable to the amount
we reasonably believe we will be able to collect from the customer. For all
other customers, we record an allowance based upon the amount of time the
receivables are past due. If actual accounts receivable collections differ
from
these estimates, an adjustment to the allowance may be necessary with a
resulting effect on operating expense.
Impairment
of Long-Lived Assets
As
of
March 31, 2006, goodwill was $24.4 million ($19.3 million related to
the Anachip acquisition, $4.2 million related to the FabTech acquisition,
and $881,000 related to Diodes-China). We account for goodwill in accordance
with SFAS No. 142, “Goodwill
and Other Intangible Assets”,
for
which goodwill is tested for impairment at least annually. We performed the
required impairment tests of goodwill and have determined that the goodwill
is
fully recoverable.
We
assess
the impairment of long-lived assets, including goodwill, on an on-going basis
and whenever events or changes in circumstances indicate that the carrying
value
may not be recoverable. Our impairment review process is based upon (i) an
income approach from a discounted cash flow analysis, which uses our estimates
of revenues, costs and expenses, as well as market growth rates, and (ii) a
market multiples approach which measures the value of an asset through an
analysis of recent sales or offerings or comparable public entities. If ever
the
carrying value of the goodwill is determined to be less than the fair value
of
the underlying asset, a write-down of the asset will be required, with the
resulting expense charged in the period that the impairment was
determined.
Share-Based
Compensation
Effective
in January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payments” using
the modified prospective method. Under SFAS 123R, we are required to select
a
valuation technique or option-pricing model that meets the criteria as stated
in
the standard, which includes a binomial model and the Black-Scholes model.
At
the present time, the Company is continuing to use the Black-Scholes model,
consistent with prior period valuations under SFAS123. No modifications were
made to any outstanding share-options prior to the adoption of SFAS123R.
The
adoption of SFAS 123R, applying the “modified prospective method,” as elected by
the Company, requires the Company to value stock options prior to its adoption
of SFAS 123 under the fair value method and expense these amounts over the
stock
options remaining vesting period. This resulted in the Company expensing
$1,596,000 in the first quarter of fiscal 2006, which was recorded within the
cost of good sold expense, general and administrative expense and research
and
development expense on the Company’s condensed consolidated income statement. In
addition, SFAS 123R requires the Company to reflect any tax savings resulting
from tax deductions in excess of expense reflected in its financial statements
as a financing cash inflow in its statement of cash flows rather than as an
operating cash flow as in prior periods (See “Note E - Share-based Compensation”
for details). Currently, the Company’s primary type of share-based compensation
is to award stock options. The Company is evaluating its share-based
compensation programs to determine the effect of a change in share-based
compensation methodology (i.e. a change from stock option awards to restricted
stock awards, or changes the terms of share-based compensation) on the
Company.
In
addition, the Company has 330,000 restricted stock grants outstanding as of
March 31, 2006. The restricted stock grants will be recorded each quarter as
a
non-cash operating expense item. As of March 31, 2006, there was $3.7 million
of
total unrecognized compensation cost related to non-vested share-based
compensation. This cost is expected to be recognized over a weighted-average
period of 3.3 years. In the first quarter of 2006, an expense of $499,000 was
recorded. In addition to the expense, the effect of the restricted stock grants
are included in the diluted shares outstanding calculation.
Results
of Operations for the Three Months Ended March 31, 2005 and
2006
The
following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net sales and the percentage
dollar increase (decrease) of such items from period to period.
|
|
Percent
of Net Sales
|
|
Percentage
Dollar
|
|
|
|
Three
months ended March 31,
|
|
Increase
(Decrease)
|
|
|
|
2005
|
|
2006
|
|
'05
to '06
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
51.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(65.9
|
)
|
|
(67.1
|
)
|
|
54.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
34.1
|
|
|
32.9
|
|
|
45.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(15.4
|
)
|
|
(18.2
|
)
|
|
78.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
18.7
|
|
|
14.7
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense)
|
|
|
(0.3
|
)
|
|
0.8
|
|
|
(483.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
392.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
18.3
|
|
|
15.3
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(2.9
|
)
|
|
(2.3
|
)
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
15.4
|
|
|
13.0
|
|
|
27.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
14.9
|
|
|
12.8
|
|
|
28.6
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended March 31, 2006
compared to the three months ended March 31, 2005. This discussion should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report.
