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 JUNE 30, 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. 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 July 30, 1999 was 5,764,352 including 717,115 shares of
treasury stock.
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
DECEMBER 31, JUNE 30,
1998 1999
----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash $ 2,415,000 $ 2,873,000
Accounts receivable
Customers 9,107,000 12,996,000
Related party 125,000 227,000
Other 496,000 249,000
----------- -----------
9,728,000 13,472,000
Less allowance for doubtful receivables 110,000 172,000
----------- -----------
9,618,000 13,300,000
Inventories 13,777,000 12,017,000
Deferred income taxes 1,098,000 1,097,000
Prepaid expenses and other 448,000 879,000
Prepaid income taxes -- 117,000
----------- -----------
Total current assets 27,356,000 30,283,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 13,750,000 14,210,000
ADVANCES TO RELATED PARTY VENDOR 3,024,000 3,120,000
OTHER ASSETS 1,259,000 1,424,000
----------- -----------
TOTAL ASSETS $45,389,000 $49,037,000
=========== ===========
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, JUNE 30,
1998 1999
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Due to bank $ 812,000 $ 106,000
Accounts payable
Trade 2,991,000 5,187,000
Related party 1,213,000 1,771,000
Accrued liabilities 3,421,000 3,479,000
Income taxes payable 169,000 --
Current portion of long-term debt 2,111,000 2,111,000
----------- -----------
Total current liabilities 10,717,000 12,654,000
DEFERRED COMPENSATION 56,000 56,000
DEFERRED INCOME TAXES 521,000 521,000
LONG-TERM DEBT, net of current portion 5,991,000 6,025,000
MINORITY INTEREST IN JOINT VENTURE 644,000 806,000
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
December 31, 1998 and June 30, 1999 3,843,000 3,843,000
Additional paid-in capital 6,105,000 6,105,000
Retained earnings 19,294,000 20,809,000
----------- -----------
29,242,000 30,757,000
Less:
Treasury stock - 717,115 shares of common stock at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 27,460,000 28,975,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,389,000 $49,037,000
=========== ===========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
NET SALES $ 14,333,000 $ 18,007,000 $ 31,137,000 $ 33,619,000
COST OF GOODS SOLD 10,727,000 13,683,000 23,139,000 25,488,000
------------ ------------ ------------ ------------
Gross profit 3,606,000 4,324,000 7,998,000 8,131,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,900,000 3,376,000 5,732,000 6,497,000
------------ ------------ ------------ ------------
Income from operations 706,000 948,000 2,266,000 1,634,000
OTHER INCOME (EXPENSE)
Interest income 66,000 78,000 149,000 139,000
Interest expense (161,000) (143,000) (254,000) (303,000)
Minority interest in
joint venture earnings 2,000 (33,000) (3,000) (66,000)
Commissions and other 116,000 95,000 249,000 248,000
------------ ------------ ------------ ------------
23,000 (3,000) 141,000 18,000
INCOME BEFORE INCOME TAXES 729,000 945,000 2,407,000 1,652,000
PROVISION FOR INCOME TAXES 208,000 120,000 700,000 137,000
------------ ------------ ------------ ------------
NET INCOME $ 521,000 $ 825,000 $ 1,707,000 $ 1,515,000
============ ============ ============ ============
EARNINGS PER SHARE
BASIC $ 0.10 $ 0.16 $ 0.34 $ 0.30
DILUTED $ 0.10 $ 0.16 $ 0.31 $ 0.29
============ ============ ============ ============
Number of shares used in computation
Basic 5,022,621 5,047,237 5,010,589 5,047,237
Diluted 5,391,062 5,269,485 5,424,287 5,247,919
============ ============ ============ ============
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)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,707,000 $ 1,515,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 532,000 1,248,000
Minority interest earnings 3,000 66,000
Interest income accrued on advances to vendor (103,000) (96,000)
Changes in operating assets:
Accounts receivable 1,576,000 (3,682,000)
Inventories (2,340,000) 1,760,000
Prepaid expenses and other assets 321,000 (712,000)
Changes in operating liabilities:
Accounts payable (1,686,000) 2,754,000
Accrued liabilities (337,000) 58,000
Income taxes payable (460,000) (169,000)
----------- -----------
Net cash provided (used) by operating activities (787,000) 2,742,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (4,446,000) (1,708,000)
Minority Interest of Joint Venture Investment 185,000 96,000
----------- -----------
Net cash used by investing activities (4,261,000) (1,612,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (repayments) on line of credit, net 1,643,000 (706,000)
Net proceeds from the issuance of capital stock 256,000 --
Proceeds from long-term obligations 2,942,000 34,000
----------- -----------
Net cash provided (used) by financing activities 4,841,000 (672,000)
----------- -----------
INCREASE (DECREASE) IN CASH (207,000) 458,000
CASH AT BEGINNING OF PERIOD 2,325,000 2,415,000
----------- -----------
CASH AT END OF PERIOD $ 2,118,000 $ 2,873,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 105,000 $ 164,000
=========== ===========
Income taxes $ 792,000 $ 579,000
=========== ===========
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 and its wholly-owned foreign subsidiary, Diodes Taiwan Co., Ltd.
