e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
Or
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o |
|
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: 002-25577
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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95-2039518 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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15660 North Dallas Parkway, Suite 850 |
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Dallas, Texas
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75248 |
(Address of principal executive offices)
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(Zip code) |
(972) 385-2810
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ | |
Accelerated filer
o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares of the registrants Common Stock outstanding as of November 5, 2008 was
41,050,591
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
|
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|
|
|
|
|
|
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December 31, |
|
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September 30, |
|
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|
2007 |
|
|
2008 |
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|
|
|
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|
(unaudited) |
|
CURRENT ASSETS |
|
|
|
|
|
|
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|
Cash and cash equivalents |
|
$ |
56,179 |
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|
$ |
82,679 |
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Short-term investments |
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|
323,472 |
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|
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|
|
|
|
|
|
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|
Total cash and short-term investments |
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|
379,651 |
|
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|
82,679 |
|
Accounts receivable, net |
|
|
89,578 |
|
|
|
110,310 |
|
Inventories |
|
|
53,031 |
|
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|
99,094 |
|
Deferred income taxes, current |
|
|
5,173 |
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|
7,060 |
|
Prepaid expenses and other |
|
|
10,576 |
|
|
|
13,681 |
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|
|
|
|
|
|
|
Total current assets |
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|
538,009 |
|
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|
312,824 |
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|
|
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|
|
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|
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|
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|
|
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LONG-TERM INVESTMENT, available-for-sale
securities |
|
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|
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|
284,818 |
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|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net |
|
|
123,407 |
|
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|
183,203 |
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|
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|
|
|
|
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DEFERRED INCOME TAXES, non-current |
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3,241 |
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|
24,811 |
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|
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OTHER ASSETS |
|
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|
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|
|
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Goodwill |
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25,135 |
|
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|
51,559 |
|
Intangible assets, net |
|
|
9,643 |
|
|
|
43,813 |
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Other |
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|
6,930 |
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|
|
7,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total assets |
|
$ |
706,365 |
|
|
$ |
908,463 |
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|
|
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|
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|
The accompanying notes are an integral part of these financial statements.
- 3 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
(In thousands, except share data)
|
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December 31, |
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September 30, |
|
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|
2007 |
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2008 |
|
|
|
|
|
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|
(unaudited) |
|
CURRENT LIABILITIES |
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Line of credit |
|
$ |
|
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|
$ |
18,217 |
|
Accounts payable |
|
|
55,145 |
|
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|
51,493 |
|
Accrued liabilities |
|
|
27,841 |
|
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|
35,200 |
|
Income tax payable |
|
|
1,732 |
|
|
|
4,936 |
|
Current portion of long-term debt |
|
|
1,345 |
|
|
|
1,347 |
|
Current portion of capital lease obligations |
|
|
145 |
|
|
|
432 |
|
|
|
|
|
|
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|
Total current liabilities |
|
|
86,208 |
|
|
|
111,625 |
|
|
|
|
|
|
|
|
|
|
|
|
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LONG-TERM DEBT, net of current portion |
|
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|
|
|
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|
2.25% convertible senior notes due 2026 |
|
|
230,000 |
|
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|
230,000 |
|
Long-term borrowings |
|
|
5,815 |
|
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|
169,723 |
|
CAPITAL LEASE OBLIGATIONS, net of current portion |
|
|
1,331 |
|
|
|
2,132 |
|
OTHER LONG-TERM LIABILITIES |
|
|
6,249 |
|
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|
16,774 |
|
|
|
|
|
|
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Total liabilities |
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|
329,603 |
|
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530,254 |
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|
|
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|
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MINORITY INTEREST IN JOINT VENTURES |
|
|
7,164 |
|
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|
9,102 |
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|
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CONTINGENCIES AND COMMITMENTS |
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STOCKHOLDERS EQUITY |
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Preferred stock par value $1.00 per share; 1,000,000 shares authorized;
no shares issued or outstanding |
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Common stock par value $0.66 2/3 per share; 70,000,000 shares authorized;
40,172,491 and 41,042,237 issued and outstanding at December 31, 2007 and
September 30, 2008, respectively |
|
|
26,782 |
|
|
|
27,361 |
|
Additional paid-in capital |
|
|
121,412 |
|
|
|
131,331 |
|
Retained earnings |
|
|
220,504 |
|
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|
244,868 |
|
Accumulated other comprehensive income (loss) |
|
|
900 |
|
|
|
(34,453) |
|
|
|
|
|
|
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Total stockholders equity |
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|
369,598 |
|
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|
369,107 |
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|
|
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|
|
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Total liabilities and stockholders equity |
|
$ |
706,365 |
|
|
$ |
908,463 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 4 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
|
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2007 |
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|
2008 |
|
|
2007 |
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|
2008 |
|
NET SALES |
|
$ |
105,264 |
|
|
$ |
134,047 |
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$ |
293,567 |
|
|
$ |
345,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
COST OF GOODS SOLD |
|
|
71,112 |
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|
95,929 |
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|
199,214 |
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|
235,993 |
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
34,152 |
|
|
|
38,118 |
|
|
|
94,353 |
|
|
|
109,652 |
|
|
|
|
|
|
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|
|
|
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OPERATING EXPENSES |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling, general and administrative |
|
|
14,607 |
|
|
|
20,914 |
|
|
|
40,682 |
|
|
|
52,655 |
|
Research and development |
|
|
3,554 |
|
|
|
7,360 |
|
|
|
9,654 |
|
|
|
16,090 |
|
Amortization of acquisition-related intangible assets |
|
|
|
|
|
|
1,583 |
|
|
|
|
|
|
|
1,583 |
|
Purchased in-process research and development |
|
|
|
|
|
|
7,865 |
|
|
|
|
|
|
|
7,865 |
|
Restructuring charge |
|
|
|
|
|
|
|
|
|
|
1,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,161 |
|
|
|
37,722 |
|
|
|
52,107 |
|
|
|
78,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
15,991 |
|
|
|
396 |
|
|
|
42,246 |
|
|
|
31,459 |
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4,712 |
|
|
|
1,824 |
|
|
|
13,031 |
|
|
|
9,826 |
|
Interest expense |
|
|
(1,706 |
) |
|
|
(3,291 |
) |
|
|
(5,127 |
) |
|
|
(7,274 |
) |
Other |
|
|
(13 |
) |
|
|
(897 |
) |
|
|
(69 |
) |
|
|
(2,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses) |
|
|
2,993 |
|
|
|
(2,364 |
) |
|
|
7,835 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority
interest |
|
|
18,984 |
|
|
|
(1,968 |
) |
|
|
50,081 |
|
|
|
31,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
(2,243 |
) |
|
|
(319 |
) |
|
|
(7,122 |
) |
|
|
(5,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
16,741 |
|
|
|
(2,287 |
) |
|
|
42,959 |
|
|
|
26,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in earnings of joint ventures |
|
|
(640 |
) |
|
|
(659 |
) |
|
|
(1,601 |
) |
|
|
(1,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
16,101 |
|
|
$ |
(2,946 |
) |
|
$ |
41,358 |
|
|
$ |
24,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
(0.07 |
) |
|
$ |
1.05 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.38 |
|
|
$ |
(0.07 |
) |
|
$ |
0.98 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Number of shares used in computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,845 |
|
|
|
40,889 |
|
|
|
39,430 |
|
|
|
40,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
42,445 |
|
|
|
40,889 |
|
|
|
42,099 |
|
|
|
42,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 5 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,358 |
|
|
$ |
24,364 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
18,849 |
|
|
|
27,298 |
|
Amortization of intangibles |
|
|
627 |
|
|
|
2,370 |
|
Purchased in-process research and development |
|
|
|
|
|
|
7,865 |
|
Amortization of convertible bond issuance costs |
|
|
941 |
|
|
|
933 |
|
Minority interest earnings |
|
|
1,602 |
|
|
|
1,938 |
|
Share-based compensation |
|
|
7,253 |
|
|
|
7,697 |
|
Loss (gain) on disposal of property, plant and equipment |
|
|
305 |
|
|
|
(41 |
) |
Changes in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(11,821 |
) |
|
|
(8,301 |
) |
Inventories |
|
|
(19 |
) |
|
|
(12,184 |
) |
Prepaid expenses and other current assets |
|
|
(3,044 |
) |
|
|
(383 |
) |
Deferred income taxes |
|
|
1,816 |
|
|
|
(2,091 |
) |
Changes in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(1,550 |
) |
|
|
(9,294 |
) |
Accrued liabilities |
|
|
381 |
|
|
|
(4,189 |
) |
Other liabilities |
|
|
2,554 |
|
|
|
(1,147 |
) |
Income taxes payable |
|
|
(89 |
) |
|
|
1,799 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
59,163 |
|
|
$ |
36,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
$ |
|
|
|
$ |
(153,158 |
) |
Purchases of available-for-sale securities |
|
|
(69,768 |
) |
|
|
(4,435 |
) |
Proceeds from sale of available-for-sale securities |
|
|
43,050 |
|
|
|
7,282 |
|
Purchases of property, plant and equipment |
|
|
(41,642 |
) |
|
|
(41,196 |
) |
Proceeds from sale of property, plant and equipment |
|
|
99 |
|
|
|
56 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
$ |
(68,261 |
) |
|
$ |
(191,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Advances on line of credit, net |
|
$ |
934 |
|
|
$ |
18,334 |
|
Net proceeds from issuance of common stock |
|
|
6,120 |
|
|
|
2,802 |
|
Proceeds from long-term debt |
|
|
|
|
|
|
165,000 |
|
Repayments of long-term debt |
|
|
(1,681 |
) |
|
|
(1,135 |
) |
Repayments of capital lease obligations |
|
|
(111 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
5,262 |
|
|
$ |
184,736 |
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
92 |
|
|
|
(3,419 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(3,744 |
) |
|
|
26,500 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
48,888 |
|
|
|
56,179 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
45,144 |
|
|
$ |
82,679 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 6 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (cont)
(Unaudited)
(In thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Acquisition: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
|
|
|
$ |
191,999 |
|
Liabilities assumed |
|
|
|
|
|
|
(38,841) |
|
Cash acquired |
|
|
|
|
|
|
24,566 |
|
|
|
|
|
|
|
|
Cash paid for the acquisition |
|
$ |
|
|
|
$ |
177,724 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
- 7 -
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A Basis of Presentation and Recently Issued Accounting Pronouncements
Unless the context otherwise requires, the words Diodes, the Company, we, us and our
refer to Diodes Incorporated and its subsidiaries. The accompanying unaudited consolidated
condensed financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (U.S.) (GAAP) 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, results of operations and cash flows in conformity
with GAAP for complete financial statements. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and related notes
contained in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 three and nine months ended September
30, 2008 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2008. The condensed consolidated financial data at December 31, 2007 is derived from
audited financial statements included in our Annual Report on Form 10-K for the year ended December
31, 2007.
The preparation of financial statements in conformity with GAAP 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. As permitted under GAAP,
interim accounting for certain expenses, including income taxes, are based on full year forecasts.
Such amounts are expensed in full in the year incurred. For interim financial reporting purposes,
income taxes are recorded based upon estimated annual effective income tax rates.
All significant intercompany balances and transactions have been eliminated.
Corporate Structure
During 2007, we undertook an internal restructuring whereby our foreign subsidiaries were
structured under our newly formed, wholly owned Netherlands holding company, Diodes International
B.V. In addition, Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co.,
Ltd. were structured under Diodes Hong Kong Holding Company Limited., a newly formed, wholly owned
subsidiary of Diodes International B.V. The primary purpose of this internal restructuring was for
treasury management and tax planning functions.
In connection with our acquisition of Zetex plc (Zetex) (see-Note M Business
Acquisitions), we formed Diodes Holdings UK Limited and Diodes Investment Company, which are the
holding companies for Diodes Zetex Limited and its subsidiaries.
The consolidated financial statements include the parent company, Diodes Incorporated, and the
following:
|
|
|
Holding companies |
|
|
|
|
|
Diodes International B.V. |
|
100% owned |
Diodes Hong Kong Holding Company Limited |
|
100% owned |
Diodes Holdings UK Limited |
|
100% owned (2008) |
Diodes Investment Company |
|
100% owned (2008) |
|
|
|
Subsidiaries |
|
|
|
|
|
Diodes Taiwan Inc. |
|
100% owned |
Diodes Hong Kong Limited |
|
100% owned |
Anachip Corp. |
|
99.81% owned |
Shanghai Kai Hong Electronic Co., Ltd. |
|
95% owned |
Shanghai Kai Hong Technology Co., Ltd. |
|
95% owned |
Diodes FabTech Inc. |
|
100% owned |
Diodes United Kingdom Limited |
|
100% owned |
Diodes Korea Inc. |
|
100% owned |
Diodes Germany GmbH |
|
100% owned |
Diodes France SARL |
|
100% owned (2008) |
Diodes Zetex Limited |
|
100% owned (2008) |
- 8 -
Reclassifications
Certain prior years balances have been reclassified to conform to the current financial
statement presentation. These reclassifications had no impact on previously reported net income or
stockholders equity.
Change in Accounting Principle
During the third quarter of fiscal year 2008, the Company changed the timing of its annual
goodwill impairment testing from the end of the fourth quarter, December 31, to the beginning of
the fourth quarter, October 1. This change allows the Company to complete its annual goodwill
impairment testing in advance of its year-end closing. The Company determined that the change in
accounting principle related to the annual goodwill impairment testing date is preferable under the
circumstances.
Recently Issued Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active. FSP FAS 157-3 clarifies the application of FASB Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, in determining the fair value of a financial
asset when the market for that financial asset is not active. FSP FAS 157-3 became effective upon
issuance and includes prior periods for which financial statements have not been issued. The
Companys adoption of this pronouncement for its third quarter of fiscal year 2008 financial
statements did not have a material impact on the fair values assigned.
In June 2008, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF
Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys
Own Stock. EITF Issue No. 07-05 clarifies the determination of whether an instrument (or an
embedded feature) is indexed to an entitys own stock, which would qualify as a scope exception in
paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF
Issue No. 07-05 is effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the future
impacts and required disclosures of this pronouncement.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 provides that
unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of earnings per share (EPS) pursuant to the two-class method. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after December 15, 2008. Upon
adoption, a company is required to retrospectively adjust its EPS data (including any amounts
related to interim periods, summaries of earnings and selected financial data) to conform with the
provisions of FSP EITF 03-6-1. The Company is currently evaluating the future impacts and required
disclosures of this pronouncement.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies
that convertible debt instruments that may be settled in cash upon conversion are not addressed by
paragraph 12 of Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants. FSP APB 14-1 also specifies that issuers of such
instruments should separately account for the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the future impacts and
required disclosures of this pronouncement and believes that there will be a material adjustment
made to account for the liability and equity components of the Companys $230 million convertible
senior notes separately. Preliminarily, the Company expects to allocate approximately $136
million of the $230 million convertible senior notes to equity and record an additional non-cash
interest expense of approximately $2.8 million for fiscal year 2009. Furthermore, this allocation
will be treated retrospectively as of the date of issuance of the convertible senior notes and
therefore, will be treated as if convertible senior notes have always been accounted for in
accordance with this pronouncement.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. This standard is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with GAAP for non-governmental entities. SFAS No. 162
is effective 60 days following approval by the U.S. Securities and Exchange Commission (SEC) of
the Public Company Accounting Oversight Boards amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not
expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial
statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Asset. FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to
- 9 -
measure the fair value of the asset under SFAS 141R, Business Combinations, and other
accounting principles generally accepted in the U.S. FSP FAS 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of
a recognized intangible asset in this FSP shall be applied prospectively to intangible assets
acquired after the effective date. The disclosure requirements shall be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective date. The Company is
currently evaluating the future impacts and required disclosures of adopting this pronouncement.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an Amendment of SFAS No. 133 (SFAS 161). SFAS 161 requires that objectives
for using derivatives instruments be disclosed in terms of underlying risk and accounting
designation. The fair value of derivative instruments and their gains and losses will need to be
presented in tabular format in order to present a more complete picture of the effects of using
derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years
beginning after November 15, 2008. The Company is currently evaluating the future impacts and
required disclosures of adopting this pronouncement.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which
changes how business acquisitions are accounted. SFAS 141R requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination. Among the more significant
changes in the accounting for acquisitions are the following: i) Transaction costs will generally
be expensed. Certain such costs are presently treated as costs of the acquisition; ii) In-process
research and development (IPR&D) will be accounted for as an asset, with the cost recognized as
the research and development is realized or abandoned. IPR&D is presently expensed at the time of
the acquisition; iii) Contingencies, including contingent consideration, will generally be recorded
at fair value with subsequent adjustments recognized in operations. Contingent consideration is
presently accounted for as an adjustment of purchase price; and iv) Decreases in valuation
allowances on acquired deferred tax assets will be recognized in operations. Such changes
previously were considered to be subsequent changes in consideration and were recorded as
adjustments to goodwill. SFAS 141R is effective for business combinations and adjustments to an
acquired entitys deferred tax asset and liability balances occurring after December 31, 2008.
Early adoption is prohibited. The Company is currently evaluating the future impacts and required
disclosures of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS 160), which establishes new standards
governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned
consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as minority interests) be
treated as a separate component of equity, not as a liability; that increases and decreases in the
parents ownership interest, that leave control intact, be treated as equity transactions, rather
than as step acquisitions or dilution gains or losses; and that losses of a partially owned
consolidated subsidiary be allocated to the NCIs even when such allocation might result in a
deficit balance. This standard also requires changes to certain presentation and disclosure
requirements. SFAS 160 is effective for financial statements issued beginning January 1, 2009. The
provisions of the standard are to be applied to all NCIs prospectively, except for the presentation
and disclosure requirements, which are to be applied retrospectively to all periods presented.
After adoption, noncontrolling interests ($4.8 million and $7.2 million for the years ended
December 31, 2006 and 2007, respectively) will be classified as stockholders equity, a change from
its current classification between liabilities and stockholders equity. The Company is currently
evaluating the future impacts and required disclosures of this pronouncement.