|
|
2005
|
|
2006
|
|
Net
sales
|
|
$
|
48,600,000
|
|
$
|
73,589,000
|
|
Net
sales
increased approximately $25.0 million for the three months ended March 31,
2006,
compared to the same period last year, due primarily to sales of products
related to the acquisition of Anachip. The 51.4% increase in net sales
represents an approximately 42.8% increase in units sold. Our average selling
prices (“ASP”) for discrete devices decreased approximately 10.2% from the first
quarter of 2005, and decreased 0.7% from the fourth quarter of 2005, due
primarily to demand induced product mix change in the quarter. ASPs for wafer
products decreased approximately 3.0% from the same period last year, however
they improved 5.0% from the fourth quarter of 2005, due primarily to market
pricing changes. ASPs for analog IC products increased approximately 16.2%
from
the previous quarter also due to a favorable market condition.
|
|
2005
|
|
2006
|
|
Cost
of goods sold
|
|
$
|
32,004,000
|
|
$
|
49,375,000
|
|
Gross
profit
|
|
$
|
16,596,000
|
|
$
|
24,214,000
|
|
Gross
profit margin percentage
|
|
|
34.1
|
%
|
|
32.9
|
%
|
Cost
of
goods sold increased approximately $17.4 million, or 54.3%, for the three months
ended March 31,
2006
compared
to the same period in 2005, primarily due to the integration of Anachip. As
a
percent of sales, cost of goods sold increased from 65.9% for the three months
ended March 31, 2005 to 67.1% for the three months ended March 31, 2006. Our
average unit cost (“AUP”) for discrete devices decreased approximately 9.4% from
the first quarter of 2005, and increased 0.4% from the fourth quarter of 2005.
AUPs for wafer products decreased approximately 3.6% in the first quarter of
2006 from the same period last year, but increased 5.2% from the fourth quarter
of 2005. AUPs for analog IC products increased approximately 3.3% from the
previous quarter. The year-over-year and sequential decreases in AUPs for
discrete products were due primarily to improved manufacturing efficiencies
and
utilization, as well as more effective cost management. Included in cost of
goods sold was $133,000 of non-cash, share-based compensation expense related
to
our manufacturing facilities.
Gross
profit increased in the first quarter of 2006 by approximately $7.6 million,
or
45.9%, compared to the three months ended March 31, 2005. Gross margin as a
percentage of net sales was at 32.9% for the first three months ended March
31,
2006, down from 34.1% for the same period of 2005. We are in the early stages
of
our analog manufacturing integration and with the addition of Anachip, we can
pursue opportunities in adjacent product categories that could expand our gross
margins.
|
|
2005
|
|
2006
|
|
Selling,
general and administrative expenses (“SG&A”)
|
|
$
|
6,692,000
|
|
$
|
11,284,000
|
|
SG&A
for the three months ended March 31, 2006 increased approximately $4.6 million,
or 68.6%, compared to the same period last year, due primarily to (i) an
approximately $1.3 million associated with non-cash, stock-based compensation
expense due to our adoption of SFAS 123R, (ii) a $296,000 expense relating
to
restricted stock grants made to Dr. Keh-Shew Lu, our President and Chief
Executive Officer, and C.H. Chen, our Vice Chairman, (iii) higher sales
commissions, wages and marketing expenses associated with the acquisition of
Anachip and increased sales, and (iv) audit and legal expenses associated with
Sarbanes-Oxley Act compliance. SG&A, as a percentage of sales, was 15.3% in
the current quarter compared to 13.8% in the prior-year quarter.
