NN

29.9

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2018March 31, 2019

Or

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

For the transition period from                     to                     .

Commission file number: 002-25577

 

DIODES INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-2039518

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

4949 Hedgcoxe Road, Suite 200,

Plano, Texas

 

75024

(Address of principal executive offices)

 

(Zip code)

(972) 987-3900

(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      No  

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      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.66 2/3

DIOD

The NASDAQ Stock Market LLC

The number of shares of the registrant’s Common Stock outstanding as of AugustMay 3, 20182019 was 50,088,309.50,613,957.

 

 

 


 

 

Table of Contents

 

 

  

Page

 

Part I – Financial Information

  

3

 

Item 1. Financial Statements

  

3

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

2220

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

3130

 

Item 4. Controls and Procedures

  

3130

 

Part II – Other Information

  

32

Item 1. Legal Proceedings

 

3231

Item 1A. Risk Factors

 

3231

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

3231

Item 3. Defaults Upon Senior Securities

 

3231

Item 4. Mine Safety Disclosures

 

3231

Item 5. Other Information

 

3231

Item 6. Exhibits

 

3332

 

Signatures

  

3433

 

 

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DIODES INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

June 30,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2018

 

 

2017

 

2019

 

 

2018

 

(Unaudited)

 

 

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

152,403

 

 

$

203,820

 

$

301,167

 

 

$

241,053

 

Short-term investments

 

7,225

 

 

 

4,558

 

 

6,751

 

 

 

7,499

 

Accounts receivable, net of allowances of $3,687 and $4,480 at

June 30, 2018 and December 31, 2017, respectively

 

199,949

 

 

 

200,112

 

Accounts receivable, net of allowances of $4,258 and $4,102 at

March 31, 2019 and December 31, 2018, respectively

 

215,229

 

 

 

228,405

 

Inventories

 

222,786

 

 

 

216,506

 

 

216,569

 

 

 

215,435

 

Prepaid expenses and other

 

36,177

 

 

 

37,328

 

 

41,274

 

 

 

42,446

 

Total current assets

 

618,540

 

 

 

662,324

 

 

780,990

 

 

 

734,838

 

Property, plant and equipment, net

 

460,237

 

 

 

459,169

 

 

441,215

 

 

 

446,835

 

Deferred income tax

 

39,811

 

 

 

40,580

 

 

31,830

 

 

 

31,652

 

Goodwill

 

132,829

 

 

 

134,187

 

 

135,669

 

 

 

132,437

 

Intangible assets, net

 

146,941

 

 

 

156,445

 

 

133,506

 

 

 

137,935

 

Other

 

38,414

 

 

 

35,968

 

 

89,788

 

 

 

42,674

 

Total assets

$

1,436,772

 

 

$

1,488,673

 

$

1,612,998

 

 

$

1,526,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

$

4,268

 

 

$

1,008

 

$

12,330

 

 

$

10,254

 

Accounts payable

 

104,575

 

 

 

108,001

 

 

107,078

 

 

 

117,808

 

Accrued liabilities and other

 

88,225

 

 

 

99,301

 

 

86,880

 

 

 

82,605

 

Income tax payable

 

16,920

 

 

 

18,216

 

 

21,452

 

 

 

15,744

 

Current portion of long-term debt

 

23,717

 

 

 

20,636

 

 

28,403

 

 

 

27,613

 

Total current liabilities

 

237,705

 

 

 

247,162

 

 

256,143

 

 

 

254,024

 

Long-term debt, net of current portion

 

162,121

 

 

 

247,492

 

 

187,378

 

 

 

186,143

 

Deferred tax liabilities

 

26,322

 

 

 

25,176

 

 

18,003

 

 

 

17,993

 

Other long-term liabilities

 

87,809

 

 

 

94,925

 

 

134,176

 

 

 

90,779

 

Total liabilities

 

513,957

 

 

 

614,755

 

 

595,700

 

 

 

548,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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;

49,846,164 and 49,130,090, issued and outstanding at June 30, 2018

and December 31, 2017, respectively

 

34,204

 

 

 

33,727

 

Common stock - par value $0.66 2/3 per share; 70,000,000 shares authorized;

50,596,756 and 50,221,035, issued and outstanding at March 31, 2019

and December 31, 2018, respectively

 

34,704

 

 

 

34,454

 

Additional paid-in capital

 

391,332

 

 

 

386,338

 

 

410,163

 

 

 

399,915

 

Retained earnings

 

576,280

 

 

 

532,687

 

 

668,424

 

 

 

636,708

 

Treasury stock, at cost, 1,457,206 shares held at June 30, 2018

and December 31, 2017

 

(37,768

)

 

 

(37,768

)

Treasury stock, at cost, 1,457,206 shares held at March 31, 2019

and December 31, 2018

 

(37,768

)

 

 

(37,768

)

Accumulated other comprehensive loss

 

(81,633

)

 

 

(83,480

)

 

(106,848

)

 

 

(101,846

)

Total stockholders' equity

 

882,415

 

 

 

831,504

 

 

968,675

 

 

 

931,463

 

Noncontrolling interest

 

40,400

 

 

 

42,414

 

 

48,623

 

 

 

45,969

 

Total equity

 

922,815

 

 

 

873,918

 

 

1,017,298

 

 

 

977,432

 

Total liabilities and stockholders' equity

$

1,436,772

 

 

$

1,488,673

 

$

1,612,998

 

 

$

1,526,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

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

 

-3-


 

DIODES INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

 

 

2018

 

Net sales

$

304,085

 

 

 

$

264,224

 

 

$

578,597

 

 

$

500,527

 

$

302,293

 

 

 

$

274,512

 

Cost of goods sold

 

196,817

 

 

 

 

174,085

 

 

 

372,734

 

 

 

336,477

 

 

189,882

 

 

 

 

175,917

 

Gross profit

 

107,268

 

 

 

 

90,139

 

 

 

205,863

 

 

 

164,050

 

 

112,411

 

 

 

 

98,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

42,153

 

 

 

39,697

 

 

 

89,303

 

 

 

79,387

 

 

43,688

 

 

 

47,150

 

Research and development

 

22,050

 

 

 

19,796

 

 

 

42,250

 

 

 

37,836

 

 

22,170

 

 

 

20,200

 

Amortization of acquisition related intangible assets

 

4,678

 

 

 

4,646

 

 

 

9,445

 

 

 

9,404

 

 

4,484

 

 

 

4,767

 

Restructuring

 

526

 

 

 

1,838

 

 

 

206

 

 

 

4,069

 

Other operating expense (income)

 

17

 

 

 

 

334

 

 

 

(125

)

 

 

169

 

Other operating income

 

(54

)

 

 

 

 

(462

)

Total operating expense

 

69,424

 

 

 

 

66,311

 

 

 

141,079

 

 

 

130,865

 

 

70,288

 

 

 

 

71,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

37,844

 

 

 

23,828

 

 

 

64,784

 

 

 

33,185

 

 

42,123

 

 

 

26,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

443

 

 

 

308

 

 

 

957

 

 

 

603

 

 

875

 

 

 

514

 

Interest expense

 

(2,544

)

 

 

 

(3,447

)

 

 

(5,301

)

 

 

(6,932

)

 

(2,145

)

 

 

 

(2,757

)

Foreign currency gain (loss), net

 

300

 

 

 

(1,628

)

 

 

(2,729

)

 

 

(5,422

)

Foreign currency loss, net

 

(64

)

 

 

 

(3,029

)

Other income

 

377

 

 

 

 

802

 

 

 

5,012

 

 

 

531

 

 

1,245

 

 

 

 

4,635

 

Total other expense

 

(1,424

)

 

 

 

 

(3,965

)

 

 

(2,061

)

 

 

(11,220

)

 

(89

)

 

 

 

 

(637

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interest

 

36,420

 

 

 

19,863

 

 

 

62,723

 

 

 

21,965

 

 

42,034

 

 

 

26,303

 

Income tax provision

 

10,753

 

 

 

 

6,039

 

 

 

18,536

 

 

 

6,599

 

 

10,298

 

 

 

 

7,783

 

Net income

 

25,667

 

 

 

 

13,824

 

 

 

44,187

 

 

 

15,366

 

 

31,736

 

 

 

 

18,520

 

Less net income attributable to noncontrolling interest

 

(599

)

 

 

 

 

(645

)

 

 

(593

)

 

 

(970

)

Less net (income) loss attributable to noncontrolling interest

 

(20

)

 

 

 

 

6

 

Net income attributable to common stockholders

$

25,068

 

 

 

$

13,179

 

 

$

43,594

 

 

$

14,396

 

$

31,716

 

 

 

$

18,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.50

 

 

 

$

0.27

 

 

$

0.88

 

 

$

0.30

 

$

0.63

 

 

 

$

0.38

 

Diluted

$

0.49

 

 

 

$

0.26

 

 

$

0.86

 

 

$

0.29

 

$

0.62

 

 

 

$

0.37

 

Number of shares used in earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

49,680

 

 

 

 

48,518

 

 

 

49,509

 

 

 

48,418

 

 

50,398

 

 

 

 

49,337

 

Diluted

 

50,792

 

 

 

 

49,944

 

 

 

50,727

 

 

 

49,807

 

 

51,462

 

 

 

 

50,622

 

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

 

 

 

-4-


 

DIODES INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

Net income

$

25,667

 

 

$

13,824

 

 

$

44,187

 

 

$

15,366

 

$

31,736

 

 

$

18,520

 

Unrealized gain (loss) on defined benefit plan, net of tax

 

7,266

 

 

 

(2,238

)

 

 

7,701

 

 

 

(1,382

)

Unrealized gain (loss) on interest rate swap, net of tax

 

927

 

 

 

(647

)

 

 

3,275

 

 

 

(120

)

Unrealized foreign currency (loss) gain, net of tax

 

(24,985

)

 

 

7,725

 

 

 

(9,130

)

 

 

17,167

 

Unrealized (loss) gain on defined benefit plan, net of tax

 

(6,029

)

 

 

435

 

Unrealized (loss) gain on swaps and collars, net of tax

 

(3,909

)

 

 

2,348

 

Unrealized foreign currency gain, net of tax

 

4,936

 

 

 

15,856

 

Comprehensive income

 

8,875

 

 

 

18,664

 

 

 

46,033

 

 

 

31,031

 

 

26,734

 

 

 

37,159

 

Less: Comprehensive income attributable to noncontrolling interest

 

(599

)

 

 

(645

)

 

 

(593

)

 

 

(970

)

 

(20

)

 

 

6

 

Total comprehensive income attributable to common stockholders

$

8,276

 

 

$

18,019

 

 

$

45,440

 

 

$

30,061

 

$

26,714

 

 

$

37,165

 

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


-5-


DIODES INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)

 

 

Common stock

 

 

Treasury stock

 

 

Additional

paid-in

 

 

Retained

 

 

Accumulated

other comprehensive

 

 

Total Diodes

Incorporated Stockholders'

 

 

Noncontrolling

 

 

Total

 

(Amounts in thousands)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

loss

 

 

equity

 

 

interest

 

 

equity

 

Balance, December 31, 2017

 

 

50,587

 

 

$

33,727

 

 

 

(1,457

)

 

$

(37,768

)

 

$

386,338

 

 

$

532,687

 

 

$

(83,480

)

 

$

831,504

 

 

$

42,414

 

 

$

873,918

 

Total comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

18,526

 

 

 

18,639

 

 

 

37,165

 

 

 

(6

)

 

 

37,159

 

Noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Dividends to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,152

)

 

 

(1,152

)

Common stock issued for share-based plans

 

 

441

 

 

 

294

 

 

 

-

 

 

 

-

 

 

 

574

 

 

 

-

 

 

 

-

 

 

 

868

 

 

 

-

 

 

 

868

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,280

 

 

 

-

 

 

 

-

 

 

 

6,280

 

 

 

-

 

 

 

6,280

 

Tax related to net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,264

)

 

 

-

 

 

 

-

 

 

 

(7,264

)

 

 

-

 

 

 

(7,264

)

Balance, March 31, 2018

 

 

51,028

 

 

$

34,021

 

 

 

(1,457

)

 

$

(37,768

)

 

$

385,928

 

 

$

551,213

 

 

$

(64,841

)

 

$

868,553

 

 

$

41,256

 

 

$

909,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

51,678

 

 

$

34,454

 

 

 

(1,457

)

 

$

(37,768

)

 

$

399,915

 

 

$

636,708

 

 

$

(101,846

)

 

$

931,463

 

 

$

45,969

 

 

$

977,432

 

Total comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31,716

 

 

 

(5,002

)

 

 

26,714

 

 

 

20

 

 

 

26,734

 

Noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,755

 

 

 

2,755

 

Dividends to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(121

)

 

 

(121

)

Common stock issued for share-based plans

 

 

376

 

 

 

250

 

 

 

-

 

 

 

-

 

 

 

6,417

 

 

 

-

 

 

 

-

 

 

 

6,667

 

 

 

-

 

 

 

6,667

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,476

 

 

 

-

 

 

 

-

 

 

 

4,476

 

 

 

-

 

 

 

4,476

 

Tax related to net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(645

)

 

 

-

 

 

 

-

 

 

 

(645

)

 

 

-

 

 

 

(645

)

Balance, March 31, 2019

 

 

52,054

 

 

$

34,704

 

 

 

(1,457

)

 

$

(37,768

)

 

$

410,163

 

 

$

668,424

 

 

$

(106,848

)

 

$

968,675

 

 

$

48,623

 

 

$

1,017,298

 

