UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 002-25577

DIODES INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		95-2039518 (I.R.S. Employer Identification Number)
4949 Hedgcoxe Road, Suite 200 Plano, Texas (Address of principal executive offices)		75024 (Zip code)

(972) 987-3900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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:

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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 registrant’s Common Stock outstanding as of August 4, 2011 was 45,601,664.

 

 

Table of Contents

		Page
Part I — Financial Information			3
Item 1 — Financial Statements			3
Consolidated Condensed Balance Sheets as of June 30, 2011 and December 31, 2010			3
Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010			5
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010			6
Notes to Consolidated Condensed Financial Statements			7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			28
Item 4 — Controls and Procedures			28
Part II — Other Information			29
Item 1 — Legal Proceedings			29
Item 1A — Risk Factors			29
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3 — Defaults Upon Senior Securities			29
Item 4 — (Removed and Reserved)			29
Item 5 — Other Information			29
Item 6 — Exhibits			30
Signature			32
EX-10.1
EX-10.2
EX-31.1
ex-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)

ASSETS

		June 30,				December 31,
		2011				2010
		(Unaudited)
CURRENT ASSETS
Cash and cash equivalents		$	290,366			$	270,901
Accounts receivable, net			144,205				129,207
Inventories			128,730				120,689
Deferred income taxes, current			8,200				8,276
Prepaid expenses and other			17,328				11,679
Total current assets			588,829				540,752
PROPERTY, PLANT AND EQUIPMENT, net			229,793				200,745
DEFERRED INCOME TAXES, non-current			1,534				1,574
OTHER ASSETS
Goodwill			70,207				68,949
Intangible assets, net			27,077				28,770
Other			5,624				5,760
Total assets		$	923,064			$	846,550

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (cont’)

LIABILITIES AND EQUITY
(In thousands, except share data)

		June 30,				December 31,
		2011				2010
		(Unaudited)
CURRENT LIABILITIES
Lines of credit		$	10,000			$	—
Accounts payable			82,074				70,057
Accrued liabilities			42,197				36,937
Income tax payable			6,014				15,412
Convertible senior notes			132,272				128,261
Other current liabilities			718				698
Total current liabilities			273,275				251,365
LONG-TERM DEBT, net of current portion			3,227				3,393
CAPITAL LEASE OBLIGATIONS, net of current portion			1,234				1,380
OTHER LONG-TERM LIABILITIES			31,899				37,520
Total liabilities			309,635				293,658
COMMITMENTS AND CONTINGENCIES
EQUITY
Diodes Incorporated stockholders’ equity
Preferred stock — par value $1.00 per share; 1,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock — par value $0.66 2/3 per share; 70,000,000 shares authorized; 45,474,579 and 44,662,796 issued and outstanding at June 30, 2011 and December 31, 2010, respectively			30,316				29,775
Additional paid-in capital			240,988				231,842
Retained earnings			362,572				324,907
Accumulated other comprehensive loss			(33,718	)			(45,080	)
Total Diodes Incorporated stockholders’ equity			600,158				541,444
Noncontrolling interest			13,271				11,448
Total equity			613,429				552,892
Total liabilities and equity		$	923,064			$	846,550

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
NET SALES		$	169,806			$	149,153			$	331,361			$	286,000
COST OF GOODS SOLD			114,191				95,686				218,353				184,750
Gross profit			55,615				53,467				113,008				101,250
OPERATING EXPENSES
Selling, general and administrative			22,575				21,422				43,985				42,841
Research and development			6,533				6,815				13,051				13,191
Other operating expenses			1,153				1,222				2,288				2,350
Total operating expenses			30,261				29,459				59,324				58,382
Income from operations			25,354				24,008				53,684				42,868
OTHER INCOME (EXPENSES)			(1,913	)			(3,423	)			(5,144	)			(3,279	)
Income before income taxes and noncontrolling interest			23,441				20,585				48,540				39,589
INCOME TAX PROVISION			4,718				3,035				9,553				6,359
NET INCOME			18,723				17,550				38,987				33,230
Less: NET INCOME attributable to noncontrolling interest			(742	)			(903	)			(1,322	)			(1,625	)
NET INCOME attributable to common stockholders		$	17,981			$	16,647			$	37,665			$	31,605
EARNINGS PER SHARE attributable to common stockholders
Basic		$	0.40			$	0.38			$	0.84			$	0.72
Diluted		$	0.38			$	0.37			$	0.80			$	0.70
Number of shares used in computation
Basic			45,325				43,975				45,074				43,871
Diluted			47,148				45,510				46,837				45,358

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Six Months Ended
		June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES		$	48,082			$	46,928
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term investments			—				296,600
Purchases of property, plant and equipment			(44,984	)			(41,053	)
Proceeds from sale of property, plant and equipment			10				2,141
Other			77				(152	)
Net cash provided by (used in) investing activities			(44,897	)			257,536
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit			10,000				3,762
Repayments on lines of credit			—				(301,625	)
Net proceeds from issuance of common stock			3,709				2,634
Repayments of long-term debt			(272	)			(969	)
Repayments of capital lease obligations			(88	)			(139	)
Net cash provided by (used in) financing activities			13,349				(296,337	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			2,931				(4,440	)
INCREASE IN CASH AND CASH EQUIVALENTS			19,465				3,687
CASH AND CASH EQUIVALENTS, beginning of period			270,901				241,953
CASH AND CASH EQUIVALENTS, end of period		$	290,366			$	245,640
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash financing activities:
Property, plant and equipment purchased on accounts payable		$	9,409			$	6,292

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE A – Nature of Operations, Basis of Presentation and Recently Issued Accounting Pronouncements

Nature of Operations

          Diodes Incorporated and its subsidiaries (collectively, the “Company”) is a leading global manufacturer and supplier of high-quality, application specific standard products within the broad discrete, logic and analog semiconductor markets, serving the consumer electronics, computing, communications, industrial and automotive markets throughout Asia, North America and Europe.

