UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______ to ________.
Commission file number: 1-5740
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 95-2039518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 East Hillcrest Drive
Westlake Village, California 91362
(Address of principal executive offices) (Zip code)
(805) 446-4800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock, $0.66 2/3 par value,
outstanding as of November 12, 2003 was 9,745,940, including 1,075,672 shares of
treasury stock.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
December 31, September 30,
2002 2003
------------------- -------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 7,284,000 $ 9,783,000
Accounts receivable
Customers 19,387,000 24,150,000
Related parties 3,138,000 3,906,000
------------------- -------------------
22,525,000 28,056,000
Less: Allowance for doubtful receivables 353,000 330,000
------------------- -------------------
22,172,000 27,726,000
Inventories 14,916,000 15,270,000
Deferred income taxes, current 4,338,000 4,342,000
Prepaid expenses, income taxes and other current assets 2,228,000 2,460,000
------------------- -------------------
Total current assets 50,938,000 59,581,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 44,693,000 47,504,000
DEFERRED INCOME TAXES, non-current 3,205,000 2,280,000
OTHER ASSETS
Goodwill 5,090,000 5,090,000
Other 1,084,000 1,287,000
------------------- -------------------
TOTAL ASSETS $ 105,010,000 $ 115,742,000
=================== ===================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
2002 2003
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Line of credit $ 3,025,000 $ 7,419,000
Accounts payable
Trade 9,039,000 10,420,000
Related parties 3,361,000 3,706,000
Accrued liabilities 8,693,000 9,498,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 3,333,000 3,333,000
Current portion of capital lease obligations 157,000 160,000
------------------ ------------------
Total current liabilities 30,108,000 37,036,000
LONG-TERM DEBT, net of current portion
Related party 6,250,000 4,375,000
Other 6,333,000 3,833,000
CAPITAL LEASE OBLIGATIONS, net of current portion 2,495,000 2,370,000
MINORITY INTEREST IN JOINT VENTURE 2,145,000 2,431,000
STOCKHOLDERS' EQUITY
Class A convertible preferred stock - par value $1.00 per share; 1,000,000
shares authorized;
no shares issued and outstanding -- --
Common stock - par value $0.66 2/3 per share;
30,000,000 shares authorized; 9,292,764 and 9,644,261
shares issued at December 31, 2002
and September 30, 2003, respectively 6,195,000 6,428,000
Additional paid-in capital 8,060,000 8,928,000
Retained earnings 45,684,000 52,342,000
------------------ ------------------
59,939,000 67,698,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 478,000 219,000
------------------ ------------------
2,260,000 2,001,000
Total stockholders' equity 57,679,000 65,697,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,010,000 $ 115,742,000
================== ==================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
Net sales $ 30,287,000 $ 34,941,000 $ 87,157,000 $ 97,785,000
Cost of goods sold 22,420,000 25,779,000 67,807,000 72,816,000
----------------- ------------------ ------------------ ------------------
Gross profit 7,867,000 9,162,000 19,350,000 24,969,000
Selling, general and administrative
expenses 4,291,000 5,089,000 12,395,000 14,097,000
Research and development expenses 459,000 612,000 1,231,000 1,358,000
Loss on sale and impairment of fixed assets 56,000 300,000 94,000 244,000
----------------- ------------------ ------------------ ------------------
Total operating expenses 4,806,000 6,001,000 13,720,000 15,699,000
Operating income 3,061,000 3,161,000 5,630,000 9,270,000
Other income (expense)
Interest expense, net (281,000) (209,000) (895,000) (672,000)
Other (159,000) 126,000 (28,000) 29,000
----------------- ------------------ ------------------ ------------------
(440,000) (83,000) (923,000) (643,000)
Income from operations before income taxes and
minority interest 2,621,000 3,078,000 4,707,000 8,627,000
Income tax provision (771,000) (416,000) (949,000) (1,684,000)
----------------- ------------------ ------------------ ------------------
Income from operations before minority interest 1,850,000 2,662,000 3,758,000 6,943,000
Minority interest in joint venture earnings (83,000) (99,000) (219,000) (285,000)
----------------- ------------------ ------------------ ------------------
Net income $ 1,767,000 $ 2,563,000 $ 3,539,000 $ 6,658,000
================= ================== ================== ==================
Earnings per share
Basic $ 0.22 $ 0.30 $ 0.43 $ 0.79
Diluted $ 0.20 $ 0.26 $ 0.40 $ 0.70
================= ================== ================== ==================
Weighted average shares outstanding
Basic 8,190,887 8,542,328 8,177,506 8,436,987
Diluted 8,862,272 9,697,504 8,834,311 9,502,471
================= ================== ================== ==================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------
2002 2003
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,539,000 $ 6,658,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,943,000 8,133,000
Reserve for fixed assets -- 300,000
Minority interest earnings 219,000 285,000
Loss (gain) on sale of property, plant and equipment 95,000 (46,000)
Changes in operating assets:
Accounts receivable (5,463,000) (5,554,000)
Inventories 949,000 (354,000)
Prepaid expenses, taxes and other assets (722,000) 485,000
Changes in operating liabilities:
Accounts payable 3,655,000 1,726,000
Accrued liabilities 2,720,000 805,000
----------------- ------------------
Net cash provided by operating activities 11,935,000 12,438,000
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,645,000) (11,653,000)
Proceeds from sale of property, plant and equipment -- 457,000
----------------- ------------------
Net cash used by investing activities (2,645,000) (11,196,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on (repayments of) line of credit, net (4,629,000) 4,394,000
Proceeds from the issuance of common stock 293,000 1,101,000
Repayments of long-term obligations (7,564,000) (4,375,000)
Repayments of capital lease obligations -- (122,000)
Other (14,000) --
Management incentive reimbursement from LSC 375,000 --
----------------- ------------------
Net cash provided (used) by financing activities (11,539,000) 998,000
----------------- ------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 188,000 259,000
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,061,000) 2,499,000
CASH AT BEGINNING OF PERIOD 8,103,000 7,284,000
----------------- ------------------
CASH AT END OF PERIOD $ 6,042,000 $ 9,783,000
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 895,000 $ 672,000
================= ==================
Income taxes $ -- $ 777,000
================= ==================
NON-CASH INVESTING ACTIVITIES
Building acquired through capital lease obligation $ 2,785,000 $ --
================= ==================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. They do not include all information and
footnotes necessary for a fair presentation of financial position, and results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America for complete financial statements.
These consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation of the
results of operations for the period presented have been included in the interim
period. Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. The consolidated financial data at December 31, 2002 is
derived from audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
The consolidated financial statements include the accounts of
Diodes-North America and its wholly-owned foreign subsidiaries, Diodes Taiwan
Corporation, Ltd. ("Diodes-Taiwan") and Diodes-Hong Kong Ltd. ("Diodes-Hong
Kong"), the accounts of Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China")
in which the Company has a 95% interest, and the accounts of its wholly-owned
United States subsidiary, FabTech Incorporated ("FabTech" or "Diodes-FabTech").
All significant intercompany balances and transactions have been eliminated.
NOTE B - Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 150 ("Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity"). SFAS 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS No. 150 as a liability because that financial instrument embodies an
obligation of an issuer. SFAS No. 150 must be applied immediately to instruments
entered into or modified after May 31, 2003 and to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003. Management believes the adoption of SAFS No. 150
will not have a material impact on the financial statements.
In April 2003, FASB issued SFAS No. 149 ("Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities"). SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. In addition, all
provisions of this Statement should be applied prospectively. This Statement
amends SFAS No. 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative. Management believes the
adoption of SFAS No. 149 will not have a material impact on the financial
statements.
In November 2002, the FASB issued Interpretation No. 45,
("Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others"). The Interpretation elaborates
on the disclosures to be made by sellers or guarantors of products and services,
as well as those entities guaranteeing the financial performance of others. The
Interpretation further clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the obligations it has undertaken
in issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are effective on a prospective basis to
guarantees issued or modified after December 31, 2002, and the disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. The Company believes that its disclosures with regards to
these matters are adequate.
In January 2003, the FASB issued Interpretation No. 46
("Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51"). The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. Management does not believe the
Interpretation will have a material impact on the financial statements.
NOTE C - Functional Currencies, Comprehensive Loss and
Foreign Currency Translation
The Company entered into an interest rate swap agreement with
a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt.
The effect of the $205,000 gain in intercompany translation
adjustments and $54,000 gain related to the interest rate swap agreement results
in a change in accumulated other comprehensive loss (income) of ($259,000) for
the nine months ended September 30, 2003, and is reflected on the balance sheet
as a separate component of shareholders' equity. There were no other components
of other comprehensive loss (income) for the nine months ended September 30,
2003.
