1
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, 1998
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, 1998 was 6,164,352 including 717,115 shares of
treasury stock.
THIS REPORT INCLUDES A TOTAL OF 25 PAGES
THE EXHIBIT INDEX IS ON PAGE 18
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash $ 1,406,000 $2,325,000
Accounts receivable
Customers 9,489,000 10,342,000
Related party 421,000 213,000
Other 1,169,000 916,000
----------- -----------
11,079,000 11,471,000
Less allowance for doubtful receivables 128,000 74,000
----------- -----------
10,951,000 11,397,000
Inventories 13,338,000 13,525,000
Deferred income taxes 1,101,000 1,096,000
Prepaid expenses and other 1,566,000 806,000
----------- -----------
Total current assets 28,362,000 29,149,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 10,828,000 5,165,000
ADVANCES TO RELATED PARTY VENDOR 2,958,000 2,821,000
OTHER ASSETS 1,212,000 1,219,000
----------- -----------
TOTAL ASSETS $43,360,000 $38,354,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
CURRENT LIABILITIES
Due to bank $ 2,297,000 $1,000,000
Accounts payable
Trade 2,571,000 4,567,000
Related party 1,474,000 952,000
Accrued liabilities 2,057,000 1,988,000
Income taxes payable 688,000 912,000
Current portion of long-term debt 1,729,000 1,031,000
----------- -----------
Total current liabilities 10,816,000 10,450,000
LONG-TERM DEBT, net of current portion 5,038,000 3,226,000
MINORITY INTEREST IN JOINT VENTURE 536,000 225,000
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;
9,000,000 shares authorized; 5,764,352 and 5,701,019
shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 3,843,000 3,801,000
Additional paid-in capital 6,027,000 5,813,000
Retained earnings 18,882,000 16,621,000
----------- -----------
28,752,000 26,235,000
Less:
Treasury stock - 717,115 shares of common stock
at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 26,970,000 24,453,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,360,000 $38,354,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET SALES $ 14,646,000 $ 16,939,000 $ 45,784,000 $ 48,969,000
COST OF GOODS SOLD 11,032,000 12,517,000 34,172,000 35,159,000
------------ ------------ ------------ ------------
Gross profit 3,614,000 4,422,000 11,612,000 13,810,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,811,000 2,569,000 8,543,000 8,647,000
------------ ------------ ------------ ------------
Income from operations 803,000 1,853,000 3,069,000 5,163,000
OTHER INCOME (EXPENSE)
Interest income 65,000 73,000 214,000 206,000
Interest expense (150,000) (98,000) (404,000) (298,000)
Minority interest in
joint venture earnings (3,000) (42,000) (6,000) (290,000)
Commissions and other 72,000 159,000 321,000 361,000
------------ ------------ ------------ ------------
(16,000) 92,000 125,000 (21,000)
INCOME BEFORE INCOME TAXES 787,000 1,945,000 3,194,000 5,142,000
PROVISION FOR INCOME TAXES 233,000 604,000 933,000 1,388,000
------------ ------------ ------------ ------------
NET INCOME $ 554,000 $ 1,341,000 $ 2,261,000 $ 3,754,000
============ ============ ============ ===========
EARNINGS PER SHARE
BASIC $ 0.11 $ 0.27 $ 0.45 $ 0.76
DILUTED $ 0.11 $ 0.24 $ 0.42 $ 0.69
============ ============ ============ ===========
Number of shares used in
computation
Basic 5,047,237 4,977,033 5,022,939 4,966,256
Diluted 5,231,630 5,539,699 5,366,861 5,450,771
============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,261,000 $ 3,754,000
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 790,000 712,000
Minority interest earnings 6,000 290,000
Interest income accrued on advances to vendor (137,000) (141,000)
Changes in operating assets:
Accounts receivable 446,000 (2,337,000)
Inventories 187,000 680,000
Prepaid expenses and other assets (753,000) (628,000)
Changes in operating liabilities:
Accounts payable (1,474,000) 876,000
Accrued liabilities 69,000 758,000
Income taxes payable (224,000) 842,000
----------- -----------
Net cash provided by operating activities 1,171,000 4,806,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,458,000) (732,000)
----------- -----------
Net cash used by investing activities (6,458,000) (732,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit, net 1,297,000 1,000,000
Net proceeds from the issuance of capital stock 256,000 62,000
Minority interest capital contribution 305,000 13,000
Proceeds from (repayments of) long-term obligations 2,510,000 (703,000)
----------- -----------
Net cash provided by financing activities 4,368,000 372,000
----------- -----------
INCREASE (DECREASE) IN CASH (919,000) 4,446,000
CASH AT BEGINNING OF PERIOD 2,325,000 1,820,000
----------- -----------
CASH AT END OF PERIOD $ 1,406,000 $ 6,266,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 190,000 $ 233,000
=========== ===========
Income taxes $ 757,000 $ 1,263,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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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 the instruction to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position and results of operations have been
included. Operating results for interim periods are not necessarily indicative
of the results that may be expected for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the calendar year ended December
31, 1997.
