10-Q
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 June
30, 2006
Or
o 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
|
|
|
Westlake
Village, California
|
|
91362
|
(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
o
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 o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
The
number of shares of the registrant’s Common Stock outstanding as of August 4,
2006 was 25,602,643.
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
ASSETS
|
|
December
31,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
CURRENT
ASSETS
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
73,288,000
|
|
$
|
48,915,000
|
|
Short-term
investments
|
|
|
40,348,000
|
|
|
51,417,000
|
|
Total
cash and short-term investments
|
|
|
113,636,000
|
|
|
100,332,000
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Customers
|
|
|
48,348,000
|
|
|
57,885,000
|
|
Related
parties
|
|
|
6,804,000
|
|
|
5,590,000
|
|
|
|
|
55,152,000
|
|
|
63,475,000
|
|
Less:
Allowance for doubtful receivables
|
|
|
(534,000
|
)
|
|
(670,000
|
)
|
|
|
|
54,618,000
|
|
|
62,805,000
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
24,611,000
|
|
|
43,241,000
|
|
Deferred
income taxes, current
|
|
|
2,541,000
|
|
|
3,432,000
|
|
Prepaid
expenses and other current assets
|
|
|
5,326,000
|
|
|
6,216,000
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
200,732,000
|
|
|
216,026,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, at
cost, net
|
|
|
|
|
|
|
|
of
accumulated depreciation and amortization
|
|
|
68,930,000
|
|
|
88,988,000
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non
current
|
|
|
8,466,000
|
|
|
7,540,000
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Equity
investment
|
|
|
5,872,000
|
|
|
—
|
|
Goodwill
|
|
|
5,090,000
|
|
|
24,564,000
|
|
Other
|
|
|
425,000
|
|
|
2,829,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
289,515,000
|
|
$
|
339,947,000
|
|
|
|
|
|
|
|
|
|
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,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Line
of credit
|
|
$
|
3,000,000
|
|
$
|
4,861,000
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
18,619,000
|
|
|
32,656,000
|
|
Related
parties
|
|
|
7,921,000
|
|
|
11,610,000
|
|
Accrued
liabilities
|
|
|
19,782,000
|
|
|
24,000,000
|
|
Current
portion of long-term debt
|
|
|
4,621,000
|
|
|
1,870,000
|
|
Current
portion of capital lease obligations
|
|
|
138,000
|
|
|
139,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
54,081,000
|
|
|
75,136,000
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net
of current portion
|
|
|
4,865,000
|
|
|
4,043,000
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,618,000
|
|
|
1,538,000
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST IN JOINT VENTURE
|
|
|
3,477,000
|
|
|
3,989,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
64,041,000
|
|
|
84,706,000
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
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 25,541,588
|
|
|
|
|
|
|
|
shares
issued at December 31, 2005
|
|
|
|
|
|
|
|
and
June 30, 2006, respectively
|
|
|
16,839,000
|
|
|
17,059,000
|
|
Additional
paid-in capital
|
|
|
94,664,000
|
|
|
103,078,000
|
|
Retained
earnings
|
|
|
114,659,000
|
|
|
135,356,000
|
|
|
|
|
226,162,000
|
|
|
255,493,000
|
|
Less:
Accumulated other comprehensive loss
|
|
|
(688,000
|
)
|
|
(252,000
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
225,474,000
|
|
|
255,241,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
289,515,000
|
|
$
|
339,947,000
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
50,598,000
|
|
$
|
82,712,000
|
|
$
|
99,198,000
|
|
$
|
156,301,000
|
|
Cost
of goods sold
|
|
|
33,101,000
|
|
|
55,279,000
|
|
|
65,105,000
|
|
|
104,654,000
|
|
Gross
profit
|
|
|
17,497,000
|
|
|
27,433,000
|
|
|
34,093,000
|
|
|
51,647,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and general administrative expenses
|
|
|
7,196,000
|
|
|
11,716,000
|
|
|
13,888,000
|
|
|
23,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
850,000
|
|
|
2,077,000
|
|
|
1,750,000
|
|
|
4,043,000
|
|
Loss
(gain) on disposal of fixed assets
|
|
|
—
|
|
|
—
|
|
|
(105,000
|
)
|
|
120,000
|
|
Total
operating expenses
|
|
|
8,046,000
|
|
|
13,793,000
|
|
|
15,533,000
|
|
|
27,163,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
9,451,000
|
|
|
13,640,000
|
|
|
18,560,000
|
|
|
24,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
39,000
|
|
|
1,004,000
|
|
|
43,000
|
|
|
1,738,000
|
|
Interest
expense
|
|
|
(118,000
|
)
|
|
(133,000
|
)
|
|
(277,000
|
)
|
|
(273,000
|
)
|
Other
|
|
|
12,000
|
|
|
12,000
|
|
|
(21,000
|
)
|
|
(195,000
|
)
|
|
|
|
(67,000
|
)
|
|
883,000
|
|
|
(255,000
|
)
|
|
1,270,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
9,384,000
|
|
|
14,523,000
|
|
|
18,305,000
|
|
|
25,754,000
|
|
Income
tax provision
|
|
|
(1,461,000
|
)
|
|
(2,885,000
|
)
|
|
(2,903,000
|
)
|
|
(4,575,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
7,923,000
|
|
|
11,638,000
|
|
|
15,402,000
|
|
|
21,179,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in joint venture earnings
|
|
|
(258,000
|
)
|
|
(253,000
|
)
|
|
(497,000
|
)
|
|
(482,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,665,000
|
|
$
|
11,385,000
|
|
$
|
14,905,000
|
|
$
|
20,697,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
$
|
0.45
|
|
$
|
0.69
|
|
$
|
0.81
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.41
|
|
$
|
0.62
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,628,229
|
|
|
25,521,144
|
|
|
21,478,374
|
|
|
25,434,880
|
|
Diluted
|
|
|
24,314,477
|
|
|
27,994,117
|
|
|
24,107,135
|
|
|
27,861,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
14,905,000
|
|
$
|
20,697,000
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,813,000
|
|
|
9,670,000
|
|
Minority
interest earnings
|
|
|
497,000
|
|
|
490,000
|
|
Share-based
compensation
|
|
|
358,000
|
|
|
4,085,000
|
|
Loss
(gain) on disposal of property, plant and equipment
|
|
|
(105,000
|
)
|
|
120,000
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,336,000
|
)
|
|
3,409,000
|
|
Inventories
|
|
|
(66,000
|
)
|
|
(11,516,000
|
)
|
Prepaid
