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, 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 November 8, 2002 was 9,282,164, 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, September 30,
2001 2002
------------------- -------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 8,103,000 $ 6,042,000
Accounts receivable
Customers 16,250,000 19,511,000
Related parties 1,486,000 3,718,000
------------------- -------------------
------------------- -------------------
17,736,000 23,229,000
Less: Allowance for doubtful receivables 343,000 373,000
------------------- -------------------
17,393,000 22,856,000
Inventories 17,813,000 16,864,000
Deferred income taxes, current 4,368,000 4,368,000
Prepaid expenses, income taxes and other current assets 1,266,000 2,518,000
------------------- -------------------
------------------- -------------------
Total current assets 48,943,000 52,648,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 44,925,000 43,217,000
DEFERRED INCOME TAXES, non-current 3,672,000 2,726,000
OTHER ASSETS
Goodwill 5,090,000 5,090,000
Other 628,000 1,044,000
------------------- -------------------
TOTAL ASSETS $ 103,258,000 $ 104,725,000
=================== ===================
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, September 30,
2001 2002
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Line of credit $ 6,503,000 $ 1,874,000
Accounts payable
Trade 6,098,000 9,639,000
Related parties 3,149,000 3,263,000
Accrued liabilities 5,062,000 7,781,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 5,833,000 8,992,000
Current portion of capital lease obligations -- 156,000
------------------ ------------------
Total current liabilities 29,145,000 34,205,000
LONG-TERM DEBT, net of current portion
Related party 7,500,000 6,875,000
Other 13,664,000 3,566,000
CAPITAL LEASE OBLIGATIONS, net of current portion -- 2,530,000
MINORITY INTEREST IN JOINT VENTURE 1,825,000 2,045,000
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 9,280,664
shares issued at December 31, 2001
and September 30, 2002, respectively 6,151,000 6,187,000
Additional paid-in capital 7,310,000 7,942,000
Retained earnings 39,882,000 43,420,000
------------------ ------------------
------------------ ------------------
53,343,000 57,549,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 437,000 263,000
------------------ ------------------
2,219,000 2,045,000
Total stockholders' equity 51,124,000 55,504,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,258,000 $ 104,725,000
================== ==================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ------------------------------------------
2001 2002 2001 2002
----------------- ------------------- ------------------ --------------------
Net sales $ 22,698,000 $ 30,287,000 $ 69,447,000 $ 87,157,000
Cost of goods sold 20,279,000 22,420,000 58,863,000 67,807,000
----------------- ------------------- ------------------ --------------------
Gross profit 2,419,000 7,867,000 10,584,000 19,350,000
Research and development expenses 141,000 459,000 450,000 1,231,000
Selling, general and administrative
expenses 3,704,000 4,311,000 10,032,000 12,448,000
----------------- ------------------- ------------------ --------------------
Total operating expenses 3,845,000 4,770,000 10,482,000 13,679,000
Income from operations (1,426,000) 3,097,000 102,000 5,671,000
Other income (expense)
Interest income 80,000 7,000 222,000 31,000
Interest expense (592,000) (288,000) (1,903,000) (926,000)
Other 94,000 (195,000) 211,000 (69,000)
----------------- ------------------- ------------------ --------------------
(418,000) (476,000) (1,470,000) (964,000)
Income (loss) before income taxes and
minority interest (1,844,000) 2,621,000 (1,368,000) 4,707,000
Income tax benefit (provision) 1,052,000 (771,000) 1,741,000 (949,000)
----------------- ------------------- ------------------ --------------------
----------------- ------------------- ------------------ --------------------
Income (loss) before minority interest (792,000) 1,850,000 373,000 3,758,000
Minority interest in joint venture earnings (55,000) (83,000) (174,000) (219,000)
----------------- ------------------- ------------------ --------------------