("Diodes-Taiwan"), and the accounts of 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 $1,097,000 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 Diodes-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 ("FabTech"), a wholly owned subsidiary of Vishay Lite-On Power
Semiconductor, Pte, Ltd. ("VLPSC"). Interest accrues monthly at the Company's
borrowing rate with total accrued interest of approximately $620,000 as of June
30, 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 and the U.S.
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 Incorporated Consolidated
JUNE 30, 1998 (China) (Taiwan) (United States) Segments
------------ ----------------- ------------------- ------------
Total sales $ 525,000 $ 6,941,000 $ 11,030,000 $ 18,496,000
Inter-segment sales (525,000) (3,315,000) (323,000) (4,163,000)
------------ ------------ ------------ ------------
Net sales $ -- $ 3,626,000 $ 10,707,000 $ 14,333,000
Depreciation and amortization $ 164,000 $ 16,000 $ 89,000 $ 269,000
Interest expense (income), net $ 6,000 $ (6,000) $ 95,000 $ 95,000
Income tax provision (benefit) $ -- $ 262,000 $ (54,000) $ 208,000
Net income (loss) $ (34,000) $ 633,000 $ (78,000) $ 521,000
Segment assets $ 10,677,000 $ 8,083,000 $ 24,705,000 $ 43,465,000
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Shanghai
KaiHong Diodes-Taiwan
THREE MONTHS ENDED Electronics Corporation, Ltd. Diodes Incorporated Consolidated
JUNE 30, 1999 (China) (Taiwan) (United States) Segments
------------ ----------------- ------------------- ------------
Total sales $ 2,240,000 $ 10,509,000 $ 11,280,000 $ 24,029,000
Inter-segment sales (1,491,000) (3,971,000) (560,000) (6,022,000)
------------ ------------ ------------ ------------
Net sales $ 749,000 $ 6,538,000 $ 10,720,000 $ 18,007,000
Depreciation and amortization $ 574,000 $ 14,000 $ 82,000 $ 670,000
Interest expense (income), net $ (16,000) $ (5,000) $ 86,000 $ 65,000
Income tax provision (benefit) $ -- $ 284,000 $ (164,000) $ 120,000
Net income (loss) $ 627,000 $ 605,000 $ (407,000) $ 825,000
Segment assets $ 15,763,000 $ 14,559,000 $ 18,715,000 $ 49,037,000
Shanghai
KaiHong Diodes-Taiwan
SIX MONTHS ENDED Electronics Corporation, Ltd. Diodes Incorporated Consolidated
JUNE 30, 1998 (China) (Taiwan) (United States) Segments
------------ ----------------- ------------------- ------------
Total sales $ 1,495,000 $ 14,221,000 $ 24,349,000 $ 40,065,000
Inter-segment sales (1,436,000) (6,718,000) (774,000) (8,928,000)
------------ ------------ ------------ ------------
Net sales $ 59,000 $ 7,503,000 $ 23,575,000 $ 31,137,000
Depreciation and $ 324,000 $ 31,000 $ 177,000 $ 532,000
Interest expense (income), net $ 14,000 $ (2,000) $ 93,000 $ 105,000
Income tax provision (benefit) $ -- $ 500,000 $ 200,000 $ 700,000
Net income (loss) $ 66,000 $ 1,352,000 $ 289,000 $ 1,707,000
Segment assets $ 10,677,000 $ 8,083,000 $ 24,705,000 $ 43,465,000
Shanghai
KaiHong Diodes-Taiwan
SIX MONTHS ENDED Electronics Corporation, Ltd. Diodes Incorporated Consolidated
JUNE 30, 1999 (China) (Taiwan) (United States) Segments
------------ ----------------- ------------------- ------------
Total sales $ 4,254,000 $ 18,173,000 $ 21,379,000 $ 43,806,000
Inter-segment sales (2,941,000) (6,042,000) (1,204,000) (10,187,000)
------------ ------------ ------------ ------------
Net sales $ 1,313,000 $ 12,131,000 $ 20,175,000 $ 33,619,000
Depreciation and $ 1,042,000 $ 42,000 $ 164,000 $ 1,248,000
Interest expense (income), net $ (4,000) $ (2,000) $ 170,000 $ 164,000
Income tax provision (benefit) $ -- $ 588,000 $ (451,000) $ 137,000
Net income (loss) $ 1,251,000 $ 1,079,000 $ (815,000) $ 1,515,000
Segment assets $ 15,763,000 $ 14,559,000 $ 18,715,000 $ 49,037,000
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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.