expenses and others
|
|
|
1,082,000
|
|
|
(383,000
|
)
|
Deferred
income taxes
|
|
|
(1,462,000
|
)
|
|
35,000
|
|
Changes
in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
3,235,000
|
|
|
6,871,000
|
|
Accrued
liabilities
|
|
|
(1,207,000
|
)
|
|
1,242,000
|
|
Income
tax payable
|
|
|
1,223,000
|
|
|
433,000
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
21,937,000
|
|
|
35,153,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(6,845,000
|
)
|
|
(29,650,000
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
—
|
|
|
54,000
|
|
Purchase
of available-for-sale securities
|
|
|
|
|
|
(11,069,000
|
)
|
Acquisitions,
net of cash acquired
|
|
|
|
|
|
(18,957,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(6,845,000
|
)
|
|
(59,622,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments
of line of credit
|
|
|
(3,167,000
|
)
|
|
(928,000
|
)
|
Net
proceeds from the issuance of common stock
|
|
|
2,973,000
|
|
|
1,517,000
|
|
Excess
tax benefits from stock option exercises
|
|
|
2,201,000
|
|
|
3,032,000
|
|
Proceeds
from long-term debt
|
|
|
1,170,000
|
|
|
|
|
Repayments
of long-term debt
|
|
|
(4,749,000
|
)
|
|
(3,883,000
|
)
|
Repayments
of capital lease obligations
|
|
|
(79,000
|
)
|
|
(79,000
|
)
|
Management
incentive reimbursement from LSC
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by financing activities
|
|
|
(1,276,000
|
)
|
|
(341,000
|
)
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES
|
|
|
|
|
|
|
|
ON
CASH AND CASH EQUIVALENTS
|
|
|
228,000
|
|
|
437,000
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
|
|
14,044,000
|
|
|
(24,373,000
|
)
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
18,970,000
|
|
|
73,288,000
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
33,014,000
|
|
$
|
48,915,000
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2005
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
Interest
|
|
$
|
289,000
|
|
$
|
1,008,000
|
|
Income
taxes
|
|
$
|
1,627,000
|
|
$
|
1,306,000
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
Tax
benefits related to stock options
|
|
|
|
|
|
|
|
credited
to paid-in capital
|
|
$
|
2,201,000
|
|
$
|
3,032,000
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
3,456,000
|
|
$
|
(2,175,000
|
)
|
|
|
|
|
|
|
|
|
On
January 10, 2006, the Company purchased 99.81% of the capital stock
of
Anachip
|
|
|
|
|
|
|
|
Corporation
for approximately $31 million (including $5,873,000 paid in year
2005).
|
|
|
|
|
|
|
|
In
conjuction with the acquisition, liabilities were assumed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
|
|
|
$
|
47,473,000
|
|
Cash
paid for the capital stock
|
|
|
|
|
|
(28,780,000
|
)
|
Payable
due for business acquisition
|
|
|
|
|
|
(2,511,000
|
)
|
Liabilities
assumed
|
|
|
|
|
$
|
16,182,000
|
|
|
|
|
|
|
|
|
|
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 and six months
ended June 30, 2006 are not necessarily indicative of the results that may
be
expected for the year ending December 31, 2006. The condensed 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 Diodes-North America and its
subsidiaries:
Diodes
Taiwan Corporation, Ltd. (“Diodes-Taiwan”) - 100% owned
Diodes
Hong Kong Ltd. (“Diodes-Hong Kong”) - 100% owned
Anachip
Corporation (Diodes-Anachip) - 99.8% owned
Shanghai
KaiHong Electronics Co., Ltd. (“Diodes-China”) - 95% owned
Diodes
Shanghai Co., Ltd. (“Diodes-Shanghai”) - 95% owned
FabTech
Incorporated (“FabTech” or “Diodes-FabTech”) - 100% owned
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 our Taiwan 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.
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
June
30, 2006 was $688,000 and $252,000, respectively.
Total
comprehensive income for the three and six months ended June 30, 2005 and 2006
was as follows:
|
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Net
Income
|
|
$
|
7,665,000
|
|
$
|
11,385,000
|
|
$
|
14,095,000
|
|
$
|
20,697,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
206,000
|
|
|
465,000
|
|
|
228,000
|
|
|
436,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
7,871,000
|
|
$
|
11,850,000
|
|
$
|
14,323,000
|
|
$
|
21,133,000
|
|
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,
|
|
June
30,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
14,722,000
|
|
$
|
26,834,000
|
|
Work-in-progress
|
|
|
3,002,000
|
|
|
8,027,000
|
|
Raw
materials
|
|
|
9,534,000
|
|
|
13,345,000
|
|
|
|
|
27,258,000
|
|
|
48,206,000
|
|
Less:
reserves
|
|
|
(2,647,000
|
)
|
|
(4,965,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
24,611,000
|
|
$
|
43,241,000
|
|
NOTE
D - Income Tax Provision
We
recognized income tax expense of $2.9 million for the second quarter of 2006,
resulting in an effective tax rate of 19.9%, as compared to 16.6% in the same
period last year and 15.0% in the first quarter of 2006. Our higher effective
tax rate was the result of higher quarterly income in the U.S. at high tax
rates, and accrued dividend related taxes in Taiwan. 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 our foreign subsidiaries, primarily
Diodes-Hong Kong. For the six months ended June 30, 2006, we have accrued an
additional $1.0 million for taxes on a future dividend from our foreign
subsidiaries to the U.S.
Our
global presence requires us to pay income taxes in a number of jurisdictions.
In
general, earnings in the U.S. 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 Hong
Kong sales are foreign income tax-free. Earnings at Diodes-Taiwan,
Diodes-Anachip 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.
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. We currently intend to maintain this volume of exports in the
future.
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 second
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 in this zone.
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 (subject to certain qualifications of Taiwanese tax law).
We are currently evaluating the optimal year to begin this tax holiday; a
decision that is required to be made by September 20, 2006. The Taiwanese
statutory tax rate for Anachip earnings is 35%, which is reflected in the
current financial statements.
