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, 2001
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 [ ]
The number of shares of the registrant's Common Stock, $0.66 2/3 par value,
outstanding as of November 2, 2001 was 9,223,705, including 1,075,672 shares of
treasury stock.
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 4,476,000 $ 2,531,000
Accounts receivable
Customers 19,723,000 19,924,000
Related parties 615,000 1,412,000
Other 26,000 --
------------ ------------
20,364,000 21,336,000
Less allowance for doubtful receivables 311,000 249,000
------------ ------------
20,053,000 21,087,000
Inventories 31,788,000 20,899,000
Deferred income taxes, current 4,387,000 4,382,000
Prepaid expenses and other current assets 686,000 1,407,000
------------ ------------
Total current assets 61,390,000 50,306,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 45,129,000 46,326,000
DEFERRED INCOME TAXES, non-current 616,000 2,914,000
OTHER ASSETS
Goodwill, net 5,318,000 5,386,000
Other 497,000 593,000
------------ ------------
TOTAL ASSETS $112,950,000 $105,525,000
============ ============
The accompanying notes are an integral part of these financial statements.
2
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------- -------------
(UNAUDITED)
CURRENT LIABILITIES
Line of credit $ 7,750,000 $ 7,604,000
Accounts payable
Trade 10,710,000 5,712,000
Related parties 1,008,000 3,384,000
Accrued liabilities 8,401,000 6,115,000
Income taxes payable 1,370,000 --
Current portion of long-term debt
Related party 11,049,000 4,490,000
Other 3,811,000 3,647,000
------------- -------------
Total current liabilities 44,099,000 30,952,000
LONG-TERM DEBT, net of current portion
Related party 2,500,000 8,750,000
Other 13,497,000 12,467,000
------------- -------------
MINORITY INTEREST IN JOINT VENTURE 1,601,000 1,776,000
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; 9,201,704 and 9,223,705
shares issued and outstanding at December 31, 2000
and September 30, 2001, respectively 6,134,000 6,149,000
Additional paid-in capital 7,143,000 7,231,000
Retained earnings 39,758,000 40,184,000
Foreign currency translation loss -- (202,000)
------------- -------------
53,035,000 53,362,000
Less:
Treasury stock -- 1,075,672 shares of common stock,
at cost 1,782,000 1,782,000
------------- -------------
Total stockholders' equity 51,253,000 51,580,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 112,950,000 $ 105,525,000
============= =============
The accompanying notes are an integral part of these financial statements.
3
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
NET SALES $ 32,332,000 $ 22,698,000 $ 92,369,000 $ 69,447,000
COST OF GOODS SOLD 21,211,000 20,279,000 62,322,000 58,863,000
------------ ------------ ------------ ------------
Gross profit 11,121,000 2,419,000 30,047,000 10,584,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,050,000 3,845,000 14,862,000 10,482,000
------------ ------------ ------------ ------------
Income (loss) from operations 6,071,000 (1,426,000) 15,185,000 102,000
OTHER INCOME (EXPENSE)
Interest income 128,000 80,000 323,000 222,000
Interest expense (332,000) (592,000) (920,000) (1,903,000)
Other 135,000 94,000 181,000 211,000
------------ ------------ ------------ ------------
(69,000) (418,000) (416,000) (1,470,000)
Income (loss) before income taxes and
minority interest 6,002,000 (1,844,000) 14,769,000 (1,368,000)
INCOME TAX BENEFIT (PROVISION) (1,170,000) 1,052,000 (2,197,000) 1,741,000
------------ ------------ ------------ ------------
Income (loss) before minority interest 4,832,000 (792,000) 12,572,000 373,000
MINORITY INTEREST IN JOINT VENTURE
EARNINGS (182,000) (55,000) (462,000) (174,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 4,650,000 $ (847,000) $ 12,110,000 $ 199,000
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
Basic $ 0.57 $ (0.10) $ 1.50 $ 0.02
Diluted $ 0.50 $ (0.10) $ 1.31 $ 0.02
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,101,667 8,147,902 8,053,675 8,142,333
Diluted 9,260,765 8,815,581 9,259,095 8,928,711
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 4,650,000 $ (847,000) $12,110,000 $ 199,000
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustment -- (202,000) -- (202,000)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 4,650,000 $(1,049,000) $12,110,000 $ (3,000)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,110,000 $ 199,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 3,336,000 5,946,000
Minority interest earnings 462,000 174,000
Interest income accrued on advances to vendor (143,000) --
Changes in operating assets:
Accounts receivable (5,978,000) (1,034,000)
Inventories (8,426,000) 10,889,000
Prepaid expenses and other assets (170,000) (3,110,000)
Changes in operating liabilities:
Accounts payable 2,739,000 (2,622,000)
Accrued liabilities 3,037,000 (2,286,000)
Income taxes payable 218,000 (1,370,000)
------------ ------------
Net cash provided by operating activities 7,185,000 6,786,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (14,310,000) (7,143,000)
Collections on note receivable 162,000 --
------------ ------------
Net cash used by investing activities (14,148,000) (7,143,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on (repayments of) line of credit, net 4,862,000 (146,000)
Net proceeds from the issuance of capital stock 589,000 103,000
Proceeds from (repayments of) long-term obligations 966,000 (1,503,000)
Other (44,000) (42,000)
------------ ------------
Net cash provided (used) by financing activities 6,373,000 (1,588,000)
------------ ------------
DECREASE IN CASH (590,000) (1,945,000)
CASH AT BEGINNING OF PERIOD 3,557,000 4,476,000
------------ ------------
CASH AT END OF PERIOD $ 2,967,000 $ 2,531,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 597,000 $ 1,681,000
============ ============
Income taxes $ 1,994,000 $ 1,922,000
============ ============
The accompanying notes are an integral part of these financial statements.