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 and the U.S. 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 ("VLPSC"). 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.
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's 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's
manufacturing 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.
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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 have 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 24.2% for
the six months ended June 30, 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 and continuing throughout the first six
months of 1999, 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 larger distributors, and thus may result in
continuing pressure on gross profit margins.
Beginning in 1999, the Company began selling silicon wafers.
Silicon wafers are the basic material from which discrete semiconductor are
manufactured. Currently, the Company purchases the wafers from two related
parties, VLPSC and FabTech. Wafers are purchased by the Company for resale and
for use in its own manufacturing facilities. For the three and six months ended
June 30, 1999, sales of wafers were $943,000 and $1.4 million, respectively.
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 8.3% for the six months ended June 30, 1999 from 29.1% in
the first half 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 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
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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 JUNE 30, 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 DOLLAR
PERCENT OF NET SALES INCREASE
THREE MONTHS ENDED JUNE 30, (DECREASE)
------------------------------- -------------
1998 1999 `98 TO `99
----------- ----------- -------------
Net sales 100.0 % 100.0 % 25.6 %
Cost of goods sold (74.8) (76.0) 27.6
----------- ----------- -------------
Gross profit 25.2 24.0 19.9
Selling, general &
administrative expenses ("SG&A") (20.2) (18.7) 16.4
----------- ----------- -------------
Income from operations 5.0 5.3 34.3
Interest expense, net (0.7) (0.4) (31.6)
Other income 0.8 0.3 (47.5)
----------- ----------- -------------
Income before taxes 5.1 5.2 29.6
Income taxes 1.5 0.6 (42.3)
----------- ----------- -------------
Net income 3.6 4.6 58.3
=========== =========== =============
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended June 30, 1999 compared to the three months ended June 30,
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 $ 14,333,000 $ 18,007,000
- ---------
Net sales increased approximately $3.7 million, or 25.6%, for
the three months ended June 30, 1999 compared to the same period last year, due
primarily to a 55.7% increase in units sold, as a result of an increased demand
for the Company's products, primarily in the Far East. Diodes-China trade sales
of $750,000, compared to $0 in the same period last year, was partly offset by a
19.4% decrease in the Company's average selling price, primarily in the Far
East. The Company anticipates these pricing pressures will continue for the
balance of the year, though the severity should slowly diminish. In 1999,
Diodes-Taiwan began purchasing wafers from FabTech for resale in the Far East.
Sales totaling $943,000 of silicon wafers, a new product line, also contributed
to the increase in sales.
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1998 1999
------------ ------------
GROSS PROFIT $ 3,606,000 $ 4,324,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 25.2% 24.0%
- ------------------------------
Gross profit increased approximately $718,000, or 19.9%, due
primarily to the 25.6% increase in sales. Continuing pricing pressures within
the discrete semiconductor industry, primarily in the Far East, and an increase
in the percentage of the Company's sales to larger distributors at lower gross
profit margins contributed to a decrease in gross margin percentage to 24.0% for
the three months ended June 30, 1999 compared to 25.2% for the same period in
1998. In addition, silicon wafer sales in the Far East, at substantially lower
gross margins than the Company's primary product lines, also contributed to the
lower gross margin percentage.
1998 1999
------------ ------------
SG&A $ 2,900,000 $ 3,376,000
- ----
SG&A for the three months ended June 30, 1999 increased
approximately $476,000, or 16.4%, compared to the same period last year, due
primarily to increases in management expenses at Diodes-China, higher
Company-wide marketing and advertising expenses, increased sales commissions at
Diodes-Taiwan, and additional sales and engineering personnel. SG&A as a
percentage of sales decreased to 18.7% from 20.2% in the comparable period last
year.
1998 1999
------------ ------------
INTEREST INCOME $ 66,000 $ 78,000
- ---------------
INTEREST EXPENSE $ 161,000 $ 143,000
- ----------------
NET INTEREST EXPENSE $ 95,000 $ 65,000
- --------------------
Net interest expense for the three months ended June 30, 1999
decreased $30,000, due primarily to a decreased use of the Company's credit
facility to support the expansion of Diodes-China versus the same period last
year. 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 $ 2,000 $ (33,000)
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's (income) or loss for the
period. The increase in the joint venture earnings for the three months ended
June 30, 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 June 30, 1999,
the Company had a 95% controlling interest in the joint venture.
