Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended June
30, 2007
Or
o
Transition Report Pursuant to
Section 13 or 15(d) of
the
Securities Exchange Act of 1934
For
the
transition period from _______ to ________.
Commission
file number: 1-5740
DIODES
INCORPORATED
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
|
95-2039518
|
15660
North Dallas Parkway Suite 850
Dallas,
Texas
(Address
of principal executive offices)
|
|
75248
|
(972)
385-2810
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one)
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
The
number of shares of the registrant’s Common Stock outstanding as of August 8,
2007 was 39,711,040.
Table
of Contents
|
Page
|
|
|
Part
I – Financial Information
|
3
|
|
|
Item
1 – Financial Statements
|
3
|
|
|
Consolidated
Condensed Balance Sheet as
of June 30, 2007 and December 31, 2006
|
3
|
|
|
Consolidated
Condensed Statements of Income for the Three and Six Months ended
June
30,
2007 and
2006
|
5
|
|
|
Consolidated
Condensed Statements of Cash Flows for
the Six Months ended June 30, 2007 and 2006
|
6
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
8
|
|
|
Item
2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
|
Item
3 –
Quantitative and Qualitative Disclosures about Market Risk
|
40
|
|
|
Item
4 –
Controls and Procedures
|
40
|
|
|
Part
II –
Other Information
|
40
|
|
|
Item
1 –
Legal Proceedings
|
40
|
|
|
Item
1A –
Risk Factors
|
40
|
|
|
Item
2 –
Unregistered Sales of Equity Securities and Use of
Proceeds
|
40
|
|
|
Item
3 –
Defaults Upon Senior Securities
|
41
|
|
|
Item
4 –
Submission of Matters to a Vote of Security Holders
|
41
|
|
|
Item
5 –
Other Information
|
41
|
|
|
Item
6 –
Exhibits
|
42
|
|
|
Signature
|
43
|
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEET
(In
thousands, except share data)
ASSETS
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,888
|
|
$
|
42,679
|
|
Short-term
investments
|
|
|
291,008
|
|
|
309,780
|
|
Total
cash and short-term investments
|
|
|
339,896
|
|
|
352,459
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Trade
customers
|
|
|
72,175
|
|
|
79,690
|
|
Related
parties
|
|
|
6,147
|
|
|
6,126
|
|
|
|
|
78,322
|
|
|
85,816
|
|
Allowance
for doubtful accounts
|
|
|
(617
|
)
|
|
(462
|
)
|
Accounts
receivable, net of allowances
|
|
|
77,705
|
|
|
85,354
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
48,202
|
|
|
48,549
|
|
Deferred
income taxes, current
|
|
|
4,650
|
|
|
6,511
|
|
Prepaid
expenses and other
|
|
|
8,393
|
|
|
9,621
|
|
Total
current assets
|
|
|
478,846
|
|
|
502,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT,
net
|
|
|
95,469
|
|
|
110,424
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non-current
|
|
|
5,428
|
|
|
6,906
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
10,669
|
|
|
10,037
|
|
Goodwill
|
|
|
25,030
|
|
|
24,872
|
|
Other
|
|
|
6,697
|
|
|
6,690
|
|
Total assets
|
|
$
|
622,139
|
|
$
|
661,423
|
|
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,
|
|
June
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
-
|
|
$
|
1,035
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
40,029
|
|
|
34,787
|
|
Related parties
|
|
|
12,120
|
|
|
11,873
|
|
Accrued
liabilities
|
|
|
24,967
|
|
|
29,269
|
|
Income
tax payable
|
|
|
3,433
|
|
|
3,342
|
|
Current
portion of long-term debt
|
|
|
2,802
|
|
|
2,122
|
|
Current
portion of capital lease obligations
|
|
|
141
|
|
|
143
|
|
Total
current liabilities
|
|
|
83,492
|
|
|
82,571
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT,
net of current portion
|
|
|
|
|
|
|
|
2.25%
convertible senior notes due 2026
|
|
|
230,000
|
|
|
230,000
|
|
Others
|
|
|
7,115
|
|
|
6,412
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,477
|
|
|
1,395
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,101
|
|
|
5,267
|
|
MINORITY
INTEREST
|
|
|
4,787
|
|
|
5,748
|
|
Total
liabilities
|
|
|
327,972
|
|
|
331,393
|
|
|
|
|
|
|
|
|
|
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;
38,941,901 and 39,714,162 issued at December 31, 2006 and June
30, 2007,
respectively (1)
|
|
|
17,308
|
|
|
17,651
|
|
Additional
paid-in capital
|
|
|
113,449
|
|
|
125,856
|
|
Retained
earnings
|
|
|
162,802
|
|
|
186,104
|
|
Accumulated
other comprehensive gain
|
|
|
608
|
|
|
419
|
|
Total
stockholders' equity
|
|
|
294,167
|
|
|
330,030
|
|
Total
liabilities and stockholders' equity
|
|
$
|
622,139
|
|
$
|
661,423
|
|
(1)
Adjusted for the effect of a 3-for-2 stock split in July 2007 (Note
O)
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
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
82,712
|
|
$
|
96,283
|
|
$
|
156,301
|
|
$
|
188,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
55,279
|
|
|
65,605
|
|
|
104,654
|
|
|
128,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
27,433
|
|
|
30,678
|
|
|
51,647
|
|
|
60,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
11,716
|
|
|
13,397
|
|
|
23,000
|
|
|
26,075
|
|
Research
and development
|
|
|
2,077
|
|
|
3,156
|
|
|
4,043
|
|
|
6,101
|
|
Restucturing
and impariment of fixed assets
|
|
|
-
|
|
|
1,770
|
|
|
120
|
|
|
1,770
|
|
Total
operating expenses
|
|
|
13,793
|
|
|
18,323
|
|
|
27,163
|
|
|
33,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
13,640
|
|
|
12,355
|
|
|
24,484
|
|
|
26,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,004
|
|
|
4,285
|
|
|
1,738
|
|
|
8,320
|
|
Interest
expense
|
|
|
(133
|
)
|
|
(1,696
|
)
|
|
(273
|
)
|
|
(3,421
|
)
|
Other
|
|
|
12
|
|
|
72
|
|
|
(195
|
)
|
|
(56
|
)
|
Total
other income
|
|
|
883
|
|
|
2,661
|
|
|
1,270
|
|
|
4,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
14,523
|
|
|
15,016
|
|
|
25,754
|
|
|
31,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
(2,885
|
)
|
|
(2,221
|
)
|
|
(4,575
|
)
|
|
(4,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
11,638
|
|
|
12,795
|
|
|
21,179
|
|
|
26,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(253
|
)
|
|
(546
|
)
|
|
(482
|
)
|
|
(961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
11,385
|
|
$
|
12,249
|
|
$
|
20,697
|
|
$
|
25,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
$
|
0.31
|
|
$
|
0.54
|
|
$
|
0.64
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.29
|
|
$
|
0.50
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,281,715
|
|
|
39,397,309
|
|
|
38,152,320
|
|
|
39,219,907
|
|
Diluted
|
|
|
41,991,176
|
|
|
42,022,979
|
|
|
41,792,910
|
|
|
41,897,204
|
|
(1)
Adjusted for the effect of a 3-for-2 stock split in July 2007 (Note
O)
The
accompanying notes are an integral part of these financial statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,697
|
|
$
|
25,258
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,670
|
|
|
13,026
|
|
Minority interest earnings
|
|
|
490
|
|
|
961
|
|
Share-based compensation
|
|
|
4,085
|
|
|
4,654
|
|
Loss on disposal of property, plant and equipment
|
|
|
120
|
|
|
348
|
|
Changes in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3,409
|
|
|
(7,793
|
)
|
Inventories
|
|
|
(11,516
|
)
|
|
(442
|
)
|
Prepaid
expenses and other current assets
|
|
|
(383
|
)
|
|
(1,876
|
)
|
Deferred
income taxes
|
|
|
35
|
|
|
(3,339
|
)
|
Changes in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
6,871
|
|
|
(5,382
|
)
|
Accrued
liabilities
|
|
|
1,242
|
|
|
415
|
|
Other
liabilities
|
|
|
-
|
|
|
2,210
|
|
Income
taxes payable
|
|
|
433
|
|
|
(88
|
)
|
Net
cash provided by operating activities
|
|
|
35,153
|
|
|
27,952
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(29,650
|
)
|
|
(23,318
|
)
|
Purchases
of short-term investments
|
|
|
(11,069
|
)
|
|
(18,772
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(18,957
|
)
|
|
-
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
54
|
|
|
5
|
|
Net
cash used by investing activities
|
|
|
(59,622
|
)
|
|
(42,085
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Advances
(repayments) on line of credit, net
|
|
|
(928
|
)
|
|
1,056
|
|
Net
proceeds from issuance of common stock
|
|
|
1,517
|
|
|
3,894
|
|
Excess
tax benefits
|
|
|
3,032
|
|
|
4,202
|
|
Repayments
of long-term debt
|
|
|
(3,883
|
)
|
|
(1,383
|
)
|
Repayments
of capital lease obligations
|
|
|
(79
|
)
|
|
(81
|
)
|
Net
cash provided (used) by financing activities
|
|
|
(341
|
)
|
|
7,688
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
|
|
|
437
|
|
|
236
|
|
DECREASE
IN CASH
|
|
|
(24,373
|
)
|
|
(6,209
|
)
|
CASH
AND CASH EQUIVALENTS,
beginning of period
|
|
|
73,288
|
|
|
48,888
|
|
CASH
AND CASH EQUIVALENTS,
end of period
|
|
$
|
48,915
|
|
$
|
42,679
|
|
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)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2007
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,008
|
|
$
|
2,598
|
|
Income
taxes
|
|
$
|
1,306
|
|
$
|
2,147
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
(2,175
|
)
|
$
|
3,943
|
|
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 and
six
months ended June 30, 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 Incorporated and its
subsidiaries:
Diodes
Taiwan, Inc. (“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
Diodes
International B.V. (“Diodes-International”) - 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 dollars
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 $57,000
and
$53,000 for the quarter ended June 30, 2006 and 2007, respectively, and $350,000
and $307,000 for the six months ended June 30, 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 $419,000
at
December 31, 2006 and June 30, 2007, respectively. The $189,000 change of other
comprehensive income was primarily a result of currency translation loss during
the first six months of 2007.
