UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______ to ________.
COMMISSION FILE NUMBER: 1-5740
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 95-2039518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 EAST HILLCREST DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices) (Zip code)
(805) 446-4800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock, $0.66 2/3 par value,
outstanding as of August 12, 2003 was 9,617,077, including 1,075,672 shares of
treasury stock.
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
DECEMBER 31, JUNE 30,
2002 2003
------------------- -------------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 7,284,000 $ 7,283,000
Accounts receivable
Customers 19,387,000 22,159,000
Related parties 3,138,000 3,219,000
------------------- -------------------
22,525,000 25,378,000
Less: Allowance for doubtful receivables 353,000 317,000
------------------- -------------------
22,172,000 25,061,000
Inventories 14,916,000 16,292,000
Deferred income taxes, current 4,338,000 4,339,000
Prepaid expenses, income taxes and other current assets 2,228,000 3,183,000
------------------- ------------------
Total current assets 50,938,000 56,158,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 44,693,000 46,686,000
DEFERRED INCOME TAXES, non-current 3,205,000 2,360,000
OTHER ASSETS
Goodwill 5,090,000 5,090,000
Other 1,084,000 1,233,000
------------------- -------------------
TOTAL ASSETS $ 105,010,000 $ 111,527,000
=================== ===================
The accompanying notes are an integral part of these
financial statements.
2
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
2002 2003
------------------ ------------------
(UNAUDITED)
CURRENT LIABILITIES
Line of credit $ 3,025,000 $ 6,242,000
Accounts payable
Trade 9,039,000 11,400,000
Related parties 3,361,000 2,806,000
Accrued liabilities 8,693,000 8,154,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 3,333,000 3,333,000
Current portion of capital lease obligations 157,000 159,000
------------------ ------------------
Total current liabilities 30,108,000 34,594,000
LONG-TERM DEBT, net of current portion
Related party 6,250,000 5,000,000
Other 6,333,000 4,667,000
CAPITAL LEASE OBLIGATIONS, net of current portion 2,495,000 2,405,000
MINORITY INTEREST IN JOINT VENTURE 2,145,000 2,332,000
STOCKHOLDERS' EQUITY
Class A convertible preferred stock - par value $1.00 per share; 1,000,000
shares authorized;
no shares issued and outstanding -- --
Common stock - par value $0.66 2/3 per share;
30,000,000 shares authorized; 9,292,764 and 9,583,480
shares issued at December 31, 2002
and June 30, 2003, respectively 6,195,000 6,389,000
Additional paid-in capital 8,060,000 8,559,000
Retained earnings 45,684,000 49,778,000
------------------ ------------------
59,939,000 64,726,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 478,000 415,000
------------------ ------------------
2,260,000 2,197,000
Total stockholders' equity 57,679,000 62,529,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,010,000 $ 111,527,000
================== ==================
The accompanying notes are an integral part of these
financial statements.
3
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------- ------------------------------------------
2002 2003 2002 2003
-------------------- ------------------- ------------------ --------------------
NET SALES $ 29,946,000 $ 33,391,000 $ 56,870,000 $ 62,844,000
COST OF GOODS SOLD 22,815,000 25,045,000 45,387,000 47,037,000
-------------------- ------------------- ------------------ --------------------
Gross profit 7,131,000 8,346,000 11,483,000 15,807,000
RESEARCH AND DEVELOPMENT EXPENSES 460,000 400,000 773,000 746,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,370,000 4,796,000 8,135,000 9,048,000
-------------------- ------------------- ------------------ --------------------
Total operating expenses 4,830,000 5,196,000 8,908,000 9,794,000
Income from operations 2,301,000 3,150,000 2,575,000 6,013,000
OTHER INCOME (EXPENSE)
Interest income 16,000 5,000 25,000 9,000
Interest expense (292,000) (223,000) (638,000) (472,000)
Other 109,000 (20,000) 124,000 (1,000)
-------------------- ------------------- ------------------ --------------------
(167,000) (238,000) (489,000) (464,000)
Income before income taxes and minority
interest 2,134,000 2,912,000 2,086,000 5,549,000
INCOME TAX BENEFIT (PROVISION) (473,000) (651,000) (178,000) (1,268,000)
-------------------- ------------------- ------------------ --------------------
Income before minority interest 1,661,000 2,261,000 1,908,000 4,281,000
MINORITY INTEREST IN JOINT VENTURE EARNINGS (98,000) (89,000) (136,000) (187,000)
-------------------- ------------------- ------------------ --------------------
NET INCOME $ 1,563,000 $ 2,172,000 $ 1,772,000 $ 4,094,000
==================== =================== ================== ====================
EARNINGS PER SHARE
Basic $ 0.19 $ 0.26 $ 0.22 $ 0.49
Diluted $ 0.18 $ 0.23 $ 0.20 $ 0.44
==================== =================== ================== ====================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,176,025 8,452,129 8,170,704 8,383,444
Diluted 8,874,416 9,512,266 8,824,025 9,372,507
==================== =================== ================== ====================
The accompanying notes are an integral part of these
financial statements.
4
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------------------
2002 2003
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,772,000 $ 4,094,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,731,000 5,327,000
Minority interest earnings 136,000 187,000
Gain on sale of property, plant and equipment -- (107,000)
Changes in operating assets:
Accounts receivable (5,421,000) (2,889,000)
Inventories 2,479,000 (1,376,000)
Prepaid expenses, taxes and other assets (1,133,000) (259,000)
Changes in operating liabilities:
Accounts payable 4,952,000 1,806,000
Accrued liabilities 1,436,000 (539,000)
----------------- ------------------
Net cash provided by operating activities 8,952,000 6,244,000
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,785,000) (7,656,000)
Proceeds from sale of property, plant and equipment -- 442,000
----------------- ------------------
Net cash used by investing activities (1,785,000) (7,214,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on (repayments of) line of credit, net (6,143,000) 3,217,000
Proceeds from the issuance of common stock 140,000 693,000
Repayments of long-term obligations (3,004,000) (2,916,000)
Repayments of capital lease obligations -- (88,000)
Management incentive reimbursement from LSC 375,000 --
----------------- ------------------
Net cash provided (used) by financing activities (8,632,000) 906,000
----------------- ------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 183,000 63,000
DECREASE IN CASH (1,282,000) (1,000)
CASH AT BEGINNING OF PERIOD 8,103,000 7,284,000
----------------- ------------------
CASH AT END OF PERIOD $ 6,821,000 $ 7,283,000
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 613,000 $ 463,000
================= ==================
Income taxes $ 5,000 $ 761,000
================= ==================
Building acquired through capital lease obligation $ 2,785,000 $ --
================= ==================
The accompanying notes are an integral part of these
financial statements.
5
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States 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, and 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 the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. 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 six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. The consolidated financial data at December 31, 2002 is derived from
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
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 the accounts of
Diodes-North America and its wholly-owned foreign subsidiaries, Diodes Taiwan
Corporation, Ltd. ("Diodes-Taiwan") and Diodes-Hong Kong Ltd. ("Diodes-Hong
Kong"), the accounts of Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China")
in which the Company has a 95% interest, and the accounts of its wholly-owned
United States subsidiary, FabTech Incorporated ("FabTech" or "Diodes-FabTech").
All significant intercompany balances and transactions have been eliminated.
NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 150 ("Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity"). SFAS 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS 150 as a liability because that financial instrument embodies an
obligation of an issuer. SFAS No. 150 must be applied immediately to instruments
entered into or modified after May 31, 2003 and to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003. Management believes the adoption of SAFS No. 150
will not have a material impact on the financial statements.
In April 2003, FASB issued SFAS No. 149 ("Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities"). SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. In addition, all
provisions of this Statement should be applied prospectively. This Statement
amends SFAS No. 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative. Management believes the
adoption of SFAS No. 149 will not have a material impact on the financial
statements.
In November 2002, the FASB issued Interpretation No. 45,
("Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others"). The Interpretation elaborates
on the disclosures to be made by sellers or guarantors of products and services,
as well as those entities guaranteeing the financial performance of others. The
Interpretation further clarifies that a guarantor
6
is required to recognize, at the inception of a guarantee, a liability for the
obligations it has undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of this Interpretation are effective on a
prospective basis to guarantees issued or modified after December 31, 2002, and
the disclosure requirements are effective for financial statements of periods
ending after December 15, 2002. The Company believes that its disclosures with
regards to these matters are adequate.
In January 2003, the FASB issued Interpretation No. 46
("Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51"). The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. Management does not believe the
Interpretation will have a material impact on the financial statements.
