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 MARCH 31, 1999
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. Employee
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 May 10, 1999 was 5,764,352 including 717,115 shares of
treasury stock.
THIS REPORT INCLUDES A TOTAL OF 19 PAGES
THE EXHIBIT INDEX IS ON PAGE 17
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
DECEMBER 31, MARCH 31,
1998 1999
----------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 2,415,000 $ 3,288,000
Accounts receivable
Customers 9,107,000 11,459,000
Related party 125,000 85,000
Other 496,000 216,000
----------- -----------
9,728,000 11,760,000
Less allowance for doubtful receivables 110,000 124,000
----------- -----------
9,618,000 11,636,000
Inventories 13,777,000 12,033,000
Deferred income taxes 1,098,000 1,095,000
Prepaid expenses and other 448,000 837,000
Prepaid income taxes -- 241,000
----------- -----------
Total current assets 27,356,000 29,130,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 13,750,000 13,512,000
ADVANCES TO RELATED PARTY VENDOR 3,024,000 3,072,000
OTHER ASSETS 1,259,000 1,264,000
----------- -----------
TOTAL ASSETS $45,389,000 $46,978,000
=========== ===========
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
DECEMBER 31, MARCH 31,
1998 1999
----------- ----------
(UNAUDITED)
CURRENT LIABILITIES
Due to bank $ 812,000 $ 450,000
Accounts payable
Trade 2,991,000 3,608,000
Related party 1,213,000 1,570,000
Accrued liabilities 3,421,000 3,158,000
Income taxes payable 169,000 --
Current portion of long-term debt 2,111,000 2,111,000
----------- -----------
Total current liabilities 10,717,000 10,897,000
DEFERRED COMPENSATION 56,000 54,000
DEFERRED INCOME TAXES 521,000 521,000
LONG-TERM DEBT, net of current portion 5,991,000 6,583,000
MINORITY INTEREST IN JOINT VENTURE 644,000 773,000
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 shares issued and outstanding
at March 31, 1999 and December 31, 1998 3,843,000 3,843,000
Additional paid-in capital 6,105,000 6,105,000
Retained earnings 19,294,000 19,984,000
----------- -----------
29,242,000 29,932,000
Less:
Treasury stock - 717,115 shares of
common stock at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 27,460,000 28,150,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,389,000 $46,978,000
=========== ===========
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
MARCH 31,
----------------------------
1998 1999
----------- -----------
NET SALES $16,804,000 $15,612,000
COST OF GOODS SOLD 12,412,000 11,806,000
----------- -----------
Gross profit 4,392,000 3,806,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,832,000 3,120,000
----------- -----------
Income from operations 1,560,000 686,000
OTHER INCOME (EXPENSES)
Interest income 83,000 62,000
Interest expense (93,000) (160,000)
Minority interest in joint venture
earnings (5,000) (33,000)
Commissions and other 133,000 152,000
----------- -----------
118,000 21,000
INCOME BEFORE INCOME TAXES 1,678,000 707,000
PROVISION FOR INCOME TAXES 492,000 17,000
----------- -----------
NET INCOME $ 1,186,000 $ 690,000
=========== ===========
EARNINGS PER SHARE
BASIC $ 0.24 $ 0.14
=========== ===========
DILUTED $ 0.22 $ 0.13
=========== ===========
Number of shares used in computation
Basic 4,998,422 5,047,237
=========== ===========
Diluted 5,452,486 5,233,425
=========== ===========
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)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,186,000 $ 690,000
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization 254,000 552,000
Minority interest earnings 6,000 129,000
Interest income accrued on advances
to vendor (50,000) (48,000)
Changes in operating assets:
Accounts receivable (556,000) (2,018,000)
Inventories (774,000) 1,744,000
Prepaid expenses and other assets (179,000) (632,000)
Changes in operating liabilities:
Accounts payable 387,000 974,000
Accrued liabilities 98,000 (265,000)
Income taxes payable (298,000) (169,000)
----------- -----------
Net cash provided by operating
activities 74,000 957,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,573,000) (314,000)
Proceeds from disposal of other assets 10,000 --
----------- -----------
Net cash used by investing
activities (1,563,000) (314,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (repayments) on line of
credit, net 619,000 (362,000)
Net proceeds from the issuance of
capital stock 140,000 --
Proceeds from (repayments of)
long-term obligations (176,000) 592,000
----------- -----------
Net cash provided by financing
activities 583,000 230,000
----------- -----------
INCREASE (DECREASE) IN CASH (906,000) 873,000
CASH AT BEGINNING OF PERIOD 2,325,000 2,415,000
----------- -----------
CASH AT END OF PERIOD $ 1,419,000 $ 3,288,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 48,000 $ 48,000
=========== ===========
Income taxes $ 1,082,000 $ 580,000
=========== ===========
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,
1998.