Net income (loss) $ (847,000) $ 1,767,000 $ 199,000 $ 3,539,000
================= =================== ================== ====================
Earnings (loss) per share
Basic $ (0.10) $ 0.22 $ 0.02 $ 0.43
Diluted $ (0.10) $ 0.20 $ 0.02 $ 0.40
================= =================== ================== ====================
Weighted average shares outstanding
Basic 8,147,902 8,190,887 8,142,333 8,177,506
Diluted 8,815,581 8,862,272 8,928,711 8,834,311
================= =================== ================== ====================
The accompanying notes are an integral part of
these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------
2001 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 199,000 $ 3,539,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,946,000 6,943,000
Loss on disposal of property, plant and equipment -- 95,000
Minority interest earnings 174,000 219,000
Changes in operating assets:
Accounts receivable (1,034,000) (5,463,000)
Inventories 10,889,000 949,000
Prepaid expenses, taxes and other assets (3,110,000) (722,000)
Changes in operating liabilities:
Accounts payable (2,622,000) 3,655,000
Accrued liabilities (2,286,000) 2,720,000
Income taxes payable (1,370,000) --
----------------- ------------------
Net cash provided by operating activities 6,786,000 11,935,000
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (7,143,000) (2,645,000)
----------------- ------------------
Net cash used by investing activities (7,143,000) (2,645,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of line of credit, net (146,000) (4,629,000)
Proceeds from the issuance of capital stock 103,000 293,000
Repayments of long-term obligations (1,503,000) (7,564,000)
Proceeds from majority shareholder contract reimbursement -- 375,000
Other (42,000) (14,000)
----------------- ------------------
Net cash used by financing activities (1,588,000) (11,539,000)
----------------- ------------------
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS -- 188,000
DECREASE IN CASH (1,945,000) (2,061,000)
CASH AT BEGINNING OF PERIOD 4,476,000 8,103,000
----------------- ------------------
CASH AT END OF PERIOD $ 2,531,000 $ 6,042,000
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 1,681,000 $ 895,000
================= ==================
Income taxes $ 1,922,000 $ --
================= ==================
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
condensed 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 nine months ended September 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
Diodes-North America 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.
The following tables show the effect of SFAS No. 142 on net
income and earnings per share for the three and nine months ended September 30,
2001 and 2002:
Three Months Ended
September 30,
------------------------------------------
2001 2002
------------------- -------------------
Reported net income (loss) $ (847,000) $ 1,767,000
Add: Goodwill amortization, net of tax 42,000 --
------------------- -------------------
Adjusted net income (loss) $ (805,000) $ 1,767,000
=================== ===================
Diluted earnings per common share:
Reported net income (loss) $ (0.10) $ 0.20
Add: Goodwill amortization, net of tax $ 0.00 --
------------------- -------------------
Adjusted diluted earnings per common share $ (0.10) $ 0.20
=================== ===================
Nine Months Ended
September 30,
------------------------------------------
2001 2002
------------------- -------------------
Reported net income $ 199,000 $ 3,539,000
Add: Goodwill amortization, net of tax 126,000 --
------------------- -------------------
Adjusted net income $ 325,000 $ 3,539,000
=================== ===================
Diluted earnings per common share:
Reported net income $ 0.02 $ 0.40
Add: Goodwill amortization, net of tax $ 0.02 --
------------------- -------------------
Adjusted diluted earnings per common share $ 0.04 $ 0.40
=================== ===================
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of
April 2002". SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" criteria.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)".
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of
Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9.