In December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1, Accounting for
Collaborative Arrangements, that discusses how parties to a collaborative arrangement (which does
not establish a legal entity within such arrangement) should account for various activities. The
consensus indicates that costs incurred and revenues generated from transactions with third parties
(i.e., parties outside of the collaborative arrangement) should be reported by the collaborators on
the respective line items in their statements of operations pursuant to EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent. Additionally, the consensus
provides that statements of operations characterization of payments between the participants in a
collaborative arrangement should be based upon existing authoritative pronouncements; analogy to
such pronouncements is not within their scope; or a reasonable, rational, and consistently applied
accounting policy election. EITF Issue No. 07-1 is effective for financial statements issued
beginning January 1, 2009 and is to be applied retrospectively to all periods presented for
collaborative arrangements existing as of the date of adoption. The Company is currently evaluating
the future impacts and required disclosures of this pronouncement.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 clarifies the principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under SFAS 157, fair value
measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157
became effective for financial statements issued beginning January 1, 2008 and did not have a
material effect on the Companys financial position, results of operations or cash flows. In
February 2008, FSP No. 157-2, Effective Date of FASB Statement No. 157, was issued that delayed the application of SFAS 157 for non-financial assets and non-financial liabilities, until
January 1, 2009 (see Note E Fair Value Measurements).
- 10 -
NOTE B Functional Currencies, Comprehensive Income and Foreign Currency Translation
Functional Currencies and Translation The functional currency for most of our international
operations is the U.S. dollar. The functional currency for our subsidiaries Diodes Taiwan Inc.,
Anachip Corp. and Diodes Zetex Limited is their local currency, as the Company believes it is the
appropriate currency for them to use. Assets and liabilities denominated in foreign currencies
are translated at the exchange rate on the balance sheet date. Income and expense accounts
denominated in foreign currencies are translated at the average exchange rate during the period
presented. Resulting translation adjustments are recorded as a separate component of accumulated
other comprehensive income or loss within stockholders equity in the consolidated condensed
balance sheets. Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are recorded as other
income (expense) in the consolidated condensed statements of operations. The Company had foreign
exchange transaction losses of approximately $0.1 million and $1.0 million for the three months
ended September 30, 2007 and 2008, respectively, and approximately $0.4 million and $2.7 million
for the nine months ended September 30, 2007 and 2008, respectively.
Comprehensive Income (Loss) GAAP generally requires that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and liabilities are
reported as separate components of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income or loss. The components of other comprehensive
income or loss include foreign currency translation adjustments, unrealized holding losses for
available-for-sale securities, unrealized gain on defined benefit plan and foreign currency loss on
forward contracts. Accumulated other comprehensive income was $0.9 million at December 31, 2007
and accumulated other comprehensive loss was $34.5 million at September 30, 2008. The $35.4
million change in other comprehensive loss was primarily a result of a $22.7 million, net of tax,
unrealized loss of available-for-sale securities (see Note F Short-term and Long-term
Investments), a $13.4 million currency translation loss and a $1.6 million foreign currency loss on
forward contract, net of tax, partially offset by a $2.4 million, net of tax, unrealized gain on
defined benefit plan (see Note P Defined Benefit Plan) during the first nine months of 2008.
Total comprehensive income for the three and nine months ended September 30, 2007 and 2008 was
as follows (in thousands):
Total Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
Net income (loss) |
|
$ |
16,101 |
|
|
$ |
(2,946 |
) |
|
$ |
41,358 |
|
|
$ |
24,364 |
|
|
Translation adjustment |
|
|
304 |
|
|
|
(18,110 |
) |
|
|
114 |
|
|
|
(13,429 |
) |
|
Unrealized loss on available-for-sale securities,
net of tax |
|
|
|
|
|
|
(6,213 |
) |
|
|
|
|
|
|
(22,737 |
) |
|
Unrealized gain on defined benefit plan, net of tax |
|
|
|
|
|
|
10,970 |
|
|
|
|
|
|
|
2,430 |
|
|
Foreign currency loss on forward contracts, net of
tax |
|
|
|
|
|
|
(2,042 |
) |
|
|
|
|
|
|
(1,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
16,405 |
|
|
$ |
(18,341 |
) |
|
$ |
41,472 |
|
|
$ |
(10,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE C Hedging
As a multinational company, our transactions are denominated in a variety of currencies.
During the second quarter of 2008, in connection with the acquisition of Zetex, the Company adopted
forward exchange contracts, designated as foreign-currency cash flow hedges, to reduce the
potentially adverse effects of foreign-currency exchange rate fluctuations that occur in the normal
course of business. The Company uses forward exchange contracts to hedge, thereby attempting to
reduce our overall exposure to the effects of currency fluctuations on cash flows. The Company does
not permit speculation in financial instruments for profit on the exchange rate price fluctuation,
trading in currencies for which there are no underlying exposures, or entering into trades for any
currency to intentionally increase the underlying exposure.
- 11 -
These forward exchange contracts are recognized on the balance sheet at their fair value.
Unrealized gain positions are recorded as assets and unrealized loss positions are recorded as
liabilities. Changes in the fair values of the outstanding forward exchange contracts that are
highly effective are recorded in other comprehensive income until net income is affected by the
variability of the cash flows of the hedged transaction. Changes in the fair values of the forward
exchange contracts not effective as hedging instruments are recognized in earnings in the current
period. Results of ineffective hedges are recorded in the expense line item being hedged in the
consolidated condensed statements of operations.
The Company assesses both at the inception of the hedge and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in offsetting changes
in the cash flows of hedged items and whether those forward exchange contracts are expected to
remain highly effective in future periods.
As of September 30, 2008, the Company had forward contracts, primarily relating to the Diodes
Zetex Limited operations, of approximately $33.1 million that mature monthly over the next 15
months. For the nine months ended September 30, 2008, the Company had net foreign exchange
hedge-related transaction losses of $1.5 million related to hedging the Zetex acquisition purchase
price and deferred net unrealized losses on outstanding forward exchange contracts recorded as
other comprehensive gain of $1.6 million (net of tax). For the nine months ended September 30,
2008, the Company had no material ineffective hedges because forward foreign currency contract
amounts were less than the specifically identified anticipated transactions.
- 12 -
NOTE D Earnings (Loss) Per Share
The shares used in the computation of basic and diluted earnings (loss) per common share were
as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding used in computing basic earnings (loss) per share |
|
|
39,845 |
|
|
|
40,889 |
|
|
|
39,430 |
|
|
|
40,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
16,101 |
|
|
$ |
(2,946 |
) |
|
$ |
41,358 |
|
|
$ |
24,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
$ |
0.40 |
|
|
$ |
(0.07 |
) |
|
$ |
1.05 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding used in computing basic earnings (loss) per share |
|
|
39,845 |
|
|
|
40,889 |
|
|
|
39,430 |
|
|
|
40,585 |
|
Add: Assumed exercise of stock options and stock
awards |
|
|
2,600 |
|
|
|
|
|
|
|
2,669 |
|
|
|
2,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,445 |
|
|
|
40,889 |
|
|
|
42,099 |
|
|
|
42,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
16,101 |
|
|
$ |
(2,946 |
) |
|
$ |
41,358 |
|
|
$ |
24,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
$ |
0.38 |
|
|
$ |
(0.07 |
) |
|
$ |
0.98 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share are based upon the weighted average number of shares of Common Stock
and common stock equivalents outstanding, including those related to share-based compensation and
convertible notes. Earnings per share are computed using the treasury stock method under FASB
Statement No. 128. The convertible notes include a net share settlement feature which requires us
to redeem the par amount of the bond in cash and any remaining value, assuming the bond is in the
money, in incremental shares, cash or a combination thereof. The net share settled convertible as
structured is defined in EITF 90-19, Instrument C, which allows us to use the treasury stock method
of calculating the diluted earnings per share. The incremental value of the shares is determined
based on the average price of our Common Stock over the reporting period. There are no shares in
the earnings per share calculation related to the convertible notes outstanding as our average
stock price did not exceed the conversion price of $39.00 and, therefore, there is no conversion
spread. For the three months ended September 30, 2008, the Company has excluded the assumed
exercise of stock options and stock awards from the calculation of diluted net loss per share
because these securities are anti-dilutive.
NOTE E Fair Value Measurements
As stated in Note A Basis of Presentation and Recently Issued Accounting Pronouncements,
on January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value the
financial assets and liabilities. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer
the liability occurs in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement costs). Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning
- 13 -
those that reflect the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent sources, or unobservable,
meaning those that reflect the reporting entitys own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is
as follows:
Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss
severities, credit risks and default rates) or inputs that are derived principally from or
corroborated by observable market data by correlation or other means.
Level 3 Inputs Significant unobservable inputs that reflect an entitys own assumptions that
market participants would use in pricing the assets or liabilities.
Historically, the fair value of the Companys auction rate securities (ARS) has approximated
par value due to the frequent resets through the auction process. While we continue to earn
interest on investments at the maximum contractual rate, these investments are not currently
trading and therefore, do not currently have a readily determinable market value. Accordingly, the
estimated fair value of the ARS no longer approximates par value.
Due to lack of observable market quotes on our $320.6 million ARS portfolio, the fair value
measurements have been estimated using Level 3 inputs. The fair value was based on factors that
reflect assumptions market participants would use in pricing, including, among others: relevant
future market conditions including those that are based on the expected cash flow streams, the
underlying financial condition and credit quality of the issuer and bond insurer, the percent of
the Federal Family Education Loan Program (FFELP) guaranty, and the maturity of the securities,
as well as the market activity of similar securities. The valuation of our ARS investment portfolio
is subject to uncertainties that are difficult to predict and the future actual market prices may
differ materially (see Note F Short-term and Long-term Investments).
Financial assets and liabilities carried at fair value as of September 30, 2008 are classified
in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Level 2: |
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Significant |
|
|
Level 3: |
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total at |
|
Description |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
September 30, 2008 |
|
Available-for-sale
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
284,818 |
|
|
$ |
284,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
284,818 |
|
|
$ |
284,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the beginning and ending balances for assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) during the period ended September 30, 2008 (in thousands):
|
|
|
|
|
|
|
Available-for-sale securities |
|
Beginning balance as of January 1, 2008 |
|
$ |
320,700 |
|
|
Total gains or losses (unrealized)
Included in other comprehensive loss |
|
|
(35,807 |
) |
|
Purchases, issuances, and settlements |
|
|
(75 |
) |
|
|
|
|
|
Ending balance as of September 30, 2008 |
|
$ |
284,818 |
|
|
|
|
|
- 14 -
Certain financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example, when there is evidence
of impairment). Financial assets and financial liabilities measured at fair value on a
non-recurring basis were not significant at September 30, 2008.
Certain non-financial assets and non-financial liabilities measured at fair value on a
recurring and non-recurring basis include goodwill, other intangible assets and other non-financial
long-lived assets. As previously stated above, SFAS 157 will be applicable to these fair value
measurements beginning January 1, 2009.
NOTE F Short-term and Long-term Investments
Short-term and long-term investments at September 30, 2008 and December 31, 2007, were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
As of September 30, 2008 |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment
in auction rate securities |
|
$ |
320,625 |
|
|
$ |
|
|
|
$ |
(35,807 |
) |
|
$ |
284,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments |
|
$ |
320,625 |
|
|
$ |
|
|
|
$ |
(35,807 |
) |
|
$ |
284,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
As of December 31, 2007 |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment
in auction rate securities |
|
$ |
320,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
320,700 |
|
Money market mutual funds |
|
|
2,772 |
|
|
|
|
|
|
|
|
|
|
|
2,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
323,472 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
323,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, we had $320.6 million invested in ARS, which are generally long-term debt
instruments that provided liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals. These mechanisms historically have allowed
existing investors to roll over their holdings and continue to own the respective securities or to
liquidate their holdings by selling their securities at par value.
Historically, the Company invested in ARS for short periods of time as part of its cash
management program. However, the recent uncertainties in the credit markets and the failure of the
auctions for the Companys ARS have prevented us and other investors from liquidating holdings of
ARS. An auction failure, which is not a default in the underlying debt instrument, occurs when the
amount of securities submitted for sale exceeds the amount of purchase orders, resulting in our
continuing to hold these securities. The maturity dates for the Companys ARS range from 19 to 39
years and averages 32 years. Based on current market conditions, if a secondary market does not
develop, it is likely that auctions related to these securities will continue to be unsuccessful.
Unsuccessful auctions will result in our holding securities beyond their next scheduled auction
reset dates, thereby limiting the liquidity of these investments. See Note R Subsequent Event
for further information.
Due to the inability to trade all of the Companys investments in ARS in the current market,
the Company continues to earn interest on its ARS at a weighted average rate of 2.6% of as
September 30, 2008, which it is currently collecting. The weighted average maximum contractual
default rate is 17.3%.
The Companys ARS are primarily in student loan association bonds. None of our investments are
collateralized mortgage obligations or are any other type of mortgage-backed or real estate-backed
security.
As of September 30, 2008, approximately 85.7%, or $274.8 million, of the $320.6 million par
value ARS are collateralized by higher education funded student loans that are supported by the
federal government as part of FFELP. The following table shows a natural grouping of the FFELP
guaranteed securities, as well as the percentage of the ARS portfolio guaranteed by FFELP (in
thousands).
|
|
|
|
|
|
|
|
|
% of FFELP guaranty |
|
Par Value |
|
% of Total |
|
Greater than 99.0% |
|
$ |
195,000 |
|
|
|
60.8 |
% |
Between 81.2% and 82.1% |
|
|
86,825 |
|
|
|
27.1 |
% |
50.50% |
|
|
17,000 |
|
|
|
5.3 |
% |
10.00% |
|
|
3,850 |
|
|
|
1.2 |
% |
non-FFELP guaranteed |
|
|
18,000 |
|
|
|
5.6 |
% |
|
Total |
|
$ |
320,675 |
|
|
|
100.0 |
% |
- 15 -
As of September 30, 2008, our portfolio of ARS was valued using a valuation model that relies
exclusively on Level 3 inputs. The valuation resulted in the ARS being discounted by a range of
7.8% to 25.3% of par value. The resulting discount of the total ARS portfolio was 11.2% of par
value, or $35.8 million pre-tax unrealized loss (see Note E Fair Value Measurements).
We currently have the ability and intent to hold these ARS investments until a recovery of the
auction process or until maturity. Because of the inability to determine when our investments in
ARS would settle, as of March 31, 2008, we reclassified the entire ARS balance from short-term
investments to long-term investment, available-for-sale securities on our consolidated balance
sheet.
Although we are uncertain as to when the liquidity issues relating to these investments will
improve, we consider these issues to be only temporary, and thus reduced the carrying value of the
ARS to $284.8 million by recording a $22.7 million unrealized loss (net of $13.1 million tax
effect) in other comprehensive loss.
It is possible that further declines in ARS fair value may occur. We continue to monitor the
market for ARS and consider its impact (if any) on the fair market value of the investments. If the
current market conditions deteriorate further, we may be required to record additional unrealized
losses in other comprehensive income or record impairment charges to the statements of operations.
NOTE G Inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally
by the first-in, first-out method (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Raw materials |
|
$ |
19,918 |
|
|
$ |
29,411 |
|
Work-in-progress |
|
|
11,868 |
|
|
|
30,314 |
|
Finished goods |
|
|
21,245 |
|
|
|
39,369 |
|
|
|
|
|
|
|
|
|
|
$ |
53,031 |
|
|
$ |
99,094 |
|
|
|
|
|
|
|
|
NOTE H Goodwill and Other Intangible Assets
The following amounts of goodwill and intangible assets relating to the acquisition of Zetex
are preliminary (See Note M Business Acquisitions). The final amounts and determinable lives of
goodwill and intangible assets are subject to change upon the completion of the Companys valuation
of the assets acquired and liabilities assumed, which it expects to complete by 2008 year-end.
Changes in goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
|
|
|
|
|
Acquisitions/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions/ |
|
|
|
|
|
|
|
|
|
|
purchase |
|
Currency |
|
|
|
|
|
|
|
|
|
purchase |
|
Currency |
|
|
|
|
Balance, |
|
accounting |
|
exchange |
|
Balance, |
|
Balance, |
|
accounting |
|
exchange |
|
Balance, |
|
|
January 1 |
|
adjustments |
|
and other |
|
December 31 |
|
January 1 |
|
adjustments |
|
and other |
|
September 30 |
|
|
|
Total |
|
$ |
25,030 |
|
|
$ |
|
|
|
$ |
105 |
|
|
$ |
25,135 |
|
|
$ |
25,135 |
|
|
$ |
28,056 |
|
|
$ |
(1,632 |
) |
|
$ |
51,559 |
|
|
|
|
- 16 -
Intangible assets at September 30, 2008 are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
|
|
|
|
|
|
|
|
|
|
30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
Currency |
|
|
|
|
|
|
Carrying |
|
Accumulated |
|
exchange |
|
|
Intangible Assets |
|
Useful life |
|
Amount |
|
Amortization |
|
and other |
|
Net |
|
Amortized Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and trade
names |
|
5-15 years |
|
$ |
14,006 |
|
|
$ |
(1,942 |
) |
|
$ |
(227 |
) |
|
$ |
11,837 |
|
|
Software license |
|
3 years |
|
|
1,212 |
|
|
|
(684 |
) |
|
|
(41 |
) |
|
|
487 |
|
Developed product technology |
|
2-10 years |
|
|
29,248 |
|
|
|
(1,308 |
) |
|
|
(2,283 |
) |
|
|
25,657 |
|
|
Customer relationships |
|
12 years |
|
|
6,521 |
|
|
|
(174 |
) |
|
|
(515 |
) |
|
|
5,832 |
|
|
|
Total amortized intangible assets: |
|
|
|
$ |
50,987 |
|
|
$ |
(4,108 |
) |
|
$ |
(3,066 |
) |
|
$ |
43,813 |
|
|
Amortization expense related to intangible assets subject to amortization was $0.2 million and
$1.9 million for the three months ended September 30, 2007 and 2008, respectively.
Amortization expense related to intangible assets subject to amortization was $0.6 million and
$2.4 million for the nine months ended September 30, 2007 and 2008, respectively.
NOTE I Income Tax Provision
Income tax expense of $0.3 million and $5.3 million was recorded for the three and nine months
ended September 30, 2008, respectively. This resulted in an effective tax rate of 12.3% in the
nine months ended September 30, 2008, as compared to 15.0% in the same period of last year and
compared to 13.2% for the full year of 2007. Our lower effective tax rate compared with the same
period last year was the result of income tax refunds in China and lower income in the U.S. and
higher income in lower-taxed jurisdictions, partially offset by an increased income tax rates at
our China subsidiaries due to the phase-out of previously granted income tax holidays. For the
nine month ended September 30, 2007, the Company reported domestic and foreign pre-tax income of
approximately $(0.6) million and $49.5 million, respectively. For the nine month ended September
30, 2008, the Company reported domestic and foreign pre-tax income of approximately $(17.5) million
and $63.1 million, respectively, excluding $14.0 million pre-tax purchase accounting adjustments.