Basis of Presentation

          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 U.S. 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. All significant intercompany balances and transactions have been eliminated in consolidation. 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 six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2011. The consolidated condensed financial data at December 31, 2010 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

          The preparation of financial statements in conformity with U.S. 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 U.S. 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.

          Certain prior year’s balances have been reclassified to conform to the current financial statement presentation.

Recently Issued Accounting Pronouncements

          In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 provides two options for presenting other comprehensive income (OCI), which previously has typically been placed near the statement of equity. The amendments require an OCI statement to be included with the income statement, which together will make a statement of total comprehensive income or separate from the income statement, but the two statements will have to appear consecutively within a financial report. The provisions of ASU No. 2011-05 are effective for fiscal quarters and years beginning on or after December 15, 2011. The Company will select one of the two presentation options in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012.

NOTE B – Functional Currencies, Foreign Currency Translation and Comprehensive Income

          Functional Currencies and Foreign Currency Translation – The functional currency for the Company’s China subsidiaries is the U.S. dollar, while other subsidiaries, including subsidiaries in Taiwan and the United Kingdom (“U.K.”), use their local currency as their functional currency. 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 gain of approximately $1 million and loss of approximately $1 million for the three months ended June 30, 2011 and 2010, respectively, and gain of approximately $0 million and loss of approximately $1 million for the six months ended June 30, 2011 and 2010, respectively.

          Comprehensive Income – U.S. GAAP generally requires that recognized revenues, 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.

     Total comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

Total Comprehensive Income

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	18,723			$	17,550			$	38,987			$	33,230
Translation adjustment			1,507				(2,833	)			6,231				(10,913	)
Unrealized gain/(loss) on defined benefit plan, net of tax			(2,183	)			(3,177	)			5,129				(5,870	)
Comprehensive income			18,047				11,540				50,347				16,447
Less: Comprehensive income attributable to noncontrolling interest			(742	)			(903	)			(1,322	)			(1,625	)
Total comprehensive income attributable to common stockholders		$	17,305			$	10,637			$	49,025			$	14,822

NOTE C – Earnings Per Share

          Basic earnings per share is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.

          The computation of basic and diluted earnings per common share is as follows (in thousands, except per share data):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
BASIC
Weighted average number of common shares outstanding used in computing basic earnings per share			45,325				43,975				45,074				43,871
Net income attributable to common stockholders		$	17,981			$	16,647			$	37,665			$	31,605
Earnings per share attributable to common stockholders		$	0.40			$	0.38			$	0.84			$	0.72
DILUTED
Weighted average number of common shares outstanding used in computing basic earnings per share			45,325				43,975				45,074				43,871
Add: Assumed exercise of stock options and stock awards			1,823				1,535				1,763				1,487
			47,148				45,510				46,837				45,358
Net income attributable to common stockholders		$	17,981			$	16,647			$	37,665			$	31,605
Earnings per share attributable to common stockholders		$	0.38			$	0.37			$	0.80			$	0.70

          There are no shares included in the earnings per share calculation related to the Company’s 2.25% convertible senior notes (“Notes”) outstanding as our average stock price did not exceed the conversion price and, therefore, there is no conversion spread.

NOTE D – Inventories

          Inventories stated at the lower of cost or market value are as follows (in thousands):

		June 30,				December 31,
		2011				2010
Raw materials		$	67,127			$	60,402
Work-in-progress			26,731				22,288
Finished goods			34,872				37,999
Total		$	128,730			$	120,689

NOTE E – Goodwill and Intangible Assets

     Changes in goodwill are as follows (in thousands):

Balance at December 31, 2010		$	68,949
Currency exchange and other			1,258
Balance at June 30, 2011		$	70,207

          Changes in intangible assets are as follows (in thousands):

Balance at June 30, 2011:
Intangible assets subject to amortization:
Gross carrying amount		$	48,664
Accumulated amortization			(16,972	)
Currency exchange and other			(7,185	)
Net value			24,507
Intangible assets with indefinite lives:
Gross carrying amount			3,162
Currency exchange and other			(592	)
Total			2,570
Total intangible assets, net		$	27,077

          Amortization expense related to intangible assets subject to amortization was approximately $1 million for the three months ended June 30, 2011 and 2010, and approximately $2 million for the six months ended June 30, 2011 and 2010.

NOTE F – Income Tax Provision

          Income tax expense of approximately $5 million and $10 million was recorded for the three and six months ended June 30, 2011, respectively. This resulted in an effective tax rate of 20% for the six months ended June 30, 2011, as compared to 16% in the same period of last year and compared to 18% for the full year of 2010. Our effective tax rates for the six months ended June 30, 2011 and 2010, respectively, were lower than the U.S. statutory tax rate of 35%, principally from the impact of higher income in lower-taxed jurisdictions. In addition, the Company’s effective tax rate for the six months ended June 30, 2010 was impacted by the noncash income tax benefit of reversing valuation allowances on deferred tax assets from U.K. loss carryforwards.

