e8vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
August 7, 2008
Date of Report (Date of earliest event reported)
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
(State or other
jurisdiction of
incorporation)
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002-25577
(Commission File Number)
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95-2039518
(I.R.S. Employer
Identification No.) |
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15660 North Dallas Parkway, Suite 850
Dallas, TX
(Address of principal executive offices)
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75248
(Zip Code) |
(972) 385-2810
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition.
On August 7, 2008, Diodes Incorporated issued a press release
announcing second quarter 2008 results. A copy of the press release
is attached as Exhibit 99.1.
On August 7, 2008, Diodes Incorporated hosted a conference call to
discuss its second quarter 2008 results. A recording of the
conference call has been posted on its website at www.diodes.com.
A copy of the script is attached as Exhibit 99.2.
During the conference call on August 7, 2008, Dr. Keh-Shew Lu,
President and Chief Executive Officer of Diodes Incorporated, as
well as Carl C. Wertz, Chief Financial Officer, Rick White, Senior
Vice President of Finance, and Mark King, Senior Vice President of
Sales and Marketing, made additional comments during a question
and answer session. A copy of the transcript is attached as
Exhibit 99.3.
In our press release announcing second quarter 2008 results, and
during the conference on August 7, 2008, Diodes Incorporated
provided guidance on other income (expense)of $2.0 to $2.8
million for the third quarter of 2008. Other income (expense)
includes interest income, interest expense, foreign exchange gains
(losses) and other miscellaneous income and expenses. To provide
further clarification, Diodes Incorporated expects the interest
income for the fourth quarter of 2008 to be approximately $1.0
million higher than the guidance provided for the third quarter of
2008.
In the press release, the Company utilizes financial measures and
terms not calculated in accordance with generally accepted
accounting principles in the United States (GAAP) in order to
provide investors with an alternative method for assessing our
operating results in a manner that enables investors to more
thoroughly evaluate our current performance as compared to past
performance. We also believe these non-GAAP measures provide
investors with a more informed baseline for modeling the Companys
future financial performance. Our management uses these non-GAAP
measures for the same purpose. We believe that our investors
should have access to, and that we are obligated to provide, the
same set of tools that we use in analyzing our results. These
non-GAAP measures should be considered in addition to results
prepared in accordance with GAAP, but should not be considered a
substitute for or superior to GAAP results. We have provided
definitions for certain non-GAAP financial measures, together with
an explanation of why management uses these measures and why
management believes that these non-GAAP financial measures are
useful to investors. In addition, in our press release we have
provided tables to reconcile the non-GAAP financial measures
utilized to GAAP financial measures.
Item 7.01 Regulation FD Disclosure.
The earnings release also provides an update on the Companys business outlook.
In addition, Steven Ho, Asia President and Vice President, Asia Sales and
Marketing, retired from the Company effective July 31, 2008.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
See exhibit index.
The information in this Form 8-K and the exhibits attached hereto shall not be
deemed filed for purposes of Section 18 of the Securities Exchange Act of
1934, nor shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall
be expressly set forth by specific reference in such filing.
SIGNATURES
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 hereunto duly
authorized.
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Dated: August 11, 2008 |
DIODES INCORPORATED
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By /s/ Carl C. Wertz
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CARL C. WERTZ |
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Chief Financial Officer |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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99.1
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Press release dated August 7, 2008 |
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99.2
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Conference call script dated August 7, 2008 |
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99.3
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Question and answer transcript dated August 7, 2008 |
exv99w1
Exhibit 99.1
Diodes Incorporated Reports Second Quarter 2008 Financial Results
Achieves Record Revenue and Record Gross Profit
Dallas, Texas August 7, 2008 Diodes Incorporated (NASDAQ:DIOD), a leading global manufacturer
and supplier of high-quality application specific standard products within the broad discrete and
analog semiconductor markets, today reported financial results for the second quarter ended June
30, 2008. Diodes second quarter financials include one month of financial results from Zetex plc
following the successful June completion of the acquisition.
Financial and Business Highlights:
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Revenue increased 20.5 percent over the prior year period and 21.4 percent sequentially to
a record $116.0 million; |
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Gross profit increased 29.1 percent over the same period last year and 24.1 percent
sequentially to $39.6 million; |
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Gross margin increased 220 basis points over the prior year period and 70 basis points
sequentially to 34.1 percent; |
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Achieved adjusted net income of $15.0 million, or $0.35 per share; and |
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Completed the acquisition of Zetex. |
Revenue for the second quarter of 2008 increased 20.5 percent to $116.0 million as compared to
$96.3 million reported in the second quarter of 2007, and increased 21.4 percent when compared to
$95.6 million reported in the first quarter of 2008.
Gross profit for the second quarter of 2008 increased 29.1 percent to $39.6 million, or 34.1
percent of revenue, compared to $30.7 million, or 31.9 percent of revenue, in the prior year
quarter and $31.9 million, or 33.4 percent of revenue, in the first quarter of 2008.
Commenting on the quarter, Dr. Keh-Shew Lu, President and CEO of Diodes Incorporated, said, I am
pleased to report strong quarterly financial results, including record revenue at the high end of
our guidance and a 24 percent sequential increase in gross profit. The growth achieved in the
quarter resulted from strength in our core business, particularly in Asia, combined with the
one-month contribution from the Zetex acquisition. We achieved these results despite the continued
weakening of the global economic environment and are confident in our ability to achieve growth
rates that consistently exceed those of the industry.
Dr. Lu further commented, In terms of the acquisition, our integration efforts are well underway
with significant progress made in aligning and integrating the sales and distribution channels
across all geographies. Zetex was accretive on an operational basis in the month of June, and we
are well positioned to accelerate our growth through the extensive synergies and cross-selling
opportunities of the combined companies, while capitalizing on the cost savings and operational
benefits.
Second quarter net income, which included a one-time, $1.5 million non-cash currency hedge loss
related to the Zetex acquisition, was $13.1 million, or $0.31 per diluted share, compared to $12.2
million, or $0.29 per share, in the second quarter of 2007 and $14.2 million, or $0.33 per share,
in the first quarter of 2008.
1
Adjusted net income for the second quarter of 2008, which excluded $1.2 million of SFAS 123R stock
option expenses and the one-time non-cash currency hedge loss, was $15.0 million, or $0.35 per
diluted share.
As of June 30, 2008, Diodes had approximately $86.1 million in cash, $294.7 million in long-term
investments, $196.7 million in working capital, $400 million in long-term debt (including the
convertible notes) and unused and available credit facilities of $49.5 million.
Business Outlook
Dr. Lu concluded, As we look to the third quarter of 2008, we expect revenue to increase to
between $134 million and $142 million. Included in the total revenue guidance is the expectation
of approximately $27 million to $33 million of revenue associated with the Zetex acquisition.
Additionally, we expect the overall gross profit to grow 13 percent to 20 percent from the second
quarter. Because of the one-month contribution of the acquisition of Zetex in the second quarter,
we are providing more detailed guidance for the third quarter only. Future guidance will not
include the same amount of detail or a breakout of the Zetex results, since Zetexs operations will
become an integrated part of our business.
The Company is in the process of obtaining third-party valuations per SFAS 141 for many of the
assets and liabilities acquired. Therefore, the fair market value adjustments and corresponding
depreciation and amortization are not being provided in this guidance. The adjustments to fair
market value and corresponding depreciation and amortization may include, but are not limited to,
valuations of inventories and property, plant and equipment, as well as valuation models for
identifiable intangible assets.
When the purchase price valuation is complete the Company may revise its third quarter guidance to
include the fair market value adjustments and corresponding depreciation and amortization charges
to the financial statements. These purchase accounting rules should have no impact to the Companys
ongoing free cash flow but will affect U.S. GAAP gross margins and net income in future periods.