Our global presence requires us to pay income taxes in a number of jurisdictions. In general,
earnings in the U.S. and Taiwan are currently subject to tax rates of 39.0% and 25.0%,
respectively. In addition, Taiwan earnings are subject to an additional 10% retained earnings tax
should the Taiwan earnings not be distributed. Earnings in Hong Kong are subject to a 16.5% tax
for local sales or local source sales; all other Hong Kong sales are not subject to foreign income
taxes. Earnings in Taiwan and Hong Kong are also subject to U.S. taxes with respect to those
earnings that are derived from product manufactured by our China subsidiaries and sold to customers
outside of Taiwan and Hong Kong, respectively. The U.S. tax rate on this Subpart F income is
computed as the difference between the foreign effective tax rates and the U.S. tax rate. In
accordance with U.S. tax law, we receive credit against our U.S. federal tax liability for income
taxes paid by our foreign subsidiaries.
As an incentive for the formation of Anachip Corp., its earnings are subject to a five-year
tax holiday (subject to certain qualifications of Taiwanese tax law). In the third quarter of 2006,
we elected to begin this five-year tax holiday as of January 1, 2006. Beginning 2011, Anachip
Corps earnings will be subject to the statutory Taiwan income tax rate.
Prior to 2008, earnings in the Songjiang district of China have a standard central government
tax rate of 24.0%. However, as an incentive for establishing Shanghai Kai Hong Electronic Co.,
Ltd., its earnings were subject to a 0% tax rate by the central government from 1996 through 2000,
and to a 12.0% tax rate from 2001 through 2007. For 2008, we expect a tax rate of 25%. In
addition, due to a $15 million permanent re-investment of Shanghai Kai Hong Electronic Co., Ltd.s
earnings in 2004, it has received additional preferential tax treatment (earnings will be exempted
from central government income tax for two years, and then subject to tax rates in the range of
12.0% to 12.5% for the following three years) on earnings that are generated by this investment.
- 17 -
In addition, the earnings of Shanghai Kai Hong Electronic Co., Ltd. would ordinarily be
subject to a standard local government tax rate of 3.0% through 2007. However, as an incentive for
establishing Shanghai Kai Hong Electronic Co., Ltd., the local government waived this tax from 1996
through 2007.
In 2004, we established our second Shanghai-based manufacturing facility, Shanghai Kai Hong
Technology Co., Ltd., located in the Songjiang Export Zone of Shanghai, China. In the Songjiang
Export Zone, the central government standard tax rate is 15.0%, and there is no local government
tax. As an incentive for establishing Shanghai Kai Hong Technology Co., Ltd., its 2005 and 2006
earnings were exempted from central government income tax and the 2007 earnings were subject to a
7.5% tax rate. For 2008, we expect a tax rate of 12.5%.
It is unclear to what extent our China subsidiaries will receive preferential tax treatment.
The recent China government income tax reform terminates some existing tax incentives for foreign
enterprises doing business in China. The central government tax rate in China increased to 25%
beginning in 2008; however, we believe Shanghai Kai Hong Electronic Co., Ltd may qualify for a
high technology preferential tax treatment that would reduce the tax rate to 15% and Shanghai Kai
Hong Technology Co., Ltd. may also qualify for a transitional tax rate of 9%.
The impact of the tax holidays decreased the Companys tax expense by approximately $6.9
million and $5.7 million for the nine months ended September 30, 2007 and 2008, respectively. The
benefit of the tax holiday on basic and diluted earnings per share for the nine months ended
September 30, 2007 was $0.17 and $0.16, respectively. The benefit of the tax holiday on basic and
diluted earnings per share for the nine months ended September 30, 2008 was $0.14 and $0.13,
respectively.
On June 9, 2008, the Company completed the acquisition of all the outstanding ordinary capital
stock of Zetex. Zetexs earnings in the United Kingdom are currently subject to a tax rate of 28%
and its earnings in Hong Kong are subject to a 16.5% tax rate. In addition, Zetexs earnings in
Germany are subject to a 30% tax rate.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities
for tax years before 2005. The Internal Revenue Service has contacted the Company regarding an
examination for the tax year ended 2005. With respect to state and local jurisdictions and
countries outside of the U.S., with limited exceptions, we are no longer subject to income tax
audits for years before 2002. Although the outcome of tax audits is always uncertain, we believe
that adequate amounts of tax, interest and penalties, if any, have been provided for in our FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN48) reserve for any
adjustments that may result from future tax audits. We recognize accrued interest and penalties, if
any, related to unrecognized tax benefits in income tax expense.
We adopted the provisions FIN48 effective January 1, 2007. As a result of the implementation
of FIN48, we increased our liability for unrecognized tax benefits, primarily related to our
foreign subsidiaries, by approximately $2.0 million during the first quarter of 2007, which was
accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of January 1,
2008 and September 30, 2008, the gross amount of unrecognized tax benefits was approximately $4.1
million and $4.5 million, respectively.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain
of our unrecognized tax positions will significantly increase or decrease within the next 12
months. These changes may be the result of settlement of ongoing audits or competent authority
proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be
made.
In addition, funds repatriated from foreign subsidiaries to the U.S. may be subject to federal
and state income taxes. As of January 1, 2007, we had accrued $3.3 million for U.S. taxes on future
dividends from our foreign subsidiaries. With the establishment of the holding companies in 2007,
the Company intends to permanently reinvest overseas all of its earnings from its foreign
subsidiaries. Accordingly, the $3.3 million liability was reversed during 2007, and U.S. taxes are
no longer being recorded on undistributed foreign earnings. Furthermore, the Company determined
that it was more likely than not that a portion of its federal foreign tax credit carryforwards
would expire before they could be utilized. Accordingly, the Company recorded a $5.0 million
valuation allowance during the twelve months ended December 31, 2007.
NOTE J Deferred Compensation
Beginning January 1, 2007, the Company implemented a Non-Qualified
Deferred Compensation Plan (the Deferred Compensation Plan) for
executive officers, key employees and members of the Board of
Directors (the Board). The Deferred Compensation Plan allows
eligible participants to defer the receipt of eligible compensation
until designated future dates. The Company offsets its obligations
under the Deferred Compensation Plan by investing in the actual
underlying investments. These investments are classified as trading
securities and are carried at fair value. At September 30, 2008,
these investments totaled approximately $2.2 million. All gains and
losses in these investments are equally offset by corresponding
gains and losses in the Deferred Compensation Plan liabilities.
- 18 -
NOTE K Share-based Compensation
We maintain share-based compensation plans for our officers, key employees, and our Board,
which provide for stock options and stock awards. For further details regarding the Companys
share-based compensation plans, please see Note 15 of our notes to consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31, 2007.
Stock Options. Through March 31, 2006, substantially all stock options granted vest in
equal annual installments over a three-year period and expire ten years after the grant date.
Beginning April 1, 2006, substantially all stock options granted vest in equal annual installments
over a four-year period and expire ten years after the grant date.
For the three months and nine months ended September 30, 2007 and 2008, share-based
compensation expense associated with the Companys stock options recognized in the statements of
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
Cost of sales |
|
$ |
59 |
|
|
$ |
7 |
|
|
$ |
219 |
|
|
$ |
112 |
|
Selling and
administrative expense |
|
|
1,173 |
|
|
|
764 |
|
|
|
3,680 |
|
|
|
2,915 |
|
Research and development
expense |
|
|
112 |
|
|
|
69 |
|
|
|
355 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense |
|
$ |
1,344 |
|
|
$ |
840 |
|
|
$ |
4,254 |
|
|
$ |
3,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense for the three months and nine months ended September 30, 2007 and 2008
was estimated on the date of grant using the Black-Scholes option pricing model. For the nine
months ended September 30, 2008, the Company granted stock options to purchase approximately
241,000 shares of the Companys Common Stock, which vest in equal annual installments over a
four-year period and expire ten years from the date of grant. Options granted during the nine
months ended September 30, 2008 had a weighted-average grant date fair value of $16.70.
The total intrinsic value (actual gain) of options exercised during the nine months ended
September 30, 2008 was approximately $8.7 million. The total net cash proceeds received from stock
option exercises during the nine months ended September 30, 2008 was $2.8 million.
A summary of the stock option plans as of September 30, 2008 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Stock options |
|
(000) |
|
|
Price |
|
|
Term (yrs) |
|
|
($000) |
|
Outstanding at January 1, 2008 |
|
|
4,268 |
|
|
$ |
10.06 |
|
|
|
6.0 |
|
|
$ |
85,393 |
|
Granted |
|
|
241 |
|
|
|
27.95 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(488) |
|
|
|
5.74 |
|
|
|
|
|
|
|
8,679 |
|
Forfeited or expired |
|
|
(46) |
|
|
|
23.76 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
3,975 |
|
|
$ |
11.53 |
|
|
|
5.6 |
|
|
$ |
32,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
3,415 |
|
|
$ |
9.21 |
|
|
|
5.1 |
|
|
$ |
32,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above is before applicable income taxes and
represents the amount optionees would have received if all options had been exercised on the last
business day of the period indicated, based on our closing stock price.
- 19 -
As of September 30, 2008, total unrecognized stock-based compensation expense related to
unvested stock options, net of forfeitures, was approximately $7.8 million, before income taxes,
and is expected to be recognized over a weighted average of approximately 2.8 years.
Share Grants. Restricted stock awards and restricted stock units generally vest in equal
annual installments over a four-year period.
For the three months and nine months ended September 30, 2007 and 2008, share-based
compensation expense associated with the Companys share grants recognized in the statements of
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
Cost of sales |
|
$ |
66 |
|
|
$ |
91 |
|
|
$ |
135 |
|
|
$ |
240 |
|
Selling and
administrative expense |
|
|
1,077 |
|
|
|
1,434 |
|
|
|
2,636 |
|
|
|
3,696 |
|
Research and development
expense |
|
|
112 |
|
|
|
198 |
|
|
|
227 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share grant expense |
|
$ |
1,255 |
|
|
$ |
1,723 |
|
|
$ |
2,998 |
|
|
$ |
4,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of our non-vested share grants as of September 30, 2008 follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Grant-Date |
|
|
Value |
|
Share Grants |
|
(000) |
|
|
Fair Value |
|
|
($000) |
|
Nonvested at January 1, 2008 |
|
|
1,018 |
|
|
$ |
18.34 |
|
|
$ |
30,602 |
|
Granted |
|
|
262 |
|
|
|
27.25 |
|
|
|
|
|
Vested |
|
|
(382) |
|
|
|
15.98 |
|
|
|
9,517 |
|
Forfeited |
|
|
(45) |
|
|
|
26.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2008 |
|
|
853 |
|
|
$ |
21.71 |
|
|
$ |
15,737 |
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2007 and 2008, there was $1.3 million and $1.7
million, respectively, of share-based compensation expense related to non-vested stock award
arrangements granted under the plans.
During the nine months ended September 30, 2007 and 2008, there was $3.0 million and $4.4
million, respectively, of share-based compensation expense related to non-vested stock award
arrangements granted under the plans.
The total intrinsic value (actual gain) of restricted stock grants vested during the nine
months ended September 30, 2008 was approximately $9.5 million.
As of September 30, 2008, total un-recognized share-based compensation expense related to
non-vested stock award arrangements, net of forfeitures, was approximately $15.2 million, before
income taxes and is expected to be recognized over a weighted average of approximately 2.3 years.
NOTE L Segment and Geographic Information
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. Our
chief decision-making group consists of the President and Chief Executive Officer, Chief Financial
Officer, Senior
- 20 -
Vice President of Operations, Senior Vice President of Sales and Marketing and
Senior Vice President of Finance. For financial reporting purposes, we operate in a single
segment, standard semiconductor products, through our various manufacturing and distribution
facilities. We aggregated our products since the products are similar and have similar economic
characteristics, and the products are similar in production process and share the same customer
type.
Our primary operations include the domestic operations in Asia, North America and Europe.
The accounting policies of the operations are the same as those described in the summary of
significant accounting policies in our Annual Report on Form 10-K for the year ended December 31,
2007. Revenues are attributed to geographic areas based on the location of subsidiaries producing
the revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
September 30, 2007 |
|
Asia |
|
|
North America |
|
|
Europe (1) |
|
|
Segments |
|
Total sales |
|
$ |
135,597 |
|
|
$ |
31,629 |
|
|
$ |
|
|
|
$ |
167,226 |
|
Inter-company sales |
|
|
(56,777 |
) |
|
|
(5,185 |
) |
|
|
|
|
|
|
(61,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
78,820 |
|
|
$ |
26,444 |
|
|
$ |
|
|
|
$ |
105,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and minority interest |
|
$ |
19,657 |
|
|
$ |
(673 |
) |
|
$ |
|
|
|
$ |
18,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
104,044 |
|
|
$ |
15,174 |
|
|
$ |
|
|
|
$ |
119,218 |
|
Assets |
|
$ |
214,990 |
|
|
$ |
471,912 |
|
|
$ |
|
|
|
$ |
686,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
September 30, 2008 |
|
Asia |
|
|
North America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
164,859 |
|
|
$ |
31,839 |
|
|
$ |
13,626 |
|
|
$ |
210,324 |
|
Inter-company sales |
|
|
(69,010 |
) |
|
|
(6,262 |
) |
|
|
(1,005 |
) |
|
|
(76,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
95,849 |
|
|
$ |
25,577 |
|
|
$ |
12,621 |
|
|
$ |
134,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and minority interest |
|
$ |
18,531 |
|
|
$ |
(8,080 |
) |
|
$ |
(12,419 |
) |
|
$ |
(1,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
109,587 |
|
|
$ |
27,955 |
|
|
$ |
45,661 |
|
|
$ |
183,203 |
|
Assets |
|
$ |
337,186 |
|
|
$ |
387,294 |
|
|
$ |
183,983 |
|
|
$ |
908,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
September 30, 2007 |
|
Asia |
|
|
North America |
|
|
Europe (1) |
|
|
Segments |
|
Total sales |
|
$ |
367,504 |
|
|
$ |
92,295 |
|
|
$ |
|
|
|
$ |
459,799 |
|
Inter-company sales |
|
|
(150,172 |
) |
|
|
(16,060 |
) |
|
|
|
|
|
|
(166,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
217,332 |
|
|
$ |
76,235 |
|
|
$ |
|
|
|
$ |
293,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and minority interest |
|
$ |
50,679 |
|
|
$ |
(598 |
) |
|
$ |
|
|
|
$ |
50,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
104,044 |
|
|
$ |
15,174 |
|
|
$ |
|
|
|
$ |
119,218 |
|
Assets |
|
$ |
214,990 |
|
|
$ |
471,912 |
|
|
$ |
|
|
|
$ |
686,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
September 30, 2008 |
|
Asia |
|
|
North America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
464,008 |
|
|
$ |
92,252 |
|
|
$ |
18,906 |
|
|
$ |
575,166 |
|
Inter-company sales |
|
|
(206,372 |
) |
|
|
(22,110 |
) |
|
|
(1,039 |
) |
|
|
(229,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
257,636 |
|
|
$ |
70,142 |
|
|
$ |
17,867 |
|
|
$ |
345,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and minority interest |
|
$ |
57,383 |
|
|
$ |
(16,941 |
) |
|
$ |
(8,825 |
) |
|
$ |
31,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
109,587 |
|
|
$ |
27,955 |
|
|
$ |
45,661 |
|
|
$ |
183,203 |
|
Assets |
|
$ |
337,186 |
|
|
$ |
387,294 |
|
|
$ |
183,983 |
|
|
$ |
908,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Information for the three and nine months ended September 30, 2007 is not presented as the
amounts are immaterial. |
- 21 -
Geographic Information
Revenues were derived from (billed to) customers located in the following countries. All
Others represents countries with less than 10% of the total revenues each (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
for the Three Months |
|
|
Percentage of |
|
|
|
Ended September 30, |
|
|
Net Sales |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
China |
|
$ |
42,451 |
|
|
$ |
41,565 |
|
|
|
40.3 |
% |
|
|
31.0 |
% |
Taiwan |
|
|
23,267 |
|
|
|
34,013 |
|
|
|
22.1 |
% |
|
|
25.4 |
% |
United States |
|
|
21,930 |
|
|
|
26,000 |
|
|
|
20.8 |
% |
|
|
19.4 |
% |
All Others |
|
|
17,616 |
|
|
|
32,469 |
|
|
|
16.8 |
% |
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,264 |
|
|
$ |
134,047 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
for the Nine Months |
|
|
Percentage of |
|
|
|
Ended September 30, |
|
|
Net Sales |
|
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
China |
|
$ |
104,490 |
|
|
$ |
102,650 |
|
|
|
35.6 |
% |
|
|
29.7 |
% |
Taiwan |
|
|
80,087 |
|
|
|
100,061 |
|
|
|
27.3 |
% |
|
|
28.9 |
% |
United States |
|
|
62,759 |
|
|
|
67,240 |
|
|
|
21.4 |
% |
|
|
19.5 |
% |
All Others |
|
|
46,231 |
|
|
|
75,694 |
|
|
|
15.7 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
293,567 |
|
|
$ |
345,645 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE M Business Acquisitions
Zetex Acquisition On June 9, 2008, the Company completed the acquisition of all the
outstanding ordinary capital stock of Zetex, a company incorporated under the laws of England and
Wales. The shareholders of Zetex received 85.45 pence in cash per Zetex ordinary share, valuing
the fully diluted share capital of Zetex at approximately U.S.$176.3 million (based on a USD:GBP
exchange rate of 1.9778), excluding acquisition costs, fees and expenses.
As consideration for Zetex, the Company paid the following (in thousands):
|
|
|
|
|
Purchase price (net of cash acquired) |
|
$ |
149,144 |
|
Acquisition related costs |
|
|
4,014 |
|
|
|
|
|
Total purchase price |
|
$ |
153,158 |
|
|
|
|
|
In addition, in order to finance the acquisition, the Company entered into a loan for $165
million, which accrued interest at a floating rate of interest per annum equal to the sum of the
prevailing daily 30-day LIBOR plus 1.25% as of September 30, 2008 (see Note N Margin Loan for
further details), secured by its ARS portfolio.