          For the six months ended June 30, 2011, the Company reported domestic and foreign pre-tax income (loss) of approximately $(12) million and $61 million, respectively. For the six months ended June 30, 2010, the Company reported domestic and foreign pre-tax income (loss) of approximately $(12) million and $52 million, respectively. Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. The Company intends to permanently reinvest overseas all of its earnings from its foreign subsidiaries; accordingly, U.S. taxes are not being recorded on undistributed foreign earnings.

          The impact of tax holidays decreased the Company’s tax expense by approximately $2 million for the six months ended June 30, 2011 and 2010. The benefit of the tax holidays on both basic and diluted earnings per share for the six months ended June 30, 2011 was approximately $0.10. The benefit of the tax holidays on basic and diluted earnings per share for the six months ended June 30, 2010 was approximately $0.08 and $0.07, respectively.

          The Company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2007. With respect to state and local jurisdictions and countries outside of the U.S., with limited exceptions, the Company is no longer subject to income tax audits for years before 2006. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties, if any, have been provided for in the Company’s reserve for any adjustments that may result from future tax audits. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of June 30, 2011, the gross amount of unrecognized tax benefits was approximately $10 million.

          It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlements of ongoing audits or competent authority proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

NOTE G – Share-Based Compensation

          The following table shows the total compensation expensed for share-based compensation plans, including stock options and share grants, recognized in the statements of operations (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Cost of sales		$	89			$	82			$	175			$	175
Selling and administrative expense			2,961				2,822				5,829				5,686
Research and development expense			233				329				463				653
Total share-based compensation expense		$	3,283			$	3,233			$	6,467			$	6,514

          Stock Options. Stock options generally vest in equal annual installments over a four-year period and expire ten years after the grant date, and expense was estimated on the date of grant using the Black-Scholes option pricing model.

          The total net cash proceeds received from stock option exercises during the six months ended June 30, 2011 was approximately $3 million. Stock option expense for both the three months ended June 30, 2011 and 2010 was approximately $1 million. Stock option expense for both the six months ended June 30, 2011 and 2010 was approximately $2 million.

          A summary of the stock option plans is as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Stock Options		Shares (000)				Price				Term (yrs)				Value ($000)
Outstanding at January 1, 2011			3,707			$	14.14				5			$	47,891
Granted			363				29.21
Exercised			(476	)			6.97								10,957
Forfeited or expired			—				—
Outstanding at June 30, 2011			3,594			$	16.61				6			$	35,726
Exercisable at June 30, 2011			2,623			$	14.48				4			$	30,860

          The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount option holders would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price.

          As of June 30, 2011, total unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, was approximately $12 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 3 years.

          Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.

          The total fair value of restricted stock awards vested during the six months ended June 30, 2011 was $5 million. Share grant expense for both the three months ended June 30, 2011 and 2010 was approximately $2 million. Share grant expense for both the six months ended June 30, 2011 and 2010 was approximately $4 million

          A summary of the status of the Company’s non-vested share grants is as follows:

						Weighted-Average				Aggregate
						Grant-Date				Intrinsic
Share Grants		Shares (000)				Fair Value				Value ($000)
Nonvested at January 1, 2011			774			$	16.16			$	12,479
Granted			121				29.44
Vested			(236	)			20.74				4,884
Forfeited			(16	)			17.44
Nonvested at June 30, 2011			643			$	16.95			$	10,868

          As of June 30, 2011, total unrecognized share-based compensation expense related to non-vested stock awards, net of forfeitures, was approximately $20 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 3 years.

NOTE H – Segment Information and Enterprise-Wide Disclosure

          For financial reporting purposes, the Company operates in a single segment, standard semiconductor products, through the Company’s various manufacturing and distribution facilities. The Company aggregates its products because the products are similar and have similar economic characteristics, and the products are similar in production process and share the same customer type.

          The Company’s primary operations include the domestic operations in Asia, North America and Europe.

          Revenues are attributed to geographic areas based on the location of subsidiaries producing the revenues (in thousands):

Three Months Ended						North
June 30, 2011		Asia				America				Europe				Consolidated
Total sales		$	150,015			$	37,224			$	61,710			$	248,949
Inter-company sales			(24,128	)			(15,878	)			(39,137	)			(79,143	)
Net sales		$	125,887			$	21,346			$	22,573			$	169,806

Three Months Ended						North
June 30, 2011		Asia				America				Europe				Consolidated
Total sales		$	122,170			$	37,010			$	42,771			$	201,951
Inter-company sales			(12,558	)			(14,099	)			(26,141	)			(52,798	)
Net sales		$	109,612			$	22,911			$	16,630			$	149,153

Six Months Ended						North
June 30, 2011		Asia				America				Europe				Consolidated
Total sales		$	281,570			$	72,597			$	110,473			$	464,640
Inter-company sales			(38,577	)			(31,210	)			(63,492	)			(133,279	)
Net sales		$	242,993			$	41,387			$	46,981			$	331,361
Property, plant and equipment		$	162,654			$	34,459			$	32,680			$	229,793
Total assets		$	512,542			$	183,362			$	227,160			$	923,064

Six Months Ended						North
June 30, 2011		Asia				America				Europe				Consolidated
Total sales		$	231,231			$	69,611			$	82,643			$	383,485
Inter-company sales			(22,093	)			(25,196	)			(50,196	)			(97,485	)
Net sales		$	209,138			$	44,415			$	32,447			$	286,000
Property, plant and equipment		$	123,614			$	29,783			$	30,846			$	184,243
Total assets		$	427,116			$	161,560			$	184,015			$	772,691

Geographic Information

          Revenues were derived from (billed to) customers located in the following countries (in thousands):

