10-Q 1 form10q2q02main2.txt 2Q02 FORM 10-Q MAIN 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, 2002 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 August 9, 2002 was 9,258,164, including 1,075,672 shares of treasury stock. PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS DIODES INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET ASSETS
DECEMBER 31, JUNE 30, 2001 2002 ------------------- ------------------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 8,103,000 $ 6,821,000 Accounts receivable Customers 16,250,000 19,148,000 Related parties 1,486,000 4,033,000 ------------------- ------------------- ------------------- ------------------- 17,736,000 23,181,000 Less: Allowance for doubtful receivables 343,000 367,000 ------------------- ------------------- 17,393,000 22,814,000 Inventories 17,813,000 15,334,000 Deferred income taxes, current 4,368,000 4,373,000 Prepaid expenses, income taxes and other current assets 1,266,000 2,426,000 ------------------- ------------------- ------------------- ------------------- Total current assets 48,943,000 51,768,000 PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation and amortization 44,925,000 44,698,000 DEFERRED INCOME TAXES, non-current 3,672,000 3,213,000 OTHER ASSETS Goodwill, net 5,090,000 5,090,000 Other 628,000 1,055,000 ------------------- ------------------- TOTAL ASSETS $ 103,258,000 $ 105,824,000 =================== ===================
The accompanying notes are an integral part of these financial statements. DIODES INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JUNE 30, 2001 2002 ------------------ ------------------ (UNAUDITED) CURRENT LIABILITIES Line of credit $ 6,503,000 $ 360,000 Accounts payable Trade 6,098,000 9,926,000 Related parties 3,149,000 4,273,000 Accrued liabilities 5,062,000 6,498,000 Current portion of long-term debt Related party 2,500,000 2,500,000 Other 5,833,000 8,094,000 Current portion of capital lease obligations -- 154,000 ------------------ ------------------ Total current liabilities 29,145,000 31,805,000 LONG-TERM DEBT, net of current portion Related party 7,500,000 7,500,000 Other 13,664,000 8,399,000 CAPITAL LEASE OBLIGATIONS, net of current portion -- 2,564,000 MINORITY INTEREST IN JOINT VENTURE 1,825,000 1,962,000 STOCKHOLDERS' EQUITY Class A convertible preferred stock - par value $1.00 per share; 1,000,000 shares authorized; no shares issued and outstanding -- -- Common stock - par value $0.66 2/3 per share; 30,000,000 shares authorized; 9,227,664 and 9,252,164 shares issued and outstanding at December 31, 2001 and June 30, 2002, respectively 6,151,000 6,167,000 Additional paid-in capital 7,310,000 7,809,000 Retained earnings 39,882,000 41,654,000 ------------------ ------------------ ------------------ ------------------ 53,343,000 55,630,000 Less: Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000 Accumulated other comprehensive loss 437,000 254,000 ------------------ ------------------ 2,219,000 2,036,000 Total stockholders' equity 51,124,000 53,594,000 ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,258,000 $ 105,824,000 ================== ==================
The accompanying notes are an integral part of these financial statements. DIODES INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------- ------------------------------------------ 2001 2002 2001 2002 ------------------ ------------------- ------------------ -------------------- NET SALES $ 21,001,000 $ 29,946,000 $ 46,749,000 $ 56,870,000 COST OF GOODS SOLD 16,957,000 22,815,000 38,584,000 45,387,000 ------------------ ------------------- ------------------ -------------------- Gross profit 4,044,000 7,131,000 8,165,000 11,483,000 RESEARCH AND DEVELOPMENT EXPENSES 170,000 460,000 309,000 773,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,283,000 4,370,000 6,328,000 8,135,000 ------------------ ------------------- ------------------ -------------------- Total operating expenses 3,453,000 4,830,000 6,637,000 8,908,000 Income from operations 591,000 2,301,000 1,528,000 2,575,000 OTHER INCOME (EXPENSE) Interest income 16,000 16,000 39,000 25,000 Interest expense (511,000) (292,000) (1,208,000) (638,000) Other 467,000 109,000 371,000 124,000 ------------------ ------------------- ------------------ -------------------- (28,000) (167,000) (798,000) (489,000) Income before income taxes and minority interest 563,000 2,134,000 730,000 2,086,000 INCOME TAX BENEFIT (PROVISION) 7,000 (473,000) 436,000 (178,000) ------------------ ------------------- ------------------ -------------------- ------------------ ------------------- ------------------ -------------------- Income before minority interest 570,000 1,661,000 1,166,000 1,908,000 MINORITY INTEREST IN JOINT VENTURE EARNINGS (45,000) (98,000) (119,000) (136,000) ------------------ ------------------- ------------------ -------------------- NET INCOME $ 525,000 $ 1,563,000 $ 1,047,000 $ 1,772,000 ================== =================== ================== ==================== EARNINGS PER SHARE Basic $ 0.06 $ 0.19 $ 0.13 $ 0.22 Diluted $ 0.06 $ 0.18 $ 0.12 $ 0.20 ================== =================== ================== ==================== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 8,143,318 8,176,025 8,139,501 8,170,704 Diluted 8,896,744 8,874,416 8,970,791 8,824,025 ================== =================== ================== ====================
The accompanying notes are an integral part of these financial statements. DIODES INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, --------------------------------------- 2001 2002 ----------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,047,000 $ 1,772,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,102,000 4,731,000 Minority interest earnings 119,000 136,000 Changes in operating assets: Accounts receivable (431,000) (5,421,000) Inventories 7,849,000 2,479,000 Prepaid expenses, taxes and other assets (1,740,000) (1,133,000) Changes in operating liabilities: Accounts payable (2,771,000) 4,952,000 Accrued liabilities (2,929,000) 1,436,000 Income taxes payable (1,041,000) -- ----------------- ------------------ Net cash provided by operating activities 4,205,000 8,952,000 ----------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (6,542,000) (1,785,000) ----------------- ------------------ Net cash used by investing activities (6,542,000) (1,785,000) ----------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Advances on (repayments of) line of credit, net 305,000 (6,143,000) Proceeds from the issuance of capital stock 95,000 140,000 Proceeds (repayments) of long-term obligations 247,000 (3,004,000) Proceeds from majority shareholder contract reimbursement -- 375,000 Other 81,000 -- ----------------- ------------------ Net cash provided (used) by financing activities 728,000 (8,632,000) ----------------- ------------------ EFFECT OF EXCHANGE RATE AND INTEREST RATE CHANGES ON CASH AND CASH EQUIVALENTS -- 183,000 DECREASE IN CASH (1,609,000) (1,282,000) CASH AT BEGINNING OF PERIOD 4,476,000 8,103,000 ----------------- ------------------ CASH AT END OF PERIOD $ 2,867,000 $ 6,821,000 ================= ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 1,174,000 $ 613,000 ================= ================== Income taxes $ 1,904,000 $ 5,000 ================= ================== Non-cash acquisitions of property, plant and equipment $ -- $ 2,785,000 ================= ==================
The accompanying notes are an integral part of these financial statements. DIODES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position and results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim period. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The consolidated financial data at December 31, 2001 is derived from audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The consolidated financial statements include the accounts of the Company and its wholly-owned foreign subsidiaries, Diodes Taiwan Corporation., Ltd. ("Diodes-Taiwan") and Diodes-Hong Kong Ltd. ("Diodes-Hong Kong"), the accounts of Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China") in which the Company has a 95% interest, and the accounts of its wholly-owned United States subsidiary, FabTech Incorporated ("FabTech" or "Diodes-FabTech"). All significant intercompany balances and transactions have been eliminated. NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill beginning in the first quarter of 2002. An independent appraiser, hired by the Company, performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and has determined that the goodwill is fully recoverable. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income, net of tax, of approximately $165,000 ($0.02 per share) per year.