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary, Diodes Taiwan Co., Ltd. (a foreign
subsidiary), and the accounts of the KaiHong joint venture in which the Company
has a 95% controlling interest. All significant intercompany balances and
transactions have been eliminated.
NOTE B - 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 $1,101,000 resulting from temporary differences in bases
of assets and liabilities. This deferred tax asset results primarily from
inventory reserves and expense accruals which are not currently deductible for
income tax purposes.
The income tax expense as a percentage of pre-tax income differs
from the statutory combined federal and state tax rates. The primary reasons for
this difference are (i) in accordance with Chinese tax policy, earnings of the
KaiHong joint venture are not subject to tax for the first two years upon
commencement of profitable operations, and (ii) earnings of the Company's
subsidiary in Taiwan are subject to tax at a lower rate than in the U.S.
Under Federal tax law foreign earnings are taxed when funds are
distributed by foreign subsidiaries to the parent Company. A temporary
difference between financial and tax reporting exists for profits earned at the
foreign subsidiary level not distributed to the parent. As of September 30, 1998
the Company had undistributed earnings at its Taiwanese subsidiary which, at
effective Federal and State tax rates, less applicable credits for foreign taxes
paid, results in a deferred tax liability. Management has not recognized a
deferred tax liability for undistributed earnings because it considers earnings
accumulated and undistributed through September 30, 1998 to be permanent
reinvestments of capital in Taiwan.
NOTE C - ADVANCES TO RELATED PARTY VENDOR
Under a compensation-trade agreement the Company has advanced
$2.5 million in cash and equipment to a related party vendor, FabTech
Incorporated, a wholly owned subsidiary of LPSC. Interest accrues monthly at the
Company's borrowing rate with total accrued interest of approximately $475,000
as of September 30, 1998. Amounts advanced, including interest, are payable
beginning after 1998 and expiring February 2001 when any outstanding balances
become due on demand. The compensation-trade agreement allows the Company to
recover interest and principal due by deducting a fixed amount per unit for
products purchased from the vendor.
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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 provider of high-quality
discrete semiconductor devices to leading manufacturers in the automotive,
electronics, computing and telecommunications industries. The Company's products
include small signal transistors and MOSFETs, transient voltage suppressors
(TVSs), zeners, Schottkys, diodes, rectifiers and bridges.
Since the beginning of 1998, the Company's operations have been
adversely affected by a slowdown throughout the electronics industry that has
included the semiconductor segment. Over-capacity, lower average selling prices,
and higher customer inventory levels have contributed to the decreased demand.
In the first nine months of 1998, the Company significantly
increased the amount of product shipped to larger distributors. Although these
sales were significant in terms of total sales dollars and gross margin dollars,
they generally were 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,
primarily at its U.S. operations.