NOTE
E - Share-based Compensation
We
maintain share-based compensation plans for our Board of Directors
(“Directors”), officers, and key employees, which provide for stock options and
stock awards. 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.
Stock
Options.
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. Beginning
April 1, 2006, substantially all stock options granted vest in equal annual
installments over a four-year period and expire ten years after the grant date.
Beginning
in fiscal year 2006, we adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, “Share-Based Payments” (SFAS 123R), on a modified
prospective transition method to account for our employee stock options. Under
the modified prospective transition method, fair value of new and previously
granted but unvested stock options are recognized as compensation expense in
the
income statement, and prior period results are not restated, and thus do not
include the additional compensation expense. In the three and six months ended
June 30, 2006, operating income decreased by $1.7 million and $3.3 million,
respectively, net income decreased by $1.5 million and $2.9 million,
respectively, and diluted earnings per share were reduced by $0.04 and $0.08,
respectively. For the three and six months ended June 30, 2006, stock-based
compensation expense associated with the Company’s stock options recognized in
the income statement is as follows:
|
|
June
30, 2006
|
|
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
Selling
and administrative expense
|
|
$
|
1,441,000
|
|
$
|
2,757,000
|
|
Reseach
and development expense
|
|
$
|
146,000
|
|
$
|
293,000
|
|
Cost
of sales
|
|
$
|
133,000
|
|
$
|
266,000
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
$
|
1,720,000
|
|
$
|
3,316,000
|
|
Compensation
expense for the three and six months ended June 30, 2006 for stock options
granted during the quarter was calculated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
June
30, 2006
|
|
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
Expected
volatility
|
|
|
54.97
|
%
|
|
53.76
|
%
|
Expected
term (in years)
|
|
|
6.22
|
|
|
5.83
|
|
Risk-free
interest rate
|
|
|
4.39
|
%
|
|
4.69
|
%
|
Expected
forfeitures
|
|
|
2.56
|
%
|
|
2.56
|
%
|
Expected
volatility.
The
Company estimates expected volatility using historical volatility. Public
trading volume on options in the Company’s stock is not material. As a result,
the Company determined that utilizing an implied volatility factor would not
be
appropriate. The Company calculates historical volatility for the period that
is
commensurate with the option’s expected term assumption.
Expected
term.
The
Company has evaluated expected term based on history and exercise patterns
across its demographic population. The Company believes that this historical
data is the best estimate of the expected term of a new option. The expected
term for officers and Directors is 6.57 years, while the expected term for
all
other employees is 4.83 years.
Risk
free interest rate. The
Company estimated the risk-free interest rate based on zero-coupon
U.S. Treasury securities for a period that is commensurate with the
expected term assumption.
Forfeiture
rate. The
amount of stock-based compensation recognized during a period is based on the
value of the portion of the awards that are ultimately expected to vest as
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The term “forfeitures” is distinguished from “cancellations” or
“expirations” and represents only the unvested portion of the surrendered
option. The Company has applied an annual forfeiture rate of 2.56% to all
unvested options as of June 30, 2006. This analysis will be re-evaluated at
least annually, and the forfeiture rate will be adjusted as necessary.
Dividend
yield. The
Company historically has not paid a cash dividend; therefore this input is
not
applicable.
For
the
six months ended June 30, 2006, the Company granted stock options to
purchase 255,780 shares of the Company’s Common Stock, which vest in equal
annual installments over a three or four-year period and expire ten years from
the date of grant. Options granted in the three and six months ended
June 30, 2006 had a weighted-average grant date fair value of $17.23 and
$17.95, respectively.
The
total
intrinsic value (actual gain) of options exercised during the six months ended
June 30, 2006 was approximately $8.3 million.
At
June 30, 2006, un-amortized compensation expense related to unvested
options, net of forfeitures, was approximately $12.5 million. The weighted
average period over which compensation expense related to these options will
be
recognized is 2.4 years.
A
summary
of the stock option plans as of June 30, 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
|
|
|
256
|
|
|
34.05
|
|
|
|
|
|
|
|
Exercised
|
|
|
(283
|
)
|
|
5.35
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(47
|
)
|
|
23.95
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
4,021
|
|
$
|
12.16
|
|
|
6.7
|
|
$
|
117,723
|
|
Exercisable
at June 30, 2006
|
|
|
2,319
|
|
$
|
6.81
|
|
|
5.2
|
|
$
|
80,309
|
|
Prior
to
our adoption of SFAS 123R, Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) provided an
alternative to APB Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25), in accounting for stock-based compensation issued to employees. SFAS
123 provided for a fair value based method of accounting for employee stock
options and similar equity instruments. However, companies that continued to
account for stock-based compensation arrangements under APB 25 were required
by
SFAS 123 to disclose, in the notes to financial statements, the pro forma
effects on net income and net income per share as if the fair value based method
prescribed by SFAS 123 had been applied. Prior to our adoption of SFAS 123R,
we
accounted for stock-based compensation using the provisions of APB 25 and
presented the pro forma information required by SFAS 123 as amended by Statement
of Financial Accounting Standards No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure” (SFAS 148).
Had
the
Company accounted for stock-based compensation plans using the fair value based
accounting method described by SFAS 123R for the periods prior to fiscal year
2006, the Company’s earnings per common share, basic and diluted, for the three
and six months ended June 30, 2005, would have approximately the
following:
|
|
Three
Months
Ended
June
30,
2005
|
|
Six
Months
Ended
June
30,
2005
|
|
Net
income, as reported
|
|
$
|
7,665,000
|
|
$
|
14,905,000
|
|
Deduct:
Total stock-based compensation expense determined under fair value
based
method for all awards, net of tax benefits
|
|
|
(567,000
|
)
|
|
(1,083,000
|
)
|
Pro
forma net income
|
|
$
|
7,098,000
|
|
$
|
13,822,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
-
as reported
|
|
$
|
0.35
|
|
$
|
0.69
|
|
-
pro forma
|
|
$
|
0.33
|
|
$
|
0.65
|
|
Diluted
|
|
|
|
|
|
|
|
-
as reported
|
|
$
|
0.32
|
|
$
|
0.62
|
|
-
pro forma
|
|
$
|
0.29
|
|
$
|
0.57
|
|
Share
Grants. Restricted
stock awards and restricted stock units generally vest in equal annual
installments over a four-year period.
