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 June 30, 2009
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 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 o 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 |
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Accelerated filer
o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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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 registrants Common Stock outstanding as of August 4, 2009 was
42,489,550.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
|
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|
|
|
|
|
|
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December 31, |
|
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June 30, |
|
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|
2008 |
|
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2009 |
|
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|
(As Adjusted) |
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
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|
Cash and cash equivalents |
|
$ |
103,496 |
|
|
$ |
109,486 |
|
Short-term investment securities |
|
|
|
|
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|
319,825 |
|
Accounts receivable, net |
|
|
74,574 |
|
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|
85,702 |
|
Inventories |
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|
99,118 |
|
|
|
79,784 |
|
Deferred income taxes, current |
|
|
6,761 |
|
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|
6,958 |
|
Prepaid expenses and other |
|
|
15,578 |
|
|
|
11,637 |
|
|
|
|
|
|
|
|
Total current assets |
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|
299,527 |
|
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|
613,392 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
LONG-TERM INVESTMENT SECURITIES |
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320,625 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
PROPERTY, PLANT AND EQUIPMENT, net |
|
|
174,667 |
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|
169,019 |
|
|
|
|
|
|
|
|
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OTHER ASSETS |
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|
|
|
|
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Goodwill |
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56,791 |
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|
68,356 |
|
Intangible assets, net |
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|
35,928 |
|
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|
37,833 |
|
Other |
|
|
5,907 |
|
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|
4,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
893,445 |
|
|
$ |
893,549 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS(cont)
LIABILITIES AND EQUITY
(Unaudited)
(In thousands, except share data)
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|
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December 31, |
|
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June 30, |
|
|
|
2008 |
|
|
2009 |
|
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|
(As Adjusted) |
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
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|
Lines of credit |
|
$ |
6,098 |
|
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$ |
215,249 |
|
Accounts payable |
|
|
47,561 |
|
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|
44,029 |
|
Accrued liabilities |
|
|
31,195 |
|
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|
26,294 |
|
Income tax payable |
|
|
358 |
|
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|
4,374 |
|
Current portion of long-term debt |
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|
1,339 |
|
|
|
363 |
|
Current portion of capital lease obligations |
|
|
377 |
|
|
|
349 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
86,928 |
|
|
|
290,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, net of current portion |
|
|
|
|
|
|
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Convertible senior notes |
|
|
155,451 |
|
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|
138,687 |
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Long-term borrowings |
|
|
217,146 |
|
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS, net of current portion |
|
|
1,854 |
|
|
|
1,808 |
|
DEFERRED INCOME TAXES, non-current |
|
|
10,753 |
|
|
|
18,520 |
|
OTHER LONG-TERM LIABILITIES |
|
|
22,935 |
|
|
|
48,238 |
|
|
|
|
|
|
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Total liabilities |
|
|
495,067 |
|
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|
501,474 |
|
|
|
|
|
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COMMITMENTS AND CONTINGENCIES |
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EQUITY |
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Diodes Incorporated 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;
41,378,816 and 42,436,009 issued and outstanding at December 31, 2008 and
June 30, 2009, respectively |
|
|
27,586 |
|
|
|
28,291 |
|
Additional paid-in capital |
|
|
167,964 |
|
|
|
185,134 |
|
Retained earnings |
|
|
241,814 |
|
|
|
228,094 |
|
Accumulated other comprehensive loss |
|
|
(48,439 |
) |
|
|
(58,085 |
) |
|
|
|
|
|
|
|
Total Diodes Incorporated stockholders equity |
|
|
388,925 |
|
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|
383,434 |
|
Noncontrolling interest |
|
|
9,453 |
|
|
|
8,641 |
|
|
|
|
|
|
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|
Total equity |
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|
398,378 |
|
|
|
392,075 |
|
|
|
|
|
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Total liabilities and equity |
|
$ |
893,445 |
|
|
$ |
893,549 |
|
|
|
|
|
|
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|
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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Six Months Ended |