Management does not believe the adoption of SFAS 145, 146, and
147 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 $188,000 gain in translation adjustments and
$14,000 loss related to the interest rate swap agreement results in a change in
accumulated other comprehensive loss (income) of ($174,000) for the nine months
ended September 30, 2002, and is reflected on the balance sheet as a separate
component of shareholders' equity. There was no other comprehensive loss for the
nine months ended September 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, September 30,
2001 2002
---------------- ----------------
Finished goods $ 12,030,000 $ 10,195,000
Work-in-progress 1,848,000 1,730,000
Raw materials 6,311,000 7,577,000
---------------- ----------------
20,189,000 19,502,000
Less: Reserves (2,376,000) (2,638,000)
---------------- ----------------
Net inventory $ 17,813,000 $ 16,864,000
================ ================
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 September 30, 2002, the
Company has recorded a net deferred tax asset of $7.1 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. Earnings in 2001, 2002 and 2003 are subject to tax
of 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 three 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 September 30, 2002, accumulated and undistributed
earnings of Diodes-China are 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,
at that time, considered this investment to be permanent, and had no plans or
obligation to distribute all or part of that amount from China to the United
States. Beginning in April 2002, under the direction of the Board, the Company
began to record deferred taxes on a portion of the 2002 earnings of Diodes-China
in preparation of a possible dividend distribution. As of September 30, 2002,
the Company has recorded $630,000 in deferred taxes and has made no
distributions.
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 the Company's corporate office
in 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 - Stock Options
During the first nine months of 2002, the Company issued
322,600 stock options to directors, officers, and key employees of the Company
at exercise prices between $8.53 and $8.77 (equal to the closing price of the
Company's Common Stock on the date of grant). Had compensation cost for the
options granted in 2002 been determined consistent with SFAS 123, the Company
would have recorded compensation expense in the amount of $278,000 for the nine
months ended September 30, 2002. As of September 30, 2002, the Company has not
adopted SFAS 123.
NOTE G - 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
---------------- ----------------------- --------------------
September 30, 2002
Total sales $ 23,056,000 $ 18,833,000 $ 41,889,000
Inter-company sales (10,052,000) (1,550,000) (11,602,000)
---------------- ----------------------- --------------------
Net sales $ 13,004,000 $ 17,283,000 $ 30,287,000
Assets $ 57,686,000 $ 47,039,000 $ 104,725,000
Deferred tax assets $ 111,000 $ 6,983,000 $ 7,094,000
================ ======================= ====================
Consolidated
Three Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2001
Total sales $ 19,573,000 $ 12,258,000 $ 31,831,000
Inter-company sales (8,381,000) (752,000) (9,133,000)
---------------- ----------------------- --------------------
Net sales $ 11,192,000 $ 11,506,000 $ 22,698,000
Assets $ 61,269,000 $ 44,256,000 $ 105,525,000
Deferred tax assets $ 128,000 $ 7,167,000 $ 7,295,000
================ ======================= ====================
Consolidated
Nine Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2002
Total sales $ 69,049,000 $ 51,098,000 $ 120,147,000
Inter-company sales (29,724,000) (3,266,000) (32,990,000)
---------------- ----------------------- --------------------
Net sales $ 39,325,000 $ 47,832,000 $ 87,157,000
Assets $ 57,686,000 $ 47,039,000 $ 104,725,000
Deferred tax assets $ 111,000 $ 6,983,000 $ 7,094,000
================ ======================= ====================
Consolidated
Nine Months Ended Far East North America Segments
---------------- ----------------------- --------------------
September 30, 2001
Total sales $ 52,554,000 $ 41,402,000 $ 93,956,000
Inter-company sales (21,980,000) (2,529,000) (24,509,000)
---------------- ----------------------- --------------------
Net sales $ 30,574,000 $ 38,873,000 $ 69,447,000
Assets $ 61,269,000 $ 44,256,000 $ 105,525,000
Deferred tax assets $ 128,000 $ 7,167,000 $ 7,295,000
================ ======================= ====================
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 "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.
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 end 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.