The following table provides the details of the third-quarter GAAP guidance excluding the purchase
price valuation impact:
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Revenue growth |
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15% to 22% |
Gross profit growth |
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13% to 20% |
SG&A, % of revenue |
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15.0% to 15.5% |
R&D, % of revenue |
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5.0% to 5.5% |
Other expense, net |
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$2.0 to $2.8 million |
Tax rate |
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16.0% to 17.0% |
Fully diluted share count |
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43.0 to 43.4 million |
2
Conference Call
Diodes will host a conference call on Thursday, August 7, 2008 at 10:00 a.m. Central Time (11:00
a.m. Eastern Time) to discuss its second quarter 2008 financial results. Investors and analysts may
join the conference call by dialing 1-888-713-4214 and providing the confirmation code 24472970.
International callers may join the teleconference by dialing 1-617-213-4866. A telephone replay of
the call will be available approximately two hours after the call and will be available until
August 11, 2008 at midnight Pacific Time. The replay number is 1-888-286-8010 with a pass code of
18588755. International callers should dial 1-617-801-6888 and enter the same pass code at the
prompt. Additionally, this conference call will be broadcast live over the Internet and can be
accessed by all interested parties on the Investor section of Diodes website at
http://www.diodes.com. To listen to the live call, please go to the Investor section of Diodes
website and click on the Conference Call link at least fifteen minutes prior to the start of the
call to register, download, and install any necessary audio software. For those unable to
participate during the live broadcast, a replay will be available shortly after the call on Diodes
website for approximately 60 days.
About Diodes Incorporated
Diodes Incorporated (Nasdaq: DIOD), an S&P SmallCap 600 and Russell 3000 Index company, is a
leading global manufacturer and supplier of high-quality application specific standard products
within the broad discrete and analog semiconductor markets, serving the consumer electronics,
computing, communications, industrial and automotive markets. Diodes products include diodes,
rectifiers, transistors, MOSFETs, protection devices, functional specific arrays, amplifiers and
comparators, Hall-effect sensors and temperature sensors, power management devices including LED
drivers, DC-DC switching, regulators, linear voltage regulators and voltage reference along with
special function devices including USB power switch, load switch, voltage supervisor and motor
controllers. The Company has its corporate offices in Dallas, Texas, with a sales, marketing,
engineering and logistics office in Southern California; design centers in Dallas, San Jose,
Taipei, England and Germany; wafer fabrication facilities in Kansas City, Missouri and Manchester,
England; two manufacturing facilities in Shanghai, China, one in Neuhaus, Germany and a joint
venture facility in Chengdu, China; engineering, sales, warehouse and logistics offices in Taipei,
Hong Kong and Manchester, England, and sales and support offices throughout the world. For further
information, including SEC filings, visit the Companys website at http://www.diodes.com.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements
set forth above that are not historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. Such statements include statements regarding our expectation that: we
are confident in our ability to achieve growth rates that consistently exceed those of the
industry; we are well positioned to accelerate our growth through the extensive synergies and
cross-selling opportunities of the combined companies while capitalizing on the cost savings and
operational benefits; we expect revenue to increase in the third quarter to between $134 million
and $142 million; we expect to include approximately $27 million to $33 million of revenue
associated with the Zetex acquisition in our total revenue guidance; we expect our overall gross
profit to grow 13 percent to 20 percent from the second quarter; the adjustments to fair market
value and corresponding depreciation and amortization may include, but are not limited to,
valuations of inventories and property, plant and equipment, as well as valuation models for
identifiable intangible assets; and we expect that purchase accounting rules should have no impact
to our ongoing free cash flow but will affect U.S. GAAP gross margins and net income in the future
periods. Potential risks and uncertainties include, but are not limited to, such factors as the
Companys business strategy, the introduction and market reception to new product announcements,
fluctuations in product demand and supply, prospects for the U.S. and global economy; the continue
introduction of new products, the Companys ability to maintain customer and vendor relationships,
technological advancements, impact of competitive products and pricing, growth in targeted markets,
successful integration of acquired companies and/or assets, the Companys ability to successfully
make additional acquisitions, risks of domestic and foreign operations, uncertainties in the
Auction Rate Securities market; currency exchange rates; availability of tax credits, and other
information detailed from time to time in the Companys filings with the United States Securities
and Exchange Commission.
3
Recent news releases, annual reports, and SEC filings are available at the Companys website:
http://www.diodes.com. Written requests may be sent directly to the Company, or they may be
e-mailed to: diodes-fin@diodes.com.
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Company Contact:
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Investor Contact: |
Carl Wertz
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Leanne Sievers |
Chief Financial Officer
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EVP, IR |
Diodes, Inc.
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Shelton Group |
(805) 446-4800
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(949) 224-3874 |
carl_wertz@diodes.com
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lsievers@sheltongroup.com |
CONSOLIDATED CONDENSED INCOME STATEMENT and BALANCE SHEET FOLLOW
4
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2007 |
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2008 |
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2007 |
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2008 |
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Net sales |
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$ |
96,283 |
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$ |
116,018 |
|
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$ |
188,303 |
|
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$ |
211,598 |
|
Cost of goods sold |
|
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65,605 |
|
|
|
76,400 |
|
|
|
128,102 |
|
|
|
140,064 |
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|
|
|
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|
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|
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|
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|
|
|
|
Gross profit |
|
|
30,678 |
|
|
|
39,618 |
|
|
|
60,201 |
|
|
|
71,534 |
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Selling, general and administrative expenses |
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13,397 |
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17,127 |
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26,075 |
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|
31,786 |
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Research and development expenses |
|
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3,156 |
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|
|
4,994 |
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|
|
6,100 |
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8,730 |
|
Gain on disposal of fixed assets |
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1,770 |
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|
|
|
|
|
1,770 |
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(45 |
) |
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|
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|
|
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Total operating expenses |
|
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18,323 |
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|
|
22,121 |
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|
|
33,946 |
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|
|
40,471 |
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Income from operations |
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12,355 |
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|
|
17,497 |
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|
|
26,255 |
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|
31,063 |
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Other income (expense) |
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Interest income |
|
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4,285 |
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|
|
2,554 |
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|
|
8,320 |
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|
|
8,002 |
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Interest expense |
|
|
(1,696 |
) |
|
|
(2,285 |
) |
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|
(3,421 |
) |
|
|
(3,983 |
) |
Other |
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72 |
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(1,202 |
) |
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(56 |
) |
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(1,496 |
) |
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|
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|
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2,661 |
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(933 |
) |
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4,843 |
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|
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2,523 |
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Income before income taxes and minority interest |
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15,016 |
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16,564 |
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31,098 |
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33,586 |
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Income tax provision |
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(2,221 |
) |
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(2,781 |
) |
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(4,879 |
) |
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(4,996 |
) |
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Income before minority interest |
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12,795 |
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|
13,783 |
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26,219 |
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28,590 |
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Minority interest in joint venture earnings |
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(546 |
) |
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(675 |
) |
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(961 |
) |
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(1,279 |
) |
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|
|
|
|
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Net income |
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$ |
12,249 |
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|
$ |
13,108 |
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$ |
25,258 |
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$ |
27,311 |
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Earnings per share |
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Basic |
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$ |
0.31 |
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$ |
0.32 |
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$ |
0.64 |
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|
$ |
0.68 |
|
Diluted |
|
$ |
0.29 |
|
|
$ |
0.31 |
|
|
$ |
0.60 |
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|
$ |
0.64 |
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|
|
|
|
|
|
|
|
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Number of shares used in computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,397 |
|
|
|
40,616 |
|
|
|
39,220 |
|
|
|
40,431 |
|
Diluted |
|
|
42,023 |
|
|
|
42,843 |
|
|
|
41,897 |
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|
|
42,695 |
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|
|
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|
|
|
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|
5
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME
(in thousands, except per share data)
(unaudited)
ADJUSTED NET INCOME
This measure consists of generally accepted accounting principles, or GAAP, net income, which is
then adjusted solely for the purpose of adjusting for non-cash share-based compensation expense and
restructuring costs. Excluding the non-cash share-based compensation expense and the restructuring
costs adjustments provides investors with a better depiction of the Companys operating results and
provides a more informed baseline for modeling future earnings expectations. We recommend a review
of net income on both a non-GAAP basis and GAAP basis be performed to get a comprehensive view of
our results. We provide a reconciliation of adjusted net income to GAAP net income below.
