Unassociated Document
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 September
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 x Accelerated
filer o 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 November 3,
2006 was 25,939,514.
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
ASSETS
|
|
2005
|
|
2006
|
|
CURRENT
ASSETS
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
73,288,000
|
|
$
|
53,157,000
|
|
Short-term
investments
|
|
|
40,348,000
|
|
|
56,139,000
|
|
Total
cash and short-term investments
|
|
|
113,636,000
|
|
|
109,296,000
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Customers
|
|
|
48,348,000
|
|
|
70,049,000
|
|
Related
parties
|
|
|
6,804,000
|
|
|
5,554,000
|
|
|
|
|
55,152,000
|
|
|
75,603,000
|
|
Less:
Allowance for doubtful receivables
|
|
|
(534,000
|
)
|
|
(675,000
|
)
|
|
|
|
54,618,000
|
|
|
74,928,000
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
24,611,000
|
|
|
45,767,000
|
|
Deferred
income taxes, current
|
|
|
2,541,000
|
|
|
2,565,000
|
|
Prepaid
expenses and other current assets
|
|
|
5,326,000
|
|
|
7,104,000
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
200,732,000
|
|
|
239,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, at
cost, net of
accumulated depreciation and amortization
|
|
|
68,930,000
|
|
|
89,168,000
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non
current
|
|
|
8,466,000
|
|
|
11,043,000
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Equity
investment
|
|
|
5,872,000
|
|
|
-
|
|
Goodwill
|
|
|
5,090,000
|
|
|
24,093,000
|
|
Other
|
|
|
425,000
|
|
|
2,906,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
289,515,000
|
|
$
|
366,870,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
2005
|
|
2006
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
3,000,000
|
|
$
|
-
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
18,619,000
|
|
|
37,250,000
|
|
Related
parties
|
|
|
7,921,000
|
|
|
13,215,000
|
|
Accrued
liabilities
|
|
|
19,782,000
|
|
|
27,756,000
|
|
|
|
|
|
|
|
|
|
Long-term
debt, current portion
|
|
|
4,621,000
|
|
|
1,954,000
|
|
Capital
lease obligations, current portion
|
|
|
138,000
|
|
|
141,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
54,081,000
|
|
|
80,316,000
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net
of current portion
|
|
|
4,865,000
|
|
|
3,709,000
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,618,000
|
|
|
1,508,000
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST IN JOINT VENTURE
|
|
|
3,477,000
|
|
|
4,321,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
64,041,000
|
|
|
89,854,000
|
|
|
|
|
|
|
|
|
|
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;
|
|
|
|
|
|
|
|
70,000,000
shares authorized; 25,258,119 and 25,930,914
|
|
|
|
|
|
|
|
shares
issued at December 31, 2005
|
|
|
|
|
|
|
|
and
September 30, 2006, respectively
|
|
|
16,839,000
|
|
|
17,288,000
|
|
Additional
paid-in capital
|
|
|
94,664,000
|
|
|
111,424,000
|
|
Retained
earnings
|
|
|
114,659,000
|
|
|
148,126,000
|
|
|
|
|
226,162,000
|
|
|
276,838,000
|
|
Less:
Accumulated other comprehensive gain (loss)
|
|
|
(688,000
|
)
|
|
178,000
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
225,474,000
|
|
|
277,016,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
289,515,000
|
|
$
|
366,870,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
54,200,000
|
|
$
|
92,575,000
|
|
$
|
153,398,000
|
|
$
|
248,876,000
|
|
Cost
of goods sold
|
|
|
35,323,000
|
|
|
61,879,000
|
|
|
100,428,000
|
|
|
166,532,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
18,877,000
|
|
|
30,696,000
|
|
|
52,970,000
|
|
|
82,344,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and general administrative expenses
|
|
|
7,581,000
|
|
|
11,825,000
|
|
|
21,469,000
|
|
|
34,883,000
|
|
Research
and development expenses
|
|
|
938,000
|
|
|
1,941,000
|
|
|
2,688,000
|
|
|
5,985,000
|
|
Loss
(gain) on disposal of fixed assets
|
|
|
-
|
|
|
32,000
|
|
|
(105,000
|
)
|
|
152,000
|
|
Total
operating expenses
|
|
|
8,519,000
|
|
|
13,798,000
|
|
|
24,052,000
|
|
|
41,020,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
10,358,000
|
|
|
16,898,000
|
|
|
28,918,000
|
|
|
41,324,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
23,000
|
|
|
1,069,000
|
|
|
66,000
|
|
|
2,807,000
|
|
Interest
expense
|
|
|
(188,000
|
)
|
|
(89,000
|
)
|
|
(465,000
|
)
|
|
(363,000
|
)
|
Other
|
|
|
116,000
|
|
|
(1,563,000
|
)
|
|
95,000
|
|
|
(1,699,000
|
)
|
|
|
|
(49,000
|
)
|
|
(583,000
|
)
|
|
(304,000
|
)
|
|
745,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
10,309,000
|
|
|
16,315,000
|
|
|
28,614,000
|
|
|
42,069,000
|
|
Income
tax provision
|
|
|
(1,621,000
|
)
|
|
(3,212,000
|
)
|
|
(4,523,000
|
)
|
|
(7,778,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
8,688,000
|
|
|
13,103,000
|
|
|
24,091,000
|
|
|
34,291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in joint venture earnings
|
|
|
(305,000
|
)
|
|
(333,000
|
)
|
|
(802,000
|
)
|
|
(824,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,383,000
|
|
$
|
12,770,000
|
|
$
|
23,289,000
|
|
$
|
33,467,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
0.50
|
|
$
|
1.08
|
|
$
|
1.31
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.45
|
|
$
|
0.96
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,010,235
|
|
|
25,686,913
|
|
|
21,658,863
|
|
|
25,520,156
|
|
Diluted
|
|
|
24,731,514
|
|
|
28,152,592
|
|
|
24,344,795
|
|
|
28,055,154
|
|
The
accompanying notes are an integral part of these financial statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended September
30,
|
|
|
|
2005
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,289,000
|
|
$
|
33,467,000
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,887,000
|
|
|
14,053,000
|
|
Minority
interest earnings
|
|
|
802,000
|
|
|
824,000
|
|
Share-based
compensation
|
|
|
856,000
|
|
|
5,826,000
|
|
Loss
(gain) on disposal of property, plant and equipment
|
|
|
(105,000
|
)
|
|
221,000
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,338,000
|
)
|
|
(9,017,000
|
)
|
Inventories
|
|
|
(4,182,000
|
)
|
|
(14,227,000
|
)
|
Prepaid
expenses and others
|
|
|
297,000
|
|
|
(1,493,000
|
)
|
Deferred
income taxes
|
|
|
(1,586,000
|
)
|
|
(2,601,000
|
)
|
Changes
in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
7,685,000
|
|
|
13,352,000
|
|
Accrued
liabilities
|
|
|
1,567,000
|
|
|
5,038,000
|
|
Income
tax payable
|
|
|
2,138,000
|
|
|
1,040,000
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
37,310,000
|
|
|
46,483,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(14,260,000
|
)
|
|
(34,768,000