The results of operations of the Zetex acquisition have been included in the consolidated
financial statements from June 1, 2008. The purpose of this acquisition was to create revenue,
operating and cost synergies and to enhance the Companys leadership in discrete and analog
solutions. In addition, the Company believes that the acquisition will strengthen and broaden the
Companys product offerings, including entry into the LED lighting and automotive markets and
expand the Companys geographical footprint in the European markets.
- 22 -
A final determination of the allocation of the purchase price to the assets acquired and
liabilities assumed has not been made and should be considered preliminary. The final
determination is subject to the completion of the Companys valuation of the assets acquired and
liabilities assumed, which it expects to complete by 2008 year-end.
The following summarizes the preliminary (subject to final determination) allocation of the
purchase price to the fair value of the assets acquired and liabilities assumed at the date of
acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
purchase price |
|
|
|
|
|
|
Purchase price |
|
|
allocation |
|
|
|
|
|
|
allocation on |
|
|
recorded |
|
|
Revised purchase |
|
|
|
acquisition |
|
|
during third |
|
|
price allocation on |
|
|
|
date |
|
|
quarter of 2008 |
|
|
acquisition date |
|
Assets acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
13,445 |
|
|
$ |
|
|
|
$ |
13,445 |
|
Inventory |
|
|
30,605 |
|
|
|
5,386 |
|
|
|
35,991 |
|
Prepaid expenses and other current assets |
|
|
4,363 |
|
|
|
|
|
|
|
4,363 |
|
Property, plant and equipment, net |
|
|
50,145 |
|
|
|
2,146 |
|
|
|
52,291 |
|
Deferred tax assets |
|
|
5,235 |
|
|
|
5,041 |
|
|
|
10,276 |
|
Other long-term assets |
|
|
136 |
|
|
|
|
|
|
|
136 |
|
Trademarks and other intangible assets |
|
|
7,991 |
|
|
|
39,449 |
|
|
|
47,440 |
|
Goodwill |
|
|
85,036 |
|
|
|
(57,399 |
) |
|
|
27,637 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
$ |
196,956 |
|
|
$ |
(5,377 |
) |
|
$ |
191,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,057 |
|
|
$ |
|
|
|
$ |
6,057 |
|
Accrued expenses and other liabilities |
|
|
16,154 |
|
|
|
652 |
|
|
|
16,806 |
|
Pension liability |
|
|
10,873 |
|
|
|
|
|
|
|
10,873 |
|
Deferred tax liabilities |
|
|
7,288 |
|
|
|
(6,029 |
) |
|
|
1,259 |
|
Other liabilities |
|
|
3,846 |
|
|
|
|
|
|
|
3,846 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
44,218 |
|
|
|
(5,377 |
) |
|
|
38,841 |
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
152,738 |
|
|
$ |
|
|
|
$ |
152,738 |
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2008, the Company evaluated and adjusted its inventory for a
reasonable profit allowance in accordance with SFAS No. 141, Business Combinations (SFAS 141),
which is intended to permit the Company to report only the profits normally associated with its
activities following the acquisition as it relates to the work-in-progress and finished goods
inventory. As such, the Company stepped-up (increased) its acquired inventory from Zetex by
approximately $5.4 million and subsequently recorded that step-up (increase), adjusted for foreign
exchange rates, into cost of goods sold in the amount of approximately $5.2 million as all the
acquired work-in-process and finished goods inventory has been sold as of September 30, 2008.
As of September 30, 2008, the Company has preliminarily identified $47.5 million of
identifiable intangible assets separate from goodwill. Acquired intangible in-process research and
development (IPR&D), which had not yet reached technological feasibility and had no alternative
future use as of the date of acquisition in the amount of $7.9 million was expensed immediately, in
accordance with SFAS 141 during the third quarter of fiscal 2008. The
remaining acquired intangible assets, including developed technology, customer relationships and
trade names, are being amortized over an average of 7.9 years. Preliminarily, the Company is
amortizing all of the identified intangible assets separate from goodwill under estimated useful
lives and will adjust the lives accordingly, including any as indefinite life intangible assets
upon completion of its final determination of the allocation of the purchase price. For the three
and nine months ended September 30, 2008, approximately $9.5 million has been recorded as
amortization expense associated with the identified intangible assets, including $7.9 million for
IPR&D. Amortization expense associated with these identified intangible assets will approximate
between $2.2 million and $4.9 million per year over the next 5 to 10 years.
- 23 -
The following unaudited pro forma consolidated results of operations for the quarters ended
September 30, 2007 and 2008 have been prepared as if the acquisition of Zetex had occurred at
January 1, 2007 and January 1, 2008, respectively, for each quarter (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2007 |
|
2008 |
Net revenues |
|
$ |
135,625 |
|
|
$ |
387,108 |
|
|
$ |
395,886 |
|
|
Net income |
|
$ |
14,042 |
|
|
$ |
40,809 |
|
|
$ |
12,131 |
|
|
Net income per common shareBasic |
|
$ |
0.36 |
|
|
$ |
1.04 |
|
|
$ |
0.30 |
|
|
Net income per common shareDiluted |
|
$ |
0.33 |
|
|
$ |
0.97 |
|
|
$ |
0.28 |
|
The unaudited pro forma consolidated results of operations do not purport to be indicative of
the results that would have been obtained if the above acquisition had actually occurred as of the
dates indicated or of those results that may be obtained in the future. The unaudited pro forma
consolidated results of operations do not include the final adjustments to net income to give the
final effects to depreciation of property, plant and equipment acquired and amortization of
intangible assets acquired as the Company working to complete its valuation of the assets and
liabilities acquired and is unable to determine what those final effects would be. Upon completion
of the valuation, the Company intends to make adjustments for these items in future pro forma
disclosures for Zetex. These unaudited pro forma consolidated results of operations were derived,
in part, from the historical consolidated financial statements of Zetex and other available
information and assumptions believed to be reasonable under the circumstances.
Note N Long-Term Borrowings Margin Loan
On March 31, 2008, the Company obtained from UBS Financial Services Inc. (UBS) an
Irrevocable Standby Letter of Credit (Letter of Credit) in favor of Diodes FabTech Inc., in an
aggregate amount of $165 million.
In connection with the acquisition of Zetex (see Note M Business Acquisitions), the Company
drew $165 million, which accrued interest at a floating rate of interest per annum equal to the sum
of the prevailing daily 30-day LIBOR plus 1.25% as of September 30, 2008 and is payable monthly.
Beginning October 9, 2008, the interest rate will be reduced from LIBOR plus 1.25% to LIBOR plus
0.00%. The margin loan does not contain covenants, is secured by the Companys ARS portfolio,
which is classified as a non-current asset, and does not have a maturity date. The margin loan may
be called if the outstanding balance exceeds 75% of the fair value, as determined by UBS, of the
ARS portfolio or below a required percentage of the par value under applicable statutes, rules and
regulations and may be called any time subject to the discretion of UBS if UBS considers a margin
call necessary for its protection. The source of repayment, if the margin loan was to be called,
would be for UBS to charge the Companys ARS portfolio, which is a non-current asset. There are no
scheduled principal payments and the margin loan can be paid in part or in its entirety by the
Company at anytime without penalty. The Company believes the margin loan will be available to the
Company as long as the ARS are illiquid and believes that the likelihood of the margin loan being
called within the next twelve months is remote. See Note R Subsequent Event for further
information regarding our margin loan.
NOTE O Commitments
Purchase Commitments As of September 30, 2008, we have approximately $10.6 million in
non-cancelable purchase contracts related to capital expenditures, primarily for manufacturing
equipment in China.
NOTE P Defined Benefit Plan
In connection with the acquisition of Zetex (see Note M Business Acquisitions), the Company
has adopted a contributory defined benefit plan that covers certain employees in the United Kingdom
(U.K.) and Germany. The defined benefit plan is closed to new entrants and frozen with respect
to future benefit accruals. The retirement benefit is based on the final average compensation and
service of each eligible employee. On the acquisition date, the Company determined the fair value
of the defined benefit plan assets and plans to utilize an annual measurement date of December 31.
At subsequent measurement dates, defined benefit plan assets will be determined based on fair
value. Defined benefit plan assets consist primarily of high quality corporate bonds that are
denominated in the currency in which the benefits will be paid and that have terms to maturity
approximating to the terms of the related pension liability. The net pension and supplemental
retirement benefit obligations and the related periodic costs are based on, among other things,
assumptions of the discount rate, estimated return on plan assets and mortality rates. These
obligations and related
- 24 -
periodic costs are measured using actuarial techniques and assumptions. The
projected unit credit method is the actuarial cost method used to compute the pension liabilities
and related expenses.
For the nine months ended September 30, 2008, net period benefit costs associated with the
defined benefit in accordance with SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R), were
approximately $0.3 million. All unrecognized actuarial gains and losses, prior service
costs and accumulated other comprehensive income are eliminated and the balance sheet
liability is set equal to the funded status of the defined benefit plan at acquisition date.
The following tables set forth the benefit obligation, the fair value of plan assets, and the
funded status of the Companys plans for the nine months ended September 30, 2008 (in thousands):
|
|
|
|
|
|
|
Defined Benefit Plan |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
|
|
|
Acquisition |
|
|
121,842 |
|
|
Service cost |
|
|
131 |
|
Interest cost |
|
|
2,670 |
|
|
Actuarial loss (gain) |
|
|
(17,297 |
) |
|
Benefits paid |
|
|
(1,243 |
) |
|
Currency changes |
|
|
(8,641 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at September 30, 2008 |
|
$ |
97,462 |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
Fair value of plan assets at date of acquisition |
|
$ |
111,664 |
|
|
Actual return on plan assets |
|
|
(11,678 |
) |
|
Benefits paid |
|
|
(1,243 |
) |
|
Currency changes |
|
|
(8,029 |
) |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 30, 2008 |
|
$ |
90,714 |
|
|
|
|
|
|
|
|
|
|
Funded status at September 30, 2008 |
|
|
(6,748 |
) |
|
|
|
|
Based on an actuarial study performed as of September 30, 2008, the plan is under-funded and a
liability of $6.7 million is reflected in the Companys consolidated financial statements as
noncurrent liabilities. The amount recognized in accumulated other comprehensive income was a net
gain of $2.4 million and the weighted-average discount rate assumption used to determine benefit
obligations as of September 30, 2008 was 7.3%.
The following are weighted-average assumptions used to determine net periodic benefit costs
for the nine months ended September 30, 2008:
|
|
|
|
|
Discount rate |
|
|
6.6 |
% |
Expected long-term return on plan assets |
|
|
6.7 |
% |
The Company does not expect to make any contributions to the defined benefit plan during
fiscal year 2008. The Company adopted a payment plan that Zetex had in place with the trustees of
the defined benefit plan, in which the Company will pay approximately £1.0 million GBP
(approximately $1.6 million based on a USD:GBP exchange rate of 1.6:1) every March from 2009
through 2012.
The Company also has pension plans in Asia for which the benefit obligation, fair value of the
plan assets and the funded status amounts are deemed immaterial and therefore, not included in the
numbers or assumptions above.
- 25 -
NOTE Q Related Parties
We conduct business with one related party company, Lite-On Semiconductor Corporation (LSC),
and its subsidiaries and affiliates, that owns 20.6% of our outstanding Common Stock as of
September 30, 2008, and one significant company, Zi Yun International Pte., Ltd. (Zi Yun)
(formerly Keylink International) (and its subsidiaries and affiliates), our 5% joint venture
partner in Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd. For
further details about related parties, please see Note 16 of our notes to consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31, 2007
The Audit Committee of our Board of Directors reviews all related party transactions for
potential conflict of interest situations on an ongoing basis, in accordance with such procedures
as the Audit Committee may adopt from time to time. We believe that all related party transactions
are on terms no less favorable to us than would be obtained from unaffiliated third parties.
Lite-On Semiconductor Corporation During the nine months ended September 30, 2007 and 2008,
we sold silicon wafers to LSC totaling 6.8% and 3.8% of our net sales, respectively, making LSC one
of our largest customers. Also for the nine months ended September 30, 2007 and 2008, 11.4 % and
9.6%, respectively, of our net sales were from discrete semiconductor products purchased from LSC
for subsequent sale by us. We also purchase wafers for use in our manufacturing process, making
LSC our largest outside supplier. We also rent warehouse space in Hong Kong from a member of The
Lite-On Group, which also provides us with warehousing services at that location. For the nine
months ended September 30, 2007 and 2008, we reimbursed this entity in aggregate amounts of $0.4
million and $0.5 million, respectively, for these items. We believe such transactions are on terms
no less favorable to us than could be obtained from unaffiliated third parties.
Net sales to, and purchases from, LSC for the three and nine months ended September 30, 2007
and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2008 |
|
2007 |
|
2008 |
Net sales |
|
$ |
7,107 |
|
|
$ |
5,209 |
|
|
$ |
19,995 |
|
|
$ |
13,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
$ |
12,601 |
|
|
$ |
13,458 |
|
|
$ |
36,330 |
|
|
$ |
40,624 |
|
Zi Yun International Pte., Ltd. During the nine months ended September 30, 2007 and 2008,
we sold silicon wafers to companies owned by Zi Yun totaling 0.5% and 0.4% of our net sales,
respectively. Also for the nine months ended September 30, 2007 and 2008, 1.5% and 1.2%,
respectively, of our net sales were from discrete semiconductor products purchased from companies
owned by Zi Yun. In addition, Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong
Technology Co., Ltd. lease their manufacturing facilities from, and subcontract a portion of their
manufacturing process (metal plating and environmental services) to, Zi Yun. We also pay a
consulting fee to Zi Yun. For the nine months ended September 30, 2007 and 2008, we paid Zi Yun an
aggregate of $6.8 million and $8.1 million, respectively, with respect to these items. We believe
such transactions are on terms no less favorable to us than could be obtained from unaffiliated
third parties.
Net sales to, and purchases from, companies owned by Zi Yun for three and nine months ended
September 30, 2007 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2008 |
|
2007 |
|
2008 |
Net sales |
|
$ |
717 |
|
|
$ |
227 |
|
|
$ |
1,552 |
|
|
$ |
1,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
$ |
763 |
|
|
$ |
1,683 |
|
|
$ |
2,946 |
|
|
$ |
5,093 |
|
- 26 -
Accounts receivable from, and accounts payable to, LSC and Zi Yun were as follows as of
December 31, 2007 and September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Accounts receivable |
|
|
|
|
|
|
|
|
LSC |
|
$ |
3,526 |
|
|
$ |
4,223 |
|
Zi Yun International |
|
|
1,879 |
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
$ |
5,405 |
|
|
$ |
4,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
LSC |
|
$ |
8,906 |
|
|
$ |
7,839 |
|
Zi Yun International |
|
|
4,229 |
|
|
|
4,037 |
|
|
|
|
|
|
|
|
|
|
$ |
13,135 |
|
|
$ |
11,876 |
|
|
|
|
|
|
|
|
NOTE R Subsequent Event
On October 29, 2008, the Company entered into a settlement with UBS AG and its affiliates
(UBS AG) that will provide the Company the following:
|
|
|
Replacement of the current margin loan with a no net cost credit line (No Net
Cost Loan), which the interest expense charged will be equal the interest income
earned on the collateralized ARS; |
|
|
|
|
Allow the Company to borrow up to 75% of the market value, as determined by UBS
AG, of the Companys ARS portfolio under the no net cost loan; |
|
|
|
|
The Company will be reimbursed for all interest paid in excess of interest earned
on its collateralized ARS under the current margin loan; |
|
|
|
|
The Company will be eligible to transfer its ARS portfolio to UBS AG at par value
at any time during the period of June 30, 2010, through July 2, 2012; |
|
|
|
|
The Company will release UBS AG and it employees/agents from all claims except
for consequential damages directly or indirectly relating to its marketing and sale
of ARS; and |
|
|
|
|
UBS AG will have the right to sell the Companys ARS at par without notice,
provided UBS AG pays the proceeds of the sales to the Company within one day of the
settlement of transaction. |
On November 4, 2008, the Company accepted an offer of No Net Cost Loan from UBS BANK USA (UBS
Bank), an affiliate of UBS AG, with a credit line up to 75% of the market value, as determined by
the UBS Bank, of the Companys ARS that the Company pledged as collateral. UBS Bank may, upon the
request of the Company, make one or more advances to the Company. The following are in connection
with the No Net Cost Loan:
|
|
|
The interest that the Company pays on the No Net Cost Loan will not exceed the
interest that the Company receives on the ARS that the Company have pledged to the
UBS Bank as security for the No Net Cost Loan and which are held in the collateral
account; |
|
|
|
|
UBS Bank will not make an advance against the ARS collateral in amounts equal to
the fair market or par value of the ARS collateral unless the Company arranges for
another person or entity to provide additional collateral or assurances on terms and
conditions satisfactory to the UBS Bank; |
|
|
|
|
UBS Bank may demand full or partial payment of the No Net Cost Loan, at its sole
option and without cause, at any time. All No Net Cost Loan advances are subject to
collateral maintenance requirements. UBS Bank may, at any time, in its discretion,
terminate and cancel the No Net Cost Loan. If at any time UBS Bank exercises its
right of demand under certain sections of the Credit Line Agreement, UBS Financial
Services, Inc. shall provide as soon as reasonably possible, alternative financing
on substantially the same terms and conditions as those under the Credit Line
Agreement and UBS Bank agrees that the Credit Line Agreement shall remain in full
force and effect until such time as such alternative financing has been established.
If alternative financing cannot be established, then one of the UBS Entities will
purchase the pledged ARS at par; and |
|
|
|
|
If the Company elects to sell any ARS that are pledged as collateral under the
Credit Line Agreement with UBS Bank to a purchaser other than UBS Bank, UBS Bank
intends to exercise its right to demand repayment of the No Net Cost Loan relating
to the ARS sold by the Company.
|
- 27 -
Item 2 Managements 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 Companys
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 in
this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no
obligation to publicly release the results of any revisions to their forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unexpected events. Unless the context otherwise requires, the words Diodes, the
Company, we, us and our refer to Diodes Incorporated and its subsidiaries.
This managements discussion should be read in conjunction with the managements discussion
included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007,
previously filed with Securities and Exchange Commission.
