UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 002-25577

DIODES INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware		95-2039518
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

15660 North Dallas Parkway, Suite 850
Dallas, Texas		75248
(Address of principal executive offices)		(Zip code)

(972) 385-2810
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s Common Stock outstanding as of November 2, 2009 was 43,627,061.

 

 

Table of Contents

		Page
Part I — Financial Information		1
Item 1 — Financial Statements		1
Consolidated Condensed Balance Sheets as of December 31, 2008 and September 30, 2009		1
Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2009		3
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2009		4
Notes to Consolidated Condensed Financial Statements		5
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		36
Item 4 — Controls and Procedures		36
Part II — Other Information		37
Item 1 — Legal Proceedings		37
Item 1A — Risk Factors		37
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3 — Defaults Upon Senior Securities		37
Item 4 — Submission of Matters to a Vote of Security Holders		37
Item 5 — Other Information		37
Item 6 — Exhibits		38
Signature		39
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

		December 31,				September 30,
		2008				2009
		(As Adjusted)
CURRENT ASSETS
Cash and cash equivalents		$	103,496			$	126,072
Short-term investment securities			—				311,900
Accounts receivable, net			74,574				101,695
Inventories			99,118				82,880
Deferred income taxes, current			3,994				8,542
Prepaid expenses and other			15,578				11,783
Total current assets			296,760				642,872
LONG-TERM INVESTMENT SECURITIES			320,625				—
PROPERTY, PLANT AND EQUIPMENT, net			174,667				163,521
OTHER ASSETS
Goodwill			56,791				67,616
Intangible assets, net			35,928				35,751
Other			5,907				4,854
Total assets		$	890,678			$	914,614

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (cont’)

LIABILITIES AND EQUITY
(Unaudited)
(In thousands, except share data)

		December 31,				September 30,
		2008				2009
		(As Adjusted)
CURRENT LIABILITIES
Lines of credit and short-term debt		$	6,098			$	207,149
Accounts payable			47,561				57,339
Accrued liabilities			31,195				32,241
Income tax payable			358				3,484
Current portion of long-term debt			1,339				372
Current portion of capital lease obligations			377				313
Total current liabilities			86,928				300,898
LONG-TERM DEBT, net of current portion
Convertible senior notes			155,451				123,098
Long-term borrowings			217,146				3,540
CAPITAL LEASE OBLIGATIONS, net of current portion			1,854				1,726
DEFERRED INCOME TAXES, non-current			7,986				18,189
OTHER LONG-TERM LIABILITIES			22,935				36,820
Total liabilities			492,300				484,271
COMMITMENTS AND CONTINGENCIES			—				—
EQUITY
Diodes Incorporated stockholders’ equity
Preferred stock — par value $1.00 per share; 1,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock — par value $0.66 2/3 per share; 70,000,000 shares authorized; 41,378,816 and 43,508,314 issued and outstanding at December 31, 2008 and September 30, 2009, respectively			27,586				29,006
Additional paid-in capital			167,964				205,549
Retained earnings			241,814				235,114
Accumulated other comprehensive loss			(48,439	)			(48,788	)
Total Diodes Incorporated stockholders’ equity			388,925				420,881
Noncontrolling interest			9,453				9,462
Total equity			398,378				430,343
Total liabilities and equity		$	890,678			$	914,614

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
		(As Adjusted)								(As Adjusted)
NET SALES		$	134,047			$	122,122			$	345,645			$	304,070
COST OF GOODS SOLD			95,929				84,547				235,993				224,632
Gross profit			38,118				37,575				109,652				79,438
OPERATING EXPENSES
Selling, general and administrative			20,841				19,079				52,435				50,375
Research and development			7,212				6,284				15,618				16,944
Amortization of acquisition related intangible assets			1,804				1,271				2,275				3,480
Purchased in-process research and development			7,865				—				7,865				—
Restructuring			—				(291	)			—				(440	)
Total operating expenses			37,722				26,343				78,193				70,359
Income from operations			396				11,232				31,459				9,079
OTHER INCOME (EXPENSES)
Interest income			1,824				805				9,826				3,907
Interest expense			(3,213	)			(1,784	)			(7,041	)			(5,709	)
Amortization of debt discount			(2,748	)			(1,981	)			(8,073	)			(6,471	)
Other			(897	)			(1,062	)			(2,393	)			(1,074	)
Total other expenses			(5,034	)			(4,022	)			(7,681	)			(9,347	)
Income (loss) before income taxes and noncontrolling interest			(4,638	)			7,210				23,778				(268	)
INCOME TAX PROVISION (BENEFIT)			(722	)			(629	)			2,258				4,924
NET INCOME (LOSS)			(3,916	)			7,839				21,520				(5,192	)
Less: NET INCOME attributable to noncontrolling interest			(659	)			(819	)			(1,938	)			(1,507	)
NET INCOME (LOSS) attributable to common stockholders		$	(4,575	)		$	7,020			$	19,582			$	(6,699	)
EARNINGS (LOSS) PER SHARE attributable to common stockholders
Basic		$	(0.11	)		$	0.17			$	0.48			$	(0.16	)
Diluted		$	(0.11	)		$	0.16			$	0.46			$	(0.16	)
Number of shares used in computation
Basic			40,889				42,533				40,585				41,761
Diluted			40,889				44,013				42,746				41,761

