Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended September
30, 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
|
|
95-2039518
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
15660
North Dallas Parkway Suite 850
|
|
|
Dallas,
Texas
|
|
75248
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
(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 November 5,
2007 was 40,069,364.
Table
of Contents
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|
Page
|
|
|
|
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|
Part
I - Financial Information
|
|
|
3
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|
|
|
|
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|
Item
1 - Financial Statements
|
|
|
3
|
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of September 30, 2007
|
|
|
|
|
and
December 31, 2006
|
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|
3
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|
|
|
|
|
|
Consolidated
Condensed Statements of Income for the Three and Nine
Months
|
|
|
|
|
ended
September 30, 2007 and 2006
|
|
|
5
|
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the Nine Months
|
|
|
|
|
ended
September 30, 2007 and 2006
|
|
|
6
|
|
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements
|
|
|
8
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|
|
|
|
|
|
Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
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22
|
|
|
|
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|
|
Item
3 - Quantitative and Qualitative Disclosures about Market
Risk
|
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41
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|
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Item
4 - Controls and Procedures
|
|
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41
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|
Part
II - Other Information
|
|
|
41
|
|
|
|
|
|
|
Item
1 - Legal Proceedings
|
|
|
41
|
|
|
|
|
|
|
Item
1A - Risk Factors
|
|
|
41
|
|
|
|
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
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|
41
|
|
|
|
|
|
|
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
|
|
|
|
|
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|
Signature
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|
43
|
|
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
thousands, except share data)
ASSETS
|
|
December
31,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,888
|
|
$
|
45,144
|
|
Short-term
investments
|
|
|
291,008
|
|
|
317,726
|
|
Total
cash and short-term investments
|
|
|
339,896
|
|
|
362,870
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Trade
customers
|
|
|
72,175
|
|
|
82,779
|
|
Related
parties
|
|
|
6,147
|
|
|
7,186
|
|
|
|
|
78,322
|
|
|
89,965
|
|
Allowance
for doubtful accounts
|
|
|
(617
|
)
|
|
(485
|
)
|
Accounts
receivable, net of allowances
|
|
|
77,705
|
|
|
89,480
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
48,202
|
|
|
48,379
|
|
Deferred
income taxes, current
|
|
|
4,650
|
|
|
8,195
|
|
Prepaid
expenses and other
|
|
|
8,393
|
|
|
10,778
|
|
Total
current assets
|
|
|
478,846
|
|
|
519,702
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT,
net
|
|
|
95,469
|
|
|
119,218
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES, non-current
|
|
|
5,428
|
|
|
6,735
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
10,669
|
|
|
9,842
|
|
Goodwill
|
|
|
25,030
|
|
|
25,018
|
|
Other
|
|
|
6,697
|
|
|
6,387
|
|
Total
assets
|
|
$
|
622,139
|
|
$
|
686,902
|
|
The
accompanying notes are an integral part of these financial
statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
|
December
31,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Line
of credit
|
|
$
|
-
|
|
$
|
920
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Trade
|
|
|
40,029
|
|
|
37,198
|
|
Related
parties
|
|
|
12,120
|
|
|
13,383
|
|
Accrued
liabilities
|
|
|
24,967
|
|
|
26,580
|
|
Income
tax payable
|
|
|
3,433
|
|
|
3,355
|
|
Long-term
debt, current portion
|
|
|
2,802
|
|
|
2,111
|
|
Capital
lease obligations, current portion
|
|
|
141
|
|
|
144
|
|
Total
current liabilities
|
|
|
83,492
|
|
|
83,691
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT,
net of current portion
|
|
|
|
|
|
|
|
2.25%
convertible senior notes due 2026
|
|
|
230,000
|
|
|
230,000
|
|
Others
|
|
|
7,115
|
|
|
6,125
|
|
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS,
net of current portion
|
|
|
1,477
|
|
|
1,363
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,101
|
|
|
5,610
|
|
MINORITY
INTEREST
|
|
|
4,787
|
|
|
6,389
|
|
Total
liabilities
|
|
|
327,972
|
|
|
333,178
|
|
|
|
|
|
|
|
|
|
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 39,962,300
|
|
|
|
|
|
|
|
issued
at December 31, 2006 and September 30, 2007, respectively
|
|
|
25,962
|
|
|
26,642
|
|
Additional
paid-in capital
|
|
|
104,795
|
|
|
124,155
|
|
Retained
earnings
|
|
|
162,802
|
|
|
202,205
|
|
Accumulated
other comprehensive income
|
|
|
608
|
|
|
722
|
|
Total
stockholders' equity
|
|
|
294,167
|
|
|
353,724
|
|
Total
liabilities and stockholders' equity
|
|
$
|
622,139
|
|
$
|
686,902
|
|
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
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
92,575
|
|
$
|
105,264
|
|
$
|
248,876
|
|
$
|
293,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
61,879
|
|
|
71,112
|
|
|
166,532
|
|
|
199,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
30,696
|
|
|
34,152
|
|
|
82,344
|
|
|
94,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
11,825
|
|
|
14,607
|
|
|
34,883
|
|
|
40,682
|
|
Research
and development
|
|
|
1,941
|
|
|
3,554
|
|
|
5,985
|
|
|
9,654
|
|
Restucturing
costs and fixed asset impairment
|
|
|
32
|
|
|
-
|
|
|
152
|
|
|
1,771
|
|
Total
operating expenses
|
|
|
13,798
|
|
|
18,161
|
|
|
41,020
|
|
|
52,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
16,898
|
|
|
15,991
|
|
|
41,324
|
|
|
42,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,069
|
|
|
4,712
|
|
|
2,807
|
|
|
13,032
|
|
Interest
expense
|
|
|
(89
|
)
|
|
(1,706
|
)
|
|
(363
|
)
|
|
(5,127
|
)
|
Other
|
|
|
(1,563
|
)
|
|
(13
|
)
|
|
(1,699
|
)
|
|
(70
|
)
|
Total
other income
|
|
|
(583
|
)
|
|
2,993
|
|
|
745
|
|
|
7,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
minority interest
|
|
|
16,315
|
|
|
18,984
|
|
|
42,069
|
|
|
50,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
(3,212
|
)
|
|
(2,243
|
)
|
|
(7,778
|
)
|
|
(7,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
13,103
|
|
|
16,741
|
|
|
34,291
|
|
|
42,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(333
|
)
|
|
(640
|
)
|
|
(824
|
)
|
|
(1,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
12,770
|
|
$
|
16,101
|
|
$
|
33,467
|
|
$
|
41,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.33
|
|
$
|
0.40
|
|
$
|
0.87
|
|
$
|
1.05
|
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.38
|
|
$
|
0.80
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,530,370
|
|
|
39,844,587
|
|
|
38,280,234
|
|
|
39,430,422
|
|
Diluted
|
|
|
42,228,888
|
|
|
42,445,255
|
|
|
42,082,731
|
|
|
42,098,668
|
|
The
accompanying notes are an integral part of these financial statements.