One of the Company's primary strategic programs has been the
formation of the KaiHong joint venture. The KaiHong joint venture, in which the
Company has invested in a SOT-23 manufacturing facility on mainland China,
provides replacements for a portion of the parts previously purchased from ITT.
Due to the success of the first phase of KaiHong, the Company's Board of
Directors approved funding for further expansion of the joint venture. The
equipment expansion will allow for the manufacturer of additional SOT-23
packaged components as well as other surface-mount packaging. In the second
quarter of 1998, due to the market slowdown, management re-evaluated the KaiHong
expansion, and determined to continue proceeding with a scaled-down version of
the expansion.
Currently, the Company is in negotiations to become a significant
supplier to a European customer. Should negotiations prove successful, this
increased demand will warrant KaiHong's expansion as originally planned. The
total capital required is approximately $18 million. As of October 31, 1998, the
Company has invested approximately $12.5 million in the KaiHong joint venture.
The Company's credit facility as well as KaiHong's own credit facility will be
used to finance the additional manufacturing capacity.
The Company purchases products from foreign suppliers primarily
in United States dollars. To a limited extent, and from time to time, the
Company contracts in foreign currencies (e.g., a portion of the equipment
purchases for the KaiHong expansion), and, accordingly, its results of
operations could be materially affected by fluctuations in currency exchange
rates. Due to the limited number of contracts denominated in foreign currencies
and the complexities of currency hedges, the Company has not engaged in hedging
to date. If the volume of contracts written in foreign currencies increases, and
the Company does not engage in currency hedging, any substantial increase in the
value of such currencies could have a material adverse effect on the Company's
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results of operations. Management believes that the current contracts written in
foreign currencies are not significant enough to justify the costs inherent in
currency hedging.
The Company's imported products are also subject to United
States customs duties and, in the ordinary course of business, the Company, from
time to time, is subject to claims by the United States Customs Service for
duties and other charges. The Company attempts to reduce the risk of doing
business in foreign countries by, among other things, contracting in U.S.
dollars, and, when possible, maintaining multiple sourcing of product groups
from several countries.
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue
("Y2K") and has developed an implementation plan to resolve the issue. Y2K is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for Y2K compliance.
Confirmation has been requested from the Company's primary processing vendors
and major customers that plans are being developed to address processing of
transactions in the year 2000. Management estimates the Y2K compliance expense
at approximately $250,000 over the next twelve months. The Company's Y2K
compliance plans call for testing of all critical systems by the end of 1998.
The Company presently believes that, with modifications to existing software and
upgrades to Y2K compliant software, Y2K will not pose significant operational
problems for the Company's computer systems, as so modified and upgraded.
However, if such modifications and upgrades are not completed timely, Y2K may
have a material impact on the operations of the Company.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth, for the periods indicated, the
percentage which 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 INCREASE
THREE MONTHS ENDED SEPTEMBER 30, (DECREASE)
-------------------------------- ------------------
1998 1997 `97 TO `98
------------ ------------- -------------------
Net sales 100.0% 100.0% (13.5)%
Cost of goods sold (75.3) (73.9) (11.9)
----- ----- -----
Gross profit 24.7 26.1 (18.3)
SG&A (19.2) (15.2) 9.4
----- ----- -----
Income from operations 5.5 10.9 (56.7)
Interest expense, net (0.6) (0.1) 240.0
Other income 0.5 0.7 (41.0)
----- ----- -----
Income before taxes 5.4 11.5 (59.5)
Income taxes 1.6 3.6 (61.4)
----- ----- -----
Net income 3.8 7.9 (58.7)
===== ===== =====
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
quarterly report.
1998 1997
---- ----
NET SALES $ 14,646,000 $ 16,939,000
- ---------
Net sales decreased approximately $2.3 million, or 13.5%, for the
three months ended September 30, 1998 compared to the same period last year, due
primarily to a decrease in units sold of approximately 6.2%. This decrease in
units sold is comprised of a decrease in units sold in North America of
approximately 17.3%, partly offset by an increase in units sold in the Far East
of 50.5%. Average selling prices in the third quarter of 1998 decreased
approximately 8.0%, which represents a decrease in average selling price in the
Far East of approximately 38.7%, partly offset by an increase in the North
American average selling price of approximately 1.8% compared to the same period
in 1997.