NOTE D - Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method.
December 31, September 30,
2002 2003
---------------- ----------------
Finished goods $ 9,853,000 $ 9,380,000
Work-in-progress 1,522,000 1,845,000
Raw materials 5,488,000 6,141,000
---------------- ----------------
16,863,000 17,366,000
Less: Reserves (1,947,000) (2,096,000)
---------------- ----------------
Net inventory $ 14,916,000 $ 15,270,000
================ ================
NOTE E - Income Taxes
The Company accounts for income taxes using an asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the tax effect of differences between the financial statement and
tax basis of assets and liabilities. Accordingly, as of September 30, 2003, the
Company has recorded a net deferred tax asset of $6.6 million resulting from net
operating loss carryforwards, foreign tax credits, and temporary differences in
bases of assets and liabilities. The temporary differences in bases of assets
and liabilities are not currently deductible for income tax purposes.
In accordance with the current taxation policies of the
People's Republic of China ("PRC"), Diodes-China was granted preferential tax
treatment for the years ended December 31, 1999 through 2003. Earnings were
subject to 0% tax rates in 1999 and 2000. Earnings in 2001, 2002 and 2003 are
subject to tax of 12% (one half the normal central government tax rate), and at
normal rates thereafter. Earnings of Diodes-China are also subject to tax of 3%
by the local taxing authority in Shanghai. The local taxing authority waived
this tax in 2001, 2002 and for the first nine months of 2003.
Earnings of Diodes-Taiwan are currently subject to a tax rate
of 35%, which is comparable to the U.S. Federal tax rate for C corporations.
Earnings of Diodes-Hong Kong are currently subject to 16% tax
for profit on local sales and 0% tax for profit on export sales. These tax rates
are valid provided the vendor is located outside Hong Kong.
As of September 30, 2003, accumulated and undistributed
earnings of Diodes-China are approximately $29.9 million. Through March 31,
2002, the Company had not recorded deferred Federal or state tax liabilities
(estimated to be $8.9 million) on these cumulative earnings since the Company
considered this investment to be permanent, and had no plans or obligations to
distribute all or part of that amount from China to the United States. Beginning
in April 2002, based upon a decision to make a cash distribution from
Diodes-China to the United States in the near future, the Company began to
record deferred taxes on a portion of the 2002 earnings of Diodes-China, and had
accrued $0.9 million at December 31, 2002. In 2003, the Company continued to
record deferred taxes on a portion of the 2003 estimated earnings of
Diodes-China, recording $0.6 million in deferred taxes during the first nine
months of 2003.
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of Diodes-China and Diodes-Hong Kong to
the extent such earnings may be appropriated for distribution to the Company's
corporate office in North America, and as further investment strategies with
respect to Diodes-China are determined. Should the Company's North American cash
requirements exceed the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company's foreign subsidiaries.
However, the distribution of any unappropriated funds to the U.S. will require
the recording of income tax provisions on the U.S. entity, thus reducing net
income.
NOTE F - Stock Based Compensation and Stock Options
The Company has a stock-based employee compensation plan,
which is described more fully in Note 10 of the Company's audited financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2002. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, ("Accounting for Stock Issued to
Employees"), and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan have an
exercise price equal to the fair market value of the underlying common stock at
the date of grant. During the first nine months of 2003, the Company issued
335,300 stock options to directors, officers and key employees at an average
exercise price of $19.54.
The following table illustrates the effect on net income if
the Company had applied the fair value recognition provisions of SFAS No. 123,
("Accounting for Stock Based Compensation"), to stock based employee
compensation.
For the three months ended September 30 (in 000's except per share data),
---------------------------------- ------------------------------------------
Amounts Per Share Amounts Per Share
---------------------------------- ------------------------------------------
2002 Basic Diluted 2003 Basic Diluted
----------- --------- ------------ ----------------- ---------- --------------
Net income $ 1,767 $0.22 $0.20 $ 2,563 $0.30 $0.26
Additional compensation for fair
value of stock options,
net of tax effect (168) (0.02) (0.02) (208) (0.02) (0.02)
----------- --------- ------------ ----------------- ---------- --------------
Proforma net income $ 1,599 $0.20 $0.18 $ 2,355 $0.28 $0.24
=========== ========= ============ ================= ========== ==============
For the nine months ended September 30 (in 000's except per share data),
---------------------------------- ------------------------------------------
Amounts Per Share Amounts Per Share
---------------------------------- ------------------------------------------
2002 Basic Diluted 2003 Basic Diluted
----------- --------- ------------ ----------------- ---------- --------------
Net income $ 3,539 $0.43 $0.40 $ 6,658 $0.79 $0.70
Additional compensation for fair
value of stock options,
net of tax effect (502) (0.06) (0.06) (326) (0.04) (0.03)
----------- --------- ------------ ----------------- ---------- --------------
Proforma net income $ 3,038 $0.37 $0.34 $ 6,332 $0.75 $0.67
=========== ========= ============ ================= ========== ==============
NOTE G - Geographic Segments
An operating segment is defined as a component of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief decision-making group consists of the President and Chief Executive
Officer, Chief Financial Officer, Vice President of Sales and Marketing, and
Senior Vice President of Operations. The Company operates in a single segment,
discrete semiconductor devices, through its various manufacturing and
distribution facilities.
The Company's operations include the domestic operations
(Diodes-North America and Diodes-FabTech) located in the United States, and the
Far East operations (Diodes-Taiwan located in Taipei, Taiwan; Diodes-China
located in Shanghai, China; and Diodes-Hong Kong located in Hong Kong, China).
For reporting purposes, European operations, which account for approximately 2%
of total sales for the nine months ended September 30, 2003, are consolidated
into the domestic (North America) operations.
The accounting policies of the operating entities are the same
as those described in the summary of significant accounting policies. Revenues
are attributed to geographic areas based on the location of the market producing
the revenues.
Consolidated
Three Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2003
Total sales $ 31,672,000 $ 17,879,000 $ 49,551,000
Inter-company sales (12,254,000) (2,356,000) (14,610,000)
---------------- ----------------------- --------------------
Net sales $ 19,418,000 $ 15,523,000 $ 34,941,000
Assets $ 74,583,000 $ 41,159,000 $ 115,742,000
Property, plant and equipment $ 34,661,000 $ 12,843,000 $ 47,504,000
================ ======================= ====================
Consolidated
Three Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2002
Total sales $ 23,056,000 $ 18,833,000 $ 41,889,000
Inter-company sales (10,052,000) (1,550,000) (11,602,000)
---------------- ----------------------- --------------------
Net sales $ 13,004,000 $ 17,283,000 $ 30,287,000
Assets $ 57,686,000 $ 47,039,000 $ 104,725,000
Property, plant and equipment $ 30,790,000 $ 12,427,000 $ 43,217,000
================ ======================= ====================
Consolidated
Nine Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2003
Total sales $ 87,180,000 $ 52,188,000 $ 139,368,000
Inter-company sales (33,481,000) (8,102,000) (41,583,000)
---------------- ----------------------- --------------------
Net sales $ 53,699,000 $ 44,086,000 $ 97,785,000
Assets $ 74,583,000 $ 41,159,000 $ 115,742,000
Property, plant and equipment $ 34,661,000 $ 12,843,000 $ 47,504,000
================ ======================= ====================
Consolidated
Nine Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2002
Total sales $ 69,049,000 $ 51,098,000 $ 120,147,000
Inter-company sales (29,724,000) (3,266,000) (32,990,000)
---------------- ----------------------- --------------------
Net sales $ 39,325,000 $ 47,832,000 $ 87,157,000
Assets $ 57,686,000 $ 47,039,000 $ 104,725,000
Property, plant and equipment $ 30,790,000 $ 12,427,000 $ 43,217,000
================ ======================= ====================
NOTE H - Reclassifications
Certain 2002 and 2003 amounts as well as quarterly financial data presented
in the accompanying financial statements have been reclassified to conform with
2003 financial statement presentation. These reclassifications had no impact on
previously reported net income or stockholders' equity.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
Except for the historical information contained herein, the
matters addressed in this Item 2 constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are subject to a variety of risks and uncertainties,
including those discussed below under the heading "Risk Factors" and elsewhere
in this Quarterly Report on Form 10-Q, that could cause actual results to differ
materially from those anticipated by the Company's management. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made on this Quarterly Report on Form 10-Q are made pursuant to the
Act.