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
54,000
|
|
Purchase
of available-for-sale securities
|
|
|
(30,002,000
|
)
|
|
(15,791,000
|
)
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
(18,411,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(44,262,000
|
)
|
|
(68,916,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments
of line of credit, net
|
|
|
(3,167,000
|
)
|
|
(5,717,000
|
)
|
Net
proceeds from the issuance of common stock
|
|
|
63,565,000
|
|
|
4,111,000
|
|
Excess
tax benefits
|
|
|
3,116,000
|
|
|
7,274,000
|
|
Proceeds
from long-term debt
|
|
|
4,509,000
|
|
|
-
|
|
Repayments
of long-term debt
|
|
|
(4,875,000
|
)
|
|
(4,125,000
|
)
|
Repayments
of capital lease obligations
|
|
|
(107,000
|
)
|
|
(107,000
|
)
|
Management
incentive reimbursement from LSC
|
|
|
375,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
63,416,000
|
|
|
1,436,000
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
|
|
|
(1,221,000
|
)
|
|
866,000
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND EQUIVALENTS
|
|
|
55,243,000
|
|
|
(20,131,000
|
)
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
18,970,000
|
|
|
73,288,000
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
74,213,000
|
|
$
|
53,157,000
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
|
|
Nine
Months Ended September
30,
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
2005
|
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
456,000
|
|
$
|
334,000
|
|
Income
taxes
|
|
$
|
2,049,000
|
|
$
|
2,142,000
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
Tax
benefits related to stock options
|
|
|
|
|
|
|
|
credited
to paid-in capital
|
|
$
|
3,116,000
|
|
$
|
7,274,000
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
1,990,000
|
|
$
|
(2,699,000
|
)
|
|
|
|
|
|
|
|
|
The
Company purchased 99.81% of capital stock of Anachip
|
|
|
|
|
|
|
|
Corporation
for $31 million (including $5.9 million paid in year
2005).
|
|
|
|
|
|
|
|
In
conjuction with the acquisition, liabilities were assumed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
|
|
|
$
|
46,274,000
|
|
Cash
paid for the capital stock
|
|
|
|
|
|
(28,067,000
|
)
|
Decrease
in payables for business acquisition
|
|
|
|
|
|
(2,445,000
|
)
|
|
|
|
|
|
|
|
|
Liabilities
assumed
|
|
|
|
|
$
|
15,762,000
|
|
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 nine months
ended September 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
Shanghai
KaiHong Technology 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 was $688,000 and accumulated
other comprehensive gain was $178,000 at December 31, 2005 and September 30,
2006, respectively. The $866,000 change was primarily a result of a $1.1 million
one-time adjustment to other expense for intercompany foreign currency exchange
losses that were incorrectly recorded directly to shareholders’ equity via other
comprehensive loss, rather than by recording to shareholders’ equity through the
income statement.
Total
comprehensive income for the three and nine months ended September 30, 2005
and
2006 was as follows:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Net
income
|
|
$
|
8,383,000
|
|
$
|
12,770,000
|
|
$
|
23,289,000
|
|
$
|
33,467,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(1,449,000
|
)
|
|
429,000
|
|
|
(1,221,000
|
)
|
|
866,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
6,934,000
|
|
$
|
13,199,000
|
|
$
|
22,068,000
|
|
$
|
34,333,000
|
|
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.
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
14,722,000
|
|
$
|
28,310,000
|
|
Work-in-progress
|
|
|
3,002,000
|
|
|
8,873,000
|
|
Raw
materials
|
|
|
9,534,000
|
|
|
13,458,000
|
|
|
|
|
27,258,000
|
|
|
50,641,000
|
|
Less:
reserves
|
|
|
(2,647,000
|
)
|
|
(4,874,000
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
24,611,000
|
|
$
|
45,767,000
|
|
NOTE
D - Income Tax Provision
We
recognized income tax expense of $3.2 million for the third quarter of 2006,
resulting in an effective tax rate of 19.8%, as compared to 15.7% in the same
period last year and 19.9% in the second 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 nine months ended September 30, 2006, we have accrued
an additional $1.6 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 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 third
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).
In the third quarter of 2006, we elected to begin this five-year tax holiday
as
of January 1, 2006.
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 nine months ended
September 30, 2006, operating income decreased by $1.6 million and $5.0 million,
respectively, net income decreased by $1.4 million and $4.3 million,
respectively, and diluted earnings per share were reduced by $0.04 and $0.13,
respectively. For the three and nine months ended September 30, 2006,
stock-based compensation expense associated with the Company’s stock options
recognized in the income statement is as follows:
|
|
September
30, 2006
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Selling
and administrative expense
|
|
$
|
1,355,000
|
|
$
|
4,112,000
|
|
Reseach
and development expense
|
|
$
|
146,000
|
|
$
|
438,000
|
|
Cost
of sales
|
|
$
|
133,000
|
|
$
|
398,000
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
$
|
1,634,000
|
|
$
|
4,948,000
|
|
Share-based
compensation expense for the three and nine months ended September 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:
|
|
September
30, 2006
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Expected
volatility
|
|
|
56.03
|
%
|
|
53.85
|
%
|
Expected
term (in years)
|
|
|
6.57
|
|
|
5.86
|
|
Risk-free
interest rate
|
|
|
5.07
|
%
|
|
4.70
|
%
|
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 5.88 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 September 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
three and nine months ended September 30, 2006, the Company granted stock
options to purchase 10,000 and 265,780
shares of the Company’s Common Stock, respectively, 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 nine months ended September 30,
2006 had a weighted-average grant date fair value of $25.12 and $18.95,
respectively.
The
total
intrinsic value (actual gain) of options exercised during the nine months ended
September 30, 2006 was approximately $21.7 million.
At
September 30, 2006, un-amortized compensation expense related to unvested
options, net of forfeitures, was approximately $11.0 million. The weighted
average period over which share-based compensation expense related to these
options will be recognized is 2.2 years.