DIODES
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
33,467
|
|
$
|
41,358
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,053
|
|
|
20,417
|
|
Minority
interest earnings
|
|
|
824
|
|
|
1,602
|
|
Share-based
compensation
|
|
|
5,826
|
|
|
7,253
|
|
Loss
on disposal of property, plant and equipment
|
|
|
221
|
|
|
305
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(9,017
|
)
|
|
(11,821
|
)
|
Inventories
|
|
|
(14,227
|
)
|
|
(19
|
)
|
Prepaid
expenses and other current assets
|
|
|
(1,493
|
)
|
|
(3,044
|
)
|
Deferred
income taxes
|
|
|
(2,601
|
)
|
|
(4,851
|
)
|
Changes
in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
13,352
|
|
|
(1,550
|
)
|
Accrued
liabilities
|
|
|
5,038
|
|
|
381
|
|
Other
liabilities
|
|
|
-
|
|
|
2,554
|
|
Income
taxes payable
|
|
|
1,040
|
|
|
(89
|
)
|
Net
cash provided by operating activities
|
|
|
46,483
|
|
|
52,496
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(34,768
|
)
|
|
(41,642
|
)
|
Purchases
of short-term investments
|
|
|
(15,791
|
)
|
|
(26,718
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(18,411
|
)
|
|
-
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
54
|
|
|
99
|
|
Net
cash used by investing activities
|
|
|
(68,916
|
)
|
|
(68,261
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Advances
(repayments) on line of credit, net
|
|
|
(5,717
|
)
|
|
934
|
|
Net
proceeds from issuance of common stock
|
|
|
4,111
|
|
|
6,120
|
|
Excess
tax benefits
|
|
|
7,274
|
|
|
6,667
|
|
Repayments
of long-term debt
|
|
|
(4,125
|
)
|
|
(1,681
|
)
|
Repayments
of capital lease obligations
|
|
|
(107
|
)
|
|
(111
|
)
|
Net
cash provided by financing activities
|
|
|
1,436
|
|
|
11,929
|
|
EFFECT
OF EXCHANGE RATE CHANGES
|
|
|
|
|
|
|
|
ON
CASH AND CASH EQUIVALENTS
|
|
|
866
|
|
|
92
|
|
DECREASE
IN CASH
|
|
|
(20,131
|
)
|
|
(3,744
|
)
|
CASH
AND CASH EQUIVALENTS,
beginning of period
|
|
|
73,288
|
|
|
48,888
|
|
CASH
AND CASH EQUIVALENTS,
end of period
|
|
$
|
53,157
|
|
$
|
45,144
|
|
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)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2006
|
|
2007
|
|
Cash
paid during the year for:
|
|
|
|
|
|
Interest
|
|
$
|
334
|
|
$
|
5,594
|
|
Income
taxes
|
|
$
|
2,142
|
|
$
|
3,581
|
|
Non-cash
activities:
|
|
|
|
|
|
|
|
Property,
plant and equipment purchased on accounts payable
|
|
$
|
(2,699
|
)
|
$
|
(1,268
|
)
|
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,” “our” and “the
Company” 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 nine months ended September 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 Electronic 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 subsidiaries in Taiwan, Hong Kong and
China.
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. As these factors may change in the future,
we
will periodically assess our position with respect to the functional currency.
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.
The
U.S.
dollar is 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.
Included
in net income are foreign currency exchange losses of approximately $1.5
million
and $0.1 million for the quarter ended September 30, 2006 and 2007,
respectively, and $1.9 million and $0.4 million for the nine months ended
September 30, 2006 and 2007, respectively. The $1.5 million foreign exchange
loss in the third quarter of 2006 was primarily a result of a $1.1 million
one-time adjustment to other expense for intercompany foreign currency exchange
losses that were, as previously disclosed, incorrectly recorded directly
to
shareholders’ equity rather than through the income statement.
Accounting
principles generally require that recognized revenue, expenses, gains and
losses
be included in net income. Certain changes in assets and liabilities are
reported as a separate component of the equity section of the balance sheet,
and
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 income was $0.6 million and
$0.7
million at December 31, 2006 and September 30, 2007, respectively. The $0.1
million change in other comprehensive income was primarily a result of currency
translation gain during the first nine months of 2007.
Total
comprehensive income for the three and nine months ended September 30, 2006
and
2007 was as follows (in
thousands):
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Net
income
|
|
$
|
12,770
|
|
$
|
16,101
|
|
$
|
33,467
|
|
$
|
41,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
429
|
|
|
304
|
|
|
866
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
13,199
|
|
$
|
16,405
|
|
$
|
34,333
|
|
$
|
41,472
|
|
NOTE
C -
Earnings
Per Share
The
shares used in the computation of basic and diluted earnings per common share
were as follows (in
thousands, except per share data):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
shares
outstanding used in computing
|
|
|
|
|
|
|
|
|
|
basic
earnings per share (1)
|
|
|
38,530
|
|
|
39,845
|
|
|
38,280
|
|
|
39,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,770
|
|
$
|
16,101
|
|
$
|
33,467
|
|
$
|
41,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share (1)
|
|
$
|
0.33
|
|
$
|
0.40
|
|
$
|
0.87
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding used in computing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
earnings per share (1)
|
|
|
38,530
|
|
|
39,845
|
|
|
38,280
|
|
|
39,430
|
|
Add:
Assumed exercise of stock options and stock awards (1)
|
|
|
3,699
|
|
|
2,601
|
|
|
3,802
|
|
|
2,668
|
|
|
|
|
42,229
|
|
|
42,445
|
|
|
42,083
|
|
|
42,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,770
|
|
$
|
16,101
|
|
$
|
33,467
|
|
$
|
41,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share (1)
|
|
$
|
0.30
|
|
$
|
0.38
|
|
$
|
0.80
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Adjusted for the effect of a 3-for-2 stock split in July 2007
Earnings
per share are based upon the weighted average number of shares of Common
Stock
and common stock equivalents outstanding, including
those related to share-based compensation
and convertible notes. Earnings per share are computed using the “treasury stock
method” under Financial Accounting Standards Board (FASB) Statement No. 128. The
convertible notes includes a net share settlement feature which requires
us to
redeem the par amount of the bond in cash and any remaining value, assuming
the
bond is in the money, in incremental shares, cash or a combination thereof.
The
net share settled convertible as structured is defined in EITF 90-19, instrument
C, which allows us to use the treasury stock method of calculating the diluted
earnings per share. The incremental value of the shares will be determined
based
on the average price of our Common Stock over the reporting period. There
are no
shares in the earnings per share calculation related to the convertible notes
as
our average stock price did not exceed the conversion price and, therefore,
there is no conversion spread.
NOTE
D -
Short-term
Investments
Short-term
investments at September 30, 2007, were as follows (in
thousands):
|
|
Cost
Basis
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
|
|
|
|
|
|
|
|
|
|
|
State
and local government obligations
|
|
$
|
317,306
|
|
$
|
-
|
|
$
|
-
|
|
$
|
317,306
|
|
Money
market mutual funds
|
|
|
420
|
|
|
-
|
|
|
-
|
|
$
|
420
|
|
Total
short-term investments
|
|
$
|
317,726
|
|
$
|
-
|
|
$
|
-
|
|
$
|
317,726
|
|
The
estimated fair value of available-for-sale debt securities is $317.3 million,
and is based on publicly available market information or other estimates
determined by management. Although the maturities of the securities are over
ten
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
E -
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,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
24,421
|
|
$
|
21,213
|
|
Work-in-progress
|
|
|
10,104
|
|
|
9,723
|
|
Raw
materials
|
|
|
13,677
|
|
|
17,443
|
|
|
|
$
|
48,202
|
|
$
|
48,379
|
|
NOTE
F - Goodwill and Other Intangible Assets
Goodwill
has been recorded 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,
September
30
|
|
Goodwill-China
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill-FabTech
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
|
-
|
|
|
-
|
|
|
4,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill-Anachip
|
|
|
-
|
|
|
19,675
|
|
|
265
|
|
|
19,940
|
|
|
-
|
|
|
(12
|
)
|
|
19,928
|
|
Total
|
|
$
|
5,090
|
|
$
|
19,675
|
|
$
|
265
|
|
$
|
25,030
|
|
$
|
-
|
|
$
|
(12
|
)
|
$
|
25,018
|
|
Intangible
assets subject to amortization are (in
thousands):
As
of September 30, 2007
|
|
Amortized
Intangible Assets
|
|
Useful
life
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Currency
exchange and other
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APD:
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
15
years
|
|
$
|
8,402
|
|
$
|
(499
|
)
|
$
|
-
|
|
$
|
7,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anachip:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and trademarks
|
|
|
3-10
years
|
|
$
|
2,430
|
|
$
|
(625
|
)
|
$
|
134
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
$
|
10,832
|
|
$
|
(1,124
|
)
|
$
|
134
|
|
$
|
9,842
|
|
Amortization
expense related to intangible assets subject to amortization was $70,000 and
$209,000 for the three months ended September 30, 2006 and 2007, respectively,
and $212,000 and $627,000 for the nine months ended September 30, 2006 and
2007,
respectively.
NOTE
G - Stockholders’ Equity
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. The
par
value of our stock is not be affected by the dividend and remains at $0.66
2/3
per share. The outstanding shares stated on the balance sheet and the
consolidated condensed statement of income and disclosures have been adjusted
to
reflect the effects of the stock split.