General
Diodes Incorporated (the "Company"), a Delaware corporation,
is engaged in the manufacture, sale and distribution of discrete semiconductors
worldwide, primarily to manufacturers in the communications, computing,
industrial, consumer electronics and automotive markets, and to distributors of
electronic components to end customers in these markets. The Company's broad
product line includes high-density diode and transistor arrays in
ultra-miniature surface-mount packages, as well as silicon wafers used in
manufacturing these products. Technologies include high density diode and
transistor arrays in multi-pin surface-mount packages; Powermite(R)3,
high-performance surface mount packages; performance Schottkys, switching and
rectifier diodes; single and dual prebiased transistors; performance tight
tolerance and low current zener diodes; subminiature surface mount packages;
transient voltage suppressors (TVS and TSPD); small signal transistors and
MOSFETs; and standard, fast, ultra-fast, and super-fast rectifiers.
Positioning the Company to rapidly respond to the demands of
the global marketplace and continuing to increase its investment in research and
development, the Company is focused on expanding its product portfolio and
closely controlling product quality and time-to-market. Shifting development
priorities toward specialized configurations, such as the Company's high-density
array devices, the Company is introducing a range of new products that improve
the trade-off between size, performance and power consumption for surface-mount
packages, such as the Company's BAT750 Schottky rectifier and SOT-523 product
lines. These product lines are designed for battery-powered and handheld
applications, such as those used in the computer and communications industries;
specifically, wireless devices, notebooks, flat panel displays, digital cameras,
mobile handsets, set top boxes, as well as DC to DC conversion and automotive
electronic applications.
In addition to the Company's corporate headquarters in
Westlake Village, California, which provides sales, marketing, engineering,
logistics and warehousing functions, the Company's wholly-owned subsidiary,
Diodes Taiwan Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales,
engineering and purchasing facility in Taipei, Taiwan. The Company also has a
95% interest in Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or
"KaiHong"), a manufacturing facility in Shanghai, China, and offices in Shanghai
and Shenzhen, China. In March 2002, the Company opened a sales, warehousing and
logistics subsidiary in Hong Kong ("Diodes-Hong Kong"). In addition, in December
2000, the Company acquired FabTech Incorporated ("Diodes-FabTech" or "FabTech"),
a silicon wafer manufacturer located near Kansas City, Missouri. Offices in
Toulouse, France, and Hattenheim, Germany support the Company's European sales
expansion.
The discrete semiconductor industry has historically been
subject to severe pricing pressures. At times, although manufacturing costs have
decreased, excess manufacturing capacity and over-inventory have caused selling
prices to decrease to a greater extent than manufacturing costs. To compete in
this highly competitive industry, the Company has, over the past several years,
committed substantial new resources to the further development and
implementation of sales and marketing functions, and expanded manufacturing
capabilities. Emphasizing the Company's focus on customer service, additional
sales personnel and programs have been added, primarily in Asia, and most
recently in Europe. In order to meet customers' needs at the design stage of
end-product development, the Company also continues to employ additional
applications engineers who work directly with customers to assist them in
"designing in" the correct products to produce optimum results. Regional sales
managers in the U.S. and Europe, working closely with manufacturers'
representative firms and distributors, have also been added to help satisfy
customers' requirements. In addition, the Company continues to develop
relationships with major distributors who inventory and sell the Company's
products.
Sales, Marketing and Distribution
The Company sells its products through its own internal and
regional sales departments, as well as through representatives and distributors.
The Company's sales team, aided by the sales force of approximately 30
independent sales representatives located throughout North America, Asia, and
most recently Europe, supplies approximately 230 OEM accounts. In 2002, OEM
customers accounted for approximately 69% of the Company's sales (72% in the
third quarter of 2003), compared to approximately 66% in 2001. The increase was
primarily due to wafer sales at Diodes-FabTech. OEM customers range from small,
privately held electronics companies to Fortune 500 companies.
The Company's major OEM customers include industry leaders
such as: Intel Corporation, Cisco Systems Incorporated, Sony Corporation, Nortel
Networks Corporation, Delphi Automotive, Bose Corporation, Scientific Atlanta
Incorporated, Samsung Electronics, Asustek Computer, Inc., Quanta and LG
Electronics, Inc. The Company further supplies approximately 50 distributors
(28% in the third quarter of 2003 and 31% of 2002 sales), who collectively sell
to approximately 10,000 customers on the Company's behalf. The Company's
worldwide distribution network includes Arrow Electronics, Inc., Avnet, Inc.,
Digi-Key Corporation, Future Electronics Ltd., Jaco Electronics, Inc., Reptron
Electronics, Inc., and All American Semiconductor, Inc., among others. The
Company is not dependent on any one customer to support its level of sales. For
the fiscal year ended December 31, 2002, not one OEM customer accounted for more
than 14% (11% in the third quarter of 2003) of the Company's sales, while the
largest distributor accounted for 4% of sales. The twenty largest customers
accounted, in total, for approximately 61% (59% in the third quarter of 2003) of
the Company's sales in 2002, compared to 55% in 2001.
The Company's products are sold primarily in North America,
the Far East, and Europe, both directly to end-users and through electronic
component distributors. In the third quarter of 2003, approximately 42%, 56%,
and 2% of the Company's products were sold in North America, the Far East, and
Europe, respectively, compared to approximately 56%, 43%, and 1% in the third
quarter of 2002, and compared to 55%, 45%, and 0% for the year 2001,
respectively. An increase in the percentage of sales in the Far East is expected
as the Company significantly increased its sales presence there and believes
there is greater potential to increase market share in that region due to the
expanding base of electronic product manufacturers. In addition, in the third
quarter of 2003, we continued to secure new product design wins and new products
sales grew to 13.3% of sales from 6.7% a year ago.
Related Parties
The Company conducts business with two related party
companies, Lite-On Semiconductor Corporation ("LSC") and Xing International.
LSC, who owns 35.9% of the Company's common stock, is the Company's largest
shareholder, and Xing International is owned by the Company's 5% joint venture
partner in Diodes-China. C.H. Chen, the Company's President and Chief Executive
Officer, and a member of the Company's Board of Directors, is also Vice-Chairman
of LSC. M.K. Lu, a member of the Company's Board of Directors, is President of
LSC, while Raymond Soong, the Company's Chairman of the Board, is the Chairman
of the Lite-On Group, a significant shareholder of LSC.
In the third quarter of 2003, the Company sold silicon wafers
to LSC totaling 11.7% (13.7% in 2002) of the Company's sales, making LSC the
Company's largest customer. Also for the third quarter of 2003, 18.2% (17.9% in
2002) of the Company's sales were from discrete semiconductor products purchased
from LSC, making LSC the Company's largest outside vendor. A long-standing sales
agreement exists where the Company is the exclusive North American distributor
for certain LSC product lines. In addition, the Company leases warehouse space
from LSC for its operations in Hong Kong. All such transactions are on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
In December 2000, the Company acquired the wafer foundry,
FabTech, Inc., from LSC. As part of the purchase price, at September 30, 2003,
LSC holds a subordinated, interest-bearing note for approximately $6.9 million.
In May 2002, the Company renegotiated the terms of the note to extend the
payment period from two years to four years, and therefore, payments of
approximately $208,000 plus interest began in July 2002. In connection with the
terms of the acquisition, LSC entered into a volume purchase agreement to
purchase wafers from FabTech. In addition, as per the terms of the stock
purchase agreement, the Company has entered into several management incentive
agreements with members of FabTech's management. The agreements provide members
of FabTech's management guaranteed annual payments as well as contingent bonuses
based on the annual profitability of FabTech, subject to a maximum annual
amount. Any portion of the guaranteed and contingent liability paid by FabTech
is reimbursed by LSC.
In the third quarter of 2003, the Company sold silicon wafers
to companies owned by Xing International totaling 0.9% (1.5% in 2002) of the
Company's sales. Also for the third quarter of 2003, 4.5% (5.6% in 2002) of the
Company's sales were from discrete semiconductor products purchased from
companies owned by Xing International. In addition, Diodes-China leases its
manufacturing facilities from, subcontracts a portion of its manufacturing
process (metal plating and environment protection facilities) to, and pays a
consulting fee to Xing International. All such transactions are on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
Manufacturing and Significant Vendors
The Company's Far East subsidiary, Diodes-China, manufactures
products for sale primarily to North America and Asia. Diodes-China's
manufacturing focuses on SOT-23 and SOD-123 products, as well as sub-miniature
packages such as SOT-363, SOT-563, and SC-75. These surface-mount devices
("SMD") are much smaller in size and are used in the computer and communication
industries, destined for cellular phones, notebook computers, pagers, PCMCIA
cards, modems, and garage door transmitters, among others. Diodes-China's
state-of-the-art facilities have been designed to develop even smaller,
higher-density products as electronic industry trends to portable and hand-held
devices continue. Although Diodes-China purchases silicon wafers from
Diodes-FabTech, the majority are currently purchased from other wafer vendors.