THREE MONTHS ENDED JUNE 30, ------------------------------------------ 2001 2002 ------------------- ------------------- Reported net income $ 525,000 $ 1,563,000 Add: Goodwill amortization, net of tax 42,000 -- ------------------- ------------------- Adjusted net income $ 567,000 $ 1,563,000 =================== =================== Diluted earnings per common share: Reported net income $ 0.06 $ 0.18 Add: Goodwill amortization, net of tax $ 0.00 -- ------------------- ------------------- Adjusted diluted earnings per common share $ 0.06 $ 0.18 =================== ===================
SIX MONTHS ENDED JUNE 30, ------------------------------------------ 2001 2002 ------------------- ------------------- Reported net income $ 1,047,000 $ 1,772,000 Add: Goodwill amortization, net of tax 84,000 -- ------------------- ------------------- Adjusted net income $ 1,131,000 $ 1,772,000 =================== =================== Diluted earnings per common share: Reported net income $ 0.12 $ 0.20 Add: Goodwill amortization, net of tax $ 0.01 -- ------------------- ------------------- Adjusted diluted earnings per common share $ 0.13 $ 0.20 =================== ===================
Also during 2001, FASB issued SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets", and No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of SFAS 143 and SFAS 144 will have material impact on the financial statements. NOTE C - FUNCTIONAL CURRENCIES, COMPREHENSIVE LOSS AND FOREIGN CURRENCY TRANSLATION Until June 30, 2001, the functional currency of Diodes-Taiwan was the U.S. dollar. Effective July 1, 2001, the Company changed the functional currency of Diodes-Taiwan to the local currency in Taiwan. As a result of this change, the translation of the balance sheet and statement of income of Diodes-Taiwan from the local currency into the reporting currency (US dollar) results in translation adjustments. The Company believes this reporting change most appropriately reflects the current economic facts and circumstances of the operations of Diodes-Taiwan. The Company continues to use the U.S. dollar as the functional currency at Diodes-China and Diodes-Hong Kong, as substantially all monetary transactions are made in that currency, and other significant economic facts and circumstances currently support that position. As these factors may change in the future, the Company will periodically assess its position with respect to the functional currency of Diodes-China and Diodes-Hong Kong. The Company has entered into an interest rate swap agreement with a major U.S. bank which expires November 30, 2004, to hedge its exposure to variability in expected future cash flows resulting from interest rate risk related to a portion of its long-term debt. The effect of the $178,000 gain in translation adjustments and $5,000 gain related to the interest rate swap agreement results in a change in accumulated other comprehensive loss (income) of ($183,000) for the six months ended June 30, 2002, and is reflected on the balance sheet as a separate component of shareholders' equity. There was no other comprehensive loss for the six months ended June 30, 2002. NOTE D - INVENTORIES Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method. DECEMBER 31, JUNE 30, 2001 2002 ---------------- ---------------- ---------------- ---------------- Finished goods $ 12,030,000 $ 9,633,000 Work-in-progress 1,848,000 2,169,000 Raw materials 6,311,000 6,164,000 ---------------- ---------------- ---------------- ---------------- 20,189,000 17,966,000 Less: Reserves (2,376,000) (2,632,000) ---------------- ---------------- ---------------- ---------------- Net inventory $ 17,813,000 $ 15,334,000 ================ ================ NOTE E - INCOME TAXES The Company accounts for income taxes using an asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effect of differences between the financial statement and tax basis of assets and liabilities. Accordingly, as of June 30, 2002, the Company has recorded a net deferred tax asset of $7.6 million resulting from temporary differences in bases of assets and liabilities. This deferred tax asset results primarily from inventory reserves and certain expense accruals, which are not currently deductible for income tax purposes. In accordance with the current taxation policies of the People's Republic of China, Diodes-China was granted preferential tax treatment for the years ended December 31, 1999 through 2003. Earnings were subject to 0% tax rates in 1999 and 2000, and 12% in 2001. Earnings in 2002 and 2003 will be taxed at 12% (one half the normal central government tax rate), and at normal rates thereafter. Earnings of Diodes-China are also subject to tax of 3% by the local taxing authority in Shanghai. The local taxing authority waived this tax in 2001 and in the first two quarters of 2002, and current indications are that the local tax will be waived for the remainder of 2002. Earnings of Diodes-Taiwan are currently subject to a tax rate of 35%, which is comparable to the U.S. Federal tax rate for C corporations. As of June 30, 2002, accumulated and undistributed earnings of Diodes-China is approximately $24.2 million. Through March 31, 2002, the Company had not recorded deferred Federal or state tax liabilities (estimated to be $8.9 million) on these cumulative earnings since the Company considered this investment to be permanent, and had no plans, intentions or obligation to distribute all or part of that amount from China to the United States. Beginning in April 2002, the Company began to record deferred taxes on a portion of the 2002 earnings of Diodes-China. As of June 30, 2002, the Company has recorded $360,000 in deferred taxes. The Company is evaluating the need to provide additional deferred taxes for the future earnings of Diodes-China to the extent such earnings may be appropriated for distribution to Diodes-North America, and as further investment strategies with respect to Diodes-China are determined. Should the Company's North American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained from the Company's foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the recording of income tax provisions on the U.S. entity, thus reducing net income. NOTE F - GEOGRAPHIC SEGMENTS An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief decision-making group consists of the President and Chief Executive Officer, Chief Financial Officer, Vice President of Sales and Marketing, and Vice President of Operations. The Company operates in a single segment, discrete semiconductor devices, through its various manufacturing and distribution facilities. The Company's operations include the domestic operations (Diodes-North America and Diodes-FabTech) located in the United States, and the Far East operations (Diodes-Taiwan located in Taipei, Taiwan; Diodes-China located in Shanghai, China; and Diodes-Hong Kong located in Hong Kong, China). For reporting purposes, European operations, which account for approximately 3% of total sales, are consolidated into the domestic operations. The accounting policies of the operating entities are the same as those described in the summary of significant accounting policies. Revenues are attributed to geographic areas based on the location of the market producing the revenues.