A
summary
of the stock option plans as of September 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
|
|
|
266
|
|
|
34.33
|
|
|
|
|
|
|
|
Exercised
|
|
|
(673
|
)
|
|
6.11
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(54
|
)
|
|
24.05
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
3,634
|
|
$
|
12.51
|
|
|
6.5
|
|
$
|
110,453
|
|
Exercisable
at September 30, 2006
|
|
|
2,646
|
|
$
|
8.88
|
|
|
5.8
|
|
$
|
90,712
|
|
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 nine months ended September 30, 2005, would have approximated the
following:
|
|
Three
Months
Ended
September
30,
2005
|
|
Nine
Months Ended
September
30,
2005
|
|
Net
income, as reported
|
|
$
|
8,383,000
|
|
$
|
23,289,000
|
|
Deduct:
Total stock-based compensation expense determined under fair value
based
method for all awards, net of tax benefits
|
|
|
(824,000
|
)
|
|
(1,907,000
|
)
|
Pro
forma net income
|
|
$
|
7,559,000
|
|
$
|
21,382,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
-
as reported
|
|
$
|
0.38
|
|
$
|
1.08
|
|
-
pro forma
|
|
$
|
0.35
|
|
$
|
0.99
|
|
Diluted
|
|
|
|
|
|
|
|
-
as reported
|
|
$
|
0.34
|
|
$
|
0.96
|
|
-
pro forma
|
|
$
|
0.29
|
|
$
|
0.88
|
|
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 September 30, 2005
and September 30, 2006 are presented below:
Nonvested
Shares
|
|
Shares
(000)
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2005
|
|
|
—
|
|
|
—
|
|
Granted
|
|
|
330
|
|
$
|
17.30
|
|
Vested
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Nonvested
at September 30, 2005
|
|
|
330
|
|
$
|
17.30
|
|
Nonvested
Shares
|
|
Shares
(000)
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2006
|
|
|
330
|
|
$
|
17.30
|
|
Granted
|
|
|
204
|
|
|
33.96
|
|
Vested
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Nonvested
at September 30, 2006
|
|
|
534
|
|
$
|
23.66
|
|
During
the nine months ended September 30, 2006 and September 30, 2005, there were
$878,000 and $856,000 of total recognized share-based compensation expense
related to non-vested stock award arrangements granted under the plans,
respectively.
The
total
of unrecognized share-based compensation expense as of September 30, 2006 and
September 30, 2005 was $9.8 million and $4.9 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 3.2% and 3.5%
of total sales for the three and nine months ended September 30, 2006,
respectively (2.7% for the third quarter of 2005, and 2.6% for the nine months
ended September 30, 2005), 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 September
30, 2005
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
62,622,000
|
|
$
|
23,229,000
|
|
$
|
85,851,000
|
|
Inter-company
sales
|
|
|
(26,460,000
|
)
|
|
(5,191,000
|
)
|
|
(31,651,000
|
)
|
Net
sales
|
|
$
|
36,162,000
|
|
$
|
18,038,000
|
|
$
|
54,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
53,601,000
|
|
$
|
11,279,000
|
|
$
|
64,880,000
|
|
Assets
|
|
$
|
155,330,000
|
|
$
|
109,237,000
|
|
$
|
264,567,000
|
|
Three
Months Ended September
30, 2006
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
113,717,000
|
|
$
|
30,636,000
|
|
$
|
144,353,000
|
|
Inter-company
sales
|
|
|
(46,559,000
|
)
|
|
(5,219,000
|
)
|
|
(51,778,000
|
)
|
Net
sales
|
|
$
|
67,158,000
|
|
$
|
25,417,000
|
|
$
|
92,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,161,000
|
|
$
|
13,007,000
|
|
$
|
89,168,000
|
|
Assets
|
|
$
|
227,454,000
|
|
$
|
139,416,000
|
|
$
|
366,870,000
|
|
Nine
Months Ended September
30, 2005
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
171,425,000
|
|
$
|
66,153,000
|
|
$
|
237,578,000
|
|
Inter-company
sales
|
|
|
(71,108,000
|
)
|
|
(13,072,000
|
)
|
|
(84,180,000
|
)
|
Net
sales
|
|
$
|
100,317,000
|
|
$
|
53,081,000
|
|
$
|
153,398,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
53,601,000
|
|
$
|
11,279,000
|
|
$
|
64,880,000
|
|
Assets
|
|
$
|
155,330,000
|
|
$
|
109,237,000
|
|
$
|
264,567,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September
30, 2006
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
287,102,000
|
|
$
|
89,248,000
|
|
$
|
376,350,000
|
|
Inter-company
sales
|
|
|
(110,825,000
|
)
|
|
(16,649,000
|
)
|
|
(127,474,000
|
)
|
Net
sales
|
|
$
|
176,277,000
|
|
$
|
72,599,000
|
|
$
|
248,876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,161,000
|
|
$
|
13,007,000
|
|
$
|
89,168,000
|
|
Assets
|
|
$
|
227,454,000
|
|
$
|
139,416,000
|
|
$
|
366,870,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information
Revenues
were derived from (invoiced to) customers located in the following countries.
“All Others” represents countries with less than 20% of total revenues
each.
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the three months
|
|
Percentage
of
|
|
|
|
ended
September 30,
|
|
net
sales
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
$
|
16,383
|
|
$
|
35,014
|
|
|
30.2
|
%
|
|
37.8
|
%
|
China
|
|
|
17,318
|
|
|
24,840
|
|
|
32.0
|
%
|
|
26.8
|
%
|
United
States
|
|
|
13,377
|
|
|
20,038
|
|
|
24.7
|
%
|
|
21.6
|
%
|
All
Others
|
|
|
7,122
|
|
|
12,683
|
|
|
13.1
|
%
|
|
13.8
|
%
|
Total
|
|
$
|
54,200
|
|
$
|
92,575
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the nine months
|
|
Percentage
of
|
|
|
|
ended
September 30,
|
|
net
sales
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
42,854
|
|
$
|
78,209
|
|
|
27.9
|
%
|
|
31.4
|
%
|
Taiwan
|
|
|
49,989
|
|
|
73,993
|
|
|
32.6
|
%
|
|
29.7
|
%
|
United
States
|
|
|
38,534
|
|
|
57,600
|
|
|
25.1
|
%
|
|
23.1
|
%
|
All
Others
|
|
|
22,021
|
|
|
39,074
|
|
|
14.4
|
%
|
|
15.8
|
%
|
Total
|
|
$
|
153,398
|
|
$
|
248,876
|
|
|
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 a 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
|
|
$
|
(1,121,000
|
)
|
$
|
22,631,000
|
|
Fixed
assets/non-current
|
|
|
2,045,000
|
|
|
(46,000
|
)
|
|
1,999,000
|
|
Intangible
assets
|
|
|
|
|
|
|
|
|
0
|
|
Patents
and trademarks
|
|
|
2,269,000
|
|
|
125,000
|
|
|
2,394,000
|
|
Computer
cost
|
|
|
246,000
|
|
|
0
|
|
|
246,000
|
|
Goodwill
|
|
|
19,541,000
|
|
|
(537,000
|
)
|
|
19,004,000
|
|
Total
assets acquired
|
|
|
47,853,000
|
|
|
(1,579,000
|
)
|
|
46,274,000
|
|
Current
liabilities
|
|
|
(16,829,000
|
)
|
|
1,369,000
|
|
|
(15,460,000
|
)
|
Non-current
liabilities
|
|
|
(655,000
|
)
|
|
353,000
|
|
|
(302,000
|
)
|
Total
liabilities assumed
|
|
|
(17,484,000
|
)
|
|
1,722,000
|
|
|
(15,762,000
|
)
|
Total
purchase price
|
|
$
|
30,369,000
|
|
$
|
143,000
|
|
$
|
30,512,000
|
|
Purchase
adjustments primarily relate to acquisition costs and refinement to estimated
fair values of assets acquired and liabilities assumed.