The Company plans to increase the number of Diodes-FabTech wafers used at
Diodes-China over the next several years.
Acquired in December 2000 from LSC, FabTech's wafer foundry is
located in Lee's Summit, Missouri. FabTech manufactures primarily 5-inch silicon
wafers, which are the building blocks for semiconductors. FabTech has full
foundry capabilities, including processes such as silicon epitaxy, silicon
oxidation, photolithography and etching, ion implantation and diffusion, low
pressure and plasma enhanced chemical vapor deposition, sputtered and evaporated
metal deposition, wafer backgrinding, and wafer probe and ink.
The Company also purchases products for sale to its customers
from outside vendors other than the related party vendors mentioned previously.
Although the Company believes alternative sources exist for the products of any
of its suppliers, the loss of any one of its principal suppliers or the loss of
several suppliers in a short period of time could have a materially adverse
effect on the Company until an alternate source is located and has commenced
providing such products or raw materials.
Available Information
Our Internet address is http://www.diodes.com. We make
available, free of charge through our Internet website, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy
Statements, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission (the "SEC"). To support our global customer-base,
particularly in Asia and Europe, our website is language-selectable into
English, Chinese, Japanese, Korean and German, giving us an effective marketing
tool for worldwide markets. With its extensive online Product (Parametric)
Catalog with advanced search capabilities, our website facilitates quick and
easy product selection. Our website provides easy access to worldwide sales
contacts and customer support, and incorporates a distributor-inventory check to
provide component inventory availability and a small order desk for overnight
sample fulfillment. Our website also provides access to current and complete
investor financial information, including SEC filings and press releases, as
well as stock quotes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, inventory reserves and income taxes, among
others. Our estimates are based upon historical experiences, market trends and
financial forecasts and projections, and upon various other assumptions that
management believes to be reasonable under the circumstances and at that certain
point in time. Actual results may differ, significantly at times, from these
estimates under different assumptions or conditions.
The Company's significant accounting policies are described in
Note 1 to the financial statements included in Item 14 of the Annual Report on
Form 10-K, filed with the SEC for the year ended December 31, 2002.
We believe the following critical accounting policies and
estimates, among others, affect the significant estimates and judgments we use
in the preparation of our consolidated condensed financial statements:
Revenue Recognition
Revenue is recognized when the product is actually shipped to
both end users and electronic component distributors. The Company reduces
revenue in the period of sale for estimates of product returns, distributor
price adjustments and other allowances. Actual returns and adjustments could be
different from our estimates and provisions, resulting in future adjustments to
revenues.
Allowance for Doubtful Accounts
Management evaluates the collectibility of our accounts
receivable based upon a combination of factors, including the current business
environment and historical experience. If we are aware of a customer's inability
to meet its financial obligations to us, we record an allowance to reduce the
receivable to the amount we reasonably believe we will be able to collect from
the customer. For all other customers, we record an allowance based upon the
amount of time the receivables are past due. If actual accounts receivable
collections differ from these estimates, an adjustment to the allowance may be
necessary with a resulting effect to bad debt expense.
Inventory Reserves
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method. On an on-going
basis, we evaluate our inventory for obsolescence and slow-moving items. This
evaluation includes analysis of sales levels, sales projections and purchases by
items. Based upon this analysis we accrue a reserve for obsolete and slow-moving
inventory. If future demand or market conditions are different than our current
estimates, an inventory adjustment may be required, and would be reflected in
cost of goods sold in the period the revision is made.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the tax
jurisdictions in which we operate. This process involves using an asset and
liability approach whereby deferred tax assets and liabilities are recorded for
differences in the financial reporting bases and tax bases of the Company's
assets and liabilities. Significant management judgment is required in
determining our provision for income taxes, deferred tax assets and liabilities.
Management continually evaluates its deferred tax asset as to whether it is
likely that the deferred tax assets will be realized. If management ever
determined that its deferred tax asset was not likely to be realized, a
write-down of the asset would be required and would be reflected as an expense
in the accompanying period.
Results of Operations for the Three Months Ended September 30, 2002 and 2003
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of income bear to net sales and
the percentage dollar increase (decrease) of such items from period to period.
Percentage Dollar
Percent of Net Sales Increase
Three Months Ended September 30, (Decrease)
--------------------------------------------------------------
2002 2003 `02 to `03
---------------- -------------------------------------------
Net sales 100.0 % 100.0 % 15.4 %
Cost of goods sold (74.0) (73.8) 15.0
---------------- -------------------------------------------
Gross profit 26.0 26.2 16.5
Operating expenses (15.9) (17.2) 24.9
---------------- -------------------------------------------
Operating income 10.1 9.0 3.3
Interest expense, net (0.9) (0.6) (25.6)
Other income (0.5) 0.4 179.2
---------------- -------------------------------------------
Income before taxes and minority interest 8.7 8.8 17.4
Income tax benefit (provision) (2.6) (1.2) (46.0)
---------------- -------------------------------------------
Income before minority interest 6.1 7.6 43.9
Minority interest (0.3) (0.3) 19.3
---------------- -------------------------------------------
Net income 5.8 7.3 45.0
================ ===========================================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 30, 2003 compared to the three months ended
September 30, 2002. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
2002 2003
---- ----
Net Sales $ 30,287,000 $ 34,941,000
- ---------
Net sales increased approximately $4.7 million, or 15.4%, for
the three months ended September 30, 2003, compared to the same period last
year, due primarily to an approximately 23% increase in units sold as a result
of increased demand, primarily in the Far East. The Company's average selling
prices ("ASP") for discrete devices were essentially the same for the third
quarter of 2002, and decreased 1% from the second quarter of 2003.
ASP's for wafer products decreased approximately 33% from the
same period last year, and decreased 14% from the second quarter of 2003, due
primarily to product mix changes as a result of increased capacity. Production
line re-engineering targeted at yield improvement and efficiency gains resulted
in additional capacity of approximately 20% compared to last year.
2002 2003
---- ----
Cost of Goods Sold $ 22,420,000 $ 25,779,000
- ------------------
Gross Profit $ 7,867,000 $ 9,162,000
- ------------
Gross Profit Margin Percentage 26.0% 26.2%
- ------------------------------
Cost of goods sold increased approximately $3.4 million, or
15.0%, for the three months ended September 30, 2003 compared to the year ago
period. As a percent of sales, cost of goods sold decreased from 74.0% for the
three months ended September 30, 2002 to 73.8% for the three months ended
September 30, 2003. Gross profit increased approximately $1.3 million, or 16.5%,
for the three months ended September 30, 2003 compared to the year ago period.
Of the $1.3 million increase, approximately $1.2 million was due to the 15.4%
increase in sales, while $0.1 million was due to the increase in gross margin
percentage from 26.0% to 26.2%. Gross margin percentage increased from 25.0% in
the second quarter of 2003. The higher gross margin percentage was due primarily
to sales of higher margin products, partially offset by pricing pressures on the
companies commodity and wafer products. For the third quarter of 2003,
Diodes-China's average capacity utilization was above 90%, compared to 88% in
the third quarter of 2002, while Diodes-FabTech was at approximately 80%,
equivalent to the third quarter of 2002. Due to increased capital expenditures
and production line re-engineering, Diodes-FabTech's capacity was increased by
approximately 15% in the third quarter of 2003. Capacity at Diodes-China was
increased by approximately 10% in the current quarter, due primarily to capital
expenditures.
2002 2003
---- ----
Total Operating Expenses $ 4,806,000 $ 6,001,000
- ------------------------
Operating expenses, which include selling, general,
administrative expenses ("SG&A"), research and development expenses ("R&D"), and
loss on sale and impairment of fixed assets, for the three months ended
September 30, 2003 increased approximately $1.2 million, or 24.9%, compared to
the same period last year, due primarily to (i) a $300,000 reserve at
Diodes-FabTech for excess equipment due to production line re-engineering, (ii)
a 33.3% increase in R&D primarily at Diodes-FabTech, and (iii) higher sales
commissions and incentives, marketing expenses, as well as expenses associated
with Sarbanes-Oxley Act compliance, including an internal audit function.
The Company's goal is to increase its R&D expenditures, both
in absolute dollars and as a percentage of sales, as part of its strategy to
develop more proprietary products aimed at improving gross margins. SG&A, as a
percentage of sales, increased from 14.2% to 14.6% in the comparable period last
year, while R&D increased from 1.5% to 1.8% of sales. Total operating expenses,
as a percentage of sales, increased to 17.2% from 15.9% in the comparable period
last year.
