PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
(In
thousands, except share data)
ASSETS
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,888
|
|
$
|
40,538
|
|
Short-term
investments
|
|
|
291,008
|
|
|
294,779
|
|
Total
cash and short-term investments
|
|
|
339,896
|
|
|
335,317
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Trade
customers
|
|
|
72,175
|
|
|
76,871
|
|
Related
parties
|
|
|
6,147
|
|
|
6,210
|
|
|
|
|
78,322
|
|
|
83,081
|
|
Allowance
for doubtful accounts
|
|
|
(617
|
)
|
|
(660
|
)
|
Accounts
receivable, net of allowances
|
|
|
77,705
|
|
|
82,421
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
48,202
|
|
|
48,821
|
|
Deferred
income taxes, current
|
|
|
4,650
|
|
|
3,573
|
|
Prepaid
expenses and other
|
|
|
8,393
|
|
|
9,241
|
|
Total
current assets
|
|
|
478,846
|
|
|
479,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT,
net
|
|
|
95,469
|
|
|
101,552
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non-current
|
|
|
5,428
|
|
|
7,104
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
10,669
|
|
|
10,232
|
|
Goodwill
|
|
|
25,030
|
|
|
24,735
|
|
Other
|
|
|
6,697
|
|
|
6,778
|
|
Total
assets
|
|
$
|
622,139
|
|
$
|
629,774
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
LIABILITIES
AND STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Line
of credit
|
|
$
|
-
|
|
$
|
-
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
40,029
|
|
|
34,298
|
|
Related
parties
|
|
|
12,120
|
|
|
12,308
|
|
Accrued
liabilities
|
|
|
24,967
|
|
|
19,455
|
|
Income
tax payable
|
|
|
3,433
|
|
|
3,570
|
|
Current
portion of long-term debt
|
|
|
2,802
|
|
|
2,494
|
|
Current
portion of capital lease obligations
|
|
|
141
|
|
|
142
|
|
Total
current liabilities
|
|
|
83,492
|
|
|
72,267
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT,
net of current portion
|
|
|
|
|
|
|
|
2.25%
convertible senior notes due 2026
|
|
|
230,000
|
|
|
230,000
|
|
Others
|
|
|
7,115
|
|
|
6,717
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,477
|
|
|
1,426
|
|
OTHER
LONG TERM LIABILITIES
|
|
|
1,101
|
|
|
4,932
|
|
MINORITY
INTEREST
|
|
|
4,787
|
|
|
5,202
|
|
Total
Liabilities
|
|
|
327,972
|
|
|
320,544
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
AND COMMITMENTS
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock - par value $1.00 per share;
|
|
|
|
|
|
|
|
1,000,000
shares authorized; no shares issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock - par value $0.66 2/3 per share;
|
|
|
|
|
|
|
|
70,000,000
shares authorized; 25,961,267 and 26,082,860
|
|
|
|
|
|
|
|
issued
at December 31, 2006 and March 31, 2007, respectively
|
|
|
17,308
|
|
|
17,389
|
|
Additional
paid-in capital
|
|
|
113,449
|
|
|
117,823
|
|
Retained
earnings
|
|
|
162,802
|
|
|
173,856
|
|
Accumulated
other comprehensive gain
|
|
|
608
|
|
|
162
|
|
Total
stockholders' equity
|
|
|
294,167
|
|
|
309,230
|
|
Total
liabilities and stockholders' equity
|
|
$
|
622,139
|
|
$
|
629,774
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In
thousands, except share data)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
73,589
|
|
$
|
92,020
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
49,375
|
|
|
62,496
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
24,214
|
|
|
29,524
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
11,284
|
|
|
12,679
|
|
Research
and development
|
|
|
1,966
|
|
|
2,944
|
|
Loss
on fixed assets
|
|
|
120
|
|
|
-
|
|
Total
operating expenses
|
|
|
13,370
|
|
|
15,623
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
10,844
|
|
|
13,901
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
594
|
|
|
2,629
|
|
Other
|
|
|
(207
|
)
|
|
(448
|
)
|
Total
other income
|
|
|
387
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
and
minority interest
|
|
|
11,231
|
|
|
16,082
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
(1,690
|
)
|
|
(2,658
|
)
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
9,541
|
|
|
13,424
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(229
|
)
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
9,312
|
|
$
|
13,009
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation
|
|
|
|
|
|
|
|
Basic
|
|
|
25,348,986
|
|
|
26,027,023
|
|
Diluted
|
|
|
27,679,070
|
|
|
27,850,553
|
|
The
accompanying notes are an integral part of these financial statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,312
|
|
$
|
13,009
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,673
|
|
|
6,291
|
|
Minority
interest earnings
|
|
|
229
|
|
|
415
|
|
Share-based
compensation
|
|
|
1,891
|
|
|
2,429
|
|
Loss
on disposal of property, plant and equipment
|
|
|
120
|
|
|
-
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,961
|
|
|
(4,716
|
)
|
Inventories
|
|
|
(5,216
|
)
|
|
(619
|
)
|
Prepaid
expenses and other current assets
|
|
|
(127
|
)
|
|
(1,249
|
)
|
Deferred
income taxes
|
|
|
(1,841
|
)
|
|
(598
|
)
|
Changes
in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,893
|
|
|
(5,543
|
)
|
Accrued
liabilities
|
|
|
(1,364
|
)
|
|
(4,982
|
)
|
Other
liabilities
|
|
|
-
|
|
|
1,877
|
|
Income
taxes payable
|
|
|
438
|
|
|
137
|
|
Net
cash provided by operating activities
|
|
|
16,969
|
|
|
6,451
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(11,616
|
)
|
|
(12,906
|
)
|
Purchases
of short-term investments
|
|
|
(5,458
|
)
|
|
(3,771
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(18,747
|
)
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
27
|
|
|
529
|
|
Net
cash used by investing activities
|
|
|
(35,794
|
)
|
|
(16,148
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments
on line of credit, net
|
|
|
(1,052
|
)
|
|
-
|
|
Net
proceeds from the issuance of common stock
|
|
|
1,246
|
|
|
844
|
|
Excess
tax benefits
|
|
|
2,473
|
|
|
1,182
|
|
Repayments
of long-term debt
|
|
|
(3,382
|
)
|
|
(706
|
)
|
Repayments
of capital lease obligations
|
|
|
(49
|
)
|
|
(50
|
)
|
Net
cash provided (used) by financing activities
|
|
|
(764
|
)
|
|
1,270
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES
|
|
|
|
|
|
|
|
ON
CASH AND CASH EQUIVALENTS
|
|
|
(28
|
)
|
|
77
|
|
DECREASE
IN CASH
|
|
|
(19,617
|
)
|
|
(8,350
|
)
|
CASH
AND CASH EQUIVALENTS,
beginning of period
|
|
|
73,288
|
|
|
48,888
|
|
CASH
AND CASH EQUIVALENTS,
end of period
|
|
$
|
53,671
|
|
$
|
40,538
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2006
|
|
2007
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
451
|
|
$
|
2,517
|
|
Income
taxes
|
|
$
|
915
|
|
$
|
1,147
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
(1,690
|
)
|
$
|
(531
|
)
|
Liabilities
for unrecognized tax benefits recorded as cumulative effect
|
|
|
|
|
|
|
|
adjustment
to equity
|
|
$
|
-
|
|
$
|
1,955
|
|
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, 2006. In the opinion of management, all adjustments (consisting
of
normal recurring adjustments and accruals) considered necessary for a fair
presentation of the results of operations for the period presented have been
included in the interim period. Operating results for the three months ended
March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. The condensed consolidated
financial data at December 31, 2006 is derived from audited financial statements
included in our Annual Report on Form 10-K for the year ended December 31,
2006.
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 foreign operations in Taiwan, Hong Kong and
China.
We
believe the New Taiwan (“NT”) dollar as the functional currency at Diodes-Taiwan
and Diodes-Anachip most appropriately reflects the current economic facts
and
circumstances of the operations. Assets and liabilities recorded in NT dollar
are translated at the exchange rate on the balance sheet date. Income and
expense accounts are translated at the average monthly exchange rate during
the
year. Resulting translation adjustments are recorded as a separate component
of
accumulated other comprehensive income or loss.