6
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with 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
generally accepted accounting principles. These consolidated 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, 2000. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and accruals) considered
necessary for a fair presentation have been included in the interim period.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
The consolidated financial statements include the accounts of the
Company and its wholly-owned foreign subsidiary, Diodes Taiwan Co., Ltd.
("Diodes-Taiwan"), the accounts of Shanghai KaiHong Electronics Co., Ltd.
("Diodes-China") in which the Company has a 95% interest, and the accounts of
FabTech Incorporated ("FabTech" or "Diodes-FabTech"), which the Company acquired
in December 2000. All significant intercompany balances and transactions have
been eliminated.
NOTE B -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill
beginning in the first quarter of 2002. During 2002, the Company will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. The Company has not yet determined what
effect the implementation of these new rules will have on the earnings and
financial position of the Company. Application of the non-amortization
provisions of the Statements is expected to result in an increase in net income
of approximately $288,000 ($0.03 per share) per year, assuming no impairment
adjustment.
NOTE C -- FUNCTIONAL CURRENCIES AND FOREIGN CURRENCY TRANSLATION
Through June 30, 2001, the functional currency of Diodes-Taiwan
has been the U.S. dollar. Effective July 1, 2001, the Company changed the
functional currency of Diodes-Taiwan to the local currency in Taiwan. As a
result of this change, the translation of the balance sheet and statement of
income of Diodes-Taiwan from the local currency into the reporting currency (US
dollar) results in translation adjustments, the effect of which is reflected in
the accompanying statement of comprehensive income and on the balance sheet as a
separate component of shareholders' equity.
The Company believes this reporting change most appropriately
reflects the current economic facts and circumstances of the operations of
Diodes-Taiwan. The Company continues to use the U.S. dollar as the functional
currency in Diodes-China as substantially all monetary transactions are made in
that currency, and other significant economic facts and circumstances currently
support that position. As these factors may change in the future, the Company
will periodically assess its position with respect to the functional currency of
Diodes-China.
7
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,
2000 2001
------------ -------------
Finished goods $18,603,000 $11,916,000
Work-in-progress 2,683,000 1,944,000
Raw materials 10,502,000 7,039,000
----------- -----------
$31,788,000 $20,899,000
=========== ===========
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, the Company has recorded a net
deferred tax asset of $7.3 million resulting from temporary differences in bases
of assets and liabilities. This deferred tax asset results primarily from
inventory reserves and certain expense accruals, which are not currently
deductible for income tax purposes.
The reported income tax rate as a percentage of pretax income
differs from the statutory combined federal and state tax rates of approximately
40%. The primary reasons for this difference are; 1) currently the effective tax
rate of Diodes-China is approximately 2%, and as discussed below, deferred U.S.
federal and state income taxes are not provided on these earnings, and 2)
deferred income tax benefits at a rate of 37.5% have been recognized on losses
incurred at FabTech.
As of September 30, 2001, accumulated and undistributed earnings
of Diodes-China are approximately $23.1 million. The Company has not recorded a
deferred tax liability (estimated to be $9.5 million) on these earnings since
the Company considers this investment to be permanent, and has no plans,
intentions or obligation to distribute all or part of that amount from China to
the United States. The Company will consider the need to provide deferred taxes
on future earnings of Diodes-China, as further investment strategies with
respect to Diodes-China are determined.
NOTE F -- STOCK SPLIT
On July 14, 2000, the Company effected a three-for-two stock
split for shareholders of record as of June 28, 2000. All share and per share
amounts in the accompanying financial statements reflect the effect of this
stock split.
NOTE G -- SEGMENT INFORMATION
Information about the Company's operations in North America and
the Far East are presented below. Items transferred among the Company and its
subsidiaries are transferred at prices to recover costs plus an appropriate mark
up for profit. Inter-company revenues, profits and assets have been eliminated
to arrive at the consolidated amounts.
Operating segments are defined as components 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, the
Vice President of Sales and Marketing, the Chief Financial Officer and the Vice
President of Far East Operations.
The Company's reportable operating segments include the domestic
operations (Diodes and FabTech) located in the United States and the Far East
operations (Diodes-Taiwan located in Taipei, Taiwan; and
8
Diodes-China located in Shanghai, China). Diodes-North America procures and
distributes products primarily throughout North America and provides management,
warehousing, engineering and logistics support. As a component of the North
American segment, FabTech, Inc. manufactures and distributes 5-inch silicon
wafers primarily to trade customers, as well as for use in the Company's
internal manufacturing processes at Diodes-China. Diodes-Taiwan markets and
sells discrete semiconductor devices throughout the Far East and to Diodes
Incorporated. Diodes-China manufactures discrete semiconductor devices for sale
to Diodes Incorporated, Diodes-Taiwan and third-party customers in the Far East.