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1998 1997
---- ----
GROSS PROFIT $ 3,614,000 $ 4,422,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 24.7% 26.1%
- ------------------------------
Gross profit decreased approximately $800,000, or 18.3%, and
gross profit margin decreased to 24.7% from 26.1%, for the three months ended
September 30, 1998 compared to the same period a year ago, due primarily to
market pricing pressures. Gross profit margin was also negatively affected by an
increase in the percentage of the Company's sales to larger distributors at
lower gross profit margins.
1998 1997
---- ----
SG&A $ 2,811,000 $ 2,569,000
- ----
SG&A for the three months ended September 30, 1998 increased
approximately $242,000, or 9.4%, compared to the same period last year, due
primarily to consulting fees paid to the minority investor of the KaiHong joint
venture. In July 1998, the Company entered into a consulting agreement with the
minority investor (the "Consultant") in the KaiHong joint venture. In order to
be assured of the continued association and services of the Consultant and in
order to take advantage of her experience, knowledge and abilities in the
Company's manufacturing business, it is in the Company's best interest to retain
the Consultant under the terms and conditions set forth in this agreement (see
the Consulting Agreement filed herein).
SG&A as a percentage of net sales increased to 19.2% for the
three months ended September 30, 1998 from 15.2% for the same period last year.
1998 1997
---- ----
INTEREST INCOME $ 65,000 $ 73,000
- ---------------
INTEREST EXPENSE $150,000 $ 98,000
- ----------------
Net interest expense for the three months ended September 30,
1998 increased approximately $60,000 compared to the same period last year due
primarily to increased debt to finance the KaiHong expansion. Interest income is
primarily the interest charged to FabTech, a related party, under the Company's
loan agreement, as well as earnings on its cash balances. The Company's interest
expense is primarily the result of the term loan by which the Company is
financing (i) the investment in the KaiHong joint venture and (ii) the $2.8
million advanced to FabTech.
1998 1997
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (3,000) $ (42,000)
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the KaiHong joint venture's net income for the period. The
decrease in the joint venture earnings for the three months ended September 30,
1998 is primarily the result of lower unit sales as well as pricing pressures.
The joint venture investment is eliminated in consolidation of the Company's
financial statements and the activities of KaiHong are included therein. As of
September 30, 1998, the Company had a 95% controlling interest in the joint
venture compared to 70% in the same period last year. The Company increased its
interest in KaiHong through an arrangement in accordance with the original joint
venture agreement and through the purchase of a substantial portion of the
minority interest in the fourth quarter of 1997.
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1998 1997
---- ----
COMMISSIONS AND OTHER INCOME $ 72,000 $ 159,000
- ----------------------------
Other income for the three months ended September 30, 1998
decreased approximately $87,000, or 54.7%, compared to the same period last
year, due primarily to currency exchange fluctuation at the Company's Taiwan
subsidiary. Commissions earned by the Company's Taiwan subsidiary on drop
shipment sales in Asia for the three months ended September 30, 1998 were flat
compared to the same period last year.