NOTE C - FUNCTIONAL CURRENCIES, COMPREHENSIVE LOSS AND
FOREIGN CURRENCY TRANSLATION
The Company entered into an interest rate swap agreement with
a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt.
The effect of the $30,000 gain in intercompany translation
adjustments and $33,000 gain related to the interest rate swap agreement results
in a change in accumulated other comprehensive loss (income) of ($63,000) for
the six months ended June 30, 2003, and is reflected on the balance sheet as a
separate component of shareholders' equity. There were no other components of
other comprehensive loss for the six months ended June 30, 2003.
NOTE D - INVENTORIES
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method.
DECEMBER 31, JUNE 30,
2002 2003
---------------- ----------------
Finished goods $ 9,853,000 $ 9,552,000
Work-in-progress 1,522,000 1,980,000
Raw materials 5,488,000 6,656,000
---------------- ----------------
16,863,000 18,188,000
Less: Reserves (1,947,000) (1,896,000)
---------------- ----------------
Net inventory $ 14,916,000 $ 16,292,000
================ ================
NOTE E - INCOME TAXES
The Company accounts for income taxes using an asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the tax effect of differences between the financial statement and
tax basis of assets and liabilities. Accordingly, as of June 30, 2003, the
Company has recorded a net deferred tax asset of $6.7 million resulting from
temporary differences in bases of assets and liabilities. This deferred tax
asset results primarily from inventory reserves and certain expense accruals,
which are not currently deductible for income tax purposes.
In accordance with the current taxation policies of the
People's Republic of China ("PRC"), Diodes-China was granted preferential tax
treatment for the years ended December 31, 1999 through 2003. Earnings were
subject to 0% tax rates in 1999 and 2000. Earnings in 2001, 2002 and 2003 are
subject to tax of 12% (one half the normal central government tax rate), and at
normal rates thereafter. Earnings of Diodes-China are also subject to tax of 3%
by the local taxing authority in Shanghai. The local taxing authority waived
this tax in 2001, 2002 and for the first six months of 2003.
7
Earnings of Diodes-Taiwan are currently subject to a tax rate
of 35%, which is comparable to the U.S. Federal tax rate for C corporations.
Earnings of Diodes-Hong Kong are currently subject to 16% tax
for profit on local sales and 0% tax for profit on export sales. These tax rates
are valid provided the source of the finished goods is located outside Hong
Kong.
As of June 30, 2003, accumulated and undistributed earnings of
Diodes-China are approximately $29.9 million. Through March 31, 2002, the
Company had not recorded deferred Federal or state tax liabilities (estimated to
be $8.9 million) on these cumulative earnings since the Company considered this
investment to be permanent, and had no plans or obligations to distribute all or
part of that amount from China to the United States. Beginning in April 2002,
based upon a decision to make a cash distribution from Diodes-China to the
United States in the near future, the Company began to record deferred taxes on
a portion of the 2002 earnings of Diodes-China, and had accrued $0.9 million at
December 31, 2002. In 2003, the Company continued to record deferred taxes on a
portion of the 2003 estimated earnings of Diodes-China, recording $0.4 million
in deferred taxes during the first six months of 2003.
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of Diodes-China to the extent such
earnings may be appropriated for distribution to the Company's corporate office
in North America, and as further investment strategies with respect to
Diodes-China are determined. Should the Company's North American cash
requirements exceed the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company's foreign subsidiaries.
However, the distribution of any unappropriated funds to the U.S. will require
the recording of income tax provisions on the U.S. entity, thus reducing net
income.
8
NOTE F - STOCK BASED COMPENSATION AND STOCK OPTIONS
The Company has a stock-based employee compensation plan,
which is described more fully in Note 10 of the Company's audited financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2002. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, ("Accounting for Stock Issued to
Employees"), and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan have an
exercise price equal to the fair market value of the underlying common stock at
the date of grant. During the first six months of 2003, the Company issued 1,500
stock options at an average exercise price of $15.95.
The following table illustrates the effect on net income if
the Company had applied the fair value recognition provisions of SFAS No. 123,
("Accounting for Stock Based Compensation"), to stock based employee
compensation.
For the three months ended June 30 (in 000's except per share data),
-----------------------------------------------------------------------------
Amounts Per Share AMOUNTS PER SHARE
---------------------------------- ------------------------------------------
2002 Basic Diluted 2003 BASIC DILUTED
----------- --------- ------------ ----------------- ---------- --------------
Net income $ 1,563 $0.19 $0.18 $ 2,172 $0.26 $0.23
Additional compensation for fair
value of stock options,
net of tax effect (169) (0.02) (0.02) (64) (0.01) (0.01)
----------- --------- ------------ ----------------- ---------- --------------
Proforma net income $ 1,394 $0.17 $0.16 $ 2,108 $0.25 $0.22
=========== ========= ============ ================= ========== ==============
For the six months ended June 30 (in 000's except per share data),
-----------------------------------------------------------------------------
Amounts Per Share AMOUNTS PER SHARE
---------------------------------- ------------------------------------------
2002 Basic Diluted 2003 BASIC DILUTED
----------- --------- ------------ ----------------- ---------- --------------
Net income $ 1,772 $0.22 $0.20 $ 4,094 $0.49 $0.44
Additional compensation for fair
value of stock options,
net of tax effect (328) (0.04) (0.06) (118) (0.02) (0.02)
----------- --------- ------------ ----------------- ---------- --------------
Proforma net income $ 1,444 $0.18 $0.14 $ 3,976 $0.47 $0.42
=========== ========= ============ ================= ========== ==============
NOTE G - GEOGRAPHIC SEGMENTS
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. The Company's
chief decision-making group consists of the President and Chief Executive
Officer, Chief Financial Officer, Vice President of Sales and Marketing, and
Senior Vice President of Operations. The Company operates in a single segment,
discrete semiconductor devices, through its various manufacturing and
distribution facilities.
The Company's 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; Diodes-China
located in Shanghai, China; and Diodes-Hong Kong located in Hong Kong, China).
For reporting purposes, European operations, which account for approximately 3%
of total sales, are consolidated into the domestic (North America) operations.
The accounting policies of the operating entities 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.
9
CONSOLIDATED
THREE MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS
---------------- ----------------------- --------------------
JUNE 30, 2003
Total sales $ 28,551,000 $ 18,060,000 $ 46,611,000
Inter-company sales (10,739,000) (2,481,000) (13,220,000)
---------------- ----------------------- --------------------
Net sales $ 17,812,000 $ 15,579,000 $ 33,391,000
Assets $ 69,143,000 $ 42,384,000 $ 111,527,000
Property, plant and equipment $ 34,053,000 $ 12,633,000 $ 46,686,000
================ ======================= ====================
CONSOLIDATED
THREE MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS
---------------- ----------------------- --------------------
JUNE 30, 2002
Total sales $ 24,798,000 $ 17,441,000 $ 42,239,000
Inter-company sales (11,104,000) (1,189,000) (12,293,000)
---------------- ----------------------- --------------------
Net sales $ 13,694,000 $ 16,252,000 $ 29,946,000
Assets $ 60,608,000 $ 45,216,000 $ 105,824,000
Property, plant and equipment $ 32,381,000 $ 12,317,000 $ 44,698,000
================ ======================= ====================
CONSOLIDATED
SIX MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS
---------------- ----------------------- --------------------
JUNE 30, 2003
Total sales $ 55,508,000 $ 34,308,000 $ 89,816,000
Inter-company sales (21,227,000) (5,745,000) (26,972,000)
---------------- ----------------------- --------------------
Net sales $ 34,281,000 $ 28,563,000 $ 62,844,000
Assets $ 69,143,000 $ 42,384,000 $ 111,527,000
Property, plant and equipment $ 34,053,000 $ 12,633,000 $ 46,686,000
================ ======================= ====================
CONSOLIDATED
SIX MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS
---------------- ----------------------- --------------------
JUNE 30, 2002
Total sales $ 45,993,000 $ 32,265,000 $ 78,258,000
Inter-company sales (19,672,000) (1,716,000) (21,388,000)
---------------- ----------------------- --------------------
Net sales $ 26,321,000 $ 30,549,000 $ 56,870,000
Assets $ 60,608,000 $ 45,216,000 $ 105,824,000
Property, plant and equipment $ 32,381,000 $ 12,317,000 $ 44,698,000
================ ======================= ====================
NOTE H - RECLASSIFICATIONS
Certain 2002 and 2003 amounts as well as unaudited quarterly
financial data presented in the accompanying financial statements have been
reclassified to conform with 2003 financial statement presentation. These
reclassifications had no impact on previously reported net income or
stockholders' equity.