A
summary
of the status of the Company’s non-vested share grants as of June 30, 2005 and
June 30, 2006 are presented below:
|
|
|
|
Weighted-
Average
|
|
|
|
|
|
Weighted-
Average
|
|
Nonvested
Shares
|
|
Shares
(000)
|
|
Grant-Date
Fair
Value
|
|
Nonvested
Shares
|
|
Shares
(000)
|
|
Grant-Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at January 1, 2005
|
|
|
—
|
|
|
|
|
|
Non-vested
at January 1, 2006
|
|
|
330
|
|
$
|
17.30
|
|
Granted
|
|
|
330
|
|
$
|
17.30
|
|
|
Granted
|
|
|
193
|
|
|
33.56
|
|
Vested
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
Non-vested
at June 30, 2005
|
|
|
330
|
|
$
|
17.30
|
|
|
Non-vested
at June 30, 2006
|
|
|
523
|
|
$
|
23.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2006 and June 30, 2005, there were $770,000 and
$475,000 of total recognized compensation expense related to non-vested stock
award arrangements granted under the plans, respectively.
The
total
of unrecognized compensation expense as of June 30, 2006 and June 30, 2005
was
$9.5 million and $3.9 million, respectively.
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 Finance, 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
HsinChu, 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 4.0% and 3.7%
of total sales for the three and six months ended June 30, 2006, respectively
(2.8% for the second quarter of 2005, and 3.3% for the first quarter of 2006),
are consolidated into the domestic (North America) operations.
The
accounting policies of the operations 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.
Three
Months Ended
|
|
Far
East
|
|
North
America
|
|
Consolidated
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
56,088,000
|
|
$
|
21,554,000
|
|
$
|
77,642,000
|
|
Inter-company
sales
|
|
|
(22,815,000
|
)
|
|
(4,229,000
|
)
|
|
(27,044,000
|
)
|
Net
sales
|
|
$
|
33,273,000
|
|
$
|
17,325,000
|
|
$
|
50,598,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
51,582,000
|
|
$
|
11,423,000
|
|
$
|
63,005,000
|
|
Assets
|
|
$
|
135,414,000
|
|
$
|
50,966,000
|
|
$
|
186,380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Consolidated
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
92,734,000
|
|
$
|
31,496,000
|
|
$
|
124,230,000
|
|
Inter-company
sales
|
|
|
(34,739,000
|
)
|
|
(6,779,000
|
)
|
|
(41,518,000
|
)
|
Net
sales
|
|
$
|
57,995,000
|
|
$
|
24,717,000
|
|
$
|
82,712,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,502,000
|
|
$
|
12,485,000
|
|
$
|
88,987,000
|
|
Assets
|
|
$
|
215,516,000
|
|
$
|
124,431,000
|
|
$
|
339,947,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Consolidated
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
108,803,000
|
|
$
|
42,924,000
|
|
$
|
151,727,000
|
|
Inter-company
sales
|
|
|
(44,649,000
|
)
|
|
(7,880,000
|
)
|
|
(52,529,000
|
)
|
Net
sales
|
|
$
|
64,154,000
|
|
$
|
35,044,000
|
|
$
|
99,198,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
51,582,000
|
|
$
|
11,423,000
|
|
$
|
63,005,000
|
|
Assets
|
|
$
|
135,414,000
|
|
$
|
50,966,000
|
|
$
|
186,380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Consolidated
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
173,386,000
|
|
$
|
58,612,000
|
|
$
|
231,998,000
|
|
Inter-company
sales
|
|
|
(64,268,000
|
)
|
|
(11,429,000
|
)
|
|
(75,697,000
|
)
|
Net
sales
|
|
$
|
109,118,000
|
|
$
|
47,183,000
|
|
$
|
156,301,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,502,000
|
|
$
|
12,485,000
|
|
$
|
88,987,000
|
|
Assets
|
|
$
|
215,516,000
|
|
$
|
124,431,000
|
|
$
|
339,947,000
|
|
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
|
|
Percentage
of
|
|
|
|
ended
June 30,
|
|
net
sales
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
12,852
|
|
$
|
27,800
|
|
|
25.4
|
%
|
|
33.6
|
%
|
Taiwan
|
|
|
17,042
|
|
|
20,708
|
|
|
33.7
|
%
|
|
25.0
|
%
|
United
States
|
|
|
13,085
|
|
|
19,971
|
|
|
25.9
|
%
|
|
24.1
|
%
|
All
Others
|
|
|
7,619
|
|
|
14,233
|
|
|
15.0
|
%
|
|
17.3
|
%
|
Total
|
|
$
|
50,598
|
|
$
|
82,712
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the six months
|
|
Percentage
of
|
|
|
|
ended
June 30,
|
|
net
sales
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
25,536
|
|
|
53,369
|
|
|
25.7
|
%
|
|
34.1
|
%
|
Taiwan
|
|
|
33,606
|
|
|
38,979
|
|
|
33.9
|
%
|
|
24.9
|
%
|
United
States
|
|
$
|
25,157
|
|
$
|
37,562
|
|
|
25.4
|
%
|
|
24.0
|
%
|
All
Others
|
|
|
14,899
|
|
|
26,391
|
|
|
15.0
|
%
|
|
17.0
|
%
|
Total
|
|
$
|
99,198
|
|
$
|
156,301
|
|
|
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
|
|
$
|
(517,000
|
)
|
$
|
23,235,000
|
|
Fixed
assets/non-current
|
|
|
2,045,000
|
|
|
8,000
|
|
|
2,053,000
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
0
|
|
Patents
and trademarks
|
|
|
2,269,000
|
|
|
189,000
|
|
|
2,458,000
|
|
Computer
cost
|
|
|
246,000
|
|
|
6,000
|
|
|
252,000
|
|
Goodwill
|
|
|
19,541,000
|
|
|
(66,000
|
)
|
|
19,475,000
|
|
Total
assets acquired
|
|
|
47,853,000
|
|
|
(380,000
|
)
|
|
47,473,000
|
|
Current
liabilities
|
|
|
(16,829,000
|
)
|
|
978,000
|
|
|
(15,851,000
|
)
|
Non-current
liabilities
|
|
|
(655,000
|
)
|
|
324,000
|
|
|
(331,000
|
)
|
Total
liabilities assumed
|
|
|
(17,484,000
|
)
|
|
1,302,000
|
|
|
(16,182,000
|
)
|
Total
purchase price
|
|
$
|
30,369,000
|
|
$
|
922,000
|
|
$
|
31,291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.5 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 and six months ended June 30, 2005 as though the acquisition
had been completed as of the beginning of that reporting period. The
pro
forma information is presented for illustrative purposes and is not indicative
of future performance.