THREE MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, 2000 FAR EAST NORTH AMERICA SEGMENTS
- ------------------ ------------- ------------- -------------
Total sales $ 29,645,000 $ 18,587,000 $ 48,232,000
Inter-segment sales (15,014,000) (886,000) (15,900,000)
------------- ------------- -------------
Net sales $ 14,631,000 $ 17,701,000 $ 32,332,000
Depreciation and
amortization $ 1,165,000 $ 84,000 $ 1,249,000
Operating income $ 5,008,000 $ 1,063,000 $ 6,071,000
Assets $ 62,602,000 $ 24,744,000 $ 87,346,000
Capital expenditures $ 8,167,000 $ 178,000 $ 8,345,000
============= ============= =============
THREE MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, 2001 FAR EAST NORTH AMERICA SEGMENTS
- ------------------ ------------- ------------- -------------
Total sales $ 19,573,000 $ 12,258,000 $ 31,831,000
Inter-segment sales (8,381,000) (752,000) (9,133,000)
------------- ------------- -------------
Net sales $ 11,192,000 $ 11,506,000 $ 22,698,000
Depreciation and
amortization $ 1,437,000 $ 407,000 $ 1,844,000
Operating income $ 1,180,000 $ (2,606,000) $ (1,426,000)
Assets $ 61,269,000 $ 44,256,000 $ 105,525,000
Capital expenditures $ 405,000 $ 196,000 $ 601,000
============= ============= =============
NINE MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, 2000 FAR EAST NORTH AMERICA SEGMENTS
- ------------------ ------------- ------------- -------------
Total sales $ 80,425,000 $ 52,763,000 $ 133,188,000
Inter-segment sales (38,508,000) (2,311,000) (40,819,000)
------------- ------------- -------------
Net sales $ 41,917,000 $ 50,452,000 $ 92,369,000
Depreciation and
amortization $ 3,085,000 $ 251,000 $ 3,336,000
Operating income $ 14,619,000 $ 566,000 $ 15,185,000
Assets $ 62,602,000 $ 24,744,000 $ 87,346,000
Capital expenditures $ 13,712,000 $ 599,000 $ 14,311,000
============= ============= =============
9
NINE MONTHS ENDED CONSOLIDATED
SEPTEMBER 30, 2001 FAR EAST NORTH AMERICA SEGMENTS
- ------------------ ------------- ------------- -------------
Total sales $ 52,554,000 $ 41,402,000 $ 93,956,000
Inter-segment sales (21,980,000) (2,529,000) (24,509,000)
------------- ------------- -------------
Net sales $ 30,574,000 $ 38,873,000 $ 69,447,000
Depreciation and
amortization $ 4,369,000 $ 1,577,000 $ 5,946,000
Operating income $ 4,469,000 $ (4,367,000) $ 102,000
Assets $ 61,269,000 $ 44,256,000 $ 105,525,000
Capital expenditures $ 5,884,000 $ 1,259,000 $ 7,143,000
============= ============= =============
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 "Factors That May Affect
Future Results" 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") is a manufacturer and
distributor of high-quality discrete semiconductor devices to leading
manufacturers in the communications, computer, industrial, consumer electronics
and automotive industries, and to distributors of electronic components. The
Company's products include small signal transistors and MOSFETs, transient
voltage suppressors (TVSs), zeners, diodes, rectifiers and bridges, as well as
silicon wafers used in manufacturing these products.
For financial reporting purposes, the Company is deemed to engage
in two industry segments: North America and the Far East. Both segments focus on
discrete semiconductor devices. The North American segment includes the
corporate offices in California ("Diodes-North America") as well as FabTech,
Inc. ("FabTech" or "Diodes-FabTech"), the newly acquired 5-inch wafer foundry
located in Missouri. Diodes-North America procures and distributes products
primarily throughout North America and provides management, warehousing,
engineering and logistics support. Diodes-FabTech manufactures silicon wafers
for use by Diodes-China as well as for sale to its customer base. The Far East
segment includes the operations of Diodes-China (QS-9000 and ISO-14001
certified) in Shanghai, and Diodes-Taiwan (ISO-9000 certified) in Taipei.
Diodes-China manufactures product for, and distributes product to, both
Diodes-North America and Diodes-Taiwan, as well as to trade customers.
Diodes-Taiwan is the Company's Asia-Pacific sales, logistics and distribution
center, and procures product from, and distributes product primarily to,
customers in Taiwan, Korea, Singapore and Hong Kong, and to Diodes-North
America.
10
The discrete semiconductor industry, in which the Company
competes, has historically had periods of severe pricing pressures. Although
manufacturing costs have been falling, excess manufacturing capacity and
over-inventory has caused selling prices to fall to a greater extent than
manufacturing cost. To compete in this highly competitive industry, in recent
years, the Company has committed substantial resources to the development and
implementation of two areas of operation: (i) sales and marketing, and (ii)
manufacturing. Emphasizing the Company's focus on customer service, additional
sales personnel and programs have been added. In order to meet customers' needs
at the design stage of end-product development, the Company has also employed
additional applications engineers. These applications engineers work directly
with customers to assist them in "designing in" the correct products to produce
optimum results. Regional sales managers, working closely with manufacturers'
representatives and distributors, have also been added in North America, Europe
and the Far East to help satisfy customers' requirements. In addition, the
Company has continued to develop relationships with major distributors who
inventory and sell the Company's products. For a description of the Company's
manufacturing capacity, see "Manufacturing and Vendors."
SALES
The Company's products are sold primarily in North America and
the Far East, both directly to end users and through electronic component
distributors. Beginning in 1998, the Company has increased the amount of product
shipped to larger distributors. Although these sales are significant in terms of
total sales dollars and gross margin dollars, they generally are under
agreements that resulted in lower gross profit margins for the Company when
compared to sales to smaller distributors and OEM customers. As the
consolidation of electronic component distributors continues, the Company
anticipates that a greater portion of its distributor sales will be to the
larger distributors, and thus may result in lower gross profit margins for this
sales channel.
In 1999, Diodes-Taiwan began purchasing silicon wafers, a new
product line, from FabTech for resale to customers in the Far East. The gross
margin percentage on sales of silicon wafers is currently far below that of the
Company's standard product line. Initially a complementary service for some
customers rather than a focused product line, silicon wafers will now be a
focused product line supplied by FabTech to its current customer base, as well
as to Diodes-China for use in its manufacturing process. Silicon wafer sales to
trade customers were $3.5 million and $1.0 million, for the three months ended
September 30, 2001 and 2000, respectively, and $11.4 million and $5.9 million
for the nine months ended September 30, 2001 and 2000, respectively.