2002 2003
---- ----
Net Interest Expense $ 281,000 $ 209,000
- --------------------
Net interest expense for the three months ended September 30,
2003 decreased approximately $72,000, or 25.6% versus the third quarter last
year, due primarily to a reduction in the Company's total debt as well as lower
interest rates. The Company's interest expense is primarily the result of the
Company's borrowings to finance the FabTech acquisition, as well as the
investment and expansion in the Diodes-China manufacturing facility.
2002 2003
---- ----
Other Income (expense) $ (159,000) $ 126,000
- ----------------------
Other income for the three months ended September 30, 2003
increased $285,000 from the third quarter of 2002, due primarily to the receipt
of a $250,000 high-technology grant at Diodes-China, partially offset by
currency losses, primarily in Taiwan.
2002 2003
---- ----
Income Tax Provision $ 771,000 $ 416,000
- --------------------
Income taxes for the third quarter were at a rate of 13.5%
compared to 22.4% in the second quarter of 2003 and 29.4% in the
year-ago-quarter as more profit was earned by the Company's Far East
subsidiaries in lower tax jurisdictions. The Company is benefiting from its
Diodes-Hong Kong subsidiary, established last year, not only due to its lower
tax rates, but also as another entry point into the Asia market. Included in the
tax provision for the three months ended September 30, 2003 is $210,000 in
deferred taxes recorded for a portion of the 2003 earnings at Diodes-China.
2002 2003
---- ----
Minority Interest in Joint Venture $ 83,000 $ 99,000
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
increase in the joint venture earnings for the three months ended September 30,
2003 is primarily the result of increased capacity utilization, as well as
demand induced product mix changes. The joint venture investment is eliminated
in consolidation of the Company's financial statements, and the activities of
Diodes-China are included therein. As of September 30, 2003, the Company had a
95% controlling interest in the joint venture.
Results of Operations for the Nine Months Ended September 30, 2002 and 2003
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of income bear to net sales and
the percentage dollar increase (decrease) of such items from period to period.
Percent of Net Sales Percentage Dollar
Nine Months Ended September 30, Increase (Decrease)
---------------------------------------------------------------
2002 2003 `02 to `03
---------------- -------------------- --------------------
Net sales 100.0 % 100.0 % 12.2 %
Cost of goods sold (77.8) (74.5) 7.4
---------------- -------------------- --------------------
Gross profit 22.2 25.5 29.0
Operating expenses (15.7) (16.0) 14.4
---------------- -------------------- --------------------
Operating income 6.5 9.5 64.7
Interest expense, net (1.0) (0.7) (24.9)
Other income (0.1) (0.0) 203.6
---------------- -------------------- --------------------
Income before taxes and minority interest 5.4 8.8 83.3
Income tax benefit (provision) (1.1) (1.7) 77.4
---------------- -------------------- --------------------
Income before minority interest 4.3 7.1 84.8
Minority interest (0.2) (0.3) 30.1
---------------- -------------------- --------------------
Net income 4.1 6.8 88.1
================ ==================== ====================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 2003 compared to the nine months ended September
30, 2002. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
2002 2003
---- ----
Net Sales $ 87,157,000 $ 97,785,000
- ---------
Net sales increased approximately $10.6 million, or 12.2%, for
the nine months ended September 30, 2003, compared to the same period last year,
due primarily to a 15.5% increase in units sold as a result of increased demand,
primarily in the Far East. The Company's ASP for discrete devices increased
approximately 1.9% from the same nine-month period last year. ASP's for wafer
products decreased 9.8% from the same period last year.
2002 2003
---- ----
Cost of Goods Sold $ 67,807,000 $ 72,816,000
- ------------------
Gross Profit $ 19,350,000 $ 24,969,000
- ------------
Gross Profit Margin Percentage 22.2% 25.5%
- ------------------------------
Cost of goods sold increased approximately $5.0 million, or
7.4%, for the nine months ended September 30, 2003 compared to the year ago
period. As a percent of sales, cost of goods sold decreased from 77.8% for the
nine months ended September 30, 2002 to 74.5% for the nine months ended
September 30, 2003 due primarily to higher factory utilizations, increased
efficiencies, lower manufacturing costs, and sales of higher margin products,
partly offset by pricing pressures of commodity and wafer products. Gross profit
increased approximately $5.6 million, or 29.0%, for the nine months ended
September 30, 2003 compared to the year ago period. Of the $5.6 million
increase, approximately $2.4 million was due to the 12.2% increase in sales,
while $3.3 million was due to the increase in gross margin percentage from 22.2%
to 25.5%.
2002 2003
---- ----
Total Operating Expenses $ 13,720,000 $ 15,699,000
- ------------------------
Operating expenses, which include SG&A, R&D, and loss on sale
and impairment of fixed assets for the nine months ended September 30, 2003
increased approximately $2.0 million, or 14.4%, compared to the same period last
year, due primarily to (i) a $300,000 reserve at Diodes-FabTech for excess
equipment due to production line re-engineering, (ii) a 10.3% increase in R&D
primarily at Diodes-FabTech, and (iii) higher sales commissions and incentives,
as well as expenses associated with Sarbanes-Oxley Act compliance, including an
internal audit function. SG&A, as a percentage of sales, increased from 14.2% to
14.4% in the comparable period last year, while R&D remained at 1.4% of sales.
Total operating expenses, as a percentage of sales, increased to 16.1% from
15.7% in the comparable period last year.
2002 2003
---- ----
Net Interest Expense $ 895,000 $ 672,000
- --------------------
Net interest expense for the nine months ended September 30,
2003 decreased approximately $223,000 versus the same period last year, due
primarily to a reduction in the Company's total debt as well as lower interest
rates.
2002 2003
---- ----
Other Income (expense) $ (28,000) $ 29,000
- ----------------------
Other income for the nine months ended September 30, 2003
increased $57,000 from the same period in 2002, due primarily to the receipt of
a $250,000 high-technology grant at Diodes-China, partially offset by currency
losses, primarily in Taiwan.
2002 2003
---- ----
Income Tax Provision $ 949,000 $ 1,684,000
- --------------------
Income taxes for the nine months ended September 30, 2003 were
at a rate of 19.5% compared to 20.2% in the same period last year as more profit
was earned by the Company's Far East subsidiaries in lower tax jurisdictions.
Included in the tax provision for the nine months ended September 30, 2003 is
$630,000 in deferred taxes recorded for a portion of the 2003 earnings at
Diodes-China.
2002 2003
---- ----
Minority Interest in Joint Venture $ 219,000 $ 285,000
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
increase in the joint venture earnings for the nine months ended September 30,
2003 is primarily the result of increased capacity utilization, as well as
demand induced product mix changes.
Financial Condition
Liquidity and Capital Resources
The Company's liquidity requirements arise from the funding of
its working capital needs, primarily inventory, work-in-process and accounts
receivable. The Company's primary sources for working capital and capital
expenditures are cash flow from operations, borrowings under the Company's bank
credit facilities and borrowings from principal stockholders. Any withdrawal of
support from its banks or principal stockholders could have serious consequences
on the Company's liquidity. The Company's liquidity is dependent, in part, on
customers paying within credit terms, and any extended delays in payments or
changes in credit terms given to major customers may have an impact on the
Company's cash flow. In addition, any abnormal product returns or pricing
adjustments may also affect the Company's source of short-term funding.
At September 30, 2003 the Company had cash and cash
equivalents totaling $9.8 million, increased $2.5 million from December 31,
2002. Cash provided by operating activities for the nine months ended September
30, 2003 was $12.4 million compared to $11.9 million for the same period in
2002. The primary sources of cash flows from operating activities for the nine
months of 2003 were $8.1 million in depreciation and amortization, $6.7 million
in net income, and $1.7 million increase in accounts payable. In 2002, the
primary sources were $6.9 million in depreciation and amortization, $3.7 million
increase in accounts payable, and $3.5 million in net income.
The primary use of cash flows from operating activities for
the nine months of 2003 was an increase in accounts receivable of $5.6 million,
while the primary use of cash flows from operating activities in the same period
in 2002 was a $5.5 million increase in accounts receivable. Accounts receivable
days were 71 days at September 30, 2003, compared to 70 at December 31, 2002.
For the nine months ended September 30, 2003, gross accounts
receivable increased 24.6% compared to the 12.2% increase in sales. The Company
continues to closely monitor its credit terms, while at times providing extended
terms, required primarily by Far East customers and major U.S. distributors.