As
of
September 30, 2007, we had approximately 40.0 million outstanding common shares.
During the first nine months of 2007, shares outstanding increased by
approximately 1.0 million shares, due to approximately 0.9
million
shares
issued in conjunction with stock option exercises and 0.1 million shares issued
in conjunction with vested restricted stock units.
Additional
paid-in capital increased approximately $19.6 million in the first nine months
of 2007, primarily due to $4.3 million in stock option expense, $3.0 million
in
share grant expense, $5.6 million in conjunction with stock option exercises,
and $6.7 million in 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, primarily related to our foreign subsidiaries, which was accounted
for as a reduction to the January 1, 2007 balance of retained
earnings.
NOTE
H - Restructuring Costs and Fixed Asset Impairment
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
I - Income Taxes
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 2004.
With
respect to state and local jurisdictions and countries outside of the U.S.,
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 in our FIN48 reserve for any adjustments that may result from future tax
audits. We 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, we increased our liability for unrecognized tax
benefits, primarily related to our foreign subsidiaries, by approximately $2.0
million during the first quarter of 2007, which was accounted for as a reduction
to the January 1, 2007 balance of retained earnings. As of January 1, 2007
and
September 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 $7.1 million for the three and nine months
ended
September 30, 2007, respectively, was recorded, resulting in an effective tax
rate of 14.2% in the first nine months of 2007, as compared to 18.5% in the
first nine months 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.
and
higher income in lower-taxed jurisdictions, as well as a decrease in the amount
of estimated repatriation of earnings of our foreign subsidiaries, partially
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).
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 25.0%, respectively. In addition, Taiwan earnings are subject to
an
additional 10% retained earnings tax should the Taiwan earnings not be
distributed. 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. In addition, funds
repatriated from foreign subsidiaries to the U.S. may be subject to federal
and
state income taxes. As
of
September 30, 2007, we had accrued $3.3 million for U.S. taxes on future
dividends from our foreign subsidiaries.
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. Beginning 2011, Anachip earnings will be subject to
statutory Taiwan income tax.
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. The
12.0% tax rate is expected to continue for 2007. In addition, due to an $18.5
million permanent re-investment of Diodes-China earnings in 2004, Diodes-China
has received additional preferential tax treatment (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) on earnings that are generated by $15.0
million of this investment. We are awaiting preferential tax treatment approval
on the remaining $3.5 million of this investment.
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%, and
there is no local government tax. As an incentive for establishing
Diodes-Shanghai, the 2005 and 2006 earnings of Diodes-Shanghai were exempted
from central government income tax, and for the years 2007 through 2009 its
earnings will be subject to a 7.5% tax rate.
With
the
recent China government income tax reform, which terminates some existing tax
incentives for foreign enterprises doing business in China, it is unclear to
what extent our China subsidiaries will continue to receive preferential tax
treatment beyond 2007 for Diodes-China and 2010 for
Diodes-Shanghai.
NOTE
J - Deferred Compensation Plan
Beginning
January 1, 2007, we began sponsoring a Non-Qualified Deferred Compensation
Plan
(the “Plan”) for executive officers, key employees and members of our Board of
Directors (the “Board”). The Plan allows eligible participants to defer the
receipt of eligible compensation until designated future dates. We hedge our
obligations under the Plan by investing in the actual underlying investments.
These investments are classified as trading securities and are carried at fair
market value. At September 30, 2007, these investments totaled approximately
$0.8 million. All gains and losses in these investments are equally offset
by
corresponding gains and losses in the Company’s deferred compensation
liabilities.
NOTE
K - 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. Share-based compensation expense
related to stock options recognized in the income statement was as follows
(in
thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Cost
of goods sold
|
|
$
|
133
|
|
$
|
59
|
|
$
|
398
|
|
$
|
219
|
|
Selling
and administrative expense
|
|
|
1,355
|
|
|
1,173
|
|
|
4,112
|
|
|
3,680
|
|
Research
and development expense
|
|
|
146
|
|
|
112
|
|
|
438
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock option expense
|
|
$
|
1,634
|
|
$
|
1,344
|
|
$
|
4,948
|
|
$
|
4,254
|
|
No
stock
options were granted during the third quarter ended September 30, 2007.
Compensation expense for the nine months ended September 30, 2007 for stock
options granted during the period was calculated on the date of grant using
the
Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2007
|
|
Expected
volatility
|
|
|
53.85
|
%
|
|
54.52
|
%
|
Expected
term (in years)
|
|
|
5.86
|
|
|
6.63
|
|
Risk-free
interest rate
|
|
|
4.70
|
%
|
|
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
grants made to officers and the Board 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 September 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
nine months ended September 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 nine months ended September 30, 2007
had a weighted-average grant date fair value of $14.74.
The
total
intrinsic value (actual gain) of options exercised during the nine months ended
September 30, 2006 and 2007 was approximately $21.7 million and $21.4 million,
respectively.
The
total
net cash proceeds received from stock option exercise for the nine months ended
September 30, 2006 and 2007 was $4.1 million and $6.1 million,
respectively.
During
the nine months ended September 30, 2006 and 2007, there were $5.0 million
and
$4.3 million, respectively, of total recognized share-based compensation expense
related to stock options under the plans.
As
of
September 30, 2007, total unrecognized share-based compensation expense related
to unvested stock options, net of forfeitures, was approximately $8.7 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 2.6 years.
A
summary
of the stock option plans as of September 30, 2007 follows:
Stock
options
|
|
Shares
(000)
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (yrs)
|
|
Aggregate
Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
5,316
|
|
$
|
8.46
|
|
|
6.4
|
|
$
|
80,974
|
|
Granted
|
|
|
265
|
|
$
|
24.96
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,045
|
)
|
$
|
5.93
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(47
|
)
|
$
|
18.19
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
4,489
|
|
$
|
9.92
|
|
|
6.1
|
|
$
|
99,586
|
|
Exercisable
at September 30, 2007
|
|
|
3,625
|
|
$
|
7.47
|
|
|
5.6
|
|
$
|
89,295
|
|
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 restricted stock awards and restricted stock units as of
September 30, 2007 is presented below:
|
|
|
|
Weighted-Average
|
|
Restricted
stock awards and restricted stock units
|
|
Shares
(000)
|
|
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2007
|
|
|
848
|
|
$
|
16.41
|
|
Granted
|
|
|
288
|
|
|
25.81
|
|
Vested
|
|
|
(75
|
)
|
|
22.58
|
|
Forfeited
|
|
|
(41
|
)
|
|
23.72
|
|
Nonvested
at September 30, 2007
|
|
|
1,020
|
|
$
|
18.32
|
|
Approximately
$0.9 million and $3.0 million of total share-based compensation expense was
recognized during the nine months ended September 30, 2006 and 2007,
respectively, related to stock awards granted under the plans.
As
of
September 30, 2007, total unrecognized share-based compensation expense related
to unvested share grants, net of forfeitures, was approximately $14.0 million,
before income taxes, and is expected to be recognized over a weighted average
of
approximately 3.0 years.