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

		Nine Months Ended
		September 30,
		2008				2009
		(As Adjusted)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	21,520			$	(5,192	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			27,298				31,599
Amortization of intangibles			2,370				3,480
Amortization of convertible bond issuance costs			700				505
Purchased in-process research and development			7,865				—
Amortization of discount on convertible bond			8,073				6,471
Share-based compensation			7,697				7,551
Loss (gain) on disposal of property, plant and equipment			(41	)			67
Gain on extinguishment of debt			—				(1,193	)
Investment gain recognized under equity method			—				22
Changes in operating assets:
Accounts receivable			(8,301	)			(25,655	)
Inventories			(12,184	)			19,455
Prepaid expenses and other current assets			(383	)			3,082
Deferred income taxes			(2,000	)			(1,338	)
Changes in operating liabilities:
Accounts payable			(9,294	)			7,724
Accrued liabilities			(4,189	)			(2,913	)
Other liabilities			(1,147	)			(3,524	)
Deferred tax liabilities			(3,149	)			1,439
Income taxes payable			1,799				2,416
Net cash provided by operating activities		$	36,634			$	43,996
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired		$	(153,158	)		$	(30	)
Purchases of securities			(4,435	)			—
Proceeds from sale of securities			7,282				8,725
Purchases of property, plant and equipment			(41,196	)			(12,948	)
Proceeds from sale of property, plant and equipment			56				120
Decrease of other assets			—				476
Net cash used in investing activities		$	(191,451	)		$	(3,657	)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit		$	44,596			$	15,680
Repayments on line of credit			(26,262	)			(27,305	)
Net proceeds from issuance of common stock			2,802				793
Proceeds from long-term debt			165,000				—
Dividend distribution to noncontrolling interest			—				(1,500	)
Repayments of long-term debt			(1,135	)			(8,503	)
Repayments of capital lease obligations			(265	)			(287	)
Net cash provided by (used in) financing activities		$	184,736			$	(21,122	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(3,419	)			3,359
INCREASE IN CASH AND CASH EQUIVALENTS			26,500				22,576
CASH AND CASH EQUIVALENTS, beginning of period			56,179				103,496
CASH AND CASH EQUIVALENTS, end of period		$	82,679			$	126,072
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash financing activities:
Property, plant and equipment purchased on accounts payable		$	2,459			$	(2,875	)
Fair value of common stock issued for repayment of long-term debt		$	—			$	(31,437	)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE A — Nature of Operations, Basis of Presentation and Recently Issued Accounting Pronouncements

Nature of Operations

     Diodes Incorporated and its subsidiaries (collectively, the “Company”) is a leading global designer, 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. These 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 and linear voltage regulators, voltage references, special function devices (including USB power switch, load switch, voltage supervisor and motor controllers) and silicon wafers used to manufacture these products. These products are sold primarily throughout North America, Asia and Europe.

Basis of Presentation

     The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP 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, 2008. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim period. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The consolidated condensed financial data at December 31, 2008 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and subsequently adjusted for a change in accounting principle on January 1, 2009. See Note B for additional information regarding the change in accounting principle. Subsequent events were evaluated through November 6, 2009, the date these consolidated condensed financial statements were issued.

     The preparation of financial statements in conformity with U.S. GAAP 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. As permitted under U.S. GAAP, interim accounting for certain expenses are based on full year forecasts. Such amounts are expensed in full in the year incurred.

     Certain prior year’s balances have been reclassified to conform to the current financial statement presentation.