The Company has recently expanded its Far East sales force to be
able to expand sales and to more effectively service accounts in Taiwan, Hong
Kong, Mainland China and other areas that the Company believes are positioned
for rapid growth. In addition, the Company has initiated a sales team in Europe
to serve the UK, France, Germany, Italy and Israel, among others, and is
actively sampling customers and taking orders.
MANUFACTURING AND VENDORS
The Company's Far East manufacturing subsidiary, Diodes-China,
manufactures product for sale primarily to customers in North America and the
Far East. Diodes-China's manufacturing focuses on miniature surface- mount
packages for diodes and transistors, starting with single chip implementations
and adding multi-chip packaging to meet custom requirements reducing the space
required in end equipment. These surface-mount devices ("SMD") are much smaller
in size and are used primarily in the computer and communication industries,
destined for wireless devices, notebook computers, pagers, PCMCIA cards and
modems, as well as in consumer products such as garage door transmitters and
other electronic devices. 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. Currently, Diodes-China is
operating at approximately 52% of capacity (up from 45% last quarter) and
reporting an operating profit. Although Diodes-China purchases processed silicon
wafers from FabTech for use in its manufacturing process, the majority currently
are purchased from other wafer vendors.
11
Since 1997, the Company's manufacturing focus has primarily been
in the development and expansion of Diodes-China. To date, the Company and its
5% minority partner have increased property, plant and equipment at the facility
to approximately $44.9 million. The equipment expansion allows for the
manufacture of additional SOT-23 packaged components as well as other
surface-mount packaging, including the smaller SOD packages. As the industry
requires manufacturing of smaller and more efficient products that meet the
technical requirements of customers seeking to integrate multiple technologies
within one package, the Company will continue to increase manufacturing capacity
as worldwide demand warrants.
In addition, the Company will continue its strategic plan of
locating alternate sources of its products and raw materials, including those
provided by its major suppliers. Alternate sources include, but are not limited
to sourcing agreements in place, as well as those in negotiation. The Company
anticipates that the effect of the loss of any one of its major suppliers will
not have a material adverse effect on the Company's operations, provided that
alternate sources remain available. The Company continually evaluates
alternative sources of its products to assure its ability to deliver
high-quality, cost-effective products.
FABTECH
Acquired on December 1, 2000 from Lite-On Semiconductor
Corporation ("LSC"), FabTech's wafer foundry is located in Lee's Summit,
Missouri. As of September 30, 2001, LSC owns approximately 37.6% of the
outstanding Common Stock of the Company. FabTech manufactures primarily 5-inch
silicon wafers (the building blocks for semiconductors) that are used to make
Schottky diodes and rectifiers. 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.
FabTech purchases polished silicon wafers, and then by using the
various technologies listed above, in conjunction with many chemicals and gases,
fabricates several layers on the wafers, including epitaxial silicon, ion
implants, dielectrics, and metals, with various patterns. Depending upon these
layers and the die size (which is determined during the photolithography process
and completed at the customer's packaging site where the wafer is sawed into
square or rectangular die), wafers, with different types of diodes with various
currents, voltages, and switching speeds, are produced. Currently,
Diodes-FabTech is operating at approximately 45% of capacity (up from 35% last
quarter) and reporting an operating loss.
The FabTech purchase price consisted of approximately $6 million
in cash and an earnout of up to $30 million over a four-year period if FabTech
meets specified earnings targets. As of September 30, 2001, due to the industry
downturn, it is unlikely these specified earning targets would be met for 2001.
In addition, FabTech is obligated to repay an aggregate of approximately $19
million, consisting of (i) approximately $13.6 million payable, together with
interest at LIBOR plus 1%, to LSC through March 31, 2002, (ii) approximately
$2.6 million payable, together with interest at LIBOR plus 1.1%, to the Company
through February 28, 2001 and (iii) approximately $3.0 million 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.
The Company has recently re-negotiated its obligation to LSC. The
new terms consist of a monthly payment of approximately $500,000 plus interest
accrued (based upon LIBOR plus 1.0%) per month beginning in July 2001 for the
remainder of the year, followed by the remaining balance of $10,000,000 payable
in 24 equal monthly installments, together with interest at the rate of LIBOR
plus 2.0%, commencing on July 31, 2002. Accrued interest on the $10,000,000 will
be paid monthly beginning in July 2001.
RECENT RESULTS
Starting in the second half of 1999, and continuing through the
first three quarters of 2000, industry demand exceeded industry capacity. In
addition, OEM customers and distributors increased their inventory levels. As a
result, the Company's gross profit margins reached a peak of 34.4% in the third
quarter of 2000.
As semiconductor manufacturers, including the Company, rapidly
invested in plant and equipment to increase their capacity, the semiconductor
industry experienced a sharp inventory correction primarily in two key
12
markets, communications and computers. Compounding this inventory correction,
economies (primarily the U.S. and the Far East) slowed, causing a sharp decline
in sales in the fourth quarter of 2000.
The excess capacity, combined with the decreased demand and
higher customer inventory levels, continued into 2001. Although the Company's
market share has remained stable, market conditions have not improved. Because
of this, the Company expects lower gross profit margins until such a time as
demand increases and the Company utilizes more of its available manufacturing
capacity.
The impact to earnings is largely attributable to lower unit
sales, pricing pressures, reduced capacity utilization of the Company's
manufacturing assets and demand-induced product mix changes, all which have had
a negative impact on gross margins. Due to market conditions, 2001 average
capacity utilization at Diodes-FabTech has decreased approximately 35% as
compared to the previous year, while Diodes-China's utilization has decreased
25%. From the second quarter to the third quarter of 2001, capacity utilization
has increased. Presently, the manufacturing facility in China is running at
approximately 52% of total capacity, up from 45% last quarter, and FabTech has
improved to 45% from 35%.