ADJUSTED EARNINGS PER SHARE
This non-GAAP financial measure is the portion of the Companys GAAP net income assigned to each
share of stock, excluding non-cash share-based compensation expense and restructuring costs.
Excluding the non-cash share-based compensation expense and the restructuring costs adjustments
provides a more informed baseline for modeling future earnings expectations. We recommend a review
of diluted EPS on both a non-GAAP basis and GAAP basis be performed to get a comprehensive view of
our results. Information on how these share calculations are made is below.
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Three months ended |
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Six months ended |
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|
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June 30, |
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June 30, |
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2007 |
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|
2008 |
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|
2007 |
|
|
2008 |
|
Net income (Per-GAAP) |
|
$ |
12,249 |
|
|
$ |
13,108 |
|
|
$ |
25,258 |
|
|
$ |
27,311 |
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|
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|
|
|
|
|
|
|
|
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|
|
Adjustments to reconcile net income
to adjusted net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
included in cost of goods sold: |
|
|
78 |
|
|
|
52 |
|
|
|
160 |
|
|
|
105 |
|
Stock option expense
included in selling and general
administrative expenses: |
|
|
1,205 |
|
|
|
1,072 |
|
|
|
2,508 |
|
|
|
2,151 |
|
Stock option expense
included in research and
development expenses: |
|
|
118 |
|
|
|
110 |
|
|
|
243 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense |
|
|
1,402 |
|
|
|
1,234 |
|
|
|
2,911 |
|
|
|
2,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
1,770 |
|
|
|
|
|
|
|
1,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments |
|
|
55 |
|
|
|
1,540 |
|
|
|
95 |
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit related to
stock option expense, restructuring costs and other adjustments |
|
|
479 |
|
|
|
874 |
|
|
|
828 |
|
|
|
1,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (Non-GAAP) |
|
$ |
14,997 |
|
|
$ |
15,008 |
|
|
$ |
29,206 |
|
|
$ |
30,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares used in computing
earnings per share |
|
|
42,023 |
|
|
|
42,843 |
|
|
|
41,897 |
|
|
|
42,695 |
|
Incremental shares considered
to be outstanding: |
|
|
847 |
|
|
|
558 |
|
|
|
898 |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted diluted shares used in computing
Adjusted earnings per share |
|
|
42,870 |
|
|
|
43,402 |
|
|
|
42,795 |
|
|
|
43,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share (Non-GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.38 |
|
|
$ |
0.37 |
|
|
$ |
0.74 |
|
|
$ |
0.75 |
|
Diluted |
|
$ |
0.35 |
|
|
$ |
0.35 |
|
|
$ |
0.68 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF NET INCOME TO EBITDA
EBITDA represents earnings before net interest expense, income tax provision, depreciation and
amortization. Our management believes EBITDA is useful to investors because it is frequently used
by securities analysts, investors and other interested parties in evaluating companies in our
industry. In addition, our management believes that EBITDA is useful in evaluating our operating
performance compared to that of other companies in our industry because the calculation of EBITDA
generally eliminates the effects of financing and income taxes and the accounting effects of
capital spending, which items may vary for different companies for reasons unrelated to overall
operating performance. As a result, our management uses EBITDA as a measure to evaluate the
performance of our business. However, EBITDA is not a recognized measurement under generally
accepted accounting principles, or GAAP, and when analyzing our operating performance, investors
should use EBITDA in addition to, and not as an alternative for, income from operations and net
income, each as determined in accordance with GAAP. Because not all companies use identical
calculations, our presentation of EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our
managements discretionary use, as it does not consider certain cash requirements such as a tax and
debt service payments.
The following table provides a reconciliation of net income to EBITDA (in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2008 |
|
Net Income (Per-GAAP) |
|
$ |
12,249 |
|
|
$ |
13,108 |
|
Plus: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(2,590 |
) |
|
|
(269 |
) |
Income tax provision |
|
|
2,221 |
|
|
|
2,781 |
|
Depreciation and amortization |
|
|
6,424 |
|
|
|
9,275 |
|
|
|
|
|
|
|
|
EBITDA (Non-GAAP) |
|
$ |
18,304 |
|
|
$ |
24,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2008 |
|
Net Income (Per-GAAP) |
|
$ |
25,258 |
|
|
$ |
27,311 |
|
Plus: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(4,900 |
) |
|
|
(4,019 |
) |
Income tax provision |
|
|
4,879 |
|
|
|
4,996 |
|
Depreciation and amortization |
|
|
12,396 |
|
|
|
16,931 |
|
|
|
|
|
|
|
|
EBITDA (Non-GAAP) |
|
$ |
37,633 |
|
|
$ |
45,219 |
|
|
|
|
|
|
|
|
7
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
(unaudited) |
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
56,179 |
|
|
$ |
86,132 |
|
Short-term investments |
|
|
323,472 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and short-term investments |
|
|
379,651 |
|
|
|
86,132 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
Customers |
|
|
84,638 |
|
|
|
108,556 |
|
Related parties |
|
|
5,405 |
|
|
|
3,994 |
|
|
|
|
|
|
|
|
|
|
|
90,043 |
|
|
|
112,550 |
|
Less: Allowance for doubtful receivables |
|
|
(465 |
) |
|
|
(616 |
) |
|
|
|
|
|
|
|
|
|
|
89,578 |
|
|
|
111,934 |
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
53,031 |
|
|
|
101,649 |
|
Deferred income taxes, current |
|
|
5,174 |
|
|
|
6,620 |
|
Prepaid expenses and other current assets |
|
|
10,576 |
|
|
|
15,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
538,010 |
|
|
|
321,423 |
|
|
|
|
|
|
|
|
|
|
LONG TERM INVESTMENT, available-for-sale securities |
|
|
|
|
|
|
294,653 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization |
|
|
123,407 |
|
|
|
183,415 |
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES, non current |
|
|
3,241 |
|
|
|
17,626 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
9,643 |
|
|
|
17,418 |
|
Goodwill |
|
|
25,135 |
|
|
|
112,324 |
|
Other |
|
|
6,929 |
|
|
|
7,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
706,365 |
|
|
$ |
954,577 |
|
|
|
|
|
|
|
|
8
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
(unaudited) |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Line of credit |
|
$ |
|
|
|
$ |
16,520 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Trade |
|
|
42,010 |
|
|
|
44,698 |
|
Related parties |
|
|
13,135 |
|
|
|
13,725 |
|
Accrued liabilities |
|
|
27,841 |
|
|
|
41,541 |
|
Income tax payable |
|
|
1,732 |
|
|
|
6,418 |
|
Long-term debt, current portion |
|
|
1,345 |
|
|
|
1,365 |
|
Capital lease obligations, current portion |
|
|
145 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
86,208 |
|
|
|
124,716 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, net of current portion |
|
|
|
|
|
|
|
|
2.25% convertible senior notes due 2026 |
|
|
230,000 |
|
|
|
230,000 |
|
Others |
|
|
5,815 |
|
|
|
170,038 |
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS, net of current portion |
|
|
1,331 |
|
|
|
2,352 |
|
OTHER LONG-TERM LIABILITIES |
|
|
6,249 |
|
|
|
35,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
329,603 |
|
|
|
562,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST IN JOINT VENTURES |
|
|
7,164 |
|
|
|
8,448 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock par value $1.00 per share;
1,000,000 shares authorized;
no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock par value $0.66 2/3 per share;
70,000,000 shares authorized; 40,172,491 and 40,838,821
shares issued and outstanding at December 31, 2007
and June 30, 2008, respectively |
|
|
26,782 |
|
|
|
27,226 |
|
Additional paid-in capital |
|
|
121,412 |
|
|
|
127,248 |
|
Retained earnings |
|
|
220,504 |
|
|
|
247,814 |
|
Accumulated other comprehensive gain (loss) |
|
|
900 |
|
|
|
(19,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
369,598 |
|
|
|
383,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
706,365 |
|
|
$ |
954,577 |
|
|
|
|
|
|
|
|
9
exv99w2
Exhibit 99.2
Diodes, Inc. Second Quarter 2008 Financial Results Script
Thursday, August 7, 2008 @ 10:00am CST / 8:00am PST
Call Participants: Dr. Keh-Shew Lu, Carl Wertz, Mark King and Richard White
Operator:
Good morning and welcome to Diodes Incorporateds second quarter 2008 financial results conference
call. At this time, all participants are in a listen only mode. At the conclusion of todays
conference call, instructions will be given for the question and answer session. If anyone needs
assistance at any time during the conference call, please press the star followed by the zero on
your touchtone phone.