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June 30, |
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June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
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|
(As Adjusted) |
|
|
|
|
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|
(As Adjusted) |
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NET SALES |
|
$ |
116,018 |
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|
$ |
103,898 |
|
|
$ |
211,598 |
|
|
$ |
181,948 |
|
|
|
|
|
|
|
|
|
|
|
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|
COST OF GOODS SOLD |
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|
76,400 |
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|
76,528 |
|
|
|
140,064 |
|
|
|
140,085 |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
39,618 |
|
|
|
27,370 |
|
|
|
71,534 |
|
|
|
41,863 |
|
|
|
|
|
|
|
|
|
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|
|
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OPERATING EXPENSES |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Selling, general and administrative |
|
|
17,052 |
|
|
|
15,240 |
|
|
|
31,594 |
|
|
|
31,296 |
|
Research and development |
|
|
4,832 |
|
|
|
5,385 |
|
|
|
8,406 |
|
|
|
10,660 |
|
Amortization of acquisition related intangible assets |
|
|
237 |
|
|
|
1,118 |
|
|
|
471 |
|
|
|
2,209 |
|
Restructuring |
|
|
|
|
|
|
(248 |
) |
|
|
|
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
22,121 |
|
|
|
21,495 |
|
|
|
40,471 |
|
|
|
44,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
17,497 |
|
|
|
5,875 |
|
|
|
31,063 |
|
|
|
(2,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,554 |
|
|
|
1,345 |
|
|
|
8,002 |
|
|
|
3,102 |
|
Interest expense |
|
|
(2,207 |
) |
|
|
(1,877 |
) |
|
|
(3,828 |
) |
|
|
(3,925 |
) |
Amortization of debt discount |
|
|
(2,691 |
) |
|
|
(2,281 |
) |
|
|
(5,325 |
) |
|
|
(4,490 |
) |
Other |
|
|
(1,202 |
) |
|
|
(275 |
) |
|
|
(1,496 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses |
|
|
(3,546 |
) |
|
|
(3,088 |
) |
|
|
(2,647 |
) |
|
|
(5,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling interest |
|
|
13,951 |
|
|
|
2,787 |
|
|
|
28,416 |
|
|
|
(7,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
1,762 |
|
|
|
5,156 |
|
|
|
2,980 |
|
|
|
5,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
12,189 |
|
|
|
(2,369 |
) |
|
|
25,436 |
|
|
|
(13,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: NET INCOME attributable to noncontrolling interest |
|
|
(675 |
) |
|
|
(584 |
) |
|
|
(1,279 |
) |
|
|
(688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) attributable to common stockholders |
|
$ |
11,514 |
|
|
$ |
(2,953 |
) |
|
$ |
24,157 |
|
|
$ |
(13,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
(0.07 |
) |
|
$ |
0.60 |
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.27 |
|
|
$ |
(0.07 |
) |
|
$ |
0.57 |
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
40,616 |
|
|
|
41,587 |
|
|
|
40,431 |
|
|
|
41,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
42,843 |
|
|
|
41,587 |
|
|
|
42,695 |
|
|
|
41,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
|
(As Adjusted) |
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
25,436 |
|
|
$ |
(13,031 |
) |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
16,465 |
|
|
|
20,785 |
|
Amortization of intangibles |
|
|
466 |
|
|
|
2,286 |
|
Amortization of convertible bond issuance costs |
|
|
467 |
|
|
|
343 |
|
Amortization of discount on convertible bond |
|
|
5,325 |
|
|
|
4,490 |
|
Share-based compensation |
|
|
5,133 |
|
|
|
4,684 |
|
Gain on disposal of property, plant and equipment |
|
|
(37 |
) |
|
|
(30 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
(1,354 |
) |
Investment gain recognized under equity method |
|
|
|
|
|
|
53 |
|
Changes in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(7,347 |
) |
|
|
(10,037 |
) |
Inventories |
|
|
(16,652 |
) |
|
|
22,624 |
|
Prepaid expenses and other current assets |
|
|
(1,237 |
) |
|
|
3,150 |
|
Deferred income taxes |
|
|
(973 |
) |
|
|
(35 |
) |
Changes in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(3,502 |
) |
|
|
(4,117 |
) |
Accrued liabilities |
|
|
(1,248 |
) |
|
|
(7,274 |
) |
Deferred income taxes |
|
|
(2,077 |
) |
|
|
1,480 |
|
Other liabilities |
|
|
(104 |
) |
|
|
(3,091 |
) |
Income taxes payable |
|
|
3,064 |
|
|
|
3,639 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
23,179 |
|
|
$ |
24,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
$ |
(152,934 |
) |
|
$ |
(30 |
) |
Acquired intangibles |
|
|
(66 |
) |
|
|
|
|
Purchases of securities |
|
|
(3,963 |
) |
|
|
|
|
Proceeds from sale of securities |
|
|
6,760 |
|
|
|
800 |
|
Purchases of property, plant and equipment |
|
|
(25,092 |
) |
|
|
(9,375 |
) |
Proceeds from sale of property, plant and equipment |
|
|
45 |
|
|
|
93 |
|
Purchases of other assets |
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(175,250 |
) |
|
$ |
(7,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Advances (repayments) on line of credit |
|
$ |
16,463 |
|
|
$ |
(3,655 |
) |
Net proceeds from issuance of common stock |
|
|
1,147 |
|
|
|
99 |
|
Proceeds from long-term debt |
|
|
165,000 |
|
|
|
|
|
Dividend distribution to noncontrolling interest |
|
|
|
|
|
|
(1,500 |
) |
Repayments of long-term debt |
|
|
(1,062 |
) |
|
|
(8,225 |
) |
Repayments of capital lease obligations |
|
|
(156 |
) |
|
|
(193 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
181,392 |
|
|
$ |
(13,474 |
) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
632 |
|
|
|
2,690 |
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
29,953 |
|
|
|
5,990 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
56,179 |
|
|
|
103,496 |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
86,132 |
|
|
$ |
109,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for repayment of
long-term debt |
|
$ |
|
|
|
$ |
(13,236 |
) |
The accompanying notes are an integral part of these financial statements.