Recently Issued Accounting Pronouncements

     In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 132R-1 (FASB Accounting Standards Codification (“ASC”) 715-20-65), Employers’ Disclosures about Postretirement Benefit Plan Assets. This pronouncement provides additional guidance regarding disclosures about plan assets of defined benefit pensions or other postretirement plans. FSP FAS 132R-1 is effective for financial statements issued for fiscal years beginning after December 15, 2009. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In April 2009, the FASB issued FSP FAS 141(R)-1 (FASB ASC 805-20-25, 30, 35, 50), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies. This pronouncement amends SFAS No. 141 (revised 2007), Business Combinations, to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, in accordance with SFAS No. 157 (FASB ASC 820-10-35), Fair Value Measurements, if the fair value can be determined during the measurement period. FSP FAS 141(R)-1 is effective for business combinations occurring after December 31, 2008. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In June 2009, the FASB issued SFAS No. 166 (not yet reflected in FASB ASC), Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140. This pronouncement eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS No. 166 is effective

for fiscal years beginning after November 15, 2009. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of GAAP. These changes establish the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the consolidated financial statements.

NOTE B — Change in Accounting Principle

     On January 1, 2009 the Company changed how it accounted for its 2.25% Convertible Senior Notes due 2026 (“Notes”) in accordance with FASB ASC 470-20 (prior authoritative literature FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)). As a result, the Company adjusted its December 31, 2008 consolidated condensed balance sheet, consolidated condensed statement of operations for the three and nine months ended September 30, 2008 and consolidated condensed statement of cash flows for the nine months ended September 30, 2008 to reflect the retrospective application required by the change in accounting principle. FASB ASC 470-20 specifies that issuers of instruments, such as convertible debt instruments, should separately account for liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate. All adjustments were made retrospectively as of the date of issuance of the Company’s Notes and therefore, the financial statements are presented as if the Notes have always been accounted for in this manner. The material retrospective adjustments to the Company’s December 31, 2008 consolidated condensed balance sheet were to adjust: long-term debt from $183.5 million to $155.5 million; additional paid-in capital of approximately $34.3 million to reflect the initial recognition of the equity component, deferred taxes and debt issuance costs; deferred taxes associated with the convertible debt instrument; and retained earnings to reflect the additional non-cash, pre-tax interest expense retrospectively recorded for 2006, 2007 and 2008 by approximately $1.7 million, $10.0 million and $10.7 million, respectively, and to reflect the $15.7 million pre-tax reduction to the gain on extinguishment of debt for the repurchase of $46.5 million par value Notes in December 2008. The material retrospective adjustments to the Company’s consolidated condensed statement of operations for the three and nine months ended September 30, 2008 were to recognize the additional non-cash interest expense of approximately $2.7 million and $8.1 million, respectively, and the related tax effects to the tax provision. The retrospective adjustments to the Company’s consolidated condensed statement of cash flows for the nine months ended September 30, 2008 were to adjust separate line items within cash flows from operating activities, which did not affect the original net reported amounts for operating activities, investing activities or financing activities. See Note N for additional information.

     In addition, on January 1, 2009, the Company changed how it classifies its noncontrolling interests (“NCIs”) on its consolidated financial statements in accordance with FASB ASC 810-10-65 (prior authoritative literature SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51). As a result, the Company adjusted its December 31, 2008 consolidated condensed balance sheet to reflect the retrospective application required with the change in accounting principle. FASB ASC 810-10-65 indicates, among other things, that: NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; increases and decreases in the parent’s ownership interest, that leaves control intact, be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and losses of a partially owned consolidated subsidiary be allocated to the NCIs even when such allocation might result in a deficit balance. FASB ASC 810-10-65 also requires changes to certain presentation and disclosure requirements. The provisions are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. Therefore, NCIs of $9.5 million as of December 31, 2008 were reclassified to equity, a change from its previous classification between liabilities and stockholders’ equity.

     The adjustments made to the December 31, 2008 consolidated condensed balance sheet are as follows (in thousands):

		December 31, 2008
						ASC 470-20				ASC 810-10-65				Reclass
		As Reported				Adjustments				Adjustment				Adjustment				Adjusted
ASSETS
Deferred income taxes, non-current		$	2,745			$	281			$	—			$	(3,026	)		$	—
Other assets			6,627				(720	)			—				—				5,907
LIABILITIES AND EQUITY
2.25% Convertible Senior Notes due 2026			183,500				(28,049	)			—				—				155,451
Deferred income taxes, non-current			—				13,779				—				(5,793	)			7,986
Noncontrolling interest (previously referred to as minority interests)			9,453				—				(9,453	)			—				—
Additional paid-in capital			133,701				34,263				—				—				167,964
Retained earnings			259,479				(17,665	)			—				—				241,814
Noncontrolling interest			—				—				9,453				—				9,453

     The adjustments made to the three and nine months ended September 30, 2008 consolidated condensed statement of operations are as follows (in thousands, except per share data):