The
acquired intangible assets include patents and trademarks of $2.4 million with
an approximately 10-year weighted-average useful life, and computer costs of
$246,000 with a weighted-average useful life of approximately 3-7 years. The
recorded goodwill was assigned primarily to the analog IC segment.
The
following unaudited table summarizes the supplemental pro forma information
for
the three months and nine months ended September 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.
|
|
Three
months ended
September
30, 2005
|
|
|
|
As
reported
|
|
Pro
forma
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
54,200,000
|
|
$
|
67,737,000
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
8,383,000
|
|
|
9,575,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.39
|
|
|
|
Nine
months ended September 30, 2005
|
|
|
|
As
reported
|
|
Pro
forma
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
153,398,000
|
|
$
|
188,844,000
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
23,289,000
|
|
|
24,943,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.08
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.96
|
|
$
|
1.02
|
|
NOTE
H - Commitments
In
April
2006, the Company signed an agreement to purchase a new building with a contract
price of approximately $6.0 million. This facility is used to consolidate and
expand our sales, administrative, and warehousing offices in Taipei,
Taiwan.
As of
September 30, 2006, the Company had temporarily used all cash to purchase the
building, but subsequently converted it to approximately 80% bank financing
in
October 2006.
NOTE
I - Adjustments to Share-Based and Other Expense
Management
believes two errors existed in our accounting treatment for certain transactions
related to prior reporting periods. In consideration of Staff Accounting
Bulletin No. 108, management assessed the impact of the following errors and
determined the errors were immaterial, and did not, individually and in the
aggregate, materially impact the consolidated financial position, net income
or
earnings per share for any of the affected annual and quarterly results: (i)
an
overstatement of operating expense for the year ended December 31, 2005 in
the
amount of $0.8 million relating to the expensing of restricted share grants
resulted when we incorrectly marked-to-market the quarterly share grant expense
rather than fixing the expense based on the market price of our common stock
on
the date the award was granted, and (ii) an understatement of other expense
in
the amounts of $0.1 million, $0.1 million, $0.2 million, and $0.7 million for
the years ended December 31, 2002, 2003, 2004, and 2005, respectively, which
arose when we incorrectly assessed the long-term nature of our intercompany
accounts, and eliminated intercompany foreign currency exchange losses by
recording the losses directly to shareholders’ equity via other comprehensive
loss, rather than recording to shareholders’ equity through the income
statement. In the quarter ended September 30, 2006, we made a one-time
adjustment to the relevant accounts, and the tax adjusted net result was a
decrease to net income of approximately $0.6 million.
NOTE
J - Subsequent Events
In
October 2006, the Company issued $230 million in aggregate principal convertible
senior notes due on October 1, 2026. The notes will pay interest semiannually
at
a rate of 2.25% per annum, with a 39.68% conversion premium, and with any
conversion premium redeemable into cash and/or shares of common stock at the
Company’s option. The pre-tax net investment interest income to the Company, at
current market rates, is projected to be approximately $5.0 to $5.5 million
per
year.
On
October 24, 2006, the Company signed an agreement to purchase the net assets
of
APD Semiconductor, a privately held U.S.-based fabless discrete semiconductor
company. The
asset
acquisition included a $7.0 million payment for patents, technology, and
trademarks, and approximately $1.0 million for net working capital, which is
in
addition to a potential earnout provision. The
acquisition was completed on November 3, 2006. The Company is in the process
of
obtaining third-party valuations of certain intangible assets to define the
allocation of aggregate purchase cost.
NOTE
K - 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
L - Recently Issued Accounting Pronouncements
In
September 2006, Financial Accounting Standards Board (“FASB”) issued
FAS 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
Amendment of FASB Statements No. 87, 88, 106 and 132(R)
("FAS
158"). FAS 158 requires an employer that is a business entity and sponsors
one
or more single employer benefit plans to (1) recognize the funded
status of the benefit in its statement of financial position, (2) recognize
as a
component of other comprehensive income, net of tax, the gains or
losses
and prior service costs or credits that arise during the period, but are not
recognized as components of net periodic benefit cost, (3) measure defined
benefit plan assets and obligations as of the date of the employer's fiscal
year
end statement of financial position and (4) disclose in the notes to
financial statements additional information about certain effects on net
periodic benefit cost for the next fiscal year that arise from
delayed recognition
of the gains or losses, prior service costs on credits, and transition asset
or
obligations. We do not expect FAS 158 to have a material impact on our
consolidated financial statements.
In
September 2006, the FASB issued FAS 157, Fair
Value Measurements
(“FAS
157”). FAS 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability
and
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would
be
separately disclosed by level within the fair value hierarchy. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years, with early
adoption permitted. The Company has not yet determined the effect, if any,
that
the implementation of FAS 157 will have on our consolidated results of
operations or financial condition.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(“SAB
108”). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The SEC staff believes that registrants
should quantify errors using both a balance sheet and an income statement
approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for the Company’s fiscal year
ending December 31, 2006. We do not expect SAB 108 to have a material impact
on
our consolidated financial statements.
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 consolidated financial position and
results of operations. It is not expected to have a significant impact on the
Company’s consolidated financial statements upon adoption.
In
May
2005, the Financial Accounting Standards Board (FASB) issued FAS 154,
“Accounting Changes and Error Corrections, A Replacement of APB Opinion No.
20
and FASB Statement No. 3.” FAS 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. FAS 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. FAS 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 affected by a change in accounting principle. FAS 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 consolidated financial
statements from the adoption of this consensus.
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 Annual Report on Form 10-K for the fiscal
year-ended December 31, 2005 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 focusing 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:
· |
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;
|
· |
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;
|
· |
establishing
our sales and marketing organization in Europe commencing in 2002;
and
|
· |
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:
· |
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.
|
· |
As
part of our growth strategy, in January 2006 we acquired Anachip
Corporation, 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 nine months of 2006 earnings,
and
is expected to be accretive to our full-year 2006
earnings.
|
· |
In
2005 and the nine months ended September 30, 2006, 15.3% and 26.2%,
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.
|
· |
Our
gross profit margin was 33.2% in the third quarter of 2006, compared
to
34.8% 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.
|
· |
As
of September 30, 2006, we had invested approximately
$117.3 million in our Asian manufacturing facilities. For the three
and nine months ended September 30, 2006, we invested approximately
$4.9 million and $32.4 million, respectively, in capital expenditures,
primarily in our Asian manufacturing facilities. Excluding our
non-production related $6.0 million Taiwan building purchase, year-to-date
capital expenditures were at approximately 10.6% of revenue. Our
full-year
capital expenditure estimate is at 10-12% of our total revenue. Our
capital expenditure objective is to meet increased demand by investing
in
equipment to increase our manufacturing efficiencies, and to integrate
the
analog business.