|
|
2005
|
|
2006
|
|
Research
and development expenses (“R&D”)
|
|
$
|
900,000
|
|
$
|
1,966,000
|
|
Investment
in R&D in the current quarter was $2.0 million, an increase of approximately
$1.0 million from that in the same period last year. Of the $1.0 million
increase, $763,000 reflected the impact of the acquisition of Anachip and
Diodes’ investment in developing new products in discrete, analog and mixed
signal segments, while $147,000 was associated with stock-based compensation
expense due to our adoption of SFAS 123R. R&D, as a percentage of sales, was
2.7% of first quarter 2006 sales compared to 1.9% in the same period 2005.
We
continue to seek to hire qualified engineers who fit our focus on
next-generation processes and packaging technologies. Our goal is to expand
R&D to 2-3% of revenue as we bring proprietary technology and advanced
devices to the market.
|
|
2005
|
|
2006
|
|
Interest
income (expense)
|
|
$
|
(155,000
|
)
|
$
|
594,000
|
|
Net
interest income for the three months ended March 31, 2006 was $594,000, compared
to the net interest expense of $155,000 in the same period 2005, due primarily
to interest income earned on proceeds from our public offering of equity
securities in 2005, as well as to a reduction in out total debt. Our interest
expense is primarily the result of our borrowings to finance the FabTech
acquisition, as well as the on-going investment and expansion in the
Diodes-China and Diodes-Shanghai manufacturing facilities.
|
|
2005
|
|
2006
|
|
Other
expense
|
|
$
|
42,000
|
|
$
|
207,000
|
|
Other
expense for the three months ended March 31, 2006 increased $165,000, compared
to the first quarter of 2005, due primarily to currency exchange losses of
approximately $292,000, primarily in Taiwan.
|
|
2005
|
|
2006
|
|
Income
tax provision
|
|
$
|
1,433,000
|
|
$
|
1,690,000
|
|
We
recognized income tax expense of $1.7 million for the first quarter of 2006,
resulting in an effective tax rate of 15.0%, as compared to 16.1% in the same
period last year, due primarily to an increase in profits earned in lower tax
rate jurisdictions. We continue to take advantage of available strategies to
optimize our tax rate across the jurisdictions in which we operate.
|
|
2005
|
|
2006
|
|
Minority
interest in joint venture earnings
|
|
$
|
239,000
|
|
$
|
229,000
|
|
Minority
interest in joint venture earnings represents the minority investor’s share of
the Diodes-China and Diodes-Shanghai joint venture’s income for the period. The
increase in the joint venture earnings for the three months ended March 31,
2006
is primarily the result of increased capacity utilization and manufacturing
efficiencies. The
joint
venture investment is eliminated in consolidation of our financial statements,
and the activities of Diodes-China and Diodes-Shanghai are included therein.
As
of March
31,
2006,
we
had a
95% controlling interest in the joint ventures.
Financial
Condition
Liquidity
and Capital Resources
Our
primary sources of liquidity are cash, funds from operations and borrowings
under our credit facilities. Our primary liquidity requirements have been
to
meet our inventory and capital expenditure needs. At December 31, 2005 and
March
31, 2006, our working capital was $146.7 million and $139.2 million,
respectively. We anticipate our working capital position will be sufficient
for
at least the next 12 months.
During
2005, we sold 3.2 million (stock split adjusted) shares of our Common Stock
in a
follow-on public offering, raising approximately $71.7 million (net of
commissions and expenses). We used approximately $30 million of the net proceeds
in connection with the Anachip acquisition and we
intend
to use the remaining net proceeds from this offering for working capital
and
other general corporate purposes, including acquisitions.
For
2005
and the first quarter of 2006, our capital expenditures were $19.6 million
and $11.6 million, respectively. Our capital expenditures for these periods
were primarily related to manufacturing expansion in our facilities in China
and, to a lesser extent, our wafer fabrication facility in the United States.