NOTE
L-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 4.4% and 4.4%
of total sales for the three months and nine months ended September 30, 2007,
respectively (3.2%
for
the third quarter of 2006, and 3.5% for the first nine months 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):
Three
Months Ended
September
30, 2006
|
|
Far
East
|
|
North
America
|
|
Total
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
113,717
|
|
$
|
30,636
|
|
$
|
144,353
|
|
Inter-company
sales
|
|
|
(46,559
|
)
|
|
(5,219
|
)
|
|
(51,778
|
)
|
Net
sales
|
|
$
|
67,158
|
|
$
|
25,417
|
|
$
|
92,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,161
|
|
$
|
13,007
|
|
$
|
89,168
|
|
Assets
|
|
$
|
227,454
|
|
$
|
139,416
|
|
$
|
366,870
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
135,597
|
|
$
|
31,629
|
|
$
|
167,226
|
|
Inter-company
sales
|
|
|
(56,777
|
)
|
|
(5,185
|
)
|
|
(61,962
|
)
|
Net
sales
|
|
$
|
78,820
|
|
$
|
26,444
|
|
$
|
105,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
104,044
|
|
$
|
15,174
|
|
$
|
119,218
|
|
Assets
|
|
$
|
214,990
|
|
$
|
471,912
|
|
$
|
686,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
September
30, 2006
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
287,102
|
|
$
|
89,248
|
|
$
|
376,350
|
|
Inter-company
sales
|
|
|
(110,825
|
)
|
|
(16,649
|
)
|
|
(127,474
|
)
|
Net
sales
|
|
$
|
176,277
|
|
$
|
72,599
|
|
$
|
248,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
76,161
|
|
$
|
13,007
|
|
$
|
89,168
|
|
Assets
|
|
$
|
227,454
|
|
$
|
139,416
|
|
$
|
366,870
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Far
East
|
|
|
North
America
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$
|
367,504
|
|
$
|
92,295
|
|
$
|
459,799
|
|
Inter-company
sales
|
|
|
(150,172
|
)
|
|
(16,060
|
)
|
|
(166,232
|
)
|
Net
sales
|
|
$
|
217,332
|
|
$
|
76,235
|
|
$
|
293,567
|
|
Property,
plant and equipment
|
|
$
|
104,044
|
|
$
|
15,174
|
|
$
|
119,218
|
|
Assets
|
|
$
|
214,990
|
|
$
|
471,912
|
|
$
|
686,902
|
|
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
September 30,
|
|
Net
Sales
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
China
|
|
$
|
35,014
|
|
$
|
42,451
|
|
|
37.8
|
%
|
|
40.3
|
%
|
Taiwan
|
|
|
24,840
|
|
|
23,267
|
|
|
26.8
|
%
|
|
22.1
|
%
|
United
States
|
|
|
20,038
|
|
|
21,930
|
|
|
21.6
|
%
|
|
20.8
|
%
|
All
Others
|
|
|
12,683
|
|
|
17,616
|
|
|
13.8
|
%
|
|
16.8
|
%
|
Total
|
|
$
|
92,575
|
|
$
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
for
the Nine Months
|
|
Percentage
of
|
|
|
|
Ended
September 30,
|
|
Net
Sales
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
China
|
|
$
|
78,209
|
|
|
|
|
|
31.4
|
%
|
|
35.6
|
%
|
Taiwan
|
|
|
73,993
|
|
|
80,087
|
|
|
29.7
|
%
|
|
27.3
|
%
|
United
States
|
|
|
57,600
|
|
|
62,759
|
|
|
23.1
|
%
|
|
21.4
|
%
|
All
Others
|
|
|
39,074
|
|
|
46,231
|
|
|
15.8
|
%
|
|
15.7
|
%
|
Total
|
|
$
|
248,876
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
NOTE
M - 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 two-year earn-out
provision with respect to pre-defined covered products. As of September 30,
2007, we recorded $1.0 million for the potential earn-out. 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.
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
|
)
|
Contingent
consideration
|
|
|
(1,000
|
)
|
Net
assets acquired
|
|
$
|
8,408
|
|
NOTE
N - Commitments
Purchase
commitments -
We have
non-cancelable purchase contracts for capital expenditures, primarily for
manufacturing equipment in China, totaling approximately $4.4 million at
September 30, 2007.
NOTE
O - 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, primarily
related to our foreign subsidiaries, which was accounted for as a reduction
to
the January 1, 2007, balance of retained earnings. As of January 1 and September
30, 2007, the gross amount of unrecognized tax benefits was approximately $3.2
million and $3.0 million, respectively.
NOTE
P - 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 21.7% of our outstanding Common Stock as of
September 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 nine months ended September 30, 2007, we sold silicon wafers
to
LSC totaling 6.8% and 6.8%, respectively, (6.5% in 2006 and 9.6% in 2005) of
our
net sales, making LSC our largest customer. Also for the three and nine months
ended September 30, 2007, 11.7%, and 11.4%, respectively, (13.0% in 2006 and
14.7% in 2005) of our net sales were from discrete semiconductor products
purchased from LSC for subsequent sale by us, respectively, 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 reviewed the contracts associated
with these related party transactions.
During
the three and nine months ended September 30, 2007, we sold silicon wafers
to
companies owned by Keylink International totaling 0.7% and 0.5%, respectively,
(0.4% in 2006 and 0.6% in 2005) of our net sales. Also for the three and nine
months ended September 30, 2007, 1.3% and 1.5%, respectively, (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 nine months ended September
30, 2007, we paid Keylink International an aggregate of $7.9 million, $2.6
million and $6.8 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 reviewed the contracts associated with these related
party transactions.
In
December 2005, we entered into a definitive stock purchase agreement to acquire
Anachip Corporation. 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 nine-month period, Anachip and LSC will renegotiate in good faith the price
of wafers to reflect the cost increase.
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 application specific standard products within the broad
discrete and analog semiconductor markets. These products include diodes,
rectifiers, transistors, MOSFET’s, protection devices, functional specific
arrays, power management devices including DC-DC switching and linear voltage
regulators, amplifiers and comparators, Hall effect sensors and silicon wafers
used to manufacture these products.
We
design, manufacture and market these semiconductors focusing on diverse end-use
applications in the consumer electronics, computing, industrial, communications
and automotive sectors. For the third quarter of 2007, approximately 35.4%,
38.4%, 9.4%, 14.8% and 2.0% of our net sales were generated by these sectors,
respectively, as compared to 35.2%, 37.0%, 12.3%, 13.4% and 2.0% in the third
quarter of 2006, respectively.
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 semiconductor companies
that provide a wider range of semiconductor products.
Our
product portfolio of over 4,000 part numbers addresses the design needs of
many
advanced electronic devices including high-volume consumer devices such as
digital audio players, notebook computers, flat-panel displays, mobile handsets,
digital cameras and set-top boxes. We believe we have particular strength in
designing innovative surface-mount semiconductors for applications with critical
need to minimize product size while maximizing power efficiency and overall
performance and at a lower cost than alternative solutions.
We
are
headquartered in Dallas, Texas. Our two manufacturing facilities are located
in
Shanghai, China; our wafer fabrication facility is located near Kansas City,
Missouri; our sales and marketing and logistical centers are located in Taipei,
Taiwan, Shanghai and Shenzhen, China, Hong Kong, and San Jose and Westlake
Village, California; and our IC design company, Anachip, is located in Hsinchu,
Taiwan. We also have regional sales offices and/or representatives in:
Derbyshire, England; Toulouse, France; Frankfurt, Germany, and in various cities
in the United States.
Our
customers are located primarily in Asia, North America and Europe, which
represent approximately 75%, 21% and 4% of our sales, respectively, in the
third
quarter of 2007, compared to 73%, 24% and 3% in the same period last year.
We
serve over 150 direct customers worldwide, representing
approximately 62% (58% in the third quarter of 2006) of our sales,
which
consist of original equipment manufacturers (OEMs) and electronic manufacturing
services (EMS) providers. Additionally, we have approximately 60 distributor
customers worldwide, representing approximately 38% (42% in the third quarter
of
2006) of our sales, through which we indirectly serve over 10,000 customers.
Our
customers include: (i) industry leading OEMs in a broad range of
industries, such as Bose Corporation, Honeywell International, Inc., LG
Electronics, Inc., Logitech, Inc., Motorola, Inc., Quanta Computer, Inc., Sagem
Communication, Samsung Electronics Co., Ltd. and Thompson, Inc.;
(ii) leading EMS providers such as Celestica, Inc., Flextronics
International, Ltd., Hon Hai Precision Industry Co., Ltd., Inventec Corporation,
Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation who
build
end-market products incorporating our semiconductors for companies such as
Apple
Computer, Inc., Cisco Systems, Inc., Dell, Inc., EMC Corporation, Intel
Corporation, Microsoft Corporation and Roche Diagnostics; and (iii) leading
distributors, such as Arrow Electronics, Inc., Avnet, Inc., Future Electronics
and Yosun Industrial Corp.
In
order
to extend our distribution network in Europe, in July 2007, we signed
a
distribution agreement with SILICA, an Avnet, Inc. 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. 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 our long-term profitable growth.
In
addition, in September 2007, we entered into a distribution agreement with
Arrow
Asia Pac (a business unit of Arrow Electronics, Inc.), one of the leading
electronics component distributors in Asia. The agreement is an important
extension to our long-term global partnership with Arrow
Electronics.