6
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
designer, manufacturer and supplier of high-quality, application specific standard products within
the broad discrete and analog semiconductor markets, serving the consumer electronics, computing,
communications, industrial and automotive markets. These products include diodes, rectifiers,
transistors, MOSFETs, protection devices, functional specific arrays, amplifiers and comparators,
Hall effect sensors and temperature sensors, power management devices (including LED drivers),
DC-DC switching and linear voltage regulators, voltage references, special function devices
(including USB power switch, load switch, voltage supervisor and motor controllers) and silicon
wafers used to manufacture these products. These products are sold primarily throughout North
America, Asia 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 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 Companys Annual Report on Form 10-K for
the year ended December 31, 2008. 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, 2009 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2009. The consolidated condensed financial data
at December 31, 2008 is derived from audited financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008 and subsequently adjusted for a change in
accounting principle on January 1, 2009. See Note B for additional information regarding the
change in accounting principle. Subsequent events were evaluated through August 7, 2009, the date
these consolidated condensed financial statements were issued.
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 are based on full year forecasts. Such amounts are
expensed in full in the year incurred.
Certain prior years balances have been reclassified to conform to the current financial
statement presentation.
Recently Issued Accounting Pronouncements
In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 132R-1, Employers Disclosures about Postretirement Benefit Plan Assets. This
pronouncement provides additional guidance regarding disclosures about plan assets of defined
benefit pensions or other postretirement plans. FSP FAS 132R-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2009. The Company is currently
evaluating the future impacts and required disclosures of this pronouncement.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial Instruments. These pronouncements amend FASB
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments, including
method(s) and significant assumptions used to estimate the fair value in interim financial
statements as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for
interim and annual periods ending after June 15, 2009. The Company adopted these pronouncements in
the second quarter of 2009; they did not have a material impact on its consolidated financial
statements.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. This pronouncement provides additional guidance on determining whether a
market for a financial asset is not active and a transaction is not distressed for fair value
measurements under SFAS No. 157, Fair Value Measurements. FSP FAS 157-4 will be applied
prospectively and is effective for
7
interim and annual periods ending after June 15, 2009. The Company adopted this pronouncement
in the second quarter of 2009; it did not have a material impact on its consolidated financial
statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. These pronouncements are intended to provide greater clarity to
investors about the credit and noncredit component of an other-than-temporary impairment (OTTI)
event and to more effectively communicate when an OTTI event has occurred. FSP FAS 115-2 and FAS
124-2 apply to debt securities and require that the total OTTI be presented in the statement of
earnings with an offset for the amount of impairment that is recognized in other comprehensive
income, which is the noncredit component. Noncredit component losses are to be recorded in other
comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b)
it is not more likely than not that it will have to sell the security prior to its anticipated
recovery. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after
June 15, 2009. FSP FAS 115-2 and FAS 124-2 will be applied prospectively with a cumulative effect
transition adjustment as of the beginning of the period in which they are adopted. The Company
adopted these pronouncements in the second quarter of 2009; they did not have a material impact on
its consolidated financial statements.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from Contingencies. This pronouncement
amends SFAS No. 141 (revised 2007), Business Combinations, to require that assets acquired and
liabilities assumed in a business combination that arise from contingencies be recognized at fair
value, in accordance with SFAS No. 157, Fair Value Measurements, if the fair value can be
determined during the measurement period. FSP FAS 141(R)-1 is effective for business combinations
occurring after December 31, 2008. The Company is currently evaluating the future impacts and
required disclosures of this pronouncement.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This pronouncement is intended
to establish general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued.