		Three Months Ended September 30, 2008												Nine Months Ended September 30, 2008
			As			ASC 470-20									As			ASC 470-20
		Reported				Adjustments				Adjusted				Reported				Adjustments				Adjusted
Interest expense		$	(3,291	)		$	78			$	(3,213	)		$	(7,274	)		$	233			$	(7,041	)
Amortization of debt discount			—				(2,748	)			(2,748	)			—				(8,073	)			(8,073	)
Income tax provision (benefit)			(319	)			(403	)			(722	)			(5,315	)			7,573				2,258
Net income (loss) attributable to common stockholders			(2,946	)			(1,629	)			(4,575	)			24,364				(4,782	)			19,582
Earnings (loss) per share attributable to common stockholders
Basic		$	(0.07	)		$	(0.04	)		$	(0.11	)		$	0.60			$	(0.12	)		$	0.48
Diluted		$	(0.07	)		$	(0.04	)		$	(0.11	)		$	0.57			$	(0.11	)		$	0.46
Number of shares used in computation
Basic			40,889								40,889				40,585								40,585
Diluted			40,889								40,889				42,746								42,746

NOTE C — Functional Currencies, Foreign Currency Translation and Comprehensive Income (Loss)

     Functional Currencies and Foreign Currency Translation — The functional currency for most of our international operations is the U.S. dollar, while some subsidiaries use their local currency as their functional currency. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are recorded as other income (expense) in the consolidated condensed statements of operations. The Company had foreign exchange transaction losses of approximately $1.0 million and $1.4 million for the three months ended September 30, 2008 and 2009, respectively, and approximately $2.7 million and $4.8 million for the nine months ended September 30, 2008 and 2009, respectively.

     Comprehensive Income (Loss) — U.S. GAAP generally requires that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income or loss. As of September 30, 2009, the components of other comprehensive income or loss include foreign currency translation adjustments, unrealized gain or loss on defined benefit plan and foreign currency gain (loss) on forward contracts. Accumulated other comprehensive loss was $48.8 million at September 30, 2009.

     Total comprehensive income (loss) for the three and nine months ended September 30, 2008 and 2009 is as follows (in thousands):

Total Comprehensive Income (Loss)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Net income (loss)		$	(3,916	)		$	7,839			$	21,520			$	(5,192	)
Translation adjustment			(18,110	)			(1,391	)			(13,429	)			12,109
Unrealized loss on securities			(6,213	)			—				(22,737	)			—
Unrealized income (loss) on defined benefit plan, net of tax			10,970				10,246				2,430				(16,041	)
Foreign currency adjustments on forward contracts, net of tax			(2,042	)			441				(1,617	)			3,672
Comprehensive income (loss)			(19,311	)			17,135				(13,833	)			(5,452	)
Comprehensive income attributable to noncontrolling interest			659				819				1,938				1,507
Total comprehensive income (loss) attributable to common stockholders		$	(19,970	)		$	16,316			$	(15,771	)		$	(6,959	)

NOTE D — Hedging

     As of September 30, 2009, the Company had forward contracts, primarily relating to its United Kingdom (“U.K.”) operations, of approximately $1.7 million that mature monthly over the next three months. For the nine months ended September 30, 2009, the Company had deferred net unrealized gains on outstanding forward exchange contracts recorded within other comprehensive loss (“OCI”) of $0.8 million (net of tax). For the nine months ended September 30, 2009, the Company had no material ineffective hedges because forward foreign currency contract amounts were less than the specifically identified anticipated transactions.

     The following details the location and amount of derivative instrument fair values in the consolidated condensed balance sheets as of September 30, 2009 (in thousands):

Asset Derivatives

Liability Derivatives

Balance sheet

Balance sheet

location

Fair value

location

Fair value

Derivatives designated as hedging instruments under FASB ASC 815-10:

Foreign exchange contracts

Other assets

$

—

Other liabilities

$

285

     The following details the location and amount of gains and losses on derivative instruments in the consolidated condensed statement of operations for the nine months ended September 30, 2009 (in thousands):

Location of Gain

Amount of Gain

(Loss) Recognized

(Loss) Recognized

in Income on

in Income on

Derivative

Derivative

Amount of Gain

Location of Gain

Amount of Gain

(Ineffective

(Ineffective

Derivatives in FASB

(Loss) Recognized

(Loss) Reclassified

(Loss) Reclassified

Portion and Amount

Portion and Amount

ASC 815-10 Cash

in OCI on

from Accumulated

from Accumulated

Excluded from

Excluded from

Flow Hedging

Derivative

OCI into Income

OCI into Income

Effectiveness

Effectiveness

Relationships

(Effective Portion)

(Effective Portion)

(Effective Portion)

Testing)

Testing)

Foreign exchange contracts

$

582

Other income (expense)

$

(3,523

)

Other income (expense)

$

—

NOTE E — Earnings (Loss) Per Share

     Basic net earnings (loss) per share is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period. Diluted net earnings per share is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.