Total
comprehensive income for the three and six months ended June 30, 2006 and 2007
was as follows (in
thousands):
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Net
income
|
|
$
|
11,385
|
|
$
|
12,249
|
|
$
|
20,697
|
|
$
|
25,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
465
|
|
|
257
|
|
|
436
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
11,850
|
|
$
|
12,506
|
|
$
|
21,133
|
|
$
|
25,069
|
|
NOTE
C –
Short-term
Investments
Short-term
investments at June 30, 2007, were as follows (in
thousands):
|
|
Cost
Basis
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
|
|
|
|
|
|
|
|
|
|
|
State
and local government obligations
|
|
$
|
309,541
|
|
$
|
-
|
|
$
|
-
|
|
$
|
309,541
|
|
Money
market mutual funds
|
|
|
239
|
|
|
-
|
|
|
-
|
|
$
|
239
|
|
Total
short-term investments
|
|
$
|
309,780
|
|
$
|
-
|
|
$
|
-
|
|
$
|
309,780
|
|
The
estimated fair value of available-for-sale debt securities is $309.5 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,
|
|
June
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
30,626
|
|
$
|
25,485
|
|
Work-in-progress
|
|
|
10,265
|
|
|
9,043
|
|
Raw
materials
|
|
|
13,464
|
|
|
18,389
|
|
|
|
|
54,355
|
|
|
52,917
|
|
Less:
reserves
|
|
|
(6,153
|
)
|
|
(4,368
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
48,202
|
|
$
|
48,549
|
|
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
|
|
Acquisitions/
purchase
accounting
adjustments
|
|
Currency
exchange
and
other
|
|
Balance,
June
30
|
|
Goodwill-China
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
Goodwill-FabTech
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
Goodwill-Anachip
|
|
|
-
|
|
|
19,675
|
|
|
265
|
|
|
19,940
|
|
|
-
|
|
|
(158
|
)
|
|
19,782
|
|
Total
|
|
$
|
5,090
|
|
$
|
19,675
|
|
$
|
265
|
|
$
|
25,030
|
|
$
|
-
|
|
$
|
(158
|
)
|
$
|
24,872
|
|
Intangible
assets subject to amortization are (in
thousands):
As
of June 30, 2007
|
|
Amortized
Intangible Assets
|
|
Useful
life
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Currency
exchange and other
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
15
years
|
|
$
|
8,569
|
|
$
|
(359
|
)
|
$
|
(167
|
)
|
$
|
8,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anachip:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks
|
|
|
3-10
years
|
|
$
|
2,430
|
|
$
|
(419
|
)
|
$
|
(17
|
)
|
$
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
$
|
10,999
|
|
$
|
(778
|
)
|
$
|
(184
|
)
|
$
|
10,037
|
|
Amortization
expense related to intangible assets subject to amortization was $72,000 and
$209,000 for the three months ended June 30, 2006 and 2007, respectively, and
$142,000 and $418,000 for the six months ended June 30, 2006 and 2007,
respectively.
NOTE
F – Stockholders’ Equity
As
of
June 30, 2007, we had approximately 39.7 million outstanding common shares.
During the first six months of 2007, shares outstanding increased by
approximately 772,000 shares, due to approximately 700,000 shares issued in
conjunction with stock option exercises and approximately 72,000 shares issued
in conjunction with vested restricted stock units (split adjusted).
Additional
paid-in capital increased approximately $12.4 million in the first six months
of
2007, primarily due to $2.9 million in stock option expense, $1.7 million in
share grant expense, $3.6 million in conjunction with stock option exercises
and
$4.2 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, during the first quarter
of
2007, we increased our liability for unrecognized tax benefits by approximately
$2.0 million, which was accounted for as a reduction to the January 1, 2007,
balance of retained earnings.
NOTE
G – Restructuring Costs and Impairment of Fixed Assets
In
the
second quarter of 2007, we recorded approximately $1.8 million in restructuring
costs related to the consolidation of our analog wafer probe and final test
operations from Hsinchu, Taiwan to our manufacturing facilities in Shanghai,
China. The expense primarily consisted of approximately $0.8 million in
termination and severance costs, $0.3 million in impairment of fixed assets
and
$0.3 million in relocation charges.
NOTE
H – Income Tax Provision
We
file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. We are 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, we are no longer subject to income tax audits
for years before 2001. Although the outcome of tax audits is always uncertain,
we believe 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 of FIN48, during the first quarter of 2007, we increased our
liability for unrecognized tax benefits by approximately $2.0 million, which
was
accounted for as a reduction to the January 1, 2007, balance of retained
earnings. As of January 1 and June 30, 2007, the gross amount of unrecognized
tax benefits was approximately $3.2 million and $3.0 million,
respectively.
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. At this time,
an estimate of the range of the reasonably possible outcomes cannot be
made.
Income
tax expense of $2.2 million and $4.9 million for the three and six months ended
June 30, 2007, respectively, was recorded, resulting in an effective tax rate
of
15.7%, as compared to 17.8% in the first half of last year. Our lower effective
tax rate compared with the same period last year was the result of lower
quarterly income in the U.S. as well as a decrease in the amount of repatriation
of earnings of our foreign subsidiaries, offset by the increased income tax
rate
at one of our China subsidiaries (Diodes-Shanghai is subject to a 7.5%
preferential tax rate from 2007 through 2009, compared to a 0% tax rate in
2006). As of June 30, 2007, we had accrued $3.3 million for taxes on future
dividends 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 2006.
Management expects this tax to be waived for 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%. 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. From
2010
onward, Diodes-Shanghai earnings might not continue to be subject to the 15%
tax
rate as the recently promulgated income tax reform in March 2007 could terminate
some existing tax incentives for foreign enterprises doing business in
China.
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
I – Deferred Compensation Plan
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 June 30, 2007, these investments totaled
approximately $0.7 million. All gains and losses in these investments are
equally offset by corresponding gains and losses in the Company’s deferred
compensation liabilities.