NOTE
H - Commitments
|
|
Three
months ended
June
30, 2005
|
|
|
|
Six
months ended
June
30, 2005
|
|
|
|
As
reported
|
|
Pro
forma
|
|
|
|
As
reported
|
|
Pro
forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
50,598,000
|
|
$
|
61,852,000
|
|
|
Revenue
|
|
$
|
99,198,000
|
|
$
|
121,015,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
7,665,000
|
|
|
7,843,000
|
|
|
Net
income
|
|
|
14,905,000
|
|
|
15,349,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
$
|
0.36
|
|
|
Basic
|
|
$
|
0.69
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.32
|
|
|
Diluted
|
|
$
|
0.62
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
April
2006, the Company signed an agreement to purchase a new building with a contract
price of approximately $6.0 million. This facility is used to consolidate and
expand our sales, administrative, and warehousing offices in Taipei,
Taiwan.
As of
June 30, 2006, the Company temporarily used 100% cash to purchase the building,
but plans to convert to approximately 80% bank financing.
NOTE
I - 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
J - Recently Issued Accounting Pronouncements
In
July
2006, the FASB issued FASB interpretation (FIN) No. 48, "Accounting for
Uncertainty in Income Taxes" which clarifies the accounting for uncertainty
in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes". This Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. This Interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
potential impact of this standard on its financial position and results of
operations. It is not expected to have a significant impact on the Company’s
financial statements upon adoption.
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’s discussion should be read in conjunction with the management’s
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 near Kansas City, Missouri; our sales and marketing and logistical
centers are located in Taipei, Taiwan; and 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 in 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. 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 half
of 2006
earnings, and is expected to be accretive to our full-year 2006
earnings.
|
|
Ø |
In
2005 and the first six months ended June 30, 2006, 15.3% and 24.2%,
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.
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Our
gross profit margin was 33.2% in the second quarter of 2006, compared
to
34.6% 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.
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As
of June 30, 2006, we had invested approximately $113.4 million
in our Asian manufacturing facilities. During the second quarter
of 2006,
we invested approximately $17.4 million ($27.5 million for the first
six months of 2006) primarily in our Asian manufacturing facilities.
Included in the $17.4 million invested in the second quarter was
a $6
million office building we purchased in Taipei, Taiwan. Excluding
this
non-production related $6 million building purchase, year-to-date
capital
expenditures were at approximately 13% of revenue, slightly ahead
of our
10-12% full-year estimate. Our capital expenditure objective is to
meet
increased demand by investing in equipment to increase our manufacturing
efficiencies, and to integrate the analog
business.
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During
the second quarter of 2006, the percentage of our net sales derived
from
our Asian subsidiaries was 70.1%, compared to 69.5% in the first
quarter
of 2006, 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 U.S. to
Asia.
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We
have increased our investment in research and development from $850,000,
or 1.7% of net sales in the second quarter of 2005 to $2.1 million,
or 2.5% of net sales, in the second quarter of 2006, as we completed
the
Anachip acquisition, continued investing in enhancing current product
features, and developed 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 between 2.5% and 3% of net sales as we bring additional
proprietary devices to the market.
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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 approximately $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 additional
acquisitions.
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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 22.6% of our outstanding Common Stock as of June
30, 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.
During
the three and six months ended June 30, 2006, we sold silicon wafers to LSC
totaling 5.8% and 6.5%, (9.6% in 2005 and 11.1% in 2004) of our net sales,
respectively, making LSC our largest customer. Also during the second quarter
of
2006, 12.8% (14.7% in 2005 and 17.2% in 2004) of our net 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 1.9% of our net sales, respectively, in 2004, 2005 and the second
quarter 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 six months ended June 30, 2006, we reimbursed
this entity in aggregate amounts of $190,000, $288,000 and $217,000,
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 contracts associated
with these related party transactions.
In
December 2000, we acquired a wafer foundry, FabTech, Inc., from LSC for
approximately $6.0 million cash plus $19.0 million in assumed debt (the debt
was
due primarily to LSC). 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 $375,000 in 2003, 2004, and 2005 for each
of 2002, 2003 and 2004, for amounts paid by us under these management incentive
agreements.
During
the three and six months ended June 30, 2006, we sold silicon wafers to
companies owned by Keylink International totaling 0.2% and 0.4%, respectively,
(0.6% in 2005 and 0.9% in 2004) of our net sales. Also for the three and six
months ended June 30, 2006, 2.5% and 2.6% (3.0% in 2004 and 3.5% in 2004) of
our
net sales were from discrete semiconductor products purchased from companies
owned by Keylink International, respectively. 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 2005, and the three and six months ended June 30, 2006, we
paid Keylink International an aggregate of $6.6 million, $1.7 million and
$4.0 million, respectively, with respect to these items, respectively. 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 purchased
from LSC by Anachip at the time of the acquisition. 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 purchased such
wafers from LSC at the time of the acquisition; 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, and Korean, 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.
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 Annual Report on 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
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Downturns
in the highly cyclical semiconductor industry or changes in end-market
demand could affect our operating results and financial
condition.
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The
semiconductor business is highly competitive, and increased competition
may harm our business and our operating
results.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
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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.
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We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
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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.
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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.
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If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
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We
rely heavily on our internal electronic information and communications
systems, and any system outage could adversely affect our business
and
results of operations.
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We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
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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.
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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.
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Risks
Related To Our International Operations
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Our
international operations subject us to risks that could adversely
affect
our operations.
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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.
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We
are subject to foreign currency risk as a result of our international
operations.
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We
may not continue to receive preferential tax treatment in China,
thereby
increasing our income tax expense and reducing our net
income.
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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.
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Risks
Related To Our Common Stock
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Variations
in our quarterly operating results may cause our stock price to be
volatile.