The Company's most recent product introduction includes its
line of 3 and 5 Amp Powermite(R)3 Schottky barrier rectifiers, which uses
patented packaging technology licensed from Microsemi, Inc., and will be
manufactured at the Company's state-of-the-art facilities at Diodes-China. The
Company's Powermite(R)3 parts offer a significant reduction in required board
space and superior thermal performance as compared to industry-standard SMC and
D-Pak packages. The Powermite(R)3 package has a very low profile of only 1.1mm,
which allows it to be used in many portable applications in which the 2.3mm
profile of SMC and D-Pak is prohibitive. In addition, the Powermite(R)3 package
requires approximately half the board space of the SMC and only 40% of the
D-Pak. This gives the Powermite(R)3 package a high Power Density value of
55mW/mm2, which is over double the values for D-Pak or SMC. Target applications
include notebooks, battery chargers, GPS units, TFT-LCD panels, quarter-brick
and half-brick power supplies.
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 third quarter of 2002, 57% of the Company's
products were sold in North America, while 40% were sold in the Far East and 3%
in Europe. This compares to 55%, 44% 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 third quarter of 2002, 71% of the
Company's sales were direct, while 29% 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.
During the third quarter the Company hired a representative
company in Japan to target the Japanese customer base. As Japanese manufacturing
moves to China, the Company sees a higher level of openness from the major
electronics manufacturers in developing alternative overseas sources of supply
that can meet logistics and local content requirements. A sales organization in
Japan will enable the Company to provide service and design support to this
large potential customer base. Given the strength of traditional
vendor-manufacturer relationships in Japan, this is a longer-term strategy, but
a major opportunity for the Company.
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 as 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 for the nine months ended September 30, 2002. 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 37.4% 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 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 third quarter of 2002, the Company sold silicon wafers
to LSC totaling 13.5% (7.7% in 2001) of the Company's sales, making LSC the
Company's largest customer. Also for the third quarter of 2002, 11.1% (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 September 30, 2002, LSC holds a
subordinated, interest-bearing note for approximately $9.4 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.
As per the terms of the stock purchase agreement, the Company
has entered into several management incentive agreements with members of
FabTech's management. The agreements provide members of FabTech's management
guaranteed annual payments as well as contingent bonuses based on the annual
profitability of FabTech, subject to a maximum annual amount. Any portion of the
guaranteed and contingent liability paid by FabTech will be reimbursed by LSC.
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 began in July 2002.
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 the 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. The Company plans to increase
the number of Diodes-FabTech wafers used at Diodes-China
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 manufacturing 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 third quarter
ended September 30, 2002, sales of products manufactured by LSC and the two
other largest vendors were approximately 11.1% (15.2% in 2001) and 14.3% (10.0%
in 2001), respectively, while 35.2% (27% in 2001) and 29.4% (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 2002 and 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. Earnings in 2001, 2002 and 2003 are
subject to tax of 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 three quarters of 2002, and current
indications are that the local tax will be waived for the remainder of 2002.
As of September 30, 2002, accumulated and undistributed
earnings of Diodes-China are 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 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 September 30, 2002, the Company has
recorded $630,000 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.
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.
Results of Operations for the Three Months Ended September 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 September 30,
--------------------------------------- ---------------------
2001 2002 `01 to `02
------------------- ------------------- ---------------------
Net sales 100.0 % 100.0 % 33.4 %
Cost of goods sold (89.3) (74.0) (10.6)
------------------- ------------------- ---------------------
Gross profit 10.7 26.0 225.2
Operating expenses (16.9) (15.7) (24.1)
------------------- ------------------- ---------------------
Income from operations (6.2) 10.3 317.2
Interest expense, net (2.3) (0.9) (45.1)
Other income 0.4 (0.6) (307.4)
------------------- ------------------- ---------------------
Income before taxes and minority (8.0) 8.8 242.2
Income taxes 4.6 (2.5) 173.3
------------------- ------------------- ---------------------
------------------- ------------------- ---------------------
Income before minority interest (3.4) 6.3 333.7
Minority interest (0.2) (0.3) 50.9
------------------- ------------------- ---------------------
Net income (3.6) 6.0 308.7
=================== =================== =====================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 30, 2002 compared to the three months ended
September 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 $ 22,698,000 $ 30,287,000
- ---------
Net sales increased approximately $7.6 million, or 33.4%, for
the three months ended September 30, 2002, compared to the same period last
year, due primarily to a 18.9% 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 2.3% from the same three-month
period last year, but increased 1.0% from the second quarter of 2002. ASP's for
wafer products increased 14.9% from the same period last year, and increased
0.4% from the second quarter of 2002.