NOTE
J – 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. For the three months and six months
ended June 30, 2007, share-based compensation expense related to stock options
recognized in the income statement was as follows (in
thousands):
|
|
June
30, 2007
|
|
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
Selling,
general and administrative expense
|
|
$
|
1,205
|
|
$
|
2,508
|
|
Research
and development expense
|
|
$
|
118
|
|
$
|
243
|
|
Cost
of sales
|
|
$
|
79
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
Total
stock option expense
|
|
$
|
1,402
|
|
$
|
2,911
|
|
Compensation
expense for the three months and six months ended June 30, 2007, for stock
options granted during the respective periods was calculated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
June
30, 2007
|
|
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
Expected
volatility
|
|
|
54.52
|
%
|
|
54.52
|
%
|
Expected
term (in years)
|
|
|
6.63
|
|
|
6.63
|
|
Risk-free
interest rate
|
|
|
4.91
|
%
|
|
4.91
|
%
|
Expected
forfeitures
|
|
|
2.56
|
%
|
|
2.56
|
%
|
Expected
dividends
|
|
|
n/a
|
|
|
n/a
|
|
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 6.94 years, while the expected term for all
other employees is 4.66 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 and restricted share units as of June 30, 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
six months ended June 30, 2007, the Company granted stock options to
purchase approximately 265,000 shares of the Company's Common Stock, which
vest
in equal annual installments over a four-year period and expire ten years from
the date of grant. Options granted in the three months ended June 30, 2007
had a weighted-average grant date fair value of $14.74. (Split
adjusted)
The
total
intrinsic value (actual gain) of options exercised during the six months ended
June 30, 2007 was approximately $13.4 million.
The
total
net cash proceeds received from stock option exercise for the six months ended
June 30, 2007 was $3.9 million.
During
the six months ended June 30, 2006 and 2007, there were $3.3 million and $2.9
million, respectively, of total recognized share-based compensation expense
related to stock options under the plans.
As
of
June 30, 2007, total unrecognized share-based compensation expense related
to
unvested stock options, net of forfeitures, was approximately $10.0 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 2.7 years.
A
summary
of the stock option plans as of June 30, 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 (1)
|
|
|
5,368
|
|
$
|
8.49
|
|
|
6.4
|
|
$
|
81,396
|
|
Granted
(1)
|
|
|
265
|
|
|
24.96
|
|
|
|
|
|
|
|
Exercised
(1)
|
|
|
(700
|
)
|
|
5.66
|
|
|
|
|
|
|
|
Forfeited
or expired (1)
|
|
|
(89
|
)
|
|
18.41
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007 (1)
|
|
|
4,844
|
|
$
|
9.69
|
|
|
6.3
|
|
$
|
87,961
|
|
Exercisable
at June 30, 2007 (1)
|
|
|
3,334
|
|
$
|
6.51
|
|
|
5.4
|
|
$
|
71,138
|
|
(1)
Adjusted for the effect of a 3-for-2 stock split in July 2007 (Note
O)
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 Company’s share grants as of June 30, 2007 is presented
below:
Approximately
$0.8 million and $1.7 million of total share-based compensation expense was
recognized during the six months ended June 30, 2006 and 2007, respectively,
related to stock awards granted under the plans.
|
|
|
|
Weighted-Average
|
|
Share
Grants
|
|
Shares
(000)
|
|
Grant-Date
Fair
Value
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2007 (1)
|
|
|
852
|
|
$
|
16.45
|
|
Granted
(1)
|
|
|
269
|
|
|
25.70
|
|
Vested
(1)
|
|
|
(72
|
)
|
|
22.37
|
|
Forfeited
(1)
|
|
|
(23
|
)
|
|
23.59
|
|
Nonvested
at June 30, 2007 (1)
|
|
|
1,026
|
|
$
|
18.24
|
|
|
|
|
|
|
|
|
|
(1)
Adjusted for the effect of a 3-for-2 stock split in July 2007 (Note
O) |
|
As
of
June 30, 2007, total unrecognized share-based compensation expense related
to
unvested share grants, net of forfeitures, was approximately $14.8 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 3.2 years.
NOTE
K–Segment
and Enterprise 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,
Asia
President, 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 operations, which accounted for approximately 4.2% and 4.3%
of total sales for the three months and six months ended June 30, 2007,
respectively (4.0%
for
the second quarter of 2006, and 3.7% for the first half of 2006), are
consolidated into the domestic (North America) operations.
Geographic
Information
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):
|
|
Far
East
|
|
North
America
|
|
Total
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
92,734
|
|
$
|
31,496
|
|
$
|
124,230
|
|
Inter-company
sales
|
|
|
(34,739
|
)
|
|
(6,779
|
)
|
|
(41,518
|
)
|
Net sales
|
|
$
|
57,995
|
|
$
|
24,717
|
|
$
|
82,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,502
|
|
$
|
12,485
|
|
$
|
88,987
|
|
Assets
|
|
$
|
215,516
|
|
$
|
124,431
|
|
$
|
339,947
|
|
Three
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
121,240
|
|
$
|
29,943
|
|
$
|
151,183
|
|
Inter-company
sales
|
|
|
(48,585
|
)
|
|
(6,315
|
)
|
|
(54,900
|
)
|
Net sales
|
|
$
|
72,655
|
|
$
|
23,628
|
|
$
|
96,283
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
97,658
|
|
$
|
12,766
|
|
$
|
110,424
|
|
Assets
|
|
$
|
199,278
|
|
$
|
462,145
|
|
$
|
661,423
|
|
Six
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
173,386
|
|
$
|
58,612
|
|
$
|
231,998
|
|
Inter-company
sales
|
|
|
(64,268
|
)
|
|
(11,429
|
)
|
|
(75,697
|
)
|
Net sales
|
|
$
|
109,118
|
|
$
|
47,183
|
|
$
|
156,301
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,502
|
|
$
|
12,485
|
|
$
|
88,987
|
|
Assets
|
|
$
|
215,516
|
|
$
|
124,431
|
|
$
|
339,947
|
|
Six
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
231,907
|
|
$
|
60,666
|
|
$
|
292,573
|
|
Inter-company
sales
|
|
|
(93,395
|
)
|
|
(10,875
|
)
|
|
(104,270
|
)
|
Net sales
|
|
$
|
138,512
|
|
$
|
49,791
|
|
$
|
188,303
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
97,658
|
|
$
|
12,766
|
|
$
|
110,424
|
|
Assets
|
|
$
|
199,278
|
|
$
|
462,145
|
|
$
|
661,423
|
|
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
|
|
Percentage
of
|
|
|
|
ended
June 30,
|
|
net
sales
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
27,800
|
|
$
|
37,047
|
|
|
33.6
|
%
|
|
38.5
|
%
|
Taiwan
|
|
|
20,708
|
|
|
23,201
|
|
|
25.0
|
%
|
|
24.1
|
%
|
United
States
|
|
|
19,971
|
|
|
20,643
|
|
|
24.1
|
%
|
|
21.4
|
%
|
All
Others
|
|
|
14,233
|
|
|
15,392
|
|
|
17.3
|
%
|
|
16.0
|
%
|
Total
|
|
$
|
82,712
|
|
$
|
96,283
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the six months
|
|
Percentage
of
|
|
|
|
ended
June 30,
|
|
net
sales
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
53,369
|
|
$
|
62,039
|
|
|
34.1
|
%
|
|
32.9
|
%
|
Taiwan
|
|
|
38,979
|
|
|
56,820
|
|
|
24.9
|
%
|
|
30.2
|
%
|
United
States
|
|
|
37,562
|
|
|
40,829
|
|
|
24.0
|
%
|
|
21.7
|
%
|
All
Others
|
|
|
26,391
|
|
|
28,615
|
|
|
17.0
|
%
|
|
15.2
|
%
|
Total
|
|
$
|
156,301
|
|
$
|
188,303
|
|
|
100.0
|
%
|
|
100.0
|
%
|
NOTE
L – Business Acquisition
APD
acquisition -
On
October 19, 2006, we signed an agreement to purchase 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 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.
|
|
Total
Allocation
|
|
Assets
acquired
|
|
|
|
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
M – Commitments
Purchase
commitments -
We have
non-cancelable purchase contracts for capital expenditures, primarily for
manufacturing equipment in China, totaling approximately $10.6 million at June
30, 2007.