CONSOLIDATED THREE MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS ---------------- ----------------------- -------------------- JUNE 30, 2002 Total sales $ 24,798,000 $ 17,441,000 $ 42,239,000 Inter-company sales (11,104,000) (1,189,000) (12,293,000) ---------------- ----------------------- -------------------- Net sales $ 13,694,000 $ 16,252,000 $ 29,946,000 Assets $ 60,608,000 $ 45,216,000 $ 105,824,000 Deferred tax assets $ 115,000 $ 7,553,000 $ 7,668,000 ================ ======================= ==================== CONSOLIDATED THREE MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS ---------------- ----------------------- -------------------- JUNE 30, 2001 Total sales $ 16,255,000 $ 13,017,000 $ 29,271,000 Inter-company sales (6,826,000) (1,445,000) (8,271,000) ---------------- ----------------------- -------------------- Net sales $ 9,429,000 $ 11,572,000 $ 21,001,000 Assets $ 62,913,000 $ 45,335,000 $ 108,248,000 Deferred tax assets $ 128,000 $ 6,427,000 $ 6,555,000 ================ ======================= ==================== CONSOLIDATED SIX MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS ---------------- ----------------------- -------------------- JUNE 30, 2002 Total sales $ 45,993,000 $ 32,265,000 $ 78,258,000 Inter-company sales (19,672,000) (1,716,000) (21,388,000) ---------------- ----------------------- -------------------- Net sales $ 26,321,000 $ 30,549,000 $ 56,870,000 Assets $ 60,608,000 $ 45,216,000 $ 105,824,000 Deferred tax assets $ 115,000 $ 7,553,000 $ 7,668,000 ================ ======================= ==================== CONSOLIDATED SIX MONTHS ENDED FAR EAST NORTH AMERICA SEGMENTS ---------------- ----------------------- -------------------- JUNE 30, 2001 Total sales $ 32,981,000 $ 29,144,000 $ 62,125,000 Inter-company sales (13,599,000) (1,777,000) (15,376,000) ---------------- ----------------------- -------------------- Net sales $ 19,382,000 $ 27,367,000 $ 46,749,000 Assets $ 62,913,000 $ 45,335,000 $ 108,248,000 Deferred tax assets $ 128,000 $ 6,427,000 $ 6,555,000 ================ ======================= ====================
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters addressed in this Item 2 constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading "Factors That May Affect Future Results" and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company's management. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made on this Quarterly Report on Form 10-Q are made pursuant to the Act. GENERAL Diodes Incorporated (the "Company"), a Delaware corporation, is engaged in the manufacture, sale and distribution of discrete semiconductors worldwide, primarily to manufacturers in the communications, computing, industrial, consumer electronics and automotive markets, and to distributors of electronic components to customers in these markets. The Company's broad product line includes high-density diode and transistor arrays in ultra-miniature surface-mount packages, as well as silicon wafers used in manufacturing these products. Technologies include Schottky diodes and rectifiers, switching diodes, zener diodes, Transient Voltage Suppressors (TVSs), standard, fast, ultra-fast and super-fast recovery rectifiers, bridge rectifiers, and small signal transistors and MOSFETs. In addition to the Company's corporate headquarters in Westlake Village, California, which provides sales, marketing, engineering, logistics and warehousing functions, the Company's wholly-owned subsidiary, Diodes Taiwan Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales, engineering and purchasing facility in Taipei, Taiwan. The Company also has a 95% interest in Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or "KaiHong"), a manufacturing facility in Shanghai, China, with offices in Shanghai and Shenzhen, China. The Company recently opened a sales, warehousing and logistics subsidiary in Hong Kong ("Diodes-Hong Kong"). In addition, in December 2000, the Company acquired FabTech Incorporated ("Diodes-FabTech" or "FabTech"), a silicon wafer manufacturer located near Kansas City, Missouri. An office in Toulouse, France supports the Company's European sales expansion. Positioning the Company to rapidly respond to the demands of the global marketplace and continuing to increase research and development expenses, the Company is focused on expanding its product portfolio and closely controlling product quality and time-to-market. Shifting development priorities toward specialized configurations, such as the Company's high-density array devices, the Company is introducing a range of new products that improve the trade-off between size, performance and power consumption for surface-mount packages, such as the Company's BAT750 Schottky rectifier and SOT-523 product lines. These product lines are designed for battery-powered and handheld applications, such as those used in the computer and communication industries; specifically, wireless devices, notebooks, flat panel displays, digital cameras, mobile handsets, set top boxes, as well as DC to DC conversion and automotive electronic applications, and more. The Company's most recent product introductions include its comprehensive range of single and dual Pre-biased transistors with resistor-biased circuitry integrated into the transistor chip. This line is designed for a variety of battery-powered applications such as cellular phones, laptop computers, pagers, and PDA's where space is at a premium. The Company is also refining its high-precision manufacturing processes for zener diodes, which offer significant performance improvements over other zener products on the market today. SALES. The Company's products are sold primarily in North America and the Far East, both directly to end users and through electronic component distributors. In the second quarter of 2002, 54% of the Company's products were sold in North America, while 43% were sold in the Far East and 3% in Europe. This compares to 55%, 45% and 1% for the year 2001, respectively, and 54%, 46% and 0% for the year 2000, respectively. An increase in the percentage of sales in the Far East is expected as the Company significantly increases its sales presence there and believes there is greater potential to increase market share in that region due to the expanding base of electronics manufacturers. The Company sells direct to OEM customers as well as to distributors of electronic components. In the second quarter of 2002, 69% of the Company's sales were direct, while 31% were to distributors. This compares to 68% and 32%, respectively, for the year 2001, and 52% and 48%, respectively, for the year 2000. As the consolidation of electronic component distributors continues, the Company anticipates that a greater portion of its distributor sales will be to the larger distributors, and thus, may result in lower gross profit margins for this sales channel. REPORTING SEGMENTS. For financial reporting purposes, the Company is deemed to engage in one industry segment - discrete semiconductors. The Company has separated its operations into two geographical areas: North America and the Far East. North America includes the corporate offices in Southern California ("Diodes-North America") as well the wafer foundry, Diodes-FabTech, located in Missouri. For reporting purposes, the North American region includes European sales as well, which account for approximately 3% of total sales. Diodes-North America procures and distributes products primarily throughout North America and provides management, warehousing, engineering and logistics functions. Diodes-FabTech manufactures silicon wafers for sale to its customer base, as well as for use in manufacturing by Diodes-China. The Far East includes the operations of Diodes-Taiwan, Diodes-China and Diodes-Hong Kong. Diodes-China manufactures product for, and sells product to, Diodes-North America, Diodes-Taiwan and Diodes-Hong Kong, as well as directly to end customers. Diodes-Taiwan procures product from, and sells product primarily to, customers in Taiwan, Korea and Singapore. Diodes-Hong Kong sells to customers primarily in Hong Kong and China. LSC. Lite-On Semiconductor Corporation ("LSC"), formerly Lite-On Power Semiconductor Corporation ("LPSC"), is the Company's largest stockholder, holding approximately 37.5% of the outstanding shares. LSC is a member of The Lite-On Group of companies. The Lite-On Group, a Taiwanese consortium with worldwide sales of approximately $4.5 billion, is a leading manufacturer of power semiconductors, computer peripherals and communication products. C.H. Chen, the Company's President and Chief Executive Officer, is also Vice Chairman of LSC. For the second quarter of 2002, the Company sold silicon wafers to LSC totaling 13.8% (7.7% in 2001) of the Company's sales, making LSC the Company's largest customer. Also for the second quarter of 2002, 14.2% (15.2% in 2001) of the Company's sales were from discrete semiconductor products purchased from LSC, making LSC the Company's largest outside vendor. All such transactions are on terms no less favorable to the Company than could be obtained from unaffiliated third parties. In addition, in December 2000, the Company acquired FabTech from LSC. As part of the purchase price, at June 30, 2002, LSC holds a subordinated, interest-bearing note for approximately $10.0 million. In connection with the terms of the acquisition, LSC entered into a volume purchase agreement to purchase wafers from FabTech. LSC is currently in compliance with the terms of the wafer purchase agreement. In June 2001, as per the Company's U.S. bank covenants, the Company was not permitted to make regularly scheduled principal and interest payments to LSC on the remaining $10.0 million payable related to the FabTech acquisition note, but was, however, able to renegotiate with LSC the terms of the