		Net Sales
		for the Three Months								Percentage of
		Ended June 30,								Net Sales
		2011				2010				2011				2010
China		$	53,129			$	46,898				31	%			31	%
Taiwan			36,581				34,803				22	%			23	%
United States			29,928				32,584				18	%			22	%
Korea			10,422				8,558				6	%			6	%
England			8,510				1,817				5	%			1	%
Germany			7,999				10,121				5	%			7	%
Singapore			6,027				6,018				3	%			4	%
All Others (1)			17,210				8,354				10	%			6	%
Total		$	169,806			$	149,153				100	%			100	%

		Net Sales
		for the Six Months								Percentage of
		Ended June 30,								Net Sales
		2011				2010				2011				2010
China		$	100,565			$	88,957				30	%			31	%
Taiwan			74,261				67,806				23	%			24	%
United States			56,457				61,789				17	%			22	%
Korea			20,189				16,888				6	%			6	%
Germany			17,456				17,152				5	%			6	%
England			17,228				6,675				5	%			2	%
Singapore			11,589				11,369				4	%			4	%
All Others (1)			33,616				15,364				10	%			5	%
Total		$	331,361			$	286,000				100	%			100	%

NOTE I – Convertible Senior Notes

          In October 2006, the Company issued and sold Notes with an aggregate principal amount of $230 million due 2026, 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.

          On October 1, 2011, and every five years thereafter, holders may require the Company to purchase all or a portion of their Notes at a purchase price in cash equal to 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the purchase date. Therefore, the Company has classified its Notes as a current liability. Should the holders choose not to require the Company to purchase their Notes on October 1, 2011, the Company has the option to call the Notes, which it intends to do. Should the holders choose to require the Company to purchase its Notes or if the Company exercises its option, either will require the Company to use available funds and/or seek alternative means to service the debt.

          The Notes can be converted into cash or, at the Company’s option, cash and/or shares of the Company’s Common Stock based on an initial conversion rate, subject to adjustment, of 25.6419 shares (split adjusted) per $1,000 principal amount of Notes, which represents an initial conversion price of $39.00 per share (split adjusted), in certain circumstances. In addition, following a “make-whole fundamental change” that occurs prior to October 1, 2011, the Company may, at its option, increase the conversion rate for a holder who elects to convert its Notes in connection with such “make-whole fundamental change,” in certain circumstances.

          In determining the liability and equity components, the Company determined the expected life of the Notes to be five years as that is the earliest date in which the Notes can be put back to the Company at par value. As of June 30, 2011, three months remain over which the discount of the liability will be amortized. As of June 30, 2011, the liability and equity components are as follows (in thousands):

Liability Component		Liability Component				Liability Component				Equity Component
Principal Amount		Net Carrying Amount				Unamortized Discount				Carrying Amount
$                       134,293		$	132,272			$	2,021			$	35,515

          The effective interest rate of the liability component is 8.5%, which is a comparable yield for nonconvertible notes with terms and conditions otherwise comparable to the Company’s Notes as of the date of issuance. The amount of interest expense, including amortization of debt discount for the liability component and debt issuance costs is as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Notes contractual interest expense		$	754			$	792			$	1,510			$	1,552
Amortization of debt discount			2,027				1,873				4,011				3,707
Amortization of debt issuance costs			138				136				275				274
Total		$	2,919			$	2,801			$	5,796			$	5,533

NOTE J – Commitments

          Purchase commitments – As of June 30, 2011, the Company had approximately $22 million in non-cancelable purchase contracts related to capital expenditures, primarily for manufacturing equipment in China.

          Other commitments – During 2010, the Company entered into an investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the “CDHT”). Under this agreement, the Company agreed to form a joint venture with a Chinese partner, Chengdu Ya Guang Electronic Company Limited, to establish a semiconductor manufacturing facility for the purpose of providing surface mounted component production, assembly and testing, and integrated circuit assembly and testing in Chengdu, People’s Republic of China. This is a long-term, multi-year project that will provide additional capacity once the Company has reached the maximum capacity at its Shanghai facilities in the next few years. The Company is expected to invest approximately $48 million in installments during the first three years. As of June 30, 2011, the Company has invested approximately $5 million.

NOTE K – Employee Benefit Plans

Defined Benefit Plan

          The Company has a contributory defined benefit plan that covers certain employees in the United Kingdom (“U.K.”) and Germany. The net pension and supplemental retirement benefit obligations and the related periodic costs are based on, among other things, assumptions regarding 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.

          For the six months ended June 30, 2011, net period benefit costs associated with the defined benefit plan were approximately $0 million.

          The following tables set forth the benefit obligation, the fair value of plan assets, and the funded status of the Company’s plan (in thousands):

		Defined Benefit Plan
Change in benefit obligation:
Balance at December 31, 2010		$	118,505
Service cost			162
Interest cost			3,090
Actuarial gain			(6,545	)
Benefits paid			(1,970	)
Currency changes			3,040
Benefit obligation at June 30, 2011		$	116,282
Change in plan assets:
Fair value of plan assets at December 31, 2010		$	93,642
Actual return on plan assets			1,807
Employer contribution			1,535
Benefits paid			(1,970	)
Currency changes			2,366
Fair value of plan assets at June 30, 2011		$	97,380
Underfunded status at June 30, 2011		$	(18,902	)

          Based on an actuarial study performed as of June 30, 2011, the plan is underfunded and a liability is reflected in the Company’s consolidated financial statements as a long-term liability. The weighted-average discount rate assumption used to determine benefit obligations as of June 30, 2011 was 5.5%.