The ratio of the Company's current assets to current
liabilities was 1.61 at September 30, 2003 and 1.69 at December
31, 2002.
Inventories increased to $15.3 million from $14.9 million at
December 31, 2002, primarily due to an increase in wafer and raw material
inventory at Diodes-China. Inventory turns improved to 6.8 turns at September
30, 2003 from 5.8 turns at December 31, 2002.
Cash used by investing activities for the nine months ended
September 30, 2003 was $11.1 million, compared to $2.6 million during the same
period in 2002. The primary investment in both years was for additional
manufacturing equipment at the Diodes-China manufacturing facility, and to a
lesser extent, for capacity increases at Diodes-FabTech in 2003.
On December 1, 2000, the Company purchased all the outstanding
capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee's
Summit, Missouri from Lite-On Semiconductor Corporation ("LSC"), the Company's
largest stockholder. The acquisition purchase price consisted of approximately
$5 million in cash and an earn-out of up to $30 million if FabTech meets
specified earnings targets over a four-year period. In 2001 and 2002, these
earnings targets were not met, and, therefore, no earn-out was paid. In
addition, FabTech was obligated to repay an aggregate of approximately $19
million in debt, consisting of (i) approximately $13.6 million note payable to
LSC, (ii) approximately $2.6 million note payable to the Company, and (iii)
approximately $3.0 million note payable to a financial institution, which amount
was repaid on December 4, 2000 with the proceeds of a capital contribution by
the Company. The acquisition was financed internally and through bank credit
facilities.
In June 2001, according to the Company's U.S. bank covenants,
Diodes-FabTech was not permitted to make regularly scheduled principal and
interest payments to LSC on the remaining $10.0 million payable related to the
FabTech acquisition note, but was, however, able to renegotiate with LSC the
terms of the note. Under the terms of the amended and restated subordinated
promissory note, payments of approximately $417,000 plus interest were scheduled
to begin again in July 2002, provided the Company met the terms of its U.S.
bank's covenants. In May 2002, the Company renegotiated the terms of the note to
extend the payment period from two years to four years, and therefore, payments
of approximately $208,000 plus interest began in July 2002.
Cash provided by financing activities was $1.0 million for the
nine months ended September 30, 2003, as the Company borrowed on its revolving
line of credit, primarily to fund capital expenditures and inventory, compared
to cash used by financing activities of $11.5 million in the same period of
2002, due primarily to repayments of debt.
In February 2003, the Company and its U.S. bank renewed its
$7.5 million revolving credit line, extending it for two years, and obtained an
additional $2.0 million credit facility to be used for capital expenditure
requirements at its wafer fabrication facility. This $2.0 million facility
brings the Company's total credit facility to $50.2 million, with the total
available and unused credit at September 30, 2003 of $31.5 million.
At September 30, 2003, the Company's total bank credit
facility of $50.2 million encompasses one major U.S. bank, three banks in
Mainland China and four in Taiwan. As of September 30, 2003, the total credit
lines were $17.8 million, $25.0 million, and $7.4 million, for the U.S. facility
secured by substantially all assets, the unsecured Chinese facilities, and the
unsecured Taiwanese facilities, respectively. As of September 30, 2003, the
available credit was $4.1 million, $22.0 million, and $5.4 million, for the U.S.
facility, the Chinese facilities, and the Taiwanese facilities, respectively. In
2002, the Company paid down its total credit facilities by $14.6 million, from
$36.0 million to $21.4 million, and at September 30, 2003 total debt (including
the LSC note) was $21.5 million due to the increase in the short-term
borrowings.
The credit agreements have certain covenants and restrictions,
which, among other matters, require the maintenance of certain financial ratios
and operating results, as defined in the agreements, and prohibit the payment of
dividends. The Company was in compliance with its covenants as of September 30,
2003.
The Company has used its credit facilities primarily to fund
the expansion at Diodes-China and for the FabTech acquisition, as well as to
support its operations. The Company believes that the continued availability of
these credit facilities, together with internally generated funds, will be
sufficient to meet the Company's current foreseeable operating cash
requirements.
The Company has entered into an interest rate swap agreement
with a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt. The interest rate under the swap
agreement is fixed at 6.8% and is based on the notional amount. The swap
contract is inversely correlated to the related hedged long-term debt and is
therefore considered an effective cash flow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured by the changes in the
market value of the hedged long-term debt resulting from fluctuation in interest
rates. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
Total working capital increased approximately 8.2% to $22.5
million as of September 30, 2003, from $20.8 million as of December 31, 2002.
The Company believes that such working capital position will be sufficient for
foreseeable operations and growth opportunities. The Company's total debt to
equity ratio decreased to 0.76 at September 30, 2003, from 0.82 at December 31,
2002.
The Company has no material plans or commitments for capital
expenditures other than in connection with manufacturing expansion at
Diodes-China and Diodes-FabTech equipment requirements. However, to ensure that
the Company can secure reliable and cost effective inventory sourcing to support
and better position itself for growth, the Company is continuously evaluating
additional internal manufacturing expansion, as well as additional outside
sources of products. The Company believes its financial position will provide
sufficient funds should an appropriate investment opportunity arise and thereby,
assist the Company in improving customer satisfaction and in maintaining or
increasing market share. As of September 30, 2003, based upon plans for new
product introductions, product mixes, capacity restraints on certain product
lines and equipment upgrades, the Company expects that year 2003 capital
expenditures will be in the $13 to $14 million range as the Company approaches
higher capacity utilizations and brings new products into production.
Inflation did not have a material effect on net sales or net
income in the first nine months of 2003. A significant increase in inflation
could affect future performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary business objective is the maximization of
operating income given an acceptable level of risk. Our objective is exposed to
three primary sources of market risk: foreign currency risk, interest rate risk,
and political risk. No material changes to any of these risks have occurred
since December 31, 2002. For a more detailed discussion of market risk, refer to
Part II, Item 7A of our 2002 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Foreign Currency Risk. The Company faces exposure to adverse
movements in foreign currency exchange rates, primarily in Asia. The Company's
foreign currency risk may change over time as the level of activity in foreign
markets grows and could have an adverse impact upon the Company's financial
results. Certain of the Company's assets, including certain bank accounts and
accounts receivable, and liabilities exist in non-U.S. dollar denominated
currencies, which are sensitive to foreign currency exchange fluctuations. These
currencies are principally the Chinese Yuan, the Taiwanese dollar, the Japanese
Yen, and the Hong Kong dollar. Because of the relatively small size of each
individual currency exposure, the Company does not employ hedging techniques
designed to mitigate foreign currency exposures. Therefore, the Company could
experience currency gains and losses.
Interest Rate Risk. The Company has credit agreements with
U.S. and Far East financial institutions at interest rates equal to LIBOR or
similar indices plus a negotiated margin. A rise in interest rates could have an
adverse impact upon the Company's cost of working capital and its interest
expense. The Company entered into an interest rate swap agreement to hedge its
exposure to variability in expected future cash flows resulting from interest
rate risk related to a portion of its long-term debt. At September 30, 2003 the
interest rate swap agreement applies to $2.9 million of the Company's long-term
debt and expires November 30, 2004. The swap contract is inversely correlated to
the related hedged long-term debt and is therefore considered an effective cash
flow hedge of the underlying long-term debt. The level of effectiveness of the
hedge is measured by the changes in the market value of the hedged long-term
debt resulting from fluctuation in interest rates. As a matter of policy, the
Company does not enter into derivative transactions for trading or speculative
purposes.
Political Risk. The Company has a significant portion of its
assets in Mainland China and Taiwan. The possibility of political conflict
between the two countries or with the United States could have an adverse impact
upon the Company's ability to transact business through these important business
segments and to generate profits. See "Risk Factors - Foreign Operations."
Item 4. Controls and Procedures
The Company's Chief Executive Officer, C.H. Chen, and Chief
Financial Officer, Carl Wertz, with the participation of the Company's
management, carried out an evaluation of the effectiveness of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer believe that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective in making known to
them material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well
designed and implemented, can provide only reasonable assurance of achieving an
entity's disclosure objectives. The likelihood of achieving such objectives is
affected by limitations inherent in disclosure controls and procedures. These
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple errors, mistakes or intentional circumvention of the established
processes.
There was no change in the Company's internal control over
financial reporting, known to the Chief Executive Officer or the Chief Financial
Officer, that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Cautionary Statement for Purposes of the "Safe Harbor" Provision of the Private
Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the
matters addressed in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements are subject to a variety of risks
and uncertainties, including those discussed under "Risk Factors" and elsewhere
in this Quarterly Report on Form 10-Q that could cause actual results to differ
materially from those anticipated by the Company's management. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made on this Quarterly Report on Form 10-Q are made pursuant to the
Act.