Specifically, this pronouncement sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim
periods ended after June 15, 2009 and will be applied prospectively. The Company adopted this
pronouncement in the second quarter of 2009; it did not have a material impact on its consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an
amendment to SFAS No. 140. This pronouncement eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial assets, and requires
additional disclosures in order to enhance information reported to users of financial statements by
providing greater transparency about transfers of financial assets, including securitization
transactions, and an entitys continuing involvement in and exposure to the risks related to
transferred financial assets. SFAS No. 166 is effective for fiscal years beginning after November
15, 2009. The Company is currently evaluating the future impacts and required disclosures of this
pronouncement.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles. This pronouncement replaces SFAS No.
162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of
GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the ASC)
will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP
for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the
ASC will become non-authoritative. This pronouncement is effective for financial statements for
interim or annual reporting periods ending after September 15, 2009. The Company will begin to use
the new guidelines and numbering system prescribed by the ASC when referring to GAAP in the third
quarter of 2009. As the ASC is not intended to change or alter existing GAAP, the Company is
currently evaluating the effect on financial statement disclosures as all future references to
authoritative accounting literature will be referenced in accordance with the ASC and the Company
believes it will not have any impact on its consolidated financial statements.
NOTE B Change in Accounting Principle
In accordance with the adoption of FSP APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), the Company
adjusted the December 31, 2008 consolidated condensed balance sheet and the consolidated condensed
statement of operations for the three and six months ended June 30, 2008 and the consolidated
condensed statement of cash flows for the six months ended June 30, 2008 to reflect the
retrospective application of this pronouncement. This pronouncement 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. All adjustments were made
8
retrospectively as of the date of issuance of the Companys 2.25% Convertible Senior Notes due 2026
(Notes) and therefore, the financial statements are presented as if the Notes have always been
accounted for in accordance with this pronouncement. The material retrospective adjustments to the
Companys December 31, 2008 consolidated condensed balance sheet were to adjust; long-term debt
from $183.5 million to $155.5 million; additional paid-in capital of approximately $34.3 million to
reflect the initial recognition of the equity component, deferred taxes and debt issuance costs;
deferred taxes associated with the convertible debt instrument; retained earnings to reflect the
additional non-cash, pre-tax interest expense retrospectively recorded for 2006, 2007 and 2008 by
approximately $1.7 million, $10.0 million and $10.7 million, respectively, and to reflect the $15.7
million pre-tax reduction to the gain on extinguishment of debt for the repurchase of $46.5 million
par value Notes in December 2008. The material retrospective adjustments to the Companys
consolidated condensed statement of operations for the three and six months ended June 30, 2008
were to recognize the additional non-cash interest expense of approximately $2.7 million and $5.3
million, respectively, and the related tax effects to the tax provision. The retrospective
adjustments to the Companys consolidated condensed statement of cash flows for the six months
ended June 30, 2008 were to adjust separate line items within cash flows from operating activities,
which did not affect the original net reported amounts for operating activities, investing
activities or financing activities. See Note N for additional information regarding FSP APB 14-1.
In addition, in accordance with the adoption of SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, the Company adjusted the December
31, 2008 consolidated condensed balance sheet to reflect the retrospective application of this
pronouncement. This pronouncement established 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 pronouncement indicate, among other
things, that: NCIs (previously referred to as minority interests) be treated as a separate
component of equity, not as a liability; increases and decreases in the parents ownership
interest, that leaves control intact, be treated as equity transactions, rather than as step
acquisitions or dilution gains or losses; and losses of a partially owned consolidated subsidiary
be allocated to the NCIs even when such allocation might result in a deficit balance. This
pronouncement also requires changes to certain presentation and disclosure requirements. 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. Upon
adoption, NCIs of $9.5 million as of December 31, 2008 were reclassified to equity, a change from
its previous classification between liabilities and stockholders equity.