          The following are weighted-average assumptions used to determine net periodic benefit costs for the six months ended June 30, 2011:

Discount rate			5.4	%
Expected long-term return on plan assets			6.6	%

          The Company previously adopted a payment plan 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 year from 2009 through 2012. Contribution amounts, if any, for 2013 and thereafter have not yet been determined, but discussions are ongoing with the trustees of the defined benefit plan as to the required payments going forward.

          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, are not included in the figures or assumptions above.

          The Company maintains 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, including equity awards, 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 June 30, 2011, these investments totaled approximately $3 million. All gains and losses in these investments are materially offset by corresponding gains and losses in the Deferred Compensation Plan liabilities.

NOTE L – Related Parties

          The Company conducts business with one related party company, Lite-On Semiconductor Corporation and its subsidiaries and affiliates (collectively, “LSC”), that owned approximately 18.4% of the Company’s outstanding Common Stock as of June 30, 2011. The Company also conducts business with one significant company, Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (collectively, “Keylink”). Keylink is the Company’s 5% joint venture partner in the Company’s Shanghai manufacturing facilities.

          The Audit Committee of the Company’s Board 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.

          Lite-On Semiconductor Corporation – During the six months ended June 30, 2011 and 2010, the Company sold products to LSC totaling approximately 0% and 2% of its net sales, respectively. Net sales decreased in 2011 compared to 2010 due to less wafers being sold to LSC and more wafers being used for internal consumption. Also, for the six months ended June 30, 2011 and 2010, approximately 6% and 11%, respectively, of the Company’s net sales were from semiconductor products purchased from LSC for subsequent sale, making LSC the Company’s largest supplier.

          Net sales to, and purchases from, LSC are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net sales		$	505			$	2,038			$	952			$	4,526
Purchases		$	9,541			$	11,623			$	18,494			$	20,888

          Keylink International (B.V.I.) Inc. – During the six months ended June 30, 2011 and 2010, the Company sold products to subsidiaries and affiliates of Keylink totaling approximately 0% and 3% of its net sales, respectively. Net sales decreased in 2011 compared to 2010 due to a contract expiring, which is currently being renegotiated. Also, for the six months ended June 30, 2011 and 2010, approximately 1% and 3%, respectively, of the Company’s net sales were from semiconductor products purchased from Keylink. In addition, the Company’s subsidiaries in China lease their manufacturing facilities from, and subcontract a portion of their manufacturing process (including, but not limited to, metal plating and environmental services) to Keylink. The Company also pays a consulting fee to, Keylink. For both the six months ended June 30, 2011 and 2010, the Company paid Keylink an aggregate of approximately $8 million with respect to these items.

          Net sales to, and purchases from, Keylink are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net sales		$	18			$	4,129			$	1,204			$	7,742
Purchases		$	3,017			$	2,547			$	5,880			$	5,173

          Accounts receivable from, and accounts payable to, LSC and Keylink are as follows (in thousands):

		June 30,
		2011
Accounts receivable
LSC		$	446
Keylink			700
		$	1,146
Accounts payable
LSC		$	8,031
Keylink			7,059
		$	15,090

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made 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 its 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 management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, previously filed with Securities and Exchange Commission.

Highlights

	•		Net sales for the three months ended June 30, 2011 was $170 million, an increase of $21 million, or 14%, over the same period last year, and a sequential increase of 5% compared to the $162 million in the first quarter of 2011;
	•		Net sales for the six months ended June 30, 2011 was $331 million, an increase of $45 million, or 16%, over the same period last year;
	•		Gross profit for the three months ended June 30, 2011 was $56 million, an increase of $2 million, or 4%, over the same period last year, and a sequential decrease of 3% compared to the $57 million in the first quarter of 2011;
	•		Gross profit for the six months ended June 30, 2011 was $113 million, an increase of $12 million, or 12%, over the same period last year;
	•		Gross profit margin for the three months ended June 30, 2011 was 33%, a decrease of 3% over the same period last year, and a sequential decrease of 3% compared to the first quarter of 2011;
	•		Gross profit margin for the six months ended June 30, 2011 was 34%, a decrease of 1% over the same period last year;
	•		Net income attributable to common stockholders for the three months ended June 30, 2011 was $18 million, or $0.38 per diluted share, compared to the same period last year, which was $17 million, or $0.37 per diluted share, and first quarter of 2011 net income of $20 million, or $0.42 per diluted share; and
	•		Net income attributable to common stockholders for the six months ended June 30, 2011 was $38 million, or $0.80 per diluted share, compared to the same period last year, which was $32 million, or $0.70 per diluted share.

          Business Outlook

          During the second quarter, distributor inventory days were down slightly from the first quarter, while channel inventory was at the high end of the preferred range as we exited the quarter. We saw weakening demand at the end of the second quarter, especially in the consumer and LED TV market, which has continued into July and the market outlook for the rest of the third quarter is uncertain. Despite market challenges, we believe we are well positioned with our customers and have a broadened product portfolio, design win momentum and the capacity to expand our revenues and margins as demand improves. As such, we expect revenue for the third quarter of 2011 to range between $160 million and $170 million, or flat to down 6% sequentially. We expect gross margin to be 32%, plus or minus 1.5%. Operating expenses are expected to be comparable to the second quarter on a dollar basis. We expect our income tax rate to range between 17% and 23%, and shares used to calculate earnings per share for the third quarter of 2011 are expected to be approximately 48 million.

Overview

          We are a leading global manufacturer and supplier of high-quality, application specific standard products within the broad discrete, logic and analog semiconductor markets, serving the consumer electronics, computing, communications, industrial and automotive markets. The products are sold primarily throughout Asia, North America and Europe.