This was in line with our objective of meeting increased demand and investing
in
equipment to increase our manufacturing efficiencies, as well as purchases
required to bring analog production in-house. We expect to invest approximately
10-12% of our net sales for capital expenditures.
In
addition, in the first quarter of 2006, we paid $22.6 million in conjunction
with the closing of the Anachip acquisition
Discussion
of Cash Flow
Cash
and
short-term investments have decreased from $113.6 million at
December 31, 2005, to $99.5 million at March 31, 2006. The decrease from
2005 to 2006 was primarily due to the cash payment for the Anachip
acquisition.
Operating
Activities
Net
cash
provided by operating activities during the first quarter of 2006 was
$17.0 million, resulting primarily from $9.3 million of net income in
this period, as well as a $6.0 million reduction in accounts receivable.
Net
cash provided by operating activities was $11.7 million for the same period
of 2005. Net cash provided by operations increased by $5.2 million from
first quarter of 2005 to first quarter of 2006. This increase resulted primarily
from an approximately $6.8 million increase in accounts receivables, a
$2.1 million increase in our net income (from $7.2 million in 2005 to
$9.3 million in 2006) and $1.9 million in share-based compensation, offset
by
increases in inventory and deferred income taxes. We continue to closely
monitor
our credit terms with our customers, while at times providing extended terms,
primarily required by our customers in Asia and Europe.
Investing
Activities
Net
cash
used by investing activities was $35.8 million for the first quarter of
2006 compared to $2.8 million for the same period of 2005. The increase in
investing activities primary relates to increases in capital expenditures
of
$8.8 million, the acquisition of Anachip of $18.8 million (net of cash
acquired), and $5.5 million of short-term investments in municipal bonds
and
equity investments. In
April
2006, the Company signed an agreement to purchase a new building with a contract
price of approximately $6.0 million. This facility will be used to consolidate
and expand our sales, administrative, and warehousing offices in Taipei,
Taiwan.
Financing
Activities
Net
cash
used in financing activities totaled $764,000 in the first quarter of 2006
compared to $26,000 used in the first quarter of 2005. The use primarily
resulted from repayment of long-term debt in the first quarter of 2006, for
which we used $3.3 million of cash, and offset by an increase in cash provided
from the exercise of stock options (including the tax benefits) of $2.3 million
quarter-over-quarter.
Debt
instruments
On
August 29, 2005, we amended our U.S. credit arrangements with Union
Bank of California, N.A. (Union Bank). Under the second amendment to our
amended
and restated credit agreement, we now have available a revolving credit
commitment of up to $20.0 million, including a $5.0 million letter of
credit sub-facility. In addition, and in connection with this amendment,
one of
our subsidiaries, FabTech, also amended and restated a term note and related
agreement with respect to an existing term loan arrangement, which we refer
to
as the FabTech term loan. After giving effect to this amendment, the principal
amount under the FabTech term loan was increased to
$5.0 million.
The
revolving credit commitment expires on August 29, 2008. The FabTech term
loan, which amortizes monthly, matures on August 29, 2010. As of March 31,
2006, we had no amounts outstanding under our revolving credit facility,
and
there was $4.4 million outstanding under the FabTech term loan. Loans to
Diodes
Incorporated under our credit facility are guaranteed by FabTech, and in
turn,
the FabTech term loan is guaranteed by Diodes Incorporated. The purpose of
the
revolving credit facility is to provide cash for domestic working capital
purposes, and to fund permitted acquisitions.
Any
amounts under the credit facility and the FabTech term loan are collateralized
by all of Diodes Incorporated’s and FabTech’s accounts, instruments, chattel
paper, documents, general intangibles, inventory, equipment, furniture and
fixtures, pursuant to security agreements entered into by Diodes Incorporated
and FabTech in connection with these credit arrangements.
Both
amounts borrowed under the revolving credit facility and the FabTech term
loan
bear interest at LIBOR plus 1.15%. At March 31, 2006, the effective rate
under both the credit agreement and the FabTech term loan was
5.38%.