We
use
the U.S. dollar as the functional currency in Diodes-China, Diodes-Shanghai
and
Diodes-Hong Kong, as substantially all monetary transactions are made in
that
currency, and other significant economic facts and circumstances currently
support that position. As these factors may change in the future, we will
periodically assess our position with respect to the functional currency
of our
foreign subsidiaries. Included
in net income are foreign currency exchange losses of approximately $292,000
and
$254,000 for the quarter ended March 31, 2006 and 2007,
respectively.
Accounting
principles generally require that recognized revenue, expenses, gains and
losses
be included in net income. Although certain changes in assets and liabilities
are reported as a separate component of the equity section of the balance
sheet,
such items, along with net income, are components of comprehensive income.
The
components of other comprehensive income include foreign currency translation
adjustments. Accumulated other comprehensive gain was $608,000 and $162,000
at
December 31, 2006 and March 31, 2007, respectively. The $446,000 change of
other
comprehensive income was primarily a result of currency translation loss
during
the first quarter of 2007.
Total
comprehensive income for the three months ended March 31, 2006 and 2007 was
as
follows (in
thousands):
Total
Comprehensive Income
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2007
|
|
Net
income
|
|
$
|
9,312
|
|
$
|
13,009
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
266
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
9,578
|
|
$
|
12,563
|
|
NOTE
C -
Short-term
investments
Short-term
investments at March 31, 2007, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Cost
Basis
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
|
|
|
|
|
|
|
|
|
|
|
State
and local government obligations
|
|
$
|
293,766
|
|
$
|
-
|
|
$
|
-
|
|
$
|
293,766
|
|
Money
market mutual funds
|
|
|
1,013
|
|
|
-
|
|
|
-
|
|
$
|
1,013
|
|
Total
short-term investments
|
|
$
|
294,779
|
|
$
|
-
|
|
$
|
-
|
|
$
|
294,779
|
|
The
estimated fair value of available-for-sale debt securities is $293.8 million,
and is based on publicly available market information or other estimates
determined by management. Although the maturities of the securities are over
10
years, management intends to use the funds within one year and does not
anticipate holding the investments until maturity; therefore, the securities
are
classified as short-term.
NOTE
D -
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined principally
by the first-in, first-out method (in
thousands).
|
|
|
|
|
|
|
|
December
31,
|
|
March
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
30,626
|
|
$
|
25,676
|
|
Work-in-progress
|
|
|
10,265
|
|
|
9,660
|
|
Raw
materials
|
|
|
13,464
|
|
|
16,893
|
|
|
|
|
54,355
|
|
|
52,230
|
|
Less:
reserves
|
|
|
(6,153
|
)
|
|
(3,409
|
)
|
|
|
$
|
48,202
|
|
$
|
48,821
|
|
NOTE
E - Goodwill and Other Intangible Assets
Changes
in goodwill are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1
|
|
Acquisitions/
purchase accounting adjustments
|
|
Currency
exchange and other
|
|
Balance,
December 31
|
|
Balance,
January 1
|
|
Acquisitions/
purchase accounting adjustments
|
|
Currency
exchange and other
|
|
Balance,
March 31
|
|
Goodwill-China
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill-FabTech
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill-Anachip
|
|
|
-
|
|
|
19,675
|
|
|
265
|
|
|
19,940
|
|
|
19,940
|
|
|
-
|
|
|
(295
|
)
|
|
19,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,090
|
|
$
|
19,675
|
|
$
|
265
|
|
$
|
25,030
|
|
$
|
25,030
|
|
$
|
-
|
|
$
|
(295
|
)
|
$
|
24,735
|
|
Intangible
assets subject to amortization at March 31, 2007 are (in
thousands):
|
|
|
|
As
of March 31, 2007
|
|
|
|
|
|
Amortized
Intangible Assets
|
|
Useful
life
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Currency
exchange and other
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
15
years
|
|
$
|
8,569
|
|
$
|
(219
|
)
|
$
|
(167
|
)
|
$
|
8,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anachip:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and trademarks
|
|
|
3-10
years
|
|
$
|
2,430
|
|
$
|
(350
|
)
|
$
|
(31
|
)
|
$
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
$
|
10,999
|
|
$
|
(569
|
)
|
$
|
(198
|
)
|
$
|
10,232
|
|
Amortization
expense related to intangible assets subject to amortization was $70,000
and
$209,000 for the three months ended March 31, 2006 and 2007,
respectively.
NOTE
F - Stockholders’ Equity
As
of
March 31, 2007, we had 26,062,860 outstanding common shares. During the first
three months of 2007, common shares increased 121,593 shares, primarily due
to
118,877 shares issued in conjunction with stock option exercises and 2,716
shares issued in conjunction with vested share grants.
Additional
paid-in capital increased approximately $4.4 million in the first three months
of 2007, primarily due to $1.5 million in stock option expense, $0.9 million
in
share grant expense, $0.8 million in conjunction with stock option exercises
and
$1.2 million excess tax benefits associated with share based
compensation.
We
adopted the provisions of FASB Interpretation No. 48 (“FIN48”) effective January
1, 2007. As a result of the implementation of FIN48, we recorded an approximate
$2.0 million increase in the liability for unrecognized tax benefits, primarily
related to our foreign subsidiaries, which was accounted for as a reduction
to
the January 1, 2007, balance of retained earnings.
NOTE
G - Income Tax Provision
The
Company files income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations by tax authorities for tax years before 2003.
With
respect to state and local jurisdictions and countries outside of the United
States, with limited exceptions, the Company and its subsidiaries are no
longer
subject to income tax audits for years before 2001. Although the outcome
of tax
audits is always uncertain, the Company believes that adequate amounts of
tax,
interest and penalties, if any, have been provided for any adjustments that
are
expected to result from these years. We will recognize accrued interest and
penalties, if any, related to unrecognized tax benefits in income tax
expense.
We
adopted the provisions of FIN48 effective January 1, 2007. As a result of
the
implementation we recorded an approximate $2.0 million increase in the liability
for unrecognized tax benefits, primarily related to our foreign subsidiaries,
which was accounted for as a reduction to the January 1, 2007, balance of
retained earnings. As of January 1 and March 31, 2007, the gross amount of
unrecognized tax benefits was approximately $1.3 million, all of which, if
recognized, will increase our effective income tax rate.
It
is
reasonably possible that the amount of the unrecognized benefit with respect
to
certain of our unrecognized tax positions will significantly increase or
decrease within the next 12 months. These changes may be the result of
settlement of ongoing audits or competent authority proceedings related to
transfer pricing. At this time, an estimate of the range of the reasonably
possible outcomes cannot be made.
We
recognized income tax expense of $2.7 million for the first quarter of 2007,
resulting in an effective tax rate of 16.5%, as compared to 15.0% in the
same
period last year, and 20.5% in the fourth quarter of 2006. The higher effective
tax rate compared to the first quarter of 2006 reflects the impact of an
expected increase in our preferential tax rate, from 0% to 7.5%, at one of
our
China subsidiaries. The decrease in the effective tax rate compared to the
fourth quarter of 2006 reflects additional tax planning efforts aimed at
improving our tax rate with lower planned foreign earnings repatriations
in
2007. As of March 31, 2007, we had accrued $3.3 million for taxes on future
dividend from our foreign subsidiaries.
Our
global presence requires us to pay income taxes in a number of jurisdictions.
In
general, earnings in the U.S. and Taiwan are currently subject to tax rates
of
39.0% and 35.0%, respectively. Earnings of Diodes-Hong Kong are subject to
a
17.5% tax for local sales or local source sales; all other Hong Kong sales
are
not subject to foreign income taxes. 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. Funds
repatriated from foreign subsidiaries to the U.S. may be subject to Federal
and
state income taxes.
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 2006. In
addition, due to an $18.5 million permanent re-investment of Diodes-China
earnings in 2004, Diodes-China has re-applied to the Chinese government for
additional preferential tax treatment on earnings that are generated by this
$18.5 million investment. If approved, those earnings will be exempted from
central government income tax for two years, and then subject to a 12.0%
tax
rate for the following three years.
In
addition, the earnings of Diodes-China would ordinarily be subject to a standard
local government tax rate of 3.0%. However, as an incentive for establishing
Diodes-China, the local government waived this tax from 1996 through 2005.