NOTE
N – 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 SFAS 157, “Fair Value Measurements” (“FAS 157”).
SFAS 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 a result of the
implementation of FIN48, during the first quarter of 2007, we increased our
liability for unrecognized tax benefits by approximately $2.0 million, which
was
accounted for as a reduction to the January 1, 2007, balance of retained
earnings. As of January 1 and June 30, 2007, the gross amount of unrecognized
tax benefits was approximately $3.2 million and $3.0 million,
respectively.
NOTE
O – Subsequent Event
On
July
10, 2007, we declared a three-for-two stock split in the form of a 50% stock
dividend payable on July 30, 2007 to stockholders of record on July 20,
2007.
Under
the
terms of this stock dividend, Diodes' stockholders received one additional
share
for every two shares held on the record date. The dividend was paid in
authorized but unissued shares of Common Stock. Fractional shares created by
the
stock dividend were paid in cash based upon the closing price of our Common
Stock on the record date.
As
of
July 31, 2007, the number of outstanding shares of Common Stock after the stock
dividend was increased from approximately 26.5 million to approximately 39.7
million shares. The par value of the Company's stock will not be affected by
the
dividend and will remain at $0.66 2/3 per share. The outstanding shares stated
on the balance sheet have been adjusted to reflect the additional shares issued
for the stock split; and the consolidated condensed statement of income and
disclosures have been adjusted to reflect the effects of stock split.
Item
2 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Except
for the historical information contained herein, the matters addressed in this
Item 2 constitute “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are subject
to
a variety of risks and uncertainties, including those discussed below under
the
heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that
could cause actual results to differ materially from those anticipated by the
Company’s management. The Private Securities Litigation Reform Act of 1995 (the
“Act”) provides certain “safe harbor” provisions for forward-looking statements.
All forward-looking statements made on this Quarterly Report on Form 10-Q are
made pursuant to the Act. The Company undertakes no obligation to publicly
release the results of any revisions to their forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unexpected events. Unless
the context otherwise requires, the words “Diodes,” “we,” “us” and “our” refer
to Diodes Incorporated and its subsidiaries.
This
management’s discussion should be read in conjunction with the management’s
discussion included in the Company’s Annual Report on Form 10-K for the fiscal
year-ended December 31, 2006, previously filed with Securities and Exchange
Commission.
Overview
We
are a
global supplier of discrete and analog semiconductor products. We design,
manufacture and market these semiconductors focusing on diverse end-use
applications in the consumer electronics, computing, industrial, communications
and automotive sectors. Our semiconductors, which provide electronic signal
amplification and switching functions, are basic building-block electronic
components that are incorporated into almost every electronic device. We believe
that our product focus provides us with a meaningful competitive advantage
relative to broadline semiconductor companies that provide a wider range of
semiconductor products.
We
are
headquartered in 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 Taipei, Taiwan,
and Shanghai, Shenzhen and Hong Kong , China, and San Jose and Westlake Village,
CA; and our 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 Diodes to deliver a stream of innovative solutions in our targeted
product categories. By working closely with our market-leading customers and
tailoring our R&D 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.
Sales
of
new products for the quarter amounted to 33.5% of total sales, compared to
24.9%
a year ago, and this growth includes the contribution of the Anachip acquisition
as well as the acquired SBRâ
technology. New product revenue was driven by products in sub-miniature array,
QFN, PowerDIÔ323,
PowerDIÔ123,
PowerDIÔ5,
SBRâ
and
Schottky platforms in both the discrete and analog product lines. Diodes
released 54 products covering 13 product families during the second quarter
of
2007.
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 strong results for the
year
reflect our customers’ acceptance of our broader product lines and reaffirm our
confidence in the soundness of our strategic direction.
In
order
to extend our distribution network in Europe, on July 9, 2007, we signed
a
distribution agreement with SILICA, an Avnet, Inc. (NYSE:AVT) company, and
one
of the largest suppliers and distributors of semiconductor products in Europe.
SILICA is a highly specialized semiconductor distributor with 36 branch offices
throughout Europe providing customers with a broad portfolio of semiconductor
products along with in-depth technical and logistic support as well as other
value-added services. SILICA’s specialized focus on semiconductor products and
extensive local presence in Europe will improve our ability to service our
customer's logistic requirements, enhance our competitiveness and strengthen
our
brand recognition. Since entering the European market in 2001, we have
consistently grown our sales and expanded our market share, successfully
building our European customer base in the automotive, communications and
industrial end-markets. We believe that Europe will make an important
contribution to Diodes' long term profitable growth.
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 further reduce
our
design cycle time in order to quickly
provide our customers with innovative products. Diodes’ 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 Diodes 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
$32
million in new manufacturing capacity and increased our total output by 43%
to
over 11.8 billion devices per year, and in the first half of 2007, we have
invested $27.3 million. 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 Diodes as a premier
supplier to some of the leading OEMs in the world.
In
order
to optimize the synergies from the business integration with Anachip, which
we
acquired in January 2006, we announced plans to consolidate our analog wafer
probe and final test operations from Hsinchu, Taiwan to our manufacturing
facilities in Shanghai, China. We recorded a restructuring charge of $1.8
million in the second quarter of 2007 (see Note G).
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.
In
November 2006, we purchased the net assets of APD Semiconductor, Inc., a
privately held U.S.-based fabless semiconductor company. APD Semiconductor
is
headquartered in Redwood City, California, with a sales, application, and
administration center in Taipei, Taiwan. 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 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.
At December 31, 2005, we had purchased an aggregate of 9,433,613 shares (or
approximately 18.9%) of the 50,000,000 outstanding shares of the capital stock
of Anachip. On January 10, 2006, (the closing date of the acquisition) we
purchased an additional 40,470,212 shares and therefore, we hold approximately
99.81% of the Anachip capital stock. As of result of the additional Anachip
interest acquired during 2006, Anachip was consolidated beginning the first
fiscal quarter of 2006. The purchase price of the acquisition was NT$20 per
share (approximately US$31 million). The acquired intangible assets include
patents and trademarks of $2.4 million with an approximately 10-year
weighted-average useful life. The
acquisition was accretive to our 2006 earnings, and is expected to be accretive
to our full-year 2007 earnings.
· In
2006
and the six months ended June 30, 2007, 28.2% and 32.7%, 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. New
products generally have gross profit margins that are higher than the
margins of our standard products. We expect net sales derived from new products
to increase in absolute terms, although our net sales of new products as a
percentage of our net sales will depend on the demand for our standard products,
as well as our product mix.
· Our
gross
profit margin was 31.9% in the second quarter of 2007, compared to 33.2% in
the
same period of 2006 and 32.1% in the first quarter of 2007. Our gross margin
percentage was lower sequentially as average selling prices have been declining
during the second quarter of 2007 due to market competition. Furthermore, we
are
still under process of integrating analog product line. With the addition of
Anachip, we can now pursue adjacent product categories that significantly expand
our growth opportunities as well as gross margin potential.
· As
of
June 30, 2007, we had invested approximately $151.7 million in our Asian
manufacturing facilities. For the six months ended June 30, 2007, we invested
approximately $27.3 million in capital expenditures, primarily in our Asian
manufacturing facilities, which was approximately 14.5% of revenue. We expect
our full-year capital expenditures to be at the upper-end of our guidance of
10-12% of 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 second quarter of 2007, the percentage of our net sales derived from our
Asian subsidiaries was 75.5%, compared to 71.6% in the first quarter of 2007,
71.9% in 2006 and 65.4% in 2005. 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 $2.1 million, or
2.5%
of net sales, in the second quarter of 2006 to $3.2 million, or 3.3% of net
sales, in the second quarter of 2007, as we completed the Anachip acquisition,
continued investing in enhancing current product features, and developed new
products. We continue to seek to hire qualified engineers who fit our focus
on
proprietary discrete and analog processes and packaging technologies. Our goal
is to maintain research and development expenses at approximately 3.0% of net
sales as we bring additional proprietary devices to the market.