10
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.
GENERAL
Diodes Incorporated (the "Company"), a Delaware corporation,
is engaged in the manufacture, sale and distribution of discrete semiconductors
worldwide, primarily to manufacturers in the communications, computing,
industrial, consumer electronics and automotive markets, and to distributors of
electronic components to end customers in these markets. The Company's broad
product line includes high-density diode and transistor arrays in
ultra-miniature surface-mount packages, as well as silicon wafers used in
manufacturing these products. Technologies include high density diode and
transistor arrays in multi-pin surface-mount packages; Powermite(R)3,
high-performance surface mount packages; performance Schottkys, switching and
rectifier diodes; single and dual prebiased transistors; performance tight
tolerance and low current zener diodes; subminiature surface mount packages;
transient voltage suppressors (TVS and TSPD); small signal transistors and
MOSFETs; and standard, fast, ultra-fast, and super-fast rectifiers.
Positioning the Company to rapidly respond to the demands of
the global marketplace and continuing to increase its investment in research and
development, the Company is focused on expanding its product portfolio and
closely controlling product quality and time-to-market. Shifting development
priorities toward specialized configurations, such as the Company's high-density
array devices, the Company is introducing a range of new products that improve
the trade-off between size, performance and power consumption for surface-mount
packages, such as the Company's BAT750 Schottky rectifier and SOT-523 product
lines. These product lines are designed for battery-powered and handheld
applications, such as those used in the computer and communications industries;
specifically, wireless devices, notebooks, flat panel displays, digital cameras,
mobile handsets, set top boxes, as well as DC to DC conversion and automotive
electronic applications.
In addition to the Company's corporate headquarters in
Westlake Village, California, which provides sales, marketing, engineering,
logistics and warehousing functions, the Company's wholly-owned subsidiary,
Diodes Taiwan Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales,
engineering and purchasing facility in Taipei, Taiwan. The Company also has a
95% interest in Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or
"KaiHong"), a manufacturing facility in Shanghai, China, and offices in Shanghai
and Shenzhen, China. In March 2002, the Company opened a sales, warehousing and
logistics subsidiary in Hong Kong ("Diodes-Hong Kong"). In addition, in December
2000, the Company acquired FabTech Incorporated ("Diodes-FabTech" or "FabTech"),
a silicon wafer manufacturer located near Kansas City, Missouri. Offices in
Toulouse, France, and Hattenheim, Germany support the Company's European sales
expansion.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products through its own internal and
regional sales departments, as well as through representatives and distributors.
The Company's sales team, aided by the sales force of approximately 30
independent sales representatives located throughout North America, Asia, and
most recently Europe, supplies approximately 200 OEM accounts. In 2002, OEM
customers accounted for approximately 69% of the Company's sales (67% in the
second quarter of 2003), compared to approximately 66% in 2001. The increase was
primarily due to wafer sales at Diodes-FabTech. OEM customers range from small,
privately held electronics companies to Fortune 500 companies.
11
The Company's major OEM customers include industry leaders
such as: Intel Corporation, Cisco Systems Incorporated, Sony Corporation, Nortel
Networks Corporation, Delphi Automotive, Bose Corporation, Scientific Atlanta
Incorporated, Samsung Electronics, Asustek Computer, Inc., Quanta and LG
Electronics, Inc. The Company further supplies approximately 40 distributors
(33% in the second quarter of 2003 and 31% of 2002 sales), who collectively sell
to approximately 10,000 customers on the Company's behalf. The Company's
worldwide distribution network includes Arrow Electronics, Inc., Avnet, Inc.,
Digi-Key Corporation, Future Electronics Ltd., Jaco Electronics, Inc., Reptron
Electronics, Inc., and All American Semiconductor, Inc., among others. The
Company is not dependent on any one customer to support its level of sales. For
the fiscal year ended December 31, 2002, not one OEM customer accounted for more
than 14% (10% in the second quarter of 2003) of the Company's sales, while the
largest distributor accounted for 4% of sales. The twenty largest customers
accounted, in total, for approximately 61% (62% in the second quarter of 2003)
of the Company's sales in 2002, compared to 55% in 2001.
The Company's products are sold primarily in North America,
the Far East, and Europe, both directly to end-users and through electronic
component distributors. In the second quarter of 2003, approximately 44%, 53%,
and 3% of the Company's products were sold in North America, the Far East, and
Europe, respectively, compared to approximately 49%, 48%, and 3% and compared to
54%, 45%, and 1% in 2002 and 2001, respectively. An increase in the percentage
of sales in the Far East is expected as the Company significantly increased its
sales presence there and believes there is greater potential to increase market
share in that region due to the expanding base of electronic product
manufacturers.
RELATED PARTIES
The Company conducts business with two related party
companies, Lite-On Semiconductor Corporation ("LSC") and Xing International.
LSC, who owns 35.9% of the Company's common stock, is the Company's largest
shareholder, and Xing International is owned by the Company's 5% joint venture
partner in Diodes-China. C.H. Chen, the Company's President and Chief Executive
Officer, and a member of the Company's Board of Directors, is also Vice-Chairman
of LSC. M.K. Lu, a member of the Company's Board of Directors, is President of
LSC, while Raymond Soong, the Company's Chairman of the Board, is the Chairman
of the Lite-On Group, a significant shareholder of LSC.
In the second quarter of 2003, the Company sold silicon wafers
to LSC totaling 9.6% (13.7% in 2002) of the Company's sales, making LSC the
Company's largest customer. Also for the second quarter of 2003, 17.2% (17.9% in
2002) of the Company's sales were from discrete semiconductor products purchased
from LSC, making LSC the Company's largest outside vendor. A long-standing sales
agreement exists where the Company is the exclusive North American distributor
for certain LSC product lines. In addition, the Company leases warehouse space
from LSC for its operations in Hong Kong. All such transactions are on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
In December 2000, the Company acquired the wafer foundry,
FabTech, Inc., from LSC. As part of the purchase price, at June 30, 2003, LSC
holds a subordinated, interest-bearing note for approximately $7.5 million. In
May 2002, the Company renegotiated the terms of the note to extend the payment
period from two years to four years, and therefore, payments of approximately
$208,000 plus interest began in July 2002. In connection with the terms of the
acquisition, LSC entered into a volume purchase agreement to purchase wafers
from FabTech. In addition, as per the terms of the stock purchase agreement, the
Company has entered into several management incentive agreements with members of
FabTech's management. The agreements provide members of FabTech's management
guaranteed annual payments as well as contingent bonuses based on the annual
profitability of FabTech, subject to a maximum annual amount. Any portion of the
guaranteed and contingent liability paid by FabTech is reimbursed by LSC.
12
In the second quarter of 2003, the Company sold silicon wafers
to companies owned by Xing International totaling 0.8% (1.5% in 2002) of the
Company's sales. Also for the second quarter of 2003, 4.9% (5.6% in 2002) of the
Company's sales were from discrete semiconductor products purchased from
companies owned by Xing International. In addition, Diodes-China leases its
manufacturing facilities from, subcontracts a portion of its manufacturing
process (metal plating) to, and pays a consulting fee to Xing International. All
such transactions are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
MANUFACTURING AND SIGNIFICANT VENDORS
The Company's Far East subsidiary, Diodes-China, manufactures
products for sale primarily to North America and Asia. Diodes-China's
manufacturing focuses on SOT-23 and SOD-123 products, as well as sub-miniature
packages such as SOT-363, SOT-563, and SC-75. These surface-mount devices
("SMD") are much smaller in size and are used in the computer and communication
industries, destined for cellular phones, notebook computers, pagers, PCMCIA
cards, modems, and garage door transmitters, among others. Diodes-China's
state-of-the-art facilities have been designed to develop even smaller,
higher-density products as electronic industry trends to portable and hand-held
devices continue. Although Diodes-China purchases silicon wafers from
Diodes-FabTech, the majority are currently purchased from other wafer vendors.
The Company plans to increase the number of Diodes-FabTech wafers used at
Diodes-China over the next several years.
Acquired in December 2000 from LSC, FabTech's wafer foundry is
located in Lee's Summit, Missouri. FabTech manufactures primarily 5-inch silicon
wafers, which are the building blocks for semiconductors. FabTech has full
foundry capabilities, including processes such as silicon epitaxy, silicon
oxidation, photolithography and etching, ion implantation and diffusion, low
pressure and plasma enhanced chemical vapor deposition, sputtered and evaporated
metal deposition, wafer backgrinding, and wafer probe and ink.