Management expects this tax to be waived for 2006 and 2007 as well; however,
the
local government can re-impose this tax at its discretion at any
time.
In
2004,
we established our second Shanghai-based manufacturing facility,
Diodes-Shanghai, located in the Songjiang Export Zone of Shanghai, China.
In the
Songjiang Export Zone, the central government standard tax rate is 15.0%.
From
2010 onward, Diodes-Shanghai earnings might not continue to be subject to
the
15% tax rate as a proposed income tax reform is expected to be taking effect
in
2007 which could terminate some existing tax incentive for foreign enterprise
doing business in China. There
is
no local government tax. During 2004, Diodes-Shanghai earnings were subject
to
the standard 15.0% central government tax rate. As an incentive for establishing
Diodes-Shanghai, the 2005 and 2006 earnings of Diodes-Shanghai were exempted
from central government income tax, and for the years 2007 through 2009 its
earnings will be subject to a 7.5% tax rate.
With
the recent China government income tax reform, which terminates some existing
tax incentives for foreign enterprises doing business in China, it is unclear
to
what extent our China subsidiaries will continue to receive preferential
tax
treatment.
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
H - Deferred compensation
Beginning
January 1, 2007, the Company began sponsoring a Non-Qualified Deferred
Compensation Plan (the “Plan”) for executive officers, key employees and members
of the Board of Directors (the “Board”). The Plan allows eligible participants
to defer the receipt of eligible compensation until designated future dates.
The
Company hedges its obligations under the plan by investing in the actual
underlying investments. These investments are classified as trading securities
and are carried at fair value. At March 31, 2007, these investments totaled
approximately $477,000. All gains and losses in these investments are equally
offset by corresponding gains and losses in the Company’s deferred compensation
liabilities.
NOTE
I - Share-based Compensation
We
maintain share-based compensation plans for our officers, key employees,
and our
Board, which provide for stock options and stock awards. The share-based
compensation plans are described more fully in Note 13 of our audited financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2006.
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 months ended March
31,
2007, operating income decreased by approximately $1.5 million, net income
decreased by $1.2 million, and diluted earnings per share were reduced by
$0.03.
For the three months ended March 31, 2006 and 2007 share-based compensation
expense associated with the Company’s stock options recognized in the income
statement is as follows (in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2007
|
|
Selling
and administrative expense
|
|
$
|
133
|
|
$
|
82
|
|
Research
and development expense
|
|
$
|
1,316
|
|
$
|
1,303
|
|
Cost
of sales
|
|
$
|
147
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
Total
stock option expense
|
|
$
|
1,596
|
|
$
|
1,509
|
|
No
stock
options were granted in the first quarter of 2007. Stock option expense for
the three months ended March 31, 2006 was calculated on the date of grant
using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
|
Three
Months Ended
March
31, 2006
|
|
|
Expected
volatility
|
|
|
50.71
|
%
|
|
|
Expected
term (in years)
|
|
|
4.80
|
|
|
|
Risk-free
interest rate
|
|
|
4.39
|
%
|
|
|
Expected
forfeitures
|
|
|
2.56
|
%
|
|
|
Expected
dividends
|
|
|
-
|
|
|
|
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 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 the Board members is 6.57 years, while the expected term for
all
other employees is 4.83 years.
Risk
free interest rate. The
Company estimated the risk-free interest rate based on zero-coupon
U.S. Treasury securities for a period that is commensurate with the
expected term assumption.
Forfeiture
rate. The
amount of stock-based compensation recognized during a period is based on
the
value of the portion of the awards that are ultimately expected to vest as
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ
from
those estimates. The term “forfeitures” is distinguished from “cancellations” or
“expirations” and represents only the unvested portion of the surrendered
option. The Company has applied an annual forfeiture rate of 2.56% to all
unvested options as of March 31, 2007. 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 months ended March 31, 2007, the Company did not grant any stock
options to purchase shares
of
the Company’s Common Stock.
The
total
intrinsic value (actual gain) of options exercised during the three months
ended
March 31, 2007 was approximately $3.4 million.
The
total
net cash proceeds received from stock option exercise for the three months
ended
March 31, 2007 was $0.8 million.
A
summary
of the stock option plans as of March 31, 2007 follows:
Stock
options
|
|
Shares
(000)
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (yrs)
|
|
Aggregate
Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
3,579
|
|
$
|
12.73
|
|
|
6.4
|
|
|
81,396
|
|
Granted
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
Exercised
|
|
|
(119
|
)
|
|
7.10
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(42
|
)
|
|
27.61
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
3,417
|
|
$
|
12.84
|
|
|
6.2
|
|
$
|
75,413
|
|
Exercisable
at March 31, 2007
|
|
|
2,479
|
|
$
|
9.06
|
|
|
5.4
|
|
$
|
63,932
|
|
As
of
March 31, 2007, total un-recognized stock-based compensation expense related
to
unvested stock options, net of forfeitures, was approximately $7.9 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 2.0 years.
The
aggregate intrinsic value in the table above is before applicable income
taxes
and represents the amount optionees would have received if all options had
been
exercised on the last business day of the period indicated, based on the
Company’s closing stock price.
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 March 31, 2007 is
presented below:
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Nonvested
Shares
|
|
Shares
(000)
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2007
|
|
|
568
|
|
$
|
24.67
|
|
Granted
|
|
|
16
|
|
|
35.48
|
|
Vested
|
|
|
(3
|
)
|
|
33.39
|
|
Forfeited
|
|
|
(10
|
)
|
|
35.53
|
|
Nonvested
at March 31, 2007
|
|
|
570
|
|
$
|
24.73
|
|
During
the three months ended March 31, 2006 and 2007, there were $0.3 million and
$0.9
million of total recognized share-based compensation expense related to
non-vested stock award arrangements granted under the plans, respectively.
As
of
March 31, 2007, total un-recognized stock-based compensation expense related
to
unvested share grants, net of forfeitures, was approximately $9.9 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 2.8 years.
NOTE
J-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 Operations, Senior Vice President of Sales and Marketing,
Vice
President of Asia Sales, and Senior Vice President of Finance. For financial
reporting purposes, we operate in a single segment, standard semiconductor
products, through our various manufacturing and distribution facilities.
We
aggregated our products since the products are similar and have similar economic
characteristics, and the products are similar in production process and share
the same customer type.
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 sales, which accounted for approximately 3.3% and 4.5%
of
total sales for the three months ended March 31, 2006 and 2007, respectively,
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
(in
thousands):
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Far
East
|
|
North
America
|
|
Consolidated
Segments
|
|
March
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
80,331
|
|
$
|
27,116
|
|
$
|
107,447
|
|
Inter-company
sales
|
|
|
(29,208
|
)
|
|
(4,650
|
)
|
|
(33,858
|
)
|
Net
sales
|
|
$
|
51,123
|
|
$
|
22,466
|
|
$
|
73,589
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
65,669
|
|
$
|
10,722
|
|
$
|
76,391
|
|
Assets
|
|
$
|
192,748
|
|
$
|
126,210
|
|
$
|
318,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Consolidated
Segments
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
110,667
|
|
$
|
30,723
|
|
$
|
141,390
|
|
Inter-company
sales
|
|
|
(44,810
|
)
|
|
(4,560
|
)
|
|
(49,370
|
)
|
Net
sales
|
|
$
|
65,857
|
|
$
|
26,163
|
|
$
|
92,020
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
88,041
|
|
$
|
13,511
|
|
$
|
101,552
|
|
Assets
|
|
$
|
177,006
|
|
$
|
452,768
|
|
$
|
629,774
|
|
Geographic
Information
Revenues
were derived from (shipped to) customers located in the following countries.