|
· |
During
the third quarter of 2006, the percentage of our net sales derived
from
our Asian subsidiaries was 72.5%, compared to 70.1% in the second
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 as a result of our customers’ continuing to shift their
manufacturing of electronic products from the U.S. to
Asia.
|
· |
We
have increased our investment in research and development from $938,000,
or 1.7% of net sales in the third quarter of 2005 to $1.9 million, or
2.1% of net sales, in the third 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 and
analog
processes and packaging technologies. Our goal is to expand research
and
development expenses to between 2.5% and 3.0% of net sales as we
bring
additional proprietary devices to the
market.
|
· |
During
2005, we sold 3.2 million (split adjusted) shares of our Common Stock
in a
follow-on public offering, raising approximately $72.0 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.
|
· |
On
November 3, 2006, we completed the agreement to purchase the assets
of APD
Semiconductor, a privately held U.S.-based fabless discrete semiconductor
company. Headquartered in Redwood City, California, APD’s main product
focus is its patented and trademarked Super Barrier RectifierTM
technology. The
asset acquisition included a $7 million payment for patents, technology,
and trademarks, and approximately $1 million for net working capital,
which is in addition to a potential earnout provision. APD
revenue is forecasted to be approximately $2.0 million for 2006.
For 2007,
we project the revenue generated from the APD product line to exceed
the
purchase price, and that the acquisition will be accretive
to
our bottom-line. The APD acquisition is aligned with our strategy
of
strengthening our technology leadership in the discrete semiconductor
market and expanding our product capabilities across important segments
of
our end-markets.
|
· |
On
October 5, 2006, we issued $230 million in aggregate principal convertible
senior notes due on October 1, 2026. The
notes pay interest semiannually at a rate of 2.25% per annum. The
notes
will be convertible, in certain circumstances, into cash up to the
principal amount, and any conversion value above the principal amount
will
be redeemable, at our option, into cash or shares of Common Stock,
at an
initial conversion rate of 17.0946 shares per $1,000 principal amount
of
notes (which represents an initial conversion price of $58.50 per
share).
The initial conversion price represents a 39.68% conversion premium,
based
on the last reported sale price of $41.88 of Company’s Common Stock on
October 5, 2006. The
Company expects this transaction to be accretive to earnings per
share
given the current short-term interest environment and intends to
use the
net proceeds from this offering for working capital and other general
corporate purposes, including acquisitions.
|
Related
Parties
We
conduct business with two related party companies, Lite-On Semiconductor
Corporation (“LSC”) (and its subsidiaries and affiliates) and Keylink
International (formerly Xing International) (and its subsidiaries). LSC is
our
largest stockholder and owned 22.3% of our outstanding Common Stock as of
September 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 Directors 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 nine months ended September 30, 2006, we sold silicon wafers
to
LSC totaling 6.2% and 6.4%, (9.6% in 2005 and 11.1% in 2004) of our net sales,
respectively, making LSC our largest customer. Also for the three and nine
months ended September 30, 2006, 13.1% and 13.4% (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 2.6% of our net sales, respectively,
in 2004, 2005 and the third 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 the nine months ended
September 30, 2006, we reimbursed this entity in aggregate amounts of $190,000,
$288,000 and $313,000, 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 our 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 nine months ended September 30, 2006, we sold silicon wafers
to
companies owned by Keylink International totaling 0.6% and 0.4%, respectively,
(0.6% in 2005 and 0.9% in 2004) of our net sales. Also for the three and nine
months ended September 30, 2006, 2.2% and 2.5% (3.0% in 2005 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 nine months ended September
30, 2006, we paid Keylink International an aggregate of $6.6 million, $2.2
million and $6.2 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
our 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 “Risks Related To Our Business”
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
· |
Downturns
in the highly cyclical semiconductor industry or changes in end-market
demand could affect our operating results and financial
condition.
|
· |
The
semiconductor business is highly competitive, and increased competition
may harm our business and our operating
results.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
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.
|
· |
We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
|
· |
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.
|
· |
We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
|
· |
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.
|
· |
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.
|
· |
If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
|
· |
We
rely heavily on our internal electronic information and communications
systems, and any system outage could adversely affect our business
and
results of operations.
|
· |
We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
|
· |
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.
|
· |
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.
|
· |
We
currently have a significant amount of debt following our convertible
senior notes offering. Our substantial indebtedness could adversely
affect
our business, financial condition and results of operations and our
ability to meet our payment obligations under the notes and our other
debt.
|
Risks
Related To Our International Operations
· |
Our
international operations subject us to risks that could adversely
affect
our operations.
|
· |
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.
|
· |
We
are subject to foreign currency risk as a result of our international
operations.
|
· |
We
may not continue to receive preferential tax treatment in China,
thereby
increasing our income tax expense and reducing our net
income.
|
· |
The
distribution of any earnings of our foreign subsidiaries to the United
States may be subject to U.S. income taxes, thus reducing our net
income.
|
Risks
Related To Our Common Stock
· |
Variations
in our quarterly operating results may cause our stock price to be
volatile.
|
· |
We
may enter into future acquisitions and take certain actions in connection
with such acquisitions that could affect the price of our Common
Stock.
|
· |
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.
|
· |
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.
|
· |
Conversion
of our convertible senior notes will dilute the ownership interest
of
existing shareholders, including holders who had previously converted
their notes.
|
Financial
Operations Overview
Net
Sales
We
generate a substantial portion of our net sales through the sale of discrete
and
analog 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:
· |
the
condition of the economy in general and of the semiconductor industry
in
particular;
|
· |
our
customers’ adjustments in their order
levels;
|
· |
changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
|
· |
the
termination of key supplier
relationships;
|
· |
the
rate of introduction of new products to, and acceptance by, our
customers;
|
· |
our
ability to compete effectively with our current and future
competitors;
|
· |
our
ability to enter into and renew key corporate and strategic relationships
with our customers, vendors and strategic
alliances;
|
· |
changes
in foreign currency exchange rates;
|
· |
a
major disruption of our information technology
infrastructure; and
|
· |
unforeseen
catastrophic events, such as armed conflict, terrorism, fires, typhoons
and earthquakes.
|
Cost
of Goods Sold
Cost
of
goods sold includes manufacturing costs for our semiconductor products and
our
wafers. These costs include raw materials used in our manufacturing processes
as
well as the labor costs and overhead expenses. Cost of goods sold is also
impacted by yield improvements, capacity utilization and manufacturing
efficiencies. In addition, cost of goods sold includes the cost of products
that
we purchase from other manufacturers and sell to our customers. Cost of goods
sold is also affected by inventory obsolescence if our inventory management
is
not efficient.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses relate primarily to compensation and
associated expenses for personnel in general management, sales and marketing,
information technology, engineering, human resources, procurement, planning
and
finance, and sales commissions, as well as outside legal, accounting and
consulting expenses, share-based compensation expenses, and other operating
expenses. We expect our selling, general and administrative expenses to increase
in absolute dollars as we hire additional personnel and expand our sales,
marketing and engineering efforts and information technology
infrastructure.