The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiary, Diodes Taiwan Co., Ltd. ("Diodes-Taiwan"),
and the accounts of the Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China")
in which the Company has a 95% 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 $1,095,000 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
Diodes-China 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. A deferred tax liability
of $521,000 is reflected in the balance sheet for a dividend of approximately
$4.5 million expected to be issued from the Taiwanese subsidiary to the parent
Company in 1999. The Company has not established a deferred tax liability for
the remaining undistributed earnings of this subsidiary of approximately $5
million since the Company views this amount as a permanent investment and has no
current plans, intentions or obligation to distribute all or part of that amount
from Taiwan to the United States.
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 Vishay Lite-On Power Semiconductor, Pte, Ltd. Interest
accrues monthly at the Company's borrowing rate with total accrued interest of
approximately $572,000 as of March 31, 1999. Amounts advanced, including
interest, are payable beginning in 1999 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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NOTE D - SEGMENT INFORMATION
Information about the Company's operations in the United States, Taiwan,
and China 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.
The Company adopted Statement of Financial Accounting Standard No. 131
(SFAS No. 131), Disclosures about Segments of an Enterprise and Related
Information, in 1998. 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, Chief Financial Officer,
and Vice President of Far East Operations. The operating segments are managed
separately because each operating segment represents a strategic business unit
whose function and purpose differs from the other segments.
For financial reporting purposes, the Company is deemed to operate in three
separate segments; North America, Taiwan, and China. All three segments focus on
discrete semiconductor devices. The North American segment procures and
distributes products primarily throughout North America and provides management,
warehousing and engineering support to the other two segments. The Taiwan
segment procures product from, and manufactures and distributes product
primarily to, companies in Taiwan, Korea, Singapore, and Hong Kong. This segment
also procures product for, and manufactures and distributes product to, the
Company's North American operations. The China segment manufactures product for,
and distributes product to, both the North American and Taiwan segments. In
1997, the China segment began manufacturing product for, and distributing
product to, customers in China, the U.S. and Europe.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on stand-alone operating segment income. Revenues
are attributed to geographic areas based on the location of the market producing
the revenues.
Shanghai
KaiHong Diodes-Taiwan
THREE MONTHS ENDED Electronics Corporation, Ltd. Diodes Consolidated
MARCH 31, 1999 (China) (Taiwan) Incorporated Segments
------------------ ----------- ---------------- ------------- ------------
Total sales $ 2,014,000 $ 7,664,000 $10,099,000 $19,777,000
Intersegment sales (1,450,000) (2,071,000) (644,000) (4,165,000)
----------- ----------- ----------- -----------
Net sales $ 564,000 $ 5,593,000 $ 9,455,000 $15,612,000
Depreciation and
amortization $ 467,000 71,000 $ 14,000 $ 552,000
Interest expense, net $ 12,000 $ 2,000 $ 84,000 $ 98,000
Income tax provision
(benefit) $ -- $ 304,000 $ (287,000) $ 17,000
Net income (loss) $ 624,000 $ 474,000 $ (408,000) $ 690,000
Segment assets $15,880,000 $12,875,000 $18,223,000 $46,978,000
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Shanghai
KaiHong Diodes-Taiwan
THREE MONTHS ENDED Electronics Corporation, Ltd. Diodes Consolidated
MARCH 31, 1998 (China) (Taiwan) Incorporated Segments
------------------ ----------- ---------------- ------------- ------------
Total sales $ 970,000 $ 7,280,000 $13,319,000 $21,569,000
Intersegment sales (911,000) (3,403,000) (451,000 (4,765,000)
----------- ----------- ----------- -----------
Net sales $ 59,000 $ 3,877,000 $12,868,000 $16,804,000
Depreciation and
amortization $ 160,000 $ 16,000 $ 78,000 $ 254,000
Interest expense (income),
net $ 8,000 $ 3,000 $ (1,000) $ 10,000
Income tax provision
(benefit) $ -- $ 238,000 $ 254,000 $ 492,000
Net income (loss) $ 100,000 $ 719,000 $ 367,000 $ 1,186,000
Segment assets $ 6,871,000 $ 7,862,000 $25,583,000 $40,316,000
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 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. The Company's products are
sold primarily in North America and Asia, both directly to end-users and through
electronic component distributors.