2001 2002
---- ----
Cost of Goods Sold $ 20,279,000 $ 22,420,000
- ------------------
Gross Profit $ 2,419,000 $ 7,867,000
- ------------
Gross Profit Margin Percentage 10.7% 26.0%
- ------------------------------
Cost of goods sold increased approximately $2.1 million, or
10.6%, for the three months ended September 30, 2002 compared to the year ago
period, due primarily to increased sales volumes. As a percent of sales, cost of
goods sold decreased from 89.3% for the three months ended September 30, 2001 to
74.0% for the three months ended September 30, 2002 due to higher factory
utilizations. Gross profit increased approximately $5.4 million, or 225.2%, for
the three months ended September 30, 2002 compared to the year ago period. Of
the $5.4 million increase, approximately $0.8 million was due to the 33.4%
increase in sales, while $4.6 million was due to the increase in gross margin
percentage from 10.7% to 26.0%. The higher gross margin percentage was due
primarily to increased capacity utilization, cost containment and sales of
higher margin products. For the third quarter of 2002, Diodes-China's average
capacity utilization was approximately 88%, up from 80% last quarter, and
Diodes-FabTech had improved to approximately 83% from 73% last quarter.
2001 2002
---- ----
Total Operating Expenses $ 3,845,000 $ 4,770,000
- ------------------------
Operating expenses, which include selling, general,
administrative expenses ("SG&A") and research and development expenses ("R&D"),
for the three months ended September 30, 2002 increased approximately $0.9
million, or 24.1%, compared to the same period last year, due primarily to
increased selling expenses, commissions and incentives, insurance costs and a
$0.3 million increase in R&D. The Company anticipates its R&D expenditures will
increase, both in absolute dollars and as a percentage of sales, as part of its
strategy to develop more proprietary products aimed at improving gross margins.
SG&A, as a percentage of sales, decreased to 14.2% from 16.3% in the comparable
period last year, while R&D increased to 1.5% from 0.6% of sales. Total
operating expenses, as a percentage of sales, decreased to 15.7% from 16.9% in
the comparable period last year.
2001 2002
---- ----
Interest Income $ 80,000 $ 7,000
- ---------------
Interest Expense $ 592,000 $ 288,000
- ----------------
Net Interest Expense $ 512,000 $ 281,000
- --------------------
Net interest expense for the three months ended September 30,
2002 decreased approximately $0.2 million versus the third quarter last year,
due primarily to a reduction in the Company's total debt of approximately $13.2
million from the same period last year. 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 in the Diodes-China
manufacturing facility.
2001 2002
---- ----
Other Income $ 94,000 $ (195,000)
- ------------
Other income for the three months ended September 30, 2002
decreased from an income of $94,000 in the third quarter of 2001 to an expense
of $195,000. The increase in expense is due primarily to (i) the discontinuance
of $165,000 of income Diodes-FabTech was receiving from an external company's
use of their testing facilities, and (ii) a $131,000 severance payment as per a
separation agreement.
2001 2002
---- ----
Income Tax Benefit (Provision) $ 1,052,000 $ (771,000)
- ------------------------------
Income taxes increased from a tax benefit in the third quarter
of 2001 to a tax provision in the third quarter of 2002, due primarily to
positive earnings at Diodes-FabTech. Included in the tax provision for the three
months ended September 30, 2002 is $270,000 in deferred taxes recorded for a
portion of the 2002 earnings at Diodes-China.
2001 2002
---- ----
Minority Interest in Joint Venture $ 55,000 $ 83,000
- ----------------------------------
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,
2002 is primarily the result of increased capacity utilization and the
associated increase in 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 September 30, 2002, the Company had a
95% controlling interest in the joint venture.