The adjustments made to the December 31, 2008 consolidated condensed balance sheet are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
|
|
|
|
|
FSP APB 14-1 |
|
SFAS 160 |
|
Reclass |
|
|
|
|
As Reported |
|
Adjustments |
|
Adjustment |
|
Adjustment |
|
Adjusted |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, current |
|
$ |
3,994 |
|
|
$ |
2,767 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,761 |
|
Deferred income taxes, non-current |
|
|
2,745 |
|
|
|
(13,498 |
) |
|
|
|
|
|
|
10,753 |
|
|
|
|
|
Other assets |
|
|
6,627 |
|
|
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
5,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25% Convertible Senior Notes
due 2026 |
|
|
183,500 |
|
|
|
(28,049 |
) |
|
|
|
|
|
|
|
|
|
|
155,451 |
|
Deferred income taxes, non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,753 |
|
|
|
10,753 |
|
Noncontrolling interest
(previously referred to as
minority interests) |
|
|
9,453 |
|
|
|
|
|
|
|
(9,453 |
) |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
133,701 |
|
|
|
34,263 |
|
|
|
|
|
|
|
|
|
|
|
167,964 |
|
Retained earnings |
|
|
259,479 |
|
|
|
(17,665 |
) |
|
|
|
|
|
|
|
|
|
|
241,814 |
|
Noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
9,453 |
|
|
|
|
|
|
|
9,453 |
|
The adjustments made to the three and six months ended June 30, 2008 consolidated
condensed statement of operations are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
Six Months Ended June 30, 2008 |
|
|
|
As |
|
|
APB 14-1 |
|
|
|
|
|
|
As |
|
|
APB 14-1 |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Adjusted |
|
|
Reported |
|
|
Adjustments |
|
|
Adjusted |
|
|
|
|
|
|
Interest expense |
|
$ |
(2,285 |
) |
|
$ |
78 |
|
|
$ |
(2,207 |
) |
|
$ |
(3,983 |
) |
|
$ |
155 |
|
|
$ |
(3,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
|
|
|
|
(2,691 |
) |
|
|
(2,691 |
) |
|
|
|
|
|
|
(5,325 |
) |
|
|
(5,325 |
) |
Income tax provision |
|
|
2,781 |
|
|
|
(1,019 |
) |
|
|
1,762 |
|
|
|
4,996 |
|
|
|
(2,016 |
) |
|
|
2,980 |
|
Net income attributable to
common stockholders |
|
|
13,108 |
|
|
|
(1,594 |
) |
|
|
11,514 |
|
|
|
27,311 |
|
|
|
(3,154 |
) |
|
|
24,157 |
|
Earnings per share
attributable to common
stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.32 |
|
|
$ |
(0.04 |
) |
|
$ |
0.28 |
|
|
$ |
0.68 |
|
|
$ |
(0.08 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
Diluted |
|
$ |
0.31 |
|
|
$ |
(0.04 |
) |
|
$ |
0.27 |
|
|
$ |
0.64 |
|
|
$ |
(0.07 |
) |
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in
computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
40,616 |
|
|
|
|
|
|
|
40,616 |
|
|
|
40,431 |
|
|
|
|
|
|
|
40,431 |
|
|
|
|
|
|
Diluted |
|
|
42,843 |
|
|
|
|
|
|
|
42,843 |
|
|
|
42,695 |
|
|
|
|
|
|
|
42,695 |
|
|
|
|
|
|
9
NOTE C Functional Currencies, Foreign Currency Translation and Comprehensive Income (Loss)
Functional Currencies and Foreign Currency Translation - The functional currency for most of
our international operations is the U.S. dollar, while some subsidiaries 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 losses of approximately $1.2 million and $2.0 million for
the three months ended June 30, 2008 and 2009, respectively and approximately $1.7 million and $3.4
million for the six months ended June 30, 2008 and 2009, 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. As of June 30, 2009, the components of
other comprehensive income or loss include foreign currency translation adjustments, unrealized
gain or loss on defined benefit plan and foreign currency loss on forward contracts. Accumulated
other comprehensive loss was $58.1 million at June 30, 2009.
Total comprehensive income (loss) for the three and six months ended June 30, 2008 and 2009 is
as follows (in thousands):
Total Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
Net income (loss) |
|
$ |
12,189 |
|
|
$ |
(2,369 |
) |
|
$ |
25,436 |
|
|
$ |
(13,031 |
) |
|
Translation adjustment |
|
|
1,622 |
|
|
|
15,831 |
|
|
|
4,681 |
|
|
|
13,410 |
|
|
Unrealized loss on securities |
|
|
(5,031 |
) |
|
|
|
|
|
|
(16,524 |
) |
|
|
|
|
|
Unrealized loss on defined benefit plan, net of tax |
|
|
(8,540 |
) |
|
|
(19,046 |
) |
|
|
(8,540 |
) |
|
|
(26,287 |
) |
|
Foreign currency adjustments on forward contracts, net of tax |
|
|
425 |
|
|
|
1,667 |
|
|
|
425 |
|
|
|
3,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
665 |
|
|
|
(3,917 |
) |
|
|
5,478 |
|
|
|
(22,677 |
) |
|
Comprehensive income attributable to noncontrolling interest |
|
|
675 |
|
|
|
584 |
|
|
|
1,279 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) attributable to common
stockholders |
|
$ |
(10 |
) |
|
$ |
(4,501 |
) |
|
$ |
4,199 |
|
|
$ |
(23,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTE D Hedging
As of June 30, 2009, the Company had forward contracts, primarily relating to its United
Kingdom (U.K.) operations, of approximately $6.6 million that mature monthly over the next six
months. For the six months ended June 30, 2009, the Company had deferred net unrealized gains on
outstanding forward exchange contracts recorded within other comprehensive income (loss) (OCI) of
$3.2 million (net of tax). For the six months ended June 30, 2009, the Company had no material
ineffective hedges because forward foreign currency contract amounts were less than the
specifically identified anticipated transactions.