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

 

 

-56-


 

DIODES INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

March 31,

 

2018

 

 

2017

 

2019

 

 

2018

 

Cash flows from operating activities

$

88,381

 

 

$

65,437

 

Net cash flows provided by operating activities

$

69,889

 

 

$

53,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(52,990

)

 

 

(43,883

)

 

(18,639

)

 

 

(31,636

)

Purchases of short-term investments

 

(10,171

)

 

 

(9,821

)

 

(3,153

)

 

 

(237

)

Proceeds from maturity of short-term investments

 

7,289

 

 

 

24,108

 

 

3,982

 

 

 

1,027

 

Other

 

2,245

 

 

 

(554

)

 

658

 

 

 

1,411

 

Net cash and cash equivalents used in investing activities

 

(53,627

)

 

 

(30,150

)

 

(17,152

)

 

 

(29,435

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances on lines of credit and short-term debt

 

3,414

 

 

 

392

 

 

3,568

 

 

 

3,414

 

Repayments of line of credit and short-term debt

 

(1,461

)

 

 

-

 

Taxes paid related to net share settlement

 

(8,617

)

 

 

(128

)

 

(645

)

 

 

(7,264

)

Proceeds from long-term debt

 

189,656

 

 

 

7,500

 

 

85,000

 

 

 

91,000

 

Repayments of long-term debt

 

(272,170

)

 

 

(34,404

)

 

(83,089

)

 

 

(137,482

)

Net proceeds from issuance of common stock

 

3,009

 

 

 

6,666

 

 

6,667

 

 

 

866

 

Proceeds from and repayment of capital lease obligation

 

1,775

 

 

 

(378

)

Dividend distribution to noncontrolling interest

 

(1,151

)

 

 

(3,282

)

Repayment of finance lease obligation

 

(293

)

 

 

(603

)

Other

 

654

 

 

 

225

 

 

(120

)

 

 

227

 

Net cash and cash equivalents used in financing activities

 

(83,430

)

 

 

(23,409

)

Net cash and cash equivalents provided by (used in) financing activities

 

9,627

 

 

 

(49,842

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(2,753

)

 

 

6,331

 

 

(1,890

)

 

 

3,971

 

Change in cash and cash equivalents, including restricted cash

 

(51,429

)

 

 

18,209

 

 

60,474

 

 

 

(21,347

)

Cash and cash equivalents, beginning of period, including restricted cash

 

205,202

 

 

 

249,712

 

 

241,833

 

 

 

205,202

 

Cash and cash equivalents, end of period, including restricted cash

$

153,773

 

 

$

267,921

 

$

302,307

 

 

$

183,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

$

5,334

 

 

$

7,079

 

Taxes

$

16,643

 

 

$

20,036

 

Interest paid during the period

$

2,095

 

 

$

2,790

 

Taxes paid during the period

$

4,323

 

 

$

4,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

Decrease/(increase) in accounts payable related to the purchase of

property, plant and equipment

$

5,452

 

 

$

(13,840

)

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Decrease in accounts payable related to the purchase of

property, plant and equipment

$

2,366

 

 

$

6,917

 

Increase in dividend accrued for noncontrolling interest

$

(1,427

)

 

$

(1,449

)

$

-

 

 

$

(1,000

)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the total of the same such amounts shown above:

Three Months Ended

Six Months Ended

March 31,

 

June 30, 2018

 

June 30, 2017

2019

 

2018

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$                     152,403

 

$                     266,605

$301,167

 

$182,411

Restricted cash (included in other current assets)

 

1,370

 

1,316

1,140

 

1,444

Total cash, cash equivalents and restricted cash

 

$                     153,773

 

$                     267,921

$302,307

 

$183,855

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

 

-67-


 

DIODES INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – Nature of Operations, Basis of Presentation, and Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates

Nature of Operations

Diodes Incorporated, together with its subsidiaries (collectively, the “Company,” “we” or “our”) (Nasdaq: DIOD), is a leading global manufacturer and supplier of high-quality, application-specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets. We serve the consumer electronics, computing, communications, industrial, and automotive markets. Our products include diodes, rectifiers, transistors, MOSFETs, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers. Our corporate headquarters and Americas’ sales officeoffices are located in Plano, Texas and Milpitas, California. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taoyuan City and Zhubei City, Taiwan; Manchester,Oldham, England; and Neuhaus, Germany. Our wafer fabrication facilities are located in ManchesterOldham and in Shanghai, China.China and Greenock, Scotland. We have assembly and test facilities located in Shanghai, Jinan and Chengdu, China, as well as in Hong Kong, Neuhaus and Taipei. Additional engineering, research and development, sales, warehouse, and logistics offices are located in Taipei; Hong Kong; Manchester;Oldham; Shanghai; Shenzhen and Yangzhou, China; Seongnam-si, South Korea; Munich, Germany; and Munich, Germany,Tokyo, Japan, with support offices throughout the world.

Basis of Presentation

The condensed consolidated financial data at December 31, 20172018 is derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the Securities and Exchange Commission (“SEC”) on February 20, 201821, 2019 (“Form 10-K”). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“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, operating results and cash flows in conformity with GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Form 10-K.  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 operating results for the period presented have been included in the interim period. Operating results for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2018.2019.

The preparation of financial statements in conformity with 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 GAAP, interim accounting for certain expenses, including income taxes, are based on full year forecasts. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates taking into consideration discrete items occurring in a quarter.

Dollar amounts and share amounts are presented in thousands, except per share amounts, unless otherwise noted. Certain prior year’s balances may have been reclassified to conform to the current financial statement presentation.

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) issued the following Accounting Standards Updates (“ASU”) which could have potential impact on the Company’s financial statements:   

Recently Adopted Standards

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) - On January 1, 2018, we adopted the comprehensive new revenue recognition standard issued by the FASB.  This standard is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard sets forth a five-step revenue recognition model which replaces the previous revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance.  The adoption of this standard did not have a material impact on our condensed consolidated financial position, reported revenue, results of operations or cash flows as of and for the three or six months ended June 30, 2018. See Note 7 for our expanded revenue disclosures required by the new standard.

-7-


ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments – In November 2016, the FASB issued guidance on the presentation of restricted cash which requires that on the statement of cash flows, amounts generally described as restricted cash or restricted cash equivalents should be included within the beginning and ending balances of cash and cash equivalents. We adopted this guidance in the first quarter of 2018 on a retrospective basis. As a result, restricted cash amounts that have historically been included in prepaid expenses on our consolidated balance sheets are now included with cash and cash equivalents on the consolidated statements of cash flows. As of June 30, 2018 and December 31, 2017 we had restricted cash of approximately $1.4 million. Restricted cash is pledged as collateral when we enter into agreements with banks for certain banking facilities.

Standards Effective in Future Years

ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) – In February 2016, the FASB issued ASU 2016-02, which amends the accounting treatment for leases and requires, among other things, lessees to recognize a right-of-use (“ROU”) asset and lease liability for most lease arrangements .arrangements. The amendments arewere effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply aThe Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective transition approach, for leases existing at, or entered into after,under which financial results reported in periods prior to 2018 are unchanged. We elected the beginning of the earliest comparative period presented in the financial statements. The ASU will become effective for the Company for interim and annual reporting periods in fiscal years beginning after December 15, 2018.  The standard offers a number offollowing allowed practical expedients for transition and certain expedients specific to lessees or lessors.  Both lessees and lessors areas permitted to make an election to apply a package of practical expedients available for implementation under the standard.  For transition guidance within the Company will recognize all effectsnew standard:

Not record leases with an initial term of transition in12 months on the beginningbalance sheet;

-8-


Not separate non-lease components of leases from the lease components; and

Not reassess (1) the definition of thea lease, (2) lease classification, and (3) initial direct costs for existing leases during transition.

Upon adoption reporting period on January 1, 2019. 

The Company will continue its implementation work of ASU 2016-02, the Company recorded ROU assets of $68.3 million, including land-use rights of $17.1 million previously recorded in 2018, including enhancementsother assets and $2.5 million previously recorded in property, plant and equipment and ROU liabilities of $50.4 million. For additional information related to the Company’s internal control framework, accounting systems and related documentation surrounding its lease accounting processes and the preparation of any additional disclosures that will be required.leases, see Note 10.   

ASU 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2016-02”) - In July 2018 the FASB issued ASU 2018-10, to add clarity to certain areas within ASU 2016-02. The effective date and transition requirements will be the same as ASU 2016-02. The Company will evaluate and adopt this ASU in conjunction with ASU 2016-02.

ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”) - In July 2018, the FASB issued ASU 2018-11, which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption (January 1, 2019) while continuing to present all prior periods under previous lease accounting guidance.   The Company will evaluate and adopt this ASU in conjunction with ASU 2016-02.

ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") - In June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 iswas effective for publicthe Company on January 1, 2019. The adoption of this standard did not have a material effect on our condensed consolidated financial statements or disclosures.

ASU No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) -In August 2017, the FASB issued ASU No. 2017-12 to better align hedge accounting with risk management strategies, and as a result, more hedging strategies will be eligible for hedge accounting. Public business entities will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge’s effectiveness. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. The amendments are effective for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year. Weand the Company adopted the new standard January 1, 2019. The new standard had no impact on the Company’s financial statements.

On January 1, 2019, the Company adopted ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815, in addition to the currently permissible benchmark interest rates. This ASU provides the Company the ability to utilize the OIS rate based on SOFR as the benchmark interest rate on certain hedges of interest rate risk. The new standard had no impact on the Company’s financial statements.

Standards Effective in Future Years

The FASB has issued the following relevant standards, effective in future years, which are currently assessing the effect this guidance maynot expected to have a material impact on our consolidated condensed financial statements.       statements:

Standard No.

Standard Name

Standard Effective Date

2018-13

Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

January 1, 2020

2018-14

Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

January 1, 2020

In April 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements and disclosures.    

All other issued and not yet effective accounting standards are not expected to be relevant to the Company.


-89-


Updates to Accounting Policies and Estimates

Leases

The Company determines if an arrangement is a lease at inception. ROU assets are included in Other assets in the Company’s condensed consolidated balance sheets. Current ROU liabilities are included in Accrued liabilities and other and long-term ROU liabilities are included in Other long-term liabilities, in our condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. To determine the present value of the lease payments, we estimate our incremental borrowing rate based on information available at the lease commencement date.

The Company’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Our leases typically do not contain any residual value guarantees.  For real estate, we account for the lease and non-lease components as a single lease component.

NOTE 2 – Earnings per Share

Earnings per share (“EPS”) is calculated by dividing net income attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted EPS is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.  During the three months ended March 31, 2019 and 2018 we paid no dividends on our Common Stock.

The table below sets forth the reconciliation between net income and the weighted average shares outstanding used for calculating basic and diluted EPS:

 

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

Earnings (numerator)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

25,068

 

 

$

13,179

 

 

$

43,594

 

 

$

14,396

 

$

31,716

 

 

$

18,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares (denominator)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

49,680

 

 

 

48,518

 

 

 

49,509

 

 

 

48,418

 

 

50,398

 

 

 

49,337

 

Dilutive effect of stock options and stock awards outstanding

 

1,112

 

 

 

1,426

 

 

 

1,218

 

 

 

1,389

 

 

1,064

 

 

 

1,285

 

Adjusted weighted average common shares outstanding (diluted)

 

50,792

 

 

 

49,944

 

 

 

50,727

 

 

 

49,807

 

 

51,462

 

 

 

50,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.50

 

 

$

0.27

 

 

$

0.88

 

 

$

0.30

 

$

0.63

 

 

$

0.38

 

Diluted

$

0.49

 

 

$

0.26

 

 

$

0.86

 

 

$

0.29

 

$

0.62

 

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and stock awards excluded from EPS

calculation because the effect would be anti-dilutive

 

24

 

 

 

854

 

 

 

13

 

 

 

801

 

 

58

 

 

 

6

 

 

 

-910-


 

NOTE 3 – Inventories

The table below sets forth inventories which are stated at the lower of cost or marketnet realizable value:

 

June 30, 2018

 

 

December 31, 2017

 

March 31, 2019

 

 

December 31, 2018

 

Finished goods

$

73,179

 

 

$

81,194

 

$

55,493

 

 

$

59,244

 

Work-in-progress

 

55,475

 

 

 

52,578

 

 

64,243

 

 

 

59,166

 

Raw materials

 

94,132

 

 

 

82,734

 

 

96,833

 

 

 

97,025

 

Total

$

222,786

 

 

$

216,506

 

$

216,569

 

 

$

215,435

 

 

 

NOTE 4 – Goodwill and Intangible Assets

The table below sets forth the changes in goodwill:

 

Balance at December 31, 2017

$

134,187

 

Foreign currency translation adjustment

 

(1,358

)

Balance at June 30, 2018

$

132,829

 

Balance at December 31, 2018

$

132,437

 

Acquisition

 

2,570

 

Foreign currency translation adjustment

 

662

 

Balance at March 31, 2019

$

135,669

 

The increase in goodwill is related to the preliminary purchase price accounting allocation of an investment in Canyon Semiconductor. This amount possibly will be changed when the purchase price allocation becomes final later in 2019.