“All Others” represents countries with less than 10% of total revenues each
(in
thousands):
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the three months
|
|
|
|
|
|
ended
March 31,
|
|
net
sales
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
25,569
|
|
$
|
24,992
|
|
|
34.7
|
%
|
|
27.2
|
%
|
Taiwan
|
|
|
18,271
|
|
|
33,619
|
|
|
24.8
|
%
|
|
36.5
|
%
|
United
States
|
|
|
17,591
|
|
|
20,186
|
|
|
23.9
|
%
|
|
21.9
|
%
|
All
Others
|
|
|
12,158
|
|
|
13,223
|
|
|
16.6
|
%
|
|
14.4
|
%
|
Total
|
|
$
|
73,589
|
|
$
|
92,020
|
|
|
100.0
|
%
|
|
100.0
|
%
|
NOTE
K - Business Acquisition
APD
acquisition -
On
October 31, 2006, we purchased the net assets of APD Semiconductor, a privately
held U.S.-based fabless semiconductor company. The assets related to the
business of manufacturing, marketing, selling and distribution of semiconductor
products. The initial purchase price of the acquisition was $8.4 million
in
addition to a potential earn-out provision with respect to pre-defined covered
products. The acquisition was completed on November 3, 2006.
The
contingent consideration has been recorded as a liability at the date of
acquisition. When the contingency is resolved and the consideration is
distributable, any excess of the fair value of the contingent consideration
payable over the amount that was recognized as a liability shall be recognized
as an additional cost of the acquired entity. If the amount initially recognized
as a liability exceeds the consideration payable, that excess shall be allocated
as a pro rata reduction of the amounts assigned to assets acquired. Any amount
that remains after reducing those assets to zero shall be recognized as an
extraordinary gain.
The
following table (in thousands) 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 and the contingent consideration.
|
|
|
|
Assets
acquired
|
|
Total
Allocation
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
299
|
|
Inventory
|
|
|
923
|
|
Fixed
assets
|
|
|
125
|
|
Patents
|
|
|
8,399
|
|
|
|
|
|
|
Liabilities
assumed
|
|
|
|
|
Accounts
payable
|
|
|
(338
|
)
|
Accrued
liabilities
|
|
|
(1,000
|
)
|
Net
assets acquired
|
|
$
|
8,408
|
|
NOTE
L - Commitments
Purchase
commitments
-
We have
non-cancelable purchase contracts for capital expenditures, primarily for
manufacturing equipment in China, for approximately $9.1 million at March
31,
2007.
NOTE
M - Recently Issued Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (FASB) issued FAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115” (FAS 159).
This Statement permits entities to choose to measure many financial instruments
and certain other items at fair value and report unrealized gains and losses
on
these instruments in earnings. FAS 159 is effective as of January 1, 2008.
We have not yet determined the effect, if any, that the implementation of
FAS
159 will have on our results of operations or financial condition.
In
September 2006, 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, 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. We
have
not yet determined the effect, if any, that the implementation of FAS 157
will
have on our results of operations or financial condition.
In
July
2006, 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". FIN 48 prescribes a
comprehensive model for how companies should recognize, measure, present,
and
disclose in their financial statements uncertain tax positions taken or expected
to be taken on a tax return. Under FIN 48, tax positions shall initially
be
recognized in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax authorities. Such
tax
positions shall initially and subsequently be measured as the largest amount
of
tax benefit that is greater than 50% likely of being realized upon ultimate
settlement with the tax authority assuming full knowledge of the position
and
all relevant facts. FIN 48 also revises disclosure requirements to include
an
annual tabular rollforward of unrecognized tax benefits. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. We adopted the provisions
of
FIN48 effective January 1, 2007. As of result of the adoption we recorded
an
approximately $2 million increase in accrued income taxes in our consolidated
balance sheet for unrecognized tax benefits, primarily related to our foreign
subsidiaries, which was accounted for as a cumulative effect adjustment to
the
January 1, 2007, balance of retained earnings (see Note G.).
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 in 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, 2006, previously filed with Securities and Exchange
Commission.
Overview
We
are a
global manufacturer and supplier of high-quality application specific standard
products within the broad discrete and analog semiconductor markets. We design,
manufacture and market these semiconductors focusing on diverse end-use
applications in the consumer electronics, computing, communications, industrial
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.
In
the
first quarter of 2007 we transitioned our headquarters from Westlake Village,
California to Dallas, Texas. 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 Westlake Village,
California, Taipei, Taiwan, Shanghai and Shenzhen, China, and Hong Kong;
and our
newly acquired fabless IC design company, Anachip, is located in Hsinchu,
Taiwan. We also have regional sales offices or representatives in: Derbyshire,
England; Toulouse, France; Frankfurt, Germany; and in various cities in the
United States.
Our
strategy is to continue to enhance our position as a global supplier of standard
semiconductor products, and to continue to add other product lines, such
as
power management products, using our packaging technology
capability.
The
principal elements of this strategy include the following:
Focus
on technology innovation
- In
2006,
we strengthened our product design centers in Dallas, San Jose, Shanghai
and
Taipei to position our design engineers to work more closely with our customers
and enable us to deliver a stream of innovative solutions in our targeted
product categories. By working closely with our market-leading customers
and
tailoring our research and development efforts to their specific needs, we
have
gained a superior understanding of their requirements and can anticipate
and
quickly respond to their emerging product development needs. As the trend
toward
converged consumer electronics devices in ever smaller form factors continues
to
drive demand for products that can help our customers achieve enhanced
performance and energy efficiencies while shrinking printed circuit board
real
estate, we have been able to introduce market-leading innovative products
to
address our customer needs.
In
March
2007, we announced the launch of a new series of low threshold voltage MOSFETs,
optimized for low voltage applications. Designed for simple integration into
a
wide variety of low voltage circuits common to portable and handheld end
products, the new MOSFET series can be driven directly from low voltage logic
level outputs without requiring expensive and power-hungry charge pumps.
Combined with an available low-profile package height of 0.4 mm, the DFN
package
is ideal for the fast growing, space constrained, consumer electronic device
end
products such as mobile phones and portable media players. As the industry-wide
trend for smaller and more efficient products expands, a broad shift to lower
operating and logic level voltages has created widespread demand for low
threshold voltage small signal MOSFETs. To address the growing need for sub-3.3
volt logic level operation, we also introduced the DMN5L06xxK series of low
threshold voltage MOSFETs available in a variety of industry standard
surface-mount packages. Ideal for a broad range of applications, this series
is
optimized for use in notebook and desktop computers, set-top boxes, broadband
cable and xDSL modems, LCD monitors, and GPS navigation systems.
We
recently introduced the PowerDI™323, a high performance proprietary platform in
one of the smallest form factors in the market, building on the success of
our
PowerDI™123 and PowerDI™5 platforms. We also launched the AH180 product
platform, a new generation low-voltage Hall Sensor switch designed to reduce
our
customers’ time to market and solution cost. The AH180 size and power
consumption performance make it a good fit to a wide range of applications
in
the fast growing portable consumer electronics market. In addition, through
the
APD Semiconductor acquisition, we were able to launch a Super Barrier Rectifier
(SBRâ)
product
family packaged in our proprietary high performance PowerDITM123. The 3 Ampere
SBRâ
rectifier product family provides unsurpassed efficiency, superior reliability,
and a wide safe operating area in applications like disk drives, high
temperature automotive applications, DC/DC converters, and in small portable
electronics such as mobile phones, digital audio players and digital cameras.
During 2006, we introduced approximately 218 new devices in approximately
30
different product families and achieved new design wins at over 100 OEMs.
In the
first quarter of 2007, we introduced approximately 84 new devices in
approximately twelve different product families. We believe that continued
introduction of new and differentiated product solutions is critically important
in maintaining and extending our market share in the highly competitive
semiconductor marketplace.
Expand
our available market opportunities
- We
intend
to aggressively maximize our opportunities in the standard semiconductor
market
as well as in related markets where we can apply our semiconductor design
and
manufacturing expertise. A key element of this is leveraging our highly
integrated packaging expertise through our Application Specific Multi-Chip
Circuit (ASMCC) product platform, which consists of standard arrays, function
specific arrays and end-equipment specific arrays. We intend to achieve this
by:
|
Ø
|
Continuing
to focus on increasing packaging integration, particularly with
our
existing standard array and customer-specific array products, in
order to
achieve products with increased circuit density, reduced component
count
and lower overall product cost;
|
|
Ø
|
Expanding
existing products and developing new products in our function specific
array lines, which combine multiple discrete semiconductor components
to
achieve specific common electronic device functionality at a low
cost;
and
|
|
Ø
|
Developing
new product lines, which we refer to as end-equipment specific
arrays,
which combine discrete components with logic and/or standard analog
circuits to provide system-level solutions for high-volume, high-growth
applications.
|
Our
extension into the Hall effect sensors and Power Management product lines
provides us with a market opportunity that focuses on high growth areas that
have higher margins. In addition, these product lines share essentially the
same
customers and end-user applications as our current product lines, providing
us
with cross-selling opportunities, and helping us to expand and deepen our
customer relationships. Overall, we believe that our financial results reflect
our customers’ acceptance of our broader product lines and reaffirm our
confidence in the soundness of our strategic direction.
