1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 November 3, 1999 was 5,923,186, including 717,115 shares of
treasury stock.
THIS REPORT INCLUDES A TOTAL OF 24 PAGES
THE EXHIBIT INDEX IS ON PAGE 22
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 2,415,000 $ 1,711,000
Accounts receivable
Customers 9,107,000 14,041,000
Related party 125,000 295,000
Other 496,000 309,000
----------- -----------
9,728,000 14,645,000
Less allowance for doubtful receivables 110,000 291,000
----------- -----------
9,618,000 14,354,000
Inventories 13,777,000 14,499,000
Deferred income taxes 1,098,000 1,099,000
Prepaid expenses and other 448,000 569,000
Prepaid income taxes -- 171,000
----------- -----------
Total current assets 27,356,000 32,403,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 13,750,000 17,187,000
ADVANCES TO RELATED PARTY VENDOR 3,024,000 2,909,000
OTHER ASSETS, net 1,259,000 1,351,000
----------- -----------
TOTAL ASSETS $45,389,000 $53,850,000
=========== ===========
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, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
CURRENT LIABILITIES
Due to bank $ 812,000 $ 1,739,000
Accounts payable
Trade 2,991,000 5,535,000
Related party 1,213,000 2,504,000
Accrued liabilities 3,421,000 4,406,000
Income taxes payable 169,000 --
Current portion of long-term debt 2,111,000 2,111,000
----------- -----------
Total current liabilities 10,717,000 16,295,000
DEFERRED COMPENSATION 56,000 57,000
DEFERRED INCOME TAXES 521,000 521,000
LONG-TERM DEBT, net of current portion 5,991,000 5,449,000
MINORITY INTEREST IN JOINT VENTURE 644,000 860,000
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -
par value $1.00 per share;
1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock - par value $0.66 2/3 per share;
9,000,000 shares authorized; 5,764,352 and 5,766,019
shares issued and outstanding at December 31, 1998
and September 30, 1999, respectively 3,843,000 3,844,000
Additional paid-in capital 6,105,000 6,113,000
Retained earnings 19,294,000 22,493,000
----------- -----------
29,242,000 32,450,000
Less:
Treasury stock - 717,115 shares of common stock at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 27,460,000 30,668,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,389,000 $53,850,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
NET SALES $ 14,963,000 $ 21,750,000 $ 46,410,000 $ 56,011,000
COST OF GOODS SOLD 11,245,000 15,862,000 34,475,000 41,784,000
------------ ------------ ------------ ------------
Gross profit 3,718,000 5,888,000 11,935,000 14,227,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,811,000 3,636,000 8,543,000 10,132,000
------------ ------------ ------------ ------------
Income from operations 907,000 2,252,000 3,392,000 4,095,000
OTHER INCOME (EXPENSE)
Interest income 65,000 87,000 214,000 226,000
Interest expense (150,000) (141,000) (404,000) (444,000)
Other (32,000) 50,000 (2,000) 89,000
------------ ------------ ------------ ------------
(117,000) (4,000) (192,000) (129,000)
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 790,000 2,248,000 3,200,000 3,966,000
PROVISION FOR INCOME TAXES 233,000 510,000 933,000 647,000
Minority interest in joint venture earnings (3,000) (54,000) (6,000) (120,000)
------------ ------------ ------------ ------------
NET INCOME $ 554,000 $ 1,684,000 $ 2,261,000 $ 3,199,000
============ ============ ============ ============
EARNINGS PER SHARE
BASIC $ 0.11 $ 0.33 $ 0.45 $ 0.63
DILUTED $ 0.11 $ 0.31 $ 0.42 $ 0.60
============ ============ ============ ============
Number of shares used in computation
Basic 5,047,237 5,047,491 5,022,939 5,047,322
Diluted 5,231,630 5,410,451 5,366,861 5,297,077
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,261,000 $ 3,199,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 767,000 1,949,000
Minority interest earnings 6,000 120,000
Interest income accrued on advances to vendor (137,000) 115,000
Changes in operating assets:
Accounts receivable 446,000 (4,736,000)
Inventories 187,000 (722,000)
Prepaid expenses and other assets (753,000) (385,000)
Changes in operating liabilities:
Accounts payable (1,474,000) 3,835,000
Accrued liabilities 69,000 986,000
Income taxes payable (224,000) (169,000)
----------- -----------
Net cash provided by operating activities 1,148,000 4,192,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,435,000) (5,386,000)
Net cash used by investing activities (6,435,000) (5,386,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit, net 1,297,000 927,000
Net proceeds from the issuance of capital stock 256,000 9,000
Minority interest capital contribution 305,000 96,000
Proceeds from (repayments of) long-term obligations 2,510,000 (542,000)
----------- -----------
Net cash provided by financing activities 4,368,000 490,000
----------- -----------
DECREASE IN CASH (919,000) (704,000)
CASH AT BEGINNING OF PERIOD 2,325,000 2,415,000
----------- -----------
CASH AT END OF PERIOD $ 1,406,000 $ 1,711,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 190,000 $ 218,000
=========== ===========
Income taxes $ 1,552,000 $ 1,131,000
=========== ===========
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 $1,099,000 resulting from temporary differences in bases
of assets and liabilities. This deferred tax asset results primarily from
inventory reserves and certain expense accruals, which are not currently
deductible for income tax purposes.
The 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
cumulative profitable operations, and (ii) earnings of Diodes-Taiwan are not
subject to State income tax 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. Approximately $1.9 million will be distributed in 1999, with the
remaining $2.6 million by year-end 2000. The Company has not established a
deferred tax liability for the remaining undistributed earnings of this
subsidiary of approximately $5.0 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 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 an interest rate equal to the
Company's borrowing interest rate on its long-term bank loan with total accrued
interest of approximately $411,000 as of September 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 ($10.00) per unit for products (silicon wafers) purchased from
FabTech. As of September 30, 1999, the Company expects this note to be
collected, including interest, no later than February 2001, as per the terms of
the agreement.
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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.
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 Diodes
THREE MONTHS ENDED Electronics Corporation, Ltd. Incorporated Consolidated
SEPTEMBER 30, 1998 (China) (Taiwan) (United States) Segments
------------------ ------------ ----------------- --------------- ------------
Total sales $ 812,000 $ 6,580,000 $ 11,100,000 $ 18,492,000
Inter-segment sales (812,000) (1,977,000) (740,000) (3,529,000)
------------ ------------ ------------ ------------
Net sales $ -- $ 4,603,000 $ 10,360,000 $ 14,963,000
Depreciation and amortization $ 193,000 $ 15,000 $ 76,000 $ 284,000
Interest expense (income), net $ (9,000) $ 2,000 $ 92,000 $ 85,000
Income tax provision (benefit) $ -- $ 243,000 $ (10,000) $ 233,000
Net income (loss) $ 47,000 $ 522,000 $ (15,000) $ 554,000
Segment assets $ 11,146,000 $ 9,031,000 $ 23,183,000 $ 43,360,000
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Shanghai
KaiHong Diodes-Taiwan Diodes
THREE MONTHS ENDED Electronics Corporation, Ltd. Incorporated Consolidated
SEPTEMBER 30, 1999 (China) (Taiwan) (United States) Segments
------------------ ------------ ----------------- --------------- ------------
Total sales $ 2,945,000 $ 13,136,000 $ 12,972,000 $ 29,053,000
Inter-segment sales (2,124,000) (4,306,000) (873,000) (7,303,000)
------------ ------------ ------------ ------------
Net sales $ 821,000 $ 8,830,000 $ 12,099,000 $ 21,750,000
Depreciation and amortization $ 611,000 $ 47,000 $ 65,000 $ 723,000
Interest expense (income), net $ (34,000) $ 2,000 $ 86,000 $ 54,000
Income tax provision (benefit) $ -- $ 494,000 $ (16,000) $ 510,000
Net income (loss) $ 1,032,000 $ 1,149,000 $ (497,000) $ 1,684,000