The Company also purchases products for sale to its customers
from several outside vendors other than the related party vendors mentioned
previously. Although the Company believes alternative sources exist for the
products of any of its suppliers, the loss of any one of its principal suppliers
or the loss of several suppliers in a short period of time could have a
materially adverse effect on the Company until an alternate source is located
and has commenced providing such products or raw materials.
RECENT RESULTS
The discrete semiconductor industry has historically been
subject to severe pricing pressures. At times, although manufacturing costs have
decreased, excess manufacturing capacity and over-inventory have caused selling
prices to decrease to a greater extent than manufacturing costs. To compete in
this highly competitive industry, the Company has, over the past several years,
committed substantial new resources to the further development and
implementation of sales and marketing functions, and expanded manufacturing
capabilities. Emphasizing the Company's focus on customer service, additional
sales personnel and programs have been added, primarily in Asia, and most
recently in Europe. In order to meet customers' needs at the design stage of
end-product development, the Company also continues to employ additional
applications engineers who work directly with customers to assist them in
"designing in" the correct products to produce optimum results. Regional sales
managers in the U.S. and Europe, working closely with manufacturers'
representative firms and distributors, have also been added to help satisfy
customers' requirements. In addition, the Company continues to develop
relationships with major distributors who inventory and sell the Company's
products.
The first six months of 2003 presented a number of challenges,
which included pricing pressures for commodity products, seasonal softness in
consumer electronics and computers, and geopolitical issues.
13
Despite many obstacles, revenue rose 11.5% from the second
quarter of 2002 and 13.4%, sequentially. We continued to improve our capacity
utilization and manufacturing efficiency in both North American and China. For
the quarter, our manufacturing facility in China ran at an average of above 90%
capacity, up from 79% in the second quarter of 2002. Diodes-FabTech ran at an
average of above 80%, up from 78% in the prior-year quarter.
In addition, in the quarter, Asian market sales represented
53% of sales versus 46% a year ago, and we continued to secure new product
design wins and new products sales grew to 12.5% of sales from 5.7% a year ago.
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, Japanese, Korean and German, 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 current and complete
investor financial information, including SEC filings and press releases, as
well as stock quotes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States 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.
The Company's significant accounting policies are described in
Note 1 to the financial statements included in Item 14 of the Annual Report on
Form 10-K, filed with the SEC for the year ended December 31, 2002.
We believe the following critical accounting policies and
estimates, among others, affect the significant estimates and judgments we use
in the preparation of our consolidated financial statements:
REVENUE RECOGNITION
Revenue is recognized when the product is actually shipped to
both end users and electronic component distributors. The Company reduces
revenue in the period of sale for estimates of product returns, distributor
price adjustments and other allowances. Actual returns and adjustments could be
different from our estimates and provisions, resulting in future adjustments to
revenues.
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
14
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 to bad debt expense.
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 for obsolescence and slow-moving items. This
evaluation includes analysis of sales levels, sales projections and purchases by
items. Based upon this 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 the Company's
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 its 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2003
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.
PERCENTAGE DOLLAR
PERCENT OF NET SALES INCREASE
THREE MONTHS ENDED JUNE 30, (DECREASE)
-------------------------------------------------------------
2002 2003 `02 TO `03
---------------- ------------------- ---------------------
Net sales 100.0 % 100.0 % 11.5 %
Cost of goods sold (76.2) (75.0) 9.8
---------------- ------------------- ---------------------
Gross profit 23.8 25.0 17.0
Operating expenses (16.1) (15.6) 7.6
---------------- ------------------- ---------------------
Income from operations 7.7 9.4 36.9
Interest expense, net (0.9) (0.7) (21.0)
Other income 0.4 (0.1) (118.3)
---------------- ------------------- ---------------------
Income before taxes and minority interest 7.2 8.6 36.5
Income tax benefit (provision) (1.7) (1.8) 37.6
---------------- ------------------- ---------------------
Income before minority interest 5.5 6.8 36.1
Minority interest (0.3) (0.3) (9.2)
---------------- ------------------- ---------------------
Net income 5.2 6.5 39.0
================ =================== =====================
15
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended June 30, 2003 compared to the three months ended June 30,
2002. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
2002 2003
---- ----
NET SALES $ 29,946,000 $ 33,391,000
- ---------
Net sales increased approximately $3.4 million, or 11.5%, for
the three months ended June 30, 2003, compared to the same period last year, due
primarily to a 10.4% increase in units sold as a result of increased demand,
primarily in the Far East. The Company's average selling prices ("ASP") for
discrete devices increased approximately 4.6% from the same three-month period
last year, and increased 4.9% from the first quarter of 2003. ASP's for wafer
products decreased 7.6% from the same period last year, but increased 11.1% from
the first quarter of 2003.
2002 2003
---- ----
COST OF GOODS SOLD $ 22,815,000 $ 25,045,000
- ------------------
GROSS PROFIT $ 7,131,000 $ 8,346,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 23.8% 25.0%
- ------------------------------
Cost of goods sold increased approximately $2.2 million, or
9.8%, for the three months ended June 30, 2003 compared to the year ago period.
As a percent of sales, cost of goods sold decreased from 76.2% for the three
months ended June 30, 2002 to 75.0% for the three months ended June 30, 2003 due
primarily to higher factory utilizations, increased efficiencies and lower
manufacturing costs. Gross profit increased approximately $1.2 million, or
17.0%, for the three months ended June 30, 2003 compared to the year ago period.
Of the $1.2 million increase, approximately $0.8 million was due to the 11.5%
increase in sales, while $0.4 million was due to the increase in gross margin
percentage from 23.8% to 25.0%. The higher gross margin percentage was due
primarily to increased capacity utilization, cost containment and sales of
higher margin products. For the second quarter of 2003, Diodes-China's average
capacity utilization was above 90%, equivalent to that of the first quarter of
2003, and compared to 76% in the second quarter of 2002, while Diodes-FabTech
was above 80%, equivalent to the first quarter of 2003 and compared to 78% in
the second quarter of 2002.
2002 2003
---- ----
TOTAL OPERATING EXPENSES $ 4,830,000 $ 5,196,000
- ------------------------
Operating expenses, which include selling, general,
administrative expenses ("SG&A") and research and development expenses ("R&D"),
for the three months ended June 30, 2003 increased approximately $0.4 million,
or 7.6%, compared to the same period last year, due primarily to increased
selling expenses, commissions and incentives and insurance costs. The Company's
goal is to increase its R&D expenditures, both in absolute dollars and as a
percentage of sales, as part of its strategy to develop more proprietary
products aimed at improving gross margins. SG&A, as a percentage of sales,
decreased to 14.4% from 14.6% in the comparable period last year, while R&D
decreased to 1.2% from 1.5% of sales. Total operating expenses, as a percentage
of sales, decreased to 15.6% from 16.1% in the comparable period last year.
16
2002 2003
---- ----
INTEREST INCOME $ 16,000 $ 5,000
- ---------------
INTEREST EXPENSE $ 292,000 $ 223,000
- ----------------
-------------- ---------------------
NET INTEREST EXPENSE $ 276,000 $ 218,000
- --------------------
Net interest expense for the three months ended June 30, 2003
decreased approximately $57,000 versus the second quarter last year, due
primarily to a reduction in the Company's total debt as well as lower interest
rates. The Company's interest expense is primarily the result of the Company's
borrowings to finance the FabTech acquisition, as well as the investment and
expansion in the Diodes-China manufacturing facility.
2002 2003
---- ----
OTHER INCOME (EXPENSE) $ 109,000 $ (20,000)
- ----------------------
Other expense for the three months ended June 30, 2003
increased $129,000 from the second quarter of 2002, due primarily to the
discontinuance of $165,000 of income Diodes-FabTech was receiving from an
external company's use of their testing facilities, as well as the absence of a
$120,000 high technology grant that was received by Diodes-China in the second
quarter of 2002, partly offset by foreign currency gains.
2002 2003
---- ----
INCOME TAX BENEFIT (PROVISION) $ (473,000) $ (651,000)
- ------------------------------
Income taxes in the second quarter of 2003 increased $177,000
from the second quarter of 2002, due primarily to higher earnings at the North
America operations at higher effective tax rates. Included in the tax provision
for the three months ended June 30, 2003 is $210,000 in deferred taxes recorded
for a portion of the 2003 earnings at Diodes-China.