     The shares used in the computation of basic and diluted earnings (loss) per common share are as follows (in thousands, except per share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
BASIC
Weighted average number of common shares outstanding used in computing basic earnings (loss) per share			40,889				42,533				40,585				41,761
Net income (loss) attributable to common stockholders		$	(4,575	)		$	7,020			$	19,582			$	(6,699	)
Earnings (loss) per share attributable to common stockholders		$	(0.11	)		$	0.17			$	0.48			$	(0.16	)
DILUTED
Weighted average number of common shares outstanding used in computing basic earnings (loss) per share			40,889				42,533				40,585				41,761
Add: Assumed exercise of stock options and stock awards			—				1,480				2,161				—
			40,889				44,013				42,746				41,761
Net income (loss) attributable to common stockholders		$	(4,575	)		$	7,020			$	19,582			$	(6,699	)
Earnings (loss) per share attributable to common stockholders		$	(0.11	)		$	0.16			$	0.46			$	(0.16	)

     There are no shares in the earnings per share calculation related to the Notes outstanding as our average stock price did not exceed the conversion price of $39.00 and, therefore, there is no conversion spread. For the three months ended September 30, 2008 and the nine months ended September 30, 2009, the Company has excluded the assumed exercise of stock options and stock awards from the calculation of diluted loss per share as these securities are anti-dilutive.

NOTE F — Fair Value Measurements

     Financial assets and liabilities carried at fair value as of September 30, 2009 are classified in the following table (in thousands):

Description		Level 1				Level 2				Level 3				Total
Short-term - trading securities		$	—			$	—			$	286,511			$	286,511
Short-term - put option			—				—				25,389				25,389
Total		$	—			$	—			$	311,900			$	311,900

     There has been no change in the balances for assets and liabilities measured at fair value on a recurring basis, using significant unobservable inputs (Level 3) during the nine months ended September 30, 2009.

     Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at September 30, 2009.

NOTE G — Short-Term Investments

     As of September 30, 2009, the Company had $311.9 million invested in auction rate securities (“ARS”), classified as trading securities. In connection with the settlement with UBS AG, the Company was given the option to “put” the ARS portfolio back to UBS AG at any time between June 30, 2010 and July 2, 2012 at par value. Upon settlement, the Company elected the fair value option for the “put” option and recorded an asset and a gain for the fair value of the “put” option. The Company classified the “put” option as a short-term investment as it is a free standing instrument tied to the ARS portfolio, which are also classified as short-term investments.

     Short-term investments are as follows (in thousands):

						Cumulative Realized				Cumulative Realized
As of September 30, 2009		Cost Basis				Gains				Losses				Fair Value
Short-term investments
Short-term - trading securities		$	311,900			$	—			$	(25,389	)		$	286,511
Short-term - put option			—				25,389				—				25,389
Total short-term investments		$	311,900			$	25,389			$	(25,389	)		$	311,900

     The Company’s ARS are primarily backed by student loan association bonds. None of the Company’s investments are collateralized mortgage obligations or are any other type of mortgage-backed or real estate-backed securities. The Company continues to earn interest on its ARS at a weighted average rate of 0.7% as of September 30, 2009, which it is currently collecting. The weighted average maximum contractual default rate is 17.3%.

     As of September 30, 2009, approximately 94.2% or $293.9 million of the $311.9 million par value ARS are collateralized by higher education funded student loans that are supported by the federal government as part of the Federal Family Education Loan Program (“FFELP”) as shown in the table below. The following table shows a natural grouping of the FFELP guaranteed securities, as well as the percentage of the ARS portfolio guaranteed by FFELP (in thousands).

% of FFELP guaranty		Par Value				% of Total
Greater than 99.0%		$	192,950				61.9	%
Between 81.2% and 82.1%			85,000				27.2	%
50.50%			12,150				3.9	%
10.00%			3,800				1.2	%
Non-FFELP guaranteed			18,000				5.8	%
Total		$	311,900				100.0	%

     As of September 30, 2009, the Company’s portfolio of ARS was valued using a valuation model that relies exclusively on Level 3 inputs. The discount on the total ARS portfolio was 8.1% of par value, or a $25.4 million loss.