Segment assets $ 18,736,000 $ 15,149,000 $ 19,965,000 $ 53,850,000
Shanghai
KaiHong Diodes-Taiwan Diodes
NINE MONTHS ENDED Electronics Corporation, Ltd. Incorporated Consolidated
SEPTEMBER 30, 1998 (China) (Taiwan) (United States) Segments
------------------ ------------ ----------------- --------------- ------------
Total sales $ 2,307,000 $ 21,109,000 $ 35,451,000 $ 58,867,000
Inter-segment sales (2,248,000) (8,695,000) (1,514,000) (12,457,000)
------------ ------------ ------------ ------------
Net sales $ 59,000 $ 12,414,000 $ 33,937,000 $ 46,410,000
Depreciation and amortization $ 517,000 $ 46,000 $ 204,000 $ 767,000
Interest expense (income), net $ 5,000 $ -- $ 185,000 $ 190,000
Income tax provision (benefit) $ -- $ 743,000 $ 190,000 $ 933,000
Net income (loss) $ 113,000 $ 1,874,000 $ 274,000 $ 2,261,000
Segment assets $ 11,146,000 $ 9,031,000 $ 23,183,000 $ 43,360,000
Shanghai
KaiHong Diodes-Taiwan Diodes
THREE MONTHS ENDED Electronics Corporation, Ltd. Incorporated Consolidated
SEPTEMBER 30, 1998 (China) (Taiwan) (United States) Segments
------------------ ------------ ----------------- --------------- ------------
Total sales $ 7,199,000 $ 31,951,000 $ 34,352,000 $ 73,502,000
Inter-segment sales (5,065,000) (10,348,000) (2,078,000) (17,491,000)
------------ ------------ ------------ ------------
Net sales $ 2,134,000 $ 21,603,000 $ 32,274,000 $ 56,011,000
Depreciation and amortization $ 1,653,000 $ 89,000 $ 207,000 $ 1,949,000
Interest expense (income), net $ (37,000) $ -- $ 255,000 $ 218,000
Income tax provision (benefit) $ -- $ 1,081,000 $ (434,000) $ 647,000
Net income (loss) $ 2,283,000 $ 2,228,000 $ (1,312,000) $ 3,199,000
Segment assets $ 18,736,000 $ 15,149,000 $ 19,965,000 $ 53,850,000
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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 manufacturer 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.
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 25.4% for the nine months
ended September 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 nine months
of 1999, the Company, particularly through its North American operations,
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.
The Company purchases silicon wafers, the basic material from
which discrete semiconductor are manufactured. In 1999, the Company began
purchasing wafers, primarily from two related parties, VLPSC and FabTech, for
resale to its customers as well. For the three and nine months ended September
30, 1999, sales of wafers were $909,000 and $2.3 million, respectively, at gross
profit margins significantly lower than the Company's historical profit margins.
There can be no assurance that the Company can continue to obtain wafers from
VLPSC or FabTech for internal use or for resale.
Since 1997, the Company's manufacturing focus has primarily been
in the development and expansion of Diodes-China. As of September 30, 1999, the
Company has purchased approximately $18.5 million in plant and equipment for 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 $5.0 million of the Company's
existing credit facility has been used to finance the additional manufacturing
capacity.
In November 1999, the Company's Board of Director's approved an
additional expansion of plant and equipment at Diodes-China of approximately
$6.5 million bringing the total expansion plans to approximately $11.0 million.
This expansion will increase capacity for SOT-23 type packages to meet current
demand, and increase capacity for even smaller, subminiature packages such as
SOD-323, SOT-323/353/363, and SOD-123. The capacity generated from the
previously announced $4.5 million expansion has already been sold out through
year 2000. The investment will be financed by existing and future cash flow, as
well as by existing borrowing arrangements. The Company will continue to expand
Diodes-China's capacity as demand warrants.
The Company's overall effective federal, state, and foreign tax
rate decreased to 16.3% for the nine months ended September 30, 1999 from 29.2%
for the first nine 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%.