Maintain
intense customer focus
- We
intend to strengthen and deepen our customer relationships. We believe that
continued focus on customer service would increase our net sales, operating
performance and overall market share. To accomplish this, we intend to continue
to closely collaborate with our customers to design products that meet their
specific needs. A critical element of this strategy is to continue to minimize
our design cycle time in order to quickly
provide our customers with innovative products. Our customer service culture
pervades all levels of
our
organization
and has enabled us to build a customer base that includes global industry
leaders in the computing, consumer electronics, communications, industrial
and
automotive sectors. Our engineers work with customers side by side to understand
their requirements and to help them reduce component count and footprint
and to
improve functionality. And our flexible manufacturing facilities will quickly
shift production to accommodate customer needs and scale up production on
customized application specific devices. This level of responsiveness has
enabled us to stay ahead of the curve on our customers’ ongoing and future needs
and expand our position with each new generation of end devices. We deliver
world-class service support to our clients from our sales, engineering and
marketing teams in the United States, Asia and Europe.
Enhance
manufacturing efficiency
-
A
key
element of our success is our overall low-cost base. We operate two
state-of-the-art manufacturing facilities in China. During 2006, we invested
approximately $32 million in new manufacturing capacity and increased our
total
output by approximately 43% to over 11.8 billion devices per year. We remain
committed to achieving the lowest cost and highest quality position in our
industry by our relentless pursuit of continuous improvement in manufacturing
efficiencies through product innovation and economies of scale. We will continue
to deliver the highest quality products and services our customers have come
to
expect as well as maintain our customer-centered approach to adjust and
reconfigure our production schedule to deliver devices of outstanding
reliability for high-volume applications within very tight delivery schedules.
We believe that our approach to manufacturing excellence, quality, flexibility
and reliability at a very competitive cost is key to our business strategy
and
success, and has positioned us as a premier supplier to some of the leading
OEMs
in the world.
Pursue
selective strategic acquisitions -
As part
of our strategy to expand our standard semiconductor product offerings and
to
maximize our market opportunities, we may acquire discrete, analog or
mixed-signal technologies, product lines or companies in order to support
our
ASMCC product platform and enhance our standard and new product offerings.
In
December 2005, we announced the acquisition of Anachip Corporation, a fabless
Taiwanese semiconductor company focused on analog ICs designed for specific
applications, and headquartered
in the Hsinchu Science Park in Taiwan.
This
acquisition, which was completed 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.
On
November 3, 2006, we purchased the net assets of APD Semiconductor, Inc.,
a
privately held U.S.-based fabless semiconductor company. APD Semiconductor’s
main product focus is its patented and trademarked Super Barrier Rectifier
(SBR®)
technology. Utilizing a low cost IC wafer process, the SBR®
technology uses a MOS cellular design to replace standard traditional Schottky
or PN junction diodes. The SBR®
technology uses an innovative-patented process technique that allows its
key
parameters to be easily tuned to optimize any customer applications. This
adaptive and scalable technology allows for increased power saving with better
efficiency and reliability at higher operating temperatures for end user
applications like digital audio players, DC/DC converters. AC/DC power supplies,
LCD monitors, Power-over-Ethernet (POE), Power Factor Correction (PFC) and
TV/satellite set-top boxes. The SBR®
technology offers industry-leading products like the SBR20U100CT, which has
the
lowest forward voltage and highest efficiency and power saving in its class.
The
APD acquisition will enhance our product capabilities and technology leadership
position in the low pin count standard product semiconductor market and expand
our product capabilities across important segments of our end-markets.
In
implementing these strategies, 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 any 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 was accretive to our 2006 earnings, and is expected to be accretive
to our full-year 2007 earnings.
·
In 2006 and the three months ended March 31, 2007, 28.2% and 31.9%,
respectively, of our net sales were derived from products introduced within
the
last three years, which we term “new products,” compared to 15.3% in 2005. The
significant increase in new products primarily resulted from the Anachip
acquisition. We expect new products to 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 32.1% in the first quarter of 2007, compared
to
32.9% in the same period of 2006 and 33.4% in the fourth quarter of 2006.
Our
gross margin percentage was lower as average selling prices declined during
the
first quarter of 2007 due to a softer market. 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 March 31, 2007, we invested approximately $137 million in our Asian
manufacturing facilities. For the three months ended March 31, 2007, we invested
approximately $12.4 million in capital expenditures, primarily in our Asian
manufacturing facilities, which was approximately 13.4% of revenue. Our
full-year capital expenditure estimate is 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 first quarter of 2007, the percentage of our net sales derived
from
our Asian subsidiaries was 71.6%, compared to 74.8% in the fourth quarter
of
2006 and 71.9% for the year 2006. Although Asia sales decreased in the first
quarter of 2007 due to weaker demand, 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 $2.0 million,
or 2.7% of net sales, in the first quarter of 2006 to $2.9 million, or 3.2%
of net sales, in the first quarter of 2007, as we completed the Anachip and
APD
acquisitions, 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 invest in research and development to between
2.5%
and 3.5% of net sales as we bring additional proprietary devices to the
market.
·
On November 3, 2006, we purchased the assets of APD Semiconductor (APD),
a
privately held U.S.-based fabless discrete semiconductor company. APD's main
product focus is its patented and trademarked Super Barrier Rectifier
(SBR®)
technology. The
initial purchase price of the acquisition was $8.4 million in addition to
a
potential earn-out provision with respect to pre-defined covered
products.
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.
·
In October 2006, we issued $230 million in aggregate principal amount of
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. We expect this transaction to be accretive
to
earnings per share given the current short-term interest environment and
intend
to use the net proceeds from this offering for working capital and other
general
corporate purposes, including acquisitions.
Related
Parties
We
conduct business with one related party company, Lite-On Semiconductor
Corporation (“LSC”) (and its subsidiaries and affiliates) and one significant
party, Keylink International (formerly Xing International) (and its
subsidiaries). LSC is our largest stockholder and owned 22.2% of our outstanding
Common Stock as of March 31, 2007. Keylink International is our 5% joint
venture
partner in Diodes-China and Diodes-Shanghai. Raymond Soong, who became a
director and Chairman of the Board in 1993, is also Chairman of the Boards
of
LSC and Lite-On Technology Corporation (“LTC”) (a significant shareholder of
LSC), and is the founder of the Lite-On Group of companies and a board member
of
Actron Technology Corporation, a Lite-On Group company. C.H. Chen, our Vice
Chairman of the Board, is also Vice Chairman of LSC, Supervisor of LTC, and
a
board member of Actron Technology Corporation.
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 months ended March 31, 2007, we sold silicon wafers to LSC totaling
7.3%, (6.5% in 2006 and 9.6% in 2005) of our net sales, respectively, making
LSC
our largest customer. Also for the three months ended March 31, 2007, 11.8%
(13.0% in 2006 and 14.7% in 2005) 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 2.1%, 2.3% and
4.2%
of our net sales, respectively, in the first quarter of 2007, the year of
2006
and 2005, respectively. We believe such transactions are on terms no less
favorable to us than could be obtained from unaffiliated third parties. 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).
During
the three months ended March 31, 2007, we sold silicon wafers to companies
owned
by Keylink International totaling 0%, (0.4% in 2006 and 0.6% in 2005) of
our net
sales. Also for the three months ended March 31, 2007, 1.7% (2.3% in 2006
and
3.0% in 2005) 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 2006, and the three months ended March 31,
2007, we paid Keylink International an aggregate of $7.9 million and $2.1
million, respectively, with respect to these items.
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. As of
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 99.8% 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
|
Ø
|
Downturns
in the highly cyclical semiconductor industry or changes in end-market
demand could affect our operating results and financial
condition.
|
|
Ø
|
The
semiconductor business is highly competitive, and increased competition
may harm our business and our operating
results.
|
|
Ø
|
We
receive a significant portion of our net sales from a single customer.