The following details the location and amount of derivative instrument fair values in the
consolidated condensed balance sheets as of June 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
|
Liability Derivatives |
|
|
|
Balance sheet |
|
|
|
|
|
|
Balance sheet |
|
|
|
|
|
location |
|
Fair value |
|
|
|
location |
|
Fair value |
|
Derivatives designated as
hedging instruments under
SFAS 133: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other assets |
|
$ |
|
|
|
|
Other liabilities |
|
$ |
745 |
|
The following details the location and amount of gains and losses on derivative instruments in
the consolidated condensed statement of operations for the six months ended June 30, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) |
|
Recognized in |
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
Recognized in |
|
Income on |
|
|
|
Amount of |
|
|
|
|
Amount of Gain (Loss) |
|
|
Income on |
|
Derivative |
|
|
|
Gain (Loss) |
|
|
Location of Gain |
|
Reclassified |
|
|
Derivative |
|
(Ineffective |
|
|
|
Recognized |
|
|
(Loss) |
|
from |
|
|
(Ineffective |
|
Portion and |
|
|
|
in OCI on |
|
|
Reclassified from |
|
Accumulated |
|
|
Portion and Amount |
|
Amount |
|
Derivatives in SFAS 133 |
|
Derivative |
|
|
Accumulated OCI into |
|
OCI into Income |
|
|
Excluded from |
|
Excluded from |
|
Cash Flow Hedging |
|
(Effective |
|
|
Income (Effective |
|
(Effective |
|
|
Effectiveness |
|
Effectiveness |
|
Relationships |
|
Portion) |
|
|
Portion) |
|
Portion) |
|
|
Testing) |
|
Testing) |
|
Foreign exchange
contracts |
|
$ |
785 |
|
|
Other income (expense) |
|
$ |
(2,446 |
) |
|
Other income (expense) |
|
$ |
|
|
NOTE E Earnings (Loss) Per Share
Basic net earnings (loss) per share is calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding during the period. Diluted net
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 shares used in the computation of basic and diluted earnings (loss) per common share are
as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
used in computing basic earnings (loss) per share |
|
|
40,616 |
|
|
|
41,587 |
|
|
|
40,431 |
|
|
|
41,368 |
|
Net income (loss) attributable to common stockholders |
|
$ |
11,514 |
|
|
$ |
(2,953 |
) |
|
$ |
24,157 |
|
|
$ |
(13,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to common
stockholders |
|
$ |
0.28 |
|
|
$ |
(0.07 |
) |
|
$ |
0.60 |
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
used in computing basic earnings (loss) per share |
|
|
40,616 |
|
|
|
41,587 |
|
|
|
40,431 |
|
|
|
41,368 |
|
Add: Assumed exercise of stock options and stock
awards |
|
|
2,227 |
|
|
|
|
|
|
|
2,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,843 |
|
|
|
41,587 |
|
|
|
42,695 |
|
|
|
41,368 |
|
Net income (loss) attributable to common stockholders |
|
$ |
11,514 |
|
|
$ |
(2,953 |
) |
|
$ |
24,157 |
|
|
$ |
(13,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to common
stockholders |
|
$ |
0.27 |
|
|
$ |
(0.07 |
) |
|
$ |
0.57 |
|
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no shares in the earnings per share calculation related to the 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 and six months ended June 30, 2009, the Company has excluded the
assumed exercise of stock options and stock awards from the calculation of diluted loss per share
as these securities are anti-dilutive.
NOTE F Fair Value Measurements
Financial assets and liabilities carried at fair value as of June 30, 2009 are classified in
the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Short-term trading
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
293,056 |
|
|
$ |
293,056 |
|
Short-term put option |
|
|
|
|
|
|
|
|
|
|
26,769 |
|
|
|
26,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
319,825 |
|
|
$ |
319,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There has been no change in the balances for assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the six months
ended June 30, 2009.
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 June 30, 2009.