1998 1999
------------ ------------
COMMISSIONS AND OTHER INCOME $ 116,000 $ 95,000
- ----------------------------
Commissions and other income for the three months ended June
30, 1999 decreased approximately $21,000, or 18.1%, compared to the same period
last year, due primarily 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 June 30, 1999 decreased 10.3% compared to the same period last year.
12
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1998 1999
------------ ------------
PROVISION FOR INCOME TAXES $ 208,000 $ 120,000
- --------------------------
The Company's overall effective federal, state, and foreign
tax rate decreased to 12.7% for the three months ended June 30, 1999 from 28.5%
in the first three months of 1998. This decrease 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 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 DOLLAR
PERCENT OF NET SALES INCREASE
SIX MONTHS ENDED JUNE 30, (DECREASE)
------------------------------- -------------
1998 1999 `98 TO `99
----------- ----------- -------------
Net sales 100.0 % 100.0 % 8.0 %
Cost of goods sold (74.3) (75.8) 10.2
----------- ----------- -------------
Gross profit 25.7 24.2 1.7
Selling, general &
administrative expenses ("SG&A") (18.4) (19.3) 13.3
----------- ----------- -------------
Income from operations 7.3 4.9 (27.9)
Interest expense, net (0.4) (0.5) 56.2
Other income 0.8 0.5 (26.0)
----------- ----------- -------------
Income before taxes 7.7 4.9 (31.4)
Income taxes 2.2 0.4 (80.4)
----------- ----------- -------------
Net income 5.5 4.5 (11.2)
=========== =========== =============
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The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
six months ended June 30, 1999 compared to the six months ended June 30, 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 $ 31,137,000 $ 33,619,000
- ---------
Net sales increased approximately $2.5 million, or 8.0%, for
the six months ended June 30, 1999 compared to the same period last year, due
primarily to a 27.9% increase in units sold, as a result of an increased demand
for the Company's products, primarily in the Far East. Diodes-China trade sales
of $1.3 million, compared to $59,000 in the same period last year, was partly
offset by a 16.0% decrease in the Company's average selling price, primarily in
the Far East. The Company anticipates these pricing pressures will continue for
the balance of the year, though the severity should slowly diminish. Sales
totaling $1.4 million of silicon wafers, a new product at Diodes-Taiwan, also
contributed to the increase in sales.
1998 1999
------------ ------------
GROSS PROFIT $ 7,998,000 $ 8,131,000
- ------------
GROSS PROFIT MARGIN PERCENTAGE 25.7% 24.2%
- ------------------------------
Gross profit increased approximately $133,000, or 1.7%, due
primarily to the 8.0% increase in sales, offset by margin pressures. Continuing
pricing pressures within the discrete semiconductor industry, primarily in the
Far East, and an increase in the percentage of the Company's sales to larger
distributors at lower gross profit margins contributed to a decrease in gross
margin percentage to 24.2% for the six months ended June 30, 1999 compared to
25.7% for the same period in 1998. In addition, silicon wafer sales in the Far
East, at substantially lower gross margins than the Company's primary product
lines, also contributed to the lower gross margin percentage.
1998 1999
------------ ------------
SG&A $ 5,732,000 $ 6,497,000
- ----
SG&A for the six months ended June 30, 1999 increased
approximately $765,000, or 13.3%, compared to the same period last year, due
primarily to increases in management expenses at Diodes-China, higher
Company-wide marketing and advertising expenses, increased sales commissions at
Diodes-Taiwan, and additional sales and engineering personnel. SG&A as a
percentage of sales increased to 19.3% from 18.4% in the comparable period last
year.
1998 1999
------------ ------------
INTEREST INCOME $ 149,000 $ 139,000
- ---------------
INTEREST EXPENSE $ 254,000 $ 303,000
- ----------------
NET INTEREST EXPENSE $ 105,000 $ 164,000
- --------------------
Net interest expense for the six months ended June 30, 1999
increased $59,000, due primarily to a increased use of the Company's credit
facility to support the expansion of Diodes-China versus the same period in
1998. 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.
14
15
1998 1999
------------ ------------
MINORITY INTEREST IN JOINT VENTURE $ (3,000) $ (66,000)
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's (income) or loss for the
period. The increase in the joint venture earnings for the six months ended June
30, 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 June 30, 1999,
the Company had a 95% controlling interest in the joint venture.