In
addition, this customer is also our largest external supplier and
is a
related party. The loss of this customer or supplier could harm
our
business and results of
operations.
|
|
Ø
|
Delays
in initiation of production at new facilities, implementing new
production
techniques or resolving problems associated with technical equipment
malfunctions could adversely affect our manufacturing
efficiencies.
|
|
Ø
|
We
are and will continue to be under continuous pressure from our
customers
and competitors to reduce the price of our products, which could adversely
affect our growth and profit
margins.
|
|
Ø
|
Our
customer orders are subject to cancellation or modification usually
with
no penalty. High volumes of order cancellation or reductions in
quantities
ordered could adversely affect our results of operations and financial
condition.
|
|
Ø
|
New
technologies could result in the development of new products by
our
competitors and a decrease in demand for our products, and we may
not be
able to develop new products to satisfy changes in demand, which
could
result in a decrease in net sales and loss of market
share.
|
|
Ø
|
We
may be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party technology,
which
could result in significant expense and reduction in our intellectual
property rights.
|
|
Ø
|
We
depend on third-party suppliers for timely deliveries of raw materials,
parts and equipment, as well as finished products from other
manufacturers, and our results of operations could be adversely
affected
if we are unable to obtain adequate supplies in a timely
manner.
|
|
Ø
|
If
we do not succeed in continuing to vertically integrate our business,
we
will not realize the cost and other efficiencies we anticipate
and our
ability to compete, profit margins and results of operations may
suffer.
|
|
Ø
|
Part
of our growth strategy involves identifying and acquiring companies
with
complementary product lines or customers. We may be unable to identify
suitable acquisition candidates or consummate desired acquisitions
and, if
we do make any acquisitions, we may be unable to successfully integrate
any acquired companies with our
operations.
|
|
Ø
|
We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
|
|
Ø
|
Our
products may be found to be defective and, as a result, product
liability
claims may be asserted against us, which may harm our business
and our
reputation with our customers.
|
|
Ø
|
We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
|
|
Ø
|
We
may not be able to maintain our growth or achieve future growth
and such
growth may place a strain on our management and on our systems
and
resources.
|
|
Ø
|
Our
business may be adversely affected by obsolete inventories as a
result of
changes in demand for our products and change in life cycles of
our
products.
|
|
Ø
|
If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
|
|
Ø
|
We
rely heavily on our internal electronic information and communications
systems, and any system outage could adversely affect our business
and
results of operations.
|
|
Ø
|
We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
|
|
Ø
|
We
had a significant amount of debt following the offering of our
convertible
senior notes. 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.
|
|
Ø
|
If
we fail to maintain an effective system of internal controls or
discover
material weaknesses in our internal controls over financial reporting,
we
may not be able to report our financial results accurately or detect
fraud, which could harm our business and the trading price of our
Common
Stock.
|
|
Ø
|
Terrorist
attacks, or threats or occurrences of other terrorist activities
whether
in the United States or internationally may affect the markets
in which
our Common Stock trades, the markets in which we operate and our
profitability.
|
Risks
Related To Our International Operations
|
Ø
|
Our
international operations subject us to risks that could adversely
affect
our operations.
|
|
Ø
|
We
have significant operations and assets in China, Taiwan and Hong
Kong and,
as a result, will be subject to risks inherent in doing business
in those
jurisdictions, which may adversely affect our financial
performance.
|
|
Ø
|
We
are subject to foreign currency risk as a result of our international
operations.
|
|
Ø
|
We
may not continue to receive preferential tax treatment in Asia,
thereby
increasing our income tax expense and reducing our net
income.
|
|
Ø
|
The
distribution of any earnings of our foreign subsidiaries to the
United
States may be subject to U.S. income taxes, thus reducing our net
income.
|
Risks
Related To Our Common Stock
|
Ø
|
Variations
in our quarterly operating results may cause our stock price to
be
volatile.
|
|
Ø
|
We
may enter into future acquisitions and take certain actions in
connection
with such acquisitions that could affect the price of our Common
Stock.
|
|
Ø
|
Our
directors, executive officers and significant stockholders hold a
substantial portion of our Common Stock, which may lead to conflicts
with
other stockholders over corporate transactions and other corporate
matters.
|
|
Ø
|
We
were formed in 1959, and 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.
|
|
Ø
|
Conversion
of our convertible senior notes will dilute the ownership interest
of
existing shareholders, including holders who had previously converted
their notes.
|
|
Ø
|
The
repurchase rights and the increased conversion rate triggered by
a
make-whole fundamental change could discourage a potential
acquirer.
|
|
Ø
|
Anti-takeover
effects of certain provisions of Delaware law and our Certificate
of
Incorporation and Bylaws
|
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:
|
Ø
|
the
condition of the economy in general and of the semiconductor industry
in
particular;
|
|
Ø
|
our
customers’ adjustments in their order
levels;
|
|
Ø
|
changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
|
|
Ø
|
the
termination of key supplier
relationships;
|
|
Ø
|
the
rate of introduction of new products to, and acceptance by, our
customers;
|
|
Ø
|
our
ability to compete effectively with our current and future
competitors;
|
Ø
our
ability to enter into and renew key corporate and strategic relationships
with
our customers, vendors and strategic alliances;
|
Ø
|
changes
in foreign currency exchange rates;
|
|
Ø
|
a
major disruption of our information technology
infrastructure; and
|
|
Ø
|
unforeseen
catastrophic events, such as armed conflict, terrorism, fires,
typhoons
and earthquakes.
|
Cost
of Goods Sold
Cost
of
goods sold includes manufacturing costs for our semiconductor products and
our
wafers. These costs include raw materials used in our manufacturing processes
as
well as the labor costs and overhead expenses. Cost of goods sold is also
impacted by yield improvements, capacity utilization and manufacturing
efficiencies. In addition, cost of goods sold includes the cost of products
that
we purchase from other manufacturers and sell to our customers. Cost of goods
sold is also affected by inventory obsolescence if our inventory management
is
not efficient.
Selling,
General and Administrative Expenses (SG&A)
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 (R&D)
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. facilities. 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 primarily of interest payable
on our
outstanding credit facilities.
Income
Tax Provision
We
recognized income tax expense of $2.7 million for the first quarter of 2007,
resulting in an effective tax rate of 16.5%, as compared to 15.0% in the
same
period last year, and 20.5% in the fourth quarter of 2006. The higher effective
tax rate compared to the first quarter of 2006 reflects the impact of an
expected increase in our preferential tax rate, from 0% to 7.5%, at one of
our
China subsidiaries. The decrease in the effective tax rate compared to the
fourth quarter of 2006 reflects additional tax planning efforts aimed at
improving our tax rate with lower planned foreign earnings repatriations
in
2007. Going forward, we currently anticipate our consolidated tax rate to
be
comparable to the first quarter of 2007. 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.
We
are
involved in various tax matters, some of whose outcome is uncertain. For
purposes of evaluating whether or not a tax position is uncertain (1) we
presume the tax position will be examined by the relevant taxing authority
that
has full knowledge of all relevant information, (2) technical merits of a
tax position are derived from authorities such as legislation and statutes,
legislative intent, regulations, rulings and case law and their applicability
to
the facts and circumstances of the tax position, and (3) each tax position
is evaluated without consideration of the possibility of offset or aggregation
with other tax positions taken. A tax benefit from an uncertain position
may be
recognized only if it is “more likely than not” that the position is
sustainable, based on its technical merits, and the tax benefit of a qualifying
position is the largest amount of tax benefits that is greater than 50% likely
of being realized upon ultimate settlement with a taxing authority having
full
knowledge of all relevant information.
We
adopted the provisions of FIN 48 effective January 1, 2007. As a result of
the
implementation of FIN 48, we recorded an approximate $2.0 million increase
in
the liability for unrecognized tax benefits, primarily related to our foreign
subsidiaries, which was accounted for as a reduction to the January 1, 2007
balance of retained earnings.
Allowance
for Doubtful Accounts
Management
evaluates the collectability of our accounts receivable based upon a combination
of factors, including the current business environment and historical
experience. If we are aware of a customer’s inability to meet its financial
obligations to us, we record an allowance to reduce the receivable to the
amount
we reasonably believe we will be able to collect from the customer. For all
other customers, we record an allowance based upon the amount of time the
receivables are past due. If actual accounts receivable collections differ
from
these estimates, an adjustment to the allowance may be necessary with a
resulting effect on operating expense.