Gross margins decreased from 19.3% in the second quarter of 2001,
to 10.7% in the third quarter of 2001. The lower gross margin percentage was
primarily due to pricing adjustments at distributors related to decreased market
prices, and to inventory adjustments at FabTech due to lower wafer pricing.
The risks of becoming a fully integrated manufacturer are
amplified in an industry-wide slowdown because of the fixed costs associated
with manufacturing facilities. The Company has responded to this cyclical
downturn by implementing programs to cut operating costs, including reducing its
worldwide workforce by 26%, primarily at the FabTech and Diodes-China
manufacturing facilities. The Company will continue to actively adjust its cost
structure as dictated by market conditions.
Although no clear short-term change in market conditions exist,
the Company believes that long-term it will continue to generate value for
shareholders and customers, not just from its expanded Diodes-China
manufacturing and FabTech's foundry assets, but also by the addition of this
true technology component to the Company. Although market conditions changed
just as the new initiative started, the Company will continue to pursue its goal
of becoming a total solution provider. This is a multi-year initiative that will
increase the Company's ability to serve its customers' needs, while establishing
the Company at the forefront of the next generation of discrete technologies.
TAXES
The reported income tax rate as a percentage of pretax income
differs from the statutory combined federal and state tax rates of approximately
40%. The primary reasons for this difference are; 1) currently the effective tax
rate of Diodes-China is approximately 2%, and deferred U.S. federal and state
income taxes are not provided on these earnings, and 2) deferred income tax
benefits at a rate of 37.5% have been recognized on losses incurred at FabTech.
From 2001 through 2003, the tax rate at Diodes-China is expected
to be approximately 12% (the normal tax rate is 27%). The Company, however, has
received special incentives due to its advanced technology status from the local
government that reduces the effective rate to approximately 2%. Currently, no
assurances can be made regarding the duration of this preferential treatment.
Diodes-China accrues an offsetting monthly tax credit and recovers the special
incentive on a quarterly basis.
In accordance with tax treaty arrangements, the Company receives
full credit against its U.S. federal tax liability for corporate taxes paid in
Taiwan and China. The repatriation of funds from Taiwan and China to the Company
may be subject to state income taxes. In the years ending December 31, 1999 and
2000, Diodes-Taiwan distributed dividends of approximately $1.5 million and $2.6
million, respectively, which is included in federal and state taxable income.
Deferred taxes have been provided for all remaining undistributed earnings of
Diodes-Taiwan.
13
As of September 30, 2001, accumulated and undistributed earnings
of Diodes-China are approximately $23.1 million. The Company has not recorded
deferred federal or state tax liabilities (estimated to be $9.5 million) on
these earnings since the Company considers its investment in Diodes-China to be
permanent, and has no plans, intentions or obligation to distribute all or part
of that amount from China to the United States.
Each quarter the Company assesses its position with respect to
its investment plans and monetary policies as they relate to the recognition of
deferred tax liabilities on the earnings at Diodes-China. At such time the
Company plans to cease reinvesting its earnings in Diodes-China, deferred income
taxes would be provided on incremental earnings of Diodes-China thereafter.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
2001
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
PERCENT OF NET SALES DOLLAR
THREE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
-------------------- ------------
2000 2001 '00 TO '01
------ ------ ------------
Net sales 100.0% 100.0% (29.8)%
Cost of goods sold (65.6) (89.3) (4.4)
------ ------ ------------
Gross profit 34.4 10.7 (78.2)
Selling, general & administrative
expenses ("SG&A") (15.6) (16.9) (23.9)
------ ------ ------------
Income from operations 18.8 (6.2) (123.5)
Interest expense, net (0.6) (2.3) 151.0
Other income 0.4 0.4 (30.4)
------ ------ ------------
Income before taxes and minority 18.6 (8.1) (130.7)
Income taxes (3.6) 4.6 (189.9)
------ ------ ------------
Income before minority interest 15.0 (3.5) (116.4)
Minority interest (0.6) (0.2) (69.8)
------ ------ ------------
Net income 14.4 (3.7) (118.2)
====== ====== ============
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 30, 2001 compared to the three months ended
September 30, 2000. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
2000 2001
---- ----
NET SALES $ 32,332,000 $ 22,698,000
Net sales decreased approximately $9.6 million, or 29.8%, for the three months
ended September 30, 2001, compared to the same period last year, due primarily
to a 15.8% decrease in units sold as a result of decreased demand attributable
to a slow economy and higher than normal customer inventory, and due to market
pricing pressures. The Company's average selling price ("ASP") decreased
approximately 26% from the same three-month period last year, primarily in the
Far East. However, pricing seems to have begun to stabilize as ASP's
14
decreased approximately 2% from last quarter. Diodes-FabTech, acquired in
December 2000, contributed trade sales of $3.3 million in the third quarter of
2001.
2000 2001
---- ----
COST OF GOODS SOLD $22,211,000 $20,279,000
GROSS PROFIT $11,121,000 $ 2,419,000
GROSS PROFIT MARGIN PERCENTAGE 34.4% 10.7%
Gross profit decreased approximately $8.7 million, or 78.2%, for
the three months ended September 30, 2001 compared to the year ago period. Of
the $8.7 million decrease, approximately $3.3 million was due to the 29.8%
decrease in net sales, while $5.4 million was due to the decrease in gross
margin percentage from 34.4% to 10.7%. The lower gross margin percentage was
primarily due to excess manufacturing capacity and lower sales prices. Pricing
adjustments of approximately $700,000 at distributors related to decreased
market prices, and to inventory adjustments of approximately $400,000 at FabTech
due to lower wafer pricing also contributed to the decrease in gross margin
percentage. Excluding these pricing adjustments, the gross profit margin would
have been approximately 15.4% for the third quarter of 2001. The Company expects
lower than historical gross profit margins until such a time as demand increases
and the Company utilizes more of its available manufacturing capacity.