note. Again, in May 2002, the Company renegotiated the terms of the note to extend the payment period from two years to four years, and therefore, payments of approximately $208,000 plus interest are scheduled to begin in July 2002, provided, as per the terms of its U.S. bank covenants, the Company achieves 2002 year-to-date income before tax of at least $2.0 million. The Company anticipates making the regularly scheduled payments. MANUFACTURING AND SIGNIFICANT VENDORS. The Company's Far East manufacturing subsidiary, Diodes-China, manufactures product for sale primarily to North America and Asia. Diodes-China's manufacturing focuses on SOT-23 and SOD-123 products, as well as sub-miniature packages such as SOT-363, SOT-563, and SC-75. These surface-mount devices ("SMD") are much smaller in size and are used primarily in the computer and communication industries, destined for wireless devices, notebook, flat panel display, digital camera, mobile handset, set top box, DC to DC conversion, and automotive applications, 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. Diodes-China purchases a portion of its silicon wafers for its manufacturing process from Diodes-FabTech, although the majority are currently purchased from other wafer vendors. Since 1997, the Company's manufacturing focus has primarily been in the development and expansion of Diodes-China. To date, the Company and its 5% minority partner have increased property, plant and equipment at the Mainland China facility to approximately $49.3 million. The equipment expansion allows for the manufacture of additional SOT-23 packaged components as well as other surface-mount packaging, including the smaller SOD packages, and even smaller packaging such as SOT-523. All of the products sold by the Company, as well as the materials used by the Company in its manufacturing operations, are available both domestically and abroad. The three largest external suppliers of products to the Company were LSC and two other non-related vendors. For the second quarter ended June 30, 2002, sales of products manufactured by LSC and the two other largest vendors were approximately 14.2% (15.2% in 2001) and 12.9% (10.0% in 2001), respectively, while 34.2% (27% in 2001) and 26.3% (15.0% in 2001) were manufactured by Diodes-China and Diodes-FabTech, respectively. No other manufacturer of discrete semiconductors accounted for more than 5% of the Company's sales in 2001. The Company will continue its strategic plan of locating alternate sources of its products and raw materials, including those provided by its major suppliers. The Company anticipates that the effect of the loss of any one of its major suppliers would not have a material adverse effect on the Company's operations, provided that alternate sources remain available. The Company continually evaluates alternative sources of its products to assure its ability to deliver high-quality, cost-effective products. DIODES-FABTECH. Acquired by the Company from LSC on December 1, 2000, FabTech's wafer foundry is located in Lee's Summit, Missouri. Diodes-FabTech manufactures primarily 5-inch silicon wafers, which are the building blocks for semiconductors. Diodes-FabTech has full foundry capabilities including processes such as silicon epitaxy, silicon oxidation, photolithography and etching, ion implantation and diffusion, low pressure and plasma enhanced chemical vapor deposition, sputtered and evaporated metal deposition, wafer backgrinding, and wafer probe and ink. Diodes-FabTech purchases polished silicon wafers, and then by using various technologies, in conjunction with many chemicals and gases, fabricates several layers on the wafers, including epitaxial silicon, ion implants, dielectrics, and metals, with various patterns. Depending upon these layers and the die size (which is determined during the photolithography process and completed at the customer's packaging site where the wafer is sawn into square or rectangular die), different types of wafers with various currents, voltages, and switching speeds are produced. INCOME TAXES. In accordance with the current taxation policies of the People's Republic of China, Diodes-China was granted preferential tax treatment for the years ended December 31, 1999 through 2003. Earnings were subject to 0% tax rates in 1999 and 2000, and 12% in 2001. Earnings in 2002 and 2003 will be taxed at 12% (one half the normal central government tax rate), and at normal rates thereafter. Earnings of Diodes-China are also subject to tax of 3% by the local taxing authority in Shanghai. The local taxing authority waived this tax in 2001 and in the first two quarters of 2002, and current indications are that the local tax will be waived for the remainder of 2002. Earnings of Diodes-Taiwan are currently subject to a tax rate of 35%, which is comparable to the U.S. Federal tax rate for C corporations. As of June 30, 2002, accumulated and undistributed earnings of Diodes-China is approximately $24.2 million. Through March 31, 2002, the Company had not recorded deferred Federal or state tax liabilities (estimated to be $8.9 million) on these cumulative earnings since the Company considered this investment to be permanent, and had no plans, intentions or obligation to distribute all or part of that amount from China to the United States. Beginning in April 2002, the Company began to record deferred taxes on a portion of the earnings of Diodes-China. As of June 30, 2002, the Company has recorded $360,000 in deferred taxes. The Company is evaluating the need to provide additional deferred taxes for the future earnings of Diodes-China to the extent such earnings may be appropriated for distribution to Diodes-North America, and as further investment strategies with respect to Diodes-China are determined. Should the Company's North American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained from the Company's foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the recording of income tax provisions on the U.S. entity, thus reducing net income. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002 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 (DECREASE) THREE MONTHS ENDED JUNE 30, --------------------------------------- --------------------- 2001 2002 `01 TO `02 ------------------- ------------------- --------------------- Net sales 100.0 % 100.0 % 42.6 % Cost of goods sold (80.7) (76.2) 34.5 ------------------- ------------------- --------------------- Gross profit 19.3 23.8 76.3 Operating expenses (16.4) (16.1) 39.9 ------------------- ------------------- --------------------- Income from operations 2.9 7.7 289.3 Interest expense, net (2.4) (0.9) (45.0) Other income 1.0 0.3 (50.3) ------------------- ------------------- --------------------- Income before taxes and minority 1.5 7.1 588.4 Income taxes 1.2 (1.6) (282.0) ------------------- ------------------- --------------------- ------------------- ------------------- --------------------- Income before minority interest 2.7 5.5 191.4 Minority interest (0.2) (0.3) 116.5 ------------------- ------------------- --------------------- Net income 2.5 5.2 197.8 =================== =================== =====================
The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. 2001 2002 ---- ---- NET SALES $ 21,001,000 $ 29,946,000 --------- Net sales increased approximately $8.9 million, or 42.6%, for the three months ended June 30, 2002, compared to the same period last year, due primarily to a 38.0% increase in units sold as a result of increased demand, primarily in North America. The Company's average selling prices ("ASP") for discrete devices decreased approximately 5.1% from the same three-month period last year, but increased 4.5% from the first quarter of 2002. ASP's for wafer products decreased 8.9% from the same period last year, but increased 10.8% from the first quarter of 2002. 2001 2002 ---- ---- COST OF GOODS SOLD $ 16,957,000 $ 22,815,000 ------------------ GROSS PROFIT $ 4,044,000 $ 7,131,000 ------------ GROSS PROFIT MARGIN PERCENTAGE 19.3% 23.8% ------------------------------ Cost of goods sold increased approximately $5.9 million, or 34.5%, for the three months ended June 30, 2002 compared to the year ago period, due primarily to increased sales volumes, partially offset by higher factory utilization. Gross profit increased approximately $3.1 million, or 76.3%, for the three months ended June 30, 2002 compared to the year ago period. Of the $3.1 million increase, approximately $1.7 million was due to the 42.6% increase in sales, while $1.4 million was due to the increase in gross margin percentage from 19.3% to 23.8%. The higher gross margin percentage was due primarily to increased capacity utilization, cost containment and sales of higher margin products. For the second quarter of 2002, Diodes-China's average capacity utilization was above 80%, up from 58% last quarter, and Diodes-FabTech had improved to approximately 73% from 65% last quarter. 2001 2002 ---- ---- TOTAL OPERATING EXPENSES $ 3,453,000 $ 4,830,000 ------------------------ Operating expenses, which include selling, general, administrative expenses ("SG&A") and research and development expenses ("R&D"), for the three months ended June 30, 2002 increased approximately $1.4 million, or 39.9%, compared to the same period last year, due primarily to increased selling expenses, commissions and incentives, and a $290,000 increase in R&D. The Company anticipates its R&D expenditures will continue to increase as part of its strategy to develop more proprietary products aimed at improving gross margins. SG&A, as a percentage of sales, decreased to 14.6% from 15.6% in the comparable period last year, while R&D increased to 1.5% from 0.8% of sales. Total operating expenses, as a percentage of sales, decreased to 16.1% from 16.4% in the comparable period last year. 2001 2002 ---- ---- INTEREST INCOME $ 16,000 $ 16,000 --------------- INTEREST EXPENSE $ 511,000 $ 292,000 ---------------- NET INTEREST EXPENSE $ 495,000 $ 276,000 -------------------- Net interest expense for the three months ended June 30, 2002 decreased approximately $219,000 versus the same period last year, due primarily to a reduction in the Company's total debt. The Company's interest expense is primarily the result of the Company's borrowings to finance the FabTech acquisition, as well as the investment and expansion for the Diodes-China manufacturing facility. 