The table below sets forth the value of intangible assets, other than goodwill:

June 30,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2018

 

 

2017

 

2019

 

 

2018

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

$

238,867

 

 

$

234,533

 

$

243,447

 

 

$

238,867

 

Accumulated amortization

 

(97,505

)

 

 

(88,059

)

 

(110,894

)

 

 

(106,410

)

Foreign currency translation adjustment

 

(8,254

)

 

 

(8,249

)

 

(8,270

)

 

 

(8,281

)

Total

 

133,108

 

 

 

138,225

 

 

124,283

 

 

 

124,176

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

14,883

 

 

 

19,217

 

 

10,303

 

 

 

14,883

 

Foreign currency translation adjustment

 

(1,050

)

 

 

(997

)

 

(1,080

)

 

 

(1,124

)

Total

 

13,833

 

 

 

18,220

 

 

9,223

 

 

 

13,759

 

Total intangible assets, net

$

146,941

 

 

$

156,445

 

$

133,506

 

 

$

137,935

 

 

The table below sets forth amortization expense related to intangible assets subject to amortization:

 

Amortization expense

 

2018

 

 

2017

 

Three months ended June 30

 

$

4,678

 

 

$

4,646

 

Six months ended June 30,

 

$

9,445

 

 

$

9,404

 

Amortization expense

 

2019

 

 

2018

 

Three months ended March 31

 

$

4,484

 

 

$

4,767

 

 

NOTE 5 – Income Tax Provision

 

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, provided an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and created new taxes on certain foreign sourced earnings.  As of the completion of these financial statements and related disclosures, we have not completed our accounting for the tax effects of the Tax Act on our 2017 tax year.  We have not made any adjustments to the provisional tax expense of $45.9 million we recorded in the fourth quarter of 2017 to account for the tax effects of the Tax Act.  The Company expects to finalize the accounting for the effects of the Tax Act on the 2017 tax year no later than the fourth quarter of 2018, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118.  Future adjustments made to the provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which any such adjustments are determined.

We incorporated the effects of the Tax Act into our 29.9% estimated annual effective tax rate for 2018.  As shown below, the actual 29.5% effective tax rate for the quarter ended June 30, 2018, varies from the estimated annual tax rate due to discrete items related to stock-based compensation activity during the quarter (accounted for under ASU 2016-09).    

-10-


The table below sets forth information related to our income tax expense:  

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

 

June 30,

 

 

June 30,

 

March 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

 

Domestic pre-tax income (loss)

$

5,350

 

 

$

(22,032

)

 

$

(4,022

)

 

$

(35,243

)

Domestic pre-tax loss

$

12,486

 

 

$

(9,372

)

 

Foreign pre-tax income

$

31,070

 

 

$

41,895

 

 

$

66,745

 

 

$

57,208

 

$

29,548

 

 

$

35,675

 

 

Income tax provision

$

10,753

 

 

$

6,039

 

 

$

18,536

 

 

$

6,599

 

$

10,298

 

 

$

7,783

 

 

Effective tax rate

 

29.5

%

 

 

30.4

%

 

 

29.6

%

 

 

30.0

%

 

24.5

%

 

 

29.6

%

 

Impact of tax holidays on tax expense

$

70

 

 

$

(857

)

 

$

(742

)

 

$

(1,820

)

$

277

 

 

$

(812

)

 

Earnings per share impact of tax holidays:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

-

 

 

$

0.02

 

 

$

0.01

 

 

$

0.04

 

$

(0.01

)

 

$

0.02

 

 

Diluted

$

-

 

 

$

0.02

 

 

$

0.01

 

 

$

0.04

 

$

(0.01

)

 

$

0.02

 

 

-11-


 

              The decrease in the effective tax rate for the three and six months ended June 30, 2018March 31, 2019 when compared to the three and six months ended June 30, 2017,March 31, 2018, is primarily attributable to a decrease due to differences in stock-based compensation activity during the comparable periods, offset by an increase due to the “GILTI” tax, which isin estimated full year global pretax book income and a new tax on global intangible low-taxed income of non-U.S. subsidiaries that was created by the Tax Act and to which the Company is subject effective January 1, 2018.net decrease in unfavorable U.S. permanent differences.        

Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European and Asian subsidiaries.  Any future distributions of forforeigneign earnings will not be subject to additional U.S. income tax, but may be subject to non-U.S. withholding taxes.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2008, or for the 2010 and 2011 tax years. We are no longer subject to China income tax examinations by tax authorities for tax years before 2007.2008. With respect to state and local jurisdictions and countries outside of the U.S. (other than China), with limited exceptions, the Company is no longer subject to income tax audits for years before 2012.2013. 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 reserve for any adjustments that may result from currently pending tax audits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense.  As of June 30, 2018,March 31, 2019, the gross amount of unrecognized tax benefits was approximately $32.3$34.0   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. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

NOTE 6 – Share-Based Compensation

The table below sets forth the line items where share-based compensation expense was recordedrecorded:

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

Cost of goods sold

$

80

 

 

$

153

 

 

$

170

 

 

$

311

 

$

125

 

 

$

90

 

Selling, general and administrative

 

4,031

 

 

 

3,993

 

 

 

9,484

 

 

 

7,297

 

 

3,637

 

 

 

5,454

 

Research and development

 

689

 

 

 

688

 

 

 

1,426

 

 

 

1,357

 

 

715

 

 

 

736

 

Total share-based compensation expense

$

4,800

 

 

$

4,834

 

 

$

11,080

 

 

$

8,965

 

$

4,477

 

 

$

6,280

 

 

The table below sets forth share-based compensation expense by type:

 

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

Stock options

$

84

 

 

$

301

 

 

$

275

 

 

$

598

 

$

-

 

 

$

191

 

Share grants

 

4,716

 

 

 

4,533

 

 

 

10,805

 

 

 

8,367

 

 

4,477

 

 

 

6,089

 

Total share-based compensation expense

$

4,800

 

 

$

4,834

 

 

$

11,080

 

 

$

8,965

 

$

4,477

 

 

$

6,280

 

-11-


 

Stock Options. Approximately $3.0$6.7 million in cash proceeds was received from stock option exercises during the sixthree months ended June 30, 2018.March 31, 2019.

As of June 30, 2018, there wasMarch 31, 2019, we had no unrecognized share-based compensation expense related to unvested stock options.  

Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.   We also have share grants that are performance basedperformance-based and time-based that vest upon achievement of certain performance criteria.criteria over time.         Our Chief Executive Officer had a grant of 600,000 performance-based stock units that vested upon the Company reaching $1.0 billion in revenue.  Based on the Company reaching approximately $1.1 billion in revenue in 2017, our Chief Executive Officer’s grant of 600,000 performance-based stock units were released to the Chief Executive Officer, upon filing of the Company’s Annual Report on Form 10-K, in February 2018.  The expense related to the 600,000 performance-based units was all recognized in previous periods. During the six months ended June 30, 2018, we issued 357,520 stock awards.  This was primarily made up of the annual grant for officers and directors.

As of June 30, 2018,March 31, 2019, total unrecognized share-based compensation expense related to share grants was approximately $15.1$40.1 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.32.1 years.        

Stock Modification. During the six months ended June 30, 2018 we modified previously granted stock option and stock awards for two corporate officers who retired.  The result of the modification was the acceleration of the vesting of 7,500 stock options and 79,720 stock awards for the corporate officers.  The incremental expense recorded for this modification was approximately $1.8 million, which was expensed in SG&A in the six months ended June 30, 2018.

 

-12-


 

NOTE 7 – Segment Information and RevenueNet Sales

Segment Reporting.For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various manufacturing and distribution facilities. We aggregate our products because the products are similar and have similar economic characteristics, use similar production processes and share the same customer type. Our primary operations include operations in Asia, North America and Europe.  During the three and six months ended June 30,March 31, 2019, no customer accounted for 10% or more or our net sales.During the three months ended March 31, 2018, one customer, a broad-based global distributor that sells to thousands of different end users, accounted for 10.9% and 10.7%10.3% or $33.3 million and $61.7 million, respectively, of our revenue.  For the three months ended June 30, 2017, the same customer accounted for 10.0% or $26.6$28.4 million of our revenue. Thenet sales. This customer did not account for 10% or   greater of our outstanding accounts receivable at June 30, 2018 or 2017.  No customers accounted for 10% or greater of our revenue for the six months ended June 30, 2017.March 31, 2018.

 

The tables below set forth net sales based on the location of the subsidiary producing the net sale.

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

March 31, 2019

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

Total sales

 

$

269,290

 

 

$

38,392

 

 

$

51,175

 

 

$

358,857

 

 

$

273,900

 

 

$

101,280

 

 

$

51,052

 

 

$

426,232

 

Intercompany elimination

 

 

(33,813

)

 

 

(6,358

)

 

 

(14,601

)

 

 

(54,772

)

 

 

(73,597

)

 

 

(37,916

)

 

 

(12,426

)

 

 

(123,939

)

Net sales

 

$

235,477

 

 

$

32,034

 

 

$

36,574

 

 

$

304,085

 

 

$

200,303

 

 

$

63,364

 

 

$

38,626

 

 

$

302,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

March 31, 2018

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

Total sales

 

$

250,551

 

 

$

47,873

 

 

$

45,807

 

 

$

344,231

 

 

$

244,530

 

 

$

26,836

 

 

$

49,998

 

 

$

321,364

 

Intercompany elimination

 

 

(41,149

)

 

 

(22,946

)

 

 

(15,912

)

 

 

(80,007

)

 

 

(31,827

)

 

 

(1,145

)

 

 

(13,880

)

 

 

(46,852

)

Net sales

 

$

209,402

 

 

$

24,927

 

 

$

29,895

 

 

$

264,224

 

 

$

212,703

 

 

$

25,691

 

 

$

36,118

 

 

$

274,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

Total sales

 

$

513,820

 

 

$

65,228

 

 

$

101,173

 

 

$

680,221

 

Intercompany elimination

 

 

(65,640

)

 

 

(7,503

)

 

 

(28,481

)

 

 

(101,624

)

Net sales

 

$

448,180

 

 

$

57,725

 

 

$

72,692

 

 

$

578,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

410,207

 

 

$

25,540

 

 

$

24,490

 

 

$

460,237

 

Total assets

 

$

1,090,931

 

 

$

155,395

 

 

$

190,446

 

 

$

1,436,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

Asia

 

 

North America

 

 

Europe

 

 

Consolidated

 

Total sales

 

$

468,894

 

 

$

90,752

 

 

$

86,825

 

 

$

646,471

 

Intercompany elimination

 

 

(74,488

)

 

 

(40,486

)

 

 

(30,970

)

 

 

(145,944

)

Net sales

 

$

394,406

 

 

$

50,266

 

 

$

55,855

 

 

$

500,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

350,297

 

 

$

56,691

 

 

$

20,080

 

 

$

427,068

 

Total assets

 

$

993,324

 

 

$

378,736

 

 

$

207,069

 

 

$

1,579,129

 

 

Changes in Accounting Policies. Effective January 1, 2018, we adopted a comprehensive new revenue recognition standard. The details of the significant changes to our accounting policies resulting from the adoption of the new standard are set out below. We adopted the standard using a modified retrospective method. There was no change in our revenue reported for the three and six months ended June 30, 2017. The adoption of this standard did not have a material impact on our condensed consolidated financial position, reported revenue, results of operations or cash flows as of and for the three or six months ended June 30, 2018.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally speaking, our performance obligations represent a promise to transfer various semiconductor products, and have the same pattern of revenue recognition. Our performance obligations are satisfied at either a point in time, or over time as work progresses. The vast majority of our revenue from products and services is accounted for at a

-13-


point in time. Substantially all of our revenue in direct and Distributor sales is recognized at a point in time. Further, the payment terms on our sales are based on negotiations with our customers.

Customers can order different types of semiconductors in a single contract (purchase order), and each line on a purchase order represents a separate performance obligation. Depending on the terms of an arrangement, we may also be responsible for shipping and handling activities. In accordance with ASC 606-10-25-18B, we have elected to account for shipping and handling as activities to fulfill our promise to transfer the good(s). As such, shipping and handling activities do not represent a separate performance obligation, and are accrued as a fulfillment cost. Further, although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

We record allowances/reserves for a number of items.  The following items are the largest dollar items for which we record allowances/reserves with ship and debit making up the vast majority: (i) ship and debit, which arise when we issue credit to certain distributors upon their shipments to their end customers; (ii) stock rotation, which are contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical shipments to them in exchange for an equal and offsetting order; and (iii) price protection, which arise when market conditions cause average selling prices to decrease and we issue credit to certain distributors on their inventory. Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable. Stock rotation reserves are recorded as a reduction to net sales. Price protection reserves are recorded as a reduction to net sales with a corresponding increase in accrued liabilities.

We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience, their financial condition and the condition of the global economy and financial markets. Payment terms and conditions typically vary depending on negotiations with the customer.

Disaggregation of Revenue.Net sales. We disaggregate revenuenet sales from contracts with customers into direct sales and distribution sales (“Distributors”) and by geographic area. Direct sales customers consist of those customers using our product in their manufacturing process, and Distributors are those customers who resell our products to third parties. We sell our products to customers in multiple areas of the world including Asia, Europe, and North America. Across these regions, we sell products to end users in a variety of markets such as consumer electronics, computing, communications, industrial and automotive. Further, most of our contracts are fixed-price arrangements, and are short term in nature, ranging from days to several months.

-1413-


 

The tables below set forth the amount of net sales by type (direct sales or Distributor) and the location of the customer based on the location to where the products were shipped for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:

 

 

Net Sales for the Three Months Ended June 30,

 

 

Direct Sales

 

Distributor

 

 

2018

 

2017

 

2018

 

2017

China

 

$54,747

 

$54,855

 

$111,818

 

$91,529

U.S.