2002 2003
---- ----
MINORITY INTEREST IN JOINT VENTURE $ 98,000 $ 89,000
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
decrease in the joint venture earnings for the three months ended June 30, 2003
is primarily the result of demand induced product mix changes, partly offset by
increased capacity utilization. The joint venture investment is eliminated in
consolidation of the Company's financial statements, and the activities of
Diodes-China are included therein. As of June 30, 2003, the Company had a 95%
controlling interest in the joint venture.
17
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2003
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of income bear to net sales and
the percentage dollar increase (decrease) of such items from period to period.
PERCENT OF NET SALES PERCENTAGE DOLLAR
SIX MONTHS ENDED JUNE 30, INCREASE (DECREASE)
-------------------------------------------------------------
2002 2003 `02 TO `03
---------------- ------------------- ---------------------
Net sales 100.0 % 100.0 % 10.5 %
Cost of goods sold (79.8) (74.8) 3.6
---------------- ------------------- ---------------------
Gross profit 20.2 25.2 37.7
Operating expenses (15.7) (15.6) 9.9
---------------- ------------------- ---------------------
Income from operations 4.5 9.6 133.5
Interest expense, net (1.1) (0.7) (24.5)
Other income 0.2 (0.1) (100.8)
---------------- ------------------- ---------------------
Income before taxes and minority interest 3.6 8.8 166.0
Income tax benefit (provision) (0.2) (2.0) 612.4
---------------- ------------------- ---------------------
Income before minority interest 3.4 6.8 124.4
Minority interest (0.3) (0.3) 37.5
---------------- ------------------- ---------------------
Net income 3.1 6.5 131.0
================ =================== =====================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
six months ended June 30, 2003 compared to the six months ended June 30, 2002.
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report.
2002 2003
---- ----
NET SALES $ 56,870,000 $ 62,844,000
- ---------
Net sales increased approximately $6.0 million, or 10.5%, for
the six months ended June 30, 2003, compared to the same period last year, due
primarily to a 11.7% increase in units sold as a result of increased demand,
primarily in the Far East. The Company's ASP for discrete devices increased
approximately 2.8% from the same six-month period last year. ASP's for wafer
products decreased 7.1% from the same period last year.
18
2002 2003
---- ----
COST OF GOODS SOLD $ 45,387,000 $ 47,037,000
- ------------------
GROSS PROFIT $ 11,483,000 $ 15,807,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 20.2% 25.2%
- ------------------------------
Cost of goods sold increased approximately $1.7 million, or
3.6%, for the six months ended June 30, 2003 compared to the year ago period. As
a percent of sales, cost of goods sold decreased from 79.8% for the six months
ended June 30, 2002 to 74.8% for the six months ended June 30, 2003 due
primarily to higher factory utilizations, increased efficiencies and lower
manufacturing costs. Gross profit increased approximately $4.3 million, or
37.7%, for the six months ended June 30, 2003 compared to the year ago period.
Of the $4.3 million increase, approximately $1.2 million was due to the 10.5%
increase in sales, while $3.1 million was due to the increase in gross margin
percentage from 20.2% to 25.2%. The higher gross margin percentage was due
primarily to increased capacity utilization, cost containment and sales of
higher margin products.
2002 2003
---- ----
TOTAL OPERATING EXPENSES $ 8,908,000 $ 9,794,000
- ------------------------
Operating expenses, which include SG&A and R&D, for the six
months ended June 30, 2003 increased approximately $0.9 million, or 9.9%,
compared to the same period last year, due primarily to increased selling
expenses, commissions and incentives and insurance costs. SG&A, as a percentage
of sales, increased to 14.4% from 14.3% in the comparable period last year,
while R&D decreased to 1.2% from 1.3% of sales. Total operating expenses, as a
percentage of sales, decreased to 15.6% from 15.7% in the comparable period last
year.
2002 2003
---- ----
INTEREST INCOME $ 25,000 $ 9,000
- ---------------
INTEREST EXPENSE $ 638,000 $ 472,000
- ----------------
------------------ ---------------------
NET INTEREST EXPENSE $ 613,000 $ 463,000
- --------------------
Net interest expense for the six months ended June 30, 2003
decreased approximately $150,000 versus the second quarter last year, due
primarily to a reduction in the Company's total debt as well as lower interest
rates.
2002 2003
---- ----
OTHER INCOME (EXPENSE) $ 124,000 $ (1,000)
- ----------------------
Other expense for the six months ended June 30, 2003 increased
$125,000 from the same period in 2002, due primarily to the discontinuance of
$330,000 of income Diodes-FabTech was receiving from an external company's use
of their testing facilities, as well as the absence of a $120,000 high
technology grant that was received by Diodes-China in the second quarter of
2002, partly offset by the absence of foreign currency losses and a $107,000
gain on the sale of equipment in the first quarter of 2003.
2002 2003
---- ----
INCOME TAX BENEFIT (PROVISION) $ (178,000) $ (1,268,000)
- ------------------------------
Income taxes for the first six months of 2003 increased $1.1
million from the same period last year, due primarily to higher earnings at the
North America operations at higher effective tax rates. Included in the tax
provision for the six months ended June 30, 2003 is $420,000 in deferred taxes
recorded for a portion of the 2003 earnings at Diodes-China.
19
2002 2003
---- ----
MINORITY INTEREST IN JOINT VENTURE $ 136,000 $ 187,000
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
increase in the joint venture earnings for the six months ended June 30, 2003 is
primarily the result of increased capacity utilization.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from the funding of
its working capital needs, primarily inventory, work-in-process and accounts
receivable. The Company's primary sources for working capital and capital
expenditures are cash flow from operations, borrowings under the Company's bank
credit facilities and borrowings from principal stockholders. Any withdrawal of
support from its banks or principal stockholders could have serious consequences
on the Company's liquidity. The Company's liquidity is dependent, in part, on
customers paying within credit terms, and any extended delays in payments or
changes in credit terms given to major customers may have an impact on the
Company's cash flow. In addition, any abnormal product returns or pricing
adjustments may also affect the Company's source of short-term funding.
At June 30, 2003 the Company had cash and cash equivalents
totaling $7.3 million, equal with that at December 31, 2002. Cash provided by
operating activities for the six months ended June 30, 2003 was $6.2 million
compared to $9.0 million for the same period in 2002. The primary sources of
cash flows from operating activities for the first six months of 2003 were $5.3
million in depreciation and amortization, $4.1 million in net income, and $1.8
million increase in accounts payable. In 2002, the primary sources were a $5.0
million increase in accounts payable, $4.7 million in depreciation and
amortization, and a $2.5 million reduction in inventory.
The primary use of cash flows from operating activities for
the first six months of 2003 was an increase in accounts receivable of $2.9
million and an increase in inventory of $1.4 million, while the primary use of
cash flows from operating activities in the same period in 2002 was a $5.4
million increase in accounts receivable. Accounts receivable days were 68 days
at June 30, 2003, compared to 70 at December 31, 2002.
For the six months ended June 30, 2003, gross accounts
receivable increased 12.7% compared to the 10.5% increase in sales. The Company
continues to closely monitor its credit terms, while at times providing extended
terms, required primarily by Far East customers and major U.S. distributors.
The ratio of the Company's current assets to current
liabilities was 1.62 at June 30, 2003 and 1.69 at December 31, 2002.
Inventories increased to $16.3 million from $14.9 million at
December 31, 2002, primarily due to an increase in wafer and raw material
inventory at Diodes-China. The Company made a strategic decision to increase
inventory to position itself to capture demand for its new products. Inventory
turns increased to 6.2 turns at June 30, 2003 from 5.8 turns at December 31,
2002.
Cash used by investing activities for the six months ended
June 30, 2003 was $7.2 million, compared to $1.8 million during the same period
in 2002. The primary investment in both years was for additional manufacturing
equipment at the Diodes-China manufacturing facility.
On December 1, 2000, the Company purchased all the outstanding
capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee's
Summit, Missouri from Lite-On Semiconductor Corporation ("LSC"), the Company's
largest stockholder. The acquisition purchase price consisted of approximately
$5 million in cash and an earn-out of up to $30 million if FabTech meets
specified earnings targets over a four-year period. In 2001 and 2002, these
earnings targets were not met, and, therefore, no earn-out was paid. In
addition, FabTech was obligated to repay an aggregate of approximately $19
million in debt, consisting of (i) approximately $13.6 million note payable to
LSC, (ii) approximately $2.6 million note payable to the Company, and (iii)
approximately $3.0
20
million note payable to a financial institution, which amount was repaid on
December 4, 2000 with the proceeds of a capital contribution by the Company. The
acquisition was financed internally and through bank credit facilities.