Research
and Development Expenses
Research
and development expenses consist of compensation and associated costs of
employees engaged in research and development projects, as well as materials
and
equipment used for these projects. Research and development expenses are
primarily associated with our wafer facility 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 $3.2 million for the third quarter of 2006,
resulting in an effective tax rate of 19.7%, as compared to 15.7% in the same
period last year. Our higher effective tax rate was primarily the result of
higher quarterly income in the U.S. at high tax rates. Going forward, we
anticipate our tax rate to be comparable to that of the third quarter. 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
September 30, 2006, goodwill was $24.1 million ($19.0 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 $5.0 million in the third quarter and nine months ended September
30, 2006, respectively, which was recorded within the cost of goods 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 533,600 restricted stock grants outstanding as of September 30,
2006. The restricted stock grants will be recorded each quarter as a non-cash
operating expense item. As of September 30, 2006, there was $9.8 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 3.1 years. In the third quarter of 2006, an expense of $107,000 was
recorded. In addition to the expense, the effect of the restricted stock grants
are included in the diluted shares outstanding calculation.
Adjustments
to Share-Based and Other Expense
Management
believes two errors existed in our accounting treatment for certain transactions
related to prior reporting periods. In consideration of Staff Accounting
Bulletin No. 108, management assessed the impact of the following errors and
determined the errors were immaterial, and did not, individually and in the
aggregate, materially impact the financial position, net income or earnings
per
share for any of the affected annual and quarterly results: (i) an overstatement
of operating expense for the year ended December 31, 2005 in the amount of
$0.8
million relating to the expensing of restricted share grants resulted when
we
incorrectly marked-to-market the quarterly share grant expense rather than
fixing the expense based on the market price of our common stock on the date
the
award was granted, and (ii) an understatement of other expense in the amounts
of
$0.1 million, $0.1 million, $0.2 million, and $0.7 million for the years ended
December 31, 2002, 2003, 2004, and 2005, respectively, which arose when we
incorrectly assessed the long-term nature of our intercompany accounts, and
eliminated intercompany foreign currency exchange losses by recording the losses
directly to shareholders’ equity via other comprehensive loss, rather than
recording to shareholders’ equity through the income statement. In the quarter
ended September 30, 2006, we made a one-time adjustment to the relevant
accounts, and the tax adjusted net result was a decrease to net income of
approximately $0.6 million.
Results
of Operations for the Three Months Ended September 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
Three
months ended September 30,
|
|
Percentage
Dollar
Increase
(Decrease)
|
|
|
|
2005
|
|
2006
|
|
'05
to '06
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
70.8
|
%
|
Cost
of goods sold
|
|
|
(65.2
|
)
|
|
(66.8
|
)
|
|
75.2
|
|
Gross
profit
|
|
|
34.8
|
|
|
33.2
|
|
|
62.6
|
|
Operating
expenses
|
|
|
(15.7
|
)
|
|
(14.9
|
)
|
|
62.0
|
|
Operating
income
|
|
|
19.1
|
|
|
18.3
|
|
|
63.1
|
|
Interest
expense, net
|
|
|
(0.3
|
)
|
|
1.1
|
|
|
(693.9
|
)
|
Other
income
|
|
|
0.2
|
|
|
(1.7
|
)
|
|
(1,447.4
|
)
|
Income
before taxes and minority interest
|
|
|
19.0
|
|
|
17.7
|
|
|
58.3
|
|
Income
tax provision
|
|
|
(3.0
|
)
|
|
(3.5
|
)
|
|
98.1
|
|
Income
before minority interest
|
|
|
16.0
|
|
|
14.3
|
|
|
50.8
|
|
Minority
interest
|
|
|
(0.6
|
)
|
|
(0.4
|
)
|
|
9.2
|
|
Net
income
|
|
|
15.4
|
|
|
13.8
|
|
|
52.3
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended September 30, 2006
compared to the three months ended September 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
|
|
$
|
54,200,000
|
|
$
|
92,575,000
|
|
Net
sales
increased approximately $38.4 million for the three months ended September
30,
2006, compared to the same period last year, due primarily to sales of analog
products related to the acquisition of Anachip. The 70.8% increase in net sales
represents an approximately 46.1% increase in units sold. Our average selling
prices (“ASP”) for discrete devices decreased approximately 1.7% from the third
quarter of 2005, and decreased 0.5% from the first quarter of 2006, due
primarily to demand induced product mix changes in the quarter. ASPs for wafer
products however, increased approximately 12.4% from the same period last year,
and improved 0.7% sequentially, due primarily to market price changes. ASPs
for
analog IC products declined approximately 3.7% from the previous quarter due
primarily to product mix changes.
|
|
2005
|
|
2006
|
|
Cost
of goods sold
|
|
$
|
35,323,000
|
|
$
|
61,879,000
|
|
Gross
profit
|
|
$
|
18,877,000
|
|
$
|
30,696,000
|
|
Gross
profit margin percentage
|
|
|
34.8
|
%
|
|
33.2
|
%
|
Cost
of
goods sold increased approximately $26.6 million, or 75.2%, for the three months
ended September 30,
2006
compared
to the same period in 2005, primarily due to sales of analog products related
to
the integration of Anachip at lower margins. As a percent of sales, cost of
goods sold increased from 65.2% for the three months ended September 30, 2005
to
66.8% for the three months ended September 30, 2006. Our average unit cost
(“AUP”) for discrete devices decreased approximately 2.3% from the third quarter
of 2005, but increased 3.4% from the second quarter of 2006. AUPs for wafer
products increased approximately 15.1% in the third quarter of 2006 from the
same period last year, but decreased 4.2% from the second quarter of 2006.
AUPs
for analog IC products decreased approximately 3.4% from the previous quarter.
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 $133,000 of non-cash, stock option compensation
expense related to our manufacturing facilities.