For financial reporting purposes, the Company is deemed to operate in three
separate segments: North America, Taiwan, and China. All three segments focus on
discrete semiconductor devices. The North American segment procures and
distributes products primarily throughout North America and provides management,
warehousing and engineering support to the other two segments. The Taiwan
segment procures product from, and manufactures and distributes product
primarily to, companies in Taiwan, Korea, Singapore, and Hong Kong. This segment
also procures product for, and manufactures and distributes product to, the
Company's North American operations. The China segment manufactures product for,
and distributes product to, both the North American and Taiwan segments. In
1997, the China segment began manufacturing product for, and distributing
product to, customers in China, the U.S. and Europe. See Note D of "Notes to
Consolidated Financial Statements" for a description of the Company's adoption
of SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.
Products are sold under brand names such as Diodes, Lite-On, ITT and
Vishay/Lite-On Power Semiconductor. The Company is unifying product lines under
a limited number of brand names in order to establish brand name unity and
consistency of product, and to capitalize on brand name recognition, where
possible.
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The Company's Far East subsidiaries, Diodes-Taiwan and Diodes-China, both
manufacture product for sale to North America and the Far East. Diodes-Taiwan
manufacturing focuses on products such as axial Schottky and MELF rectifiers.
These "general use" products are destined for end products in the automotive
industry as well as for use in commercial appliances, household lighting, and
electric hand tools, among others. Diodes-China manufacturing, for the most
part, focuses on SOT-23 and SOD-123 products. These surface mount devices
("SMD's") are used in the computer and telecommunication industries and are
destined for cellular phones, notebook computers, pagers, PCMCIA cards, modems,
and garage door transmitters, among others. Diodes-China's state-of-the-art
facilities have been designed to develop even smaller, higher-density products
as electronic industry trends to portable and hand held devices continue.
The discrete semiconductor industry has, for the last few years, been
subject to severe pricing pressures, compounded by the Asian economic situation.
Although manufacturing costs have been falling, excess manufacturing capacity
and over-inventory has caused selling prices to fall at a greater extent than
manufacturing costs. Because of this competitive environment, gross profit
margins have declined from 28.3% in 1995 to 24.4% for the three months ended
March 31, 1999. 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 personnel
and programs have been added. In order to meet customers' needs at the design
stage of end-product development, the Company has 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'
representative firms and distributors, have also been added in the U.S. and the
Far East to help satisfy customers' requirements. In addition, the Company has
developed relationships with major distributors who inventory and sell the
Company's products. The relationship with Vishay Intertechnology, Inc. has
provided additional opportunities for the Company to have its products offered
by some of the world's largest distributors.
Beginning in 1998, the Company 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 continuing pressure on gross profit margins.
Since 1997, the Company's manufacturing focus has primarily been in the
development and expansion of Diodes-China. To date, the Company has invested
over $14 million in the manufacturing facility, which supplies product for sale
primarily in North America and the Far East. The investment allows for the
manufacture of additional SOT-23 packaged components as well as other
surface-mount packaging, including the smaller SOD packages. Approximately $8.0
million of the Company's existing credit facility has been used to finance the
additional manufacturing capacity.
The Company's overall effective federal, state, and foreign tax rate
decreased to 2.4% for the three months ended March 31, 1999 from 29.3% in the
first quarter of 1998. The decrease in the Company's effective tax rate is due
primarily to the increase in Diodes-China's contribution to net income at a tax
rate of 0%.