Currently, Diodes-China is running at approximately 52% of total capacity, up
from 45% last quarter, and FabTech has improved to 45% from 35% last quarter.
2000 2001
---- ----
SG&A $ 5,050,000 $ 3,845,000
SG&A for the three months ended September 30, 2001 decreased
approximately $1.2 million, or 23.9%, compared to the same period last year, due
primarily to lower sales commissions associated with the 29.8% decrease in
sales, and lower wages and benefits expenses resulting from a work-force
reduction which began in the fourth quarter of 2000. SG&A also decreased due to
lower corporate and administrative expenses, partly offset by the inclusion of
the SG&A expenses and goodwill amortization associated with the December 2000
FabTech acquisition. SG&A, as a percentage of sales, increased from 15.6% to
16.9% in the comparable period last year, due to lower sales.
2000 2001
---- ----
INTEREST INCOME $ 128,000 $ 80,000
INTEREST EXPENSE $ 332,000 $ 592,000
NET INTEREST EXPENSE $ 204,000 $ 512,000
Net interest expense for the three months ended September 30,
2001 increased approximately $260,000 versus the same period last year, due
primarily to an increase in the Company's total debt. The Company's interest
expense is primarily the result of the Company's financing of the FabTech
acquisition, as well as the investment in the Diodes-China manufacturing
facility. The Company expects interest expense to increase significantly in
2001, compared to 2000, as a result of the additional debt, primarily associated
with its acquisition of FabTech.
15
2000 2001
---- ----
OTHER INCOME (EXPENSE) $ 135,000 $ 94,000
Other income for the three months ended September 30, 2001
decreased approximately $41,000 compared to the same period last year, due
primarily to management incentives associated with the FabTech acquisition,
partly offset by rental income generated by FabTech for the use of some of its
testing facilities. 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 management
guaranteed annual compensation as well as contingent compensation based on the
annual profitability of FabTech, subject to a maximum annual amount. The total
guaranteed commitment is $375,000 per year. Although this $375,000 is reimbursed
to the Company by LSC (the previous owner of FabTech), because LSC is a majority
shareholder in the Company, the $375,000 per year is booked as an expense.
2000 2001
---- ----
INCOME TAX BENEFIT (PROVISION) $ (1,170,000) $ 1,520,000
The reported income tax rate as a percentage of pretax income
differs from the statutory combined federal and state tax rates of approximately
40%. The primary reasons for this difference are; 1) currently the effective tax
rate of Diodes-China is approximately 2%, and deferred U.S. federal and state
income taxes are not provided on these earnings, and 2) deferred income tax
benefits at a rate of 37.5% have been recognized on losses incurred at FabTech.
2000 2001
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (182,000) $ (55,000)
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
decrease in the joint venture earnings for the three months ended September 30,
2001 is primarily the result of decreased gross margins due to excess capacity
and demand-induced product mix changes, both internally and to external
customers. 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, 2001, the Company had a 95% controlling interest in
the joint venture.
16
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
2001
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
PERCENT OF NET SALES DOLLAR
NINE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
-------------------- ------------
2000 2001 '00 TO '01
------ ------ ------------
Net sales 100.0% 100.0% (24.8)%
Cost of goods sold (67.5) (84.8) (5.6)
------ ------ ------------
Gross profit 32.5 15.2 (64.8)
Selling, general & administrative
expenses ("SG&A") (16.1) (15.1) (29.5)
------ ------ ------------
Income from operations 16.4 0.1 (99.3)
Interest expense, net (0.6) (2.4) 182.4
Other income 0.2 0.3 19.3
------ ------ ------------
Income before taxes and minority 16.0 (2.0) (109.3)
Income taxes (2.4) 2.5 (179.2)
------ ------ ------------
Income before minority interest 13.6 0.5 (97.0)
Minority interest (0.5) (0.2) (62.3)
------ ------ ------------
Net income 13.1 0.3 (98.4)
====== ====== ============
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 2001 compared to the nine months ended September
30, 2000. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
2000 2001
---- ----
NET SALES $ 92,369,000 $ 69,447,000
Net sales decreased approximately $22.9 million, or 24.8%, for
the nine months ended September 30, 2001, compared to the same period last year,
due primarily to a 13.8% decrease in units sold as a result of decreased demand
attributable to a slow economy and excess customer inventory, and due to market
pricing pressures. The Company's average selling price ("ASP") decreased
approximately 21% from the same nine-month period last year, primarily in the
Far East. However, pricing seems to have begun to stabilize as ASP's decreased
approximately 2% from last quarter. Diodes-FabTech, acquired in December 2000,
contributed trade sales of $10.9 million in the first nine months of 2001.
17
2000 2001
---- ----
COST OF GOODS SOLD $ 62,322,000 $ 58,863,000
GROSS PROFIT $ 30,047,000 $ 10,584,000
GROSS PROFIT MARGIN PERCENTAGE 32.5% 15.2%
Gross profit decreased approximately $19.5 million, or 64.8%, for
the nine months ended September 30, 2001 compared to the year ago period. Of the
$19.5 million decrease, approximately $7.5 million was due to the 24.8% decrease
in net sales, while $12.0 million was due to the decrease in gross margin
percentage from 32.5% to 15.2%. The lower gross margin percentage was primarily
due to excess manufacturing capacity and lower sales prices. Pricing adjustments
at distributors related to decreased market prices, and inventory adjustments at
FabTech due to lower wafer pricing also contributed to the decrease in gross
margin percentage. The Company expects lower than historical gross profit
margins until such a time as demand increases and the Company utilizes more of
its available manufacturing capacity. Currently, Diodes-China is running at
approximately 52% of total capacity, up from 45% last quarter, and FabTech has
improved to 45% from 35% last quarter.