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We
may enter into future acquisitions and take certain actions in connection
with such acquisitions that could affect the price of our Common
Stock.
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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.
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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.
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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 third parties or us. 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 industries,
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:
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the
condition of the economy in general and of the semiconductor industry
in
particular;
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our
customers’ adjustments in their order
levels;
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changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
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the
termination of key supplier
relationships;
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the
rate of introduction of new products to, and acceptance by, our
customers;
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our
ability to compete effectively with our current and future
competitors;
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our
ability to enter into and renew key corporate and strategic relationships
with our customers, vendors and strategic
alliances;
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changes
in foreign currency exchange rates;
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a
major disruption of our information technology
infrastructure; and
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unforeseen
catastrophic events, such as armed conflict, terrorism, fires, typhoons
and earthquakes.
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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 near 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 $2.9 million for the second quarter of 2006,
resulting in an effective tax rate of 19.9%, as compared to 16.6% in the same
period last year. Our higher effective tax rate was the result of (i) higher
quarterly income in the U.S. at high tax rates, (ii) accrued dividend related
taxes in Taiwan. Going forward, we anticipate our tax rate to be in the
mid-to-high teens. 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 collectability 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
June 30, 2006, goodwill was $24.6 million ($19.5 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 SFAS 123. No modifications were
made to any outstanding share-options prior to the adoption of SFAS 123R.
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 and $3.3 million in the first quarter and six months ended June 30,
2006, respectively, 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). The
Company has changed its primary award type to employees from stock options
to
stock awards as an improved method of employee reward and retention. In general,
the Company extended the vesting period from three years to four years, and
reduced the number of shares subject to the award by a factor of
three.
The
Company has 523,390 restricted stock grants outstanding as of June 30, 2006.
The
restricted stock grants will be recorded each quarter as a non-cash operating
expense item. As of June 30, 2006, there was $9.5 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 3.4 years. In the
second quarter of 2006, an expense of $475,000 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 June 30, 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 June 30,
|
|
Increase
(Decrease)
|
|
|
|
2005
|
|
2006
|
|
'05
to '06
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
63.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(65.4
|
)
|
|
(66.8
|
)
|
|
67.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
34.6
|
|
|
33.2
|
|
|
56.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(15.9
|
)
|
|
(16.7
|
)
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
18.7
|
|
|
16.5
|
|
|
44.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(0.2
|
)
|
|
1.1
|
|
|
(1,202.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
0.0
|
|
|
0.0
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
18.5
|
|
|
17.6
|
|
|
54.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(2.9
|
)
|
|
(3.5
|
)
|
|
97.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
15.6
|
|
|
14.1
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
15.1
|
|
|
13.8
|
|
|
48.5
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended June 30, 2006
compared to the three months ended June 30, 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
|
|
$
|
50,598,000
|
|
$
|
82,712,000
|
|
Net
sales
increased approximately $32.1 million for the three months ended June 30, 2006,
compared to the same period last year, due primarily to sales of analog products
related to the acquisition of Anachip. The 63.5% increase in net sales
represents an approximately 42.6% increase in units sold. Our average selling
prices (“ASP”) for discrete devices decreased approximately 2.9% from the second
quarter of 2005, and decreased 1.8% from the first quarter of 2006, due
primarily to demand induced product mix changes in the quarter. ASPs for wafer
products increased approximately 5.1% from the same period last year, and they
improved 4.3% from the sequential quarter, due primarily to market pricing
changes. ASPs for analog IC products increased approximately 4.6% from the
previous quarter also due to a favorable market condition.
|
|
2005
|
|
2006
|
|
Cost
of goods sold
|
|
$
|
33,101,000
|
|
$
|
55,279,000
|
|
Gross
profit
|
|
$
|
17,497,000
|
|
$
|
27,433,000
|
|
Gross
profit margin percentage
|
|
|
34.6
|
%
|
|
33.2
|
%
|
Cost
of
goods sold increased approximately $22.2 million, or 67.0%, for the three months
ended June 30,
2006
compared
to the same period in 2005, primarily due to sales of analog products related
to
the integration of Anachip. As a percent of sales, cost of goods sold increased
from 65.4% for the three months ended June 30, 2005 to 66.8% for the three
months ended June 30, 2006. Our average unit cost (“AUP”) for discrete devices
decreased approximately 5.0% from the second quarter of 2005, and decreased
3.3%
from the first quarter of 2006. AUPs for wafer products increased approximately
8.4% in the second quarter of 2006 from the same period last year, and increased
12.0% from the first quarter of 2006. AUPs for analog IC products increased
approximately 2.4% from the previous quarter. The sequential decreases in AUPs
for discrete products were due primarily to improved manufacturing efficiencies
and utilization, as well as more effective cost management. As per SFAS 123R,
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 second quarter of 2006 by approximately $9.9 million,
or
56.8%, compared to the three months ended June 30, 2005. Gross margin as a
percentage of net sales was at 33.2% for the first three months ended June
30,
2006, compared to 34.6% for the same period of 2005, due to the Anachip
acquisition. We are in the 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
|
|
SG&A
|
|
$
|
7,196,000
|
|
$
|
11,716,000
|
|
SG&A
for the three months ended June 30, 2006 increased approximately $4.5 million,
or 62.8%, compared to the same period last year, due primarily to (i) an
approximately $1.4 million increase associated with non-cash, stock-based
compensation expense due to our adoption of SFAS 123R, (ii) higher sales
commissions, wages and marketing expenses associated with the acquisition of
Anachip and increased sales, and (iii) audit and legal expenses associated
with
Sarbanes-Oxley Act compliance. SG&A, as a percentage of sales, was 14.2% in
the current quarter, equal to the prior-year quarter. For comparable purposes,
excluding the share-based compensation, SG&A for the second quarter of 2006
would have been 12.4% of sales.
|
|
2005
|
|
2006
|
|
R&D
|
|
$
|
850,000
|
|
$
|
2,077,000
|
|
Investment
in R&D in the current quarter was $2.1 million, an increase of approximately
$1.2 million from that in the same period last year. Of the $1.2 million
increase, $670,000 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
2.5% of second quarter 2006 sales compared to 1.7% 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 2.5-3% of revenue as we bring proprietary technology and advanced
devices to the market.