2001 2002 ---- ---- OTHER INCOME $ 467,000 $ 109,000 ------------ Other income for the three months ended June 30, 2002 decreased approximately $358,000 compared to the same period last year, due primarily to high-technology grants received by Diodes-China in the second quarter of 2001. 2001 2002 ---- ---- INCOME TAX BENEFIT (PROVISION) $ 7,000 $ (473,000) ------------------------------ Income taxes increased from a tax benefit in the second quarter of 2001 to a tax provision in the second quarter of 2002, due primarily to earnings at Diodes-FabTech. Included in the tax provision for the three months ended June 30, 2002 is $360,000 in deferred taxes recorded for a portion of the 2002 earnings at Diodes-China. 2001 2002 ---- ---- MINORITY INTEREST IN JOINT VENTURE $ 45,000 $ 98,000 ---------------------------------- 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 June 30, 2002 is primarily the result of increased capacity utilization and the associated increased gross margins. 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, 2002, the Company had a 95% controlling interest in the joint venture. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2002 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 (DECREASE) SIX MONTHS ENDED JUNE 30, --------------------------------------- --------------------- 2001 2002 `01 TO `02 ------------------- ------------------- --------------------- Net sales 100.0 % 100.0 % 21.6 % Cost of goods sold (82.5) (79.8) 17.6 ------------------- ------------------- --------------------- Gross profit 17.5 20.2 40.6 Operating expenses (14.2) (15.7) 34.2 ------------------- ------------------- --------------------- Income from operations 3.3 4.5 68.5 Interest expense, net (2.6) (1.1) (47.8) Other income 0.3 0.2 1.7 ------------------- ------------------- --------------------- Income before taxes and minority 1.0 3.6 337.4 Income taxes 1.5 (0.3) (125.8) ------------------- ------------------- --------------------- ------------------- ------------------- --------------------- Income before minority interest 2.5 3.3 63.7 Minority interest (0.3) (0.2) 15.0 ------------------- ------------------- --------------------- Net income 2.2 3.1 69.2 =================== =================== =====================
The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. 2001 2002 ---- ---- NET SALES $ 46,749,000 $ 56,870,000 --------- Net sales increased approximately $10.1 million, or 21.6%, for the six months ended June 30, 2002, compared to the same period last year, due primarily to a 31.0% increase in units sold. For the first six months of 2002, ASP's for discrete devices decreased approximately 13.3%, primarily in North America. ASP's for wafer products decreased 13.6% from the same period last year. 2001 2002 ---- ---- COST OF GOODS SOLD $ 38,584,000 $ 45,387,000 ------------------ GROSS PROFIT $ 8,165,000 $ 11,483,000 ------------ GROSS PROFIT MARGIN PERCENTAGE 21.2% 25.3% ------------------------------ Cost of goods sold increased approximately $6.8 million, or 17.6%, for the six months ended June 30, 2002 compared to the year ago period, due primarily to increased sales volumes, partially offset by higher factory utilization. Gross profit increased approximately $3.3 million, or 40.6%, for the six months ended June 30, 2002 compared to the year ago period. Of the $3.3 million increase, approximately $1.8 million was due to the 21.6% increase in sales, while $1.5 million was due to the increase in gross margin percentage from 17.5% to 20.2%. The higher gross margin percentage was due primarily to increased capacity utilization, cost containment and sales of higher margin products. 2001 2002 ---- ---- TOTAL OPERATING EXPENSES $ 6,637,000 $ 8,908,000 ------------------------ Operating expenses, including SG&A and R&D, for the six months ended June 30, 2002 increased approximately $2.3 million, or 34.2%, compared to the same period last year due primarily to increased selling expenses, commissions and incentives, and a $464,000 increase in R&D. The Company anticipates its R&D expenditures will continue to increase as part of its strategy to develop more proprietary products aimed at improving gross margins. SG&A, as a percentage of sales, increased to 14.3% from 13.5% in the comparable period last year, while R&D increased to 1.4% from 0.7% of sales. Total operating expenses, as a percentage of sales, increased to 15.7% from 14.2% in the comparable period last year. 2001 2002 ---- ---- INTEREST INCOME $ 39,000 $ 25,000 --------------- INTEREST EXPENSE $ 1,208,000 $ 638,000 ---------------- ----------- --------- NET INTEREST EXPENSE $ 1,169,000 $ 613,000 -------------------- Net interest expense for the six months ended June 30, 2002 decreased approximately $556,000 versus the same period last year, due primarily to a reduction in the Company's total debt. The Company's interest expense is primarily the result of the Company's borrowings to finance the FabTech acquisition, as well as the investment and expansion for the Diodes-China manufacturing facility. 2001 2002 ---- ---- OTHER INCOME $ 371,000 $ 124,000 ------------ Other income for the six months ended June 30, 2002 decreased approximately $246,000 compared to the same period last year, due primarily to high-technology grants received by Diodes-China in the second quarter of 2001. 2001 2002 ---- ---- INCOME TAX BENEFIT (PROVISION) $ 436,000 $ (178,000) ------------------------------ Income taxes increased from a tax benefit for the first six months of 2001 to a tax provision for the first six months of 2002, due primarily to earnings at Diodes-FabTech. Included in the tax provision for the six months ended June 30, 2002 is $360,000 in deferred taxes recorded in the second quarter for a portion of the 2002 earnings at Diodes-China. 2001 2002 ---- ---- MINORITY INTEREST IN JOINT VENTURE $ 119,000 $ 136,000 ---------------------------------- 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 six months ended June 30, 2002, is primarily the result of increased capacity utilization and the associated increased gross margins. 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, 2002, the Company had a 95% controlling interest in the joint venture. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002 the Company had cash and cash equivalents totaling $6.8 million, a $1.3 million decrease from December 31, 2001, primarily as a result of the Company reducing its bank loan balances. Cash provided by operating activities for the six months ended June 30, 2002 was $9.0 million compared to $4.2 million for the same period in 2001. The primary source of cash flows from operating activities in the second quarter of 2002 was an increase in accounts payable of $5.0 million and $4.7 million in depreciation and amortization, while in 2001, the primary source was a $7.8 million reduction in inventory and $4.1 million in depreciation and amortization. The primary use of cash flows from operating activities in the second quarter of 2002 was an increase in accounts receivable of $5.4 million, while the primary use of cash flows from operating activities in 2001 was a $2.9 million decrease in accrued liabilities. Accounts receivable days were 69 days at June 30, 2002, compared to 67 at December 31, 2001. Inventory turns at June 30, 2002 were 6.0 times compared to 5.1 times at December 31, 2001. Accounts receivable days at June 30, 2002 were 69 days compared to 61 days at December 31, 2001. The ratio of the Company's current assets to current liabilities on June 30, 2002 was 1.6 to 1, compared to 1.7 to 1 at December 31, 2001. Cash used by investing activities for the six months ended June 30, 2002 was $1.8 million, compared to $6.5 million during the same period in 2001. The primary investment in both years was for additional manufacturing equipment at the Diodes-China manufacturing facility. On December 1, 2000, the Company purchased all the outstanding capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee's Summit, Missouri from Lite-On Semiconductor Corporation ("LSC"), the Company's largest stockholder. The acquisition purchase price consisted of approximately $6.0 million in cash and an earn-out of up to $30.0 million if FabTech meets specified yearly earnings targets over a four-year period (for the year 2001, these earnings targets were not met, and, therefore, no earn-out was paid). In addition, FabTech was obligated to repay an aggregate of approximately $19.2 million in debt, consisting of (i) approximately $13.6 million note payable to LSC, (ii) approximately $2.6 million note payable to the Company, and (iii) approximately $3.0 million note payable to a financial institution (this amount was repaid on December 4, 2000 with the proceeds of a capital contribution by the Company). The acquisition was financed internally and through bank credit facilities. In June 2001, as per the Company's U.S. bank covenants, the Company was not permitted to make regularly scheduled principal and interest payments to LSC on the remaining $10.0 million payable related to the FabTech acquisition note, but was, however, able to renegotiate with LSC the terms of the note. Again, in May 2002 the Company renegotiated the terms of the note to extend the payment period from 2 years to 4 years, and therefore, payments