2000 2001
---- ----
SG&A $ 14,862,000 $ 10,482,000
SG&A for the nine months ended September 30, 2001 decreased
approximately $4.4 million, or 29.5%, compared to the same period last year, due
primarily to lower sales commissions associated with the 24.8% decrease in
sales, and lower wages and benefits expenses resulting from a work-force
reduction which began in the fourth quarter of 2000. SG&A also decreased due to
lower corporate and administrative expenses, partly offset by the inclusion of
the SG&A expenses and goodwill amortization associated with the December 2000
FabTech acquisition. SG&A, as a percentage of sales, decreased to 15.1% from
16.1% in the comparable period last year.
2000 2001
---- ----
INTEREST INCOME $ 323,000 $ 217,000
INTEREST EXPENSE $ 920,000 $ 1,903,000
NET INTEREST EXPENSE $ 597,000 $ 1,686,000
Net interest expense for the nine months ended September 30, 2001
increased approximately $1.1 million versus the same period last year, due
primarily to an increase in the Company's total debt. The Company's interest
expense is primarily the result of the Company's financing of the FabTech
acquisition, as well as the investment in the Diodes-China manufacturing
facility. The Company expects interest expense to increase significantly in
2001, compared to 2000, as a result of the additional debt, primarily associated
with its acquisition of FabTech.
2000 2001
---- ----
OTHER INCOME (EXPENSE) $ 181,000 $ 216,000
Other income for the nine months ended September 30, 2001
increased approximately $35,000 compared to the same period last year, due
primarily to rental income generated by FabTech for the use of its testing
facilities, partly offset by management incentives associated with the FabTech
acquisition. 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 management guaranteed annual
compensation as well as contingent compensation based on the annual
profitability of FabTech, subject to a maximum annual amount. The guaranteed
commitment is $375,000 per year. Although this $375,000 is reimbursed to the
Company by LSC (the previous owner of FabTech), because LSC is a majority
shareholder in the Company, the $375,000 per year is booked as an expense.
18
2000 2001
---- ----
INCOME TAX BENEFIT (PROVISION) $ (2,197,000) $ 1,741,000
The reported income tax rate as a percentage of pretax income
differs from the statutory combined federal and state tax rates of approximately
40%. The primary reasons for this difference are; 1) currently the effective tax
rate of Diodes-China is approximately 2%, and deferred U.S. federal and state
income taxes are not provided on these earnings, and 2) deferred income tax
benefits at a rate of 37.5% have been recognized on losses incurred at FabTech.
2000 2001
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (462,000) $ (174,000)
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
decrease in the joint venture earnings for the nine months ended September 30,
2001 is primarily the result of decreased gross margins due to excess capacity
and demand-induced product mix changes, both internally and to external
customers. 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, 2001, the Company had a 95% controlling interest in
the joint venture.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
September 30, 2001 was $6.8 million compared to $7.2 million for the same period
in 2000. The primary sources of cash flows from operating activities in 2001
were a decrease in inventories of $10.9 million and depreciation and
amortization of $5.9 million. The primary use of cash flows from operating
activities in 2001 was a decrease in accounts payable of $2.6 million and a
decrease in accrued liabilities of $2.3 million. The primary sources of cash
flows from operating activities for the nine months ended September 30, 2000
were net income of $12.1 million and depreciation and amortization of $3.3
million, while the primary uses were a $8.4 million increase in inventories and
a $6.0 million increase in accounts receivable. Inventory turns at September 30,
2001 were 4.4 times compared to 2.5 times at December 31, 2000. Accounts
receivable days at September 30, 2001 were 76 days compared to 72 days at
December 31, 2000. The ratio of the Company's current assets to current
liabilities on September 30, 2001 was 1.6 to 1, compared to 1.4 to 1 at December
31, 2000.
Cash used by investing activities for the nine months ended
September 30, 2001 was $1.6 million, compared to $6.4 million during the same
period in 2000. The primary investment in both years was for additional
manufacturing equipment at the Diodes-China manufacturing facility.
Repayments of financing activities was $1.6 million for the nine
months ended September 30, 2001, compared to cash provided by financing
activities of $6.4 million for the same period in 2000. The Company's total
credit line is approximately $42.9 million. The Company has a $22.9 million
credit facility with a major U.S. bank consisting of: a working capital line of
credit up to $7.5 million and term commitment notes providing up to $10.0
million for plant expansion and financing the acquisition of FabTech, and $5.4
million for Diodes-China operations. Interest on outstanding borrowings under
the credit agreement is payable monthly at LIBOR plus a negotiated margin. The
agreement has certain covenants and restrictions, which, among other matters,
require the maintenance of certain financial ratios and operating results, as
defined in the agreement. The Company was in compliance as of September 30,
2001. As of September 30, 2001, approximately $15.1 million is outstanding under
the term note commitment, and the average interest rate on outstanding
borrowings was approximately 5.6%. As of September 30, 2001, the revolving
credit line balance was $3.5 million and approximately $4.0 million remains
available to the Company.
Diodes-China has expanded its credit facilities from two Chinese
lending institutions to three, and from $5.0 million to $20.0 million. Interest
on outstanding borrowings under the credit agreement is payable
19
monthly at LIBOR plus a negotiated margin. As of September 30, 2001,
approximately $4.0 million is outstanding and $16.0 million is available. In
addition, Diodes-Taiwan is in negotiations to increase their credit facility to
approximately $3.0 million.