In June 2001, according to the Company's U.S. bank covenants,
Diodes-FabTech was not permitted to make regularly scheduled principal and
interest payments to LSC on the remaining $10.0 million payable related to the
FabTech acquisition note, but was, however, able to renegotiate with LSC the
terms of the note. Under the terms of the amended and restated subordinated
promissory note, payments of approximately $417,000 plus interest were scheduled
to begin again in July 2002, provided the Company met the terms of its U.S.
bank's covenants. In May 2002, the Company renegotiated the terms of the note to
extend the payment period from two years to four years, and therefore, payments
of approximately $208,000 plus interest began in July 2002.
Cash provided by financing activities was $0.9 million for the
six months ended June 30, 2003, as the Company borrowed on its revolving line of
credit, primarily to fund capital expenditures and inventory, compared to cash
used by financing activities of $8.6 million in the same period of 2002, due
primarily to repayments of debt.
In February 2003, the Company and its U.S. bank renewed its
$7.5 million revolving credit line, extending it for two years, and obtained an
additional $2.0 million credit facility to be used for capital expenditure
requirements at its wafer fabrication facility. This $2.0 million facility
brings the Company's total credit facility to $46.7 million, with the total
available and unused credit at June 30, 2003 of $32.4 million.
At June 30, 2003, the Company's total bank credit facility of
$46.7 million encompasses one major U.S. bank, three banks in Mainland China and
four in Taiwan. As of June 30, 2003, the total credit lines were $14.5 million,
$25.0 million, and $7.2 million, for the U.S. facility secured by substantially
all assets, the unsecured Chinese facilities, and the unsecured Taiwanese
facilities, respectively. As of June 30, 2003, the available credit was $5.3
million, $22.0 million, and $5.1 million, for the U.S. facility, the Chinese
facilities, and the Taiwanese facilities, respectively. In 2002, the Company
paid down its total credit facilities by $14.6 million, from $36.0 million to
$21.4 million, and at June 30, 2003 total debt (including the LSC note) was
$21.7 million due to the increase in the short-term borrowings.
The credit agreements have certain covenants and restrictions,
which, among other matters, require the maintenance of certain financial ratios
and operating results, as defined in the agreements, and prohibit the payment of
dividends. The Company was in compliance with its covenants as of June 30, 2003.
The Company has used its credit facilities primarily to fund
the expansion at Diodes-China and for the FabTech acquisition, as well as to
support its operations. The Company believes that the continued availability of
these credit facilities, together with internally generated funds, will be
sufficient to meet the Company's current foreseeable operating cash
requirements.
The Company has entered into an interest rate swap agreement
with a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt. The interest rate under the swap
agreement is fixed at 6.8% and is based on the notional amount. The swap
contract is inversely correlated to the related hedged long-term debt and is
therefore considered an effective cash flow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured by the changes in the
market value of the hedged long-term debt resulting from fluctuation in interest
rates. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
Total working capital increased approximately 3.5% to $21.6
million as of June 30, 2003, from $20.8 million as of December 31, 2002. The
Company believes that such working capital position will be sufficient for
foreseeable operations and growth opportunities. The Company's total debt to
equity ratio decreased to 0.78 at June 30, 2003, from 0.82 at December 31, 2002.
It is anticipated that this ratio may increase should the Company use its credit
facilities to fund additional inventory sourcing opportunities.
21
The Company has no material plans or commitments for capital
expenditures other than in connection with manufacturing expansion at
Diodes-China and Diodes-FabTech equipment requirements. However, to ensure that
the Company can secure reliable and cost effective inventory sourcing to support
and better position itself for growth, the Company is continuously evaluating
additional internal manufacturing expansion, as well as additional outside
sources of products. The Company believes its financial position will provide
sufficient funds should an appropriate investment opportunity arise and thereby,
assist the Company in improving customer satisfaction and in maintaining or
increasing market share. As of June 30, 2003, based upon plans for new product
introductions, product mixes, capacity restraints on certain product lines and
equipment upgrades, the Company expects that year 2003 capital expenditures will
be in the $12 to $14 million range as the Company approaches higher capacity
utilizations and brings new products into production.
Inflation did not have a material effect on net sales or net
income in the first six months of 2003. A significant increase in inflation
could affect future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary business objective is the maximization of
operating income given an acceptable level of risk. Our objective is exposed to
three primary sources of market risk: foreign currency risk, interest rate risk,
and political risk. No material changes to any of these risks have occurred
since December 31, 2002. For a more detailed discussion of market risk, refer to
Part II, Item 7A of our 2002 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
FOREIGN CURRENCY RISK. The Company faces exposure to adverse
movements in foreign currency exchange rates, primarily in Asia. The Company's
foreign currency risk may change over time as the level of activity in foreign
markets grows and could have an adverse impact upon the Company's financial
results. Certain of the Company's assets, including certain bank accounts and
accounts receivable, and liabilities exist in non-U.S. dollar denominated
currencies, which are sensitive to foreign currency exchange fluctuations. These
currencies are principally the Chinese Yuan, the Taiwanese dollar, the Japanese
Yen, and the Hong Kong dollar. Because of the relatively small size of each
individual currency exposure, the Company does not employ hedging techniques
designed to mitigate foreign currency exposures. Therefore, the Company could
experience currency gains and losses.
INTEREST RATE RISK. The Company has credit agreements with
U.S. and Far East financial institutions at interest rates equal to LIBOR or
similar indices plus a negotiated margin. A rise in interest rates could have an
adverse impact upon the Company's cost of working capital and its interest
expense. The Company entered into an interest rate swap agreement to hedge its
exposure to variability in expected future cash flows resulting from interest
rate risk related to a portion of its long-term debt. At June 30, 2003 the
interest rate swap agreement applies to $3.5 million of the Company's long-term
debt and expires November 30, 2004. The swap contract is inversely correlated to
the related hedged long-term debt and is therefore considered an effective cash
flow hedge of the underlying long-term debt. The level of effectiveness of the
hedge is measured by the changes in the market value of the hedged long-term
debt resulting from fluctuation in interest rates. As a matter of policy, the
Company does not enter into derivative transactions for trading or speculative
purposes.
POLITICAL RISK. The Company has a significant portion of its
assets in Mainland China and Taiwan. The possibility of political conflict
between the two countries or with the United States could have an adverse impact
upon the Company's ability to transact business through these important business
segments and to generate profits. See "Risk Factors - Foreign Operations."
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, C.H. Chen, and Chief
Financial Officer, Carl Wertz, with the participation of the Company's
management, carried out an evaluation of the effectiveness of the Company's
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, the
22
Company's disclosure controls and procedures are effective in making known to
them material information relating to the Company (including its 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 the Company's 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, the Company's
internal control over financial reporting.
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. Such forward-looking statements are subject to a variety of risks
and uncertainties, including those discussed under "Risk Factors" and elsewhere
in this Quarterly Report on Form 10-Q that could cause actual results to differ
materially from those anticipated by 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.
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 the Company
or statements made by its 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.
RISK FACTORS
VERTICAL INTEGRATION
We are in the process of vertically integrating our business.
Key elements of this strategy include (i) expanding our manufacturing capacity,
(ii) establishing wafer foundry and research and development capability through
the acquisition of FabTech and (iii) establishing sales, marketing, product
development, package development and assembly/testing operations in
company-owned facilities or through the acquisition of established contractors.
We have a limited history upon which an evaluation of the prospects of our
vertical integration strategy can be based. There are certain risks associated
with our vertical integration strategy, including:
o difficulties associated with owning a manufacturing business,
including, but not limited to, the maintenance and management of
manufacturing facilities, equipment, employees and inventories and
limitations on the flexibility of controlling overhead;
o difficulties implementing our Enterprise Resource Planning system;
o difficulties expanding our operations in the Far East and developing new
operations in Europe;
o difficulties developing and implementing a successful research and
development team;
o difficulties developing proprietary technology; and,
o market acceptance of our proprietary technology.
The risks of becoming a fully integrated manufacturer are
amplified in an industry-wide slowdown because of the fixed costs associated
with manufacturing facilities.
23
ECONOMIC CONDITIONS
The discrete segment of the semiconductor industry is highly
cyclical, and the value of our business may decline during the "down" portion of
these cycles. During recent years, we, as well as many others in our industry,
experienced significant declines in the pricing of, as well as demand for, our
products and lower facilities utilization. The market for discrete
semiconductors may experience renewed, possibly more severe and prolonged,
downturns in the future. The markets for our products depend on continued demand
in the communications, computer, industrial, consumer electronic and automotive
markets, and these end-markets may experience changes in demand that could
adversely affect our operating results and financial condition.