1998 1997
---- ----
INCOME TAXES $ 233,000 $ 604,000
- ------------
Income tax expense for the three months ended September 30, 1998
decreased approximately $371,000, or 61.4%, compared to the same period last
year. The Company's effective tax rate in the current quarter decreased to 29.6%
from 31.1% for the same period last year, as a result of the increase in net
income from the Company's Taiwan operations, which are taxed at a lower rate
than that of the U.S. operations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table sets forth, for the periods indicated, the
percentage which 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
NINE MONTHS ENDED SEPTEMBER 30, (DECREASE)
-------------------------------- ------------------
1998 1997 `97 TO `98
-------------------------------- ------------------
Net sales 100.0% 100.0% (6.5)%
Cost of goods sold (74.6) (71.8) (2.8)
--------- ------ ----------
Gross profit 25.4 28.2 (15.9)
SG&A (18.7) (17.7) (1.2)
--------- ------ ----------
Income from operations 6.7 10.5 (40.6)
Interest expense, net (0.4) (0.1) 106.5
Other income 0.7 0.1 343.7
--------- ------ ----------
Income before taxes 7.0 10.5 37.9
Income taxes 2.1 2.8 (32.8)
--------- ------ ----------
Net income 4.9 7.7 (39.8)
========= ====== ==========
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 1998 compared to the nine months ended September
30, 1997. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
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1998 1997
---- ----
NET SALES $ 45,784,000 $ 48,969,000
- ---------
Net sales decreased approximately $3.2 million, or 6.5%, for the
nine months ended September 30, 1998 compared to the same period last year, due
primarily to a decrease in average selling prices of approximately 9.9%. Far
East pricing pressures resulted in a decrease in average selling prices of
approximately 26.9%, while in North America, pricing pressures lowered average
selling prices by approximately 6.1% compared to the same period last year.
Decreased average selling prices were partly offset by an increase in units sold
of approximately 3.4%, which represents an increase in units sold in the Far
East of approximately 38.8%, partially offset by a decrease in units sold of
approximately 3.5% in North America compared to the same period in 1997. Also
contributing to the decrease in sales was lost sales of approximately $2.2
million due to a design change at one of the Company's larger customers.
1998 1997
---- ----
GROSS PROFIT $ 11,612,000 $ 13,810,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 25.4% 28.2%
- ------------------------------
Gross profit decreased approximately $2.2 million, or 15.9%, and
gross profit margin decreased to 25.4% from 28.2%, for the nine months ended
September 30, 1998 compared to the same period a year ago, due primarily to
market pricing pressures resulting in lower manufacturing profits at the
Company's facilities in Asia, as well as inventory write-downs to reflect
current market value. Gross profit margin was also affected by an increase in
the percentage of the Company's sales to larger distributors, primarily in the
first quarter.
1998 1997
---- ----
SG&A $ 8,543,000 $ 8,647,000
- ----
SG&A for the nine months ended September 30, 1998 decreased
approximately $104,000, or 1.2%, compared to the same period last year, due
primarily to a decrease in operating expenses associated with tightened controls
of the Company's expenses as well as consulting fees paid to the minority
investor of the KaiHong joint venture (see the Consulting Agreement filed
herein).
SG&A as a percentage of net sales increased to 18.7% for the nine
months ended September 30, 1998 from 17.1% for the same period last year.
1998 1997
---- ----
INTEREST INCOME $ 214,000 $ 206,000
- ---------------
INTEREST EXPENSE $ 404,000 $ 298,000
- ----------------
Net interest expense for the nine months ended September 30, 1998
increased approximately $98,000 compared to the same period last year due
primarily to increased debt to finance the KaiHong expansion. Interest income is
primarily the interest charged to FabTech, a related party, under the Company's
loan agreement, as well as earnings on its cash balances. The Company's interest
expense is primarily the result of the term loan by which the Company is
financing (i) the investment in the KaiHong joint venture and (ii) the $2.8
million advanced to FabTech.
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1998 1997
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (6,000) $ (290,000)
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the KaiHong joint venture's net income for the period. The
earnings of the joint venture for the nine months ended September 30, 1998 have
been negatively affected by lower unit sales as well as by pricing pressures.
1998 1997
---- ----
COMMISSIONS AND OTHER INCOME $ 321,000 $ 361,000
- ----------------------------
Other income for the nine months ended September 30, 1998
decreased approximately $40,000, or 11.1%, compared to the same period last
year, due primarily to currency exchange losses at the Company's Taiwan
subsidiary, partly offset by increased commissions earned by the Company's
Taiwan subsidiary on drop shipment sales in Asia.