NOTE G Short-Term Investments
As of June 30, 2009, the Company had $319.8 million invested in auction rate securities
(ARS), classified as trading securities. In connection with the settlement with UBS AG, the
Company was given the option to put the ARS portfolio back to UBS AG at any time between June 30,
2010 and July 2, 2012 at par value. Upon settlement, the Company elected the fair value option for
the put option and recorded an asset and a gain for the fair value of the put option. The
Company classified the put option as a short-term investment as it is a free standing instrument
tied to the ARS portfolio, which are also classified as short-term investments.
Short-term investments at June 30, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
Realized |
|
|
|
|
As of June 30, 2009 |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term trading securities |
|
$ |
319,825 |
|
|
$ |
|
|
|
$ |
(26,769 |
) |
|
$ |
293,056 |
|
Short-term put option |
|
|
|
|
|
|
26,769 |
|
|
|
|
|
|
|
26,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
319,825 |
|
|
$ |
26,769 |
|
|
$ |
(26,769 |
) |
|
$ |
319,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys ARS are primarily backed by student loan association bonds. None of the
Companys investments are collateralized mortgage obligations or are any other type of
mortgage-backed or real estate-backed securities. The Company continues
12
to earn interest on its ARS at a weighted average rate of 1.6% of as June 30, 2009, which it is
currently collecting. The weighted average maximum contractual default rate is 17.3%.
As of June 30, 2009, approximately 85.7%, or $274.0 million, of the $319.8 million par value
ARS are collateralized by higher education funded student loans that are supported by the federal
government as part of the Federal Family Education Loan Program (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% |
|
$ |
194,200 |
|
|
|
60.8 |
% |
Between 81.2% and 82.1% |
|
|
86,825 |
|
|
|
27.1 |
% |
50.50% |
|
|
17,000 |
|
|
|
5.3 |
% |
10.00% |
|
|
3,800 |
|
|
|
1.2 |
% |
Non-FFELP guaranteed |
|
|
18,000 |
|
|
|
5.6 |
% |
|
Total |
|
$ |
319,825 |
|
|
|
100.0 |
% |
As of June 30, 2009, the Companys portfolio of ARS was valued using a valuation model that
relies exclusively on Level 3 inputs. The discount on the total ARS portfolio was 8.4% of par
value, or a $26.8 million loss.
NOTE H Inventories
Inventories stated at the lower of cost or market value are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
Raw materials |
|
$ |
28,690 |
|
|
$ |
23,379 |
|
Work-in-progress |
|
|
23,436 |
|
|
|
22,804 |
|
Finished goods |
|
|
46,992 |
|
|
|
33,601 |
|
|
|
|
|
|
|
|
Total |
|
$ |
99,118 |
|
|
$ |
79,784 |
|
|
|
|
|
|
|
|
NOTE I Goodwill and Other Intangible Assets
Changes in goodwill for the six months ended June 30, 2009 are as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
56,791 |
|
Acquisitions and purchase price adjustments |
|
|
9,587 |
|
Currency exchange and other |
|
|
1,978 |
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
68,356 |
|
|
|
|
|
Intangible assets at June 30, 2009 are as follows (in thousands):
|
|
|
|
|
Balance at June 30, 2009: |
|
|
|
|
Intangible assets subject to amortization: |
|
|
|
|
Gross carrying amount |
|
$ |
48,616 |
|
Accumulated amortization |
|
|
(7,525 |
) |
Currency exchange and other |
|
|
(5,893 |
) |
|
|
|
|
Net value |
|
|
35,198 |
|
|
|
|
|
Intangible assets with indefinite lives: |
|
|
|
|
Gross carrying amount |
|
|
3,162 |
|
Currency exchange and other |
|
|
(527 |
) |
|
|
|
|
Total |
|
|
2,635 |
|
|
|
|
|
Total intangible assets, net |
|
$ |
37,833 |
|
|
|
|
|
Amortization expense related to intangible assets subject to amortization was $0.3
million and $1.1 million for the three months ended June 30, 2008 and 2009, respectively.
Amortization expense related to intangible assets subject to amortization was $0.5 million and
$2.2 million for the six months ended June 30, 2008 and 2009, respectively.
13
NOTE J Income Tax Provision
Income tax expense of $5.2 million and $5.6 million was recorded for the three and six months
ended June 30, 2009, respectively. This resulted in an effective tax rate of (74.3%) for the six
months ended June 30, 2009, as compared to 10.5% in the same period of last year and compared to
(7.6)% for the full year of 2008. The Companys effective tax rate for the six months ended June
30, 2009 was impacted by the non-cash income tax expense associated with repatriating earnings of
foreign subsidiaries to the U.S. parent. In addition, amounts for the three and six months ended
June 30, 2008 and full year 2008 have been retrospectively adjusted for the adoption of APB 14-1.