Highlights For the Three and Nine Months Ended September 30, 2008
|
|
|
Revenue for the three months ended September 30, 2008 increased 27.3% over the prior
year same period to $134.0 million, including complete quarter of Zetex results; |
|
|
|
|
Revenue for the nine months ended September 30, 2008 increased 17.7% over prior year
same period to $345.6 million; |
|
|
|
|
Gross profit for the three months ended September 30, 2008 increased 11.6% over the
prior year same period to $38.1 million; |
|
|
|
|
Gross profit for the nine months ended September 30, 2008 increased 16.2% over the prior
year same period to $109.7 million; |
|
|
|
|
On June 9, 2008, we completed the acquisition of Zetex plc (Zetex), which is expected
to result in revenue, operating and cost synergies; |
|
|
|
|
In connection with the acquisition of Zetex, we entered into a margin loan for $165
million; and |
|
|
|
|
Preliminary estimate of the allocation of the purchase price was performed during the
third quarter of fiscal 2008; |
Overview
We are a global supplier of application specific standard products within the broad discrete
and analog semiconductor markets. These products include diodes, rectifiers, transistors,
MOSFETs, protection devices, functional specific arrays, power management devices including DC-DC
switching and linear voltage regulators, amplifiers and comparators, Hall effect sensors and
silicon wafers used to manufacture these products.
We design, manufacture and market the above semiconductors for diverse end-use applications in
the consumer electronics, computing, industrial, communications and automotive sectors.
Semiconductors, which provide electronic signal amplification and switching functions, are basic
building-block electronic components that are incorporated into almost every electronic device. We
believe that our focus on standard semiconductor products provides us with a meaningful competitive
advantage relative to other semiconductor companies that provide a wider range of semiconductor
products.
We were incorporated in 1959 in California and reincorporated in Delaware in 1969. We are
headquartered in Dallas, Texas. We have two manufacturing facilities located in Shanghai, China,
one in Neuhaus, Germany and a joint venture facility in Chengdu, China, and our wafer fabrication
facilities are in Kansas City, Missouri and Manchester, England. Our sales, marketing, engineering
and logistical centers are located in Westlake Village, California; Taipei, Taiwan; Shanghai and
Shenzhen, China; Manchester, England; and Hong Kong. We have strengthened our product design
centers in the U.S., China, England, Germany and Taiwan to position our design engineers to work
more closely with our customers and enable us to deliver a stream of innovative solutions in our
targeted product categories. We also have regional sales offices and/or representatives in:
Derbyshire, England, Toulouse, France, Frankfurt, Germany, and in various cities in the U.S.
We generate a substantial portion of our net sales through the sale of discrete and analog
semiconductor products designed and manufactured by third parties or us. We also generate a portion
of our net sales from outsourcing manufacturing capacity to third parties and from the sale of
silicon wafers to manufacturers of discrete semiconductor components. We serve customers across
diversified industries, including the consumer electronics, computing, industrial, communications
and automotive markets.
Our strategy is to continue to enhance our position as a global supplier of standard
semiconductor products, and to continue to add other product lines, such as power management
products, using our packaging technology capability.
- 28 -
As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007,
the principal elements of our strategy include the following:
|
|
|
Continue to rapidly introduce innovative discrete and analog semiconductor products; |
|
|
|
|
Expand our available market opportunities; |
|
|
|
|
Maintain intense customer focus; |
|
|
|
|
Enhance cost competitiveness; and |
|
|
|
|
Pursue selective strategic acquisitions. |
In implementing these strategies, the following factors have affected, and, we believe, will
continue to affect, our results of operations:
|
|
|
Given the current economic conditions, we expect a global decrease in demand for our
products until conditions improve. Please see cost reduction initiative below and Risk
Factor Global economic weakness and the current financial market uncertainty affect on
our business. in Part II, Item 1A of this report. |
|
|
|
|
Since 1998, we have experienced increases in the demand for our products, and
substantial pressure from our customers and competitors to reduce the selling price of our
products. We expect future increases in net income to result primarily from increases in
sales volume and improvements in product mix in order to offset any reduced average selling
prices (ASP) of our products. |
|
|
|
|
For the nine months ended September 30, 2008, our revenue reflects seasonality combined
with the impact of the overall weakening economy, in particular on key targeted
end-equipment in the consumer and computing markets, as well as our foundry and
subcontracting business, which showed greater weakness than our core revenue drivers. |
|
|
|
|
The portion of net sales derived from new products introduced within the last three
years was 27.8% and 35.1% for the nine months ended September 30, 2008 and 2007,
respectively, compared to 28.2% in 2006. The significant increase in new products primarily
resulted from the Anachip and Zetex acquisitions. We expect new products to generally have
gross profit margins that are higher than the margins of our standard products. We expect
net sales derived from new products to increase in absolute terms, although our net sales
of new products as a percentage of our net sales will depend on the demand for our standard
products, as well as our product mix. |
|
|
|
|
For the nine months ended September 30, 2008, the percentage of our net sales derived
from our Asian subsidiaries was 74.5%, compared to 74.0% in the same period last year. We
expect our net sales to the Asian market to increase as a percentage of our total net sales
as a result of our customers continuing to shift their manufacturing of electronic
products from the U.S. to Asia. |
|
|
|
|
As a result of the Zetex acquisition we will begin to add significant revenue in Europe.
As such, Europe accounted for approximately 9.4% of our revenues for the three months
ended September 30, 2008. |
|
|
|
|
Our gross profit margin was 31.7% for the nine months ended September 30, 2008, compared
to 32.1% in the same period last year. Our gross margin percentage was lower than the same
period last year even though average unit cost (AUP) increased for the nine months ended
September 30, 2008. This lower margin was affected by the one time non-cash expense of
$5.4 million incurred during the third quarter of 2008 for the step-up of inventory for
reasonable profit allowance in accordance with SFAS No. 141, Business Combinations (SFAS
141) and depreciation expense of fixed assets in connection with the Zetex acquisition
along with lower capacity utilization on our manufacturing operations mainly due to market
conditions. In 2007, we completed the move of our analog product from Taiwan to our China
manufacturing facilities to increase the gross margin on this product line. Future gross
profit margins will depend primarily on our product mix, cost savings, and the demand for
our products. We expect gross profit margins to continue to decrease until economic
conditions improve. |
|
|
|
|
As of September 30, 2008, we had invested approximately $206.7 million in our Asian
manufacturing facilities. For the nine months ended September 30, 2008, we invested
approximately $38.7 million in capital expenditures, primarily in our Asian manufacturing
facilities. For 2008, we anticipate total capital expenditures of approximately 10-12% of
annual revenue. Given the current economic conditions and our efforts to reduce costs (see
cost reduction initiative below), we expect capital expenditures to be approximately 5%
of revenue for fiscal year 2009 or until economic conditions improve and additional
manufacturing capacity is needed. |
|
|
|
|
We have increased our investment in research and development from $9.7 million, or 3.3%
of net sales, for the nine months ended September 30, 2007 to $16.1 million, or 4.7% of net
sales, for the nine months ended September 30, 2008 primarily as a result of the Zetex
acquisition. For 2008, we expect research and development expenses to be approximately 5%
to 6% of |
- 29 -
|
|
|
net sales. Although research and development as a percentage of net sales has
increased in 2008, we expect the percentage to
decrease for fiscal year 2009 as we are planning to restructure our product development
organization and consolidate our design teams. |
Business Outlook
For the fourth quarter of 2008, we expect to see a further slowdown in economic activity and a
decrease in global demand for our products, in particular in the consumer and computer markets. We
believe the long-term outlook for our business remains generally favorable despite the recent
volatility in the equity and credit markets as we continue to execute on the strategy that has
proven successful for us over the years. Although the economy creates a more challenging
environment for all businesses, we believe that over the long-term we are in a good position for
future growth. We are confident that our acquisition of Zetex will continue to add significant
value to our business as we further capitalize on the cross-selling opportunities and
diversification benefits that the transaction offers our Company. Please see Risk Factor Global
economic weakness and the current financial market uncertainty affect on our business. in Part II,
Item 1A of this report.
Cost Reduction Initiative
Looking forward, we expect the weakness and uncertainty in the economy to continue into the
coming quarters, and therefore we intend to take the necessary steps to manage through these
difficult times. We have identified a number of opportunities to optimize our cost structure and
plan to implement the following:
|
|
|
Shut down Zetex 4 inch wafer fabrication facility in Oldham in early 2009; |
|
|
|
|
Consolidate our wafer output lines; |
|
|
|
|
Currently, our Shanghai facilities are approximately 80 to 85 percent loaded. This will
allow for faster porting of Zetex products into our Shanghai packaging facilities sooner
than originally planned and thereby reduce our dependence on subcontractor OEMs. We believe
the majority of this conversion will be completed by the end of the first quarter of 2009; |
|
|
|
|
As part of our manufacturing strategy, we will continue to evaluate our raw material
costs in order to reduce our gold consumption while protecting and maintaining product
performance; |
|
|
|
|
Reduce capital expenditures going forward from our previous 10 to 12 percent model to an
amount that is necessary to meet market and capacity demands, which we expect to be less
than 5 percent of revenue until such time that the market recovers and additional
manufacturing capacity is needed; |
|
|
|
|
Restructure our product development organization and consolidate the acquired Zetex
design teams into our pre-acquisition teams; |
|
|
|
|
Headcount reductions at our wafer fabrication facility in Kansas City; and |
|
|
|
|
Implement a hiring freeze, and from an overall expense perspective, carefully manage
costs in order to conserve cash. |
Recent Acquisitions
Zetex Acquisition
On June 9, 2008 we acquired Zetex. See Note M Business Acquisitions to Notes to
Consolidated Condensed Financial Statements for detailed information regarding this acquisition.
- 30 -
Results of Operations for the Three Months Ended September 30, 2007 and 2008
The following table sets forth, for the periods indicated, the percentage that certain items
in the statements of operations bear to net sales and the percentage dollar increase (decrease) of
such items from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Net Sales |
|
|
Percentage Dollar |
|
|
|
Three Months Ended September 30, |
|
|
Increase (Decrease) |
|
|
|
2007 |
|
|
2008 |
|
|
'07 to '08 |
|
Net sales |
|
|
100 |
|
|
|
100 |
|
|
|
27.3 |
|
Cost of goods sold |
|
|
(67.6 |
) |
|
|
(71.6 |
) |
|
|
34.9 |
|
Gross profit |
|
|
32.4 |
|
|
|
28.4 |
|
|
|
11.6 |
|
Operating expenses |
|
|
(17.3 |
) |
|
|
(28.1 |
) |
|
|
107.7 |
|
Operating income |
|
|
15.1 |
|
|
|
0.3 |
|
|
|
(97.5 |
) |
Interest income |
|
|
4.5 |
|
|
|
1.4 |
|
|
|
(61.3 |
) |
Interest expenses |
|
|
(1.6 |
) |
|
|
(2.5 |
) |
|
|
92.9 |
|
Other income (expense) |
|
|
|
|
|
|
(0.7 |
) |
|
|
6,800.0 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and minority interest |
|
|
18.0 |
|
|
|
(1.5 |
) |
|
|
(110.4 |
) |
Income tax provision |
|
|
(2.1 |
) |
|
|
(0.2 |
) |
|
|
85.8 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest |
|
|
15.9 |
|
|
|
(1.7 |
) |
|
|
(113.7 |
) |
Minority interest |
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
15.3 |
|
|
|
(2.2 |
) |
|
|
(118.3 |
) |
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our consolidated operating results and
financial condition for the three months ended September 30, 2008, compared to the three months
ended September 30, 2007. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Net Sales |
|
$ |
105,264 |
|
|
$ |
134,047 |
|
Net sales increased approximately $28.8 million for the three months ended September 30, 2008,
compared to the same period last year. The 27.3% increase in net sales represents an approximately
9.7% increase in units sold with a 16.1% increase in ASP. The ASP increase is primarily
attributable to the higher ASPs of the acquired Zetex product lines. The revenue increase for the
three months ended September 30, 2008 was attributable to sales increases in all industry segments,
primarily due to the Zetex acquisition, partially offset by an overall weaker global economy, as
well as our foundry and subcontracting business, which is showing greater weakness than our core
revenue drivers. Significant price pressure and an unfavorable commodity-based product mix also
affected sales for the three months ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Cost of goods sold |
|
$ |
71,112 |
|
|
$ |
95,929 |
|
Gross profit |
|
$ |
34,152 |
|
|
$ |
38,118 |
|
Gross profit margin |
|
|
32.4 |
% |
|
|
28.4 |
% |
- 31 -
Cost of goods sold increased approximately $24.8 million, or 34.9%, for the three months ended
September 30, 2008 compared to the same period last year. As a percent of sales, cost of goods
sold increased to 71.6% for the three months ended September 30, 2008 compared to 67.6% in the same
period last year and our AUP increased 22.9%. The increase in cost of goods sold and the
percentage of sales increase were negatively affected by the one time non-cash expense of $5.4
million incurred during three months ended September 30, 2008 for the step-up (increase) of
inventory for reasonable profit allowance in accordance with SFAS 141 and depreciation expense
related to fixed assets in connection with the Zetex acquisition along with lower capacity
utilization in our manufacturing operations mainly due to market conditions and reduction of our
finished goods inventory. As per SFAS 123R, included in cost of goods sold was approximately
$59,000 and $7,000 of non-cash, stock option compensation expense related to our manufacturing
facilities for three months ended September 30, 2007 and 2008, respectively.
For the three months ended September 30, 2008, gross profit increased by approximately $4.0
million, or 11.6%, compared to the same period last year. Gross margin decreased to 28.4% for the
three months ended September 30, 2008, compared to 32.4% for the same period last year, primarily
due to the step-up (increase) of inventory for reasonable profit allowance and depreciation expense
of fixed assets in connection with the Zetex acquisition.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Selling, general and administrative expenses
(SG&A) |
|
$ |
14,607 |
|
|
$ |
20,914 |
|
SG&A for the three months ended September 30, 2008 increased approximately $6.3 million, or
43.2%, compared to the same period last year, due primarily to additional SG&A expense related to
the Zetex operations. The following expense categories increased, mainly due to additional Zetex
SG&A expenses: (i) $3.1 million increase in wages and related benefits, including share-based
compensation, (ii) $1.4 million increase in facility expense, depreciation, supplies and other
operating expenses, (iii) $1.0 million increase in marketing and selling expense and (iv) $0.8
million increase in communication and travel expense. SG&A as a percentage of sales, increased to
15.6% for the three months ended September 30, 2008, compared to 13.9% in the same period last
year. As per SFAS 123R, included in SG&A expenses was $1.2 million and $0.8 million of non-cash,
stock option compensation expense for the three months ended September 30, 2007 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Research and development expenses (R&D) |
|
$ |
3,554 |
|
|
$ |
7,360 |
|
Investment in R&D for the three months ended September 30, 2008 was $7.4 million, an increase
of approximately $3.8 million from the same period last year due primarily to additional R&D
expense related to the Zetex operations. The following expense categories increased, mainly due to
additional Zetex R&D expense: (i) $2.2 million increase in wages and related benefits and (ii) $1.4
million increase in depreciation, facility, equipment and operating expense. R&D, as a percentage
of sales, increased to 5.5% for the three months ended September 30, 2008, compared 3.4% in the
same period last year. Included in R&D expenses was $0.1 million of non-cash, SFAS 123R stock
option compensation expense for both three months ended September 30, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Amortization of acquisition-related intangibles |
|
$ |
|
|
|
$ |
1,583 |
|
During the third quarter of fiscal 2008, per SFAS 141, we recorded approximately $1.6 million
of non-cash amortization expense associated with the preliminary identification of intangible
assets in connection with the acquisition of Zetex. The third quarter charge related to four
months of amortization expense, and therefore, we estimate this charge to be approximately $1.2
million a quarter for fiscal year 2009 based on preliminary projections.
- 32 -
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Purchased in-process research and development
(IPR&D) |
|
$ |
|
|
|
$ |
7,865 |
|
During the third quarter of fiscal 2008, per SFAS 141, we recorded an approximately $7.9
million one-time non-cash expense associated with the preliminary identification of acquired
intangible IPR&D, which had not yet reached technological feasibility and had no alternative future
use as of the Zetex acquisition date.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Interest income |
|
$ |
4,712 |
|
|
$ |
1,824 |
|
Interest income decreased for the three months ended September 30, 2008 to $1.8 million,
compared to $4.7 million in the same period last year, due primarily to a decrease in interest
income earned on our available-for-sale securities. Interest income for the three months ended
September 30, 2008 has been impacted by the continued turmoil in the credit markets, and in
particular with the continued interruption in the ARS auction markets. Since mid-February, all of
our ARS portfolio auctions have failed and may continue to fail in the future.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Interest expense |
|
$ |
1,706 |
|
|
$ |
3,291 |
|
Interest expense for the three months ended September 30, 2008 was approximately $3.3 million,
compared to $1.7 million in the same period last year. The $1.7 million increase in interest
expense is due primarily to the $165 million margin loan used to finance the Zetex acquisition in
June, 2008. Interest expense of $1.3 million per quarter is attributable to the $230 million-2.25%
convertible bonds, which we expect to increase starting in fiscal year 2009 upon the adoption of
FSP APB 14-1.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Other income (expense) |
|
$ |
(13 |
) |
|
$ |
|
(897) |
Other expense for the three months ended September 30, 2008 was $0.9 million, compared to
other income of $13,000 in the same period last year. Included in other expense for the three
months ended September 30, 2008 was $1.4 million foreign currency transaction losses due primarily
to strengthening of the U.S. dollar versus the British Pound negatively effecting foreign currency
hedges entered into by Zetex prior to our acquisition, partially offset by $0.5 million foreign
currency transaction gains due primarily to favorable Taiwan currency and China currency exchange
rate changes during the period.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Income tax provision |
|
$ |
2,243 |
|
|
$ |
319 |
|
We recognized income tax expense of $0.3 million for the three months ended September 30,
2008. Income taxes for interim periods ended September 30, 2008 and 2007 have been included in the
accompanying financial statements on the basis of an estimated annual effective rate. The
estimated annual effective tax rate (excluding discrete items) is 14.9% for fiscal year 2008, as
compared to the annual effective tax rate for fiscal year 2007 of 13.2%. The increase in the
effective tax rate was the result of the higher income tax rate on Zetexs earnings
and an increased income tax rate on our China subsidiaries, partially offset by lower quarterly
income in the U.S. and higher income in lower-taxed jurisdictions. In the third quarter of 2008,
we received a $1.0 million tax refund from one of our China subsidiaries. We continue to take
advantage of available strategies to optimize our tax rate across the jurisdictions in which we
operate.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Minority interest |
|
$ |
640 |
|
|
$ |
659 |
|
Minority interest represented the minority investors share of the earnings of Shanghai Kai
Hong Electronic Co., Ltd., Shanghai Kai Hong Technology Co., Ltd. and Anachip Corp. for the three
months ended September 30, 2008 and 2007. The investment in the subsidiaries and their equity
balances are eliminated in the consolidation of our financial statements, and the activities of
these subsidiaries are included therein. As of September 30, 2008, we had 95% controlling
interests in Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd., and
a 99.81% controlling interest in Anachip Corp.