All forward-looking statements contained in this Quarterly
Report on Form 10-Q are subject to, in addition to the other matters described
in this Quarterly Report on Form 10-Q, a variety of significant risks and
uncertainties. The following discussion highlights some of these risks and
uncertainties. Further, from time to time, information provided by the Company
or statements made by its employees may contain forward-looking information.
There can be no assurance that actual results or business conditions will not
differ materially from those set forth or suggested in such forward-looking
statements as a result of various factors, including those discussed below.
Risk Factors
Vertical Integration
We are in the process of vertically integrating our business.
Key elements of this strategy include (i) expanding our manufacturing capacity,
(ii) establishing wafer foundry and research and development capability through
the acquisition of FabTech and (iii) establishing sales, marketing, product
development, package development and assembly/testing operations in
company-owned facilities or through the acquisition of established contractors.
We have a limited history upon which an evaluation of the prospects of our
vertical integration strategy can be based. There are certain risks associated
with our vertical integration strategy, including:
o difficulties associated with owning a manufacturing business, including,
but not limited to, the maintenance and management of manufacturing
facilities, equipment, employees and inventories and limitations on the
flexibility of controlling overhead;
o difficulties implementing our Enterprise Resource Planning system;
o difficulties expanding our operations in the Far East and developing new
operations in Europe;
o difficulties developing and implementing a successful research and
development team;
o difficulties developing proprietary technology; and,
o market acceptance of our proprietary technology.
The risks of becoming a fully integrated manufacturer are
amplified in an industry-wide slowdown because of the fixed costs associated
with manufacturing facilities.
Economic Conditions
The discrete segment of the semiconductor industry is highly
cyclical, and the value of our business may decline during the "down" portion of
these cycles. During recent years, we, as well as many others in our industry,
experienced significant declines in the pricing of, as well as demand for, our
products and lower facilities utilization. The market for discrete
semiconductors may experience renewed, possibly more severe and prolonged,
downturns in the future. The markets for our products depend on continued demand
in the communications, computer, industrial, consumer electronic and automotive
markets, and these end-markets may experience changes in demand that could
adversely affect our operating results and financial condition.
Competition
The discrete semiconductor industry is highly competitive. We
expect intensified competition from existing competitors and new entrants.
Competition is based on price, product performance, product availability,
quality, and reliability and customer service. We compete in various markets
with companies of various sizes, many of which are larger and have greater
resources or capabilities as it relates to financial, marketing, distribution,
brand name recognition and other resources than we have and, thus, may be better
able to pursue acquisition candidates and to withstand adverse economic or
market conditions. In addition, companies not currently in direct competition
with us may introduce competing products in the future. Some of our current
major competitors are Fairchild Semiconductor Corporation, International
Rectifier Corporation, Rohm Electronics, Phillips Electronics, On Semiconductor
Corporation, and Vishay Intertechnology, Inc. We may not be able to compete
successfully in the future, or competitive pressures may harm our financial
condition or our operating results.
Foreign Operations
We expect revenues from foreign markets to continue to
represent a significant portion of our total revenues. In addition, we maintain
facilities or contracts with entities in the Philippines, Taiwan, Germany,
Japan, England, India, and China, among others. There are risks inherent in
doing business internationally, including:
o changes in, or impositions of, legislative or regulatory requirements,
including tax laws in the United States and in the countries in which we
manufacture or sell our products;
o trade restrictions, transportation delays, work stoppages, and economic and
political instability;
o changes in import/export regulations, tariffs and freight rates;
o difficulties in collecting receivables and enforcing contracts;
o currency exchange rate fluctuations;
o restrictions on the transfer of funds from foreign subsidiaries to
Diodes-North America; o longer customer payment terms; and,
o the SARS epidemic.
Variability of Quarterly Results
We have experienced, and expect to continue to experience, a
substantial variation in net sales and operating results from quarter to
quarter. We believe that the factors that influence this variability of
quarterly results include: o general economic conditions in the countries where
we sell our products; o seasonality and variability in the computer and
communications market and our other end markets; o the timing of our and our
competitors' new product introductions; o product obsolescence; o the
scheduling, rescheduling and cancellation of large orders by our customers; o
the cyclical nature of demand for our customers' products; o our ability to
develop new process technologies and achieve volume production at our
fabrication facilities; o changes in manufacturing yields; o adverse movements
in exchange rates, interest rates or tax rates; and o the availability of
adequate supply commitments from our outside suppliers or subcontractors.
Accordingly, a comparison of the Company's results of
operations from period to period is not necessarily meaningful and the Company's
results of operations for any period are not necessarily indicative of future
performance.
New Technologies
We cannot assure that we will successfully identify new
product opportunities and develop and bring products to market in a timely and
cost-effective manner, or that products or technologies developed by others will
not render our products or technologies obsolete or noncompetitive. In addition,
to remain competitive, we must continue to reduce package sizes, improve
manufacturing yields and expand our sales. We may not be able to accomplish
these goals.
Production
Our manufacturing efficiency will be an important factor in
our future profitability, and we cannot assure you that we will be able to
maintain or increase our manufacturing efficiency. Our manufacturing processes
require advanced and costly equipment and are continually being modified in an
effort to improve yields and product performance. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results also could be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
Future Acquisitions
As part of our business strategy, we expect to review
acquisition prospects that would implement our vertical integration strategy or
offer other growth opportunities. While we have no current agreements and no
active negotiations underway with respect to any acquisitions, we may acquire
businesses, products or technologies in the future. In the event of future
acquisitions, we could:
o use a significant portion of our available cash;
o issue equity securities, which would dilute current stockholders' percentage
ownership; o incur substantial debt; o incur or assume contingent liabilities,
known or unknown; o incur amortization expenses related to intangibles; and o
incur large, immediate accounting write-offs.
Such actions by us could harm our operating results and/or
adversely influence the price of our Common Stock.
Integration of Acquisitions
During fiscal year 2000, we acquired FabTech, Inc. We may
continue to expand and diversify our operations with additional acquisitions. If
we are unsuccessful in integrating these companies or product lines with our
operations, or if integration is more difficult than anticipated, we may
experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. Some of the risks that
may affect our ability to integrate or realize any anticipated benefits from
companies we acquire include those associated with:
o unexpected losses of key employees or customers of the acquired company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o hiring additional management and other critical personnel;
o increasing the scope, geographic diversity and complexity of our operations;
o difficulties in consolidating facilities and transferring processes
and know-how;
o diversion of management's attention from other business concerns; and
o adverse effects on existing business relationships with customers.
Backlog
The amount of backlog to be shipped during any period is
dependent upon various factors and all orders are subject to cancellation or
modification, usually with minimal or no penalty to the customer. Orders are
generally booked from one to twelve months in advance of delivery. The rate of
booking new orders can vary significantly from month to month. The Company and
the industry as a whole are experiencing a trend towards shorter lead-times (the
amount of time between the date a customer places an order and the date the
customer requires shipment). The amount of backlog at any date depends upon
various factors, including the timing of the receipt of orders, fluctuations in
orders of existing product lines, and the introduction of any new lines.
Accordingly, the Company believes that the amount of backlog at any date is not
meaningful and is not necessarily indicative of actual future shipments. The
Company strives to maintain proper inventory levels to support customers'
just-in-time order expectations.
Product Resources
We sell products primarily pursuant to purchase orders for
current delivery, rather than pursuant to long-term supply contracts. Many of
these purchase orders may be revised or canceled without penalty. As a result,
we must commit resources to the production of products without any advance
purchase commitments from customers. Our inability to sell, or delays in
selling, products after we devote significant resources to them could have a
material adverse effect on our business, financial condition and results of
operations.
Qualified Personnel
Our future success depends, in part, upon our ability to
attract and retain highly qualified technical, sales, marketing and managerial
personnel. Personnel with the necessary expertise are scarce and competition for
personnel with these skills is intense. We may not be able to retain existing
key technical, sales, marketing and managerial employees or be successful in
attracting, assimilating or retaining other highly qualified technical, sales,
marketing and managerial personnel in the future. If we are unable to retain
existing key employees or are unsuccessful in attracting new highly qualified
employees, our business, financial condition and results of operations could be
materially and adversely affected.
Expansion
Our ability to successfully offer our products in the discrete
semiconductor market requires effective planning and management processes. Our
past growth, and our targeted future growth, may place a significant strain on
our management systems and resources, including our financial and managerial
controls, reporting systems and procedures. In addition, we will need to
continue to train and manage our workforce worldwide.