Results of Operations for the Nine Months Ended September 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)
Nine Months Ended September 30,
--------------------------------------- ---------------------
2001 2002 `01 to `02
------------------- ------------------- ---------------------
Net sales 100.0 % 100.0 % 25.5 %
Cost of goods sold (84.8) (77.8) (15.2)
------------------- ------------------- ---------------------
Gross profit 15.2 22.2 82.8
Operating expenses (15.1) (15.7) 30.5
------------------- ------------------- ---------------------
Income from operations 0.1 6.5 5,459.8
Interest expense, net (2.4) (1.0) (46.8)
Other income 0.3 (0.1) (132.7)
------------------- ------------------- ---------------------
Income before taxes and minority (2.0) 5.4 444.1
Income taxes 2.5 (1.1) 154.5
------------------- ------------------- ---------------------
------------------- ------------------- ---------------------
Income before minority interest 0.5 4.3 907.5
Minority interest (0.3) (0.3) 25.9
------------------- ------------------- ---------------------
Net income 0.2 4.0 1,678.4
=================== =================== =====================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 2002 compared to the nine months ended September
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 $ 69,447,000 $ 87,157,000
- ---------
Net sales increased approximately $17.7 million, or 25.5%, for
the nine months ended September 30, 2002, compared to the same period last year,
due primarily to a 26.8% increase in units sold. For the first nine months of
2002, ASP's for discrete devices decreased approximately 9.7%, primarily in
North America. ASP's for wafer products decreased 4.7% from the same period last
year.
2001 2002
---- ----
Cost of Goods Sold $ 58,863,000 $ 67,807,000
- ------------------
Gross Profit $ 10,584,000 $ 19,350,000
- ------------
Gross Profit Margin Percentage 15.2% 22.2%
- ------------------------------
Cost of goods sold increased approximately $8.9 million, or
15.2%, for the nine months ended September 30, 2002 compared to the year ago
period, due primarily to increased sales volumes. As a percent of sales, cost of
goods sold decreased from 84.8% for the nine months ended September 30, 2001 to
77.8% for the nine months ended September 30, 2002 due to higher factory
utilizations. Gross profit increased approximately $8.8 million, or 82.8%, for
the nine months ended September 30, 2002 compared to the year ago period. Of the
$8.8 million increase, approximately $2.7 million was due to the 25.5% increase
in sales, while $6.1 million was due to the increase in gross margin percentage
from 15.2% to 22.2%. 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 $ 10,482,000 $ 13,679,000
- ------------------------
Operating expenses, including SG&A and R&D, for the nine
months ended September 30, 2002 increased approximately $3.2 million, or 30.5%,
compared to the same period last year due primarily to increased selling
expenses, commissions and incentives, insurance costs and a $0.8 million
increase in R&D. The Company anticipates its R&D expenditures will increase,
both in absolute dollars and as a percentage of sales. SG&A, as a percentage of
sales, decreased to 14.3% from 14.4% in the comparable period last year, while
R&D increased to 1.4% from 0.6% of sales. Total operating expenses, as a
percentage of sales, increased to 15.7% from 15.1% in the comparable period last
year.
2001 2002
---- ----
Interest Income $ 222,000 $ 31,000
Interest Expense $ 1,903,000 $ 926,000
----------- ---------
Net Interest Expense $ 1,681,000 $ 895,000
Net interest expense for the nine months ended September 30,
2002 decreased approximately $0.8 million 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 in the Diodes-China
manufacturing facility.
2001 2002
---- ----
Other Income $ 211,000 $ (69,000)
- ------------
Other income for the nine months ended September 30, 2002
decreased from an income of $211,000 for the same period in 2001 to an expense
of $69,000. The increase in expense is due primarily to (i) the discontinuance
of $165,000 of income Diodes-FabTech was receiving from an external company's
use of their testing facilities, and (ii) a $131,000 severance payment as per a
separation agreement.