Impairment
of Long-Lived Assets
As
of March 31, 2007, goodwill was $24.7 million ($19.6 million related to the
Anachip acquisition, $4.2 million related to the FabTech acquisition, and
$0.9 million 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 (SFAS 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. We continue to use the Black-Scholes model, consistent
with
prior period valuations under SFAS 123 and SFAS 123R. 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 us 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 expensing $1.6 million
and $1.5 million in the three month periods ended March 31, 2006 and 2007,
respectively, which was recorded within the cost of goods sold expense, general
and administrative expense and research and development expense on our condensed
consolidated income statement. In addition, SFAS 123R requires us to reflect
any
tax savings resulting from tax deductions in excess of expense reflected
in our
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 I -
Share-based Compensation” for details). We have changed our primary award type
from stock options to stock awards as an improved method of employee reward
and
retention. In general, we extended the vesting period from three years to
four
years, and reduced the number of shares subject to the award by a factor
of
approximately three to one.
We
have
570,225 restricted stock grants outstanding as of March 31, 2007. The restricted
stock grants will be recorded each quarter as a non-cash operating expense
item.
As of March 31, 2007, there was $9.9 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 2.8 years. In the first quarter
of
2007, an expense of $0.9 million was recorded. In addition to the expense,
the
effects of the restricted stock grants are included in the diluted shares
outstanding calculation.
Results
of Operations for the Three Months Ended March 31, 2006 and
2007
The
following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net sales and the percentage
dollar increase (decrease) of such items from period to period.
|
|
Percent
of Net Sales
|
|
Percentage
Dollar
|
|
|
|
Three
months ended March 31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2007
|
|
'06
to '07
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(67.1
|
)
|
|
(67.9
|
)
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
32.9
|
|
|
32.1
|
|
|
21.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(18.1
|
)
|
|
(17.0
|
)
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
14.8
|
|
|
15.1
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
0.8
|
|
|
2.9
|
|
|
342.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
116.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
15.3
|
|
|
17.5
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(2.3
|
)
|
|
(2.9
|
)
|
|
57.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
13.0
|
|
|
14.6
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
80.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
12.7
|
|
|
14.1
|
|
|
39.7
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended March 31, 2007,
compared to the three months ended March 31, 2006. This discussion should
be
read in conjunction with the consolidated financial statements and notes
thereto
appearing elsewhere in this quarterly report (in
thousands).
|
2006
|
2007
|
Net
sales
|
$
73,589
|
$
92,020
|
Net
sales
increased approximately $18.4 million for the three months ended March 31,
2007,
compared to the same period last year. The 25.0% increase in net sales
represents an approximately 39.6% increase in units sold offset in part by
a
10.4% decrease in average selling prices (ASP). A first quarter 2007 sequential
revenue increase to our customers in the consumer electronics market was
offset
by weak seasonal demand in the computer and industrial segments, as well
as by
significant price pressure and an unfavorable commodity-based product mix.
First
quarter 2007 revenue in Asia was down 7% sequentially and contributed 72%
of our
first quarter sales, with demand in core end-equipment categories such as
digital media players, notebook computers and LCD screens down in the quarter.
North American sales were up 3.4% sequentially and accounted for 24% of total
sales driven by strong OEM demand. Revenue in Europe was up 63% sequentially
and
contributed 4.5% of total sales, as we continued to make progress with new
design wins, initial orders and expanded customer relationships.
|
2006
|
2007
|
Cost
of goods sold
|
$
49,375
|
$
62,496
|
Gross
profit
|
$
24,214
|
$
29,524
|
Gross
profit margin percentage
|
32.9%
|
32.1%
|
Cost
of
goods sold increased approximately $13.1 million, or 26.6%, for the three
months
ended March
31,
2007 compared
to the same period last year. As a percent of sales, cost of goods sold
increased to 67.9% in the first quarter of 2007 from 67.1% in the comparable
period last year and our average unit cost (AUP) decreased 9.3%. As per SFAS
123R, included in cost of goods sold was $133,000 and $82,000 of non-cash,
stock
option compensation expense related to our manufacturing facilities for the
three months ended March 31, 2006 and 2007, respectively.
For
the
first quarter of 2007, gross profit increased by approximately $5.3 million,
or
21.9%, compared to the three months ended March 31, 2006. Gross margin decreased
to 32.1% for the three months ended March 31, 2007, compared to 32.9% for
the
same period of 2006, due to (i) the ASP decline exceeding the AUP decline
and
(ii) demand-induced changes in product mix.
|
2006
|
2007
|
SG&A
|
$
11,284
|
$12,679
|
SG&A
for the three months ended March 31, 2007 increased approximately $1.4 million,
or 12.4%, compared to the same period last year, due primarily to increased
compensation expense, including share grant expense, related to increased
employees, as well as increased sales commissions related to the net sales
increase. Non-cash, SFAS123R stock option expense included in SG&A was $1.3
million in both first quarters of 2006 and 2007. SG&A, as a percentage of
sales, improved to 13.8% in the current quarter, compared to 15.3% in the
prior-year quarter, due primarily to the increased sales.
|
2006
|
2007
|
R&D
|
$
1,966
|
2,944
|
Investment
in R&D in the current quarter was $2.9 million, an increase of approximately
$1.0 million from the same period last year. The R&D increase was due
primarily to additional R&D initiatives, as well as the APD acquisition in
the fourth quarter of 2007 which provided the SBR®
technology. Non-cash, SFAS123R stock option expense included in R&D was $0.1
million in both first quarters of 2006 and 2007. We continue to enhance our
R&D capabilities to support our broader market focus and profitable growth
objectives. R&D, as a percentage of sales, was 3.2% in the first quarter
2007 compared to 2.7% in the same period of 2006.
|
2006
|
2007
|
Interest
income (expense), net
|
$
594
|
$
2,629
|
Net
interest income for the three months ended March 31, 2007 was $2.6 million,
compared to the net interest income of $0.6 million in the same period 2006.
The
increase was due primarily to interest income earned on short-term investment
securities purchased primarily with funds from the convertible bond
offering.
|
2006
|
2007
|
Other
expense
|
$
207
|
$
448
|
Other
expense for the three months ended March 31, 2007 was $448,000, compared
to
other expense of $207,000 in the first quarter of 2006. Included in other
expense for the first quarter of 2007 was an approximate $319,000 amortization
expenses for convertible notes issuance costs and $253,000 currency exchange
loss due to Taiwan currency changes during the quarter.
|
2006
|
2007
|
Income
tax provision
|
$
1,689
|
$
2,658
|
We
recognized income tax expense of $2.7 million for the first quarter of 2007,
resulting in an effective tax rate of 16.5%, as compared to 15.0% in the
same
period last year, and 20.5% in the fourth quarter of 2006. The higher effective
tax rate compared to the first quarter of 2006 reflects the impact of an
expected increase in our preferential tax rate, from 0% to 7.5%, at one of
our
China subsidiaries. The decrease in the effective tax rate compared to the
fourth quarter of 2006 reflects additional tax planning efforts aimed at
improving our tax rate with lower planned foreign earnings repatriations
in
2007. Going forward, we currently anticipate our consolidated tax rate to
be
comparable to the first quarter of 2007.
|
2006
|
2007
|
Minority
interest
|
$
230
|
$
415
|
Minority
interest represented the minority investor’s share of the earnings of
Diodes-China, Diodes-Shanghai and Anachip for the period. The
reciprocal investment in the above subsidiaries and their equity balances
were
eliminated in the consolidations of our financial statements, and the activities
of Diodes-China, Diodes-Shanghai and Anachip were included therein. As of
March
31, 2007, we
had 95%
controlling interests in Diodes-China and Diodes-Shanghai, and a 99.81%
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, 2006 and
March
31, 2007, our working capital was $395.4 million and $407.1 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.
On
October 5, 2006, we issued $230 million in aggregate principal amount of
convertible senior notes due on October 1, 2026. We received approximately
$224.0 in net proceeds from this debt offering and intend to use the net
proceeds from
this offering for working capital and other general corporate purposes,
including acquisitions.