COMPETITION
The discrete semiconductor industry is highly competitive. We
expect intensified competition from existing competitors and new entrants.
Competition is based on price, product performance, product availability,
quality, and reliability and customer service. We compete in various markets
with companies of various sizes, many of which are larger and have greater
resources or capabilities as it relates to financial, marketing, distribution,
brand name recognition and other resources than we have and, thus, may be better
able to pursue acquisition candidates and to withstand adverse economic or
market conditions. In addition, companies not currently in direct competition
with us may introduce competing products in the future. Some of our current
major competitors are Fairchild Semiconductor Corporation, International
Rectifier Corporation, Rohm Electronics, Phillips Electronics, On Semiconductor
Corporation, and Vishay Intertechnology, Inc. We may not be able to compete
successfully in the future, or competitive pressures may harm our financial
condition or our operating results.
FOREIGN OPERATIONS
We expect revenues from foreign markets to continue to
represent a significant portion of our total revenues. In addition, we maintain
facilities or contracts with entities in the Philippines, Taiwan, Germany,
Japan, England, India, and China, among others. There are risks inherent in
doing business internationally, including:
o changes in, or impositions of, legislative or regulatory requirements,
including tax laws in the United States and in the countries in which we
manufacture or sell our products;
o trade restrictions, transportation delays, work stoppages, and economic and
political instability; o changes in import/export regulations, tariffs
and freight rates;
o difficulties in collecting receivables and enforcing contracts;
o currency exchange rate fluctuations;
o restrictions on the transfer of funds from foreign subsidiaries to
Diodes-North America;
o longer customer payment terms; and,
o the SARS epidemic.
VARIABILITY OF QUARTERLY RESULTS
We have experienced, and expect to continue to experience, a
substantial variation in net sales and operating results from quarter to
quarter. We believe that the factors that influence this variability of
quarterly results include:
o general economic conditions in the countries where we sell our products;
o seasonality and variability in the computer and communications market and our
other end markets;
o the timing of our and our competitors' new product introductions;
o product obsolescence;
o the scheduling, rescheduling and cancellation of large orders by our
customers;
o the cyclical nature of demand for our customers' products;
o our ability to develop new process technologies and achieve volume production
at our fabrication facilities;
o changes in manufacturing yields;
o adverse movements in exchange rates, interest rates or tax rates; and
o the availability of adequate supply commitments from our outside suppliers or
subcontractors.
24
Accordingly, a comparison of the Company's results of
operations from period to period is not necessarily meaningful and the Company's
results of operations for any period are not necessarily indicative of future
performance.
NEW TECHNOLOGIES
We cannot assure that we will successfully identify new
product opportunities and develop and bring products to market in a timely and
cost-effective manner, or that products or technologies developed by others will
not render our products or technologies obsolete or noncompetitive. In addition,
to remain competitive, we must continue to reduce package sizes, improve
manufacturing yields and expand our sales. We may not be able to accomplish
these goals.
PRODUCTION
Our manufacturing efficiency will be an important factor in
our future profitability, and we cannot assure you that we will be able to
maintain or increase our manufacturing efficiency. Our manufacturing processes
require advanced and costly equipment and are continually being modified in an
effort to improve yields and product performance. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results also could be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
FUTURE ACQUISITIONS
As part of our business strategy, we expect to review
acquisition prospects that would implement our vertical integration strategy or
offer other growth opportunities. While we have no current agreements and no
active negotiations underway with respect to any acquisitions, we may acquire
businesses, products or technologies in the future. In the event of future
acquisitions, we could:
o use a significant portion of our available cash;
o issue equity securities, which would dilute current stockholders' percentage
ownership;
o incur substantial debt;
o incur or assume contingent liabilities, known or unknown;
o incur amortization expenses related to intangibles; and
o incur large, immediate accounting write-offs.
Such actions by us could harm our operating results and/or
adversely influence the price of our Common Stock.
INTEGRATION OF ACQUISITIONS
During fiscal year 2000, we acquired FabTech, Inc. We may
continue to expand and diversify our operations with additional acquisitions. If
we are unsuccessful in integrating these companies or product lines with our
operations, or if integration is more difficult than anticipated, we may
experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. Some of the risks that
may affect our ability to integrate or realize any anticipated benefits from
companies we acquire include those associated with:
o unexpected losses of key employees or customers of the acquired company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o hiring additional management and other critical personnel;
o increasing the scope, geographic diversity and complexity of our operations;
o difficulties in consolidating facilities and transferring processes
and know-how;
o diversion of management's attention from other business concerns; and
o adverse effects on existing business relationships with customers.
25
BACKLOG
The amount of backlog to be shipped during any period is
dependent upon various factors and all orders are subject to cancellation or
modification, usually with minimal or no penalty to the customer. Orders are
generally booked from one to twelve months in advance of delivery. The rate of
booking new orders can vary significantly from month to month. The Company and
the industry as a whole are experiencing a trend towards shorter lead-times (the
amount of time between the date a customer places an order and the date the
customer requires shipment). The amount of backlog at any date depends upon
various factors, including the timing of the receipt of orders, fluctuations in
orders of existing product lines, and the introduction of any new lines.
Accordingly, the Company believes that the amount of backlog at any date is not
meaningful and is not necessarily indicative of actual future shipments. The
Company strives to maintain proper inventory levels to support customers'
just-in-time order expectations.
PRODUCT RESOURCES
We sell products primarily pursuant to purchase orders for
current delivery, rather than pursuant to long-term supply contracts. Many of
these purchase orders may be revised or canceled without penalty. As a result,
we must commit resources to the production of products without any advance
purchase commitments from customers. Our inability to sell, or delays in
selling, products after we devote significant resources to them could have a
material adverse effect on our business, financial condition and results of
operations.
QUALIFIED PERSONNEL
Our future success depends, in part, upon our ability to
attract and retain highly qualified technical, sales, marketing and managerial
personnel. Personnel with the necessary expertise are scarce and competition for
personnel with these skills is intense. We may not be able to retain existing
key technical, sales, marketing and managerial employees or be successful in
attracting, assimilating or retaining other highly qualified technical, sales,
marketing and managerial personnel in the future. If we are unable to retain
existing key employees or are unsuccessful in attracting new highly qualified
employees, our business, financial condition and results of operations could be
materially and adversely affected.
EXPANSION
Our ability to successfully offer our products in the discrete
semiconductor market requires effective planning and management processes. Our
past growth, and our targeted future growth, may place a significant strain on
our management systems and resources, including our financial and managerial
controls, reporting systems and procedures. In addition, we will need to
continue to train and manage our workforce worldwide.
SUPPLIERS
Our manufacturing operations depend upon obtaining adequate
supplies of materials, parts and equipment on a timely basis from third parties.
Our results of operations could be adversely affected if we are unable to obtain
adequate supplies of materials, parts and equipment in a timely manner or if the
costs of materials, parts or equipment increase significantly. In addition, a
significant portion of our total sales is from parts manufactured by outside
vendors. From time to time, suppliers may extend lead times, limit supplies or
increase prices due to capacity constraints or other factors. Although we
generally use products, materials, parts and equipment available from multiple
suppliers, we have a limited number of suppliers for some products, materials,
parts and equipment. While we believe that alternate suppliers for these
products, materials, parts and equipment are available, any interruption could
materially impair our operations.
ENVIRONMENTAL REGULATIONS
We are subject to a variety of United States Federal, foreign,
state and local governmental laws, rules and regulations related to the use,
storage, handling, discharge or disposal of certain toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. Any of these regulations
could require us to acquire equipment or to incur substantial other expenses to
comply with environmental regulations. If we were to incur substantial
additional expenses, product costs could significantly increase, thus materially
and adversely affecting our business, financial condition and results of
operations. Any failure to comply with present or future environmental laws,
rules and regulations could result in fines, suspension of production or
cessation of operations, any of which could have a material adverse effect on
our business, financial condition and results of operations.
26
The Company received a claim from one of its former U.S.
landlords, regarding potential groundwater contamination at a site in which the
Company engaged in manufacturing from 1967 to 1973, alleging that the Company
may have some responsibility for cleanup costs. The Company anticipates
that the ultimate outcome of this matter will not have a material effect on its
financial condition.