|
|
2005
|
|
2006
|
|
Interest
income (expense), net
|
|
$
|
(79,000
|
)
|
$
|
871,000
|
|
Net
interest income for the three months ended June 30, 2006 was $871,000, compared
to the net interest expense of $79,000 in the same period 2005, due primarily
to
interest income earned on proceeds from our public offering of equity securities
in 2005.
|
|
2005
|
|
2006
|
|
Other
income
|
|
$
|
12,000
|
|
$
|
12,000
|
|
Other
income for the three months ended June 30, 2006 was $12,000, equal to the second
quarter of 2005. Other income primarily includes currency exchange gains or
losses, primarily in Taiwan.
|
|
2005
|
|
2006
|
|
Income
tax provision
|
|
$
|
1,461,000
|
|
$
|
2,885,000
|
|
We
recognized income tax expense of $2.9 million for the second quarter of 2006,
resulting in an effective tax rate of 19.9%, as compared to 16.6% in the same
period last year. Our higher effective tax rate was the result of higher
quarterly income in the U.S. at higher tax rates, and accrued dividend related
taxes in Taiwan. Going forward, we anticipate our tax rate to be in the
mid-to-high teens. 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
|
|
$
|
258,000
|
|
$
|
253,000
|
|
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
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 June
30,
2006,
we
had a
95% controlling interest in the joint ventures.
Results
of Operations for the Six Months Ended June 30, 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
|
|
|
|
Six
months ended June 30,
|
|
Increase
(Decrease)
|
|
|
|
2004
|
|
2005
|
|
'05
to '06
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
57.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
(65.6
|
)
|
|
(67.0
|
)
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
34.4
|
|
|
33.0
|
|
|
51.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(15.7
|
)
|
|
(17.3
|
)
|
|
74.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
18.7
|
|
|
15.7
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(0.2
|
)
|
|
0.9
|
|
|
(726.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(0.0
|
)
|
|
(0.1
|
)
|
|
828.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
18.5
|
|
|
16.5
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (provision)
|
|
|
(2.9
|
)
|
|
(2.9
|
)
|
|
57.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
15.6
|
|
|
13.6
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
15.1
|
|
|
13.3
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the six months ended June 30, 2006 compared
to the six months ended June 30, 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
|
|
$
|
99,198,000
|
|
$
|
156,301,000
|
|
Net
sales
increased approximately $57.1 million for the six months ended June 30, 2006,
compared to the same period last year, due primarily to sales of analog products
related to the acquisition of Anachip. The 57.6% increase in net sales
represents an approximately 34.8% increase in units sold. Our ASPs for discrete
devices decreased approximately 6.4% from the same six-month period last year
due primarily to demand induced product mix changes. ASPs for wafer products
increased approximately 0.8% from the same period last year, due primarily
to
more favorable market pricing.
|
|
2005
|
|
2006
|
|
Cost
of goods sold
|
|
$
|
65,105,000
|
|
$
|
104,654,000
|
|
Gross
profit
|
|
$
|
34,093,000
|
|
$
|
51,647,000
|
|
Gross
profit margin percentage
|
|
|
34.4
|
%
|
|
33.0
|
%
|
Cost
of
goods sold increased approximately $39.5 million, or 60.7%, for the six months
ended June 30, 2006 compared to the same period in 2005, primarily due to sales
of analog products related to the integration of Anachip. As a percent of sales,
cost of goods sold increased from 65.6% for the six months ended June 30, 2005
to 67.0% for the six months ended June 30, 2006. Our AUPs for discrete devices
decreased approximately 7.1% from the same six-month period of 2005, while
increasing 2.0% for wafer products from the same period last year. The
sequential decreases in AUPs for discrete products were due primarily to
improved manufacturing efficiencies and utilization. As per SFAS 123R, included
in cost of goods sold was $266,000 of non-cash, share-based compensation expense
related to our manufacturing facilities.
Gross
profit for the six months ended June 30, 2006 increased approximately $17.6
million, or 51.5%, compared to the six months ended June 30, 2005. Gross margin
as a percentage of net sales was at 33.0% for the first six months ended June
30, 2006, down from 34.4% for the same period of 2005.
|
|
2005
|
|
2006
|
|
SG&A
|
|
$
|
13,888,000
|
|
$
|
23,000,000
|
|
SG&A
for the six months ended June 30, 2006 increased approximately $9.1 million,
or
65.6%, compared to the same period last year, due primarily to (i) an
approximately $2.7 million increase associated with non-cash, stock-based
compensation expense due to our adoption of SFAS 123R, (ii) higher sales
commissions, wages and marketing expenses associated with the acquisition of
Anachip and increased sales, and (iii) audit and legal expenses associated
with
Sarbanes-Oxley Act compliance. SG&A for the current six-month period was
14.7% of sales, compared to 14.0% in the same six-month period last year. For
comparable purposes, excluding the share-based compensation, SG&A for the
second quarter of 2006 would have been 13.0% of sales.
|
|
2005
|
|
2006
|
|
R&D
|
|
$
|
1,750,000
|
|
$
|
4,043,000
|
|
Investment
in R&D during the first half of 2006 was $4.0 million, an increase of
approximately $2.3 million from the same period last year. Of the $2.3 million
increase, $1.5 million reflected the impact of the acquisition of Anachip and
Diodes’ investment in developing new products in discrete, analog and mixed
signal segments, while $293,000 was associated with stock-based compensation
expense due to our adoption of SFAS 123R. R&D, as a percentage of sales, was
2.6% for the current six-month period compared to 1.8% in the same period
2005.
|
|
2005
|
|
2006
|
|
Interest
income (expense), net
|
|
$
|
(234,000
|
)
|
$
|
1,465,000
|
|
Net
interest income for the six months ended June 30, 2006 was $1,465,000, compared
to the net interest expense of $234,000 in the same period 2005, due primarily
to interest income earned on proceeds from our public offering of equity
securities in 2005.
|
|
2005
|
|
2006
|
|
Other
income (loss)
|
|
$
|
(21,000
|
)
|
$
|
(195,000
|
)
|
Other
loss for the six months ended June 30, 2006 was $195,000, compared to $21,000
for the same period of 2005. Other loss includes currency exchange gains or
losses primarily in Taiwan.
|
|
2005
|
|
2006
|
|
Income
tax provision
|
|
$
|
2,903,000
|
|
$
|
4,575,000
|
|
We
recognized income tax expense of $4.6 million for the first six month ended
June
30, 2006, resulting in an effective tax rate of 17.8%, as compared to 15.9%
in
the same period last year. Our higher effective tax rate was the result of
higher quarterly income in the U.S. at higher tax rates, and accrued dividend
related taxes in Taiwan.
|
|
2005
|
|
2006
|
|
Minority
interest in joint venture earnings
|
|
$
|
497,000
|
|
$
|
482,000
|
|
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
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 June
30,
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
June
30, 2006, our working capital was $146.7 million and $140.9 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 $31 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 additional
acquisitions.