NOTE H — Inventories

     Inventories stated at the lower of cost or market value are as follows (in thousands):

		December 31,				September 30,
		2008				2009
Raw materials		$	28,690			$	29,411
Work-in-progress			23,436				22,119
Finished goods			46,992				31,350
Total		$	99,118			$	82,880

NOTE I — Goodwill and Other Intangible Assets

     Changes in goodwill are as follows (in thousands):

Balance at December 31, 2008		$	56,791
Acquisitions and purchase price adjustments			9,587
Currency exchange and other			1,238
Balance at September 30, 2009		$	67,616

     Intangible assets are as follows (in thousands):

Balance at September 30, 2009:
Intangible assets subject to amortization:
Gross carrying amount		$	48,616
Accumulated amortization			(8,796	)
Currency exchange and other			(6,628	)
Net value			33,192
Intangible assets with indefinite lives:
Gross carrying amount			3,162
Currency exchange and other			(603	)
Total			2,559
Total intangible assets, net		$	35,751

     Amortization expense related to intangible assets subject to amortization was $1.9 million and $1.3 million for the three months ended September 30, 2008 and 2009, respectively, and $2.7 million and $3.5 million for the nine months ended September 30, 2008 and 2009, respectively.

NOTE J — Income Tax Provision

     Income tax expense (benefit) of $(0.6) million and $4.9 million was recorded for the three and nine months ended September 30, 2009, respectively. This resulted in an effective tax rate of (1837.7%) for the nine months ended September 30, 2009, as compared to 9.5% in the same period of last year and compared to (7.6)% for the full year of 2008. The Company’s effective tax rate for the nine months ended September 30, 2009 was impacted by the non-cash income tax expense associated with repatriating earnings of foreign subsidiaries to the U.S. parent. In addition, amounts for the three and nine months ended September 30, 2008 and full year 2008 have been retrospectively adjusted for the change in accounting principle as described in Note B.

     Generally, income taxes are recorded based upon estimated annual effective income tax rates. Other methods may be used in situations where small changes in the company’s estimated annual income could produce large changes in the estimated effective income tax rates used for interim financial reporting. Under these circumstances, the Company has elected to use its actual year-to-date effective income tax rate for the nine months ended September 30, 2009.

     For the nine months ended September 30, 2009, the Company reported domestic and foreign pre-tax income (loss) of approximately $(35.7) million and $35.4 million, respectively. For the nine month ended September 30, 2008, the Company reported domestic and foreign pre-tax income (loss) of approximately $(25.3) million and $48.5 million, respectively.

     The impact of tax holidays decreased the Company’s tax expense by approximately $5.7 million and $5.2 million for the nine months ended September 30, 2008 and 2009, respectively. The benefit of the tax holidays on basic and diluted earnings per share for the nine months ended September 30, 2008 was $0.14 and $0.13, respectively. The benefit of the tax holidays on both basic and diluted earnings per share for the nine months ended September 30, 2009 was $0.12.

     Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. In the first quarter of 2009, the Company repatriated approximately $28.5 million of accumulated earnings from one of its Chinese subsidiaries, resulting in additional non-cash federal and state income tax expense of approximately $10.6 million. The Company intends to permanently reinvest overseas all of its earnings from its foreign subsidiaries.

     In addition, the Company determined that it was more likely than not that a portion of its federal foreign tax credit carryforwards would expire before they could be utilized. Accordingly, the Company has recorded valuation allowances of $5.6 million and $9.0 million as of December 31, 2008 and September 30, 2009.

     The Company files income tax returns in the U.S. jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. income tax examinations by tax authorities for tax years before 2006. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties, if any, have been provided for in the Company’s FASB ASC 740-10 (prior authoritative literature FIN No. 48, Accounting for Uncertainty in Income Taxes) reserve for any adjustments that may result from future tax audits. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of September 30, 2009, the gross amount of unrecognized tax benefits was approximately $4.5 million.

     It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or competent authority proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be determined.

NOTE K — Share-Based Compensation

     The following table shows the total compensation cost charged against income for share-based compensation plans, including stock options and share grants, recognized in the statements of operations (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Cost of sales		$	99			$	99			$	353			$	279
Selling and administrative expense			2,198				2,409				6,611				6,391
Research and development expense			267				359				733				881
Total share-based compensation expense		$	2,564			$	2,867			$	7,697			$	7,551

     Stock Options. Stock options generally vest in equal annual installments over a four-year period and expire ten years after the grant date and expense was estimated on the date of grant using the Black-Scholes option pricing model.

     The total intrinsic value (actual gain) of stock options exercised during the nine months ended September 30, 2009 was approximately $1.2 million. The total net cash proceeds received from stock option exercises during the nine months ended September 30, 2009 was $0.8 million. Stock option expense for the three months ended September 30, 2008 and 2009 was $0.8 million and $1.0 million, respectively. Stock option expense for the nine months ended September 30, 2008 and 2009 was $3.3 million and $2.6 million, respectively.