 

4,772

 

4,404

 

26,431

 

19,372

Korea

 

3,474

 

4,626

 

10,028

 

11,179

Germany

 

2,820

 

2,434

 

20,826

 

16,597

Singapore

 

624

 

60

 

19,571

 

15,037

Taiwan

 

922

 

1,741

 

15,828

 

16,370

All others (1)

 

16,663

 

15,799

 

15,561

 

10,221

Total

 

$84,022

 

$83,919

 

$220,063

 

$180,305

 

 

 

 

 

 

 

 

 

 

 

Percent of Net Sales by Type for the Three Months Ended June 30,

 

 

Direct Sales

 

Distributor

 

 

2018

 

2017

 

2018

 

2017

China

 

65%

 

65%

 

51%

 

51%

U.S.

 

6%

 

5%

 

12%

 

11%

Korea

 

4%

 

6%

 

5%

 

6%

Germany

 

3%

 

3%

 

9%

 

9%

Singapore

 

1%

 

-

 

9%

 

8%

Taiwan

 

1%

 

2%

 

7%

 

9%

All others (1)

 

20%

 

19%

 

7%

 

6%

Total

 

100%

 

100%

 

100%

 

100%

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales for the Three Months Ended June 30,

 

 

Dollar

 

Percent of Net Sales

 

 

2018

 

2017

 

2018

 

2017

China

 

$166,565

 

$146,386

 

55%

 

55%

U.S.

 

31,203

 

23,776

 

10%

 

9%

Korea

 

13,502

 

15,804

 

4%

 

6%

Germany

 

23,646

 

19,031

 

8%

 

7%

Singapore

 

20,195

 

15,097

 

7%

 

6%

Taiwan

 

16,750

 

18,110

 

6%

 

7%

All others (1)

 

32,224

 

26,020

 

10%

 

10%

Total

 

$304,085

 

$264,224

 

100%

 

100%

-15-


 

Net Sales for the Six Months Ended June 30,

 

Net Sales for the Three Months Ended March 31,

 

Direct Sales

 

Distributor

 

Direct Sales

 

Distributor

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

China

 

$104,072

 

$108,189

 

$210,684

 

$167,721

 

$52,224

 

$49,325

 

$99,325

 

$98,866

U.S.

 

8,457

 

8,461

 

47,531

 

36,514

 

3,233

 

3,685

 

30,498

 

21,100

Korea

 

7,551

 

8,958

 

18,913

 

24,406

 

5,138

 

4,077

 

8,160

 

8,885

Germany

 

5,925

 

5,170

 

42,431

 

31,284

 

3,028

 

3,105

 

17,516

 

21,605

Singapore

 

912

 

174

 

35,401

 

25,765

 

212

 

288

 

15,936

 

15,830

Taiwan

 

1,778

 

4,554

 

35,021

 

29,704

 

483

 

856

 

22,664

 

19,193

All others (1)

 

31,984

 

30,528

 

27,937

 

19,099

 

22,258

 

15,320

 

21,618

 

12,377

Total

 

$160,679

 

$166,034

 

$417,918

 

$334,493

 

$86,576

 

$76,656

 

$215,717

 

$197,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of Net Sales by Type for the Six Months Ended June 30,

 

Percent of Net Sales by Type for the Three Months Ended March 31,

 

Direct Sales

 

Distributor

 

Direct Sales

 

Distributor

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

China

 

65%

 

65%

 

50%

 

50%

 

60%

 

64%

 

46%

 

50%

U.S.

 

5%

 

5%

 

11%

 

11%

 

4%

 

5%

 

14%

 

11%

Korea

 

5%

 

5%

 

5%

 

7%

 

6%

 

5%

 

4%

 

4%

Germany

 

4%

 

3%

 

10%

 

9%

 

4%

 

4%

 

8%

 

11%

Singapore

 

1%

 

-

 

8%

 

8%

 

 

 

7%

 

8%

Taiwan

 

1%

 

3%

 

8%

 

9%

 

1%

 

1%

 

11%

 

10%

All others (1)

 

19%

 

19%

 

8%

 

6%

 

25%

 

21%

 

10%

 

6%

Total

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales for the Six Months Ended June 30,

 

Total Net Sales for the Three Months Ended March 31,

 

Dollar

 

Percent of Net Sales

 

Dollars

 

Percent of Net Sales

 

2018

 

2017

 

2018

 

2017

 

2019

 

2018

 

2019

 

2018

China

 

$314,756

 

$275,911

 

54%

 

55%

 

$151,549

 

$148,191

 

50%

 

54%

U.S.

 

55,988

 

44,975

 

10%

 

9%

 

33,731

 

24,785

 

11%

 

9%

Korea

 

26,464

 

33,363

 

5%

 

7%

 

13,298

 

12,962

 

4%

 

5%

Germany

 

48,356

 

36,454

 

8%

 

7%

 

20,544

 

24,710

 

7%

 

9%

Singapore

 

36,313

 

25,939

 

6%

 

5%

 

16,148

 

16,118

 

5%

 

6%

Taiwan

 

36,799

 

34,258

 

6%

 

7%

 

23,147

 

20,049

 

8%

 

7%

All others (1)

 

59,921

 

49,627

 

11%

 

10%

 

43,876

 

27,697

 

15%

 

10%

Total

 

$578,597

 

$500,527

 

100%

 

100%

 

$302,293

 

$274,512

 

100%

 

100%

(1) 

Represents countries with less than 3% of the total net sales each.

Contract Balances.  The timing of revenue recognition, billings, and cash collections can result in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheets. However, billing generally occurs at or near the same time as revenue recognition, resulting in limited activity related to contract assets and liabilities. Contract asset and liability balances for the periods ended June 30, 2018, and December 31, 2017 were immaterial to our condensed consolidated financial statements.

Other Practical Expedients Elected. The Company decided to make use of the following practical expedients available under ASC 606:

Sales tax excluded from the transaction price - The FASB decided to provide in ASU 2016-12 a practical expedient that permits entities to exclude from the transaction price all sales taxes that are assessed by a governmental authority and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes);

Incremental contract costs - Expense the incremental costs of obtaining a contract, when occurred, the amortization period of the assetthat the entity otherwise would have recognized is one year or less; and

-16-


Portfolio approach - This guidance specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

NOTE 8 – Commitments and Contingencies

Purchase commitments – As of June 30, 2018,March 31, 2019, we had approximately $20.8$36.3 million in non-cancelable purchase contracts related to capital expenditures, primarily related to our manufacturing facilities in Asia.  As of March 31, 2019, we also had a commitment to purchase approximately $103.0 million of wafers to be used in our manufacturing process.  These wafer purchases will occur during 2019 and 2020.

Defined Benefit Plan - We have a contributory defined benefit plan that covers certain employees in the United Kingdom.  As of June 30, 2018,March 31, 2019, the unfunded liability for this defined benefit plan was approximately $25.2$29.8 million.  We are obligated to make annual contributions, each year through December 2029, of approximately GBP 2 million (approximately $2.8$2.6 million based on a GBP: USD exchange rate of 1.4:1.3:1).  The trustees are required to review the funding position every three years, and the most recent review was carried out asin April 2019.  We should receive the outcome of the April 5, 2016.2019 review during June 2019. The outcome of a reviewfuture reviews can result in a change in the amount of the payment.

 

-14-


Contingencies – From time to time, we are involved in various legal proceedings that arise in the normal course of business. While we intend to defend any lawsuit vigorously, we presently believe that the ultimate outcome of any current pending legal proceeding will not have any material adverse effect on our consolidated financial position, cash flows or operating results. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact on our business and operating results for the period in which the ruling occurs or future periods.  Based on information available, we evaluate the likelihood of potential outcomes of all pending disputes. We record an appropriate liability when the amount of any liability associated with a pending dispute is deemed probable and reasonably estimable. In addition, we do not accrue for estimated legal fees and other directly related costs as they are expensed as incurred.  The Company is not currently a party to any pending litigation that the Company considers material.

 

Note 9 – Derivative Financial Instruments

We use derivative instruments to manage risks related to foreign currencies, interest rates and the net investment risk in our foreign subsidiaries. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Hedges of Foreign Currency Risk - We are exposed to fluctuations in various foreign currencies against our different functional currencies. We use foreign currency forward agreements to manage this exposure. At June 30, 2018,March 31, 2019, we had outstanding foreign currency forward contracts that are intended to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instruments are not designated for hedge accounting treatment in accordance with ASC 815.  There is noThe fair value of our foreign exchange hedges and therefore they are not recorded in our condensed consolidated balance sheets.  these instruments approximates zero.

The table below sets forth outstanding foreign currency forward contracts at June 30, 2018March 31, 2019 and December 31, 2017:2018:

Notional Amount

 

 

Effective Date

 

Maturity Date

 

Index*

Weighted Average Foreign Exchange Rate

 

Balance Sheet Hedge Designation

$

1,014

 

 

March 2019

 

May 2019

 

EUR/GPB

0.8637

 

Non-designated

 

3,014

 

 

March 2019

 

May 2019

 

EUR/USD

1.1271

 

Non-designated

 

8,241

 

 

March 2019

 

May 2019

 

GBP/USD

1.3038

 

Non-designated

 

30,670

 

 

March 2019

 

May 2019

 

USD/CNY

6.7339

 

Non-designated

 

617

 

 

March 2019

 

May 2019

 

USD/JPY

110.533

 

Non-designated

 

66,480

 

 

March 2019

 

May 2019

 

USD/TWD

30.78

 

Non-designated

 

500

 

 

January 2019

 

October 2019

 

USD/TWD

30.635

 

Non-designated

 

500

 

 

January 2019

 

January 2020

 

USD/TWD

30.635

 

Non-designated

 

500

 

 

January 2019

 

November 2019

 

USD/TWD

30.705

 

Non-designated

$

111,536

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

Effective Date

 

Maturity Date

 

Index*

Weighted Average Foreign Exchange Rate

 

Balance Sheet Hedge Designation

$

1,221

 

 

December 2018

 

February 2019

 

EUR/GBP

0.8981

 

Non-designated

 

12,538

 

 

December 2018

 

February 2019

 

EUR/USD

1.1479

 

Non-designated

 

8,463

 

 

December 2018

 

February 2019

 

GBP/USD

1.2785

 

Non-designated

 

44,946

 

 

December 2018

 

February 2019

 

USD/CNY

6.8738

 

Non-designated

 

844

 

 

December 2018

 

February 2019

 

USD/JPY

110.14

 

Non-designated

 

54,041

 

 

December 2018

 

February 2019

 

USD/TWD

30.559

 

Non-designated

 

300

 

 

December 2018

 

January 2019

 

USD/TWD

30.669

 

Non-designated

$

122,353

 

 

 

 

 

 

 

 

 

 

*  EUR = Euro

 

 

 

 

 

 

 

    GBP = British Pound Sterling

 

 

 

 

 

 

 

    USD = United States Dollar

 

 

 

 

 

    CNY = Chinese Yuan Renminbi

 

 

 

 

 

    JPY =  Japan Yen

 

 

 

 

 

 

 

    TWD = Taiwan dollar

 

 

 

 

 

 

 

-1715-


 

Notional Amount

 

 

Effective Date

 

Maturity Date

 

Index*

Weighted Average Fx Rate

 

Balance Sheet Hedge Designation

$

1,199

 

 

June 2018

 

August 2018

 

EUR/GPB

0.8854

 

Non-designated

 

26,760

 

 

June 2018

 

August 2018

 

EUR/USD

1.1708

 

Non-designated

 

9,817

 

 

June 2018

 

August 2018

 

GBP/USD

1.3224

 

Non-designated

 

41,127

 

 

June 2018

 

August 2018

 

USD/CNY

6.6391

 

Non-designated

 

923

 

 

June 2018

 

August 2018

 

USD/JPY

110.444

 

Non-designated

 

38,601

 

 

June 2018

 

August 2018

 

USD/TWD

30.46

 

Non-designated

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

Effective Date

 

Maturity Date

 

Index*

Weighted Average Fx Rate

 

Balance Sheet Hedge Designation

$

2,494

 

 

December 2017

 

January 2018

 

EUR/GBP

1.2009

 

Non-designated

 

10,514

 

 

December 2017

 

January 2018

 

EUR/USD

1.2009

 

Non-designated

 

10,612

 

 

December 2017

 

January 2018

 

GBP/USD

1.3541

 

Non-designated

 

31,834

 

 

December 2017

 

January 2018

 

USD/CNY

6.5343

 

Non-designated

 

1,594

 

 

December 2017

 

January 2018

 

USD/JPY

112.35

 

Non-designated

 

30,594

 

 

December 2017

 

January 2018

 

USD/TWD

29.406

 

Non-designated

 

 

 

 

 

 

 

 

 

 

 

 

*  EUR = Euro

 

 

 

 

 

 

 

    GBP = British Pound Sterling

 

 

 

 

 

 

 

    USD = United States Dollar

 

 

 

 

 

    CNY = Chinese Yuan Renminbi

 

 

 

 

 

    JPY =  Japan Yen

 

 

 

 

 

 

 

    TWD = Taiwan dollar

 

 

 

 

 

 

 

Hedges of Interest Rate and Net Investment Risk - The Company’s objectivesobjective in using interest rate derivatives areswaps and collars is to add stabilityminimize the risks associated with its floating rate debt. The Company makes use of cross currency swaps to interest expense and to managedecrease the foreign exchange risk inherent in the Company’s investment in its exposure to interest rate movements.foreign subsidiaries. To accomplish these objectives, the Company primarily uses interest rate swaps, including interest rate collars, as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterpartyinstruments detailed in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The table below, sets forth information related to the number of and the notional amount of our interest rate related derivative instruments:measured in U.S. dollar equivalents:

 

 

Number of Instruments

 

Notional Amount

 

 

 

June 30, 2018

 

December 31, 2017

 

June 30, 2018

 

 

December 31, 2017

 

Interest rate swaps and collars

 

14

 

14

 

$

220,000

 

 

$

220,000

 

 

 

Number of Instruments

 

 

Notional Amount

 

 

 

March 31, 2019

 

December 31, 2018

 

 

March 31, 2019

 

 

December 31, 2018

 

Interest rate swaps and collars

 

12

 

12

 

 

$

210,000

 

 

$

210,000

 

Cross currency swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GBP

 

1

 

 

-

 

 

 

112,753

 

 

 

-

 

EUR

 

1

 

 

-

 

 

 

21,060

 

 

 

-

 

 

The table below sets forth the fair value of the Company’s interest rate related derivative financial instruments, excluding adjustments for performance risk, if any, as well as their classification on our condensed consolidated balance sheets:

 

 

Fair Value

 

 

 

Other Current Assets

 

 

Other Assets

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2018

 

 

December 31, 2017

 

Interest rate swaps and collars

 

$

1,639

 

 

$

486

 

 

$

5,530

 

 

$

3,398

 

 

 

Other Current Assets

 

 

Other Assets

 

 

Other Liabilities

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

March 31, 2019

 

 

December 31, 2018

 

 

March 31, 2019

 

 

December 31, 2018

 

Interest rate swaps and collars

 

$

1,617

 

 

$

1,936

 

 

$

1,472

 

 

$

2,795

 

 

$

-

 

 

$

-

 

Cross currency swaps

 

 

-

 

 

 

-

 

 

 

859

 

 

 

-

 

 

 

3,129

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The tables below sets forth the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:

-18-


 

Amount of Gain or (Loss) Recognized in OCI on Derivative

 

 

Location of Gain or (Loss) Reclassified from

 

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Net Income

 

 

Amount of Gain or (Loss) Recognized in OCI on Derivative

 

 

Location of Gain or (Loss) Reclassified from Accumulated OCI into

Income

 

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Net Income

 

 

Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from

Effectiveness Testing)

 

Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Derivatives Designated as Hedging Instruments

 

June 30, 2018

 

 

June 30, 2017

 

 

Accumulated OCI into

Income

 

June 30, 2018

 

 

June 30, 2017

 

Derivative Instruments Designated as Hedging Instruments

 

Amount of Gain or (Loss) Recognized in OCI on Derivative

 

 

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Net Income

 

 

Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 

 

Location of Gain or (Loss) Reclassified from Accumulated OCI into

Income

 

 

Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from

Effectiveness Testing)

2019

 

 

2018

 

 

 

2019

 

 

2018

 

 

 

2019

 

 

2018

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

��

 

Interest rate swaps and collars

 

$

1,103

 

 

$

(817

)

 

Interest expense

 

$

175

 

 

$

(170

)

 

$

(1,090

)

 

$

2,404

 

 

Interest expense

$

(469

)

 

$

52

 

 

N/A

$

-

 

 

$

-

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and collars

 

$

3,507

 

 

$

(544

)

 

Interest expense

 

$

227

 

 

$

(423

)

Cross currency swaps

 

 

(2,350

)

 

 

-

 

 

N/A

 

 

-

 

 

 

-

 

 

Interest Income

 

 

455

 

 

 

-

 

 

We estimate that $1.6 million of net derivative gains included in accumulated other comprehensive income (“AOCI”) as of June 30, 2018March 31, 2019 will be reclassified into earnings within the following 12 months. No gains or losses were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during three or six months ended June 30, 2018March 31, 2019 or 2017.

2018.

Derivatives Not Designated as Hedging

 

Amount of Gain or (Loss) Recognized in Net Income

 

 

Location of Gain or (Loss) Recognized in Net

Instruments

 

June 30, 2018

 

 

June 30, 2017

 

 

Income

 

Amount of Gain or (Loss) Recognized in Net Income

 

 

Location of Gain or (Loss) Recognized in Net Income

Derivative Instruments Not Designated as Hedging Instruments

 

 

 

Amount of Gain or (Loss) Recognized in Net Income

 

March 31,

 

2019

 

 

2018

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(6,764

)

 

$

(70

)

 

Foreign currency (loss) gain, net

 

$

430

 

 

$

1,394

 

 

Foreign currency loss, net

Six Months Ended

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(5,370

)

 

$

(70

)

 

Foreign currency (loss) gain, net

 

At June 30, 2018    As of March 31, 2019 and December 31, 2017, the fair value of derivatives in a net asset position, which includes accrued interest but excludes any adjustments for nonperformance risk, related to these agreements was $7.2 million and $3.9 million, respectively.  As of June 30, 2018, and December 31, 2017, the Company had not posted any collateral related to these agreements.

-16-


NOTE 10 – Leases

The Company leases certain assets used in its business, including land, buildings and equipment.  These leased assets are used for operational and administrative purposes.

The components of lease expense are set forth in the table below:

 

 

Three Months Ended

 

 

March 31, 2019

Operating lease expense

 

$

3,704

Finance lease expense:

 

 

 

Amortization of assets

 

 

244

Interest on lease liabilities

 

 

15

Short-term lease expense

 

 

36

Variable lease expense

 

 

618

Total lease expense

 

$

4,617

The table below sets forth supplemental balance sheet information related to leases:

March 31, 2019

Operating leases:

Operating lease ROU assets

$64,277

Current operating lease liabilities

11,738

Noncurrent operating lease liabilities

34,817

Total operating lease liabilities

$46,555

Finance leases:

Finance lease ROU assets

$3,395

Accumulated amortization

(1,191)

Finance lease ROU assets, net

$2,204

Current finance lease liabilities

$1,012

Non-current finance lease liabilities

818

Total finance lease obligations

$1,830

Weighted average remaining lease term (in years):

Operating leases

5.0

Finance leases

1.9

Weighted average discount rate:

Operating leases

3.8%

Finance leases

3.7%


-17-


The table below sets forth supplemental cash flow and other information related to leases:

Three Months Ended

March 31, 2019

Cash paid for the amounts included in the measurements of lease liabilities:

Operating cash outflows from operating leases

$4,277

Operating cash outflows from finance leases

15

Financing cash outflow from finance leases

293

ROU assets obtained in exchange for lease liabilities incurred:

Operating leases

86

The table below sets forth information about lease liability maturities:

 

 

March 31, 2019

 

 

Operating Leases

 

Finance Leases

Remainder of 2019

 

$10,079

 

$821

2020

 

12,756

 

922

2021

 

8,765

 

139

2022

 

7,486

 

2023

 

4,662

 

2024

 

2,491

 

2025 and thereafter

 

5,028

 

Total lease payments

 

51,267

 

1,882

Less: imputed interest

 

(4,712)

 

(52)

Total lease obligations

 

46,555

 

1,830

Less: current obligations

 

(11,738)

 

(1,012)

Long-term lease obligations

 

$34,817

 

$818

NOTE 1011 – Employee Benefit Plans  

Deferred Compensation

We maintain a Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) for executive officers, key employees and members of the Board of Directors. The Deferred Compensation Plan allows eligible participants to defer the receipt of eligible compensation, including equity awards, until designated future dates. We offset our obligations under the Deferred Compensation Plan by investing in the actual underlying investments. These investments are classified as trading securities and are carried at fair value. At June 30, 2018March 31, 2019 and December 31, 2017,2018, these investments totaled approximately $9.5$10.1 million and $8.8$10.6 million, respectively. All gains and losses in these investments are materially offset by corresponding gains and losses in the Deferred Compensation Plan liabilities.

 

NOTE 1112 Related Parties

We conduct business with a related party company, Lite-On Semiconductor Corporation and its subsidiaries and affiliates (collectively, “LSC”), and Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, “Nuvoton”). LSC is our largest stockholder, owning approximately 16%15% of our outstanding Common Stock as of June 30,March 31, 2018019, and is a member of the Lite-On Group of companies. Raymond Soong, the Chairman of our Board of Directors, is the Chairman of LSC, and is the Chairman of Lite-On Technology Corporation (“LTC”), a significant shareholder of LSC. C.H. Chen, our former President and Chief Executive Officer and currently the Vice Chairman of our Board of Directors, is also Vice Chairman of LSC and a board member of LTC. Dr. Keh-Shew Lu, our President and Chief Executive Officer and a member of our Board of Directors, is a board member of LTC, and a board member of Nuvoton. We consider our relationships with LSC and Nuvoton to be mutually beneficial, and we plan to continue our strategic alliance with LSC and Nuvoton.  We purchase wafers from Nuvoton for use in our production process.

We also conduct business with Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (collectively, “Keylink”). Keylink is our 5% joint venture partner in our Shanghai assembly and test facilities.  We sell products to, and purchase inventory from Keylink. In addition, our subsidiaries in China lease their manufacturing facilities in Shanghai from, and subcontract a portion of our manufacturing process (metal plating and environmental services) to, Keylink. We also pay afees for plating and rental services and consulting fee to Keylink. The aggregate amounts paid to Keylink for the three months ended June 30,March 31, 2019 and 2018 and 2017 were approximately $4.2$3.9 million and $4.5 million, respectively. The aggregate amounts for these services for the six months ended June 30, 2018 and 2017 were approximately $8.8 million and $7.9 million, respectively. In addition, Chengdu Ya Guang Electronic Company Limited (“Ya Guang”)

-18-


is our 2% joint venture partner in one of our Chengdu assembly and test facilities and is our 5% joint venture partner in our other Chengdu assembly and test facility; however, we have no material transactions with Ya Guang. We also purchase materials from Jiyuan Crystal

-19-


Photoelectric Frequency Technology Ltd., a frequency control product manufacturing company in which we have made an equity investment and account for that investment using the equity method of accounting.     

The Audit Committee of the Board reviews all related party transactions for potential conflict of interest situations on an ongoing basis, all in accordance with such procedures as the Audit Committee may adopt from time to time.

The table below sets forth net sales to and purchases from related parties:

Three Months Ended

 

 

Six Months Ended

 

Three Months Ended

 

June 30,

 

 

June 30,

 

March 31,

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2019

 

 

2018

 

LSC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

225

 

 

$

504

 

 

$

592

 

 

$

735

 

$

188

 

 

$

258

 

Purchases

$

4,954

 

 

$

7,142

 

 

$

11,422

 

 

$

13,161

 

$

4,412

 

 

$

6,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nuvoton

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

$

2,359

 

 

$

3,376

 

 

$

5,413

 

 

$

6,285

 

$

1,267

 

 

$

3,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keylink

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

2,257

 

 

$

2,413

 

 

$

4,078

 

 

$

4,235

 

$

2,815

 

 

$

1,821

 

Purchases

$

881

 

 

$

943

 

 

$

1,739

 

 

$

2,021

 

$

605

 

 

$

858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JCP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

$

97

 

 

$

321

 

 

$

287

 

 

$

522

 

$

160

 

 

$

190

 

The table below sets forth accounts receivable from, and accounts payable to, related parties:

 

June 30,

 

 

December 31,

 

March 31,

 

 

December 31,

 

2018

 

 

2017

 

2019

 

 

2018

 

LSC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

$

335

 

 

$

342

 

$

188

 

 

$

286

 

Accounts payable

$

3,124

 

 

$

3,308

 

$

2,923

 

 

$

2,696

 

Keylink

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

$

3,361

 

 

$

4,089

 

$

4,583

 

 

$

6,264

 

Accounts payable

$

4,578

 

 

$

5,016

 

$

3,796

 

 

$

4,656

 

Nuvoton

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

701

 

 

$

1,121

 

$

313

 

 

$

1,939

 

JCP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

145

 

 

$

317

 

$

178

 

 

$

151

 

NOTE 12 – Restructuring Costs

In February 2017, the Company announced its plan to transfer its wafer fabrication operation located in Lee’s Summit, MO.  (“KFAB”) to other Company-owned wafer fabrication plants and external foundries. The Company ceased production operations at KFAB late in third quarter 2017 and vacated the premises in November 2017. Employees were provided retention and standard severance packages.  During the six months ended June 2017, the Company received $6.0 million of insurance proceeds as a result of the fires sustained at the KFAB facility during 2016 of which $4.2 million is recorded in Cost of Goods Sold and $1.8 million is recorded in Other Income.  During the six months ended June 30, 2018, the Company received $2.9 million of insurance proceeds as a result of the aforementioned fire.  This $2.9 million is recorded in other income.  

The table below sets forth the restructuring costs, recorded in restructuring expense in the condensed consolidated statements of operations, incurred during the three and six months ended June 30, 2018 and 2017:                                                        

-20-


 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Early supply contract termination

$

-

 

 

$

(246

)

 

$

-

 

 

$

1,985

 

Cost of equipment relocation

 

526

 

 

 

72

 

 

 

220

 

 

 

72

 

Asset retirement obligation

 

-

 

 

 

234

 

 

 

-

 

 

 

234

 

Retention costs

 

-

 

 

 

1,778

 

 

 

(14

)

 

 

1,778

 

 

$

526

 

 

$

1,838

 

 

$

206

 

 

$

4,069

 

In connection with the KFAB closure, during the six months ended June 30, 2017, the Company also recorded separation costs of $0.5 million in cost of goods sold, $0.09 million in selling, general and administrative expense and $0.02 million in research and development expense.