· During
2005, we sold 3.2 million (split adjusted) shares of our Common Stock in a
follow-on public offering, raising approximately $72.0 million (net of
commissions and expenses). We used approximately $31 million of the net proceeds
to acquire Anachip and will use the remaining net proceeds from this offering
for working capital and other general corporate purposes, including additional
acquisitions.
· On
November 3, 2006, we completed the agreement to purchase the assets of APD
Semiconductor, a privately held U.S.-based fabless discrete semiconductor
company. Headquartered in Redwood City, California, APD's main product focus
is
its patented and trademarked Super Barrier Rectifier™ 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.
APD
revenue was $0.5 million for 2006 and $1.5 million for the first six months
of
2007. The APD acquisition is aligned with our strategy of strengthening our
technology leadership in the discrete semiconductor market and expanding our
product capabilities across important segments of our end-markets.
· On
October 5, 2006, we issued $230 million in aggregate principal 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 25.6419 shares per
$1,000 principal amount of notes (which represents an initial conversion price
of $39.00 per share, split adjusted). The initial conversion price represents
an
approximate 40% conversion premium, based on the sale price of $27.92 (split
adjusted) 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, 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 22.0% of our outstanding Common Stock as of June
30, 2007. Keylink International is our 5% joint venture partner in Diodes-China
and Diodes-Shanghai. C.H. Chen, our previous President and Chief Executive
Officer, and Vice Chairman of our Board of Directors, is also Vice Chairman
of
LSC, and Raymond Soong, the Chairman of our Board of Directors, is the Chairman
of Lite-On Technology Corporation, a significant shareholder of LSC, as well
as
the Chairman of LSC.
The
Audit
Committee of our Board of Directors reviews related party transactions for
potential conflict of interest situations, and approves or ratifies all such
transactions, in accordance with such procedures as it may adopt from time
to
time. We believe that related party transactions are on terms no less favorable
to us than would be obtained from unaffiliated third parties.
During
the three and six months ended June 30, 2007, we sold silicon wafers to LSC
totaling 6.4% and 6.8% (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
June 30, 2007, 10.7% (14.2% 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. We believe such transactions are
on
terms no less favorable to us than could be obtained from unaffiliated third
parties. The Audit Committee of our Board of Directors has approved the
contracts associated with these related party transactions.
During
the three and six months ended June 30, 2007, we sold silicon wafers to
companies owned by Keylink International totaling 0.9% and 0.4% (0.4% in 2006
and 0.6% in 2005) of our net sales, respectively. Also for the three months
ended June 30, 2007, 1.5% (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. 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
and
six months ended June 30, 2007, we paid Keylink International an aggregate
of
$7.9 million, 2.2 million and $4.3 million, respectively, with respect to
these items, respectively. We believe such transactions are on terms no less
favorable to us than could be obtained from unaffiliated third parties. The
Audit Committee of our Board of Directors has approved the contracts associated
with these related party transactions.
In
December 2005, we entered into a definitive stock purchase agreement to acquire
Anachip Corporation, a Taiwanese fabless analog IC company, and headquartered
in
the Hsinchu Science Park in Taiwan. The selling shareholders included LSC (which
owned approximately 60% of Anachip’s outstanding capital stock), and two
Taiwanese venture capital firms (together owning approximately 20% of Anachip’s
stock), as well as current and former Anachip employees. At December 31, 2005,
we had purchased an aggregate of 9,433,613 shares (or approximately 18.9%)
of
the 50,000,000 outstanding shares of the capital stock of Anachip. On
January 10, 2006 (the closing date of the acquisition), we purchased an
additional 40,470,212 shares and therefore, we now hold approximately 99.81%
of
the Anachip capital stock.
Concurrent
with the acquisition, Anachip entered into a wafer purchase agreement with
LSC,
pursuant to which LSC will sell to Anachip, according to Anachip's requirements,
during the two year period ending on December 31, 2007, wafers of the same
or
similar type, and meeting the same specifications, as those wafers purchased
from LSC by Anachip at the time of the acquisition. Anachip will purchase such
wafers on terms (including purchase price, delivery schedule, and payment terms)
no less favorable to Anachip than those terms on which Anachip purchased such
wafers from LSC at the time of the acquisition, provided, however, that the
purchase price will be the lower of the current price or the most favorable
customer pricing. If the price of raw wafers increases by more than 20% within
any six-month period, Anachip and LSC will renegotiate in good faith the price
of wafers to reflect the cost increase.
Available
Information
Our
Internet address is http://www.diodes.com.
We make
available, free of charge through our Internet website, our Annual Reports
on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission (the “SEC”). To support our global customer-base,
particularly in Asia and Europe, our website is language-selectable into
English, Chinese, and Korean, giving us an effective marketing tool for
worldwide markets. With its extensive online Product (Parametric) Catalog with
advanced search capabilities, our website facilitates quick and easy product
selection. Our website provides easy access to worldwide sales contacts and
customer support, and incorporates a distributor-inventory check to provide
component inventory availability and a small order desk for overnight sample
fulfillment. Our website also provides access to investor financial information,
including SEC filings and press releases, as well as stock quotes and
information on corporate governance compliance.
Cautionary
Statement for Purposes of the “Safe Harbor” Provision of the Private Securities
Litigation Reform Act of 1995
Except
for the historical information contained herein, the matters addressed in this
Quarterly Report on Form 10-Q constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We generally identify
forward-looking statements by the use of terminology such as “may,” “will,”
“could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,”
“estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such
terms. Such forward-looking statements are subject to a variety of risks and
uncertainties, including those discussed under “Risks Related To Our Business”
and elsewhere in this Quarterly Report on Form 10-Q that could cause actual
results to differ materially from those anticipated by our management. The
Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain
“safe harbor” provisions for forward-looking statements. All forward-looking
statements made on this Quarterly Report on Form 10-Q are made pursuant to
the
Act.
All
forward-looking statements contained in this Quarterly Report on Form 10-Q
are
subject to, in addition to the other matters described in this Quarterly Report
on Form 10-Q, a variety of significant risks and uncertainties. The following
discussion highlights some of these risks and uncertainties. Further, from
time
to time, information provided by us or statements made by our employees may
contain forward-looking information. There can be no assurance that actual
results or business conditions will not differ materially from those set forth
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
For
more
detailed discussion of these factors, see the “Risk Factors” discussion in Item
1A of the Company’s most recent Annual Report on Form 10-K. The forward-looking
statements included in this Quarterly Report on Form 10-Q are made only as
of
the date of this report, and the Company undertakes no obligation to update
the
forward-looking statements to reflect subsequent events or
circumstances.
Risks
Related To Our Business
|
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.
|
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Ø
|
We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
|
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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.
|
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Ø
|
We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
|
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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.
|
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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.
|
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Ø
|
If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
|
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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.
|
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Ø
|
We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
|
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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.
|
|
Ø
|
We
currently have a significant amount of debt following our convertible
senior notes offering. Our substantial indebtedness could adversely
affect
our business, financial condition and results of operations and our
ability to meet our payment obligations under the notes and our other
debt.
|
Risks
Related To Our International Operations
|
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.
|
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Ø
|
We
are subject to foreign currency risk as a result of our international
operations.
|
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Ø
|
We
may not continue to receive preferential tax treatment in China,
thereby
increasing our income tax expense and reducing our net
income.
|
|
Ø
|
The
distribution of any earnings of our foreign subsidiaries to the United
States may be subject to U.S. income taxes, thus reducing our net
income.
|
Risks
Related To Our Common Stock
|
Ø
|
Variations
in our quarterly operating results may cause our stock price to be
volatile.
|
|
Ø
|
We
may enter into future acquisitions and take certain actions in connection
with such acquisitions that could affect the price of our Common
Stock.
|
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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.
|
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Ø
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Our
early corporate records are incomplete. As a result, we may have
difficulty in assessing and defending against claims relating to
rights to
our Common Stock purporting to arise during periods for which our
records
are incomplete.
|
|
Ø
|
Conversion
of our convertible senior notes will dilute the ownership interest
of
existing shareholders, including holders who had previously converted
their notes.
|
Financial
Operations Overview
Net
Sales
We
generate a substantial portion of our net sales through the sale of discrete
and
analog semiconductor products designed and manufactured by third parties or
us.