As a reminder, this conference call is being recorded today, Thursday August 7, 2008. I would now
like to turn the call to Shelton Group, the investor relations agency for Diodes Incorporated.
Leanne, please go ahead.
Introduction: Leanne Sievers, EVP of Shelton Group
Good morning and welcome to Diodes second
quarter 2008 earnings conference call. Im Leanne Sievers, executive vice president of Shelton
Group, Diodes investor relations firm.
With us today are Diodes President and CEO, Dr. Keh-Shew
Lu; Chief Financial Officer, Carl Wertz; Senior Vice President of Sales and Marketing, Mark King;
and Senior Vice President of Finance, Richard White.
Page 2 of 17
Before I turn the call over to Dr. Lu, I would like to remind our listeners that managements
prepared remarks contain forward-looking statements, which are subject to risks and uncertainties,
and management may make additional forward-looking statements in response to your questions.
Therefore, the Company claims the protection of the safe harbor for forward-looking statements that
is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ
from those discussed today, and therefore we refer you to a more detailed discussion of the risks
and uncertainties in the Companys filings with the Securities and Exchange Commission.
In addition,
any projections as to the Companys future performance represent managements estimates as of
today, August 7, 2008. Diodes assumes no obligation to update these projections in the future as
market conditions may or may not change.
For those of you unable to listen to the entire call at
this time, a recording will be available via webcast for 60 days at the investor relations section
of Diodes website at www.diodes.com.
And now I will turn the call over to Diodes President and
CEO, Dr. Keh-Shew Lu.
Page 3 of 17
Dr. Keh-Shew Lu, President and CEO of Diodes
Thank you, Leanne.
Welcome everyone, and thank you for joining us today.
I am pleased to report another strong quarter for Diodes in which we reported record revenue at the
high end of our guidance range and gross profits that increased 24 percent over the first quarter,
exceeding the high end of our guidance. As previously announced, our second quarter results
included one month of financial results from our June acquisition of Zetex.
As we have stated previously, the acquisition of Zetex offers substantial synergies that we believe
will further enhance Diodes global leadership in discrete and analog semiconductor solutions. We
have been analyzing Zetexs business model for several years prior to announcing the acquisition,
so we are prepared to capture the synergies of the combined companies, which we expect to realize
over the next several quarters.
To note, Zetex was accretive on an operational basis for the June month.
In terms of timing, this acquisition occurs at a time of strength in Diodes development and
growth, and will only enhance what we have accomplished to date. As all of our shareholders know,
we have consistently achieved growth rates that have exceeded those of the industry, in addition to
delivering profitable results quarter after quarter. Although the overall global
Page 4 of 17
economy is weak, we believe that our continued growth will be complemented by the addition of Zetex
to our business by enhancing Diodes market position, expanding our product portfolio, and
increasing exposure to the automotive and industrial markets, as well as broadening our presence in
Europe.
Since closing in June, we have made significant progress in aligning and integrating the sales and
distribution channels across all geographies, which Mark King will discuss with you in greater
detail. And although we will continue to analyze the costs of manufacturing and operational
synergies between our two companies in the coming quarters, our immediate focus is on capturing the
revenue and growth synergies that are offered through this acquisition. We have a very experienced
management team that has a proven track record of quickly and effectively integrating companies for
maximum return for our shareholders, and I look forward to reporting our progress in the coming
quarters. With that, I will turn the call over to Carl to discuss our second quarter financial
results in more detail.
Page 5 of 17
Carl Wertz, CFO
Thanks, Dr. Lu, and good morning everyone.
As Dr. Lu mentioned, our second quarter financials include one month of results from our
acquisition of Zetex.
Revenue for the second quarter was $116 million, which was at the high end of our increased
guidance range, representing an increase of 21 percent both sequentially and over the prior year
period, and set an all-time record for the Company.
New product sales accounted for 30 percent of revenue and does not include the one-month of Zetex.
Gross profit for the second quarter of 2008 was $39.6 million, an improvement of 24 percent
sequentially and 29 percent over the same period last year. Gross margin improved 70 basis points
sequentially to 34.1 percent of revenue and 220 basis points from the year-ago quarter. Our gross
profit results were above our increased guidance range and was driven by solid average selling
prices, continued operational efficiencies and an improved product mix.
Selling, General & Administrative expenses for the quarter were $17.1 million, or 14.8 percent of
revenue, which was an improvement from the first quarter on a percent of revenue basis. Absolute
dollar increases were
Page 6 of 17
primarily due to Zetexs operations. Included in second-quarter SG&A was $1.1 million of non-cash,
FAS123R, share-based compensation. In the earnings release we have included a table to reconcile
the impact of share-based compensation expense. Looking at the third quarter and with a full
quarter of Zetexs results, we expect SG&A to range between 15 and 15.5 percent of revenues.
Research and Development investment in the quarter was $5.0 million, or 4.3 percent of revenue. The
increase as a percent of revenue reflects Zetexs greater focus on wafer process technology as well
as their depth of engineering resources, as we have stated previously. Looking at the third
quarter, we believe that R&D will be approximately 5 to 5.5 percent of revenue as Zetex is fully
factored into our quarterly results.
Other expense amounted to approximately $900,000 for the quarter, consisting of $2.6 million of
interest income primarily related to our Auction Rate Securities Investments offset by $1.9 million
of interest expense, primarily related to our convertible bonds, and a non-cash loss of $1.5
million related to a foreign currency hedge required by the Zetex acquisition. Although the hedge
was an expense related to the Zetex acquisition purchase price, U.S. GAAP does not permit this
hedge to be booked in the purchase price accounting; thus a P&L loss was recorded. However, even
when considering this one-time charge, our operational performance was strong enough to cover the
hedge loss.
Page 7 of 17
Net other expense for the third quarter is expected to range between $2 to $2.8 million.
Our effective income tax rate in the second quarter was 16.8 percent, which was slightly higher
than our expected range due to the earnings contribution from Zetex. For the full year of 2008, we
expect the tax rate to range between 16 and 17 percent, which takes into consideration Zetex
combined with our operations in lower tax jurisdictions, as well as our preferential tax treatment
in Asia.
Adjusted net income was $15 million, or $0.35 per share. Fully diluted shares used to calculate
adjusted earnings per share were 43.4 million. For the third quarter, we expect the fully diluted
share count for GAAP earnings to be 43.0 to 43.4 million shares.
Adjusted net income for the second quarter excludes $1.2 million in non-cash, stock option expense,
as well as the one-time, non-cash hedge loss related to the Zetex acquisition.