The table below sets forth the costs accrued and paid related to the KFAB restructuring:

 

Retention Costs

 

 

Equipment Relocation

 

 

Total

 

Beginning balance, January 1, 2018

$

659

 

 

$

645

 

 

$

1,304

 

Costs accrued

 

(14

)

 

 

526

 

 

 

512

 

Restructuring costs paid

 

(645

)

 

 

(1,171

)

 

 

(1,816

)

Balance at June 30, 2018

$

-

 

 

$

-

 

 

$

-

 

 This asset retirement obligation is for the estimated amounts to be paid to contractors to remediate the KFAB facility upon vacating the property.  The table below sets forth the asset retirement obligation related to the KFAB restructuring:

Asset retirement obligation, January 1, 2018

 

 

 

 

$

389

 

Reversal of accrual

 

 

 

 

 

(389

)

Asset retirement obligation, June 30, 2018

 

 

 

 

$

-

 

In connection with the asset retirement obligation as of June 30, 2018, the offsetting asset has been fully amortized.      

 

 

NOTENote 13 - Subsequent Events    Event

In July 2018, our 60% owned subsidiary, ERIS Technology Corporation (“Eris”), acquired from Yea Shin Technology Corporation ("Yea Shin") and its shareholders 60%

On April 1, 2019, the Company closed the previously announced acquisition of Yea Shin’s outstanding shares for 193.9 million Taiwan dollars (or approximately $6.4 million) in cash. Yea Shin operates aTexas Instruments’ 200mm wafer fabrication facility and operations located in Tao Yuan county, Taiwan that was established in May 1993. The purpose of the acquisition is to expand the current wafer production capacity of Eris.

Eris also entered into a property purchase agreement with Yong Xiang Development Corporation ("Yong Xiang") to purchase the plant and facility leased by it to Yea Shin. The total purchase price of the property is approximately 776 million Taiwan dollars (or approximately $25.5 million). Eris expects to complete the purchase of the facility no later than December 31, 2020.

Eris has leased from Yong Xiang the plant and facility until the purchase has been completed. The monthly lease payment is approximately 1.2 million Taiwan dollars (or approximately $0.04 million) for the first 8.5 months and approximately 1.0 million Taiwan dollars (or approximately $0.03 million) for the remaining period. Total lease commitment is approximately $1.1 million assuming the lease term is through December 31, 2020.

Greenock, Scotland.  

 

-2119-


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as identified under the heading “Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995” herein. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by our management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. We undertake no obligation to publicly release the results of any revisions to our forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “Diodes,” the “Company,” “we,” “us” and “our” refer to Diodes Incorporated and its subsidiaries. Dollar amounts and share amounts are presented in thousands, except per share amounts, unless otherwise noted.

 

This management’s discussion should be read in conjunction with the management’s discussion included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 (“Form 10-K”), previously filed with Securities and Exchange Commission (“SEC”) on February 20, 2018.21, 2019.

Factors Relevant to Our Results of Operations for the Three Months Ended June 30, 2018

During the second quarter of 2018, revenue was a record high of $304.1 million, an increase of 15.1% from the $264.2 million in the second quarter of 2017 and an increase of 10.8% from the $274.5 million in the first quarter of 2018;

Gross profit was a record high of $107.3 million, compared to $90.1 million of gross profit in the second quarter of 2017 and $98.6 million in the first quarter of 2018;

Gross profit margin was 35.3%, compared to gross profit margin of 34.1% in the second quarter of 2017 and 35.9% in the first quarter of 2018;

Net income was $25.1 million, or $0.49 per diluted share, compared to net income of $13.2 million, or $0.26 per diluted share, in the first quarter of 2017 and net income of $18.5 million, or $0.37 per diluted share, in the first quarter 2018; and,

Cash flow from operations was $34.4 million while net cash flow was negative $30.0 million, which includes $21.4 million of capital expenditures and the pay down of $36.0 million of long-term debt.

Outlook and Factors Relevant to Our Ongoing Results of Operations

Looking ahead to the third quarter of 2018, we expect to extend our growth momentum with continued strength across our target geographies and end markets; and,

Most of our products are manufactured in China. In the second quarter of 2018, approximately 10% of our products were imported into the United States. The Office of the United States Trade Representative (“USTR”) has implemented duties of 25% on $34 billion, and has proposed duties on an additional $16 billion of products, imported into the U.S. from China. These duties are a response to what the USTR considers to be certain unfair trade practices by China. The Company has reviewed the most recent USTR list of proposed duties issued on June 15, 2018 and has determined that a number of the Company’s products being imported from China to the U.S. are subject to new duties.  The USTR has proposed tariffs on an additional $200 billion of products manufactured in China and imported into the United States. These tariffs are not yet in effect and remain subject to further review, including a comment process and public hearing. After completion of this process, the USTR will issue a final determination on the products that would be subject to additional duties. The likelihood and timing of such proposed new duties being implemented is uncertain, as the U.S. and China continue to negotiate the issues. Management is currently assessing the potential impacts of the new duties on the Company’s products if they are ultimately implemented by USTR.

Overview

We are a leading global manufacturer and supplier of high-quality, application-specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets. For detailed information, see Note 1 – Nature of Operations, Basis of

-22-


Presentation, and Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates, included in the condensed consolidated financial statements in Item 1 above.  Our products are sold primarily throughout Asia, North America and Europe. We believe that our focus on application-specific standard products utilizing innovative, highly efficient packaging and cost-effective process technologies, coupled with our collaborative, customer-focused product development, provides us with a meaningful competitive advantage relative to other semiconductor companies.

Factors Relevant to Our Results of Operations for the Three Months Ended June 30,March 31, 2019

During the first quarter of 2019, net sales were $302.3 million, an increase of 10.1% from the $274.5 million in the first quarter of 2018 due to continued market share gains, and a decrease of 3.9% from the $314.4 million in the fourth quarter of 2018;

Gross profit was $112.4 million, compared to $98.6 million of gross profit in the first quarter of 2018 and 2017$114.2 million in the fourth quarter of 2018;

Gross profit margin was 37.2%, compared to gross profit margin of 35.9% in the first quarter of 2018 and 36.3% in the fourth quarter of 2018;

Net income was a record $31.7 million, or $0.62 per diluted share, compared to net income of $18.5 million, or $0.37 per diluted share, in the first quarter of 2018 and net income of $29.5 million, or $0.58 per diluted share, in the fourth quarter 2018; and

Cash flow from operations was $69.9 million and net cash flow was $60.4 million, which includes $18.6 million of capital expenditures.

Recent Developments

April 1,2019, we announced the closing of the previously announced agreement to acquire Texas Instruments’ (“TI”) wafer fabrication facility and operation located in Greenock, Scotland (“GFAB”). We are in the process of installing Diodes’ processes to fully use the additional 8” capacity and capability of GFAB, which we believe will support our growth expansion initiatives and future cost reduction initiatives.

-20-


Results of Operations for the Three Months Ended March 31, 2019 and 2018

The following table sets forth the percentage that certain items in the consolidated statements of operations bear to net sales.

Percent of  Net Sales

 

Percent of  Net Sales

 

Three Months Ended June 30,

 

Three Months Ended March 31,

 

2018

 

 

2017

 

2019

 

 

2018

 

Net sales

 

100

%

 

 

100

%

 

100

%

 

 

100

%

Cost of goods sold

 

(65

)

 

 

(66

)

 

(63

)

 

 

(64

)

Gross profit

 

35

 

 

 

34

 

 

37

 

 

 

36

 

Total operating expense

 

23

 

 

 

25

 

 

23

 

 

 

26

 

Income from operations

 

12

 

 

 

9

 

 

14

 

 

 

10

 

Total other expense

 

-

 

 

 

(2

)

 

-

 

 

 

-

 

Income before income taxes and noncontrolling interest

 

12

 

 

 

7

 

 

14

 

 

 

10

 

Income tax provision

 

(4

)

 

 

(2

)

 

(3

)

 

 

(3

)

Net income

 

8

 

 

 

5

 

 

11

 

 

 

7

 

Net income attributable to common stockholders

 

8

 

 

 

5

 

 

11

 

 

 

7

 

The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended June 30, 2018,March 31, 2019, compared to the three months ended June 30, 2017.March 31, 2018. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

(dollars in thousands)

Three Months Ended

 

Three Months Ended

 

June 30,

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase/(Decrease)

 

 

% Change

 

2019

 

 

2018

 

 

Increase/(Decrease)

 

 

% Change

 

Net sales

$

304,085

 

 

$

264,224

 

 

$

39,861

 

 

 

15.1

%

$

302,293

 

 

$

274,512

 

 

$

27,781

 

 

 

10.1

%

Cost of goods sold

 

196,817

 

 

 

174,085

 

 

 

22,732

 

 

 

13.1

%

 

189,882

 

 

 

175,917

 

 

 

13,965

 

 

 

7.9

%

Gross profit

 

107,268

 

 

 

90,139

 

 

 

17,129

 

 

 

19.0

%

 

112,411

 

 

 

98,595

 

 

 

13,816

 

 

 

14.0

%

Total operating expense

 

69,424

 

 

 

66,311

 

 

 

3,113

 

 

 

4.7

%

 

70,288

 

 

 

71,655

 

 

 

(1,367

)

 

 

(1.9

%)

Interest income

 

443

 

 

 

308

 

 

 

135

 

 

 

43.8

%

 

875

 

 

 

514

 

 

 

361

 

 

 

70.2

%

Interest expense

 

(2,544

)

 

 

(3,447

)

 

 

(903

)

 

 

(26.2

%)

 

(2,145

)

 

 

(2,757

)

 

 

(612

)

 

 

(22.2

%)

Foreign currency gain (loss), net

 

300

 

 

 

(1,628

)

 

 

(1,928

)

 

 

(118.4

%)

Foreign currency loss, net

 

(64

)

 

 

(3,029

)

 

 

(2,965

)

 

 

(97.9

%)

Other income

 

377

 

 

 

802

 

 

 

(425

)

 

 

(53.0

%)

 

1,245

 

 

 

4,635

 

 

 

(3,390

)

 

 

(73.1

%)

Income tax provision

 

10,753

 

 

 

6,039

 

 

 

4,714

 

 

 

78.1

%

 

10,298

 

 

 

7,783

 

 

 

2,515

 

 

 

32.3

%

Net sales increased approximately $39.9$27.8 million for the three months ended June 30, 2018,March 31, 2019, compared to the same period last year primarily due to strong growthcontinued market share gains.  We experienced record net sales in Europe and record net sales in both the automotive and industrial end markets.  Net sales in the automotive market increased 23% for the three months ended March 31, 2019, when compared to the same period of 2018.  For the three months ended March 31, 2019, combined net sales in the automotive and industrial markets represented 39% of total sales.  Excluding the frequency control business, our Pericom business reached record levels of net sales in the first three months of 2019.  In terms of our end markets, which contributed to new record revenue levels being achieved across all regions.our net sales were 29% industrial, consumer and communications each 23%, computing 15% and automotive 10%,

Cost of goods sold increased approximately $22.7$14.0 million for the three months ended June 30, 2018,March 31, 2019, compared to the same period last year.  As a percent of sales, cost of goods sold was 65%62.8% for the three months ended June 30, 2018March 31, 2019 compared to 66%64.1% for the same period last year. Average unit cost increased approximately 25.2%8% for the three months ended June 30, 2018,March 31, 2019, compared to the same period last year. For the three months ended June 30, 2018,March 31, 2019, gross profit increased approximately 19.0%14.0% when compared to the same period last year. Gross profit margin for the three month periods ended June 30,March 31, 2019 and 2018 was 37.2% and 2017 was 35.3% and 34.1%35.9%, respectively. The increase in gross profit margin was related to favorable product mix, increasedhigher revenue contribution from the Pericom productsautomotive and industrial markets as well improved capacity utilization.as serial-connectivity products, which typically have higher gross profit margins.

Operating expenses for the three months ended June 30, 2018 increasedMarch 31, 2019, decreased approximately $3.1$1.4 million, or 4.7%1.9%, compared to the same period last year.three months ended March 31, 2018. Selling, general and administrative expenses (“SG&A”) increaseddecreased approximately $2.5$3.5 million and research and development expenses (“R&D”) increased approximately $2.3$2.0 million. Amortization of acquisition related intangibles was

-23-


relatively flat.decreased $0.3 million. SG&A, as a percentage of sales, was 13.9%14.5% and 15.0%17.2% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. R&D, as a percentage of sales, was 7.3% and 7.5%7.4% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively.  

-21-


Interest income increased 43%70.2% for the three months ended June 30, 2018March 31, 2019, compared to the same period last year, due to the investment of excess cash in short-term investments.interest received on cross currency swaps.  Interest expense decreased 26.2%22.2% for the three months ended June 30, 2018March 31, 2019, compared to the same period last year. The decrease in interest expense for the three months ended June 30, 2018March 31, 2019 was due to lower levels of debt partially offset by higher interest rates on the floating rate portion of the borrowings used to effect the Pericom acquisition.acquisition in the fourth quarter of 2015. Foreign currency gain (loss),loss, net was a net gainloss of $0.3$0.06 million for the three months ended June 30, 2018March 31, 2019, compared to a net loss of ($1.6)$3.1 million for the same period last year, reflecting the effectiveness of our currency hedges partially offset by losses due to stronger European and Great Britain currencies and the Taiwan dollar, when compared to the U.S. dollar.hedges.