PRODUCT LIABILITY
One or more of our products may be found to be defective after
we have already shipped such products in volume, requiring a product replacement
or recall. We may also be subject to product returns, which could impose
substantial costs and have a material and adverse effect on our business,
financial condition and results of operations. Product liability claims may be
asserted with respect to our technology or products. Although we currently have
product liability insurance, there can be no assurance that we have obtained
sufficient insurance coverage, or that we will have sufficient resources, to
satisfy all possible product liability claims.
SYSTEM OUTAGES
Risks are presented by electrical or telecommunications
outages, computer hacking or other general system failure. To try to manage our
operations efficiently and effectively, we rely heavily on our internal
information and communications systems and on systems or support services from
third parties. Any of these systems are subject to failure. System-wide or local
failures that affect our information processing could have material adverse
effects on our business, financial condition, results of operations and cash
flows. In addition, insurance coverage for the risks described above may be
unavailable.
DOWNWARD PRICE TRENDS
Our industry is intensely competitive and prices for existing
products tend to decrease steadily over their life cycle. There is substantial
and continuing pressure from customers to reduce the total cost of using our
parts. To remain competitive, we must achieve continuous cost reductions through
process and product improvements. We must also be in a position to minimize our
customers' shipping and inventory financing costs and to meet their other goals
for rationalization of supply and production. Our growth and the profit margins
of our products will suffer if our competitors are more successful than we are
in reducing the total cost to customers of their products.
OBSOLETE INVENTORIES
The life cycles of some of our products depend heavily upon
the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage closely our production and
inventory levels. Inventory may also become obsolete because of adverse changes
in end-market demand. We may in the future be adversely affected by obsolete or
excess inventories which may result from unanticipated changes in the estimated
total demand for our products or the estimated life cycles of the end products
into which our products are designed.
DEFERRED TAXES
As of June 30, 2003, accumulated and undistributed earnings of
Diodes-China are approximately $29.9 million. Through March 31, 2002, the
Company had not recorded deferred Federal or state tax liabilities (estimated to
be $8.9 million) on these cumulative earnings since the Company considered this
investment to be permanent, and had no plans or obligations to distribute all or
part of that amount from China to the United States. Beginning in April 2002,
the Company began to record deferred taxes on a portion of the 2002 earnings of
Diodes-China, and had accrued $0.9 million at December 31, 2002. In 2003, the
Company continued to record deferred taxes on a portion of the 2003 estimated
earnings of Diodes-China, recording $0.4 million in deferred taxes during the
first six months of 2003.
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of Diodes-China to the extent such
earnings may be appropriated for distribution to the Company's corporate office
in North America, and as further investment strategies with respect to
Diodes-China are determined. Should the Company's North American cash
requirements exceed the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company's foreign subsidiaries.
However, the distribution of any unappropriated funds to the U.S. will require
the recording of income tax provisions on the U.S. entity, thus reducing net
income.
27
FOREIGN CURRENCY RISK
The Company faces exposure to adverse movements in foreign
currency exchange rates, primarily in Asia and, to a lesser extent, in Europe.
The Company's foreign currency risk may change over time as the level of
activity in foreign markets grows and could have an adverse impact upon the
Company's financial results. Certain of the Company's assets, including certain
bank accounts and accounts receivable, and liabilities exist in non-U.S. dollar
denominated currencies, which are sensitive to foreign currency exchange
fluctuations. These currencies are principally the Chinese Yuan, the Taiwanese
dollar, the Japanese Yen, and the Hong Kong dollar. Because of the relatively
small size of each individual currency exposure, the Company does not employ
hedging techniques designed to mitigate foreign currency exposures. Therefore,
the Company could experience currency gains and losses.
INTEREST RATE RISK
The Company has credit agreements with U.S. and Far East
financial institutions at interest rates equal to LIBOR or similar indices plus
a negotiated margin. A rise in interest rates could have an adverse impact upon
the Company's cost of working capital and its interest expense. The Company
entered into an interest rate swap agreement to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt. At June 30, 2003 the interest rate
swap agreement applies to $3.5 million of the Company's long-term debt and
expires November 30, 2004. The swap contract is inversely correlated to the
related hedged long-term debt and is therefore considered an effective cash flow
hedge of the underlying long-term debt. The level of effectiveness of the hedge
is measured by the changes in the market value of the hedged long-term debt
resulting from fluctuation in interest rates. As a matter of policy, the Company
does not enter into derivative transactions for trading or speculative purposes.
POLITICAL RISK
The Company has a significant portion of its assets in
Mainland China, Taiwan and Hong Kong. The possibility of political conflict
between these countries or with the United States could have an adverse impact
upon the Company's ability to transact business through these important business
segments and to generate profits.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no matters to be reported under this heading.
ITEM 2. CHANGES IN SECURITIES
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.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted to a vote of its security holders at an
annual meeting of shareholders on June 2, 2003, the election of members of the
Board of Directors. The directors were each elected to serve until the 2004
annual meeting or until their successors are elected and have qualified. The
results of the tabulation for each nominee for director of the Company is as
follows:
C.H. Chen, For: 7,716,465
Director Withheld: 482,422
Michael R. Giordano, For: 7,674,985
Director Withheld: 523,902
Keh-Shew Lu, For: 7,722,891
Director Withheld: 475,996
M.K. Lu, For: 7,852,743
Director Withheld: 346,144
Shing Mao, For: 8,162,218
Director Withheld: 36,669
Raymond Soong, For: 8,163,968
Director Withheld: 34,919
John M. Stich, For: 7,573,065
Director Withheld: 625,822
The Company also submitted to a vote of its security holders
at an annual meeting of shareholders on June 2, 2003, the appointment of Moss
Adams LLP as the Company's independent certified public accountants for the
fiscal year ending December 31, 2003. The result of the tabulation was 8,188,148
shares voted in favor of the proposal, 3,195 shares voted against, and 7,544
abstained from voting on the proposal. No broker non-votes with respect to this
proposal were received.
ITEM 5. OTHER INFORMATION
The proxy materials for the 2003 annual meeting of
stockholders held on June 2, 2003 were mailed to stockholders of the Company on
April 29, 2003. Under certain circumstances, stockholders are entitled to
present proposals at stockholder meetings. Any such proposal to be included in
the proxy statement for the 2004 annual meeting of stockholders must be received
at the Company's executive offices at 3050 East Hillcrest Drive, Westlake
Village, California, 91362, addressed to the attention of the Corporate
Secretary by December 30, 2003 in a form that complies with applicable
regulations. The Securities and Exchange Commission's rule in the event a
stockholder proposal is not submitted to the Company prior to March 15, 2004,
the proxies solicited by the Board of Directors for the 2004 annual meeting of
stockholders will confer authority on the holders of the proxy to vote the
shares in accordance with their best judgment and discretion if the proposal is
presented at the 2004 annual meeting of stockholders without any discussion of
the proposal in the proxy statement for such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 31.1 Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
29
Exhibit 31.2 Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C.
1350 Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIODES INCORPORATED (Registrant)
By: /s/ Carl C. Wertz August 12, 2003
- ----------------------------------------------------
CARL C. WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
31
INDEX TO EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32
EXHIBIT - 11
DIODES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ------------------------------------
2002 2003 2002 2003
----------------- ---------------- ---------------- ---------------
BASIC
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,176,025 8,452,129 8,170,704 8,383,444
Net income $ 1,563,000 $ 2,172,000 $ 1,772,000 $ 4,094,000
================= ================ ================ ===============
Basic earnings per share $ 0.19 $ 0.26 $ 0.22 $ 0.49
================= ================ ================ ===============
DILUTED
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,176,025 8,452,129 8,170,704 8,383,444
Assumed exercise of stock options 698,391 1,060,137 653,321 989,063
----------------- ---------------- ---------------- ---------------
8,874,416 9,512,266 8,824,025 9,372,507
Net income $ 1,563,000 $ 2,172,000 $ 1,772,000 $ 4,094,000
================= ================ ================ ===============
Diluted earnings per share $ 0.18 $ 0.23 $ 0.20 $ 0.44
================= ================ ================ ===============
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C.H. Chen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes
Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
/s/ C.H. Chen
C. H. Chen
Chief Executive Officer
Date: August 12, 2003
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl C. Wertz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes
Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Carl C. Wertz
Carl C. Wertz
Chief Executive Officer
Date: August 12, 2003
EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 of Diodes Incorporated (the "Company") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Very truly yours, /s/ C.H. Chen C.H. Chen Chief Executive Officer Date: August 12, 2003 /s/ Carl C. Wertz Carl C. Wertz Chief Financial Officer Date: August 12, 2003 A signed original of this written statement required by Section 906 has been provided to Diodes Incorporated and will be furnished to the Securities and Exchange Commission or its staff upon request.