1998 1997
---- ----
INCOME TAXES $ 933,000 $ 1,388,000
- ------------
Income tax expense for the nine months ended September 30, 1998
decreased approximately $455,000, or 32.8%, compared to the same period last
year. The Company's effective tax rate for the nine months ended September 30,
1998 increased to 29.2% from 27.0% for the same period last year, as a result of
the decrease in net income from the KaiHong joint venture, which under Chinese
tax law is exempt from tax for the first two years upon commencing profitable
operation.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
September 30, 1998 was approximately $1.5 million compared to approximately $4.8
million for the nine months ended September 30, 1997. The primary source of cash
flows from operating activities for the nine months ended September 30, 1998 was
net income of approximately $1.3 million and a decrease in accounts receivable
of approximately $446,000, while the primary use of cash flows from operating
activities was a decrease in accounts payable of approximately $1.5 million. Due
to the slowdown in the semiconductor industry, the Company is directing its
efforts into reducing current inventory levels, while still providing the
service and delivery that customers demand. The primary sources of cash flows
from operating activities for the nine months ended September 30, 1997 was net
income of approximately $3.8 million, while the primary use of cash flows from
operating activities was approximately $1.3 million increase in accounts
receivable. The Company continues to closely monitor its credit policy while, at
times, providing more flexible terms primarily to its Asian customers, when
necessary. The ratio of the Company's current assets to current liabilities on
September 30, 1998 was 2.62 to 1 compared to a ratio of 2.79 to 1 as of December
31, 1997.
Cash used by investing activities was approximately $6.5 million
for the nine months ended September 30, 1998, compared to approximately $732,000
for the same period in 1997. The primary investments in 1998 was for additional
manufacturing equipment at the KaiHong manufacturing facility.
Cash provided by financing activities was approximately $4.1
million as of September 30, 1998, compared to approximately $359,000 for the
same period in 1997, as the Company continues to use its credit facilities.
In March 1998, the Company amended an August 1996 loan agreement
whereby the Company obtained a $23 million credit facility with a major bank
consisting of: a working capital line of credit up to $9
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million and term commitment notes providing up to $14 million for plant
expansion, advances to vendors, and letters of credit for KaiHong. 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 is in
compliance. The working capital line of credit expires June 30, 2000 and
contains a sublimit of $3.0 million for issuance of commercial and stand-by
letters of credit. The weighted average interest rate on outstanding borrowings
was approximately 6.9% for the nine months ended September 30, 1998. As of
September 30, 1998, approximately $6.6 million is outstanding under the term
note commitment.
The Company uses its credit facility primarily to fund the
advances to KaiHong and FabTech as well as to support its operations. The
Company believes that the continued availability of this credit facility,
together with internally generated funds, will be sufficient to meet the
Company's currently foreseeable operating cash requirements.
In July 1998, the Company replaced two previously filed
guarantees to Shanghai Kaihong Electronics Co., Ltd. and the minority investor
of the KaiHong joint venture for $1.0 million and $850,000, respectively, as
well as a $1.0 million letter of credit, with a $3.0 million guarantee. The
Company reserves the right, at any time or from time to time, on one month prior
written notice to the bank, to reduce the maximum amount guaranteed hereunder or
to terminate this guaranty; provided, however, that the Company shall in any
event remain liable as guarantor for all obligations of the borrower outstanding
at the effective date of any such notice to the bank.
The Company's total working capital decreased approximately 6.4%
to $17.5 million as of September 30, 1998 from $18.7 million as of December 31,
1997. The Company believes that its working capital position will be sufficient
for its capital requirements in the foreseeable future.
As of September 30, 1998, the Company has no material plans or
commitments for capital expenditures other than for the KaiHong expansion.
However, to ensure that the Company can secure reliable and cost effective
sourcing to support and better position itself for growth, the Company is
continuously evaluating additional sources of products. The Company believes its
credit and financial position will provide sufficient access to funds should an
appropriate investment opportunity arise and, thereby, assist the Company in
improving customer satisfaction and in maintaining or increasing product market
penetration.