2001 2002
---- ----
Income Tax Benefit (Provision) $ 1,741,000 $ (949,000)
- ------------------------------
Income taxes increased from a tax benefit for the first nine
months of 2001 to a tax provision for the first nine months of 2002, due
primarily to positive earnings at Diodes-FabTech. Included in the tax provision
for the nine months ended September 30, 2002 is $0.6 million 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 $ 174,000 $ 219,000
- ----------------------------------
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,
2002, is primarily the result of increased capacity utilization and the
associated increase in 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 September 30, 2002, the Company had a
95% controlling interest in the joint venture.
Financial Condition
Liquidity and Capital Resources
At September 30, 2002 the Company had cash and cash
equivalents totaling $6.0 million, a $2.1 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 nine months ended September 30, 2002
was $11.9 million compared to $6.8 million for the same period in 2001. The
primary sources of cash flows from operating activities for the first nine
months of 2002 were $6.9 million in depreciation and amortization and an
increase in accounts payable of $3.7 million, while in 2001, the primary sources
were a $10.9 million reduction in inventory and $5.9 million in depreciation and
amortization.
The primary use of cash flows from operating activities for
the first nine months of 2002 was an increase in accounts receivable of $5.5
million, while the primary use of cash flows from operating activities in 2001
was a $3.1 million increase in prepaid expenses, taxes and other assets.
Accounts receivable days were 68 days at September 30, 2002, compared to 61 at
December 31, 2001.
Inventory turns at September 30, 2002 were 5.4 times compared
to 5.1 times at December 31, 2001. The ratio of the Company's current assets to
current liabilities was 1.5 at September 30, 2002 and 1.7 at December 31, 2001.
Cash used by investing activities for the nine months ended
September 30, 2002 was $2.6 million, compared to $7.1 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 two years to four years, and therefore, payments
of approximately $208,000 plus interest began in July 2002.
Cash used by financing activities was $11.5 million for the
nine months ended September 30, 2002, as the Company reduced its overall debt,
compared to cash used by financing activities of $1.6 million in the same period
of 2001. In 2002, the Company increased its credit facility maximum limits to
$46.3 million, encompassing one major U.S. bank, three banks in Mainland China
and three banks in Taiwan. As of September 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 September 30, 2002, the
available credit was $6.5 million, $22.0 million, and $3.1 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 September 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 $5.6
million at September 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 September 30, 2002, the swap liability
was $172,000. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
Total working capital decreased approximately 6.8% to $18.4
million as of September 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 0.89 at September 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 $373,000 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 September 30, 2002, accumulated and undistributed
earnings of Diodes-China are 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, 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 September 30, 2002, the Company has
recorded $630,000 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary business objective is the maximization of
operating income given an acceptable level of risk. Our objective is exposed to
three primary sources of market risk: foreign currency risk, interest rate risk,
and political risk. No material changes to any of these risks have occurred
since December 31, 2001. For a more detailed discussion of market risk, refer to
Part II, Item 7A of our 2001 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
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. The interest rate swap
agreement applies to 25% 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 in Mainland China and Taiwan. The possibility of political conflict
between the two 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.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this Quarterly
Report on Form 10-Q for the third quarter ended September 30, 2002, the
Company's Chief Executive Officer, C.H. Chen, and the Chief Financial Officer,
Carl Wertz, with the participation of the Company's management, carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer believe that, as of the
date of the evaluation, the Company's disclosure controls and procedures are
effective in making known to them material information relating to the Company
(including its consolidated subsidiaries) required to be included in this
report.
Disclosure controls and procedures, no matter how well
designed and implemented, can provide only reasonable assurance of achieving an
entity's disclosure objectives. The likelihood of achieving such objections is
affected by limitations inherent in disclosure controls and procedures. These
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple errors, mistakes or intentional circumvention of the established
processes.
There were no significant changes in the Company's internal
controls, or in other factors that could significantly affect internal controls,
known to the Chief Executive Officer or the Chief Financial Officer, subsequent
to the date of the evaluation.