We also generate a portion of our net sales from outsourcing manufacturing
capacity to third parties and from the sale of silicon wafers to manufacturers
of discrete semiconductor components. We serve customers across diversified
industries, including the consumer electronics, computing, industrial,
communications and automotive markets.
We
recognize revenue from product sales when title to and risk of loss of the
product have passed to the customer, there is persuasive evidence of an
arrangement, the sale price is fixed or determinable and collection of the
related receivable is reasonably assured. These criteria are generally met
upon
shipment to our customers. Net sales is stated net of reserves for pricing
adjustments, discounts, rebates and returns.
The
principal factors that have affected or could affect our net sales from period
to period are:
|
Ø
|
the
condition of the economy in general and of the semiconductor industry
in
particular;
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Ø
|
our
customers’ adjustments in their order
levels;
|
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Ø
|
changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
|
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Ø
|
the
termination of key supplier
relationships;
|
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Ø
|
the
rate of introduction of new products to, and acceptance by, our
customers;
|
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Ø
|
our
ability to compete effectively with our current and future
competitors;
|
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Ø
|
our
ability to enter into and renew key corporate and strategic relationships
with our customers, vendors and strategic
alliances;
|
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Ø
|
changes
in foreign currency exchange rates;
|
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Ø
|
a
major disruption of our information technology
infrastructure; and
|
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Ø
|
unforeseen
catastrophic events, such as armed conflict, terrorism, fires, typhoons
and earthquakes.
|
Cost
of Goods Sold
Cost
of
goods sold includes manufacturing costs for our semiconductor products and
our
wafers. These costs include raw materials used in our manufacturing processes
as
well as the labor costs and overhead expenses. Cost of goods sold is also
impacted by yield improvements, capacity utilization and manufacturing
efficiencies. In addition, cost of goods sold includes the cost of products
that
we purchase from other manufacturers and sell to our customers. Cost of goods
sold is also affected by inventory obsolescence if our inventory management
is
not efficient.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses relate primarily to compensation and
associated expenses for personnel in general management, sales and marketing,
information technology, engineering, human resources, procurement, planning
and
finance, and sales commissions, as well as outside legal, accounting and
consulting expenses, share-based compensation expenses, and other operating
expenses. We expect our selling, general and administrative expenses to increase
in absolute dollars as we hire additional personnel and expand our sales,
marketing and engineering efforts and information technology
infrastructure.
Research
and Development Expenses
Research
and development expenses consist of compensation and associated costs of
employees engaged in research and development projects, as well as materials
and
equipment used for these projects. Research and development expenses are
primarily associated with our wafer facility near Kansas City, Missouri, our
analog IC facilities in Taipei, Taiwan, and our manufacturing facilities in
China, as well as our engineers at our U.S. headquarters. All research and
development expenses are expensed as incurred, and we expect our research and
development expenses to increase in absolute dollars as we invest in new
technologies and product lines.
Interest
Income / Expense
Interest
income consists of interest earned on our cash and investment balances. Interest
expense consists of interest payable on our outstanding credit facilities.
Income
Tax Provision
We
recognized income tax expense of $2.2 million for the second quarter of 2007,
resulting in an effective tax rate of 14.8%, as compared to 19.8% in the same
period of last year. Our lower effective tax rate reflected the decrease in
the
amount of expected repatriation of earnings of our foreign subsidiaries,
partially offset by the impact of one of our China subsidiaries,
Diodes-Shanghai, which is now subject to 7.5% preferential tax rate from 2007
through 2009, compared to a 0% tax rate in 2006. Going
forward, we anticipate our tax rate to be in the 14 to 16% range. 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, with respect to some of which the 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 FIN48 effective January 1, 2007. As a result of the
implementation of FIN48, during the first quarter of 2007, we increased our
liability for unrecognized tax benefits by approximately $2.0 million, 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.
Goodwill
As
of
June 30, 2007, goodwill was $24.9 million ($19.8 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.
Impairment
of Long-Lived Assets
We
assess
the impairment of long-lived assets, including goodwill, on an on-going basis
and whenever events or changes in circumstances indicate that the carrying
value
may not be recoverable. Our impairment review process is based upon (i) an
income approach from a discounted cash flow analysis, which uses our estimates
of revenues, costs and expenses, as well as market growth rates, and (ii) a
market multiples approach which measures the value of an asset through an
analysis of recent sales or offerings or comparable public entities. If ever
the
carrying value of the goodwill is determined to be less than the fair value
of
the underlying asset, a write-down of the asset will be required, with the
resulting expense charged in the period that the impairment was
determined.
Share-Based
Compensation
Effective
in January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payments,” using
the modified prospective method. Under SFAS 123R, we are required to select
a
valuation technique or option-pricing model that meets the criteria as stated
in
the standard, which includes a binomial model and the Black-Scholes model.
At
the present time, the Company is continuing to use the Black-Scholes model,
consistent with prior period valuations under SFAS 123. No modifications were
made to any outstanding share-options prior to the adoption of SFAS 123R.
The
adoption of SFAS 123R, applying the “modified prospective method,” as elected by
the Company, requires the Company to value stock options prior to its adoption
of SFAS 123 under the fair value method and expense these amounts over the
stock
options’ remaining vesting period. This resulted in the Company expensing $1.4
million and $2.9 million in the three and six months ended June 30, 2007,
respectively, which was recorded within the cost of goods sold expense, general
and administrative expense and research and development expense on the Company’s
condensed consolidated income statement. In addition, SFAS 123R requires the
Company to reflect any tax savings resulting from tax deductions in excess
of
expense reflected in its financial statements as a financing cash inflow in
its
statement of cash flows rather than as an operating cash flow as in prior
periods (See “Note J - Share-based Compensation” for details). The Company has
changed its primary award type to employees from stock options to stock awards
as an improved method of employee reward and retention. In general, the Company
extended the vesting period from three years to four years, and reduced the
number of shares subject to the award by a factor of three.
The
Company had 677,346 restricted stock grants outstanding as of June 30, 2007.
The
restricted stock grants will be recorded each quarter as a non-cash operating
expense item. As of June 30, 2007, there was $14.8 million of total unrecognized
compensation cost related to non-vested share-based compensation. This cost
is
expected to be recognized over a weighted-average period of 3.2 years. In the
three months and six months ended June 30, 2007, an expense of $0.8 million
and
$1.7 million was recorded, respectively. 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 June 30, 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.
|
|
Three
months ended June 30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2007
|
|
'06
to '07
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(66.8
|
)
|
|
(68.1
|
)
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
33.2
|
|
|
31.9
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(16.7
|
)
|
|
(19.0
|
)
|
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
16.5
|
|
|
12.9
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
1.1
|
|
|
2.7
|
|
|
197.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
-
|
|
|
0.1
|
|
|
500.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
17.6
|
|
|
15.7
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(3.5
|
)
|
|
(2.3
|
)
|
|
(23.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
14.1
|
|
|
13.4
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
115.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
13.8
|
|
|
12.7
|
|
|
7.6
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended June
30,
2007, compared to the three months ended June 30, 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
|
|
$
|
82,712
|
|
$
|
96,283
|
|
Net
sales
increased approximately $13.6 million for the three months ended June 30, 2007,
compared to the same period last year. The 16.4% increase in net sales was
due
to a 27.4% increase in units sold, partially offset by a 8.6% decrease in
average selling prices (“ASP”) primarily due to market price competition as well
as demand induced product mix changes.
|
|
2006
|
|
2007
|
|
Cost
of goods sold
|
|
$
|
55,279
|
|
$
|
65,605
|
|
Gross
profit
|
|
$
|
27,433
|
|
$
|
30,678
|
|
Gross
profit margin percentage
|
|
|
33.2
|
%
|
|
31.9
|
%
|
Cost
of
goods sold increased approximately $10.3 million, or 18.7%, for the three months
ended June
30,
2007 compared
to the same period in 2006. As a percent of sales, cost of goods sold increased
from 66.8% for the three months ended June 30, 2006 to 68.1% for the three
months ended June 30, 2007. Our average unit cost (“AUP”) decreased 6.8% from
the second quarter of 2006. As per SFAS 123R, included in cost of goods sold
was
$0.1 million of non-cash, stock option compensation expense related to our
manufacturing facilities.