The
credit agreement contains covenants that require us to maintain a leverage ratio
not greater than 2.25 to 1.0, an interest expense coverage ratio of not less
than 2.0 to 1.0 and a current ratio of not less than 1.0 to 1.0. It also
requires us to achieve a net profit before taxes, as of the last day of each
fiscal quarter, for the two consecutive fiscal quarters ending on that date
of
not less than $1. The credit agreement permits us to pay dividends to our
stockholders to the extent that any such dividends declared or paid in any
fiscal year do not exceed an amount equal to 50% of our net profit after
taxes
for such fiscal year. However, it limits our ability to dispose of assets,
incur
additional indebtedness, engage in liquidation or merger, acquisition,
partnership or other combination (except permitted acquisitions). The credit
agreement also contains customary representations, warranties, affirmative
and
negative covenants and events of default.
The
agreements governing the FabTech term loan do not contain any financial or
negative covenants. However, they provide that a default under our credit
agreement will cause a cross-default under the FabTech term loan.
Diodes-China
and Diodes-Taiwan have available lines of credit of up to an aggregate of
$29.1 million, with a number of Chinese and Taiwanese financial
institutions. These lines of credit, except for one Taiwanese credit facility,
are collateralized by its premises, are unsecured, uncommitted and, in some
instances, may be repayable on demand. Loans under these lines of credit
bear
interest at LIBOR or similar indices plus a specified margin.
As
of
March 31, 2006, Diodes-China owed $1.8 million under a note to one of
our customers, which debt was incurred in connection with our investing in
manufacturing equipment. We repay this unsecured and interest-free note in
quarterly price concession installments, with any remaining balance due in
July
2008.
Off-Balance
Sheet Arrangements
We
do not
have any transactions, arrangements and other relationships with unconsolidated
entities that will affect our liquidity or capital resources. We have no
special
purpose entities that provided off-balance sheet financing, liquidity or
market
or credit risk support, nor do we engage in leasing, swap agreements, or
outsource of research and development services, that could expose us to
liability that is not reflected on the face of our financial
statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
Company’s exposure to financial market risk results primarily from fluctuations
in interest and currency rates. There have been no material changes to our
market risks as disclosed in our Annual Report on Form 10-K for the year
ended
December 31, 2005.
Item
4. Controls and Procedures
Our
Chief
Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Carl C. Wertz,
with
the participation of the Company's management, carried out an evaluation
of the
effectiveness of our disclosure controls and procedures pursuant to Exchange
Act
Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and
the
Chief Financial Officer believe that, as of the end of the period covered
by
this report, our disclosure controls and procedures are effective at the
reasonable assurance level in making known to them material information relating
to us (including our consolidated subsidiaries) required to be included in
this
report.
Disclosure
controls and procedures, no matter how well designed and implemented, can
provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include
the
fact that human judgment in decision-making can be faulty and that breakdowns
in
internal control can occur because of human failures such as simple errors,
mistakes or intentional circumvention of the established processes.
There
was
no change in our internal control over financial reporting, known to the
Chief
Executive Officer or the Chief Financial Officer that occurred during the
period
covered by this report that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
The
Company is, from time to time, involved in litigation incidental to the conduct
of its business. The Company does not believe it is currently a party to
any
pending litigation.
Item
1A. Risk Factors
Cautionary
Statement for Purposes of the “Safe Harbor” Provision of the Private Securities
Litigation Reform Act of 1995
Except
for the historical information contained herein, the matters addressed in
this
Quarterly Report on Form 10-Q constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We generally identify
forward-looking statements by the use of terminology such as “may,” “will,”
“could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,”
“estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such
terms. Such forward-looking statements are subject to a variety of risks
and
uncertainties, including those discussed under “Risk Factors” and elsewhere in
this Quarterly Report on Form 10-Q that could cause actual results to differ
materially from those anticipated by our management. The Private Securities
Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor”
provisions for forward-looking statements. All forward-looking statements
made
on this Quarterly Report on Form 10-Q are made pursuant to the Act.