of approximately $208,000 plus interest are scheduled to begin in July 2002, provided the Company achieves 2002 year-to-date income before tax of at least $2.0 million. Cash used by financing activities was $8.6 million for the six months ended June 30, 2002, as the Company reduced its overall debt, compared to cash provided by financing activities of $728,000 in the same period of 2001. The Company increased its credit facility to $46.3 million, encompassing one major U.S. bank, three banks in Mainland China and three banks in Taiwan. As of June 30, 2002, the total credit facilities were $15.8 million, $25.0 million, and $4.1 million, for the U.S. facility secured by substantially all assets, the unsecured Chinese facilities, and the unsecured Taiwanese facilities, respectively. As of June 30, 2002, the available credit was $7.1 million, $21.0 million, and $1.5 million, for the U.S. facility, the Chinese facilities, and the Taiwanese facilities, respectively. The agreements have certain covenants and restrictions, which, among other matters, require the maintenance of certain financial ratios and operating results, as defined in the agreements, and prohibit the payment of dividends. As of June 30, 2002, the Company was in compliance with the covenants. The Company has used its credit facilities primarily to fund the expansion at Diodes-China and for the FabTech acquisition, as well as to support its operations. The Company believes that the continued availability of these credit facilities, together with internally generated funds, will be sufficient to meet the Company's current foreseeable operating cash requirements. The Company has entered into an interest rate swap agreement with a major U.S. bank which expires November 30, 2004, to hedge its exposure to variability in expected future cash flows resulting from interest rate risk related to a portion of its long-term debt. The interest rate under the swap agreement is fixed at 6.8% and is based on the notional amount, which was $6.0 million at June 30, 2002. The swap contract is inversely correlated to the related hedged long-term debt and is, therefore, considered an effective cash flow hedge of the underlying long-term debt. The level of effectiveness of the hedge is measured by the changes in the market value of the hedged long-term debt resulting from fluctuation in interest rates. During fiscal 2001, variable interest rates decreased resulting in an interest rate swap liability of $147,000 as of December 31, 2001. As of June 30, 2002, the swap liability was $138,000. As a matter of policy, the Company does not enter into derivative transactions for trading or speculative purposes. Total working capital increased approximately 1.0% to $20.0 million as of June 30, 2002, from $19.8 million as of December 31, 2001. The Company believes that such working capital position will be sufficient for foreseeable operations and growth opportunities. The Company's total debt to equity ratio decreased to 0.97 at June 30, 2002, from 1.02 at December 31, 2001. It is anticipated that this ratio may increase should the Company use its credit facilities to fund additional inventory sourcing opportunities.The Company has no material plans or commitments for capital expenditures other than in connection with manufacturing expansion at Diodes-China, Diodes-FabTech equipment requirements, and the Company's implementation of an Enterprise Resource Planning ("ERP") software package. However, to ensure that the Company can secure reliable and cost effective inventory sourcing to support and better position itself for growth, the Company is continuously evaluating additional internal manufacturing expansion, as well as additional outside sources of products. The Company believes its financial position will provide sufficient funds should an appropriate investment opportunity arise and, thereby, assist the Company in improving customer satisfaction and in maintaining or increasing market share. Based upon plans for new product introductions, product mixes, capacity restraints on certain product lines and equipment upgrades, the Company expects that year 2002 capital expenditures for its manufacturing facilities will run approximately $4.0 to $6.0 million, with an additional approximately $1.0 million for the ERP project. CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are described in Note 1 to the financial statements included in Item 14 of the Annual Report on Form 10-K, filed with the SEC for the year ended December 31, 2001. The Company believes its most critical accounting policies include inventory obsolescence reserves, allowance for doubtful accounts, accounting for goodwill and accounting for income taxes. The $2.6 million estimate for inventory obsolescence reserves is developed using inventory aging reports for finished goods, work-in-progress and raw materials, combined with historical usage, forecasted usage and inventory shelf-life. As trends in these variables change, the percentages applied to the inventory aging categories are updated. The $367,000 estimate of allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical collection and write-off experience. As trends in historical collection and write-offs change, the percentages applied against the accounts receivable aging categories are updated. The Company has applied the new rules on accounting for goodwill beginning in the first quarter of 2002. An independent appraiser, hired by the Company, performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and has determined that the goodwill is fully recoverable. Similar analysis will be performed at least annually. As of June 30, 2002, accumulated and undistributed earnings of Diodes-China is approximately $24.2 million. Through March 31, 2002, the Company had not recorded deferred Federal or state tax liabilities (estimated to be $8.9 million) on these cumulative earnings since the Company considered this investment to be permanent, and had no plans, intentions or obligation to distribute all or part of that amount from China to the United States. Beginning in April 2002, the Company began to record deferred taxes on a portion of the earnings of Diodes-China. As of June 30, 2002, the Company has recorded $360,000 in deferred taxes. The Company is evaluating the need to provide additional deferred taxes for the future earnings of Diodes-China to the extent such earnings may be appropriated for distribution to Diodes-North America, and as further investment strategies with respect to Diodes-China are determined. Should the Company's North American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained from the Company's foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the recording of income tax provisions on the U.S. entity, thus reducing net income. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under "Risk Factors" 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 Quarterly Report on Form 10-Q are subject to, in addition to the other matters described in this Quarterly Report on Form 10-Q, a variety of significant risks and uncertainties. The following discussion highlights some of these risks and uncertainties. Further, from time to time, information provided by the Company or statements made by its employees may contain forward-looking information. There can be no assurance that actual results or business conditions will not differ materially from those set forth or suggested in such forward-looking statements as a result of various factors, including those discussed below. RISK FACTORS VERTICAL INTEGRATION We are in the process of vertically integrating our business. Key elements of this strategy include (i) expanding our manufacturing capacity, (ii) establishing wafer foundry and research and development capability through the acquisition of FabTech and (iii) establishing sales, marketing, product development, package development and assembly/testing operations in company-owned facilities or through the acquisition of established contractors. We have a limited history upon which an evaluation of the prospects of our vertical integration strategy can be based. There are certain risks associated with our vertical integration strategy, including: difficulties associated with owning a manufacturing business, including, but not limited to, the maintenance and management of manufacturing facilities, equipment, employees and inventories and limitations on the flexibility of controlling overhead; difficulties implementing our Enterprise Resource Planning system; difficulties expanding our operations in the Far East and developing new operations in Europe; difficulties developing and implementing a successful research and development team; and difficulties developing proprietary technology. The risks of becoming a fully integrated manufacturer are amplified in an industry-wide slowdown because of the fixed costs associated with manufacturing facilities. ECONOMIC CONDITIONS The discrete segment of the semiconductor industry is highly cyclical, and the value of our business may decline during the "down" portion of these cycles. During recent years, we, as well as many others in our industry, experienced significant declines in the pricing of, as well as demand for, our products and lower facilities utilization. The market for discrete semiconductors may experience renewed, possibly more severe and prolonged, downturns in the future. The markets for our products depend on continued demand in the communications, computer, industrial, consumer electronic and automotive markets, and these end-markets may experience changes in demand that could adversely affect our operating results and financial condition. COMPETITION The discrete semiconductor industry is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, and reliability and customer service. We