Cash flow from operations for the quarter was $13 million, and $23 million year-to-date.
Turning to the balance sheet, as of June 30th, we had $86 million in cash and short-term
investments with $197 million in working capital. Long-term
Page 8 of 17
term debt, including the convertible bond and the loan related to the Zetex acquisition, was $400
million.
As discussed last quarter, we had $320 million invested in auction rate securities as part of our
cash management program. The securities are currently valued using a third-party valuation
methodology and are classified on our balance sheet as a non-current, long-term investment in the
amount of $295 million.
We review impairments in accordance with FAS 115, as well as related guidance issued by the FASB
and SEC in order to determine the classification of the impairment as temporary or
other-than-temporary. In evaluating the ARS portfolio, we classified the 8 percent decline in
value as temporary, and recorded the unrealized loss in other comprehensive loss on the balance
sheet.
As we have stated previously, we consider the liquidity issue to be temporary and currently intend
to hold these securities until a recovery of the auction process. We believe our cash flow should
be sufficient for all of our operational requirements. We will continue to monitor the auction rate
market and evaluate the securities at each quarter-end to determine the valuation required.
Inventory increased during the second quarter to $102 million, primarily as a result of the $30
million of Zetex inventory acquired. Without Zetex, inventory days increased slightly to 91 days
from 88 last quarter.
Page 9 of 17
Accounts receivable increased to $112 million with the inclusion of $18 million acquired from
Zetex. Without Zetex, A/R days improved from 82 days to 80 days.
Capital expenditures were $12 million for the quarter and $26 million year-to-date. The majority of
the investment was for manufacturing equipment in China, as well as a $5 million land purchase for
our Dallas headquarters.
Going forward, as part of our wafer fab review plan, approximately $6.5 million of capital was
authorized for Zetex to expand its 6-inch line, and we are also qualifying their 4-inch bi-polar
process in our 6-inch line at Diodes-FabTech in order to increase capacity and reduce costs. For
the year, we continue to expect to invest 10 to 12 percent of our revenues in Cap-Ex.
Depreciation expense for the second quarter was $9 million and $16.5 million for the year.
Turning to our Outlook...
As we look to the third quarter of 2008, we expect revenue to increase to between $134 and $142
million. Included in the total revenue guidance is the expectation of approximately $27 to $33
million of revenue associated with the Zetex acquisition. Additionally, we expect the overall gross
profit to grow 13 to 20 percent from the second quarter.
Page 10 of 17
Because of the one-month contribution of the acquisition of Zetex in the second quarter, we are
providing a more detailed guidance for the third quarter only. The table is included in the
earnings release. Any future guidance will not include the same level of detail or a breakout of
the Zetex results since its operations will become an integrated part of our business.
We are in the process of obtaining third-party valuations as per FAS 141 for many of the Zetex
assets and liabilities acquired, and as such, the fair market value adjustments and corresponding
depreciation and amortization expenses are not provided in todays guidance.
These purchase accounting rules should have no impact to the ongoing free cash flow of Diodes but
will affect U.S. GAAP gross margins and net income in future periods.
With that said, I will now turn the call over to Mark King, Senior Vice President, Sales and
Marketing. Mark...
Page 11 of 17
Mark King, Senior VP of Sales and Marketing
Thank you, Carl, and good morning.
As Dr. Lu mentioned, we made significant progress during the quarter in aligning and integrating
the sales and distribution channels across all geographies. Our marketing units have been combined
and consolidated, and we are in the process of consolidating our rep organization and cross
training on both product lines. And although the distribution channels and integration requirements
vary with each geographic region, we have taken the appropriate steps to fortify many areas of the
business in order to quickly combine our two organizations into one cohesive operation.
From an overall business perspective, I believe that Zetexs infrastructure combined with its
process knowledge, strong applications team, and solid technology will greatly benefit our company.
Additionally, Zetex brings analog and application-centric exposure in categories where Diodes does
not currently participate, in areas such as power management and LED-lighting.
With limited product overlap, we believe in the coming quarters we will be able to fully capitalize
on the established sales organizations, cross-selling synergies, and expanded product offerings
provided by the combined Company.
Page 12 of 17
Since Zetex was only one month of revenue, let me begin the discussion with the segment breakout
for Diodes only: computing represented 37 percent of revenue; consumer 34 percent; communications
15 percent; industrial 12; and automotive 2 percent. In terms of segment breakout, we expect with
the Zetex impact, an increase in the industrial and automotive segments, which will add more
balance to our industry distribution.
Lets move on to our new products.
During the second quarter, we released 53 new products, including 6 analog, 13 discrete, 2 Hall
devices, 22 MOSFETs, and 10 SBR® devices. As Carl mentioned, new products accounted for
30 percent of revenue.
Our new product revenue was driven by our continued expansion of our MOSFET product offerings, in
particular our newly released MOSFETs used for load switches, DC/DC switching, and inverter
applications for notebook PC, GPS, digital camera, inverters and DC fans.
Additionally, during the quarter we released a custom array product for an automotive keyless entry
system, and a custom 3amp SBR® DFN device that is being used in a DC to DC converter for ultra thin
LCD-TVs. Both of these new products resulted in design wins in the quarter.
Also during the quarter, we released our first SBR® product in our patent pending T0220S package;
and further expanded our omnipolar Hall sensor
Page 13 of 17
line with our 0.4 millimeter, slim bodied package targeting cell phones and portable devices.
In terms of overall design activity, it was another strong quarter with broad-based design wins
across all regions at over 100 accounts globally. Design wins and in-process design activity were
highlighted by:
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AP2280 loadswitch wins in digital camera and digital picture frame |
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Omni Polar Hall Sensor wins in cell phone and multiple notebook platforms, including our
recently announce AH1822 |
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LDO wins for our AP7217 in DVD-read write, and our AP7173 in set-top boxes |
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We won our first two design wins in our recently announced SBR® product for a
solar-panel application, as well as a notebook platform. |
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And multiple MOSFET wins in portable GPS, bluetooth headsets, notebook computers, and
battery packs. |
In regards to geographic breakout, Asia sales increased approximately 10 percent over the prior
quarter, and represented 80 percent of total revenues. After a weak first quarter, we experienced a
seasonal recovery in the computer and consumer industry, specifically in end-equipment of
Page 14 of 17
notebook, set-top boxes, LCD-TV and DC fan, coupled with improvements and increased demand in our
subcontract packaging business.
OEM sales were up 16 percent, while distributor point of purchase was down 3 percent and
distributor point of sales was up 7 percent over the first quarter. Distributor inventory was down
in the quarter.
In terms of design activity in Asia, we had a strong quarter with 128 design wins at 57 customers
that included 38 wins in analog, 47 in SBR® and 43 in discrete.
Now turning to North America, Discrete and analog sales remained flat compared to the prior quarter
and represented 15 percent of total sales. Direct sales were up due to continued strength in
set-top boxes and small increases in the industrial market. Distributor point of purchase decreased
1 percent after a very soft first quarter, and distributor inventory was up slightly. Distributors
continue to have very conservative outlook on the economy. Distributor point of sales was down 4
percent sequentially.
In total, we achieved 59 design wins in North America during the quarter at 18 customers: 12 of
these for analog, 44 discrete, and 3 in SBR®.
In terms of wafer sales, we were off 6 percent in the second quarter.
Page 15 of 17
Sales in Europe were down 12 percent over the record first quarter as European demand softened, and
in total, accounted for 5 percent of revenues. Distributor point of sales decreased 3 percent in
the quarter.
Our design-win momentum in Europe continued to expand in the second quarter with 36 wins at 31
accounts: including 31 discrete and 5 analog design wins. Specifically, our high power SBR® product
line received strong interest from the European customer base, and we believe these products have
the potential to become a major contributor for our future growth in the region.
Zetexs world wide sales performance trended positively in the quarter with strong design win
momentum.