Suppliers
Our manufacturing operations depend upon obtaining adequate
supplies of materials, parts and equipment on a timely basis from third parties.
Our results of operations could be adversely affected if we are unable to obtain
adequate supplies of materials, parts and equipment in a timely manner or if the
costs of materials, parts or equipment increase significantly. In addition, a
significant portion of our total sales is from parts manufactured by outside
vendors. From time to time, suppliers may extend lead times, limit supplies or
increase prices due to capacity constraints or other factors. Although we
generally use products, materials, parts and equipment available from multiple
suppliers, we have a limited number of suppliers for some products, materials,
parts and equipment. While we believe that alternate suppliers for these
products, materials, parts and equipment are available, any interruption could
materially impair our operations.
Environmental Regulations
We are subject to a variety of United States Federal, foreign,
state and local governmental laws, rules and regulations related to the use,
storage, handling, discharge or disposal of certain toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. Any of these regulations
could require us to acquire equipment or to incur substantial other expenses to
comply with environmental regulations. If we were to incur substantial
additional expenses, product costs could significantly increase, thus materially
and adversely affecting our business, financial condition and results of
operations. Any failure to comply with present or future environmental laws,
rules and regulations could result in fines, suspension of production or
cessation of operations, any of which could have a material adverse effect on
our business, financial condition and results of operations.
The Company received a claim from one of its former U.S.
landlords, regarding potential groundwater contamination at a site in which the
Company engaged in manufacturing from 1967 to 1973, alleging that the Company
may have some responsibility for cleanup costs. The Company anticipates that the
ultimate outcome of this matter will not have a material effect on its financial
condition.
Product Liability
One or more of our products may be found to be defective after
we have already shipped such products in volume, requiring a product replacement
or recall. We may also be subject to product returns, which could impose
substantial costs and have a material and adverse effect on our business,
financial condition and results of operations. Product liability claims may be
asserted with respect to our technology or products. Although we currently have
product liability insurance, there can be no assurance that we have obtained
sufficient insurance coverage, or that we will have sufficient resources, to
satisfy all possible product liability claims.
System Outages
Risks are presented by electrical or telecommunications
outages, computer hacking or other general system failure. To try to manage our
operations efficiently and effectively, we rely heavily on our internal
information and communications systems and on systems or support services from
third parties. Any of these systems are subject to failure. System-wide or local
failures that affect our information processing could have material adverse
effects on our business, financial condition, results of operations and cash
flows. In addition, insurance coverage for the risks described above may be
unavailable.
Downward Price Trends
Our industry is intensely competitive and prices for existing
products tend to decrease steadily over their life cycle. There is substantial
and continuing pressure from customers to reduce the total cost of using our
parts. To remain competitive, we must achieve continuous cost reductions through
process and product improvements. We must also be in a position to minimize our
customers' shipping and inventory financing costs and to meet their other goals
for rationalization of supply and production. Our growth and the profit margins
of our products will suffer if our competitors are more successful than we are
in reducing the total cost to customers of their products.
Obsolete Inventories
The life cycles of some of our products depend heavily upon
the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage closely our production and
inventory levels. Inventory may also become obsolete because of adverse changes
in end-market demand. We may in the future be adversely affected by obsolete or
excess inventories which may result from unanticipated changes in the estimated
total demand for our products or the estimated life cycles of the end products
into which our products are designed.
Deferred Taxes
As of September 30, 2003, accumulated and undistributed
earnings of Diodes-China are approximately $29.9 million. Through March 31,
2002, the Company had not recorded deferred Federal or state tax liabilities
(estimated to be $8.9 million) on these cumulative earnings since the Company
considered this investment to be permanent, and had no plans or obligations to
distribute all or part of that amount from China to the United States. Beginning
in April 2002, the Company began to record deferred taxes on a portion of the
2002 earnings of Diodes-China, and had accrued $0.9 million at December 31,
2002. In 2003, the Company continued to record deferred taxes on a portion of
the 2003 estimated earnings of Diodes-China, recording $0.6 million in deferred
taxes during the first nine months of 2003.
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of Diodes-China and Diodes-Hong Kong to
the extent such earnings may be appropriated for distribution to the Company's
corporate office in North America, and as further investment strategies with
respect to Diodes-China are determined. Should the Company's North American cash
requirements exceed the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company's foreign subsidiaries.
However, the distribution of any unappropriated funds to the U.S. will require
the recording of income tax provisions on the U.S. entity, thus reducing net
income.
Foreign Currency Risk
The Company faces exposure to adverse movements in foreign
currency exchange rates, primarily in Asia and, to a lesser extent, in Europe.
The Company's foreign currency risk may change over time as the level of
activity in foreign markets grows and could have an adverse impact upon the
Company's financial results. Certain of the Company's assets, including certain
bank accounts and accounts receivable, and liabilities exist in non-U.S. dollar
denominated currencies, which are sensitive to foreign currency exchange
fluctuations. These currencies are principally the Chinese Yuan, the Taiwanese
dollar, the Japanese Yen, and the Hong Kong dollar. Because of the relatively
small size of each individual currency exposure, the Company does not employ
hedging techniques designed to mitigate foreign currency exposures. Therefore,
the Company could experience currency gains and losses.
Interest Rate Risk
The Company has credit agreements with U.S. and Far East
financial institutions at interest rates equal to LIBOR or similar indices plus
a negotiated margin. A rise in interest rates could have an adverse impact upon
the Company's cost of working capital and its interest expense. The Company
entered into an interest rate swap agreement to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to a portion of its long-term debt. At September 30, 2003 the interest
rate swap agreement applies to $2.9 million of the Company's long-term debt and
expires November 30, 2004. The swap contract is inversely correlated to the
related hedged long-term debt and is therefore considered an effective cash flow
hedge of the underlying long-term debt. The level of effectiveness of the hedge
is measured by the changes in the market value of the hedged long-term debt
resulting from fluctuation in interest rates. As a matter of policy, the Company
does not enter into derivative transactions for trading or speculative purposes.
Political Risk
The Company has a significant portion of its assets in
Mainland China, Taiwan and Hong Kong. The possibility of political conflict
between these countries or with the United States could have an adverse impact
upon the Company's ability to transact business through these important business
segments and to generate profits.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no matters to be reported under this heading.
Item 2. Changes in Securities
There are no matters to be reported under this heading.
Item 3. Defaults Upon Senior Securities
There are no matters to be reported under this heading.
Item 4. Submission of Matters to a Vote of Security Holders
There are no matters to be reported under this heading.
Item 5. Other Information
There are no matters to be reported under this heading.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 31.1 Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C.
1350 Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIODES INCORPORATED (Registrant)
By: /s/ Carl C. Wertz November 12, 2003
- ----------------------------------------------------
CARL C. WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit - 11
DIODES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
2002 2003 2002 2003
----------------- ---------------- ---------------- ---------------
BASIC
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,190,887 8,542,328 8,177,506 8,436,987
Net income $ 1,767,000 $ 2,563,000 $ 3,539,000 $ 6,658,000
================= ================ ================ ===============
Basic earnings per share $ 0.22 $ 0.30 $ 0.43 $ 0.79
================= ================ ================ ===============
DILUTED
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,190,887 8,542,328 8,177,506 8,436,987
Assumed exercise of stock options 671,385 1,155,176 656,805 1,065,484
----------------- ---------------- ---------------- ---------------
8,862,272 9,697,504 8,834,311 9,502,471
Net income $ 1,767,000 $ 2,563,000 $ 3,539,000 $ 6,658,000
================= ================ ================ ===============
Diluted earnings per share $ 0.20 $ 0.26 $ 0.40 $ 0.70
================= ================ ================ ===============
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C.H. Chen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes
Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
/s/ C.H. Chen
C. H. Chen
Chief Executive Officer
Date: November 12, 2003
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl C. Wertz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes
Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Carl C. Wertz
Carl C. Wertz
Chief Executive Officer
Date: November 12, 2003
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their
knowledge, the Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2003 of Diodes Incorporated (the "Company") fully complies with
the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, and that the information contained in such periodic report
fairly presents, in all material respects, the financial condition and results
of operations of the Company as of, and for, the periods presented in such
report.
Very truly yours,
/s/ C.H. Chen
C.H. Chen
Chief Executive Officer
Date: November 12, 2003
/s/ Carl C. Wertz
Carl C. Wertz
Chief Financial Officer
Date: November 12, 2003
A signed original of this written statement required by Section 906 has been
provided to Diodes Incorporated and will be furnished to the Securities and
Exchange Commission or its staff upon request.