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Net Sales, Cost of Goods Sold and Other Income for the three- and
nine-month periods ended September 30, 1998 have been restated to be consistent
with the current presentation of certain transactions. In the past, profit
realized on drop shipments from Diodes-Taiwan was accounted for as "Commission
Income" under "Other Income". These shipments (which are expected to become an
increasingly significant part of the Company's business) are now included in
"Net Sales", with an appropriate charge to "Cost of Goods Sold". The income
derived from these transactions is now included in Gross Profit. These changes
have no effect on Net Income and Earnings per Share. The increase to Net Sales
and Gross Profit, and the decrease in Other Income for the three months ended
September 30, 1998 was $317,000, $104,000, and $104,000, respectively. The
increase to Net Sales and Gross Profit, and the decrease in Other Income for the
nine months ended September 30, 1998 was $626,000, $323,000, and $323,000,
respectively. In addition, Minority Interest in Joint Venture Earnings is
presented after Provision for Income Taxes as per Rule 5-03(b)12 of Regulation
S-X.
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 product 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 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.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 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.
PERCENT OF NET SALES PERCENTAGE
THREE MONTHS ENDED DOLLAR INCREASE
SEPTEMBER 30, (DECREASE)
--------------------------- -------------------
1998 1999 `98 TO `99
--------------------------- -------------------
Net sales 100.0% 100.0% 45.4%
Cost of goods sold (75.1) (72.9) 41.1
-------- -------- --------
Gross profit 24.9 27.1 58.4
Selling, general & administrative
expenses ("SG&A") (18.8) (16.7) 29.3
-------- -------- --------
Income from operations 6.1 10.4 148.3
Interest expense, net (0.6) (0.3) (36.5)
Other income (0.2) 0.2 256.3
-------- -------- --------
Income before taxes 5.3 10.3 184.6
Income taxes 1.6 2.3 118.9
Minority interest 0.0 (0.3) --
-------- -------- --------
Net income 3.7 7.7 204.0
======== ======== ========
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 30, 1999 compared to the three months ended
September 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 $ 14,963,000 $ 21,750,000
Net sales increased approximately $6.8 million, or 45.4%, for the
three months ended September 30, 1999 compared to the same period last year, due
primarily to a 55.2% increase in units sold, as a result of an increased demand
for the Company's products, primarily in the Far East. Diodes-China's trade
sales of $821,000, compared to $0 in the same period last year, was partly
offset by a 6.3% 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 silicon wafers, a new product line, from FabTech
for resale in the Far East. Sales totaling $909,000 of silicon wafers also
contributed to the increase in sales. There can be no guarantee that sales of
silicon wafers will continue in the future.
12
13
1998 1999
----------- -----------
COST OF GOODS SOLD $11,245,000 $15,862,000
GROSS PROFIT $ 3,718,000 $ 5,888,000
GROSS PROFIT MARGIN PERCENTAGE 24.9% 27.1%
Gross profit increased approximately $2.2 million, or 58.4%, due primarily to
the 45.4% increase in sales. Manufacturing profit at Diodes-China at higher
gross profit margins contributed to an increase in gross margin percentage to
27.1% for the three months ended September 30, 1999 compared to 24.9% for the
same period in 1998. Although gross profit margins strengthened in the third
quarter of 1999, pricing pressures continue to exist on many of the Company's
product lines, and there can be no guarantee that margins will continue to
improve.
1998 1999
----------- -----------
SG&A $ 2,811,000 $ 3,636,000
SG&A for the three months ended September 30, 1999 increased
approximately $825,000, or 29.3%, 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 decreased to 16.7% from 18.8% in the comparable period last
year.
1998 1999
-------- --------
INTEREST INCOME $ 65,000 $ 87,000
INTEREST EXPENSE $150,000 $141,000
NET INTEREST EXPENSE $ 85,000 $ 54,000
Net interest expense for the three months ended September 30,
1999 decreased $31,000, 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 $2.9 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
--------- --------
OTHER INCOME (EXPENSE) $ (32,000) $ 50,000
Other income for the three months ended September 30, 1999
increased approximately $82,000 compared to the same period last year, due
primarily to currency exchange fluctuation at the Company's subsidiaries in
Taiwan and China.