Gross
profit increased in the third quarter of 2006 by approximately $11.8 million,
or
62.6%, compared to the three months ended September 30, 2005. Gross margin,
as a
percentage of net sales, decreased to 33.2% for the three months ended September
30, 2006, compared to 34.8% for the same period of 2005, due to sales of analog
product.
|
|
2005
|
|
2006
|
|
SG&A
|
|
$
|
7,581,000
|
|
$
|
11,825,000
|
|
SG&A
for the three months ended September 30, 2006 increased approximately $4.2
million, or 56.0%, compared to the same period last year, due primarily to
(i)
an approximately $1.4 million increase in non-cash, stock option 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, legal and consulting expenses associated with
Sarbanes-Oxley Act compliance, as well as our IT infrastructure. SG&A, as a
percentage of sales, was 12.8% in the current quarter, down from 14.0% in the
prior-year quarter, due primarily to the adjustment for the overstatement of
restricted share grant expense recorded in 2005. For comparable purposes,
excluding the share-based compensation, SG&A for the third quarter of 2006
would have been 11.3% of sales.
|
|
2005
|
|
2006
|
|
R&D
|
|
$
|
938,000
|
|
$
|
1,941,000
|
|
Investment
in R&D in the current quarter was $1.9 million, an increase of approximately
$1.0 million from that in the same period last year. Of the $1.0 million
increase, $586,000 reflected the impact of the acquisition of Anachip and
Diodes’ investment in developing new products in discrete, analog and mixed
signal segments, while $146,000 was associated with stock option compensation
expense due to our adoption of SFAS 123R. R&D, as a percentage of sales, was
2.1% of third quarter 2006 sales compared to 1.7% in the same period 2005.
|
|
2005
|
|
2006
|
|
Interest
income (expense), net
|
|
$
|
(165,000
|
)
|
$
|
980,000
|
|
Net
interest income for the three months ended September 30, 2006 was $980,000,
compared to the net interest expense of $165,000 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 (expense)
|
|
$
|
116,000
|
|
$
|
(1,563,000
|
)
|
Other
expense for the three months ended September 30, 2006 was $1,563,000, compared
to other income of $116,000 in the third quarter of 2005. Included in other
expense for the third quarter of 2006 was an approximate $1.1 million one-time
adjustment due to the understatement of intercompany currency exchange losses
at
our Taiwan subsidiary for the years ended December 2002 through
2005.
|
|
2005
|
|
2006
|
|
Income
tax provision
|
|
$
|
1,621,000
|
|
$
|
3,212,000
|
|
We
recognized income tax expense of $3.2 million for the third quarter of 2006,
resulting in an effective tax rate of 19.7%, as compared to 15.7% in the same
period last year. Our higher effective tax rate is primarily 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
|
|
$
|
305,000
|
|
$
|
333,000
|
|
Minority
interest in joint venture earnings represented the minority investor’s share of
the earnings of Diodes-China, Diodes-Shanghai and Anachip’s for the period.
The
joint
venture investments were eliminated in the consolidations of our financial
statements, and the activities of Diodes-China, Diodes-Shanghai and Anachip
were
included therein. As of September
30,
2006,
we
had 95%
controlling interests in Diodes-China and Diodes-Shanghai, and a 99.8%
controlling interest in Anachip.
Results
of Operations for the Nine Months Ended September 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
Nine
months ended September 30,
|
|
Percentage
Dollar
Increase
(Decrease)
|
|
|
|
2005
|
|
2006
|
|
'05
to '06
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
62.2
|
%
|
Cost
of goods sold
|
|
|
(65.5
|
)
|
|
(66.9
|
)
|
|
65.8
|
|
Gross
profit
|
|
|
34.5
|
|
|
33.1
|
|
|
55.5
|
|
Operating
expenses
|
|
|
(15.7
|
)
|
|
(16.5
|
)
|
|
70.5
|
|
Operating
income
|
|
|
18.8
|
|
|
16.6
|
|
|
42.9
|
|
Interest
expense, net
|
|
|
(0.3
|
)
|
|
1.0
|
|
|
(712.5
|
)
|
Other
income
|
|
|
0.1
|
|
|
(0.7
|
)
|
|
(1,888.4
|
)
|
Income
before taxes and minority interest
|
|
|
18.6
|
|
|
17.0
|
|
|
47.0
|
|
Income
tax provision
|
|
|
(2.9
|
)
|
|
(3.1
|
)
|
|
72.0
|
|
Income
before minority interest
|
|
|
15.7
|
|
|
13.8
|
|
|
42.3
|
|
Minority
interest
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
2.7
|
|
Net
income
|
|
|
15.2
|
|
|
13.5
|
|
|
43.7
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the nine months ended September 30, 2006
compared to the nine months ended September 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
|
|
$
|
153,398,000
|
|
$
|
248,876,000
|
|
Net
sales
increased approximately $95.5 million for the nine months ended September 30,
2006, compared to the same period last year, due primarily to sales of analog
products related to the acquisition of Anachip. The 62.2% increase in net sales
represents an approximately 44.0% increase in units sold. Our ASPs for discrete
devices decreased approximately 4.8% from the same nine-month period last year
due primarily to demand induced product mix changes. ASPs for wafer products
increased approximately 4.7% from the same period last year, due primarily
to
more favorable market pricing.
|
|
2005
|
|
2006
|
|
Cost
of goods sold
|
|
$
|
100,428,000
|
|
$
|
166,532,000
|
|
Gross
profit
|
|
$
|
52,970,000
|
|
$
|
82,344,000
|
|
Gross
profit margin percentage
|
|
|
34.5
|
%
|
|
33.1
|
%
|
Cost
of
goods sold increased approximately $66.1 million, or 65.8%, for the nine months
ended September 30, 2006 compared to the same period in 2005, primarily due
to
sales of analog products related to the integration of Anachip at lower margins.
As a percent of sales, cost of goods sold increased from 65.5% for the nine
months ended September 30, 2005 to 66.9% for the nine months ended September
30,
2006. Our AUPs for discrete devices decreased approximately 5.3% from the same
nine-month period of 2005, while increasing 6.3% for wafer products from the
same period last year. The 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 $398,000 of non-cash, share-based
compensation expense related to our manufacturing facilities.
Gross
profit for the nine months ended September 30, 2006 increased approximately
$29.4 million, or 55.5%, compared to the nine months ended September 30, 2005.
Gross margin as a percentage of net sales was at 33.1% for the nine months
ended
September 30, 2006, down from 34.5% for the same period of 2005.
|
|
2005
|
|
2006
|
|
SG&A
|
|
$
|
21,469,000
|
|
$
|
34,883,000
|
|
SG&A
for the nine months ended September 30, 2006 increased approximately $13.4
million, or 62.5%, compared to the same period last year, due primarily to
(i)
an approximately $4.1 million increase associated with non-cash, share-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 nine-month period was
14.0% of sales, compared to 14.0% in the same nine-month period last year.
Included in SG&A for the nine months ended September 30, 2006 was an
approximate $620,000 adjustment due to an overstatement of restricted share
grant expense recorded in 2005. For comparable purposes, excluding the
share-based compensation, SG&A for the nine months ended September 30, 2006
would have been 12.3% of sales.
|
|
2005
|
|
2006
|
|
R&D
|
|
$
|
2,688,000
|
|
$
|
5,985,000
|
|
Investment
in R&D during the first nine months of 2006 was $6.0 million, an increase of
approximately $3.3 million from the same period last year. Of the $3.3 million
increase, $2.0 million reflected the impact of the acquisition of Anachip and
Diodes’ investment in developing new products in discrete, analog and mixed
signal segments, while $438,000 was associated with share-based compensation
expense due to our adoption of SFAS 123R. R&D, as a percentage of sales, was
2.4% for the current nine-month period compared to 1.8% in the same period
2005.