We recognized an income tax expense of approximately $10.8$10.3 million and $6.0$7.8 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The increase in income taxes for 20182019 compared to 2017 is2018 was primarily attributable to thean increase in pretax net income.

Results of Operations for the Six Months Ended June 30, 2018 and 2017

 

Percent of  Net Sales

 

Six Months Ended June 30,

 

2018

 

2017

Net sales

100%

 

100%

Cost of goods sold

(64)

 

(67)

Gross profit

36

 

33

Total operating expense

25

 

26

Income from operations

11

 

7

Total other expense

-

 

(3)

Income before income taxes and noncontrolling interest

11

 

4

Income tax provision

(3)

 

(1)

Net income

8

 

3

Net income attributable to common stockholders

8

 

3

The following table and discussion explains in greater detail our consolidated operating results and financial condition for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

(dollars in thousands)

 

Six Months Ended

 

June 30,

 

 

 

 

 

2018

 

2017

 

Increase/(Decrease)

 

% Change

Net sales

$578,597

 

$500,527

 

$78,070

 

15.6%

Cost of goods sold

372,734

 

336,477

 

36,257

 

10.8%

Gross profit

205,863

 

164,050

 

41,813

 

25.5%

Total operating expense

141,079

 

130,865

 

10,214

 

7.8%

Interest income

957

 

603

 

354

 

58.7%

Interest expense

(5,301)

 

(6,932)

 

(1,631)

 

(23.5%)

Foreign currency gain (loss), net

(2,729)

 

(5,422)

 

(2,693)

 

(49.7%)

Other income

5,012

 

531

 

4,481

 

843.9%

Income tax provision

18,536

 

6,599

 

11,937

 

180.9%

Net sales increased approximately $78.1 million for the six months ended June 30, 2018, compared to the same period last year, due to strong growth in the automotive and industrial markets, contributing to record revenue levels being reached in Europe and North America.

Cost of goods sold increased approximately $36.3 million for the six months ended June 30, 2018, compared to the same period last year.  As a percent of sales, cost of goods sold was 64% for the six months ended June 30, 2018 compared to 67% for the same period last year. Average unit cost increased approximately 19.2% for the six months ended June 30, 2018, compared to the same period last year. For the six months ended June 30, 2018, gross profit increased approximately 25.5% when compared to the same period last year. Gross profit margin for the three month periods ended June 30, 2018 and 2017 was 35.6% and 32.8%,

-24-


respectively.  The increase in gross profit margin was related to favorable product mix, increased contribution from the Pericom products as well improved capacity utilization.

Operating expenses for the six months ended June 30, 2018 increased approximately $10.2 million, or 7.8%, compared to the same period last year. SG&A increased approximately $9.9 million and R&D increased approximately $4.4 million.  The increase in SG&A was partially driven by $2.6 million of expenses related to officer retirements, including cash payments and the costs from the acceleration of share-based vesting. Amortization of acquisition related intangibles was relatively flat. SG&A, as a percentage of sales, was 15.4% and 15.9% for the six months ended June 30, 2018 and 2017, respectively. R&D, as a percentage of sales, was 7.3% and 7.6% for the six months ended June 30, 2018 and 2017, respectively.  

Interestpre-tax book income, increased $0.4 million for the six month ended June 30, 2018 compared to the same period last year, due to higher amounts of cash invested on a short-term basis.  The decrease in interest expense for the six months ended June 30, 2018 was due to lower levels of debt partially offset by higher interest rates on the floating rate portion of the borrowings to effect the Pericom acquisition.  Expense related to foreign currency decreased $2.7 million, reflecting the effectiveness of our currency hedges.

We recognized an income tax expense of approximately $18.5 million and $6.6 million for the six months ended June 30, 2018 and 2017, respectively. The increasea net decrease in income taxes for 2018 compared to 2017 is attributable to the increase in pretax net income.unfavorable U.S. permanent differences.

Financial Condition

 

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under our credit facilities.

Short-term debt

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $123.8 million. The amount available under the Asia credit facilities is reduced by current borrowings of $12.3 million and letters of credit of $0.4 million. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, repayable on demand, terminable by the lender at any time and contain no restrictive covenants.  These credit facilities bear interest at LIBOR or similar indices plus a specified margin.  Interest payments are due quarterly on outstanding amounts under the credit lines. In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $4.3 million on a long-term basis in order to make an investment.  The $4.3 million loan matures in 2033, but will be increasing over time to as much as $19.7 million as the amount of investment grows.

Long-term debt

We currently have a U.S. banking credit facility (the “U.S. Credit Facility”) under which we may draw up to $250 million on a revolving basis, in addition to a $250 million term loan included in the U.S. Credit Facility.loan.  The U.S. Credit Facility matures October 26, 2021.  The remaining portion of the term loan portion of the U.S. Credit Facility is repayable in part through quarterly installments that increase over time from $4.7$6.3 million in the first three quarters of 20182019 to $9.4 million per quarter in the final year of the U.S. Credit Facility. We may, from time to time, request increases in the aggregate commitments under the U.S. Credit Facility of up to $200 million, subject to the lenders electing to increase their commitments or by means of the addition of new lenders, and subject to at least half of each increase in aggregate commitments being in the form of term loans, with the remaining amount of each increase being an increase in the amount of the revolving portion of the U.S. Credit Facility.  The U.S. Credit Facility bears interest at LIBOR or similar indices plus a specified margin based on our consolidated leverage ratio.  The U.S. Credit Facility contains certain financial and non-financial covenants, including, but not limited to, a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases).  At June 30, 2018, we owed $182.9 millionThe obligations of the Company and the other borrowers under the U.S. Credit Facility $47.5 millionare secured by substantially all of which was drawn under the revolving portionassets of the Company, including controlling interests in its first-tier subsidiaries, and $135.4 millionby specified assets of which wascertain of its subsidiaries.  


-22-


The details of our borrowings outstanding under the term loan.

In addition to our U.S. Credit Facility, we maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $116.9 million as of June 30, 2018. As of June 30, 2018, in addition to the U.S. Credit Facility, our Asia subsidiaries had unused and available credit lines of up to an aggregate of approximately $112.2 million, with several financial institutions. In some cases, our foreign credit linesMarch 31, 2019 are unsecured, uncommitted and may be repayable on demand.  Our foreign credit lines include two Taiwanese credit facilities that are collateralized by assets. Our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin. At June 30, 2018, $4.7 million was outstanding on these credit lines.  In addition to our credit lines, during the second quarter of 2018, our 60% owned subsidiary, ERIS Technology Corporation, borrowed $4.3 million on a long-term basis in order to make an investment.  That investment was madeset forth in the third quarter of July 2018.  The $4.3 million loan matures in 2033, but will be increasing over time as the amount of investment grows. (See Note 13 - Subsequent Events in the “Notes to the Condensed Consolidated Financial Statements” for additional information related to this investment).table below:

Description

 

Amount outstanding

 

Interest Rate

 

Maturity Date

Short-term debt:

 

 

 

 

 

 

Foreign credit lines

 

$12,330

 

Libor or other similar indices + a specified margin

 

Various during 2019

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

Notes payable to Taiwan Bank

 

4,336

 

1.3%

 

June 2033

U.S. Credit facility;

 

 

 

 

 

 

Revolving portion

 

94,500

 

Libor + a specified margin

 

October 2021

Term portion

 

118,250

 

Libor + a specified margin

 

October 2021

Total long-term debt

 

217,086

 

 

 

 

Less: Current portion of long-term debt

 

(28,403)

 

 

 

 

Less: Unamortized debt issuance costs

 

(1,305)

 

 

 

 

Total long-term debt, net of current portion

 

$187,378

 

 

 

 

Our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations. At June 30, 2018March 31, 2019 and December 31, 2017,2018, our working capital was $380.8$524.8 million and $415.2$480.8 million, respectively. We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to cover cash needs for working capital and capital expenditures for at least the next 12 months.  

Capital expenditures for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 were $47.5$16.3 million and $57.7$24.7 million, respectively.  For the first sixthree months of 20182019 capital expenditures were approximately 8.2%5.4% of our net sales, which is at the high end ofin-line with our capital spending target range of 5% to 9% of net sales.  This increase in capital expenditures was to put capacity in place for the expected strong revenue growth in the remainder of 2018.

-25-


Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European subsidiaries.  As of June 30, 2018,March 31, 2019, our foreign subsidiaries held approximately $149.7$137.6 million of cash, cash equivalents and investments of which approximately $88.3$81.5 million would be subject to a potential non-U.S. withholding tax if distributed outside the country in which the cash is currently held.  Of this total $79.9of $137.6 million, $70.5 million is held in China.

As of June 30, 2018,March 31, 2019, we had short-term investments totaling $7.2$6.8 million. These investments are highly liquid with maturity dates greater than three months at the date of purchase. We generally can access these investments in a relatively short time frame but in doing so we generally forfeit all earned and future interest income.

Share Repurchase Program

During 2015, our Board of Directors (“Board”) approved a stock repurchase program.  The Board authorized the repurchase of up to an aggregate of $100.0 million of our outstanding Common Stock.  The share repurchase program is expected to continue through the end of 2019 unless extended or shortened by the Board.  Currently there is approximately $62.3 million available for repurchase of outstanding Common Stock under this publicly announced repurchase program.  No shares were repurchased during the three months ended June 30, 2018.March 31, 2019.  


-23-


Discussion of Cash Flow

Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and our credit facilities. Our cash and cash equivalents decreasedincreased from $203.8$241.1 million at December 31, 20172018 to $152.4$301.2 million at June 30, 2018.March 31, 2019.  

The table below sets forth a summary of the condensed consolidated statements of cash flows:

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

Change

 

Cash flows from operating activities

$

88,381

 

 

$

65,437

 

 

$

22,944

 

Net cash and cash equivalents used in investing activities

 

(53,627

)

 

 

(30,150

)

 

 

(23,477

)

Net cash and cash equivalents used in financing activities

 

(83,430

)

 

 

(23,409

)

 

 

(60,021

)

Effect of exchange rate changes on cash and cash equivalents

 

(2,753

)

 

 

6,331

 

 

 

(9,084

)

Net (decrease) increase in cash and cash equivalents,

  including restricted cash

$

(51,429

)

 

$

18,209

 

 

$

(69,638

)

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

Change

 

Net cash flows provided by operating activities

$

69,889

 

 

$

53,959

 

 

$

15,930

 

Net cash and cash equivalents used in investing activities

 

(17,152

)

 

 

(29,435

)

 

 

12,283

 

Net cash and cash equivalents provided by (used in) financing activities

 

9,627

 

 

 

(49,842

)

 

 

59,469

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,890

)

 

 

3,971

 

 

 

(5,861

)

Net increase (decrease) in cash and cash equivalents, including restricted cash

$

60,474

 

 

$

(21,347

)

 

$

81,821

 

Operating Activities

Cash flows from operating activities for the six months ended June 30, 2018 was $88.4 million.  Cash flows from operating activities resulted from net income of $44.2 million, depreciation and amortization of $51.3 million, share-based compensation of $11.1 million and a decrease in noncash working capital accounts of $17.6 million. Net cash flows provided by operating activities for the sixthree months ended June 30, 2017March 31, 2019 was $65.4$69.9 million.  For the six months ended June 30, 2017, netNet cash flowflows provided by operating activities resulted from net income of $15.4$31.7 million, depreciation and amortization of $46.4intangible assets of $26.6 million, share-based compensation of $9.0$4.5 million and a decreasean increase in noncash working capital accounts of $5.7$7.3 million. Net cash flows from operating activities for the three months ended March 31, 2018 was $54.0 million.  Net cash flows provided by operating activities resulted from net income of $18.5 million, depreciation and amortization of $25.2 million, share-based compensation of $6.3 million and an increase in noncash working capital accounts of $5.5 million.

Investing Activities

Net cash and cash equivalents used in investing activities was $53.6$17.2 million for the sixthree months ended June 30, 2018.March 31, 2019. Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $53.0$18.6 million during the sixthree months ended June 30, 2018.March 31, 2019, partially offset by net proceeds received by the sale of short-term investments of $0.8 million. Net cash and cash equivalents used in investing activities was $30.2$29.4 million for the sixthree months ended June 30, 2017,March 31, 2018. Net cash and cash equivalents used in investing activities for the three months ended March 31, 2018, was primarily fordue to the purchase of property, plant and equipment of $43.9$31.6 million, and for purchases of short-term investments of $9.8 million during the six months ended June 30, 2017, partially offset by $24.1$1.0 million of proceeds received upon the maturity of short-term investments.

Financing Activities

Net cash and cash equivalents provided by financing activities was $9.6 million for the three months ended March 31, 2019. Net cash and cash equivalents provided in the three months ended March 31, 2019 consisted primarily of proceeds from the issuance of Common Stock related to stock option exercises of $6.7 million and increases under our line of credit and short-term debt of $3.6 million.  Net cash and cash equivalents used in financing activities was $83.4$49.8 million for the sixthree months ended June 30,March 31, 2018. Net cash and cash equivalents used in the six months ended June 30, 2018 consisted primarily of repayments of long-term debt, net of $82.5$46.5 million and taxes paid on net share settlement of $8.6$7.3 million, partially offset by proceeds from short-term line of credit of $3.4 million. Net

Use of Derivative Instruments and Hedging

We use interest rate swaps, foreign exchange forward contracts and cross currency swaps to provide a level of protection against interest rate risks and foreign exchange exposure.

Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps, including interest rate collars, as part of its interest rate risk management strategy.  Interest rate swaps designated as cash and cash equivalents usedflow hedges involve the receipt of variable amounts from a counterparty in financing activities was $23.4 millionexchange for the six months ended June 30, 2017 and consisting primarilyCompany making fixed-rate payments over the life of repayments on linesthe agreements without exchange of credit and long-term debt, partially offset by proceeds from the issuance of Common Stock. underlying notional amount.

-2624-


 

Hedges of Foreign Currency Risk

We are exposed to fluctuations in various foreign currencies against our different functional currencies. We use foreign currency forward agreements to manage this exposure and to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instruments are not designated for hedge accounting treatment in accordance with ASC 815.  The fair value of our foreign exchange hedges approximates zero.

Net Investment Hedges

We use cross currency swaps to hedge our foreign exchange exposure related to our investment in our foreign subsidiaries.  These instruments are subject to market fluctuations due to changes in foreign exchange rates and at times may be in a loss position.  Market fluctuations are recorded to other comprehensive income/loss since these instruments are subject to hedge accounting. If these instruments are in a loss position at maturity, or if we decided to exit these instruments at a loss position, we would have to make a cash payment in the amount of the loss position.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, swap agreements, or outsourcing of research and development services, that could expose us to liability that is not reflected on the face of our financial statements.

Contractual Obligations

Other than as disclosed in Note 13-Subsequent Events in the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, and other than additional purchase obligations in the total amount of $91.3 million with $12.1 million remaining in 2018 and with $79.2 million payable in years 2-3, thereThere have been no material changes in our Contractual Obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on February 20, 2018.21, 2019.  

Critical Accounting Policies

No material changes were made to the Company’sOur critical accounting policies as set forthare described in “Item 7.Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included and in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018 filed with the SEC on February 20, 2018.19, 2019. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our consolidated financial statements in this Quarterly Report on Form 10-Q in Note 1 – Nature of Operations, Basis of Presentation, Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Recently Issued Accounting Pronouncements

See Note 1 - Nature of Operations, Basis of Presentation, and Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates, of the Notes to Condensed Consolidated Financial Statements, for detailed information regarding the status of recently issued accounting pronouncements.

Available Information

Our Internet address is http://www.diodes.com.  Information included on, or accessible through, our website shall not be deemed to form a part of the Quarterly Report on Form 10-Q. We make available, free of charge through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).SEC. Our website also provides access to investor financial information, including SEC filings and press releases, as well as stock quotes and information on corporate governance compliance.

Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995

Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and

-25-


Section 21E of the Exchange Act of 1934. We generally identify forward-looking statements by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such terms. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under “Risks“Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and in other reports we file with the SEC from time to time, that could cause actual results to differ materially from those anticipated by our management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act.

All forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to, in addition to the other matters described in this Quarterly Report on Form 10-Q, a variety of significant risks and uncertainties. The following discussion highlights some of these risks and uncertainties. Further, from time to time, information provided by us or statements made by our employees may contain forward-looking information. There can be no assurance that actual results or business conditions will not differ materially from those set forth or suggested in such forward-looking statements as a result of various factors, including those discussed below.

For more detailed discussion of these factors, see the “Risk Factors” discussion in Item 1A of our most recent Annual Report on Form 10-K as filed with the SEC and in Part II, Item 1A of this report The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

-27-


Risk Factors

 

RISKS RELATED TO OUR BUSINESS

 

The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.

During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a negative impact on our business, operating results and financial condition.

Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating results and financial condition.

The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.

One of our external suppliers is also a related party. The loss of this supplier could harm our business, operating results and financial condition.

Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial condition.

We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth and profit margins.

Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales and may demand to audit our operations from time to time.  A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition.

Our customer orders are subject to cancellation or modification usually with no penalty. High volumes of order cancellation or reduction in quantities ordered could adversely affect our net sales, operating results and financial condition.

Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.

New technologies could result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, operating results and financial condition.

-26-


 

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our business, operating results and financial condition.

We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner.

If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition.

Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.

We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition.

-28-


We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, operating results and financial condition.

Our products, or products we purchase from third parties for resale, may be found to be defective and, as a result, warranty claims and product liability claims may be asserted against us and we may not have recourse against our suppliers, which may harm our business, reputation with our customers, operating results and financial condition.

We may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to operate our business successfully, which could adversely affect our business, operating results and financial condition.

We may not be able to achieve future growth, and any such growth may place a strain on our management and on our systems and resources, which could adversely affect our business, operating results and financial condition.

Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely affect our business, operating results and financial condition.

If OEMsour direct sales customers do not design our products into their applications, our net sales may be adversely affected.

We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which could adversely affect our business, operating results and financial condition.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or our counterparties might not perform as agreed.

We may have a significant amount of debt with various financial institutions worldwide. Any indebtedness could adversely affect our business, operating results, financial condition and our ability to meet payment obligations under such debt.

Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.

Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition.

We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial condition.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.

-27-


 

Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.

Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.

Compliance with government regulations and customer demands regarding the use of “conflict minerals” may result in increased costs and may have a negative impact on our business, operating results and financial condition.

There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our Common Stock.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S. or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

-29-


System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and adversely affect our stock price.

 

RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

 

Our international operations subject us to risks that could adversely affect our operations.

We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results.

Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S. and may disrupt our activities in the U.S. and may have an adverse impact on our profitability and results of operations.

The U.K.’s referendum to exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would have a material adverse effect on our business, operating results and prospects.

Economic regulation in China could materially and adversely affect our business, operating results and prospects.

We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act, the U.K.’s Bribery Act 2010, China’s anti-corruption campaign and similar worldwide anti-bribery laws.

We are subject to foreign currency risk as a result of our international operations.

China is experiencing rapid social, political and economic change, which has increased labor costs and other related costs that could make doing business in China less advantageous than in prior years. Increased labor costs in China could adversely affect our business, operating results and financial condition.

We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net income.

The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net income.

-28-


 

RISKS RELATED TO OUR COMMON STOCK

Variations in our quarterly operating results may cause our stock price to be volatile.

We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the price of our Common Stock.

Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters.

We were formed in 1959, and our early corporate records are incomplete. As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.

Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities.

Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-over attempt.

Section 203 of Delaware General Corporation Law may deter a take-over attempt.

Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.


-3029-


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 20, 2018.21, 2019.

Item 4. Controls and Procedures.

Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Richard D. White,Brett R. Whitmire, with the participation of our management, carried out an evaluation, as of June 30, 2018,March 31, 2019, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e).) Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report is:

recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms; and

 

accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions on required disclosure.

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

 

 

Changes in Controls over Financial Reporting

 

There was no change in our internal control over financial reporting, known to our Chief Executive Officer or Chief Financial Officer, that occurred in the three months ended June 30, 2018, whichMarch 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

-3130-


 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company is not currently a party to any pending litigation that we consider material.

From time to time, we are involved in various legal proceedings that arise in the normal course of business. While we intend to defend any lawsuit vigorously, we presently believe that the ultimate outcome of any current pending legal proceeding will not have any material adverse effect on our financial position, cash flows or operating results. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact our business and operating results for the period in which the ruling occurs or future periods.

Item 1A. Risk Factors.

Other than the following, thereThere have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on February 20, 2018.21, 2019.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S. and may disrupt our activities in the U.S. and may have an adverse impact on our profitability and results of operations.

The U.S. government has recently imposed new or higher tariffs on specified products imported from China in response to what it characterizes as unfair trade practices, and has proposed tariffs on additional products from China. China has responded by proposing new or higher tariffs on specified products imported from the United States.

Most of our products are manufactured in China and a portion are then imported into the U.S. The Office of the United States Trade Representative (“USTR”) on June 20, 2018 published notice of the imposition of an additional 25 percent ad valorem duty on products from China with an annual trade value of approximately $34 billion. The June 20 notice also sought public comments on another proposed action in the form of an additional 25 percent ad valorem duty on products of China with an annual trade value of $16 billion, the public comment process is ongoing. On July 10, 2018, the USTR published a request for comments on a proposal to take further action in the form of an additional 10 percent ad valorem duty on products from China with an additional annual trade value of approximately $200 billion, with public hearings on this matter scheduled for August 22-23, 2018. The impacts on us of the recently imposed and proposed tariffs are uncertain because of the dynamic nature of governmental actions and responses, as well as possible exemptions for certain products. If the U.S. and China are able to negotiate the issues to restore a mutually advantageous and fair trading regime, the increased duties should be eliminated, but given the uncertainties, there can be no assurance of whether, or when, this will be accomplished. We are endeavoring to understand the impacts of the recently imposed and proposed U.S. duties on products imported from China, and our review is in the preliminary stage. Once we have a reasonable basis to assess the impacts, we intend to take whatever actions we deem appropriate to mitigate those impacts and protect our competitive position in the marketplace.

It is not clear at this time what the ultimate outcome of this will be, but given the importance of our Chinese operations and related sales, and existing and possible future restrictions with regard to transactions with Chinese entities, it is very possible that our operating results and/or financial condition may be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

 

 

-3231-


 

Item 6. Exhibits.  

 

Number

 

Description

  

Form

  

Date of First Filing

  

Exhibit
Number

  

Filed
Herewith

 

Description

  

Form

  

Date of First Filing

  

Exhibit
Number

  

Filed
Herewith

3.1

 

 

Certificate of Incorporation, as amended

  

 

10-K

 

February 20, 2018

 

 

3.1

 

 

 

 

Certificate of Incorporation, as amended

  

 

10-K

 

February 20, 2018

 

 

3.1

 

 

3.2

 

 

Amended By-laws of the Company as of January 6, 2016

  

 

8-K

 

 

January 11, 2016

 

 

3.1

 

 

 

 

Amended By-laws of the Company as of January 6, 2016

  

 

8-K

 

 

January 11, 2016

 

 

3.1

 

 

4.1

 

 

Form of Certificate for Common Stock, par value $0.66 2/3 per share

  

 

S-3

 

 

August 25, 2005

 

 

4.1

 

 

 

 

Form of Certificate for Common Stock, par value $0.66 2/3 per share

  

 

S-3

 

 

August 25, 2005

 

 

4.1

 

 

10.1

 

 

Consent to Credit Agreement (Portions of this Exhibit have been omitted)

 

 

 

 

 

 

 

 

X

10.2 +

 

Transition Agreement between Diodes Incorporated and Richard D. White

 

8-K

 

March 6, 2019

 

10.1

 

 

10.3 +

 

Amended transition agreement between Diodes Incorporated and Richard D. White

 

8-K/A

 

April 1,2019

 

10.1

 

 

31.1

 

 

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

 

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

31.2

 

Certification Pursuant to Rule 13a-14(a) /15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

 

 

 

 

 

 

 

X

 

Certification Pursuant to Rule 13a-14(a) /15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

 

 

 

 

 

 

 

X

32.1*

 

 

Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

 

 

Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

32.2*

 

 

Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

 

 

Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

 

 

 

 

 

 

 

X

101.INS

 

 

XBRL Instance Document

  

 

 

 

 

 

 

 

X

 

 

XBRL Instance Document

  

 

 

 

 

 

 

 

X

101.SCH

 

 

XBRL Taxonomy Extension Schema

  

 

 

 

 

 

 

 

X

 

 

XBRL Taxonomy Extension Schema

  

 

 

 

 

 

 

 

X

101.CAL

 

 

XBRL Taxonomy Extension Calculation Linkbase

  

 

 

 

 

 

 

 

X

 

 

XBRL Taxonomy Extension Calculation Linkbase

  

 

 

 

 

 

 

 

X

101.DEF

 

 

XBRL Taxonomy Extension Definition Linkbase Document

  

 

 

 

 

 

 

 

X

 

 

XBRL Taxonomy Extension Definition Linkbase Document

  

 

 

 

 

 

 

 

X

101.LAB

 

 

XBRL Taxonomy Extension Labels Linkbase

  

 

 

 

 

 

 

 

X

 

 

XBRL Taxonomy Extension Labels Linkbase

  

 

 

 

 

 

 

 

X

101.PRE

 

 

XBRL Taxonomy Extension Presentation Linkbase

  

 

 

 

 

 

 

 

X

 

 

XBRL Taxonomy Extension Presentation Linkbase

  

 

 

 

 

 

 

 

X

+      Constitute management contracts, or compensatory plans or arrangements that are required to be file pursuant to Item 606 of Regulation S-K.

*

A certification furnished pursuant to Item 601(b)(2)(32) of the Regulation S-K will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

PLEASE NOTE: It is inappropriate for investors to assume the accuracy of any covenants, representations or warranties that may be contained in agreements or other documents filed as exhibits to this Quarterly Report on Form 10-Q. In certain instances the disclosure schedules to such agreements or documents contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants. Moreover, some of the representations and warranties may not be complete or accurate as of a particular date because they are subject to a contractual standard of materiality that is different from those generally applicable to stockholders and/or were used for the purpose of allocating risk among the parties rather than establishing certain matters as facts. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

 

-3332-


 

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 thereunto duly authorized.

 

 

DIODES INCORPORATED

 

 

(Registrant)

 

 

 

 

AugustMay 7, 2018  2019

By: /s/ Keh-Shew Lu

 

Date

KEH SHEWKEH-SHEW LU

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

AugustMay 7, 20182019

By: /s/ Richard D. White Brett R. Whitmire

  

Date 

RICHARD D. WHITEBRETT R. WHITMIRE

  

 

Chief Financial Officer and Secretary

  

 

(Principal Financial Officer)

  

 

 

 

August 7, 2018  

By: /s/ Brett R. Whitmire

Date

BRETT R.  WHITMIRE

Corporate Controller

(Principal Accounting Officer)

 

-3433-