- 33 -
Results of Operations for the Nine Months Ended September 30, 2007 and 2008
The following table sets forth, for the periods indicated, the percentage that certain items
in the statements of operations bear to net sales and the percentage dollar increase (decrease) of
such items from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Dollar |
|
|
|
Percent of Net Sales |
|
|
Increase |
|
|
|
Nine Months Ended September 30, |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2008 |
|
|
07 to 08 |
|
Net sales |
|
|
100 |
|
|
|
100 |
|
|
|
17.7 |
|
|
Cost of goods sold |
|
|
(67.9 |
) |
|
|
(68.3 |
) |
|
|
18.5 |
|
|
Gross profit |
|
|
32.1 |
|
|
|
31.7 |
|
|
|
16.2 |
|
|
Operating expenses |
|
|
(17.7 |
) |
|
|
(22.6 |
) |
|
|
50.1 |
|
|
Operating income |
|
|
14.4 |
|
|
|
9.1 |
|
|
|
(25.5 |
) |
|
Interest income |
|
|
4.4 |
|
|
|
2.8 |
|
|
|
(24.6 |
) |
|
Interest expenses |
|
|
(1.7 |
) |
|
|
(2.1 |
) |
|
|
41.9 |
|
|
Other income (expense) |
|
|
(0.1 |
) |
|
|
(0.7 |
) |
|
|
3,369.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and minority interest |
|
|
17.0 |
|
|
|
9.1 |
|
|
|
(36.9 |
) |
|
Income tax provision |
|
|
(2.4 |
) |
|
|
(1.5 |
) |
|
|
25.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest |
|
|
14.6 |
|
|
|
7.6 |
|
|
|
(38.8 |
) |
|
Minority interest |
|
|
(0.5 |
) |
|
|
(0.6 |
) |
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
14.1 |
|
|
|
7.0 |
|
|
|
(41.1 |
) |
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our consolidated operating results and
financial condition for the nine months ended September 30, 2008, compared to the nine months ended
September 30, 2007. This discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Net Sales |
|
$ |
293,567 |
|
|
$ |
345,645 |
|
Net sales increased approximately $52.1 million for the nine months ended September 30, 2008,
compared to the same period last year. The 17.7% increase in net sales represents an approximately
12.4% increase in units sold and a 4.8% increase in ASP. The revenue increase for the nine months
ended September 30, 2008 was attributable to sales increases in all industry segments mainly due to
the Zetex acquisition, partially offset by an overall weakening of the global economy, as well as
our foundry and subcontracting business, which is showing greater weakness than our core revenue
drivers. Significant price pressure and an unfavorable commodity-based product mix also affected
sales for the nine months ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Cost of goods sold |
|
$ |
199,214 |
|
|
$ |
235,993 |
|
Gross profit |
|
$ |
94,353 |
|
|
$ |
109,652 |
|
Gross profit margin |
|
|
32.1 |
% |
|
|
31.7 |
% |
- 34 -
Cost of goods sold increased approximately $36.8 million, or 18.5%, for the nine months ended
September 30, 2008 compared to the same period last year. As a percent of sales, cost of goods
sold increased to 68.3% for the nine months ended September 30, 2008 compared to 67.9% in the same
period last year and our AUP increased 5.4%. The increase in cost of goods sold and the percentage
of sales increase were negatively affected by the one time non-cash expense of $5.4 million
incurred during the third quarter of 2008 for the step-up (increase) of inventory for reasonable
profit allowance and depreciation expense related to fixed assets in connection with the Zetex
acquisition along with lower capacity utilization in our manufacturing operations mainly due to
market conditions and reduction of our finished goods inventory during the third quarter of 2008.
As per SFAS 123R, included in cost of goods sold was $0.2 million and $0.1 million of non-cash,
stock option compensation expense related to our manufacturing facilities for the nine months ended
September 30, 2007 and 2008, respectively.
For the nine months ended September 30, 2008, gross profit increased by approximately $15.3
million, or 16.2%, compared to the same period last year. Gross margin decreased to 31.7% for the
nine months ended September 30, 2008, compared to 32.1% for the same period last year, due
primarily to the step-up (increase) of inventory for reasonable profit allowance and depreciation
expense of fixed assets in connection with the Zetex acquisition and lower capacity utilization in
our manufacturing operations.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Selling, general and administrative expenses
(SG&A) |
|
$ |
40,682 |
|
|
$ |
52,655 |
|
SG&A for the nine months ended September 30, 2008 increased approximately $12.0 million, or
29.4%, compared to the same period last year, due primarily to (i) $6.0 million increase in wages
and related benefits, including share-based compensation, associated with increased sales, (ii)
$2.6 million increase in facility expense, depreciation, supplies and other operating expenses,
(iii) $1.4 million increase in marketing and selling expense, and (iv) $2.0 million increase in
communication, professional expense and travel expense, all of which were increased in part by
additional expenses in connection with the Zetex operations. SG&A, as a percentage of sales,
increased to 15.3% for the nine months ended September 30, 2008 compared to 13.9% in the same
period last year. As per SFAS 123R, included in SG&A expenses was $3.7 million and $2.9 million of
non-cash, stock option compensation expense for the nine months ended September 30, 2007 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Research and development expenses (R&D) |
|
$ |
9,654 |
|
|
$ |
16,090 |
|
Investment in R&D in the nine months ended September 30, 2008 was $16.1 million, an increase
of approximately $6.4 million from the same period last year due primarily to (i) $4.2 million
increase in wages and related benefits as a result of hiring additional engineers, (ii) $2.2
million increase in building maintenance and utilities expense, all of which were increased in part
by additional expenses in connection with the Zetex operations. R&D, as a percentage of sales,
increased 4.7% for the nine months ended September 30, 2008, compared 3.3% in the same period last
year. Included in R&D expenses was $0.4 million and $0.3 million of non-cash, SFAS 123R stock
option compensation expense for the nine months ended September 30, 2007 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Amortization of acquisition-related intangible assets |
|
$ |
|
|
|
$ |
1,583 |
|
During the third quarter of fiscal 2008, per SFAS 141, we recorded approximately $1.6 million
of non-cash amortization expense associated with the preliminary identification of intangible
assets in connection with the acquisition of Zetex. The third quarter charge related to four
months of amortization expense, and therefore, we estimate this charge to be approximately $1.2
million a quarter for fiscal year 2009 based on preliminary projections.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Purchased in-process research and development
(IPR&D) |
|
$ |
|
|
|
$ |
7,865 |
|
- 35 -
During the third quarter of fiscal 2008, per SFAS 141, we recorded an approximately $7.9
million one-time non-cash expense associated with the preliminary identification of acquired
intangible IPR&D, which had not yet reached technological feasibility and had no alternative future
use as of the Zetex acquisition date.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Interest income |
|
$ |
13,032 |
|
|
$ |
9,826 |
|
Interest income for the nine months ended September 30, 2008 was $9.8 million, compared to
$13.0 million in the same period in 2007, due primarily to a decrease in interest income earned on
our available-for-sale securities purchased. Interest income for the first nine months of 2008 has
been impacted by the continued turmoil in the credit markets, and in particular with the continued
interruption in the ARS auction markets. Since mid-February, all of our ARS portfolio auctions
have failed and may continue to fail in the future.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Interest expense |
|
$ |
5,127 |
|
|
$ |
7,274 |
|
Interest expense for the nine months ended September 30, 2008 was $7.3 million, compared to
$5.1 million in the same period last year. The $2.2 million increase in interest expense is due
primarily to the $165 million loan used to finance the Zetex acquisition in June, 2008. Interest
expense of $1.3 million per quarter is attributable to the $230 million-2.25% convertible bonds,
which we expect to increase starting in fiscal year 2009 upon the adoption of FSP APB 14-1.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Other income (expense) |
|
$ |
(70 |
) |
|
$ |
(2,394 |
) |
Other expense for the nine months ended September 30, 2008 was $2.4 million, compared to $0.1
million for the same period last year. Included in other expense for the nine months ended
September 30, 2008 was approximately $1.5 million of loss from forward contract hedging related to
hedging the Zetex acquisition purchase price, and $1.4 million foreign currency transaction losses
due primarily to strengthening of the U.S. dollar versus the British Pound negatively effecting
foreign currency hedges entered into by Zetex prior to our acquisition, partially offset by $0.3
million foreign currency transaction gains due primarily to favorable Taiwan currency and China
currency exchange rate changes during the period.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Income tax provision |
|
$ |
7,122 |
|
|
$ |
5,315 |
|
We recognized income tax expense of $5.3 million for the nine months ended September 30, 2008.
Income taxes for interim periods ended September 30, 2008 and 2007 have been included in the
accompanying financial statements on the basis of an estimated annual effective rate. The
estimated annual effective tax rate (excluding discrete items) is 14.9% for fiscal year 2008, as
compared to the annual effective tax rate for fiscal year 2007 of 13.2%. The increase in the
effective tax rate was the result of the higher income tax rate on Diodes Zetex Limiteds earnings
and an increased income tax rate on our China subsidiaries, partially offset by lower quarterly
income in the U.S. and higher income in lower-taxed jurisdictions. In the third quarter of 2008,
we received a $1.0 million tax refund from one of our China subsidiaries. We continue to take
advantage of available strategies to optimize our tax rate across the jurisdictions in which we
operate.
- 36 -
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Minority interest |
|
$ |
1,601 |
|
|
$ |
1,938 |
|
Minority interest represented the minority investors share of the earnings of Shanghai Kai
Hong Electronic Co., Ltd., Shanghai Kai Hong Technology Co., Ltd. and Anachip Corp. for the three
months ended September 30, 2008 and 2007. The investment in the subsidiaries and their equity
balances are eliminated in the consolidation of our financial statements, and the activities of
these subsidiaries are included therein. As of September 30, 2008, we had 95% controlling
interests in Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd., and
a 99.81% controlling interest in Anachip Corp.
- 37 -
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity are cash, funds from operations
and borrowings under our credit facilities. Our primary liquidity
requirements have been to meet our inventory and capital
expenditure needs and to fund on-going operations. At December 31,
2007 and September 30, 2008, our working capital was $451.8 million
and $201.2 million, respectively. Our working capital decreased in
the first nine months of 2008 due to the re-classification of our
available-for-sale securities from current assets to long-term
assets as a result of the current lack of liquidity for the ARS.
We expect cash generated by our U.S. and international operations,
together with existing cash, cash equivalents, and available credit
facilities to be sufficient to cover cash needs for working capital
and capital expenditures for at least the next 12 months. Cash and
cash equivalents, the conversion of other working-capital items and
borrowings are expected to be sufficient to fund on-going
operations.
At September 30, 2008, we had $320.6 million of ARS. With the
liquidity issues experienced in the global credit and capital
markets, our ARS have experienced multiple failed auctions. While
we continue to earn and receive interest on these investments at
the maximum contractual rate, the estimated fair values of these
ARS no longer approximates par value. As of September 30, 2008, we
recorded unrealized losses of $22.7 million (net of $13.2 million
tax effect) in other comprehensive loss for ARS with declines in
value from December 31, 2007 deemed to be temporary.
On October 29, 2008, the Company entered into a settlement with UBS
AG and its affiliates (UBS AG) that will provide the Company the
following:
|
|
|
Replacement of the current margin loan with a no net
cost credit line (No Net Cost Loan), which the interest
expense charged will be equal the interest income earned on
the collateralized ARS; |
|
|
|
|
Allow the Company to borrow up to 75% of the market
value, as determined by UBS AG, of the Companys ARS
portfolio under the no net cost loan; |
|
|
|
|
The Company will be reimbursed for all interest paid
in excess of interest earned on its collateralized ARS under
the current margin loan; |
|
|
|
|
The Company will be eligible to transfer its ARS
portfolio to UBS AG at par value at any time during the
period of June 30, 2010, through July 2, 2012; |
|
|
|
|
The Company will release UBS AG and it
employees/agents from all claims except for consequential
damages directly or indirectly relating to its marketing and
sale of ARS; and |
|
|
|
|
UBS AG will have the right to sell the Companys ARS
at par without notice, provided UBS AG pays the proceeds of
the sales to the Company within one day of the settlement of
transaction. |
On November 4, 2008, the Company accepted an offer of No Net Cost
Loan from UBS BANK USA (UBS Bank), an affiliate of UBS AG, with a
credit line up to 75% of the market value, as determined by the UBS
Bank, of the Companys ARS that the Company pledged as collateral.
UBS Bank may, upon the request of the Company, make one or more
advances to the Company. The following are in connection with the
No Net Cost Loan:
|
|
|
The interest that the Company pays on the No Net
Cost Loan will not exceed the interest that the Company
receives on the ARS that the Company have pledged to the UBS
Bank as security for the No Net Cost Loan and which are held
in the collateral account; |
|
|
|
|
UBS Bank will not make an advance against the ARS
collateral in amounts equal to the fair market or par value
of the ARS collateral unless the Company arranges for
another person or entity to provide additional collateral or
assurances on terms and conditions satisfactory to the UBS
Bank; |
|
|
|
|
UBS Bank may demand full or partial payment of the
No Net Cost Loan, at its sole option and without cause, at
any time. All No Net Cost Loan advances are subject to
collateral maintenance requirements. UBS Bank may, at any
time, in its discretion, terminate and cancel the No Net
Cost Loan. If at any time UBS Bank exercises its right of
demand under certain sections of the Credit Line Agreement,
UBS Financial Services, Inc. shall provide as soon as
reasonably possible, alternative financing on substantially
the same terms and conditions as those under the Credit Line
Agreement and UBS Bank agrees that the Credit Line Agreement
shall remain in full force and effect until such time as
such alternative financing has been established. If
alternative financing cannot be established, then one of the
UBS Entities will purchase the pledged ARS at par; and |
|
|
|
|
If the Company elects to sell any ARS that are
pledged as collateral under the Credit Line Agreement with
UBS Bank to a purchaser other than UBS Bank, UBS Bank
intends to exercise its right to demand repayment of the No
Net Cost Loan relating to the ARS sold by the Company. |
If uncertainties in the credit and capital markets continue or
these markets deteriorate further we may incur additional value
decreases (realized or unrealized) to our ARS investment portfolio,
which could negatively affect our financial condition, financial
- 38 -
flexibility, cash flow and reported earnings.
On October 5, 2006, we issued $230 million in aggregate principal
amount of convertible senior notes due on October 1, 2026. We
received approximately $224.0 million in net proceeds from this
debt offering and our intent was to use the net proceeds from this
offering for working capital and other general corporate purposes,
including acquisitions. We have subsequently invested the
proceeds primarily in ARS, which is discussed above.
Capital expenditures for the nine months ended September 30, 2007
and 2008 were $42.9 million and $38.7 million, respectively. Our
capital expenditures for these periods were primarily related to
manufacturing expansion in our facilities in China. Capital
expenditures in the first nine months of 2008 were 11.9% of
revenue, which is in line with our 10-12% full-year estimate.
Discussion of Cash Flow
Cash and cash equivalents increased from $56.2 million at
December 31, 2007, to $82.7 million at September 30, 2008 primarily
from cash generated by operating activities.
Operating Activities
Net cash provided by operating activities for the nine months ended
September 30, 2008 was $36.6 million, resulting primarily from
$24.4 million of net income in the period, as well as $38.5 million
in depreciation and amortization. Net cash provided by operating
activities was $59.2 million for the same period last year. Net
cash provided by operating activities decreased $22.5 million for
the nine months ended September 30, 2008 compared to the same
period last year. This decrease resulted primarily from an
approximately $9.9 million decrease in assets, $14.1 million
increase in liabilities and $17.0 million decrease in net income,
partially offset by a $18.0 million increase in depreciation and
amortization expense. We continue to closely monitor our credit
terms with our customers, while at times providing extended terms,
primarily required by our customers in Asia and Europe.
Investing Activities
Net cash used by investing activities was $191.5 million for the
nine months ended September 30, 2008 compared to $68.3 million for
the same period last year. The $123.2 million increase in net cash
used by investing activities resulted primarily from an
approximately $153.0 million increase in acquisitions, net of cash
acquired, partially offset by a decrease of $23.9 million in
investment in available-for-sale securities.
Financing Activities
Our financing activities include net borrowings, share issuances
and excess tax benefits associated with stock option exercises. Net
cash provided by financing activities totaled $184.7 million for
the nine months ended September 30, 2008 compared to $5.3 million
in the same period last year. This increase is primarily the result
of $165.0 million draw on the margin loan in connection with the
acquisition of Zetex and a $17.4 million increase in advances on
line of credit.
- 39 -
Debt Instruments
On March 28, 2008, the Company entered into a fourth amendment to
its U.S. credit agreement with Union Bank (Fourth Amended Credit
Agreement or Revolving Credit Agreement). Under the Fourth
Amended Credit Agreement, the Company now has available a
revolving credit commitment of up to $22.5 million (increased from
$20.0 million), including a $5.0 million letter of credit
sub-facility and a term loan facility of $5.0 million. As of
September 30, 2008, the Company had $13.5 million outstanding
under the revolving credit commitment, and there was $1.9 million
outstanding under the term loan. The purpose of the revolving
credit facility is to provide cash for domestic working capital
purposes, and to fund permitted acquisitions. On August 8, 2008,
the maturity date of the revolving credit facility was extended
from August 29, 2008 till December 1, 2008. See Exhibit 10.1 for
further details.