1998 1999
------------ ------------
PROVISION FOR INCOME TAXES $ 700,000 $ 137,000
- --------------------------
The Company's overall effective federal, state, and foreign
tax rate decreased to 8.3% for the six months ended June 30, 1999 from 29.1% in
the first six months of 1998. This decrease 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 six months ended
June 30, 1999 was $2.7 million compared to cash used by operating activities of
$787,000 for the same period in 1998. The primary sources of cash flows from
operating activities in 1999 were an increase in accounts payable of $2.8
million and a reduction of inventories of $1.8 million. The primary use of cash
flows from operating activities in 1999 was an increase in accounts receivable
of $3.7 million. The primary sources of cash flows from operating activities for
the six months ended June 30, 1998 were net income of $1.7 million and a
decrease in accounts receivable of $1.6 million, while the primary use was a
$2.3 million increase in inventories.
A 14.6% decrease in inventories from year-end 1998 levels
reflects the Company's efforts of reducing inventory levels while still
providing the service and delivery that customers require. Since December 31,
1998 accounts receivable has increased 38.3% due primarily to a slowing trend in
payments from major distributors. The Company does not expect this trend to
result in additional bad debt expense. 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 June 30, 1999 was 2.4 to 1, compared to a ratio of 2.6
to 1 on December 31, 1998.
Cash used by investing activities was $1.6 million as of June
30, 1999, compared to $4.3 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 used by financing activities was $672,000 for the six
months ended June 30, 1999, compared to cash provided by financing activities of
$4.8 million 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 June 30, 1999. The working capital line of credit
15
16
expires June 30, 2000 and contains a sublimit of $3.0 million for issuance of
commercial and stand-by letters of credit. As of June 30, 1999, approximately
$8.0 million is outstanding under the term note commitment, and the average
interest rate on outstanding borrowings was approximately 6.2%.
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
June 30, 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.
In July 1998, the Company replaced two previously filed
guarantees to Shanghai Kaihong Electronics Co., Ltd. (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 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 6.0% to $17.6
million as of June 30, 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 long-term debt to equity ratio decreased to 0.28
at June 30, 1999, from 0.30 at December 31, 1998. The Company's total debt to
equity ratio increased to 0.66 at June 30, 1999, from 0.63 at December 31, 1998.
It is anticipated that these ratios may increase as the Company continues to use
its credit facilities to fund additional sourcing and manufacturing
opportunities.
As of June 30, 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.
16
17
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
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.
17
18
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.
The Company submitted to a vote of its security holders at an
annual meeting of shareholders on June 4, 1999, the election of members of the
Board of Directors. The directors were each elected to serve until the 1997
annual meeting or until their successors are elected and have qualified. The
results of the tabulation for each nominee for director of the Company is as
follows:
Eugene R. Conahan, Director For: 4,431,597
Withheld: 22,660
Michael R. Giordano, For: 4,435,597
Director Withheld: 18,660
David Lin, For: 4,434,597
Director Withheld: 19,660
M.K. Lu, For: 4,434,597
Director Withheld: 19,660
Shing Mao, For: 4,434,597
Director Withheld: 19,660
Michael A. Rosenberg, For: 4,427,497
Director Withheld: 26,760
Eric Schaedlich, For: 4,431,597
Director Withheld: 22,660
Leonard M. Silverman, For: 4,434,297
Director Withheld: 19,960
Raymond Soong, For: 4,434,297
Director Withheld: 19,960
18
19
William J. Spires, For: 4,431,597
Director Withheld: 22,660
The Company also submitted to a vote of its security holders
at an annual meeting of shareholders on June 4, 1999, the appointment of Moss
Adams LLP as the Company's independent certified public accountants for the
fiscal year ending December 31, 1999. The result of the tabulation was 4,439,852
shares voted in favor of the proposal and 14,405 shares voted against or
abstained from voting on the proposal. No broker non-votes with respect to this
proposal were received.
ITEM 5. OTHER INFORMATION
The proxy materials for the 1999 annual meeting of
stockholders held on June 4, 1999 were mailed to stockholders of the Company on
April 30, 1999. Stockholder proposals to be presented at the 2000 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, 2000 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, 2000, the proxies
solicited by the Board of Directors for the 2000 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 2000 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 10.28 - Diodes-Taiwan Relationship Agreement
for FabTech Wafer Sales
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
19
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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 August 10, 1999
- ----------------------------------------------------
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
20
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INDEX TO EXHIBITS
EXHIBIT 10.28 DIODES-TAIWAN RELATIONSHIP AGREEMENT
FOR FABTECH WAFER SALES Page 22
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Page 23
EXHIBIT 27 FINANCIAL DATA SCHEDULE Page 24
21