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
received from the Company's primary processing vendors
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and major customers that plans are being developed to address processing of
transactions in the year 2000. The total cost of Y2K compliance was not
considered a material expense. All internal critical systems have been tested
and the Company believes that, with its modifications to existing software and
its upgrades to Y2K compliant software, Y2K will not pose significant
operational problems for the Company's computer systems. However, if (i)
problems surface that have not yet been identified that will require substantial
time and resources to remedy, or (ii) such modifications and upgrades are not
completed timely by the Company's business partners, they could have a material
adverse effect on the Company's business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
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 INCREASE
THREE MONTHS ENDED MARCH 31, (DECREASE)
--------------------------- ---------------
1998 1999 '98 TO '99
----------- ---------- ---------------
Net sales 100.0 % 100.0 % (7.1)%
Cost of goods sold (73.9) (75.6) (4.9)
----- ----- ----
Gross profit 26.1 24.4 (13.3)
Selling, general &
administrative
expenses ("SG&A") (16.9) (20.0) 10.2
----- ----- ----
Income from operations 9.3 4.4 (56.0)
Interest expense, net (0.1) (0.6) 880.0
Other income 0.8 0.7 (7.0)
----- ----- ----
Income before taxes 10.0 4.5 (57.9)
Income taxes 2.9 0.1 (96.5)
----- ----- ----
Net income 7.1 4.4 (41.8)
===== ===== ====
The following discussion explains in greater detail the consolidated
operating results and financial condition of the Company for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report.
1998 1999
---- ----
NET SALES $ 16,804,000 $ 15,612,000
Net sales decreased approximately $1.2 million, or 7.1%, for the three
months ended March 31, 1999 compared to the same period last year, due primarily
to a 10.3% decrease in average selling prices in the first quarter of 1999,
which represents a decrease in average selling prices in North America and the
Far East of approximately 14.2% and 7.8%, respectively, compared to the same
period in 1998.
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1998 1999
---- ----
GROSS PROFIT $ 4,392,000 $ 3,806,000
GROSS PROFIT MARGIN PERCENTAGE 26.1% 24.4%
Continuing pricing pressures within the discrete semiconductor industry
resulting from decreased demand and excess on-hand inventory contributed to a
decrease in gross margin percentage to 24.4% for the three months ended March
31, 1999 compared to 26.1% for the same period in 1998. Gross profit decreased
approximately $586,000, or 13.3%, due primarily to market pricing pressures as
well as by an increase in the percentage of the Company's sales to larger
distributors at lower gross profit margins.
1998 1999
---- ----
SG&A $ 2,832,000 $ 3,120,000
SG&A for the three months ended March 31, 1999 increased approximately
$288,000, or 10.2%, compared to the same period last year, due primarily to
increases in administrative expenses at Diodes-China pursuant to incremental
management expenses, higher Company-wide marketing and advertising expenses, and
increased sales commissions and additional sales personnel at Diodes-Taiwan.
1998 1999
---- ----
INTEREST INCOME $ 83,000 $ 62,000
INTEREST EXPENSE $ 93,000 $ 160,000
NET INTEREST EXPENSE $ 10,000 $ 98,000
Net interest expense for the three months ended March 31, 1999 increased
$88,000, due primarily to an increased use of the Company's credit facility to
support the expansion of Diodes-China. The Company's interest expense is
primarily the result of the term loan by which the Company is financing (i) the
investment in the Diodes-China manufacturing facility and (ii) the $3.1 million,
including accrued interest, advanced to FabTech. Interest income is primarily
the interest charged to FabTech, a related party, under the Company's formal
loan agreement, as well as earnings on its cash balances.
1998 1999
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (5,000) $ (33,000)
Minority interest in joint venture represents the minority investor's share
of the Diodes-China joint venture's net income for the period. The increase in
the joint venture earnings for the three months ended March 31, 1999 is
primarily the result of increased sales. 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 March 31, 1999, the
Company had a 95% controlling interest in the joint venture.
1998 1999
---- ----
COMMISSIONS AND OTHER INCOME $ 133,000 $ 152,000
Commissions and other income for the three months ended March 31, 1999
increased approximately $19,000, or 14.3%, compared to the same period last
year, due in part to currency exchange fluctuation at the Company's subsidiaries
in Taiwan and China. Sales commission income earned by the Company's Taiwan
subsidiary on drop shipment sales in Asia for the three months ended March 31,
1999 increased 3.2% compared to the same period last year.
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1998 1999
---- ----
PROVISION FOR INCOME TAXES $ 492,000 $ 17,000
The Company's overall effective federal, state, and foreign tax rate
decreased to 2.4% for the three months ended March 31, 1999 from 29.3% in the
first three months of 1998. The decrease in the Company's effective tax rate is
due primarily to the increase in Diodes-China's contribution to net income at a
tax rate of 0%. Based upon tax rates in the U.S. and Taiwan and the expected
profitability of each of the Company's three business segments during the
balance of the year, it is anticipated that for the twelve months of 1999, the
provision for income taxes will be in the range of 10-20% of pre-tax income.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the three months ended March 31,
1999 was $957,000 compared to $74,000 for the same period in 1998. The primary
sources of cash flows from operating activities in 1999 were a reduction of
inventories of $1.7 million and an increase in accounts payable of $1.0 million.