          We design, manufacture and market these semiconductors for diverse end-use applications. 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.

          During the first quarter of 2011, net sales were stronger than typical first quarter seasonal patterns, assisted by increased demand in tablets, notebooks, smartphones and LED TV’s. We saw strong demand in Europe and Asia, while North America revenue declined sequentially from fourth quarter of 2010. In addition, the first quarter of 2011 was impacted by reduced unit output from our packaging facilities due to lower equipment utilization as a result of China labor shortages, and gross margin reflected reduced fixed cost coverage caused by the lower unit output. Although we experienced lower unit output during the first quarter, we were able to ship from finished goods inventory and reduced our contract assembly commitments, which allowed us to achieve sequential revenue growth in our core business. During the second quarter, we continued to focus on design wins, new products and customer expansion. During May, we started to see a slowdown in the global markets, in particular the consumer and computing space. This weakness accelerated in the last several weeks of the second quarter affecting several of our customers that build product for the U.S. and European markets. Gross margin in the second quarter was also impacted by the softening demand, which caused us to change our mix to lower margin commodity products to support revenue. In addition, there was a slower than expected ramp in productivity due to the training requirements for replacing operators as a result of the China labor shortages. We expect this productivity issue to be resolved by the end of the third quarter. We have taken several actions, including the delay of capital investments and the freezing of manufacturing manpower, until such time that the demand environment improves.

          The following has affected, and, we believe, will continue to affect, our results of operations:

	•		Net sales for the six months ended June 30, 2011 was $331 million compared to $286 million in the same period last year. This increase in net sales mainly reflects the increase in demand for our products in most geographic regions.
	•		Our gross profit margin was 34% for the six months ended June 30, 2011, compared to 35% in the same period last year. Our gross margin percentage decreased over the same period last year due to a shift in product mix to lower margin products and lower equipment utilization due to the need to train replacement operators as a result of the previously disclosed China labor shortages. Future gross profit margins will depend primarily on market prices, our product mix, manufacturing cost savings, and the demand for our products.
	•		For the six months ended June 30, 2011, our capital expenditures, excluding capital expenditures related to our investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the “CDHT”), were approximately 15% of our net sales, which is higher than our historical 10% to 12% of net sales model. For 2011, we expect capital expenditures, excluding capital expenditures related to our investment agreement, to be at the low end of our historical model.
	•		For the six months ended June 30, 2011 and 2010, the percentage of our net sales derived from our Asian subsidiaries was 73%. In the near future, we expect our percentage of net sales to the Asian market to remain approximately the same. In addition, Europe accounted for approximately 14% of our revenues for the six months ended June 30, 2011, compared to 11% in the same period last year.
	•		As of June 30, 2011, we had invested approximately $325 million in our Asian manufacturing facilities. For the six months ended June 30, 2011, we invested approximately$45 million in these manufacturing facilities, and we expect to continue to invest in our manufacturing facilities, although the amount to be invested will depend on product demand and new product developments.
	•		For the six months ended June 30, 2011, our original equipment manufacturers (“OEM”) and electronic manufacturing services (“EMS”) customers together accounted for approximately 46% of our net sales, while our global network of distributors accounted for approximately 54% of our net sales.

Results of Operations for the Three Months Ended June 30, 2011 and 2010

          The following table sets forth, 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
		Three months ended June 30,								(Decrease)
		2011				2010				'10 to '11
Net sales			100	%			100	%			14
Cost of goods sold			(67	)			(64	)			19
Gross profit			33				36				4
Operating expenses			(18	)			(20	)			3
Income from operations			15				16				6
Other income (expense)			(1	)			(2	)			(248	)
Income before income taxes and noncontrolling interest			14				14				14
Income tax provision			3				2				55
Net income			11				12				7
Net income attributable to noncontrolling interest			—				(1	)			(18	)
Net income attributable to common stockholders			11				11				8

          The following discussion explains in greater detail our consolidated operating results and financial condition for the three months ended June 30, 2011, compared to the three months ended June 30, 2010. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).

		2011				2010
Net Sales		$	169,806			$	149,153

          Net sales increased approximately $21 million for the three months ended June 30, 2011, compared to the same period last year. The 14% increase in net sales represented an approximately 4% increase in ASP and a 10% increase in units sold. The revenue increase for the three months ended June 30, 2011 was attributable to increase in demand for our products primarily in Europe and Asia.

		2011				2010
Cost of goods sold		$	114,191			$	95,686
Gross profit		$	55,615			$	53,467
Gross profit margin			32.8	%			35.8	%

          Cost of goods sold increased approximately $19 million, or 19%, for the three months ended June 30, 2011, compared to the same period last year. As a percent of sales, cost of goods sold increased to 67% for the three months ended June 30, 2011, compared to 64% in the same period last year, and our average unit cost (“AUP”) increased 9% due to product mix.

          For the three months ended June 30, 2011, gross profit increased by approximately $2 million, or 4%, compared to the same period last year. Gross margin decreased to 33% for the three months ended June 30, 2011, compared to 36% for the same period last year.

		2011				2010
Operating expenses		$	30,261			$	29,459

          Operating expenses for the three months ended June 30, 2011 increased approximately $1 million compared to the same period last year. In addition, of the components within operating expenses, selling, general and administrative expenses (“SG&A”) increased $1 million, while research and development expenses (“R&D”) remained relatively flat. SG&A, as a percentage of sales, decreased to 13% for the three months ended June 30, 2011, compared to 14% in the same period last year, and R&D, as a percentage of sales, decreased to 4% for the three months ended June 30, 2011, compared to 5% in the same period last year, due to higher net sales.