Regarding the Zetex integration efforts we have consolidated the combined sales organizations
globally.
In North America, we realigned the rep network and trained 80 percent of them. We have also added
the Zetex line to Arrow and Avnet, who have signed and placed initial stocking orders. This is a
major step for the Zetex product line as it really expands the product reach. We estimate that
better than 60 percent of the North America distributor serviceable market for semiconductors goes
through Arrow and Avnet.
Page 16 of 17
In Europe, combining resources of the direct sales teams supplemented by the rep organization in
the outer regions has greatly expanded the reach of the combined Company. Moving forward, we will
be combining the lines in the distribution network by moving the Zetex line into Rutronic, and
Diodes products into some strong regional distributors. We expect to complete the remaining
consolidation by the beginning of the fourth quarter.
In Asia, Zetex has the least distributor overlap with Diodes, so we expect to consolidate the
channel over the next 3-6 months.
In summary, we believe Diodes is taking all the right steps towards becoming a global leading
provider of complete analog and discrete solutions, and the acquisition of Zetex is an important
component of that process. We continue to execute on our growth objectives and are well positioned
to accelerate our growth through the extensive synergies of the combined companies. Our primary
focus in the coming quarters will be on expanding sales, while capitalizing on the cost savings and
other operational synergies provided through this acquisition.
With that, we will open the call for questions.
Q&A Session
Upon Completion of the Q&A...
Page 17 of 17
Dr. Lu:
Thank you for your participation today; we appreciate your time and consideration.
Operator, we may now disconnect.
exv99w3
Exhibit 99.3
QUESTION AND ANSWER
Operator
(OPERATOR INSTRUCTIONS) Shawn Harrison, Longbow Research.
Shawn Harrison - Longbow Research Analyst
Good morning. Just a number of modeling questions first off. Carl, I missed the CapEx in the
quarter.
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
It was $12 million.
Shawn Harrison - Longbow Research Analyst
Okay. And then getting back to the operating expenses, what do you expect options expense to
be in the third quarter?
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
Hang on for one second.
Shawn Harrison - Longbow Research Analyst
Then just kind of following on that, what should we see in terms of operating expense dollars
move, kind of going forward, as you take cost out of the Zetex model?
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
The SG&A expense, op expense
Shawn Harrison - Longbow Research Analyst
Yes.
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
We expect to range between 15% and 15.5%. Then the R&D percent also is 5% to 5.5%.
Shawn Harrison - Longbow Research Analyst
And options are included in that 15% to 15.5% or stock-based compensation, excuse me,
correct?
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
Correct.
Shawn Harrison - Longbow Research Analyst
And how much would you expect that to be?
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
Probably similar to this quarter. Maybe slightly more.
Shawn Harrison - Longbow Research Analyst
Okay. And I guess looking at the operating expenses of 15% to 15.5% of sales, slightly greater
than I expected and probably most street models had included. So how should we expect that to trend
over time on both a dollar and a percentage basis?
Keh-Shew Lu - Diodes, Inc. President, CEO
Okay, this is Dr. Lu. Let me answer. The reason we acquired Zetex is we know they have a very
good results over there. Their engineering is very strong and they are very good in their
resources. So our plan is not really trim down or deduce the R&D and SG&A. Okay?
Our strategy is very simple. We want to be grow the revenue either by cross-selling, by bringing in
each others product line. By our past history, we are able to grow CAGR above 20% a year if the
market is decent. Now, we dont know what will be the market next year, but assume the market is
reasonable, then we should be able to grow above 20% CAGR.
So if you look at if we grow revenue by 20%, lets say, just as an assumption, okay then our
SG&A are currently is when forecast we forecast third quarter 15% to 15.5%. Its probably very
reasonable if you said, no increase the headcount, no increase the expense. But just thats the
revenue will grow 20%. Then you can very reasonably thinking this should be go back to our model or
even better than our model.
And if you look at R&D, we use the same approach. We should be able to drop now 20%. Because if the
revenue grows 20%, okay? So then you go back to our old models. So today, our model, by adding
Zetex, which we all knew at the beginning from when we purchased this company, we know their R&D is
very high and their SG&A is high. But consolidated, two companies together, give us 12 months of
the growth. I think we should be able to bring that model back to Diodes old models.
Shawn Harrison - Longbow Research Analyst
Okay. So the key takeaway is you think you can deliver substantial revenue upside with
essentially the same cost structure at Zetex?
Keh-Shew Lu - Diodes, Inc. President, CEO
That is what I say.
Shawn Harrison - Longbow Research Analyst
Okay. Then just
Keh-Shew Lu - Diodes, Inc. President, CEO
If the market is reasonable. We really dont know what will be the market next year. But if
the market is reasonable, then we should be able to do it.
Shawn Harrison - Longbow Research Analyst
Okay. Just a quick follow-up. The Zetex revenue contribution in the second quarter, was that
about $12 million?
Keh-Shew Lu - Diodes, Inc. President, CEO
We dont separate it, but we give the guidance on end of that based last quarter, we
said 10% to 13% Im sorry, $10 million to $13 million. So you can pick somewhere there.
Shawn Harrison - Longbow Research Analyst
Okay. Then Mark, maybe just a little bit of commentary on what you are seeing in the legacy
business as we move into the third quarter. Distribution seems like it is weak in a few geographies
for you, but what maybe you are seeing by end market.
Mark King - Diodes, Inc. SVP-Sales & Marketing
Yes, I think we are seeing pretty much everything in what everybody else is seeing out there.
It is a pretty short short-term market. North America is remaining relatively flat. Europe is
softening somewhat. Asia is in a growth pattern in the third quarter, but maybe not as robust as it
has been in previous years. So I think it is a pretty quite cautious in all market areas.
Keh-Shew Lu - Diodes, Inc. President, CEO
But by our past history, our growth is not just coming on the market growth. Our growth should
be more than the market growth. And so by looking at the number we turn in, we focus the revenue
growth 15% to 22%. Yet some of that was due to one month to one quarter of the Zetex numbers.
But it still can be an organic growth, too.
Shawn Harrison - Longbow Research Analyst
Okay, thank you very much, and congratulations on closing the acquisition.
Operator
Ramesh Misra, Collins Stewart.
Ramesh Misra - Collins Stewart Analyst
Good morning, gentlemen. My first question was in regards to the gross margin improvement
sequentially of 70 basis points. Since this is the last time that you will be talking a little more
about Zetex separately, can you give us a sense of how much of that was organic and how much was
Zetex contribution?
Keh-Shew Lu - Diodes, Inc. President, CEO
Right now, we really do not separate, and it would be difficult for us to separate from the
future because we are going to sell each other and we start to qualify Zetex products to our SKE
side, and then we transport the product from some of the wafer capability from Zetex fab to our
Kansas fab, at the same time we are expanding Zetex six-inch line.
We have a lot of working between the Diodes and Zetex working together. For example, they have
people now from Zetex today is in our Kansas City helping us to transform some of their 4-inch
byproducts technology into our fab. And so I really dont like to separate. We are back to
treating as one company, and we help each other to improve the gross margin, bringing their product
to our assembly site and bringing their 4-inch line that, some of their products to our FabTech.
Expand 6-inch line, maybe well bring some of our 6-inch product to their line.
We have a lot of things going, try to make into one company instead of two separate companies. So I
really dont like to dont prefer to separate the gross margin differently from one company to
the other.
All I can say is that the product margin from we are very comparable to each other, okay? We are
comparable to each other. Their ASP is higher, but unfortunately, their manufacturing cost is
higher. And our ASP is lower, but our manufacturing cost is lower. So I think the gross margin is
not that far away from each other. Therefore, it is not a meaningful for me to separate those two.
Ramesh Misra - Collins Stewart Analyst
All right. That makes sense. Dr. Lu, as you bring in some of the manufacturing efficiencies
and operating efficiencies that Diodes has developed, do you expect a meaningful improvement on the
margin side at the former Zetex operation?