compete in various markets with companies of various sizes, many of which are larger and have greater financial, marketing, distribution, brand names and other resources than we have and, thus, may be better able to pursue acquisition candidates and to withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. Some of our current major competitors are On Semiconductor, General Semiconductor, Inc., Fairchild Semiconductor Corporation, International Rectifier Corporation, Rohm, and Phillips. We may not be able to compete successfully in the future, or competitive pressures may harm our financial condition or our operating results. FOREIGN OPERATIONS We expect revenues from foreign markets to continue to represent a significant portion of our total revenues. In addition, we maintain facilities or contracts with entities in the Philippines, Taiwan, Germany, Japan, England, India, and China, among others. There are risks inherent in doing business internationally, including: changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products; trade restrictions, transportation delays, work stoppages, and economic and political instability; changes in import/export regulations, tariffs and freight rates; difficulties in collecting receivables and enforcing contracts generally; currency exchange rate fluctuations; and, restrictions on the transfer of funds from foreign subsidiaries to Diodes-North America. VARIABILITY OF QUARTERLY RESULTS We have experienced, and expect to continue to experience, a substantial variation in net sales and operating results from quarter to quarter. We believe that the factors that influence this variability of quarterly results include: general economic conditions in the countries where we sell our products; seasonality and variability in the computer and communications market and our other end markets; the timing of our and our competitors' new product introductions; product obsolescence; the scheduling, rescheduling and cancellation of large orders by our customers; the cyclical nature of demand for our customers' products; our ability to develop new process technologies and achieve volume production at our fabrication facilities; changes in manufacturing yields; adverse movements in exchange rates, interest rates or tax rates; and the availability of adequate supply commitments from our outside suppliers or subcontractors. Accordingly, a comparison of the Company's results of operations from period to period is not necessarily meaningful and the Company's results of operations for any period are not necessarily indicative of future performance. NEW TECHNOLOGIES We cannot assure you that we will successfully identify new product opportunities and develop and bring products to market in a timely and cost-effective manner, or that products or technologies developed by others will not render our products or technologies obsolete or noncompetitive. In addition, to remain competitive, we must continue to reduce package sizes, improve manufacturing yields and expand our sales. We may not be able to accomplish these goals. PRODUCTION Our manufacturing efficiency will be an important factor in our future profitability, and we cannot assure you that we will be able to maintain or increase our manufacturing efficiency. Our manufacturing processes require advanced and costly equipment and are continually being modified in an effort to improve yields and product performance. We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Our operating results also could be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately. FUTURE ACQUISITIONS As part of our business strategy, we expect to review acquisition prospects that would implement our vertical integration strategy or offer other growth opportunities. While we have no current agreements and no active negotiations underway with respect to any acquisitions, we may acquire businesses, products or technologies in the future. In the event of future acquisitions, we could: use a significant portion of our available cash; issue equity securities, which would dilute current stockholders' percentage ownership; incur substantial debt; incur or assume contingent liabilities, known or unknown; incur amortization expenses related to goodwill or other intangibles; and incur large, immediate accounting write-offs. Such actions by us could harm our operating results and/or adversely influence the price of our Common Stock. INTEGRATION OF ACQUISITIONS During fiscal year 2000, we acquired FabTech, Inc. We may continue to expand and diversify our operations with additional acquisitions. If we are unsuccessful in integrating these companies or product lines with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business, financial condition and results of operations. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from companies we acquire include those associated with: unexpected losses of key employees or customers of the acquired company; conforming the acquired company's standards, processes, procedures and controls with our operations; coordinating our new product and process development; hiring additional management and other critical personnel; increasing the scope, geographic diversity and complexity of our operations; difficulties in consolidating facilities and transferring processes and know-how; diversion of management's attention from other business concerns; and adverse effects on existing business relationships with customers. BACKLOG The amount of backlog to be shipped during any period is dependent upon various factors and all orders are subject to cancellation or modification, usually without penalty to the customer. Orders are generally booked from one to twelve months in advance of delivery. The rate of booking new orders can vary significantly from month to month. The Company and the industry as a whole are experiencing a trend towards shorter lead-times (the amount of time between the date a customer places an order and the date the customer requires shipment). The amount of backlog at any date depends upon various factors, including the timing of the receipt of orders, fluctuations in orders of existing product lines, and the introduction of any new lines. Accordingly, the Company believes that the amount of backlog at any date is not meaningful and is not necessarily indicative of actual future shipments. The Company strives to maintain proper inventory levels to support customers' just-in-time order expectations. PRODUCT RESOURCES We sell products primarily pursuant to purchase orders for current delivery, rather than pursuant to long-term supply contracts. Many of these purchase orders may be revised or canceled without penalty. As a result, we must commit resources to the production of products without any advance purchase commitments from customers. Our inability to sell, or delays in selling, products after we devote significant resources to them could have a material adverse effect on our business, financial condition and results of operations. QUALIFIED PERSONNEL Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing and managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with these skills is intense. We may not be able to retain existing key technical, sales, marketing and managerial employees or be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel in the future. If we are unable to retain existing key employees or are unsuccessful in attracting new highly qualified employees, our business, financial condition and results of operations could be materially and adversely affected. EXPANSION Our ability to successfully offer our products in the discrete semiconductor market requires effective planning and management processes. Our past growth, and our targeted future growth, may place a significant strain on our management systems and resources, including our financial and managerial controls, reporting systems and procedures. In addition, we will need to continue to train and manage our workforce worldwide. SUPPLIERS Our manufacturing operations depend upon obtaining adequate supplies of materials, parts and equipment on a timely basis from third parties. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of materials, parts and equipment in a timely manner or if the costs of materials, parts or equipment increase significantly. In addition, a significant portion of our total sales is from parts manufactured by outside vendors. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we generally use products, materials, parts and equipment available from multiple suppliers, we have a limited number of suppliers for some products, materials, parts and equipment. While we believe that alternate suppliers for these products, materials, parts and equipment are available, any interruption could materially impair our operations. ENVIRONMENTAL REGULATIONS We are subject to a variety of United States federal, foreign, state and local governmental laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any of these regulations could require us to acquire equipment or to incur substantial other expenses to comply with environmental regulations. If we were to incur substantial additional expenses, product costs could significantly increase, thus materially and adversely affecting our business, financial condition and results of operations. Any failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations, any of which could have a material adverse effect on our business, financial condition and results of operations. The Company received a claim from one of its former U.S. landlords, regarding potential groundwater contamination at a site in which the Company engaged in manufacturing from 1967 to 1973, alleging that the Company may have some responsibility for cleanup costs. Although investigations into the landlord's allegations are ongoing, the Company does not anticipate that the ultimate outcome of this matter will have a material effect on its financial condition. PRODUCT LIABILITY One or more of our products may be found to be defective after we have already shipped such products in volume, requiring a product replacement or recall. We may also be subject to product returns, which could impose substantial costs and have a material and adverse effect on our business, financial condition and results of operations. Product liability claims may be asserted with respect to our technology or products. Although we currently have product liability insurance, there can be no assurance that we have obtained sufficient insurance coverage, or that we will have sufficient resources, to satisfy all possible product liability claims. SYSTEM OUTAGES Risks are presented by electrical or telecommunications outages, computer hacking or other general system failure. To try to manage our operations efficiently and effectively, we rely heavily on our internal information and communications systems and on systems or support services from third parties. Any of these are subject to failure. System-wide or local failures that affect our information processing could have material adverse effects on our business, financial condition, results of operations and cash flows. In addition, insurance coverage for the risks described above may be unavailable. DOWNWARD PRICE TRENDS Our industry is intensely competitive and prices for existing products tend to decrease steadily over their life cycle. There is substantial and continuing pressure from customers to reduce the total cost of using our parts. To remain competitive, we must achieve continuous cost reductions through process and product improvements. We must also be in a position to minimize our customers' shipping and inventory financing costs and to meet their other goals for rationalization of supply and production. Our growth and the profit margins of our products will suffer if our competitors are more successful than we are in reducing the total cost to customers of their products. OBSOLETE INVENTORIES The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed. Products with short life cycles require us to manage closely our production and inventory levels. Inventory may also become obsolete because of adverse changes in end market demand. We may in the future be adversely affected by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand for our products or the estimated life cycles of the end products into which our products are designed. DEFERRED TAXES As of June 30, 2002, accumulated and undistributed earnings of Diodes-China is approximately $24.2 million. Through March 31, 2002, the Company had not recorded deferred Federal or state tax liabilities (estimated to be $8.9 million) on these cumulative earnings since the Company considered this investment to be permanent, and had no plans, intentions or obligation to distribute all or part of that amount from China to the United States. Beginning in April 2002, the Company began to record deferred taxes on a portion of the earnings of Diodes-China. As of June 30, 2002, the Company has recorded $360,000 in deferred taxes. The Company is evaluating the need to provide additional deferred taxes for the future earnings of Diodes-China to the extent such earnings may be appropriated for distribution to Diodes-North America, and as further investment strategies with respect to Diodes-China are determined. Should the Company's North American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained from the Company's foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the recording of income tax provisions on the U.S. entity, thus reducing net income. FOREIGN CURRENCY RISK The Company faces exposure to adverse movements in foreign currency exchange rates, primarily in Asia. The Company's foreign currency risk may change over time as the level of activity in foreign markets grows and could have an adverse impact upon the Company's financial results. Certain of the Company's assets, including certain bank accounts and accounts receivable, and liabilities exist in non-U.S. dollar denominated currencies, which are sensitive to foreign currency exchange fluctuations. These currencies are principally the Chinese Yuan, the Taiwanese dollar, the Japanese Yen, and the Hong Kong dollar. Because of the relatively small size of each individual currency exposure, the Company does not employ hedging techniques designed to mitigate foreign currency exposures. Therefore, the Company could experience currency gains and losses. INTEREST RATE RISK The Company has credit agreements with U.S. and Far East financial institutions at interest rates equal to LIBOR or similar indices plus a negotiated margin. A rise in interest rates could have an adverse impact upon the Company's cost of working capital and its interest expense. The Company entered into an interest rate swap agreement to hedge its exposure to variability in expected future cash flows resulting from interest rate risk related to a portion of its long-term debt. At June 30, 2002, the interest rate swap agreement applies to $6.0 million of the Company's long-term debt and expires November 30, 2004. The swap contract is inversely correlated to the related hedged long-term debt and is therefore considered an effective cash flow hedge of the underlying long-term debt. The level of effectiveness of the hedge is measured by the changes in the market value of the hedged long-term debt resulting from fluctuation in interest rates. As a matter of policy, the Company does not enter into derivative transactions for trading or speculative purposes. POLITICAL RISK. The Company has a significant portion of its assets (57% at June 30, 2002) in Mainland China, Taiwan and Hong Kong. The possibility of political conflict between countries or with the United States could have an adverse impact upon the Company's ability to transact business through these important business segments and to generate profits. 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 10, 2002, the election of members of the Board of Directors. The directors were each elected to serve until the 2002 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: C.H. Chen, For: 7,055,563 Director Withheld: 126,125 Michael R. Giordano, For: 7,149,081 Director Withheld: 32,607 Keh-Shew Lu, For: 7,150,161 Director Withheld: 31,527 M.K. Lu, For: 7,146,481 Director Withheld: 35,207 Shing Mao, For: 7,156,431 Director Withheld: 25,257 Raymond Soong, For: 7,155,876 Director Withheld: 25,812 John M. Stich, For: 7,150,281 Director Withheld: 31,407 The Company also submitted to a vote of its security holders at an annual meeting of shareholders on June 10, 2002, the appointment of Moss Adams LLP as the Company's independent certified public accountants for the fiscal year ending December 31, 2002. The result of the tabulation was 7,158,386 shares voted in favor of the proposal, 18,750 shares voted against, and 4,552 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 2002 annual meeting of stockholders held on June 10, 2002 were mailed to stockholders of the Company on April 29, 2002. Under certain circumstances, stockholders are entitled to present proposals at stockholder meetings. Any such proposal to be included in the proxy statement for the 2003 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 December 27, 2002 in a form that complies with applicable regulations. 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, 2003, the proxies solicited by the Board of Directors for the 2003 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 2003 annual meeting of stockholders without any discussion of the proposal in the proxy statement for such meeting. 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.48 Third Amendment and Waiver to Union Bank Credit Agreement Exhibit 11 Computation of Earnings Per Share Exhibit 99.46 Diodes Incorporated Announces Conference Call To Discuss Second Quarter FY 2002 Results Exhibit 99.47 Diodes, Inc. Reports Second Quarter 2002 Results Exhibit 99.48 Diodes Incorporated Raises Guidance for Q2 2002 Exhibit 99.49 Diodes Incorporated Introduces New Low-Capacitance Data Line Protection Device Exhibit 99.50 Diodes Incorporated Introduces Matched Transistor Arrays Reduces board space and device cost, while providing greater design flexibility Exhibit 99.51 Diodes Incorporated Introduces New Low-Capacitance Data Line Protection Device Exhibit 99.52 Diodes Announces Launch of Comprehensive Line of Pre-biased Transistors Exhibit 99.53 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (b) Reports on Form 8-K None 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 9, 2002 ---------------------------------------------------- CARL WERTZ Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Principal Financial and Chief Accounting Officer)
INDEX TO EXHIBITS Exhibit 10.48 Third Amendment and Waiver to Union Bank Credit Agreement Page 28 Exhibit 11 Computation of Earnings Per Share Page 35 Exhibit 99.46 Diodes Incorporated Announces Conference Call To Discuss Second Quarter FY 2002 Results Page 36 Exhibit 99.47 Diodes, Inc. Reports Second Quarter 2002 Results Page 37 Exhibit 99.48 Diodes Incorporated Raises Guidance for Q2 2002 Page 42 Exhibit 99.49 Diodes Incorporated Introduces New Low-Capacitance Data Line Protection Device Page 44 Exhibit 99.50 Diodes Incorporated Introduces Matched Transistor Arrays Reduces board space and device cost, while providing greater design flexibility Page 50 Exhibit 99.51 Diodes Incorporated Introduces New Low-Capacitance Data Line Protection Device Page 48 Exhibit 99.52 Diodes Announces Launch of Comprehensive Line of Pre-biased Transistors Page 50 Exhibit 99.53 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Page 52