		2011				2010
Other income (expenses)		$	(1,913	)		$	(3,423	)

          Other expenses decreased for the three months ended June 30, 2011 to approximately $2 million, compared to approximately $3 million in the same period last year, due primarily to a foreign currency gain in 2011 compared to a foreign currency loss in 2010.

		2011				2010
Income tax provision		$	4,718			$	3,035

          We recognized income tax expense of approximately $5 million for the three months ended June 30, 2011, compared to approximately $3 million in the same period last year. The estimated effective tax rate is approximately 20% for the three months ended June 30, 2011, compared to approximately 15% in the same period last year. Our effective tax rates for the three months ended June 30, 2011 and 2010, were lower than the U.S. statutory tax rate of 35%, due primarily from the impact of higher income in lower-taxed jurisdictions. In addition, the Company’s effective tax rate for the three months ended June 30, 2010 was also impacted by the noncash income tax benefit of reversing valuation allowances on deferred tax assets from U.K. loss carryforwards.

Results of Operations for the Six Months Ended June 30, 2011 and 2010

          The following table sets forth, 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
		Six months ended June 30,								(Decrease)
		2011				2010				'10 to '11
Net sales			100	%			100	%			16
Cost of goods sold			(66	)			(65	)			18
Gross profit			34				35				12
Operating expenses			(18	)			(20	)			2
Income from operations			16				15				25
Other income (expense)			(2	)			(1	)			(173	)
Income before income taxes and noncontrolling interest			15				14				23
Income tax provision			3				2				50
Net income			12				12				17
Net income attributable to noncontrolling interest			—				(1	)			(19	)
Net income attributable to common stockholders			12				11				19

          The following discussion explains in greater detail our consolidated operating results and financial condition for the six months ended June 30, 2011, compared to the six months ended June 30, 2010. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).

		2011				2010
Net Sales		$	331,361			$	286,000

          Net sales increased approximately $45 million for the six months ended June 30, 2011, compared to the same period last year. The 16% increase in net sales represented an approximately 2% increase in ASP and a 13% increase in units sold. The revenue increase for the six months ended June 30, 2011 was attributable to increase in demand for our products primarily in Europe and Asia.

		2011				2010
Cost of goods sold		$	218,353			$	184,750
Gross profit		$	113,008			$	101,250
Gross profit margin			34.1	%			35.4	%

          Cost of goods sold increased approximately $34 million, or 18%, for the six months ended June 30, 2011 compared to the same period last year. As a percent of sales, cost of goods sold increased to 66% for the six months ended June 30, 2011 compared to 65% in the same period last year, and AUP increased 4% due to product mix.

          For the six months ended June 30, 2011, gross profit increased by approximately $12 million, or 12%, compared to the same period last year. Gross margin decreased to 34% for the six months ended June 30, 2011, compared to 35% for the same period last year.

		2011				2010
Operating expenses		$	59,324			$	58,382

          Operating expenses for the six months ended June 30, 2011 increased approximately $1 million compared to the same period last year. In addition, of the components within operating expenses, selling, general and administrative expenses (“SG&A”), increased $1 million, while research and development expenses (“R&D”) remained relatively flat. SG&A, as a percentage of sales, decreased to 13% for the six months ended June 30, 2011, compared to 15% in the same period last year, and R&D, as a percentage of sales, decreased to 4% for the six months ended June 30, 2011, compared to 5% in the same period last year, due to higher net sales.

		2011				2010
Other income (expenses)		$	(5,144	)		$	(3,279	)

          Other expenses increased for the six months ended June 30, 2011 to approximately $5 million, compared to approximately $3 million in the same period last year, due primarily to a gain on sale of non-core intellectual property for which no intangible assets were ever recorded of approximately $2 million in the six months ended June 30, 2010 and a foreign currency loss of approximately $1 million for the six months ended June 30, 2010 compared to an almost net zero for the same period of 2011. Interest income and expense both decreased approximately $2 million due to the absence of interest income being earned on our auction rate securities and the decrease in interest expense due primarily to the repayment of our “no net cost” loan on June 30, 2010 in connection with the previously disclosed settlement agreement with UBS.

		2011				2010
Income tax provision		$	9,553			$	6,359

          We recognized income tax expense of approximately $10 million for the six months ended June 30, 2011, compared to approximately $6 million in the same period last year. The estimated effective tax rate is approximately 20% for the six months ended June 30, 2011, compared to approximately 16% in the same period last year. Our effective tax rates for the six months ended June 30, 2011 and 2010 were lower than the U.S. statutory tax rate of 35%, due primarily from the impact of higher income in lower-taxed jurisdictions. In addition, the Company’s effective tax rate for the six months ended June 30, 2010 was also impacted by the noncash income tax benefit of reversing valuation allowances on deferred tax assets from U.K. loss carryforwards.

Financial Condition

Liquidity and Capital Resources

          Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under our credit facilities. We currently have a U.S. credit agreement for a $10 million revolving credit facility and a $10 million uncommitted facility with no outstanding borrowings and have foreign credit facilities with borrowing capacities of approximately $35 million with $10 million outstanding borrowings and $4 million used for import and export guarantees. Our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations. At December 31, 2010 and June 30, 2011, our working capital was $289 million and $316 million, respectively. Our working capital increased in the first six months of 2011 primarily due to the increase in cash and accounts receivables. We expect cash generated by our 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.