Gross
profit increased in the second quarter of 2007 by approximately $3.2 million,
or
11.8%, compared to the three months ended June 30, 2006. Gross margin, as a
percentage of net sales, decreased to 31.9% for the three months ended June
30,
2007, compared to 33.2% for the same period of 2006, as the AUP decrease was
not
sufficient to offset the ASP decline.
|
|
2006
|
|
2007
|
|
SG&A
|
|
$
|
11,716
|
|
$
|
13,397
|
|
SG&A
for the three months ended June 30, 2007 increased approximately $1.6 million,
or 14.3%, compared to the same period last year, due primarily to (i) share
grant expense increase of $0.5 million in the second quarter of 2007, (ii)
$0.3
million increase in outside sales commissions due to increased shares, (iii)
$0.8 million increase in wages associated with increased sales, and (iv) $0.3
million increase in audit, legal and consulting expenses associated with
Sarbanes-Oxley Act compliance, as well as $0.1 million increase in depreciation
expense. SG&A, as a percentage of sales, was 13.9% in the current quarter,
down from 14.2% in the prior-year quarter, due primarily to the increased
sales.
|
|
2006
|
|
2007
|
|
R&D
|
|
$
|
2,077
|
|
$
|
3,156
|
|
Investment
in R&D in the current quarter was $3.2 million, an increase of approximately
$1.1 million from the same period last year. Of the $1.1 million increase,
compensation costs increased $0.8 million as a result of hiring additional
engineers, $0.1 million reflected Diodes’ investment in developing new products
in discrete, analog and mixed signal, while $0.1 million was associated with
APD
patents amortization. R&D, as a percentage of sales, was 3.3% in the second
quarter 2007 compared to 2.5% in the same period in 2006.
|
|
2006
|
|
2007
|
|
Restructuring
costs and impairment of fixed assets
|
|
$
|
0
|
|
$
|
1,770
|
|
In
the
second quarter of 2007 we recorded approximately $1.8 million in restructuring
costs related to the consolidation of our analog wafer probe and final test
operations from Hsinchu, Taiwan to our manufacturing facilities in Shanghai,
China. The expense was comprised of approximately $0.8 million in termination
and severance costs, $0.3 million in impairment of fixed assets and $0.3 million
in relocation charges.
|
|
2006
|
|
2007
|
|
Interest
income
|
|
$
|
1,004
|
|
$
|
4,285
|
|
Interest
income for the three months ended June 30, 2007 was $4.3 million, compared
to
$1.0 million in the same period in 2006, due primarily to interest income earned
on short-term investment securities purchased with the proceeds of the $230
million convertible bonds.
|
|
2006
|
|
2007
|
|
Interest
expense
|
|
$
|
133
|
|
$
|
1,696
|
|
Interest
expense for the three months ended June 30, 2007 was $1.7 million, compared
to
$0.1 million in the same period 2006, due primarily to interest expense related
to the 2.25% convertible bonds, and to a lesser extent, $0.3 million in
amortization related convertible bonds issuance costs.
|
|
2006
|
|
2007
|
|
Income
tax provision
|
|
$
|
2,885
|
|
$
|
2,221
|
|
We
recognized income tax expense of $2.2 million for the second quarter of 2007,
resulting in an effective tax rate of 14.8%, as compared to 19.8% in the same
period of last year. Our lower effective tax rate reflected the decrease in
the
amount of expected repatriation of earnings of our foreign subsidiaries,
partially offset by the impact of one of our China subsidiaries,
Diodes-Shanghai, which is now subject to 7.5% preferential tax rate from 2007
through 2009, compared to a 0% tax rate in 2006. Going forward, we anticipate
our tax rate to be in the 14 to 16% range. We continue to take advantage of
available strategies to optimize our tax rate across the jurisdictions in which
we operate.
|
|
2006
|
|
2007
|
|
Minority
interest
|
|
$
|
253
|
|
$
|
546
|
|
Minority
interest in joint venture earnings represented
the minority investor’s share of the earnings of Diodes-China, Diodes-Shanghai
and Diodes-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 June 30, 2007, we had 95% controlling
interests
in
Diodes-China and Diodes-Shanghai, and a 99.81% controlling interest in Anachip.
Results
of Operations for the Six Months Ended June 30, 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 Six
months ended June 30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2007
|
|
'06
to '07
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(67.0
|
)
|
|
(68.0
|
)
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
33.0
|
|
|
32.0
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(17.4
|
)
|
|
(18.0
|
)
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
15.6
|
|
|
14.0
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
0.9
|
|
|
2.6
|
|
|
234.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(70.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
16.4
|
|
|
16.5
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(2.9
|
)
|
|
(2.6
|
)
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
13.5
|
|
|
13.9
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
13.2
|
|
|
13.4
|
|
|
22.0
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the six months ended June
30,
2007, compared to the six months ended June 30, 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
|
|
$
|
156,301
|
|
$
|
188,303
|
|
Net
sales
increased approximately $32.0 million for the six months ended June 30, 2007,
compared to the same period last year. The 20.5% increase in net sales was
due
to a 32.9% increase in units sold, partially offset by a 9.4% decrease in
average selling prices primarily due to market price competition as well as
demand induced product mix changes.
|
|
2006
|
|
2007
|
|
Cost
of goods sold
|
|
$
|
104,654
|
|
$
|
128,102
|
|
Gross
profit
|
|
$
|
51,647
|
|
$
|
60,201
|
|
Gross
profit margin percentage
|
|
|
33.0
|
%
|
|
32.0
|
%
|
Cost
of
goods sold increased approximately $23.4 million, or 22.4%, for the six months
ended June 30, 2007 compared to the same period in 2006. As a percent of sales,
cost of goods sold increased from 67.0% for the six months ended June 30, 2006
to 68.0% for the six months ended June 30, 2007. AUP decreased 7.9%
year-over-year. As per SFAS 123R, included in cost of goods sold was $0.2
million of non-cash, stock option compensation expense related to our
manufacturing facilities.
Gross
profit increased in the six months of 2007 by approximately $8.6 million, or
16.6%, compared to the six months ended June 30, 2006. Gross margin, as a
percentage of net sales, decreased to 32.0% for the six months ended June 30,
2007, compared to 33.0% for the same period of 2006, as the AUP decrease was
not
sufficient to offset the ASP decline.
|
|
2006
|
|
2007
|
|
SG&A
|
|
$
|
23,000
|
|
$
|
26,075
|
|
SG&A
for the six months ended June 30, 2007 increased approximately $3.1 million,
or
13.4%, compared to the same period last year, due primarily to (i) share-based
compensation expense increase of $0.5 million in the first six months of 2007,
(ii) $0.5 million increase in outside sales commissions, $1.0 million increase
in wages and marketing expenses associated with increased sales, and (iii)
$0.5
million audit, legal and consulting expenses associated with Sarbanes-Oxley
Act
compliance, as well as $0.3 million increase in depreciation expense. SG&A,
as a percentage of sales, was 13.8% in the first six months of 2007, down from
14.7% in the same period of last year, due primarily to the increased
sales.
|
|
2006
|
|
2007
|
|
R&D
|
|
$
|
4,043
|
|
$
|
6,101
|
|
Investment
in R&D in the first six months of 2007 was $6.1 million, an increase of
approximately $2.1 million from that in the same period last year. Of the $2.1
million increase, compensation costs increased $1.3 million as a result of
hiring additional engineers, $0.3 million reflected Diodes’ investment in
developing new products in discrete, analog and mixed signal, while $0.3 million
was associated with APD patents amortization. R&D, as a percentage of sales,
was 3.2% of the first six months of 2007 sales compared to 2.6% in the same
period 2006.
|
|
2006
|
|
2007
|
|
Restructuring
costs and impairment of fixed assets
|
|
$
|
120
|
|
$
|
1,770
|
|
In
the
second quarter of 2007 we recorded approximately $1.8 million in restructuring
costs related to the consolidation of our analog wafer probe and final test
operations from Hsinchu, Taiwan to our manufacturing facilities in Shanghai,
China. The expense was comprised of approximately $0.8 million in termination
and severance costs, $0.3 million in impairment of fixed assets and $0.3 million
in relocation charges.