Keh-Shew Lu - Diodes, Inc. President, CEO
Yes, there will be, but dont forget this kind of thing wont be quickly resolved, okay?
Especially their market is in industrial and automotive. Their customers typically do not want to
change their sourcing quickly. They are more slowly to adapt force in change.
So we are not really counting on that portion. We really count on is this. Cross-selling the new
product to each other gets the growth revenue growth quickly such that you load in the fab. And
when you load in the fab, you bring the cost down. Im more looking at that direction instead of
just taking their product from their subcon to our SKE, do this, move their fab loading into
FabTechs load. And that is not what I am looking at, especially from short-term point of view.
Okay?
Short-term is growth the revenue as fast as we can are hoping if we can grow to 20% or more,
then R&D as a percent will go down. SG&A as a percent will go down to our business models, at the
same time the loading in their fab will be increased and the loading in our fab will be increased,
too. And that will help so much, and that is the synergy Ive been talking about.
Ramesh Misra - Collins Stewart Analyst
Okay, got it. Then a final question, in terms of, again, Zetexs revenue in the month of June,
and your expectation of it in the September quarter. It seems that that number will be going down,
and I wanted to get an understanding of that. Is that because Europe slows down in the September
quarter or are there other factors?
Keh-Shew Lu - Diodes, Inc. President, CEO
Well, I will put it its two factors. One is yes, the third quarter, typically July and
August is very slow months. And the business probably starts to pick it up in September. But
another reason is they are very uneven. Typically, when you run your semiconductor, the revenue is
not coming out evenly. You have April, May typically will be slow. And then June, end of quarter,
you pick it up strong.
And thats always the case, because even your customers the same way. They dont ship linearly. So
just by taking one month, June, yes, in Zetex is much bigger than their three-month average. But
that is just that. It is not really their business is up or down so much.
Ramesh Misra - Collins Stewart Analyst
I see.
Keh-Shew Lu - Diodes, Inc. President, CEO
I hope I answered your question.
Ramesh Misra - Collins Stewart Analyst
Yes, that does. So I will stop there and let others get on. Thank you.
Operator
Steve Smigie, Raymond James.
Steve Smigie - Raymond James Analyst
Thank you. Just as a follow-on to that last call, so what might the Zetex revenue look like as
we enter the December quarter? Is that ?
Keh-Shew Lu - Diodes, Inc. President, CEO
Well, I dont we dont look at the forecast on the fourth quarter right now. Im easy to
get on the third quarter in, so Im sorry. We dont really give the guidance on the fourth quarter,
but you know .
Mark King - Diodes, Inc. SVP-Sales & Marketing
Steve, it is going to take us a little time to learn their cycles and learn the consistency of
the things and the way their distributors work and so forth. So I just dont think we have that
nailed down yet.
Keh-Shew Lu - Diodes, Inc. President, CEO
Yes, because they are more in they are very strong in Europe. You know, Europe cycle is
different from Asia cycles. Were typically very strong in the third quarter from Diodes point of
view, but they are a little bit weak in the third quarter.
Steve Smigie - Raymond James Analyst
Okay, so it is not inconceivable to think that you could potentially have a stronger fourth
quarter out of Zetex than in the third quarter?
Mark King - Diodes, Inc. SVP-Sales & Marketing
We are certainly hoping well get some synergies from the cross-selling and so forth going
into the fourth quarter and into next year. So we hope to have had an opportunity to build some
momentum. But remember, we kind of closed this deal right in the middle of summer. So in some of
the excitement, its like, okay, we are trying to get people together and so forth, but theres a
vacation season and everything else.
So we think we can really be rolling and all over the customers starting the beginning of September
in, say, the European market and so forth. But we have done an enormous amount of work to be
prepared to make that happen.
Steve Smigie - Raymond James Analyst
Right. Was there any currency impact, translating euros generated over back to dollars, or
anything that might have made Zetexs revenue look lower in terms of what you are maybe projecting
for Q3 or anything like that, or is it ?
Carl Wertz - Diodes, Inc. CFO, Secretary, Treasurer
Steve, I dont think theres anything significant in the currency other than the hedge loss
that we talked about (multiple speakers). One time where we had a hedged the whole 160 some odd
million dollars, and the dollar strengthened against the British pound.
Keh-Shew Lu - Diodes, Inc. President, CEO
This hedge for purchase to Zetex is really something we cannot really prevent. When we buy
that Zetex, we announced we are going to pay certain dollar, US dollars. So we announced in US
dollars. Unfortunately, UK government said you need to put all the money in the pound. Okay? And
at the time when you announced acquisition.
So we needed to go ahead, hedge at that time. One way or the other, even you know the exchange rate
are going to be changing one way or the other, you just need to convert into pounds. So when we do
acquisition, we are returning pounds to pounds.
Unfortunately, US GAAP said, well, if you converted at that time but you dont really give them the
money at the time of close, then whatever the exchange rate loss, its show on your P&L. It is not
in the (inaudible). So for us, you can say we buy cheaper in US dollars, but in pounds, were
buying the same. And thats cheaper versus the original announced dollar is showing into our P&L.
And that is what we are talking about the hedge loss, which is not really impact to us from the
operation point of view. We expect to spend X dollars for it and thats the X dollars.
Steve Smigie - Raymond James Analyst
Okay. Just looking at the other expense line, $2 million to $2.8 million. Just curious, if I
take your convert and multiply that through and your interest income from the ARS, that other
expense line for Q3 looks somewhat higher than I might expect. I am just curious if there is just
some one-time thing in there? Is that sort of the level we would expect roughly to run through our
models going forward?
Keh-Shew Lu - Diodes, Inc. President, CEO
The key thing is the expense for borrow the money from UBS to purchase Zetex. That never
really happened. That doesnt happen until June 9 or something, when we closed it. So if you look
at it now, we pay in three months of the interest payment to UBS for borrowing the money to
purchase Zetex.
Steve Smigie - Raymond James Analyst
Okay. At some point, I guess, if you are the auction rate market starts up, and you should
pay that off of cash, the rates would go back down, then?
Keh-Shew Lu - Diodes, Inc. President, CEO
Yes, immediately. Exactly. Whenever we get some additional cash, we will try to pay off. So
either from operations we would gradually pay off or if we get some releases from the ARS, we will
pay it off immediately.
Steve Smigie - Raymond James Analyst
Okay. Ill let somebody else have questions. Thank you.
Operator
Vijay Rakesh, (inaudible).
Vijay Rakesh Analyst
Dr. Lu, just going back to your questions on better margins with trying to get better
margins with your fab absorption at Zetex, how do you see your gross margins going forward as you
start to get more leverage out of Zetex?
Keh-Shew Lu - Diodes, Inc. President, CEO
I think from a gross margin percent improvement point of view, it will be gradual. It wont be
a big increase in a very short period of time. If you look at our expense on the Anachip
integration, it takes about more than one year. I still remember we acquired Anachip in January
2006. The real impact of major show up is in September, in the third quarter of 2007 and fourth
quarter of 2008. Those two quarters to show the major impact. Okay?
And the Zetex will be the similar way, maybe even take longer, because like I said, their customer
wont be quickly changing that much. But the one we really want to get all the synergy is like I
mentioned, we want to be aggressively growing the revenue by cross-selling, by bringing the product
to all the different distributors their distributors use our products; our distributor using
their products. And aggressively in Asia for their products, aggressively Europe for our products.
We have a lot of cross-selling activity going to be happen.
From there, you are going to be since you are holding R&D and SG&A, correct then you are
going to significantly reduce improve the bottom line. And that is what we committed, it will
be accretive within 12 months. We today is already showing June, we already tell you, is accretive
from operational. And we are accretive from operational actually in the third quarter. Okay? But
with the expense of paying those interests. But we are going to be, within 12 months, we should be
able to generate enough bottom-line savings to pay for it.