     A summary of the stock option plans is as follows:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise				Contractual				Value
Stock Options		(000)				Price				Term (yrs)				($000)
Outstanding at January 1, 2009			3,895			$	11.61				5.3			$	2,327
Granted			489				15.14
Exercised			(118	)			7.16								1,167
Forfeited or expired			(80	)			15.61
Outstanding at September 30, 2009			4,186			$	12.07				5.2			$	30,444
Exercisable at September 30, 2009			3,366			$	10.16				4.3			$	29,092

     The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price.

     As of September 30, 2009, total unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, was approximately $9.0 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.9 years.

     Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.

     The total fair value of restricted stock awards vested during the nine months ended September 30, 2009 was approximately $7.4 million. Share grant expense for the three months ended September 30, 2008 and 2009 was $1.7 million and $1.8 million, respectively. Share grant expense for the nine months ended September 30, 2008 and 2009 was $4.4 million and $5.0 million, respectively.

     A summary of the status of the Company’s non-vested share grants is as follows:

						Weighted-				Aggregate
						Average				Intrinsic
		Shares				Grant-Date				Value
Share Grants		(000)				Fair Value				($000)
Nonvested at January 1, 2009			846			$	21.41			$	5,125
Granted			352				15.80
Vested			(430	)			17.31				7,446
Forfeited			(56	)			23.31
Nonvested at September 30, 2009			712			$	20.96			$	14,910

     As of September 30, 2009, total unrecognized share-based compensation expense related to non-vested stock awards, net of forfeitures, was approximately $14.4 million, before income taxes and is expected to be recognized over a weighted average period of approximately 2.8 years.

     On September 22, 2009, the Company entered into an employment agreement (the “Agreement”) with Dr. Keh-Shew Lu, President and Chief Executive Officer of the Company (the “Employee”), pursuant to which he will continue to be employed by the Company in such positions for an additional six-year term. As part of the Agreement, the Company and the Employee entered into a Stock Award Agreement that provides that: (i) the Company will grant to the Employee 100,000 shares of Common Stock on each of April 14, 2010, 2011, 2012, 2013, 2014 and 2015; (ii) each such installment would vest only if the Company achieved a specified amount of net sales; (iii) upon the termination of the Employee’s employment, the Company’s obligation to grant any subsequent

installment would terminate; and (iv) any granted shares would be automatically forfeited and returned to the Company if the Employee’s employment with the Company is terminated before the Company achieves the specified amount of net sales, except in the case of death or Disability (as defined) in which case the granted shares would become fully vested on the date of death or Disability. The estimated fair value of this grant is approximately $12 million and will be expensed on a straight line basis throughout April 14, 2015.

NOTE L — Segment Information and Enterprise-Wide Disclosure

     For financial reporting purposes, the Company operates in a single segment, standard semiconductor products, through the Company’s various manufacturing and distribution facilities. The Company aggregated its products since the products are similar and have similar economic characteristics, and the products are similar in production process and share the same customer type.

     The Company’s primary operations include the domestic operations in Asia, North America and Europe.

     Revenues are attributed to geographic areas based on the location of subsidiaries producing the revenues (in thousands):

Three Months Ended						North								Consolidated
September 30, 2008		Asia				America				Europe				Segments
Total sales		$	102,129			$	31,868			$	13,629			$	147,626
Inter-company sales			(6,280	)			(6,260	)			(1,039	)			(13,579	)
Net sales		$	95,849			$	25,608			$	12,590			$	134,047
Property, plant and equipment		$	109,587			$	27,955			$	45,661			$	183,203
Assets		$	337,186			$	387,294			$	183,983			$	908,463

Three Months Ended						North								Consolidated
September 30, 2009		Asia				America				Europe				Segments
Total sales		$	103,394			$	21,267			$	31,925			$	156,586
Inter-company sales			(8,293	)			(6,662	)			(19,509	)			(34,464	)
Net sales		$	95,101			$	14,605			$	12,416			$	122,122
Property, plant and equipment		$	95,672			$	30,591			$	37,258			$	163,521
Assets		$	350,442			$	269,070			$	295,102			$	914,614

Nine Months Ended														Consolidated
September 30, 2008		Asia				North America				Europe				Segments
Total sales		$	277,684			$	92,252			$	18,907			$	388,843
Inter-company sales			(20,050	)			(22,109	)			(1,039	)			(43,198	)
Net sales		$	257,634			$	70,143			$	17,868			$	345,645
Property, plant and equipment		$	109,587			$	27,955			$	45,661			$	183,203
Assets		$	337,186			$	387,294			$	183,983			$	908,463