All
forward-looking statements contained in this Quarterly Report on Form 10-Q
are
subject to, in addition to the other matters described in this Quarterly
Report
on Form 10-Q, a variety of significant risks and uncertainties. The following
discussion highlights some of these risks and uncertainties. Further, from
time
to time, information provided by us or statements made by our employees may
contain forward-looking information. There can be no assurance that actual
results or business conditions will not differ materially from those set
forth
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
For
more
detailed discussion of these factors, see the Risk Factors discussion in
Item 1A
of the Company’s most recent Form 10-K. The forward-looking statements included
in this quarterly report on Form 10-Q are made only as of the date of this
report, and the Company undertakes no obligation to update the forward-looking
statements to reflect subsequent events or circumstances.
Risks
Related To Our Business
|
Ø
|
Downturns
in the highly cyclical semiconductor industry or changes in end-market
demand could affect our operating results and financial
condition.
|
|
Ø
|
The
semiconductor business is highly competitive, and increased competition
may harm our business and our operating
results.
|
|
Ø
|
We
receive a significant portion of our net sales from a single customer.
In
addition, this customer is also our largest external supplier and
is a
related party. The loss of this customer or supplier could harm
our
business and results of
operations.
|
|
Ø
|
Delays
in initiation of production at new facilities, implementing new
production
techniques or resolving problems associated with technical equipment
malfunctions could adversely affect our manufacturing
efficiencies.
|
|
Ø
|
We
are and will continue to be under continuous pressure from our
customers
and competitors to reduce the price of our products, which could
adversely
affect our growth and profit
margins.
|
|
Ø
|
Our
customer orders are subject to cancellation or modification usually
with
no penalty. High volumes of order cancellation or reductions in
quantities
ordered could adversely affect our results of operations and financial
condition.
|
|
Ø
|
New
technologies could result in the development of new products by
our
competitors and a decrease in demand for our products, and we may
not be
able to develop new products to satisfy changes in demand, which
could
result in a decrease in net sales and loss of market
share.
|
|
Ø
|
We
may be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party technology,
which
could result in significant expense and reduction in our intellectual
property rights.
|
|
Ø
|
We
depend on third-party suppliers for timely deliveries of raw materials,
parts and equipment, as well as finished products from other
manufacturers, and our results of operations could be adversely
affected
if we are unable to obtain adequate supplies in a timely
manner.
|
|
Ø
|
If
we do not succeed in continuing to vertically integrate our business,
we
will not realize the cost and other efficiencies we anticipate
and our
ability to compete, profit margins and results of operations may
suffer.
|
|
Ø
|
Part
of our growth strategy involves identifying and acquiring companies
with
complementary product lines or customers. We may be unable to identify
suitable acquisition candidates or consummate desired acquisitions
and, if
we do make any acquisitions, we may be unable to successfully integrate
any acquired companies with our
operations.
|
|
Ø
|
We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
|
|
Ø
|
Our
products may be found to be defective and, as a result, product
liability
claims may be asserted against us, which may harm our business
and our
reputation with our customers.
|
|
Ø
|
We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
|
|
Ø
|
We
may not be able to maintain our growth or achieve future growth
and such
growth may place a strain on our management and on our systems
and
resources.
|
|
Ø
|
Our
business may be adversely affected by obsolete inventories as a
result of
changes in demand for our products and change in life cycles of
our
products.
|
|
Ø
|
If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
|
|
Ø
|
We
rely heavily on our internal electronic information and communications
systems, and any system outage could adversely affect our business
and
results of operations.
|
|
Ø
|
We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
|
|
Ø
|
If
we fail to maintain an effective system of internal controls or
discover
material weaknesses in our internal controls over financial reporting,
we
may not be able to report our financial results accurately or detect
fraud, which could harm our business and the trading price of our
Common
Stock.
|
|
Ø
|
Terrorist
attacks, or threats or occurrences of other terrorist activities
whether
in the United States or internationally may affect the markets
in which
our Common Stock trades, the markets in which we operate and our
profitability.