Our
strategy is to continue to enhance our position as a global supplier of standard
semiconductor products, and to continue to add complimentary product lines,
such
as power management products, using our packaging technology capability. The
principal elements of this strategy include focusing on technology innovation,
expanding our available market opportunities, maintaining intense customer
focus, enhancing manufacturing efficiency, and pursuing selective strategic
acquisitions.
In
November 2006, we purchased the net assets of APD Semiconductor, Inc., a
privately held U.S.-based fabless semiconductor company. APD Semiconductor’s
main product focus is its patented and trademarked Super Barrier Rectifier
(“SBR”) technology. Utilizing a low cost IC wafer process, the SBR®
technology uses a MOS cellular design to replace standard traditional Schottky
or PN junction diodes. The SBR technology uses an innovative-patented process
technique that allows its key parameters to be easily tuned to optimize any
customer applications. This adaptive and scalable technology allows for
increased power saving with better efficiency and reliability at higher
operating temperatures for end user applications like digital audio players,
DC/DC converters. AC/DC power supplies, LCD monitors, Power-over-Ethernet (POE),
Power Factor Correction (PFC) and TV/satellite set-top boxes. The APD
acquisition is expected to 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.
We
have
experienced increased demand for our products, as well as substantial pressure
from our customers and competitors to reduce selling prices. 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.
Our
focus
is on profitable growth. Net sales were $105.3 million for the third quarter
of
2007. Revenue increased 9.3% compared with the prior quarter as demand for
our
current and new products increased. Revenue increased 13.7 percent compared
with
the year-ago quarter primarily due to increased demand across a broad range
of
products which more than offset an approximate 6% price decline.
Sales
of
new products for the third quarter of 2007 amounted to 34.2% of total sales,
compared to 29.7% in the year-ago quarter, and this growth includes the
contribution of the Anachip acquisition as well as the acquired SBRâ
technology. 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.
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.
During
the third quarter of 2007, the percentage of our net sales derived from our
Asian subsidiaries was 74.9%, compared to 75.5% in the second 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. Since sales prices are generally lower in Asia than in the
U.S. or Europe, we expect this trend to continue to negatively impact our
revenue growth, but we believe this impact will be more than offset by increased
volume of current product and new product sales.
Our
gross
profit margin was 32.4% in the third quarter of 2007, compared to 33.2% in
the
same period of 2006 and 31.9% in the second quarter of 2007. Our gross margin
percentage was higher sequentially as average selling prices increased during
the third quarter of 2007. Furthermore, we are still under process of
integrating the analog product line. With the addition of Anachip, we can now
pursue adjacent product categories that significantly expand our growth
opportunities as well as gross margin potential.
In
2006,
we began strengthening our product design centers in Dallas, San Jose, Shanghai
and Taipei to position our design engineers to work more closely with our
customers and enable us to deliver a stream of innovative solutions in our
targeted product categories. R&D expense increased as a percent of revenue
from 2.1% in the third quarter of 2006 to 3.4% in the third quarter of 2007
due
primarily to the Anachip
acquisition, continued investing in enhancing current product features, and
developed new products. During
the same one-year period, R&D dollars increased from $1.9 million to $3.6
million. We
continue to plan to hire qualified engineers who fit our focus on proprietary
discrete and analog processes and packaging technologies. We
released 64 products covering 14 product families during the third quarter
of
2007, which we believe will continue to bring new profitable revenue growth.
In
general, new semiconductor products from R&D investments in the current
period do not contribute materially to revenue in that period, but should
benefit profitable growth in future years.
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).
Adjusted
net income was $17.1 million in the third quarter of 2007, up $2.1 million,
or
14.2%, from the second quarter of 2007, and up $2.9 million, or 20.8%, from
the
third quarter of 2006. Adjusted net income excludes $1.3 million non-cash
FAS123R expenses. Net income was up mainly due to volume increases and improved
expense controls.
Inventory
was $48.4 million at September 30, 2007, or 61 days, compared to $45.8 million,
or 67 days, at September 30, 2006. Work-in-progress and finished goods
inventories were down from the prior-year quarter with raw material inventories
increasing $4.6 million due to our expansion of manufacturing operations in
Shanghai. We
expect
the inventory values to be maintained to support increased revenue
levels.
A
key
element of our success is our overall low-cost manufacturing base. We operate
two state-of-the-art manufacturing facilities in China, and as
of
September 30, 2007, we had invested approximately $164 million in these
facilities.
In
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
nine
months of 2007, we have invested approximately $37 million in our manufacturing
facilities.
For
the
nine months ended September 30, 2007, we invested approximately $42.9 million
in
capital expenditures, which was approximately 14.6% of sales, primarily in
our
Asian manufacturing facilities. Our capital expenditure objective is to meet
increased demand by investing in equipment to increase our manufacturing
efficiencies and to integrate the analog business.
We
had
originally planned our 2007 capital expenditures as a percentage of revenue
to
be at the upper end of our 10-12% estimate and front-loaded in the first half
of
the year to allow us to take advantage of the projected market growth in second
half of 2007. Capital expenditures for the current quarter were $15.6 million,
or 14.9% of revenue. For the nine months ended September 30, 2007, capital
expenditures were $43 million. This represents 14.6% of revenue, as we continue
to invest for expected growth by capitalizing on opportunities to expand
capacity in order to gain market share. We expect capital expenditures in the
fourth quarter of 2007 to be lower than the third quarter. Our revised expansion
plans, now including a 6-inch SBR®
line in
FabTech, and additional analog capacity in China, will put our full-year 2007
capital expenditures at between 14 and 15% of revenue.
Depreciation
expense for the third quarter and first nine months of 2007 was $6.9 million
and
$18.8 million, respectively.
We
operate most of our own manufacturing facilities and they require substantial
investment to construct and to expand capacity. Because we own most of our
manufacturing capacity, a significant portion of our operating costs is fixed.
In general, these costs do not decline with reductions in customer demand or
changes in utilization of our manufacturing capacity, and can adversely affect
profit margins as a result. Conversely, as product demand rises and factory
utilization increases, the fixed costs are spread over increased output, which
improves profit margins.
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 closing price of $27.92 (split
adjusted) of our 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.
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 semiconductor components. We serve customers across diversified industries,
including the consumer electronics, computing, industrial, communications
and
automotive markets.
We
recognize revenue from product sales when title to and risk of loss of the
product have passed to the customer, there is persuasive evidence of an
arrangement, the sale price is fixed or determinable and collection of the
related receivable is reasonably assured. These criteria are generally met
upon
shipment to our customers. Net sales is stated net of reserves for pricing
adjustments, discounts, rebates and returns.
The
principal factors that have affected or could affect our net sales from period
to period are:
· |
the
condition of the economy in general and of the semiconductor industry
in
particular;
|
· |
our
customers’ adjustments in their order
levels;
|
· |
changes
in our pricing policies or the pricing policies of our competitors
or
suppliers;
|
· |
the
termination of key supplier
relationships;
|
· |
the
rate of introduction of new products to, and acceptance by, our
customers;
|
· |
our
ability to compete effectively with our current and future
competitors;
|
· |
our
ability to enter into and renew key corporate and strategic relationships
with our customers, vendors and strategic
alliances;
|
· |
changes
in foreign currency exchange rates;
|
· |
a
major disruption of our information technology
infrastructure; and
|
· |
unforeseen
catastrophic events, such as armed conflict, terrorism, fires, typhoons
and earthquakes.
|
Cost
of Goods Sold
Cost
of
goods sold includes manufacturing costs for our finished semiconductor products
and our wafers. These costs include raw materials used in our manufacturing
processes as well as the labor costs and overhead expenses, including
depreciation. 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 and market price adjustments 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, and materials and
equipment used for these projects, as well as patent amortization. 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 in the U.S. 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 convertible notes and outstanding
credit facilities, as well as amortization of the convertible note issuance
costs.
Income
Tax Provision
Federal
income taxes for the interim periods presented have been included in the
accompanying financial statements on the basis of an estimated annual effective
tax rate. As of September 30, 2007, the estimated annual effective tax rate
for
2007 is approximately 14%. The primary reasons the effective annual tax rate
for
2007 differs from the U.S. statutory corporate income tax rate are the effects
of non-U.S. tax rates and expected utilization of various tax
benefits.