Any amounts borrowed under the Union Bank credit facility are
collateralized by all of our U.S. accounts, instruments, chattel
paper, documents, general intangibles, inventory, equipment,
furniture and fixtures, pursuant to security agreements in
connection with these credit arrangements. Any amounts borrowed
under the Union Bank credit facility bear interest at LIBOR plus
1.15%. At September 30, 2008, the effective rate under both
agreements was 4.23%.
The Revolving Credit Agreement contains covenants that require us
to maintain a leverage ratio not greater than 3.25 to 1.0, an
interest expense coverage ratio of not less than 2.0 to 1 and a
current ratio of not less than 1.0 to 1. The agreement also
requires us to achieve a net profit before taxes, as of the last
day of each fiscal quarter, for the two consecutive fiscal quarters
ending on that date of not less than $1. The Revolving Credit
Agreement permits us to pay dividends to our stockholders to the
extent that any such dividends declared or paid in any fiscal year
do not exceed an amount equal to 50% of our net profit after taxes
for such fiscal year. However, this agreement limits our ability
to dispose of some assets, incur additional indebtedness, engage in
liquidation or merger, acquisition, partnership or other
combination (except permitted acquisitions). The Revolving Credit
Agreement also contains customary representations, warranties,
affirmative and negative covenants and events of default. The term
loan does not contain any financial or negative covenants; however,
a default under our Revolving Credit Agreement will cause a
cross-default under the term loan. Due to the margin loan used to
finance the Zetex acquisition, we received a covenant waiver from
Union Bank for the leverage ratio covenant; therefore, as of
September 30, 2008, we were in compliance with the bank covenants.
On March 31, 2008, the Company obtained from UBS Financial Services
Inc. an Irrevocable Standby Letter of Credit (Letter of Credit)
in favor of Diodes FabTech Inc., in an aggregate amount of $165
million, available for payment to the order of the beneficiary on
demand. Draws under the Letter of Credit will be deemed to be a
margin loan against our approximately $320.6 million of ARS.
On June 9, 2008, in connection with the acquisition of Zetex, the
Company drew $165 million under the Letter of Credit, which accrues
interest at a floating rate of interest per annum equal to the sum
of the prevailing daily 30-day LIBOR plus 1.25%, as of September
30, 2008 and is payable monthly. Beginning October 9, 2008, the
interest rate will be reduced from LIBOR plus 1.25% to LIBOR plus
0.00%. See Note N to Notes to Consolidated Financial Statements
for further information.
On October 29, 2008, the Company entered into a settlement with UBS
AG. In addition, on November 4, 2008, the Company accepted an
offer of No Net Cost Loan from UBS BANK USA with a credit line up
to 75% of the market value, as determined by the UBS Bank, of the
Companys ARS that the Company pledged as collateral. UBS Bank
may, upon the request of the Company, make one or more advances to
the Company. See Liquidity and Capital Resources section above
for further information.
As of September 30, 2008, our Asia and Europe subsidiaries have
available lines of credit of up to an aggregate of $47.2 million,
with several local financial institutions. These lines of credit,
except for one Taiwanese credit facility, are collateralized by
each subsidiarys premises, are unsecured, uncommitted and, in some
instances, may be repayable on demand. Loans under these lines of
credit bear interest at LIBOR or similar indices plus a specified
margin. At September 30, 2008, $4.7 million was outstanding on
these lines of credit.
In October, 2006, we issued and sold convertible senior notes with
an aggregate principal amount of $230 million due 2026 (Notes),
which pay 2.25% interest per annum on the principal amount of the
Notes, payable semi-annually in arrears on April 1 and October 1 of
each year, beginning on April 1, 2007. Interest will accrue on the
Notes from and including October 12, 2006 or from and including the
last date in respect of which interest has been paid or provided
for, as the case may be, to, but excluding, the next interest
payment date or maturity date, as the case may be. Commencing with
the six-month period beginning October 1, 2011, and for each
six-month period thereafter, we will, on the interest payment date
for such interest period, pay contingent interest to the holders of
the Notes under certain circumstances and in amounts described in
the indenture.
Note holders may require us to repurchase all or a portion of their
Notes upon a fundamental change (as defined) at a repurchase price
in cash equal to 100% of the principal amount of the Notes to be
repurchased, plus any accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. Future minimum
interest payments related to the Notes as of December 31, 2007 are
$5.2 million for each year from 2008 through 2011. Future minimum
payments related to the Notes as of September 30, 2008 through 2011
and thereafter include $75.0 million in interest and $230 million
in principal for a total of $305.0 million.
- 40 -
In connection with the issuance of the Notes, we incurred approximately $6.2
million of issuance costs, which primarily consisted of investment banker fees,
legal and accounting fees. These costs are classified within other assets and
are amortized as a component of interest expense using the straight-line method
over the life of the Notes from issuance through October 12, 2011.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other
relationships with unconsolidated entities that will affect our
liquidity or capital resources. We have no special purpose
entities that provided off-balance sheet financing, liquidity or
market or credit risk support, nor do we engage in leasing, swap
agreements, or outsource of research and development services, that
could expose us to liability that is not reflected on the face of
our financial statements.
Contractual Obligations
There have been no material changes in any of our contractual
obligations since December 31, 2007, other than the following
additions due to the acquisition of Zetex:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (in thousands) |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
than |
|
1-3 |
|
3-5 |
|
than |
|
|
Total |
|
1 year |
|
years |
|
years |
|
5 years |
|
Long-term debt |
|
$ |
164,880 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
164,880 |
|
Capital leases |
|
|
1,285 |
|
|
|
147 |
|
|
|
435 |
|
|
|
307 |
|
|
|
396 |
|
Operating leases |
|
|
1,827 |
|
|
|
180 |
|
|
|
993 |
|
|
|
334 |
|
|
|
320 |
|
Defined benefit obligation |
|
|
6,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6748 |
|
Purchase obligations |
|
|
2,266 |
|
|
|
2266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
177,006 |
|
|
$ |
2,593 |
|
|
$ |
1,428 |
|
|
$ |
641 |
|
|
$ |
172,344 |
|
|
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. On an on-going basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, inventory reserves and income taxes, among others.
Our estimates are based upon historical experiences, market trends and financial forecasts and
projections, and upon various other assumptions that management believes to be reasonable under the
circumstances and at that certain point in time. Actual results may differ, significantly at
times, from these estimates under different assumptions or conditions.
We believe the following critical accounting policies and estimates affect the significant
estimates and judgments we use in the preparation of our consolidated financial statements, and may
involve a higher degree of judgment and complexity than others.
Our critical accounting policies, as described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, relate to revenue recognition, inventories, accounting for
income taxes, allowance for doubtful accounts, impairment of goodwill and long-lived assets and
share based compensation. There have been no material changes to our critical accounting policies
since December 31, 2007, except for the changes described below.
Short-term and Long-term Investments
Our investments consist primarily of ARS, all of which are classified as available-for-sale.
Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other comprehensive income.
Available-for-sale securities with remaining maturities of less than one year, and those identified
by management at time of purchase for funding operations in less than one year, are classified as
short-term, and all other available-for-securities are classified as long-term. Unrealized losses
are charged against net earnings when a decline in fair value is determined to be
other-than-temporary.
- 41 -
We review our ARS for impairment in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and related guidance issued by the FASB and SEC in order
to determine the classification of the decline in fair value as temporary or
other-than-temporary.
In evaluating the fair value of the individual ARS, we classified such decline in fair value
as temporary, and thus recorded the $22.7 million unrealized loss (net of $13.1 million tax effect)
in other comprehensive loss as of September 30, 2008. The differentiating factors between temporary
and other-than-temporary are primarily the length of the time and the extent to which the market
value has been less than cost, the financial condition and near-term prospects of the issuer and
our intent and ability to retain our investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in market value. See Note F to Notes to Consolidated Financial
Statements for further information regarding our ARS.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the tax jurisdictions in which we operate. This process
involves using an asset and liability approach whereby deferred tax assets and liabilities are
recorded for differences in the financial reporting bases and tax bases of our assets and
liabilities. Significant management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities. Management continually evaluates its deferred tax
asset as to whether it is likely that the deferred tax assets will be realized. If management ever
determined that our deferred tax asset was not likely to be realized, a write-down of the asset
would be required and would be reflected as an expense in the accompanying period.
We are involved in various tax matters, some of whose outcome is uncertain. For purposes of
evaluating whether or not a tax position is uncertain (i) we presume the tax position will be
examined by the relevant taxing authority that has full knowledge of all relevant information,
(ii) technical merits of a tax position are derived from authorities such as legislation and
statutes, legislative intent, regulations, rulings and case law and their applicability to the
facts and circumstances of the tax position, and (iii) each tax position is evaluated without
consideration of the possibility of offset or aggregation with other tax positions taken. A tax
benefit from an uncertain position may be recognized only if it is more likely than not that the
position is sustainable, based on its technical merits, and the tax benefit of a qualifying
position is the largest amount of tax benefits that is greater than 50% likely of being realized
upon ultimate settlement with a taxing authority having full knowledge of all relevant information.
We adopted the provisions of FIN 48 effective January 1, 2007. As a result of the
implementation of FIN 48, we recorded an approximate $2.0 million increase in the liability for
unrecognized tax benefits, primarily related to our foreign subsidiaries, which was accounted for
as a reduction to the January 1, 2007 balance of retained earnings.
Fair Value Measurements
As stated in Note A to Notes to Consolidated Condensed Financial Statements, on January 1,
2008, we adopted the methods of fair value as described in SFAS 157 to value ARS portfolio
investments. SFAS 157, among other things, defines fair value, establishes a consistent framework
for measuring fair value and expands disclosures for each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis. SFAS 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is
market-based measurement that should be determined based on the assumptions that market
participants would use in pricing an assets or liability. SFAS 157 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as following:
Level 1 Observable inputs such as quoted prices inactive market.
Level 2 Inputs other than the quoted prices in active markets that are observable either
directly or indirectly.
Level 3 Unobservable inputs in which there is little or no market data, which
requires the reporting entity to develop its own assumptions.
Due to lack of observable market quotes on our ARS portfolio, we utilized a valuation model
that relies exclusively on Level 3 inputs including those that are based on factors that reflect
assumptions market participants would use in pricing, including, among others: relevant future
market conditions including those that are based on the expected cash flow streams, the underlying
financial condition and credit quality of the issuer and bond insurer, the percent of the Federal
Family Education Loan Program (FFELP) guaranty, and the maturity of the securities, as well as
the market activity of similar securities. The valuation of our ARS investment portfolio is subject
to uncertainties that are difficult to predict. Factors that may impact our valuation include
changes to credit rating of the securities as well as to the underlying assets supporting those
securities, rates of default of the underlying assets, underlying collateral value, discount rates,
counterpart risk and ongoing strength and quality of market credit and liquidity.
- 42 -
Recently Issued Accounting Pronouncements
See Note A to Notes to Consolidated Condensed Financial Statements for detailed information
regarding the status of recently issued accounting pronouncements.
Available Information
Our Internet address is http://www.diodes.com. We make available, free of charge through our
Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission (the SEC). To
support our global customer-base, particularly in Asia and Europe, our website is
language-selectable into English, Chinese, and Korean, giving us an effective marketing tool for
worldwide markets. With its extensive online Product (Parametric) Catalog with advanced search
capabilities, our website facilitates quick and easy product selection. Our website provides easy
access to worldwide sales contacts and customer support, and incorporates a distributor-inventory
check to provide component inventory availability and a small order desk for overnight sample
fulfillment. Our website also provides access to investor financial information, including SEC
filings and press releases, as well as stock quotes and information on corporate governance
compliance.
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. We generally identify forward-looking statements by the use of terminology such
as may, will, could, should, potential, continue, expect, intend, plan,
estimate, anticipate, believe, or similar phrases or the negatives of such terms. Such
forward-looking statements are subject to a variety of risks and uncertainties, including those
discussed under Risks Related To Our Business and elsewhere in this Quarterly Report on Form 10-Q
that could cause actual results to differ materially from those anticipated by our 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 us or statements made by our
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.
For more detailed discussion of these factors, see the Risk Factors discussion in Item 1A of
the Companys most recent Annual Report on Form 10-K as filed with the Securities and Exchange
Commission and in Part II, Item 1A of this report. The forward-looking statements included in this
Quarterly Report on Form 10-Q are made only as of the date of this report, and the Company
undertakes no obligation to update the forward-looking statements to reflect subsequent events or
circumstances.
Risk Factors
Risks Related To Our Business
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Global economic weakness and the current financial market uncertainty affect on our
business. |
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Downturns in the highly cyclical semiconductor industry or changes in end-market demand
could affect our operating results and financial condition. |
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The semiconductor business is highly competitive, and increased competition may harm our
business and our operating results. |
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We receive a significant portion of our net sales from a single customer. In addition,
this customer is also our largest external supplier and is a related party. The loss of
this customer or supplier could harm our business and results of operations. |
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Delays in initiation of production at new facilities, implementing new production
techniques or resolving problems associated with technical equipment malfunctions could
adversely affect our manufacturing efficiencies. |
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We are and will continue to be under continuous pressure from our customers and
competitors to reduce the price of our products, which could adversely affect our growth
and profit margins. |
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Our customer orders are subject to cancellation or modification usually with no penalty.
High volumes of order cancellation or reductions in quantities ordered could adversely
affect our results of operations and financial condition. |
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New technologies could result in the development of new products by our competitors and
a decrease in demand for our products, and we may not be able to develop new products to
satisfy changes in demand, which could result in a decrease in net sales and loss of market
share. |
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We may be subject to claims of infringement of third-party intellectual property rights
or demands that we license third-party technology, which could result in significant
expense and reduction in our intellectual property rights. |
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We depend on third-party suppliers for timely deliveries of raw materials, parts and
equipment, as well as finished products from other manufacturers, and our results of
operations could be adversely affected if we are unable to obtain adequate supplies in a
timely manner. |
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If we do not succeed in continuing to vertically integrate our business, we will not
realize the cost and other efficiencies we anticipate and our ability to compete, profit
margins and results of operations may suffer. |
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Part of our growth strategy involves identifying and acquiring companies with
complementary product lines or customers. We may be unable to identify suitable acquisition
candidates or consummate desired acquisitions and, if we do make any acquisitions, we may
be unable to successfully integrate any acquired companies with our operations. |
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We are subject to many environmental laws and regulations that could affect our
operations or result in significant expenses. |
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Our products may be found to be defective and, as a result, product liability claims may
be asserted against us, which may harm our business and our reputation with our customers. |
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We may fail to attract or retain the qualified technical, sales, marketing and
management personnel required to operate our business successfully. |
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We may not be able to maintain our growth or achieve future growth and such growth may
place a strain on our management and on our systems and resources. |
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Our business may be adversely affected by obsolete inventories as a result of changes in
demand for our products and change in life cycles of our products. |
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If OEMs do not design our products into their applications, a portion of our net sales
may be adversely affected. |
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We rely heavily on our internal electronic information and communications systems, and
any system outage could adversely affect our business and results of operations. |
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We are subject to interest rate risk that could have an adverse effect on our cost of
working capital and interest expenses. |
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We have a significant amount of debt following the offering of our convertible senior
notes. Our substantial indebtedness could adversely affect our business, financial
condition and results of operations and our ability to meet our payment obligations under
the notes and our other debt. |
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It is likely that the liquidity of our ARS will continue to be limited, which could
adversely affect our ability to fund our operations and acquisitions, and may require us to
record losses on these securities. |
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UBS BANK USA (UBS Bank) may demand full or partial repayment of our no net cost loan
with the UBS Bank at any time at UBS Banks sole option and without cause, and UBS
Financial Services Inc. may be unable to provide us any alternative financing on
substantially same terms and conditions as those of the no net cost loan. |
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The value of our benefit plan assets and liabilities is based on estimates and
assumptions, which may prove inaccurate. |
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Due to the recent and ongoing fluctuations in the United Kingdoms equity markets and
bond markets, changes in actuarial assumptions for our defined benefit plan could increase
the volatility of the plans asset value, require us to increase cash contributions to the
plan and have a negative impact on our results of operations and profitability. |
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Our management certification and auditor attestation regarding the effectiveness of our
internal control over financial reporting as of September 30, 2008 and until the year ended
December 31, 2008 excluded the operations of Diodes Zetex
Limited (Zetex). If we are not able to integrate Zetex operations into our internal control
over financial reporting, our internal control over financial reporting will not be
effective. |
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Foreign currency fluctuations could adversely affect our overall sales, profits and results of operations. |
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There are risks associated with our acquisition of Zetex plc. |
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If we fail to maintain an effective system of internal controls or discover material
weaknesses in our internal controls over financial reporting, we may not be able to report
our financial results accurately or detect fraud, which could harm our business and the
trading price of our Common Stock. |
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Terrorist attacks, or threats or occurrences of other terrorist activities whether in
the United States or internationally may affect the markets in which our Common Stock
trades, the markets in which we operate and our profitability. |
Risks Related To Our International Operations
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Our international operations subject us to risks that could adversely affect our
operations. |
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We have significant operations and assets in China, Taiwan and Hong Kong and, as a
result, will be subject to risks inherent in doing business in those jurisdictions, which
may adversely affect our financial performance. |
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We are subject to foreign currency risk as a result of our international operations. |
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We may not continue to receive preferential tax treatment in Asia, thereby increasing
our income tax expense and reducing our net income. |
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The distribution of any earnings of our foreign subsidiaries to the U.S. may be subject
to U.S. income taxes, thus reducing our net income. |
Risks Related To Our Common Stock
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Variations in our quarterly operating results may cause our stock price to be volatile. |
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We may enter into future acquisitions and take certain actions in connection with such
acquisitions that could affect the price of our Common Stock. |
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Our directors, executive officers and significant stockholders hold a substantial
portion of our Common Stock, which may lead to conflicts with other stockholders over
corporate transactions and other corporate matters. |
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We were formed in 1959, and our early corporate records are incomplete. As a result, we
may have difficulty in assessing and defending against claims relating to rights to our
Common Stock purporting to arise during periods for which our records are incomplete. |
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Conversion of our convertible senior notes will dilute the ownership interest of
existing shareholders, including holders who had previously converted their notes. |
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The repurchase rights and the increased conversion rate triggered by a make-whole
fundamental change could discourage a potential acquirer. |
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Certain provisions of Delaware law and our Certificate of Incorporation and Bylaws may
delay or prevent a takeover attempt that may have resulted in a premium over the market
price for our shares. |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to financial market risk results primarily from fluctuations in interest and
currency rates. There have been no material changes to our market risks as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2007 except as updated below.