Vijay Rakesh Analyst
And Dr. Lu, on your core business, Diodes business and the Zetex business, as you look at your
guidance here for the second half, how is that visibility and what does your backlog look like for
your and Zetex businesses separately?
Keh-Shew Lu - Diodes, Inc. President, CEO
I think Mark can answer it.
Mark King - Diodes, Inc. SVP-Sales & Marketing
I think our backlog is probably around our traditional. Its pretty much level to the same it
was in the second quarter. Theres still a lot of turns businesses that had to occur. I think we
went into the quarter about 60% loaded.
Now, their backlog is a little stronger than the Diodes traditionally stronger than the Diodes
because they have had traditionally longer lead times. But I think we are pretty much right where
we always are.
Vijay Rakesh Analyst
Got it. Okay. And here as you look at your the ASPs within the two segments, within the two
Diodes and Zetex, for the quarter, and as you look out pretty flattish or what do you see?
Mark King - Diodes, Inc. SVP-Sales & Marketing
Actually, you are going to see a big shock to the ASP next quarter because their ASPs are
quite a bit higher than our ASPs, but their units are much lower. So well probably have to retrack
it.
If you look at the Diodes ASPs, they were down pretty consistently and traditionally in the second
quarter. But with that one month, our overall ASPs were up about 8%. So were going to have to kind
of readjust the whole ASP situation when we get a full quarter in.
Vijay Rakesh Analyst
Okay. And then last question here on the tax rate. It looks like it creeped up a little bit.
Is that just Europe or whats happening there?
Keh-Shew Lu - Diodes, Inc. President, CEO
Well, yes, because all that Zetex revenue or their profits, its 100%, 100% through Europe tax
rate. And thats why it bring our average up.
Now, we are working now, but it will take a while to try to get the products direct ship in all
this one. But today, 100% of their profits all through Europe and European tax rate.
Vijay Rakesh Analyst
So should it be the 16.5% range for the next couple of quarters, 17% virtually?
Keh-Shew Lu - Diodes, Inc. President, CEO
I think you are right. You should use that, yes. Until we start to have some actions to direct
ship and all those.
Vijay Rakesh Analyst
Okay, thanks.
Operator
Kevin Rottinghaus, Cleveland Research.
Dennis Reed - Cleveland Research Analyst
This is Dennis Reed for Kevin. Just wanted to dig in a little bit on the pricing environment.
You had mentioned kind of the core pricing were down at a traditional level and you got a boost
from the Zetex acquisition. If you look at your competitors, how have they behaved on a pricing
side?
Mark King - Diodes, Inc. SVP-Sales & Marketing
I think we always live in a very competitive price environment, and I think if you look at
this environment, it is probably as competitive as it gets. I think theres significant amount of
price pressure. Nothing that we have never experienced before and so forth. But obviously, when the
demand is less than traditional in a period, people are going to be more aggressive. So in our
product lines, we see the competitors positioning themselves aggressively.
Dennis Reed - Cleveland Research Analyst
Okay. Looking at the Zetex ASPs, what type of cost savings could you drive by moving some of
their outsourced assembly and test into your facilities?
Keh-Shew Lu - Diodes, Inc. President, CEO
I think I mentioned it. Savings will be good. By doing their subcon assembly packaging from
their subcon to our assembly side, savings would be good. But we like I mentioned, its not just
move it and then go. Because Zetex customer base is very, very restricted of this sourcing change.
And nobody likes all our customers dont like us change, because saving money for us instead of
good for them, right?
So my plan is not just pulling out and putting our assembly side and then saving the money. That is
not really the plan. Our plan is qualify their product in our own SKE, and then add those products
to the new customers, not existing Zetex customers. Its a new customer or a Diodes customer who
has the confidence on our packaging side. You know, most of our customers already can afford us
from our SKE side. They show confidence on our packaging side. So we are going to be selling them
the Zetex product using our own packaging side to our customers. And that is when you are going to
see the savings instead of their Zetex customers who really dont familiar with our SKE side.
And that is where we are but again, our synergy is going to be quickly accomplished by
cross-sell, by bringing up the revenue as fast as we can, holding below the line, which is R&D and
SG&A, as a constant dollar instead of percent, holding at a constant dollars. Then youre going to
see a much greater flow through from GPM-9 to [PFO9].
Dennis Reed - Cleveland Research Analyst
Okay. Sorry to jump around. In terms of the cell phone market, I think you mentioned another
couple of design wins in that market. Could you provide any color, I guess, in terms of what
percent of revenue it has become and where you ultimately see it going?
Keh-Shew Lu - Diodes, Inc. President, CEO
Well, how about that Mark can answer this.
Mark King - Diodes, Inc. SVP-Sales & Marketing
Traditionally, the cell phone marketplace has been really negligible in our overall number,
and I think we are still in that level. We are seeing more and more we are winning more and more
design wins with our Hall product. We see some more opportunities with some of our analog products.
The Zetex product line and some of their current monitors, theres some opportunity. And we are
starting to do more work in discrete.
So I think it can become more significant for us going forward, but at the present time it is not.
The timing of that depends on markets and other things, so I dont really want to get too much into
when we can see it much different at this point.
Dennis Reed - Cleveland Research Analyst
Okay. Then just one last one for me. If you look out at your customer base, whether
distributor or direct, just any thoughts or commentary on kind of inventory in the supply chain?
Mark King - Diodes, Inc. SVP-Sales & Marketing
Frankly, our customers, for our products, I can say that they are not over-inventoried. They
keep very low inventory. And I cant say the overall chain, but our distributor inventory for
Diodes products is quite clean.
The pressure is overall inventory in those distributors, and so that puts pressure on us. Because
it is not that theyre not buying Diodes products; theyre just not buying anything, okay? And
basically, they are trying to they are all focusing on cash and keeping things in cash rather
than inventory. So until I think that the sentiment changes a little bit about the direction, I
think we are going to be up against that from a distributor standpoint on a POP basis.
Now I think from the OEM side, I think they are very cautious with inventory also. Really, we have
never experienced an inventory problem at our customer base on our product line. But I think that
their buying cycles are shorter now, and they are being more conservative about planning long-term.
Dennis Reed - Cleveland Research Analyst
All right. Thank you very much.
Operator
Steve Smigie, Raymond James.
Steve Smigie - Raymond James Analyst
Thank you. Just as a follow-up, could you say how much of Zetexs revenue is outsourced to the
subcons versus done in-house?
Keh-Shew Lu - Diodes, Inc. President, CEO
I would probably say 60% is outsourcing and 40% is produced themselves. And then when we said
produced themselves, they have two sites. One is the joint venture in Chengdu, which they only
own one third. But then they 100% own is in Neuhaus in East Germany. So that is about that.
Steve Smigie - Raymond James Analyst
Okay. Then I know the major part of your plan, it sounds like, is not to move that stuff
in-house because customers dont like that. But is there any of that 60% outsourced that youll be
able to move over to your packaging and stuff in Shanghai?
Keh-Shew Lu - Diodes, Inc. President, CEO
Long time.
Steve Smigie - Raymond James Analyst
Take a long time?
Keh-Shew Lu - Diodes, Inc. President, CEO
Yes. Like I said, our objective is not really aggressive move those into our own assemblies.
Our objective is qualify the parts, which we are doing right now; sell to our own Diodes
customers, Diodes existing customers, new opportunity, new customer. And that is really our
objective.
Steve Smigie - Raymond James Analyst
Okay. Thank you.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn
the call back to Dr. Keh-Shew Lu for closing remarks.
Keh-Shew Lu - Diodes, Inc. President, CEO
Thank you for your participation today. We appreciate your time and also consideration, and I
see you three months from now. Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation in todays conference. This concludes
your presentation. You may now disconnect. Good day.