          On October 1, 2011, the holders of our 2.25% Convertible Senior Notes due 2026 (“Notes”) can require us to purchase all or a portion of their Notes at a purchase price in cash equal to 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the purchase date. Therefore, we have classified our Notes as a current liability. Should the holders choose to not require us to purchase their Notes on October 1, 2011, we have the option to call the Notes, which we intend to do. Should the holders choose to require us to purchase their Notes or if we exercise our option, either will require us to use available funds and/or seek alternative means to service the debt.

          Capital expenditures for the six months ended June 30, 2011 and 2010 were $54 million and $47 million, respectively, which include $5 million of capital expenditures related to the investment agreement with the Management Committee of the CDHT for the six months ended June 30, 2011. Capital expenditures, excluding capital expenditures related to the investment agreement, in the first six months of 2011 were approximately 15% of our net sales and were primarily related to manufacturing expansion in our facilities in China.

          On June 24, 2011, we announced an agreement to purchase up to approximately $14 million of the common stock of Eris Technology Corporation, a publicly traded company listed as an Emerging Stock on the Taiwan OTC Exchange (TWO) that provides design, manufacturing and after-market services for diode products. We expect the purchase to occur during the second half of 2011.

Discussion of Cash Flow

          Cash and cash equivalents increased from $271 million at December 31, 2010, to $290 million at June 30, 2011 primarily from cash provided by operating and financing activities, offset by cash used in investing activities.

          A summary of the consolidated condensed statements of cash flows is as follows (in thousands):

		Six Months Ended June 30,
		2011				2010				Change
Net cash provided by operating activities		$	48,082			$	46,928			$	1,154
Net cash provided by (used by) investing activities			(44,897	)			257,536				(302,433	)
Net cash provided by (used by) financing activities			13,349				(296,337	)			309,686
Effect of exchange rates on cash and cash equivalents			2,931				(4,440	)			7,371
Net increase in cash and cash equivalents		$	19,465			$	3,687			$	15,778

          Operating Activities

          Net cash provided by operating activities for the six months ended June 30, 2011 was $48 million, resulting primarily from $39 million of net income and $29 million in depreciation and amortization, offset partially by a $27 million increase in operating assets. Net cash provided by operating activities was $47 million for the same period last year, resulting primarily from $33 million of net income and $25 million in depreciation and amortization, offset partially by a greater increase in operating assets than operating liabilities.

          Investing Activities

          Net cash used in investing activities was $45 million for the six months ended June 30, 2011 compared to net cash provided by of $258 million for the same period last year. This decrease in net cash provided by investing activities was due primarily to $297 million in proceeds from the sale of short-term investments in 2010.

          Financing Activities

          Net cash provided by financing activities was $13 million for the six months ended June 30, 2011 compared to net cash used in of $296 million in the same period last year. This decrease in net cash used in was due primarily to $302 million repayment on lines of credit with the proceeds from the sale of short-term investments in 2010.

Debt Instruments

          There have been no material changes to our debt instruments as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 28, 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 provide off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, swap agreements, or outsourcing 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 as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 28, 2011.

Critical Accounting Policies

          Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, relate to revenue recognition, inventories, accounting for income taxes, goodwill and long-lived assets, share-based compensation, fair value measurements, defined benefit plan, contingencies and convertible senior notes. There have been no material changes to our critical accounting policies since December 31, 2010.

Recently Issued Accounting Pronouncements

          See Note A of the 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 Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). 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 Factors” 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 Company’s most recent Annual Report on Form 10-K as filed with the SEC 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

	•		The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our revenues, results of operations and financial condition.
	•		During times of difficult market conditions, our fixed costs combined with lower revenues may have a negative impact on our business, results of operations and financial condition.
	•		Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our results of operations and financial condition.
	•		The semiconductor business is highly competitive, and increased competition may harm our business, results of operations and financial condition.
	•		A related party is our largest external supplier and the loss of this supplier could harm our business, results of operations and financial condition.
	•		Delays in initiation of production at facilities, implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, results of operations and financial condition.
	•		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.
	•		Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales, which could adversely affect our revenues, results of operations and financial condition.
	•		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.
	•		Production at our manufacturing facilities could be disrupted for a variety of reasons, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our results of operations and financial condition.

	•		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 would adversely affect our net sales, market share, results of operations and financial condition.
	•		We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, results of operations and financial condition.
	•		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.
	•		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 reputation with customers, results of operations and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner.
	•		If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, profit margins, results of operations and financial condition.
	•		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, which could adversely affect our business, results of operations and financial condition.
	•		We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, results of operations and financial condition.
	•		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, reputation with our customers, results of operations and financial condition.
	•		We may fail to attract or retain the qualified technical, sales, marketing and management personnel required to operate our business successfully, which could adversely affect on our business, results of operations and financial condition.
	•		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, which could adversely affect our business, results of operations and financial condition.
	•		Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely affect our business, results of operations and financial condition.
	•		If OEMs do not design our products into their applications, a portion of our net sales may be adversely affected.
	•		We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses.
	•		We had a significant amount of debt following the offering of convertible notes. Our substantial indebtedness could adversely affect our business, results of operations, financial condition and our ability to meet our payment obligations under the notes and or other debt.
	•		Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.
	•		The value of our defined benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.
	•		Due to fluctuations in the U.K.’s equity markets and bond markets, changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our results of operations and financial condition.
	•		In 2010, we established a joint venture to build a semiconductor facility in Chengdu, People’s Republic of China. We are required to contribute at least $47.5 million to the joint venture during the first three years with additional contributions thereafter, as well as a substantial amount of time and resources to establish and operate the joint venture. Any failure to meet any such requirements, delays or unforeseen circumstances may cause us to incur penalties or require us to contribute