Nine Months Ended														Consolidated
September 30, 2009		Asia				North America				Europe				Segments
Total sales		$	247,127			$	58,049			$	80,456			$	385,632
Inter-company sales			(17,983	)			(16,782	)			(46,797	)			(81,562	)
Net sales		$	229,144			$	41,267			$	33,659			$	304,070
Property, plant and equipment		$	95,672			$	30,591			$	37,258			$	163,521
Assets		$	350,442			$	269,070			$	295,102			$	914,614

Geographic Information

     Revenues were derived from (billed to) customers located in the following countries. “All Others” represents countries with less than 10% of the total revenues each (in thousands):

		Net Sales
		for the Three Months								Percentage of
		Ended September 30,								Net Sales
		2008				2009				2008				2009
China		$	41,565			$	37,562				31.0	%			30.8	%
Taiwan			34,013				34,518				25.4	%			28.3	%
United States			26,000				19,025				19.4	%			15.6	%
Korea			6,143				7,518				4.6	%			6.2	%
Germany			7,141				4,606				5.3	%			3.8	%
England			5,924				5,335				4.4	%			4.4	%
Singapore			4,723				4,605				3.5	%			3.8	%
All Others			8,538				8,953				6.4	%			7.3	%
Total		$	134,047			$	122,122				100.0	%			100.0	%

		Net Sales
		for the Nine Months								Percentage of
		Ended September 30,								Net Sales
		2008				2009				2008				2009
China		$	102,650			$	91,105				29.7	%			30.0	%
Taiwan			100,061				87,247				28.9	%			28.7	%
United States			67,240				50,354				19.5	%			16.6	%
Korea			17,233				19,303				5.0	%			6.3	%
Germany			12,754				12,693				3.7	%			4.2	%
England			11,924				12,436				3.4	%			4.1	%
Singapore			11,590				9,553				3.4	%			3.1	%
All Others			22,193				21,379				6.4	%			7.0	%
Total		$	345,645			$	304,070				100.0	%			100.0	%

NOTE M— Business Acquisitions

     Zetex Acquisition — On June 9, 2008, the Company completed the acquisition of all the outstanding ordinary capital stock of Zetex plc (“Zetex”), a company incorporated under the laws of England and Wales. The Zetex shareholders received 85.45 pence in cash per ordinary share, valuing the fully diluted share capital of Zetex at approximately $176.1 million (based on a USD:GBP exchange rate of 1.9778), excluding acquisition costs, fees and expenses.

     As consideration for Zetex, the Company paid the following (in thousands):

Purchase price (cost of shares)		$	176,138
Acquisition related costs			4,054
Total purchase price		$	180,192

     In addition, in order to finance the acquisition, the Company entered into a margin loan agreement with UBS Financial Services Inc. for $165 million, collateralized by the Company’s ARS portfolio. On November 4, 2008, the Company entered into a no net cost credit line (“no net cost”) loan with UBS BANK USA, which replaced the margin loan.

     The results of operations of the Zetex acquisition have been included in the consolidated financial statements from June 1, 2008. The purpose of this acquisition was to create revenue, operating and cost synergies and to enhance the Company’s leadership in discrete and analog solutions. In addition, the Company believes the acquisition will strengthen and broaden the Company’s product offerings, including entry into the light-emitting diode (“LED”) lighting and automotive markets and expand the Company’s geographical footprint in the European markets.

     The following summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

		Revised purchase price
		allocation on acquisition date
Assets acquired:
Accounts receivable, net		$	13,445
Inventory			35,991
Prepaid expenses and other current assets			4,363
Property, plant and equipment, net			52,045
Other long-term assets			136
Intangible assets			48,274
Goodwill			51,345
Total assets acquired		$	205,599
Liabilities assumed:
Accounts payable		$	6,057
Accrued expenses and other liabilities			17,978
Pension liability			10,873
Deferred tax liabilities			13,649
Other liabilities			3,846
Total liabilities assumed			52,403
Total net assets acquired		$	153,196

     The fair values and lives for amortization purposes assigned to acquired intangible assets are as follows (in thousands):

						Estimated useful life
Intangible asset		Fair value assigned				(in years)
IPR&D:
Power management		$	1,383				N/A
Lighting			3,952				N/A
Other			2,569				N/A
Total IPR&D			7,904
Developed technology:
Discretes			16,007				10
Power management			4,941				5
Lighting			3,360				5
ASIC			3,162				7
Other			2,174				2-7
Total developed technology			29,644
Customer relationships			6,917				12
Trade name			3,162			Indefinite
Other intangibles			647			Various
Total intangibles acquired		$	48,274