|
|
2006
|
|
2007
|
|
Interest
income
|
|
$
|
1,738
|
|
$
|
8,320
|
|
Interest
income for the six months ended June 30, 2007 was $8.3 million, compared to
$1.7
million in the same period in 2006, due primarily to interest income earned
on
short-term investment securities purchased with the proceeds of the $230 million
convertible bonds.
|
|
2006
|
|
2007
|
|
Interest
expense
|
|
$
|
273
|
|
$
|
3,421
|
|
Interest
expense for the six months ended June 30, 2007 was $3.4 million, compared to
$0.3 million in the same period 2006, due primarily to interest expense related
to the 2.25% convertible bonds, and to a lesser extent, $0.6 million in
amortization related convertible bonds issuance costs.
|
|
2006
|
|
2007
|
|
Income
tax provision
|
|
$
|
4,575
|
|
$
|
4,879
|
|
We
recognized income tax expense of $4.9 million for the six months ended June
30,
2007, resulting in an effective tax rate of 15.7%, as compared to 17.8% in
the
same period of last year. Our lower effective tax rate reflected the decrease
in
the amount of expected repatriation of earnings of our foreign subsidiaries,
partially offset by the impact of one of our China subsidiaries,
Diodes-Shanghai, which is now subject to 7.5% preferential tax rate from 2007
through 2009, compared to a 0% tax rate in 2006. Going forward, we anticipate
our tax rate to be in the 14 to 16% range. We continue to take advantage of
available strategies to optimize our tax rate across the jurisdictions in which
we operate.
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
June
30, 2007, our working capital was $395.4 million and $419.9 million,
respectively. We anticipate our working capital position will be sufficient
for
at least the next 12 months.
During
2005, we sold 3.2 million (stock split adjusted) shares of our Common Stock
in a
follow-on public offering, raising approximately $72 million (net of commissions
and expenses). We used approximately $31 million of the net proceeds in
connection with the Anachip acquisition, and approximately $9 million for the
APD 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
million of 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 and six months ended June 30, 2007 were
$14.9 million and $27.3 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. Year-to-date
capital expenditures were at approximately 14.5% of revenue as of June 30,
2007,
ahead of our 10-12% full-year estimate as we continue to invest for expected
growth. We had originally planned our 2007 capital expenditures to be at the
upper end of our guidance, and front-loaded in the first half of the year to
allow us to take advantage of projected second half growth prospects. Our first
half actual at 14.5% of revenue is in-line with this plan. We are continuing
to
evaluate our second half plans in light of our original plan and the developing
market environment.
Discussion
of Cash Flow
Cash
and
short-term investments have increased from $339.9 million at
December 31, 2006, to $352.5 million at June 30, 2007.
Operating
Activities
Net
cash
provided by operating activities during the first six months of 2007 was
$28.0 million, resulting primarily from $25.3 million of net income in
this period, as well as $13.0 million in depreciation and amortization. Net
cash
provided by operating activities was $35.2 million for the same period in
2006. Net cash provided by operations decreased $7.2 million from the first
six months of 2007 compared to the same period in 2006. This decrease resulted
primarily from a $5.0 million increase in operating assets changes during the
six-month period ($11.1 million increase in accounts receivable, $11.2 million
decrease in inventory, and $4.9 million increase in other assets), and $11.4
million decrease in liabilities, offset by $4.6 million increase in our net
income (from $20.7 million in 2006 to $25.3 million in 2007), $0.6 million
increase in non-cash, share-based compensation expense, and $3.4 million
increase in depreciation and amortization expense.
Investing
Activities
Net
cash
used in investing activities was $42.1 million for the first six months of
2007 compared to $59.6 million for the same period of 2006. The $17.5
million decrease in investing activities primary relates to the $19.0 million
payment for Anachip acquisition (net of cash acquired) in the first quarter
of
2006, and a $6.3 million decrease in capital expenditures, partially offset
by a
$7.7 million decrease in investment in available for sale
securities.
Financing
Activities
Our
financing activities include net borrowings, share issuances and excess tax
benefits associated with stock options exercised. Net cash provided by financing
activities totaled $7.7 million in the first six months of 2007 compared to
$0.3
million net cash used in the same period of 2006. This increase is primarily
the
result of an increase of $2.4 million in proceeds from stock option exercised
during the first six month of 2007.
Debt
Instruments
On
August 29, 2006, we amended our U.S. credit arrangements with Union
Bank of California, N.A. (Union Bank). Under the second amendment to our amended
and restated credit agreement, we 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 June 30,
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.
Both
amounts borrowed under the revolving credit facility and the FabTech term loan
bear interest at LIBOR plus 1.15%. At June 30, 2007, the effective rate under
both the credit agreement and the FabTech term loan was 6.51%.
The
credit agreement contains covenants that require us to maintain a leverage
ratio
not greater than 3.25 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 June 30, 2007, we were in compliance with the bank
covenants.
The
agreements governing the FabTech term loan do not contain any financial or
negative covenants. However, they provide that a default under our credit
agreement will cause a cross-default under the FabTech term loan.
As
of
June 30, 2007, our Asia subsidiaries have available lines of credit of up to
an
aggregate of $26.7 million, with a number of Chinese and Taiwanese
financial institutions. These lines of credit, except for one Taiwanese credit
facility, are collateralized by its premises, are unsecured, uncommitted and,
in
some instances, may be repayable on demand. Loans under these lines of credit
bear interest at LIBOR or similar indices plus a specified margin.
As
of
June 30, 2007, Diodes-Shanghai owed $0.8 million under a note to one of our
customers, which debt was incurred in connection with our investing in
manufacturing equipment. We repay this unsecured and interest-free note in
quarterly price concession installments, with any remaining balance due in
July
2008.
On
October 12, 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 defined, 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 December 31, 2006 for 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
The
Company submitted to a vote of its security holders at an annual meeting of
stockholders on May 31, 2007, the election of members of the Board. The
directors were each elected to serve until the 2008 annual meeting or until
their successors are elected and have qualified. The results of the tabulation
for each nominee for director of the Company is as follows (voting shares have
not been adjusted for the three-for-two stock split in July 2007):
C.H.
Chen,
Director
|
|
For:
Withheld:
|
14,752,104
9,978,539
|
|
|
|
|
Michael
R. Giordano,
Director
|
|
For:
Withheld:
|
18,499,238
6,231,405
|
|
|
|
|
Keh-Shew
Lu,
Director
|
|
For:
Withheld:
|
23,988,337
742,306
|
|
|
|
|
L.P.
Hsu,
Director
|
|
For:
Withheld:
|
22,836,689
1,893,935
|
|
|
|
|
Shing
Mao,
Director
|
|
For:
Withheld:
|
14,870,070
9,859,573
|
|
|
|
|
Raymond
Soong,
Director
|
|
For:
Withheld:
|
22,979,832
1,750,811
|
|
|
|
|
John
M. Stich,
Director
|
|
For:
Withheld:
|
24,413,805
316,838
|
The
Company also submitted to a vote of its security holders at an annual meeting
of
shareholders on May 31, 2007, the appointment of Moss Adams LLP as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2007. The result of the tabulation was 24,159,902 shares voted
in
favor of the proposal, 522,582 shares voted against, and 48,159 abstained from
voting on the proposal. No broker non-votes with respect to this proposal were
received.
Item
5. Other Information
There
are
no matters to be reported under this heading.
Item
6. Exhibits
|
3.1
|
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No. 1 to the Company's Registration Statement on Form S-3
(File
No. 333-127833) filed on September 8, 2006).
|
|
|
|
|
3.2
|
Amended
Bylaws of the Company dated July 19, 2007 (incorporated by reference
to
Exhibit 3 on Form 8-K filed with the Commission on July 23,
2007).
|
|
|
|
|
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 |
August
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 July 19, 2007 (incorporated by reference
to
Exhibit 3 on Form 8-K filed with the Commission on July 23,
2007).
|
|
|
|
|
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
|