1998 1999
--------- ---------
PROVISION FOR INCOME TAXES $ 233,000 $ 510,000
The Company's overall effective federal, state, and foreign tax
rate decreased to 22.7% for the three months ended September 30, 1999 from 29.5%
in the comparable period last year. 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 15-20% of pre-tax income.
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14
1998 1999
-------- ---------
MINORITY INTEREST IN JOINT VENTURE $ (3,000) $ (54,000)
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
increase in the joint venture earnings for the three months ended September 30,
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 September 30, 1999, the
Company had a 95% controlling interest in the joint venture.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 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.
PERCENT OF NET SALES PERCENTAGE
NINE MONTHS ENDED DOLLAR INCREASE
SEPTEMBER 30, (DECREASE)
--------------------------- -------------------
1998 1999 `98 TO `99
--------------------------- -------------------
Net sales 100.0% 100.0% 20.7%
Cost of goods sold (74.3) (74.6) 21.2
--------- -------- --------
Gross profit 25.7 25.4 19.2
Selling, general & administrative
expenses ("SG&A") (18.4) (18.1) 18.6
--------- -------- --------
Income from operations 7.3 7.3 20.7
Interest expense, net (0.4) (0.4) 14.7
Other income 0.0 0.2 --
--------- -------- --------
Income before taxes 6.9 7.1 23.9
Income taxes 2.0 1.2 (30.7)
Minority interest 0.0 (0.2) --
--------- -------- --------
Net income 4.9 5.7 41.5
========= ======== ========
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15
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 1999 compared to the nine months ended September
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 $ 46,410,000 $ 56,011,000
Net sales increased approximately $9.6 million, or 20.7%, for the
nine months ended September 30, 1999 compared to the same period last year, due
primarily to a 37.1% 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 $2.1 million, compared to $59,000 in the same period last year, was partly
offset by a 12.8% 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 $2.3 million of silicon wafers, a new product line in 1999, also
contributed to the increase in sales. There can be no guarantee that sales of
silicon wafers will continue in the future.
1998 1999
------------ ------------
COST OF GOODS SOLD $ 34,475,000 $ 41,784,000
GROSS PROFIT $ 11,935,000 $ 14,227,000
GROSS PROFIT MARGIN PERCENTAGE 25.7% 25.4%
Gross profit increased approximately $2.3 million, or 19.2%, due primarily to
the 20.7% increase in sales, partly 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 25.4% for the nine months ended September 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. Although
gross profit margins seem to be strengthening, pricing pressures continue to
exist on many of the Company's product lines, and there can be no guarantee of
margin improvement.
1998 1999
----------- ------------
SG&A $ 8,543,000 $ 10,132,000
SG&A for the nine months ended September 30, 1999 increased
approximately $1.6 million, or 18.6%, 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 18.1% from 18.4% in the comparable period last
year.
15
16
1998 1999
--------- ---------
INTEREST INCOME $ 214,000 $ 226,000
INTEREST EXPENSE $ 404,000 $ 444,000
NET INTEREST EXPENSE $ 190,000 $ 218,000
Net interest expense for the nine months ended September 30, 1999
increased $28,000, 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 $2.9 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
-------- --------
OTHER INCOME $ (2,000) $ 89,000
Other income for the nine months ended September 30, 1999
increased approximately $91,000, compared to the same period last year, due
primarily to currency exchange fluctuation at the Company's subsidiaries in
Taiwan and China.
1998 1999
--------- ---------
PROVISION FOR INCOME TAXES $ 933,000 $ 647,000
The Company's overall effective federal, state, and foreign tax
rate decreased to 16.3% for the nine months ended September 30, 1999 from 29.2%
in the first nine 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 15-20% of pre-tax income.