At September 30, 2008, our $320.6 million of ARS have experienced multiple failed auctions due
to the liquidity issues experienced in the global credit and capital markets. While we continue to
earn and receive interest on these investments at the maximum contractual rate, the estimated fair
values of these auction rate securities no longer approximates par value. As of September 30, 2008,
we recorded an unrealized loss of $22.7 million (net of $13.1 million tax effect) in other
comprehensive loss for ARS with declines in value from December 31, 2007 deemed to be temporary.
We continue to monitor the market for ARS and consider its impact (if any) on the fair value
of our investments. If the current market conditions deteriorate further, or the anticipated
recovery in fair values does not occur, we may be required to record additional unrealized losses
or impairment charges in future periods.
On October 29, 2008, the Company accepted an offer from UBS that will provide the Company the
ability to transfer its ARS portfolio to UBS at par value at any time during the period of June 30,
2010, through July 2, 2012. See Note R to Notes to Consolidated Financial Statements for further
information.
We do not anticipate having to sell these securities in order to operate our business. We
believe that, based on our current unrestricted cash and cash equivalents of $82.7 million at
September 30, 2008, as well as our available credit facilities, the current lack of liquidity in
the credit and capital markets will not have a material impact on our liquidity, our cash flow, or
our ability to fund our existing operations. We may be required to hold our ARS until maturity,
please see Risk Factor It is likely that the liquidity of our ARS will continue to be limited,
which could adversely affect our ability to fund our operations and acquisitions, and may require
us to record losses on these securities. in Part II, Item 1A of this Report.
During the second quarter of 2008, with the acquisition of Zetex, we adopted forward exchange
contracts, designated as foreign-currency cash flow hedges, to reduce the potentially adverse
effects of foreign-currency exchange rate fluctuations that occur in the normal course of business.
We use forward exchange contracts to hedge, thereby attempting to reduce our overall exposure to
the effects of currency fluctuations on cash flows. We do not permit speculation in financial
instruments for profit on the exchange rate price fluctuation, trading in currencies for which
there are no underlying exposures, or entering into trades for any currency to intentionally
increase the underlying exposure. As part of our overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, primarily to changes in the value of
the Euro and the British Pound Sterling, we hedge a portion of our foreign currency exposures
anticipated over the ensuing twelve-month to two-year periods. In doing so, we use foreign currency
exchange contracts that generally have maturities of three months to two years to provide
continuing coverage throughout the hedging period.
During the second quarter of 2008, with the acquisition of Zetex, we adopted a contributory
defined benefit plan that covers certain employees in the United Kingdom and Germany. The defined
benefit plan is closed to new entrants and frozen with respect to future benefit accruals. The
retirement benefit is based on the final average compensation and service of each eligible
employee. On the acquisition date, we determined the fair value of the defined benefit plan assets
and plan to utilize an annual measurement date of December 31. At subsequent measurement dates,
defined benefit plan assets will be determined based on fair value. Defined benefit plan assets
consist primarily of high quality corporate bonds that are denominated in the currency in which the
benefits will be paid and that have terms to maturity approximating to the terms of the related
pension liability. The net pension and supplemental retirement benefit obligations and the related
periodic costs are based on, among other things, assumptions of the discount rate, estimated return
on plan assets and mortality rates. These obligations and related periodic costs are measured using
actuarial techniques and assumptions. The projected unit credit method is the actuarial cost method
used to compute the pension liabilities and related expenses. As of September 30, 2008, the plan is
underfunded and a liability of $6.7 million is reflected in our consolidated financial statements
as noncurrent liabilities. The amount recognized in accumulated other comprehensive income was a
net gain of $2.4 million and the weighted-average discount rate assumption used to determine
benefit obligations as of September 30, 2008 was 7.3%. The asset value of the defined benefit plan
has been volatile in recent months due primarily to wide fluctuations in the United Kingdoms
equity markets and bond markets. Please see Risk Factor Due to the recent and ongoing
fluctuations in the United Kingdoms equity markets and bond markets, changes in actuarial
assumptions for our Companys defined benefit plan could increase the volatility of the plans
asset value, require us to increase cash contributions to the plan and could have a negative impact
on our results of operations and profitability. in Part II, Item 1A of this Report.
- 46 -
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial
Officer, Carl C. Wertz, with the participation of the Companys
management, carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e). Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer believe that, as of the end of the
period covered by this report, our disclosure controls and
procedures are effective at the reasonable assurance level to
ensure that information required to be included in this report is:
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recorded, processed, summarized and reported within
the time period specified in the Commissions rules and
forms; and |
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accumulated and communicated to our management,
including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions required
disclosure. |
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an
entitys disclosure objectives. The likelihood of achieving such
objectives 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.
Changes in Controls over Financial Reporting
There was no change in our internal control over financial
reporting, known to the Chief Executive Officer or the Chief
Financial Officer that occurred during the last fiscal quarter
covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
- 47 -
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not party to any material pending legal proceedings. However, we are party from time
to time to certain claims, litigation, audits and investigations incidental to the conduct of our
business. We believe that we have established adequate reserves to satisfy any potential liability
we may have under all such claims, litigations, audits and investigations that are currently
pending. In our opinion, the settlement of any such currently pending or threatened matter will
not have a material adverse impact on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been material changes from the risk factors disclosed in the Risk Factors section
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on February
29, 2008, and such changes are reflected immediately below. The following risk factors as well as
the risks described in our Annual Report on Form 10-K, are not the only risks facing our Company.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating
results.
It is likely that the liquidity of our Auction Rate Securities (ARS) will continue to be
limited, which could adversely affect our ability to fund our operations and acquisitions, and may
require us to record losses on these securities.
As of June 30, 2008, we have invested primarily in ARS with a cost basis of $320.7 million and
a current fair value of $294.7 million, which are classified as long-term investment,
available-for-sale securities. The maturities of the securities range between 19 and 39 years and
averages 32 years.
ARS are generally long-term debt instruments that are intended to provide liquidity through a
Dutch auction process that resets the applicable interest rate at pre-determined calendar
intervals. These auctions historically allowed existing investors to rollover their holdings and
continue to own their respective securities or liquidate their holdings by selling their securities
at par value. Since mid-February 2008, there have been more sellers than buyers at each scheduled
interest rate auction date and parties desiring to sell their securities have been unable to do so.
As of March 31, 2008, we reclassified our ARS from short-term investments to long-term
investments, available-for-sale securities, and recorded an $11.5 million unrealized loss (net of
$6.6 million tax effect) in other comprehensive income (loss). Further, under the terms of our ARS,
most of the securities have reset to a lower interest rate. If the market for our ARS is not
re-established, the absence of liquidity could adversely affect our ability to fund operations and
acquisitions, and may require us to record losses on these securities. In addition, if our ARS do
not reset to higher interest rates, it could have a material adverse effect on our interest income.
See Note F to Notes to Consolidated Financial Statements for more information.
UBS BANK USA (UBS Bank) may demand full or partial repayment of our no net cost loan with
the UBS Bank at any time at UBS Banks sole option and without cause, and UBS Financial Services
Inc. may be unable to provide us any alternative financing on substantially same terms and
conditions as those of the no net cost loan.
On October 29, 2008, the Company entered into an ARS settlement with UBS AG to provide
liquidity for the Companys $320.7 million ARS portfolio. One of the terms of the ARS settlement
is that the Company would accept an offer of a so-called no net cost loan from UBS Bank for up to
75% of the market value, as determined by UBS Bank, of the Companys ARS that the Company pledged
as collateral to UBS Bank. The Company intends to replace its $165 million margin loan from UBS
Financial Services Inc. with the no net cost loan from UBS Bank due to the no net cost feature of
the loan and the benefit of extending our overall liquidity by approximately $50 million. However,
the no net cost loan is a demand loan that UBS Bank may demand full or partial repayment of the
loan at any time at UBS Banks sole option and without cause. Although the ARS settlement
arrangement provided that UBS Financial Services Inc. would support the Company with alternative
financing on substantially same terms and conditions as those of the no net cost loan, it is
possible that UBS Financial Services Inc. would be unable to provide the Company such alternative
financing, particularly under the present and potentially prolonging condition of Global economic
recession and financial market turmoil. Currently, we do not expect any time soon that UBS Bank
would demand full or partial repayment of our outstanding no net cost loan, we are unable to
determine or guarantee that UBS Bank would not demand full or partial repayment of the loan, and,
in case such event of demand of repayment happens, we are also unable to determine whether UBS
Financial Services Inc. would be able to fully satisfy its obligation to provide the Company with
alternative financing on substantially same terms and conditions as those of the no net cost loan.
See Note R to Notes to Consolidated Financial Statements for more information.
The value of our benefit plan assets and liabilities is based on estimates and assumptions,
which may prove inaccurate.
- 48 -
Certain of the Companys employees in the United Kingdom and Germany participate in Company
sponsored defined benefit plans. The defined benefit plan is closed to new entrants and is frozen
with respect to future benefit accruals. The retirement benefit is based on the final average
compensation and service of each eligible employee. The Company accounts for these benefit plans in
accordance with SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R), which requires the
Company to make actuarial assumptions that are used to calculate the earning value of the related
assets, where applicable, and liabilities and the amount of expenses to be recorded in the
Companys consolidated financial statements. Assumptions include the expected return on plan
assets, discount rates, and mortality rates. While we believe the underlying assumptions, under the
projected unit credit method are appropriate, the carrying value of the related assets and
liabilities and the actual amount of expenses recorded in the consolidated financial statements
could differ materially from the assumptions used. See Note P to Notes to Consolidated Financial
Statements for more information.
The Current Global economic weakness and financial market uncertainty affect on our business.
The current global economic weakness and financial market uncertainty, including the potential
for a significant and prolonged global economic recession, may materially and adversely affect our
business. The success of our business depends, among other factors, on the strength of the global
economy and the stability of the financial markets, which in term affect our customers demand for
our products, the ability of our customers to meet their payment obligations, the likelihood of
customers canceling or deferring existing orders and end-user consumers demand for items
containing our products in the consumer electronics, computing, industrial, communications and the
automotive sectors. The recent global economic slowdown and turmoil in the financial markets have
caused a decline in consumer confidence, restriction of available credits, declines in housing
values and the stock markets, and other factors, which in term have led to lower consumer
discretionary spending and demand for items that incorporate our products. Once end-user consumers
are affected by the economic weakness and the turmoil of the financial markets, our customers can
also be expected to lower their demand for our products, their ability to meet their payment
obligations may decrease and the likelihood of canceling or deferring their existing orders with us
may increase. Our business, including revenues and operating results, would be negatively affected
by such actions. The current global economic weakness and financial market uncertainty may last
longer than we anticipated or have a greater adverse effect on our business, including our revenues
and operating results, than we anticipated.
Due to the recent and ongoing fluctuations in the United Kingdoms equity markets and bond
markets, changes in actuarial assumptions for our defined benefit plan could increase the
volatility of the plans asset value, require us to increase cash contributions to the plan and
have a negative impact on our results of operations and profitability.
The asset value of the Companys defined benefit plan (the plan) has been volatile in recent
months due primarily to wide fluctuations in the United Kingdoms equity markets and bond markets.
The plan assets consist primarily of high quality corporate bonds and stocks traded on the London
Stock Exchange and are determined from time to time based on their fair value, requiring the
Company to utilize certain actuarial assumptions for the plans fair value determination.
As of September 30, 2008, the benefit obligation of the plan was approximately U.S. $97.46
million and total assets in such plan were approximately U.S. $90.71 million. This means the plan
was underfunded by approximately U.S. $6.75 million. The difference between plan obligations and
assets, or the funded status of the plan, is a significant factor in determining the net periodic
benefit costs of the Companys plan and the ongoing funding requirements of the plan.
Particularly due to the ongoing fluctuations in the United Kingdoms equity markets and bond
markets, changes in several key actuarial assumptions, including, but not limited to, changes in
discount rate, estimated return on the plan and mortality rates, can (i) affect the level of plan
funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future
funding requirements. In the event that actual results differ from the actuarial assumptions or
actuarial assumptions are changed, the funding status of the plan may change. Any deficiency in
the funding of the plan could result in additional charges to equity and an increase in future plan
expense and cash contribution. A significant increase in our funding requirements could have a
negative impact on our results of operations and profitability.
Our management certification and auditor attestation regarding the effectiveness of our
internal control over financial reporting as of September 30, 2008 and until the year ended
December 31, 2008 excluded the operations of Zetex. If we are not able to integrate Zetex
operations into our internal control over financial reporting, our internal control over financial
reporting will not be effective.
Section 404 of the Sarbanes-Oxley Act (SOX 404) requires us to furnish a management
certification and auditor attestation regarding the effectiveness of our internal control over
financial reporting. As a public company, we are required to report, among other things, control
deficiencies that constitute a material weakness or changes in internal control that materially
affect, or are reasonably likely to materially affect, internal control over financial reporting. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the
registrants annual or interim financial statements will not be prevented or detected on a timely
basis.
- 49 -
Complying with SOX 404 is time consuming and costly. Prior to the acquisition of Zetex, it was
a United Kingdom based publicly traded company, listed on the London Stock Exchange and not
required to comply with SOX 404. The integration of Zetex operations into our internal control over
financial reporting will require additional time and resources from our management and other
personnel and may increase our compliance costs. The majority of Zetex operations are in the
United Kingdom and in Germany. Such geographic distance between Zetex bases and our United States
headquarters may make the integration process of Zetex slower and more difficult. Therefore, our
management certification and auditor attestation regarding the effectiveness of our internal
control over financial reporting as of September 30, 2008 and until the year ended December 31,
2008 excluded the operations of Zetex.
Failure to comply with SOX 404, including a delay in or failure to successfully integrate
Zetex operations into our internal control over financial reporting, or the report by us of a
material weakness may cause investors to lose confidence in our consolidated financial statements,
and the trading price of our common stock may decline. If we fail to remedy any material weakness,
our financial statements may be inaccurate, our access to the capital markets may be restricted and
the trading price of our common stock may decline.
Foreign currency fluctuations could adversely affect our overall sales, profits and results of
operations.
Our financial statements are prepared in accordance with U.S. GAAP and are reported in United
States dollars. After our recent acquisition of Zetex in the second quarter 2008, our overall
sales, profits and results of operations have becoming increasingly sensitive to foreign currency
exchange rate fluctuations, particularly the currency exchange rate with Euro and British Pound,
due to an increase in the percentage of our total revenue and total costs and operation expenses
reported in these foreign currency. As our Company expands its business operations in the future
outside of the United States, fluctuations in foreign currency exchange rates may continue to have
an adverse impact and be increasingly influential to our overall sales, profits and results of
operations as amounts that are measured in foreign currency are translated back to United States
dollars. See Note B to Notes to Consolidated Financial Statements for more information
There are risks associated with our acquisition of Zetex.
The acquisition of Zetex will be accompanied by the risks commonly encountered in acquisitions
of companies. These risks include, among other things, higher than anticipated acquisition costs
and expenses, the difficulty and expense of integrating the operations and personnel of the
companies, the difficulty of bringing Zetexs standards, procedures and controls into conformance
with our operations, the ability to coordinate our new products and process development with Zetex,
the ability to hire additional management and other critical personnel to better manage Zetex, the
ability to increase the scope, geographic diversity and complexity of our operations with the
addition of Zetex, difficulties in consolidating facilities and transferring processes and know-how
with Zetex, difficulties in reducing costs of Zetex business, prolonged diversion of our
managements attention from the management of our business to matters related to Zetex, the ability
to clearly define our present and future strategies with the addition of Zetex and the loss of key
employees and customers as a result of changes in management.
In addition, geographic distances may make the integration of Zetex slower and more difficult.
We may ultimately not be successful in overcoming these risks or any other problems encountered in
connection with the acquisition of Zetex.
Our acquisition will cause a large one-time expense as well as create goodwill and other
intangible assets that may result in significant asset impairment charges in the future. We have
made preliminary estimates and assumptions in order to determine purchase price allocation and
estimate the fair value of acquired assets and liabilities of Zetex. If our estimates or
assumptions used to value acquired assets and liabilities of Zetex are not accurate, we may be
exposed to gains or losses that may be material to our results of operations and profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Revolving Credit Agreement permits us to pay dividends to our stockholders to the extent
that any such dividends declared or paid in any fiscal year do not exceed an amount equal to 50% of
our net profit after taxes for such fiscal year. For further details, please see Debt Instruments
under Part I, Item 2 of this Report.
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.
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Item 6. Exhibits
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Exhibit |
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Filed |
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Description |
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Form |
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Date of First Filing |
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Number |
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Herewith |
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10.1
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Union Bank Credit Line Maturity Date Extension
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X |
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10.2
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Supplemental Agreement to the Factory Building
Lease Agreement dated as of August 11, 2008
between Shanghai Kai Hong Technology
Electronic Co., Ltd. and Shanghai Yuan Hao
Electronic Co., Ltd.
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X |
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10.3
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DSH #2 Building Lease Agreement dated as of
August 11, 2008 between Shanghai Kai Hong
Technology Electronic Co., Ltd. and Shanghai
Yuan Howe Electronics Co., Ltd.
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X |
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18.1
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Preferability letter from independent
accountants regarding change in accounting
principle
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X |
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31.1
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Certification Pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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X |
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31.2
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Certification Pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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X |
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32.1
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Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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X |
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32.2
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Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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X |
PLEASE NOTE: It is inappropriate for investors to assume the accuracy of any covenants,
representations or warranties that may be contained in agreements or other documents filed as
exhibits to this Quarterly Report on Form 10-Q. In certain instances the disclosure schedules to
such agreements or documents contain information that modifies, qualifies and creates exceptions to
the representations, warranties and covenants. Moreover, some of the representations and warranties
may not be complete or accurate as of a particular date because they are subject to a contractual
standard of materiality that is different from those generally applicable to stockholders and/or
were used for the purpose of allocating risk among the parties rather than establishing certain
matters as facts. Accordingly, you should not rely on the representations and warranties as
characterizations of the actual state of facts at the time they were made or otherwise.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIODES INCORPORATED (Registrant)
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By:
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/s/ Carl C. Wertz
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November 7, 2008 |
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CARL C. WERTZ |
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Chief Financial Officer, Treasurer and Secretary |
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(Duly Authorized Officer and Principal Financial and |
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Chief Accounting Officer) |
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