Capital
expenditures for the current quarter were $17.4 million (including a $6
million office building purchase in Diodes-Taiwan) and $27.5 million year
to date. 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. Excluding
this non-production related $6 million building purchase, year-to-date capital
expenditures were at approximately 13% of revenue, slightly ahead of our 10-12%
full-year estimate.
In
addition, we paid $18.9 million in conjunction with the closing of the Anachip
acquisition in January 2006.
Discussion
of Cash Flow
Cash
and
short-term investments have decreased from $113.6 million at
December 31, 2005, to $100.3 million at June 30, 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 half of 2006 was
$35.1 million, resulting primarily from $20.7 million of net income in
this period, as well as a $9.6 million in depreciation and amortization. Net
cash provided by operating activities was $21.9 million for the same period
in 2005. Net cash provided by operations increased by $13.2 million from
first half of 2005 to the first half of 2006. This increase resulted primarily
from an approximately $7.7 million decrease in accounts receivables, a
$5.8 million increase in our net income (from $14.9 million in 2005 to
$20.7 million in 2006) and $3.7 million increase in non-cash, share-based
compensation expense, 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 $59.6 million for the first half of 2006
compared to $6.8 million for the same period of 2005. The increase in
investing activities primary relates to increases in capital expenditures of
$22.8 million, including the $6 million office building purchase in Taiwan,
$11.1 million of short-term investments in municipal bonds and equity
investments, and the final acquisition payment for Anachip of $18.9 million
(net
of cash acquired).
Financing
Activities
Net
cash
used by financing activities totaled $341,000 in the first half of 2006 compared
to $1.3 million used in the first half of 2005. The use primarily resulted
from
repayment of long-term debt in the first half 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 $3.0 million year-over-year.
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, Diodes-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 borrowed 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 June 30, 2006, the effective rate
under both the credit agreement and the FabTech term loan was
6.23%.
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. As of June 30, 2006, we were in
compliance with the bank covenants.
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.
As
of
June 30, 2006, our Asia subsidiaries have available lines of credit of up to
an
aggregate of $37.5 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
June 30, 2006, Diodes-China owed $1.7 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
There
have been no material changes to our risk factors as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005.
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
The
Company submitted to a vote of its security holders at an annual meeting of
stockholders on May 17, 2006, the election of members of the Board. The
directors were each elected to serve until the 2007 annual meeting or until
their successors are elected and have qualified. The results of the tabulation
for each nominee for director of the Company is as follows:
C.H.
Chen,
Director
|
|
|
For:
Withheld:
|
|
|
13,239,892
11,026,762
|
|
|
|
|
|
|
|
|
|
Michael
R. Giordano,
Director
|
|
|
For:
Withheld:
|
|
|
13,878,448
10,388,206
|
|
|
|
|
|
|
|
|
|
Keh-Shew
Lu,
Director
|
|
|
For:
Withheld:
|
|
|
14,539,177
9,727,477
|
|
|
|
|
|
|
|
|
|
M.K.
Lu,
Director
|
|
|
For:
Withheld:
|
|
|
16,073,732
8,192,922
|
|
|
|
|
|
|
|
|
|
Shing
Mao,
Director
|
|
|
For:
Withheld:
|
|
|
22,769,370
1,497,284
|
|
|
|
|
|
|
|
|
|
Raymond
Soong,
Director
|
|
|
For:
Withheld:
|
|
|
22,057,824
2,208,830
|
|
|
|
|
|
|
|
|
|
John
M. Stich,
Director
|
|
|
For:
Withheld:
|
|
|
22,455,054
1,811,600
|
|
The
Company also submitted to a vote of its security holders at an annual meeting
of
shareholders on May 17, 2006, the ratification of the restricted grant to Dr.
Lu
of 180,000 shares of Common Stock (270,000 shares split adjusted on December
1,
2005). The result of the tabulation was 18,084,658 shares voted in favor of
the
proposal, 2,260,226 shares voted against, and 97,441 abstained from voting
on
the proposal. No broker non-votes with respect to this proposal were
received.
The
Company also submitted to a vote of its security holders at an annual meeting
of
shareholders on May 17, 2006, the amendment of Certificate of Incorporation
to
increase the authorized number of shares of Common Stock from 30,000,000 to
70,000,000. The result of the tabulation was 21,101,619 shares voted in favor
of
the proposal, 3,109,751 shares voted against, and 55,284 abstained from voting
on the proposal. No broker non-votes with respect to this proposal were
received.
The
Company also submitted to a vote of its security holders at an annual meeting
of
shareholders on May 17, 2006, various amendments of the 2001 Omnibus Equity
Incentive Plan. The result of the tabulation was 16,564,932 shares voted in
favor of the proposal, 3,797,428 shares voted against, and 79,965 abstained
from
voting on the proposal. No broker non-votes with respect to this proposal were
received.
The
Company also submitted to a vote of its security holders at an annual meeting
of
shareholders on May 17, 2006, the appointment of Moss Adams LLP as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2006. The result of the tabulation was 23,895,012 shares voted
in
favor of the proposal, 322,170 shares voted against, and 49,472 abstained from
voting on the proposal. No broker non-votes with respect to this proposal were
received.
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).
|
|
10.17 |
Agreement
on purchase of office building located in Taiwan dated April 14,
2006,
between Diode-Taiwan
and First International Computer,
Inc.
|
|
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)
|
|
|
|
Date: August
8, 2006 |
By: |
/s/ Carl
C.
Wertz |
|
|
|
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).
|
|
10.17 |
Agreement
on purchase of office building located in Taiwan dated April 14,
2006,
between Diode-Taiwan and First International Computer, Inc.
|
|
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
|
|
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|