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:
o 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;
o difficulties implementing our Enterprise Resource Planning system;
o difficulties expanding our operations in the Far East and developing new
operations in Europe; o difficulties developing and implementing a successful
research and development team; o difficulties developing proprietary technology;
and, o market acceptance of our 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
resources or capabilities as it relates to 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:
o 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;
o trade restrictions, transportation delays, work stoppages, and economic and
political instability; o changes in import/export regulations, tariffs and
freight rates; o difficulties in collecting receivables and enforcing contracts;
o currency exchange rate fluctuations; o restrictions on the transfer of funds
from foreign subsidiaries to Diodes-North America; and, o longer customer
payment terms.
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:
o general economic conditions in the countries where we sell our
products;
o seasonality and variability in the computer and communications market
and our other end markets;
o the timing of our and our competitors' new product introductions;
o product obsolescence;
o the scheduling, rescheduling and cancellation of large orders by our
customers;
o the cyclical nature of demand for our customers' products;
o our ability to develop new process technologies and achieve volume
production at our fabrication facilities;
o changes in manufacturing yields;
o adverse movements in exchange rates, interest rates or tax rates; and
o 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:
o use a significant portion of our available cash;
o issue equity securities, which would dilute current stockholders' percentage
ownership; o incur substantial debt; o incur or assume contingent liabilities,
known or unknown; o incur amortization expenses related to intangibles; and o
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:
o unexpected losses of key employees or customers of the acquired
company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o hiring additional management and other critical personnel;
o increasing the scope, geographic diversity and complexity of our operations;
o difficulties in consolidating facilities and transferring processes
and know-how;
o diversion of management's attention from other business concerns; and
o 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. 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 systems 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 September 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 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 September 30, 2002, the Company has recorded
$630,000 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 September 30, 2002, the interest
rate swap agreement applies to $5.6 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 (55% at
September 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
There are no matters to be reported under this heading.
Item 5. Other Information
There are no matters to be reported under this heading.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.49 Revolving Credit Extension between the Company and Union Bank
Exhibit 11 Computation of Earnings Per Share
Exhibit 99.54 Certification Pursuant To 18 U.S.C. 1350 Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
Exhibit 99.55 Diodes Incorporated Announces Conference Call To Discuss Third
Quarter FY 2002 Results
Exhibit 99.56 Diodes, Inc. Diodes, Inc. Named to Business 2.0
Magazine's "100 Fastest Growing Tech Companies"
Exhibit 99.57 Diodes Incorporated Introduces Line of 3 & 5 Amp
Powermite(R)3 Schottky Barrier Rectifiers
Exhibit 99.58 Diodes, Inc. Reports Third Quarter Results with Continued
Gross Margin Improvement
(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 November 11, 2002
- ----------------------------------------------------
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C.H. Chen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ C.H. Chen
C. H. Chen
Chief Executive Officer
Date: 11/11/02
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Wertz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diodes Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Carl Wertz
Carl Wertz
Chief Financial Officer
Date: 11/11/02
INDEX TO EXHIBITS
Exhibit 10.49 Revolving Credit Extension between the Company and
Union Bank Page 33
Exhibit 11 Computation of Earnings Per Share Page 34
Exhibit 99.54 Certification Pursuant To 18 U.S.C. 1350 Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 2002 Page 35
Exhibit 99.55 Diodes Incorporated Announces Conference Call To Discuss
Third Quarter FY 2002 Results Page 36
Exhibit 99.56 Diodes, Inc. Diodes, Inc. Named to Business 2.0 Magazine's
"100 Fastest Growing Tech Companies" Page 37
Exhibit 99.57 Diodes Incorporated Introduces Line of 3 & 5 Amp Powermite(R)3
Schottky Barrier Rectifiers Page 39
Exhibit 99.58 Diodes, Inc. Reports Third Quarter Results with Continued
Gross Margin Improvement Page 41