The Company's debt to equity ratio was 0.59 at September 30, 1998
compared to 0.56 at December 31, 1997. The Company anticipates this ratio may
increase should the Company continue to use its credit facilities to fund
additional sourcing opportunities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
All forward-looking statements contained in this Form 10-Q are
subject to, in addition to the other matters described in this 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
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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.
There are many factors that could cause the events in such
forward looking statements to not occur, including, but not limited to, general
or specific economic conditions, fluctuations in product demand, the
introduction of new products, the Company's ability to maintain customer
relationships, technological advancements, impact of competitive products and
pricing, growth in targeted markets, risks of foreign operations, the ability
and willingness of the Company's customers to purchase products provided by the
Company, the perceived absolute or relative overall value of these products by
the purchasers, including the features, quality, and price in comparison to
other competitive products, the level of availability of products and
substitutes and the ability and willingness of purchasers to acquire new or
advanced products, and pricing, purchasing, financing, operating, advertising
and promotional decisions by intermediaries in the distribution channels which
could affect the supply of or end-user demands for the Company's products, the
amount and rate of sales growth and the Company's selling, general and
administrative expenses, difficulties in obtaining materials, supplies and
equipment, difficulties of delays in the development, production, testing and
marketing of products including, but not limited to, failure to ship new
products and technologies when anticipated, the failure of customers to accept
these products or technologies when planned, defects in products, any failure of
economies to develop when planned, the acquisition of fixed assets and other
assets, including inventories and receivables, the making or incurring of any
expenditures, the effects of and changes in trade, monetary and fiscal policies,
laws and regulations, other activities of governments, agencies and similar
organizations and social and economic conditions, such as trade restriction or
prohibition, inflation and monetary fluctuation, import and other charges or
taxes, the ability or inability of the Company to obtain or hedge against
foreign currency, foreign exchange rates and fluctuations in those rates,
intergovernmental disputes as well as actions affecting frequency, use and
availability, the costs and other effects of legal investigations, claims and
changes in those items, developments or assertions by or against the Company
relating to intellectual property rights, adaptations of new, or changes in,
accounting policies and practices in the application of such policies and
practices and the effects of changes within the Company's organization or in
compensation benefit plans, and activities of parties with which the Company has
an agreement or understanding, including any issues affecting any investment or
joint venture in which the Company has an investment, and the amount, and the
cost of financing which the Company has, and any changes to that financing, and
any other information detailed from time to time in the Company's filings with
the United States Securities and Exchange Commission.
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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
The proxy materials for the 1998 annual meeting of stockholders
held on June 5, 1998 were mailed to stockholders of the Company
on May 1, 1998. Stockholder proposals to be presented at the
1999 annual meeting of stockholders must be received at the
Company's executive offices at 3050 East Hillcrest Drive,
Westlake Village, California, 91362, addressed to the attention
of the Corporate Secretary by January 1, 1999 in order to be
considered for inclusion in the proxy materials relating to such
meeting. Recently, the Securities and Exchange Commission
amended its rule governing a company's ability to use
discretionary proxy authority with respect to stockholder
proposals which were not submitted by the stockholders in time
to be included in the proxy statement. As a result of that rule
change, in the event a stockholder proposal is not submitted to
the Company prior to March 15, 1999, the proxies solicited by
the Board of Directors for the 1999 annual meeting of
stockholders will confer authority on the holders of the proxy
to vote the shares in accordance with their best judgment and
discretion if the proposal is presented at the 1999 annual
meeting of stockholders without any discussion of the proposal
in the proxy statement for such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.26 - Consulting Agreement between the Company
and J.Y. Xing
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
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None
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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 11, 1998
CARL WERTZ
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT 10.26 CONSULTING AGREEMENT BETWEEN THE
COMPANY AND J.Y. XING Page 19
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Page 24
EXHIBIT 27 FINANCIAL DATA SCHEDULE Page 25
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