1998 1999
-------- ----------
MINORITY INTEREST IN JOINT VENTURE $ (6,000) $ (120,000)
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
increase in the joint venture earnings for the nine months ended September 30,
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 September 30, 1999, the
Company had a 95% controlling interest in the joint venture.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
September 30, 1999 was $4.2 million compared to $1.1 million for the same period
in 1998. The primary sources of cash flows from operating activities in 1999
were net income of $3.2 million and an increase in accounts payable of $3.8
million. The primary use of cash flows from operating activities in 1999 was an
increase in accounts receivable of $4.7 million. The primary sources of cash
flows from operating activities for the nine months ended September 30, 1998
were net income of $2.3 million and a decrease in accounts receivable of
$446,000, while the primary use was a $1.5 million decrease in accounts payable.
16
17
Since December 31, 1998 accounts receivable from customers has
increased 53.8% 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 policies,
while at times providing more flexible terms, primarily to its Asian customers,
when necessary. The ratio of the Company's current assets to current liabilities
on September 30, 1999 was 1.99 to 1, compared to a ratio of 2.55 to 1 on
December 31, 1998.
Cash used by investing activities was $5.3 million as of
September 30, 1999, compared to $6.4 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 $394,000 for the nine
months ended September 30, 1999, compared to $4.4 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 September 30, 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 September 30, 1999,
approximately $7.4 million is outstanding under the term note commitment, and
the average interest rate on outstanding borrowings was approximately 6.4%.
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
September 30, 1999, amounts due from FabTech, including accrued interest, are
approximately $2.9 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 is in the process of extending this agreement as
well as increasing the borrowing limits.
Total working capital decreased approximately 3.2% to $16.1
million as of September 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 0.25 at
September 30, 1999, from 0.30 at December 31, 1998. The Company's total debt to
equity ratio increased to 0.73 at September 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 September 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.
17
18
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:
- - general or specific economic conditions
- - fluctuations in product demand
- - introduction of new products
- - Company's ability to maintain customer relationships
- - technological advancements
- - impact of competitive products and pricing
- - change in growth in targeted markets
- - risks of foreign operations such as Diodes-China and Diodes-Taiwan
- - ability and willingness of the Company's customers to purchase products
provided by the Company
- - perceived absolute or relative overall value of these products by the
purchasers, including the features, quality, and price in comparison to other
competitive products
- - level of availability of products and substitutes and the ability and
willingness of purchasers to acquire new or advanced products
- - 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
- - amount and rate of growth of the Company's selling, general and
administrative expenses
- - difficulties in obtaining materials, supplies and equipment
- - difficulties or delays in the development, production, testing and marketing
of products
- - failure to ship new products and technologies when anticipated
- - failure of customers to accept these products or technologies when planned
- - defects in products o any failure of economies to develop when planned
- - acquisition of fixed assets and other assets, including inventories and
receivables
- - making or incurring of any expenditures
- - effects of and changes in trade, monetary and fiscal policies, laws and
regulations
- - other activities of governments, agencies and similar organizations
- - changes in social and economic conditions, such as trade restriction or
prohibition, inflation and monetary fluctuation, import and other charges or
taxes, especially at Diodes-China and Diodes-Taiwan
- - ability or inability of the Company to obtain or hedge against foreign
currency
- - foreign exchange rates and fluctuations in those rates
- - intergovernmental disputes
18
19
- - developments or assertions by or against the Company relating to intellectual
property rights
- - adaptations of new, or changes in, accounting policies and practices in the
application of such policies and practices and the effects of changes within
the Company's organization
- - changes in compensation benefit plans
- - 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
- - amount, and the cost of financing which the Company has, and any changes to
that financing
- - any other information detailed from time to time in the Company's filings
with the United States Securities and Exchange Commission.
19
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no matters to be reported under this heading.
ITEM 2. CHANGES IN SECURITIES
There are no matters to be reported under this heading.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no matters to be reported under this heading.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There are no matters to be reported under this heading.
ITEM 5. OTHER INFORMATION
The proxy materials for the 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 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
20
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIODES INCORPORATED (Registrant)
By: /s/ Carl Wertz November 10, 1999
- -----------------------------------------------------
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
21
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INDEX TO EXHIBITS
EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Page 23
EXHIBIT 27 FINANCIAL DATA SCHEDULE Page 24
22