|
Risks
Related To Our International Operations
|
Ø
|
Our
international operations subject us to risks that could adversely
affect
our operations.
|
|
Ø
|
We
have significant operations and assets in China, Taiwan and Hong
Kong and,
as a result, will be subject to risks inherent in doing business
in those
jurisdictions, which may adversely affect our financial
performance.
|
|
Ø
|
We
are subject to foreign currency risk as a result of our international
operations.
|
|
Ø
|
We
may not continue to receive preferential tax treatment in China,
thereby
increasing our income tax expense and reducing our net
income.
|
|
Ø
|
The
distribution of any earnings of our foreign subsidiaries to the
United
States may be subject to U.S. income taxes, thus reducing our net
income.
|
Risks
Related To Our Common Stock
|
Ø
|
Variations
in our quarterly operating results may cause our stock price to
be
volatile.
|
|
Ø
|
We
may enter into future acquisitions and take certain actions in
connection
with such acquisitions that could affect the price of our Common
Stock.
|
|
Ø
|
Our
directors, executive officers and significant stockholders hold
a
substantial portion of our Common Stock, which may lead to conflicts
with
other stockholders over corporate transactions and other corporate
matters.
|
|
Ø
|
Our
early corporate records are incomplete. As a result, we may have
difficulty in assessing and defending against claims relating to
rights to
our Common Stock purporting to arise during periods for which our
records
are incomplete.
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
are
no matters to be reported under this heading.
Item
3. Defaults Upon Senior Securities
There
are
no matters to be reported under this heading.
Item
4. Submission of Matters to a Vote of Security Holders
There
are
no matters to be reported under this heading.
Item
5. Other Information
There
are
no matters to be reported under this heading.
Item
6. Exhibits
|
3.1 |
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No.
1 to the Company's Registration Statement on Form S-3 (File No.
333-127833) filed on September
8, 2005).
|
|
3.2 |
Amended
Bylaws of the Company dated August 14, 1987 (incorporated by reference
to
Exhibit 3 to
Form 10-K filed with the Commission for fiscal year ended April
30,
1988).
|
|
10.14 |
Supplementary
to the Lease Agreement dated on September 5, 2004 with Shanghai
Ding Hong
Electronic
Co., Ltd.
|
|
10.15 |
Supplementary
to the Lease Agreement dated on June 28, 2004 with Shanghai Yuan
Hao
Electronic
Co., Ltd.
|
|
10.16 |
Agreement
on Application, Construction and Transfer of Power Facilities,
dated as of
March 15, 2006,
between the Company and Shanghai Yahong Electronic Co.,
Ltd
|
|
11 |
Computation
of Earnings Per Share
|
|
31.1 |
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2 |
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIODES INCORPORATED (Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Carl C.
Wertz |
|
|
May
9,
2006
|
CARL
C. WERTZ
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Principal Financial and
Chief
Accounting Officer)
|
|
|
|
INDEX
TO EXHIBITS
|
3.1 |
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No.
1 to the Company's Registration Statement on Form S-3 (File No.
333-127833) filed on September
8, 2005).
|
|
3.2 |
Amended
Bylaws of the Company dated August 14, 1987 (incorporated by
reference to
Exhibit 3 to
Form 10-K filed with the Commission for fiscal year ended April
30,
1988).
|
|
10.14 |
Supplementary
to the Lease Agreement dated on September 5, 2004 with Shanghai
Ding Hong
Electronic
Co., Ltd.
|
|
10.15 |
Supplementary
to the Lease Agreement dated on June 28, 2004 with Shanghai Yuan
Hao
Electronic
Co., Ltd.
|
|
10.16 |
Agreement
on Application, Construction and Transfer of Power Facilities,
dated as of
March 15, 2006,
between the Company and Shanghai Yahong Electronic Co.,
Ltd
|
|
11 |
Computation
of Earnings Per Share
|
|
31.1 |
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2 |
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
|