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
(i) we presume the tax position will be examined by the relevant taxing
authority that has full knowledge of all relevant information,
(ii) 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 (iii) 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, primarily
related to our foreign subsidiaries, which was accounted for as a reduction
to
the January 1, 2007 retained earnings balance.
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
September 30, 2007, goodwill was $25.0 million ($19.9 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
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 $1.3
million and $4.2 million in the three and nine months ended September 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. 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 increased 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 restricted stock grants will be recorded each quarter as a non-cash
operating expense item. 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 September 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
|
|
Percentage
Dollar
|
|
|
|
Three
Months Ended
September
30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2007
|
|
'06
to '07
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(66.8
|
)
|
|
(67.6
|
)
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
33.2
|
|
|
32.4
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(14.9
|
)
|
|
(17.3
|
)
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
18.3
|
|
|
15.1
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
1.1
|
|
|
2.9
|
|
|
197.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(1.7
|
)
|
|
-
|
|
|
(99.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
17.7
|
|
|
18.0
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(3.5
|
)
|
|
(2.1
|
)
|
|
(30.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
14.2
|
|
|
15.9
|
|
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.4
|
)
|
|
(0.6
|
)
|
|
92.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
13.8
|
|
|
15.3
|
|
|
26.1
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the three months ended September 30, 2007,
compared to the three months ended September 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
|
|
$
|
92,575
|
|
$
|
105,264
|
|
Net
sales
increased approximately $12.7 million for the three months ended September
30,
2007, compared to the same period last year. The 13.7% increase in net sales
was
due to a 21.3% increase in units sold, partially offset by a 6.3% decrease
in
average selling prices (“ASP”) primarily due to market pricing pressures as well
as demand induced product mix changes.
|
|
2006
|
|
2007
|
|
Cost
of goods sold
|
|
$
|
61,879
|
|
$
|
71,112
|
|
Gross
profit
|
|
$
|
30,696
|
|
$
|
34,152
|
|
Gross
profit margin percentage
|
|
|
33.2
|
%
|
|
32.4
|
%
|
Cost
of
goods sold increased approximately $9.2 million, or 14.9%, for the three months
ended September
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 September 30, 2006 to 67.6% for the three
months ended September 30, 2007. Average unit cost (“AUP”) decreased 5.3% from
the third quarter of 2006. As per SFAS 123R, included in cost of goods sold
was
$59,000 non-cash, stock option compensation expense related to our manufacturing
facilities.
Gross
profit increased in the third quarter of 2007 by approximately $3.5 million,
or
11.3%, compared to the three months ended September 30, 2006. Gross margin,
as a
percentage of net sales, decreased to 32.4% for the three months ended September
30, 2007, compared to 33.2% for the same period of 2006, as the AUP decrease
was
not sufficient to offset the decrease in ASP.
|
|
2006
|
|
2007
|
|
Selling,
general and administrative expenses
(“SG&A”)
|
|
$
|
11,825
|
|
$
|
14,607
|
|
SG&A
for the three months ended September 30, 2007 increased approximately $2.8
million, or 23.5%, compared to the same period last year, due primarily to
(i) a
share grant expense increase of $1.1 million related to the July 2007 annual
grants, (ii) $0.7 million increase in wages and related benefits associated
with
increased sales, (iii) $0.2 million increase in freight expenses associated
with
increased sales, and (iv) $0.3 million increase in audit, legal and consulting
expenses associated with Sarbanes-Oxley Act compliance. SG&A, as a
percentage of sales, was 13.9% in the current quarter, compared to 12.8% in
the
third quarter of 2006.
|
|
2006
|
|
2007
|
|
Research
and development expenses (“R&D”)
|
|
$
|
1,941
|
|
$
|
3,554
|
|
Investment
in R&D in the current quarter was $3.6 million, an increase of approximately
$1.6 million from the same period last year. Of the $1.6 million increase,
compensation and employee related costs increased $0.8 million as a result
of
hiring additional engineers, and the remaining increase was related to supplies
and material costs related to increased R&D activity. R&D, as a
percentage of sales, was 3.4% in the third quarter 2007 compared 2.1% in the
same period in 2006.
|
|
2006
|
|
2007
|
|
Interest
income
|
|
$
|
1,069
|
|
$
|
4,712
|
|
Interest
income for the three months ended September 30, 2007 was $4.7 million, compared
to $1.1 million in the same period in 2006, due primarily to interest income
earned on short-term investment securities purchased with the proceeds from
the
$230 million convertible bonds.
|
|
2006
|
|
2007
|
|
Interest
expense
|
|
$
|
89
|
|
$
|
1,706
|
|
Interest
expense for the three months ended September 30, 2007 was $1.4 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
|
|
Other
loss
|
|
$
|
1,563
|
|
$
|
13
|
|
Other
loss for the three months ended September 30, 2007 was $13,000, compared to
$1.6
million in the same period 2006. The $1.5 million decrease in other loss was
due
primarily to $1.1 million one time adjustment for currency exchange losses
in
the third quarter of 2006 and $0.3 million decrease in currency exchange loss
in
the third quarter of 2007.
|
|
2006
|
|
2007
|
|
Income
tax provision
|
|
$
|
3,212
|
|
$
|
2,243
|
|
We
recognized income tax expense of $2.2 million for the three months ended
September 30, 2007, resulting in an effective tax rate of 11.8%, as compared
to
19.7% in the same period 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 estimated repatriation of earnings
of our foreign subsidiaries, partially 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). For 2008, we anticipate our full-year effective tax rate to be in the
13%
to 15% range as we continue to take advantage of available strategies to
optimize our tax rate across the jurisdictions in which we operate.
|
|
2006
|
|
2007
|
|
Minority
interest
|
|
$
|
333
|
|
$
|
640
|
|
Minority
interest in joint venture earnings represents
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 are eliminated in the consolidation
of
our financial statements, and the activities of Diodes-China, Diodes-Shanghai
and Anachip are included therein. As of September 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 Nine Months Ended September 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
|
|
Percentage
Dollar
|
|
|
|
Nine
Months Ended
September
30,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2007
|
|
'06
to '07
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
|
|
100
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(66.9
|
)
|
|
(67.9
|
)
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
33.1
|
|
|
32.1
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(16.5
|
)
|
|
(17.7
|
)
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
16.6
|
|
|
14.4
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
1.0
|
|
|
2.7
|
|
|
234.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(0.7
|
)
|
|
(0.1
|
)
|
|
(95.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes and minority interest
|
|
|
16.9
|
|
|
17.0
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(3.1
|
)
|
|
(2.4
|
)
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
13.8
|
|
|
14.6
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
94.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
13.5
|
|
|
14.1
|
|
|
23.6
|
|
The
following discussion explains in greater detail our consolidated operating
results and financial condition for the nine months ended September 30, 2007,
compared to the nine months ended September 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
|
|
$
|
248,876
|
|
$
|
293,567
|
|
Net
sales
increased approximately $44.7 million for the nine months ended September 30,
2007, compared to the same period last year. The 18.0% increase in net sales
was
due to a 28.5% increase in units sold, partially offset by a 8.2% decrease
in
ASP primarily due to market pricing pressures as well as demand induced product
mix changes.
|
|
2006
|
|
2007
|
|
Cost
of goods sold
|
|
$
|
166,532
|
|
$
|
199,214
|
|
Gross
profit
|
|
$
|
82,344
|
|
$
|
94,353
|
|
Gross
profit margin percentage
|
|
|
33.1
|
%
|
|
32.1
|
%
|
Cost
of
goods sold increased approximately $32.7 million, or 19.6%, for the nine months
ended September 30, 2007 compared to the same period in 2006. As a percent
of
sales, cost of goods sold increased from 66.9% for the nine months ended
September 30, 2006 to 67.9% for the nine months ended September 30, 2007. AUP
decreased 6.9% year-over-year. As per SFAS 123R, included in cost of goods
sold
was $219,000 non-cash, stock option compensation expense related to our
manufacturing facilities.