Capital
expenditures for the three months ended March 31, 2006 and 2007 were $11.6
million and $12.4 million, respectively. Our capital expenditures for these
periods were primarily related to manufacturing expansion in our facilities
in
China and, to a lesser extent, our wafer fabrication facility in the U.S.
2007
capital expenditures were 13.4% of revenue, which is slightly higher than
our
10-12% full-year estimate.
Discussion
of Cash Flow
Cash
and
short-term investments decreased from $339.9 million at December 31,
2006, to $335.3 million at March 31, 2007.
Operating
Activities
Net
cash
provided by operating activities during the first three months of 2007 was
$6.5 million, resulting primarily from $13.0 million of net income in
this period, as well as a $6.3 million in depreciation and amortization.
Net
cash provided by operating activities was $17.0 million for the same period
in 2006. Net cash provided by operations decreased by $10.5 million for the
first three months from 2006 to 2007. This decrease resulted primarily from
an
approximately $6.0 million increase in operating assets and a $10.5 million
decrease in liabilities, offset by a $3.7 million increase in our net income
(from $9.3 million in 2006 to $13.0 million in 2007), $0.5 million increase
in non-cash, share-based compensation expense, and a $1.6 million increase
in
depreciation and amortization expense. 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 in investing activities was $16.1 million for the first three months
of 2007 compared to $35.8 million for the same period of 2006. The $19.7
million decrease in investing activities primary relates to the $18.7 million
payment for Anachip acquisition (net of cash acquired) in the first quarter
of
2006, and a $1.7 million decrease in investment in available for sale
securities, offset by a $1.3 million increase in capital
expenditures.
Financing
Activities
Our
financing activities include net borrowings, share issuances and excess tax
benefits associated with stock option exercises. Net cash provided by financing
activities totaled $1.3 million for the first three months of 2007 compared
to
cash used of $0.8 million in the same period of 2006. This increase is primarily
the result of a $3.7 million decrease in repayments of long-term debt and
lines
of credit, offset by a $1.3 million decrease in excess tax benefits associated
with stock option exercises, as well as $402,000 less cash proceeds from
stock
options exercised during the 2007 quarter.
Debt
Instruments
On
August 29, 2006, we amended our U.S. credit arrangements with Union
Bank of California, N.A. Under the second amendment to our amended and restated
credit agreement, we have available a revolving credit commitment of up to
$20.0 million, including a $5.0 million letter of credit sub-facility.
In addition, and in connection with this amendment, one of our subsidiaries,
Diodes-FabTech, also amended and restated a term note and related agreement
with
respect to an existing term loan arrangement, which we refer to as the FabTech
term loan. After giving effect to this amendment, the principal amount under
the
FabTech term loan was increased to $5.0 million.
The
revolving credit commitment expires on August 29, 2008. The FabTech term
loan, which amortizes monthly, matures on August 29, 2010. As of March 31,
2007, we had no amounts outstanding under our revolving credit facility,
and
there was $3.4 million outstanding under the FabTech term loan. Loans to
Diodes
Incorporated under our credit facility are guaranteed by FabTech, and in
turn,
the FabTech term loan is guaranteed by Diodes Incorporated. The purpose of
the
revolving credit facility is to provide cash for domestic working capital
purposes, and to fund permitted acquisitions.
Any
amounts borrowed under the credit facility and the FabTech term loan are
collateralized by all of Diodes Incorporated’s and FabTech’s accounts,
instruments, chattel paper, documents, general intangibles, inventory,
equipment, furniture and fixtures, pursuant to security agreements entered
into
by Diodes Incorporated and FabTech in connection with these credit
arrangements.
Any
amounts borrowed under the revolving credit facility and the FabTech term
loan
bear interest at LIBOR plus 1.15%. At March 31, 2007, the effective rate
under
both agreements 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 March 31, 2007, we were in compliance with the bank
covenants except for the leverage ratio, for which we received a waiver of
the
covenant from Union Bank, as well as an amendment to the credit agreement
revising the leverage ratio covenant to 3.25 to 1.0.
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
March 31, 2007, our Asia subsidiaries have available lines of credit of up
to an
aggregate of $34.2 million, with a several Chinese and Taiwanese financial
institutions. These lines of credit, except for one Taiwanese credit facility,
are collateralized by its premises, are unsecured, uncommitted and, in some
instances, may be repayable on demand. Loans under these lines of credit
bear
interest at LIBOR or similar indices plus a specified margin.
As
of
March 31, 2007, Diodes-China owed $1.1 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, we issued and sold convertible senior notes with an aggregate
principal amount of $230 million due 2026 (“Notes”), which pay 2.25% interest
per annum on the principal amount of the notes, payable semi-annually in
arrears
on April 1 and October 1 of each year, beginning on April 1, 2007. Interest
will
accrue on the notes from and including October 12, 2006 or from and including
the last date in respect of which interest has been paid or provided for,
as the
case may be, to, but excluding, the next interest payment date or maturity
date,
as the case may be. Commencing with the six-month period beginning October
1,
2011, and for each six-month period thereafter, we will, on the interest
payment
date for such interest period, pay contingent interest to the holders of
the
notes under certain circumstances and in amounts described in the
indenture.
Note
holders may require us to repurchase all or a portion of their notes upon
a
fundamental change, as described in this prospectus, at a repurchase price
in
cash equal to 100% of the principal amount of the notes to be repurchased,
plus
any accrued and unpaid interest to, but excluding, the fundamental change
repurchase date. Future minimum interest payments related to the Notes as
of
December 31, 2006 are $5.2 million for each year from 2007 through 2011.
Future
minimum payments related to the Notes as of March 31, 2007 through 2011 and
thereafter include $77.5 million in interest and $230 million in principal
for a
total of $307.5 million.
In
connection with the issuance of the Notes, we incurred approximately $6.2
million of issuance costs, which primarily consisted of investment banker
fees,
legal and accounting fees. These costs are classified within Other Assets
and
are amortized as a component of interest expense using the straight-line
method
over the life of the Notes from issuance through October 12, 2011.
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
Our
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, 2006.
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
We
are,
from time to time, involved in litigation incidental to the conduct of our
business. We do not believe we are currently a party to any pending
litigation.
Item
1A. Risk Factors
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, 2006, filed on March 1, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
are
no matters to be reported under this heading.
Item
3. Defaults Upon Senior Securities
There
are
no matters to be reported under this heading.
Item
4. Submission of Matters to a Vote of Security Holders
There
are
no matters to be reported under this heading.
Item
5. Other Information
There
are
no matters to be reported under this heading.
Item
6. Exhibits
|
3.1
|
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No. 1 to the Company's Registration Statement on Form
S-3 (File
No. 333-127833) filed on September 8,
2006).
|
|
3.2
|
Amended
Bylaws of the Company dated August 14, 1987 (incorporated by reference
to
Exhibit 3 to Form 10-K filed with the Commission for fiscal year
ended
April 30, 1988).
|
|
10.1
|
Deferred
Compensation Plan (incorporated by reference to Exhibit 99.1 to
Form 8-K
filed with the Commission on January 8,
2007).
|
|
10.2
|
Third
Amendment to Amended And Restated Credit Agreement between the
Company and
Union Bank of California, N.A.
|
|
11
|
Computation
of Earnings Per Share
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIODES
INCORPORATED (Registrant)
By:
/s/ Carl C. Wertz
|
May
8, 2007
|
CARL
C. WERTZ
|
|
Chief
Financial Officer, Treasurer and Secretary
|
|
(Duly
Authorized Officer and Principal Financial and
|
|
Chief
Accounting Officer)
|
|
INDEX
TO EXHIBITS
|
3.1
|
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No. 1 to the Company's Registration Statement on Form
S-3 (File
No. 333-127833) filed on September 8,
2006).
|
|
3.2
|
Amended
Bylaws of the Company dated August 14, 1987 (incorporated by reference
to
Exhibit 3 to Form 10-K filed with the Commission for fiscal year
ended
April 30, 1988).
|
|
10.1
|
Deferred
Compensation Plan (incorporated by reference to Exhibit 99.1 to
Form 8-K
filed with the Commission on January 8,
2007).
|
|
10.2
|
Third
Amendment to Amended And Restated Credit Agreement between the
Company and
Union Bank of California, N.A.
|
|
11
|
Computation
of Earnings Per Share
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|