The Company, as part of the FabTech acquisition from LSC (its
majority shareholder), also has an unsecured note payable to LSC for
approximately $13.2 million. The Company has recently re-negotiated its
obligation to LSC. The new terms consist of a monthly payment of approximately
$500,000, together with interest at the rate of LIBOR plus 1.0% commencing in
July 2001, followed by the remaining balance of $10,000,000 payable in 24 equal
monthly installments, together with interest at the rate of LIBOR plus 1.5%,
commencing on July 31, 2002. Accrued interest on the $10,000,000 is being paid
monthly beginning in July 2001. The unsecured note is subordinated to the
interest of the Company's primary lender.
The Company has used its credit facilities primarily to fund the
plant and equipment expansion at Diodes-China, as well as the acquisition of
FabTech, and to support its operations. The Company believes that the continued
availability of the credit facilities, together with internally generated funds,
will be sufficient to meet the Company's currently foreseeable operating cash
requirements.
Total working capital increased approximately 11.9% to $19.4
million as of September 30, 2001 from $17.3 million as of December 31, 2000. The
Company believes that its working capital position will be sufficient for growth
opportunities.
The Company's long-term debt to equity ratio decreased to 0.55 at
September 30, 2001, from 0.58 at December 31, 2000. The Company's total debt to
equity ratio decreased to 1.05 at September 30, 2001, from 1.20 at December 31,
2000. It is anticipated that these ratios may increase should the Company use
its credit facilities to fund additional sourcing and manufacturing
opportunities.
As of September 30, 2001, the Company has no material plans or
commitments for capital expenditures other than in connection with market-driven
expansion at Diodes-China and the Company's implementation of an Oracle
Enterprise Resource Planning software package, planned for late 2001. 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.
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 below 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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
20
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:
- 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;
- difficulties implementing our Oracle Enterprise Resource Planning
system;
- difficulties expanding our operations in the Far East and developing
new operations in Europe;
- difficulties developing and implementing a successful research and
development team; and
- difficulties developing proprietary technology.
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, reliability and customer service. We compete in various markets with
companies of various sizes, many of which are larger and have greater financial,
marketing, distribution, brand names 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 On Semiconductor, General Semiconductor, Inc.,
Fairchild Semiconductor Corporation, International Rectifier Corporation, Rohm,
and Phillips. 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:
- 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;
- trade restrictions; transportation delays; work stoppages; economic
and political instability;
- changes in import/export regulations, tariffs and freight rates;
- difficulties in collecting receivables and enforcing contracts
generally; and
- currency exchange rate fluctuations.
21
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, which influence this variability of
quarterly results, include:
- general economic conditions in the countries where we sell our
products;
- seasonality and variability in the computer and communications market
and our other end markets;
- the timing of our and our competitors' new product introductions;
- product obsolescence;
- the scheduling, rescheduling and cancellation of large orders by our
customers;
- the cyclical nature of demand for our customers' products;
- our ability to develop new process technologies and achieve volume
production at our fabrication facilities;
- changes in manufacturing yields;
- adverse movements in exchange rates, interest rates or tax rates; and
- 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 you 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:
- use a significant portion of our available cash;
- issue equity securities, which would dilute current stockholders'
percentage ownership;
- incur substantial debt;
- incur or assume contingent liabilities, known or unknown;
- incur amortization expenses related to goodwill or other intangibles;
and
- 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.
22
INTEGRATION OF ACQUISITIONS
During fiscal year 2000, we acquired FabTech. 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:
- unexpected losses of key employees or customers of the acquired
company;
- conforming the acquired company's standards, processes, procedures
and controls with our operations;
- coordinating our new product and process development;
- hiring additional management and other critical personnel;
- increasing the scope, geographic diversity and complexity of our
operations;
- difficulties in consolidating facilities and transferring processes
and know-how;
- diversion of management's attention from other business concerns; and
- 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 without 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
23
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, an
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.
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 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 in reducing
the total cost to customers of their products than we are.
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.
24
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 10.36 Diodes Incorporated Building Lease -- Third
Amendment
Exhibit 10.37 Document of Understanding between the Company and
Microsemi
Exhibit 11 Computation of Earnings Per Share
Exhibit 99.33 Press release: Diodes Incorporated Announces
Alliance with Microsemi Corporation
Exhibit 99.34 Press release: Diodes, Inc. Announces Conference
Call To Discuss Third Quarter Financial Results
Exhibit 99.35 Press release: Diodes Incorporated Reports
Third-Quarter 2001 Results
Exhibit 99.36 Press release: Diodes Incorporated Announces
Development of High--Precision Zener Diode Process
Exhibit 99.37 Press release: Diodes Incorporated Announces New
SOT-523 Product Line
(b) Reports on Form 8-K
None
25
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 Wertz November 2, 2001
- -----------------------------------------------------
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
26
INDEX TO EXHIBITS
Exhibit 10.36 Diodes Incorporated Building Lease -- Third Amendment Page 27
Exhibit 10.37 Document of Understanding between the Company and Microsemi Page 28
Exhibit 11 Computation of Earnings Per Share Page 32
Exhibit 99.33 Press release: Diodes Incorporated Announces Alliance
with Microsemi Corporation Page 33
Exhibit 99.34 Press release: Diodes, Inc. Announces Conference Call
To Discuss Third Quarter Financial Results Page 35
Exhibit 99.35 Press release: Diodes Incorporated Reports
Third-Quarter 2001 Results Page 36
Exhibit 99.36 Press release: Diodes Incorporated Announces Development
of High--Precision Zener Diode Process Page 41
Exhibit 99.37 Press release: Diodes Incorporated Announces
New SOT-523 Product Line Page 43