Gross
profit increased in the nine months of 2007 by approximately $12.0 million,
or
14.6%, compared to the nine months ended September 30, 2006. Gross margin,
as a
percentage of net sales, decreased to 32.1% for the nine months ended September
30, 2007, compared to 33.1% for the same period of 2006, as the AUP decrease
was
not sufficient to offset the ASP decline.
|
|
2006
|
|
2007
|
|
SG&A
|
|
$
|
34,883
|
|
$
|
40,682
|
|
SG&A
for the nine months ended September 30, 2007 increased approximately $5.8
million, or 16.6%, compared to the same period last year, due primarily to
(i) a
share-based compensation expense increase of $1.4 million related to the July
2007 annual grants, (ii) $0.7 million increase in outside sales commissions,
$1.8 million increase in wages and related benefits associated with increased
sales, and (iii) $0.7 million audit, legal and consulting expenses associated
with Sarbanes-Oxley Act compliance, as well as $0.4 million increase in
depreciation expense and $0.3 million increase in freight expense. SG&A, as
a percentage of sales, was 13.9% in the first nine months of 2007, compared
to
14.0% in the same period of last year, due primarily to increased
sales.
|
|
2006
|
|
2007
|
|
R&D
|
|
$
|
5,985
|
|
$
|
9,654
|
|
Investment
in R&D in the first nine months of 2007 was $9.7 million, an increase of
approximately $3.7 million from the same period last year. Of the $3.7 million
increase, compensation and employee related costs increased $2.1 million as
a
result of hiring additional engineers, $0.3 million related to supplies and
material costs related to increased R&D activity, while $0.4 million was
associated with APD patents amortization. R&D, as a percentage of sales, was
3.3% of the first nine months of 2007 sales compared to 2.4% in the same period
2006.
|
|
2006
|
|
2007
|
|
Restructuring
costs and impairment of fixed assets
|
|
$
|
152
|
|
$
|
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
|
|
$
|
2,807
|
|
$
|
13,032
|
|
Interest
income for the nine months ended September 30, 2007 was $13.0 million, compared
to $2.8 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
|
|
$
|
363
|
|
$
|
5,127
|
|
Interest
expense for the nine months ended September 30, 2007 was $5.1 million, compared
to $0.4 million in the same period 2006, due primarily to interest expense
related to the 2.25% convertible bonds, and to a lesser extent, $0.9 million
in
amortization related convertible bonds issuance costs.
|
|
2006
|
|
2007
|
|
Other
loss
|
|
$
|
1,699
|
|
$
|
70
|
|
Other
loss for the nine months ended September 30, 2007 was $70,000, compared to
$1.7
million in the same period 2006. The $1.7 million decrease in other loss was
due
primarily to $1.1 million one time adjustment for currency exchange loss in
the
third quarter of 2006, $0.4 million decrease in currency exchange loss and
$0.1
million increase in other income.
|
|
2006
|
|
2007
|
|
Income
tax provision
|
|
$
|
7,778
|
|
$
|
7,122
|
|
We
recognized income tax expense of $7.1 million for the nine months ended
September 30, 2007, resulting in an effective tax rate of 14.2%, as compared
to
18.5% in the same period of last year. Our lower effective tax rate reflects
the
higher income in lower tax jurisdiction and the decrease in the amount of
estimated repatriation of earnings of our foreign subsidiaries, partially offset
by the impact of a higher income tax rate at Diodes-Shanghai, which is now
subject to 7.5% preferential tax rate from 2007 through 2009, compared to a
0%
tax rate in 2006.
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
September 30, 2007, our working capital was $395.4 million and $436.0 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 nine months ended September 30, 2007 were
$15.6 million and $42.9 million, respectively. Our capital expenditures for
these periods were primarily related to manufacturing expansion at our
facilities in China and, to a lesser extent, our wafer fabrication facility
in
the U.S.
Discussion
of Cash Flow
Cash
and
short-term investments increased $23.0 million from $339.9 million at
December 31, 2006, to $362.9million at September 30, 2007.
Operating
Activities
Net
cash
provided by operating activities during the first nine months of 2007 was
$52.5 million, resulting primarily from $41.4 million of net income,
as well as $20.4 million in depreciation and amortization. Net cash provided
by
operating activities was $46.5 million for the same period in 2006. Net
cash provided by operations increased $6.0 million from the first nine
months of 2007 compared to the same period in 2006. This increase resulted
primarily from $7.9 million increase in net income (from $33.5 million in
2006 to $41.4 million in 2007), $1.4 million increase in non-cash, share-based
compensation expense, and $6.4 million increase in depreciation and amortization
expense, offset by a $7.6 million increase in operating assets during the
nine-month period ($2.8 million increase in accounts receivable, $14.2 million
decrease in inventory, and $3.8 million increase in other assets), and $18.1
million decrease in liabilities changes ( $15.0 million decrease in accounts
payable, $2.1 million decrease in accrued liabilities and other liabilities,
$1.1 million decrease in income tax payable).
Investing
Activities
Net
cash
used in investing activities was $68.3 million for the first nine months of
2007 compared to $68.9 million for the same period of 2006. The $0.7
million decrease in investing activities primary relates to the $18.4 million
payment for the Anachip acquisition (net of cash acquired) in the first quarter
of 2006, offset by $6.9 million increase in capital expenditures, and a $10.9
million increase 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 $11.9 million in the first nine months of 2007 compared
to
$1.4 million net cash provided in the same period of 2006. This increase is
primarily the result of a $5.7 million repayment of a line of credit in the
first nine months of 2006 and $1.0 million increase in a line of credit in
the
first nine months of 2007, an increase of $2.0 million in proceeds from stock
option exercised and $2.4 million decrease in repayment of long-term debt,
offset by $0.1 million decrease in excess tax benefits during the first nine
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,
Diodes-FabTech, also amended and restated a term note and related agreement
with
respect to an existing term loan arrangement, which we refer to as the FabTech
term loan. After giving effect to this amendment, the principal amount under
the
FabTech term loan was increased to $5.0 million.
The
revolving credit commitment expires on August 29, 2008. The FabTech term
loan, which amortizes monthly, matures on August 29, 2010. As of September
30, 2007, we had no amounts outstanding under our revolving credit facility,
and
there was $2.9 million outstanding under the FabTech term loan. Loans to us
under our credit facility are guaranteed by FabTech, and in turn, the FabTech
term loan is guaranteed by us. The primary 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 U.S. credit facilities are collateralized by all
of
the U.S. operations’ accounts, instruments, chattel paper, documents, general
intangibles, inventory, equipment, furniture and fixtures, pursuant to security
agreements entered into by us and FabTech in connection with these credit
arrangements.
Any
amounts borrowed under the revolving credit facility and the FabTech term loan
bear interest at LIBOR plus 1.15%. At September 30, 2007, the effective rate
was
6.75%.
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 September 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
September 30, 2007, our Asia subsidiaries have unused and available lines of
credit of up to an aggregate of $31.9 million, with several Chinese and
Taiwanese financial institutions. These lines of credit, except for one
Taiwanese credit facility, are collateralized by their premises, are unsecured,
uncommitted and, in some instances, may be repayable on demand. Loans under
these lines of credit bear interest at LIBOR or similar indices plus a specified
margin.
As
of
September 30, 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 April 1, 2007. Interest accrues
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 nine-month period beginning October 1, 2011,
and for each nine-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
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.
Available
Information
Our
Internet address is http://www.diodes.com.
We make
available, free of charge through our Internet website, our Annual Reports
on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission (the “SEC”). To support our global customer-base,
particularly in Asia and Europe, our website is language-selectable into
English, Chinese, and Korean, giving us an effective marketing tool for
worldwide markets. With its extensive online Product (Parametric) Catalog with
advanced search capabilities, our website facilitates quick and easy product
selection. Our website provides easy access to worldwide sales contacts and
customer support, and incorporates a distributor-inventory check to provide
component inventory availability and a small order desk for overnight sample
fulfillment. Our website also provides access to investor financial information,
including SEC filings and press releases, as well as stock quotes and
information on corporate governance compliance.