|
|
2005
|
|
2006
|
|
Interest
income (expense), net
|
|
$
|
(399,000
|
)
|
$
|
2,444,000
|
|
Net
interest income for the nine months ended September 30, 2006 was $2,444,000,
compared to the net interest expense of $399,000 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)
|
|
$
|
95,000
|
|
$
|
(1,699,000
|
)
|
Other
loss for the nine months ended September 30, 2006 was $1.7 million, compared
to
$95,000 for the same period of 2005. Included in other expense for the nine
months ended September 30,2006, was an approximate $1.1 million one-time
adjustment due to the understatement of intercompany currency exchange losses
at
our Taiwan subsidiary for the years ended December 2002 through
2005.
|
|
2005
|
|
2006
|
|
Income
tax provision
|
|
$
|
4,523,000
|
|
$
|
7,778,000
|
|
We
recognized income tax expense of $7.8 million for the first nine months ended
September 30, 2006, resulting in an effective tax rate of 18.5%, as compared
to
15.8% 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
|
|
$
|
802,000
|
|
$
|
824,000
|
|
Minority
interest in joint venture earnings represented the minority investor’s share of
the earnings of Diodes-China, Diodes-Shanghai and Anachip’s for the period.
The
joint
venture investments were eliminated in the consolidations of our financial
statements, and the activities of Diodes-China, Diodes-Shanghai and Anachip
were
included therein. As of September
30,
2006,
we
had 95%
controlling interests in Diodes-China and Diodes-Shanghai, and a 99.8%
controlling interest in Anachip.
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
September 30, 2006, our working capital was $146.7 million and $159.3 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 $72 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 $4.9 million and $32.4 million
year-to-date (including a $6 million office building purchase in Diodes-Taiwan
during the second quarter). 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 U.S. Excluding
this non-production related $6 million building purchase, year-to-date capital
expenditures were at approximately 10.6% of revenue as of September 30, 2006,
which is in the range 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 $109.3 million at September 30, 2006. The decrease
from 2005 to 2006 was primarily due to capital expenditures as well as the
Anachip acquisition.
Operating
Activities
Net
cash
provided by operating activities during the first nine months of 2006 was
$46.5 million, resulting primarily from $33.5 million of net income in
this period, as well as a $14.1 million in depreciation and amortization. Net
cash provided by operating activities was $37.3 million for the same period
in 2005. Net cash provided by operations increased by $9.2 million for the
first nine months from 2005 to 2006. This increase resulted primarily from
an
approximately $10.2 million increase in our net income (from $23.3 million
in 2005 to $33.5 million in 2006), $5.0 million increase in non-cash,
share-based compensation expense, and $2.2 million increase in depreciation
and
amortization expense, offset by increases in inventory, prepaid expenses and
accounts receivables. 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 $68.9 million for the first nine months of
2006 compared to $44.3 million for the same period of 2005. The increase in
investing activities primary relates to increases in capital expenditures of
$20.6 million, including the $6 million office building purchase in Taiwan,
and
the final acquisition payment for Anachip of $18.4 million (net of cash
acquired).
Financing
Activities
Net
cash
provided by financing activities totaled $2.0 million in the first nine months
of 2006 compared to $63.4 million provided in the same period of 2005. This
decrease is primarily the result of the proceeds received from the secondary
offering during the third quarter of 2005.
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 September
30, 2006, we had no amounts outstanding under our revolving credit facility,
and
there was $3.9 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 September 30, 2006, the effective rate
under both the credit agreement and the FabTech term loan was
6.51%.
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 and a current ratio of not less than 1.0 to 1. 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 September 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
September 30, 2006, our Asia subsidiaries have available lines of credit of
up
to an aggregate of $42.2 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
September 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.
In
October 2006, the Company issued $230 million in aggregate principal amount
of
convertible senior notes due on October 1, 2026. The notes will pay interest
semiannually at a rate of 2.25% per annum, with a 39.68% conversion premium,
and
with any conversion premium redeemable into cash and/or shares of common stock
at the Company’s option. The pre-tax net investment interest income to the
Company, at current market rates, is projected to be approximately $5.0 to
$5.5
million per year.
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
Other
than with respect to the risk factors below, there have been no material
changes
from the risk factors disclosed in the “Risk Factors” section of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, filed on
March 15, 2006.
The
following risk factors are new risk factors compared to the risk factors
in our
Annual Report on Form 10-K:
We
currently have a significant amount of debt following our convertible senior
notes offering. Our substantial indebtedness could adversely affect our
business, financial condition and results of operations and our ability to
meet
our payment obligations under the notes and our other
debt.
Following
our offering of $230.0 million of senior convertible notes in October, 2006,
we
currently have a significant amount of debt and substantial debt service
requirements. In addition to the debt from our note offering, we have $20.0
million available for future borrowings under our senior secured credit
facility, and we are permitted under the terms of our debt agreements to
incur
substantial additional debt.
This
level of debt could have significant consequences on our future operations,
including:
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making
it more difficult for us to meet our payment and other obligations
under
the notes and our other outstanding debt;
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resulting
in an event of default if we fail to comply with the financial and
other
restrictive covenants contained in our debt agreements, which event
of
default could result in all of our debt becoming immediately due
and
payable and, in the case of an event of default under our secured
debt,
such as our senior secured credit facility, could permit the lenders
to
foreclose on our assets securing that
debt;
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l |
reducing
the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes,
and
limiting our ability to obtain additional financing for these
purposes;
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l |
subjecting
us to the risk of increased sensitivity to interest rate increases
on our
indebtedness with variable interest rates, including borrowings under
our
senior secured credit facility;
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l |
limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which
we
operate and the general economy; and
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placing
us at a competitive disadvantage compared to our competitors that
have
less debt or are less leveraged.
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Any
of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the notes and our other debt.
Conversion
of our convertible senior notes will dilute the ownership interest of existing
shareholders, including holders who had previously converted their
notes.
To
the
extent we issue common stock upon conversion of the notes, the conversion
of
some or all of the notes will dilute the ownership interests of existing
shareholders, including holders who have received common stock upon prior
conversion of the notes. Any sales in the public market of the common stock
issuable upon such conversion could adversely affect prevailing market prices
of
our common stock. In addition, the existence of the notes may encourage short
selling by market participants because the conversion of the notes could
depress
the price of our common stock.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
are
no matters to be reported under this heading.
Item
3. Defaults Upon Senior Securities
There
are
no matters to be reported under this heading.
Item
4. Submission of Matters to a Vote of Security Holders
There
are
no matters to be reported under this heading.
Item
5. Other Information
There
are
no matters to be reported under this heading.
Item
6. Exhibits
3.1
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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).
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3.2
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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).
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11
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Computation
of Earnings Per Share
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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32.1
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Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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32.2
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Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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)
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By: |
/s/ Carl
C.
Wertz |
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November
8,
2006
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CARL
C. WERTZ
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Principal Financial and
Chief
Accounting Officer)
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INDEX
TO EXHIBITS
3.1
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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).
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3.2
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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).
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11
|
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Computation
of Earnings Per Share
|
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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32.1
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Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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32.2
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Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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