The primary use of cash flows from operating activities in 1999 was an increase
in accounts receivable of $2.0 million. The primary source of cash flows from
operating activities for the three months ended March 31, 1998 were net income
of $1.2 million, while the primary use was a $774,000 increase in inventories.
Due to the recent slowdown in the semiconductor industry, the Company has
directed its efforts into reducing inventory levels, while still providing the
service and delivery that customers demand. 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 March 31, 1999 was 2.7 to 1, compared
to a ratio of 2.6 to 1 on December 31, 1998.
Cash used by investing activities was $314,000 as of March 31, 1999,
compared to $1.6 million during the same period in 1998. The primary investment
in both years was for additional manufacturing equipment at the Diodes-China
manufacturing facility.
Cash provided by financing activities was $230,000 for the three months
ended March 31, 1999, compared to $583,000 for the same period in 1998. In March
1998, the Company amended an August 1996 loan agreement whereby the Company
obtained a $23.1 million credit facility with a major bank consisting of: a
working capital line of credit up to $9 million and term commitment notes
providing up to $14 million for plant expansion, advances to vendors, and
letters of credit for Diodes-China. Interest on outstanding borrowings under the
credit agreement is payable monthly at LIBOR plus a negotiated margin. Fixed
borrowings require fixed principal plus interest payments for sixty months
thereafter. 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 March
31, 1999. 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. As of March 31, 1999, approximately $8.7 million is outstanding under
the term note commitment, and the average interest rate on outstanding
borrowings was approximately 6.8%.
The Company has used its credit facility primarily to fund the advances to
Diodes-China and FabTech as well as to support its operations. At March 31,
1999, amounts due from FabTech, including accrued interest, are approximately
$3.1 million, and the entire amount is due February 2001. 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.
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The Company provides guarantees to Diodes-China and the minority investor
of the Diodes-China 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's
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.
Total working capital increased approximately 9.6% to $18.2 million as of
March 31, 1999, from $16.6 million as of December 31, 1998. The Company believes
that such working capital position will be sufficient for growth opportunities.
The Company's debt to equity ratio increased to 0.64 at March 31, 1999,
from 0.63 at December 31, 1998. It is anticipated that this ratio may increase
as the Company continues to use its credit facilities to fund additional
sourcing opportunities.
As of March 31, 1999, the Company has no material plans or commitments for
capital expenditures other than in connection with the expansion at
Diodes-China. 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 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.
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 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:
o general or specific economic conditions
o fluctuations in product demand
o introduction of new products
o Company's ability to maintain customer relationships
o technological advancements
o impact of competitive products and pricing
o change in growth in targeted markets
o risks of foreign operations
o ability and willingness of the Company's customers to purchase products
provided by the Company
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o perceived absolute or relative overall value of these products by the
purchasers, including the features, quality, and price in comparison to
other competitive products
o level of availability of products and substitutes and the ability and
willingness of purchasers to acquire new or advanced products
o pricing, purchasing, financing, operational, 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
o amount and rate of growth of the Company's selling, general and
administrative expenses
o difficulties in obtaining materials, supplies and equipment
o difficulties or delays in the development, production, testing and
marketing of products
o failure to ship new products and technologies when anticipated
o failure of customers to accept these products or technologies when planned
o defects in products
o any failure of economies to develop when planned
o acquisition of fixed assets and other assets, including inventories and
receivables
o making or incurring of any expenditures
o effects of and changes in trade, monetary and fiscal policies, laws and
regulations
o other activities of governments, agencies and similar organizations
o changes in social and economic conditions, such as trade restriction or
prohibition, inflation and monetary fluctuation, import and other charges
or taxes
o ability or inability of the Company to obtain or hedge against foreign
currency
o foreign exchange rates and fluctuations in those rates
o intergovernmental disputes
o developments or assertions by or against the Company relating to
intellectual property rights
o 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
o changes in compensation benefit plans
o 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
o amount, and the cost of financing which the Company has
o any changes to that financing
o 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
There are no matters to be reported under this heading.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
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 May 13, 1999
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May 13, 1999
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Page 18
EXHIBIT 27 FINANCIAL DATA SCHEDULE Page 19
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