Cautionary
Statement for Purposes of the “Safe Harbor” Provision of the Private Securities
Litigation Reform Act of 1995
Except
for the historical information contained herein, the matters addressed in this
Quarterly Report on Form 10-Q constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We generally identify
forward-looking statements by the use of terminology such as “may,” “will,”
“could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,”
“estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such
terms. Such forward-looking statements are subject to a variety of risks and
uncertainties, including those discussed under “Risks Related To Our Business”
and elsewhere in this Quarterly Report on Form 10-Q that could cause actual
results to differ materially from those anticipated by our management. The
Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain
“safe harbor” provisions for forward-looking statements. All forward-looking
statements made on this Quarterly Report on Form 10-Q are made pursuant to
the
Act.
All
forward-looking statements contained in this Quarterly Report on Form 10-Q
are
subject to, in addition to the other matters described in this Quarterly Report
on Form 10-Q, a variety of significant risks and uncertainties. The following
discussion highlights some of these risks and uncertainties. Further, from
time
to time, information provided by us or statements made by our employees may
contain forward-looking information. There can be no assurance that actual
results or business conditions will not differ materially from those set forth
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
For
more
detailed discussion of these factors, see the “Risk Factors” discussion in Item
1A of the Company’s most recent Annual Report on Form 10-K. The forward-looking
statements included in this Quarterly Report on Form 10-Q are made only as
of
the date of this report, and the Company undertakes no obligation to update
the
forward-looking statements to reflect subsequent events or
circumstances.
Risks
Related To Our Business
|
· |
Downturns
in the highly cyclical semiconductor industry or changes in end-market
demand could affect our operating results and financial
condition.
|
|
|
The
semiconductor business is highly competitive, and increased competition
may harm our business and our operating
results.
|
|
|
We
receive a significant portion of our net sales from a single customer.
In
addition, this customer is also our largest external supplier and
is a
related party. The loss of this customer or supplier could harm our
business and results of
operations.
|
|
|
Delays
in initiation of production at new facilities, implementing new production
techniques or resolving problems associated with technical equipment
malfunctions could adversely affect our manufacturing
efficiencies.
|
|
·
|
We
are and will continue to be under continuous pressure from our customers
and competitors to reduce the price of our products, which could
adversely
affect our growth and profit
margins.
|
|
·
|
Our
customer orders are subject to cancellation or modification usually
with
no penalty. High volumes of order cancellation or reductions in quantities
ordered could adversely affect our results of operations and financial
condition.
|
|
·
|
New
technologies could result in the development of new products by our
competitors and a decrease in demand for our products, and we may
not be
able to develop new products to satisfy changes in demand, which
could
result in a decrease in net sales and loss of market
share.
|
|
·
|
We
may be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party technology,
which
could result in significant expense and reduction in our intellectual
property rights.
|
|
|
We
depend on third-party suppliers for timely deliveries of raw materials,
parts and equipment, as well as finished products from other
manufacturers, and our results of operations could be adversely affected
if we are unable to obtain adequate supplies in a timely
manner.
|
|
|
If
we do not succeed in continuing to vertically integrate our business,
we
will not realize the cost and other efficiencies we anticipate and
our
ability to compete, profit margins and results of operations may
suffer.
|
|
|
Part
of our growth strategy involves identifying and acquiring companies
with
complementary product lines or customers. We may be unable to identify
suitable acquisition candidates or consummate desired acquisitions
and, if
we do make any acquisitions, we may be unable to successfully integrate
any acquired companies with our
operations.
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|
·
|
We
are subject to many environmental laws and regulations that could
affect
our operations or result in significant
expenses.
|
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|
Our
products may be found to be defective and, as a result, product liability
claims may be asserted against us, which may harm our business and
our
reputation with our customers.
|
|
|
We
may fail to attract or retain the qualified technical, sales, marketing
and management personnel required to operate our business
successfully.
|
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|
We
may not be able to maintain our growth or achieve future growth and
such
growth may place a strain on our management and on our systems and
resources.
|
|
|
Our
business may be adversely affected by obsolete inventories as a result
of
changes in demand for our products and change in life cycles of our
products.
|
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|
If
OEMs do not design our products into their applications, a portion
of our
net sales may be adversely
affected.
|
|
|
We
rely heavily on our internal electronic information and communications
systems, and any system outage could adversely affect our business
and
results of operations.
|
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|
We
are subject to interest rate risk that could have an adverse effect
on our
cost of working capital and interest
expenses.
|
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|
If
we fail to maintain an effective system of internal controls or discover
material weaknesses in our internal controls over financial reporting,
we
may not be able to report our financial results accurately or detect
fraud, which could harm our business and the trading price of our
Common
Stock.
|
|
|
Terrorist
attacks, or threats or occurrences of other terrorist activities
whether
in the United States or internationally may affect the markets in
which
our Common Stock trades, the markets in which we operate and our
profitability.
|
|
|
We
currently have a significant amount of debt following our convertible
senior notes offering. Our substantial indebtedness could adversely
affect
our business, financial condition and results of operations and our
ability to meet our payment obligations under the notes and our other
debt.
|
Risks
Related To Our International Operations
|
|
Our
international operations subject us to risks that could adversely
affect
our operations.
|
|
·
|
We
have significant operations and assets in China, Taiwan and Hong
Kong and,
as a result, will be subject to risks inherent in doing business
in those
jurisdictions, which may adversely affect our financial
performance.
|
|
|
We
are subject to foreign currency risk as a result of our international
operations.
|
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|
We
may not continue to receive preferential tax treatment in China,
thereby
increasing our income tax expense and reducing our net
income.
|
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|
The
distribution of any earnings of our foreign subsidiaries to the United
States may be subject to U.S. income taxes, thus reducing our net
income.
|
Risks
Related To Our Common Stock
|
|
Variations
in our quarterly operating results may cause our stock price to be
volatile.
|
|
|
We
may enter into future acquisitions and take certain actions in connection
with such acquisitions that could affect the price of our Common
Stock.
|
|
|
Our
directors, executive officers and significant stockholders hold a
substantial portion of our Common Stock, which may lead to conflicts
with
other stockholders over corporate transactions and other corporate
matters.
|
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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.
|
|
|
Conversion
of our convertible senior notes will dilute the ownership interest
of
existing shareholders, including holders who had previously converted
their notes.
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to financial market risk results primarily from fluctuations in
interest and currency rates. There have been no material changes to our market
risks as disclosed in our Annual Report on Form 10-K for the year ended December
31, 2006.
Item
4. Controls and Procedures
Our
Chief
Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Carl C. Wertz,
with
the participation of the Company's management, carried out an evaluation of
the
effectiveness of our disclosure controls and procedures pursuant to Exchange
Act
Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and
the
Chief Financial Officer believe that, as of the end of the period covered by
this report, our disclosure controls and procedures are effective at the
reasonable assurance level in making known to them material information relating
to us (including our consolidated subsidiaries) required to be included in
this
report.
Disclosure
controls and procedures, no matter how well designed and implemented, can
provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns
in
internal control can occur because of human failures such as simple errors,
mistakes or intentional circumvention of the established processes.
There
was
no change in our internal control over financial reporting, known to the Chief
Executive Officer or the Chief Financial Officer that occurred during the period
covered by this report that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We
are,
from time to time, involved in litigation incidental to the conduct of our
business. We do not believe we are currently a party to any pending
litigation.
Item
1A. Risk Factors
There
have been no material changes from the risk factors disclosed in the “Risk
Factors” section of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, filed on March 1, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
There
are
no matters to be reported under this heading.
Item
3. Defaults Upon Senior Securities
There
are
no matters to be reported under this heading.
Item
4. Submission of Matters to a Vote of Security Holders
There
are
no matters to be reported under this heading.
Item
5. Other Information
There
are
no matters to be reported under this heading.
Item
6. Exhibits
|
3.1 |
Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of
Amendment No.
1 to the Company's Registration Statement on Form S-3 (File No.
333-127833) filed on September
8, 2006).
|
|
3.2 |
Amended
Bylaws of the Company dated July 19, 2007 (incorporated by reference
to
Exhibit 3 on
Form 8-K filed with the Commission on July 23,
2007).
|
|
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) |
|
|
|
|
|
|
|
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|
|
|
By:
/s/ Carl C. Wertz |
|
|
November
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).
|
|
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
|