See Note B for this retrospective treatment and the impacts on previously issued financial
statements.
Generally, income taxes are recorded based upon estimated annual effective income tax rates.
Other methods may be used in situations where small changes in the companys estimated annual
income could produce large changes in the estimated effective income tax rates used for interim
financial reporting. Under these circumstances, the Company has elected to use its actual
year-to-date effective income tax rate.
For the six months ended June 30, 2009, the Company reported domestic and foreign pre-tax
income (loss) of approximately $(21.6) million and $14.1 million, respectively. For the six month
ended June 30, 2008, the Company reported domestic and foreign pre-tax income (loss) of
approximately $(6.1) million and $39.7 million, respectively.
The impact of tax holidays decreased the Companys tax expense by approximately $3.2 million
and $2.6 million for the six months ended June 30, 2008 and 2009, respectively. The benefit of the
tax holidays on basic and diluted earnings per share for the six months ended June 30, 2008 was
$0.08 and $0.07, respectively. The benefit of the tax holidays on both basic and diluted earnings
per share for the six months ended June 30, 2009 was $0.06.
Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state
income taxes. During the six months ended June 30, 2009, the Company repatriated approximately
$28.5 million of accumulated earnings from one of its Chinese subsidiaries, resulting in additional
non-cash federal and state income tax expense of approximately $10.6 million. The Company intends
to permanently reinvest overseas all of its remaining earnings from its foreign subsidiaries. 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 has
recorded valuation allowances of $5.6 million and $8.6 million as of December 31, 2008 and June 30,
2009.
The Company files income tax returns in the U.S. federal jurisdiction and 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 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 Companys FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes 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, 2009, the gross amount of unrecognized tax benefits was approximately $4.4 million.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain
of the Companys 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
determined.
NOTE K Share-Based Compensation
The following table shows the total compensation cost charged against income for share-based
compensation plans, including stock options and share grants, recognized in the statements of
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
Cost of sales |
|
$ |
128 |
|
|
$ |
101 |
|
|
$ |
250 |
|
|
$ |
182 |
|
Selling and administrative expense |
|
|
2,214 |
|
|
|
1,894 |
|
|
|
4,415 |
|
|
|
3,982 |
|
Research and development expense |
|
|
241 |
|
|
|
260 |
|
|
|
468 |
|
|
|
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
expense |
|
$ |
2,583 |
|
|
$ |
2,255 |
|
|
$ |
5,133 |
|
|
$ |
4,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
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 intrinsic value (actual gain) of options exercised during the six months ended June
30, 2009 was approximately $0.5 million. The total net cash proceeds received from stock option
exercises during the six months ended June 30, 2009 was $0.1 million. Stock option expense for the
three months ended June 30, 2008 and 2009 was $1.2 million and $0.8 million, respectively. Stock
option expense for the six months ended June 30, 2008 and 2009 was $2.5 million and $1.5 million,
respectively.
A summary of the stock option plans as of June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Stock options |
|
(000) |
|
|
Price |
|
|
Term (yrs) |
|
|
($000) |
|
Outstanding at January 1, 2009 |
|
|
3,895 |
|
|
$ |
11.61 |
|
|
|
5.3 |
|
|
$ |
2,327 |
|
Granted |
|
|
461 |
|
|
|
15.05 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(62 |
) |
|
|
5.73 |
|
|
|
|
|
|
|
538 |
|
Forfeited or expired |
|
|
(46 |
) |
|
|
14.76 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
4,248 |
|
|
$ |
12.03 |
|
|
|
5.4 |
|
|
$ |
22,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
3,418 |
|
|
$ |
10.11 |
|
|
|
4.5 |
|
|
$ |
22,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the Companys closing stock price.
As of June 30, 2009, total unrecognized stock-based compensation expense related to unvested
stock options, net of forfeitures, was approximately $9.8 million, before income taxes, and is
expected to be recognized over a weighted average period of approximately 3.2 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,
2009 was approximately $6.4 million. Share grant expense for the three months ended June 30, 2008
and 2009 was $1.3 million and $1.4 million, respectively. Share grant expense for the six months
ended June 30, 2008 and 2009 was $2.7 million and $3.1 million, respectively.
A summary of the status of the Companys non-vested share grants as of June 30, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Grant-Date |
|
|
Value |
|
Share Grants |
|
(000) |
|
|
Fair Value |
|
|
($000) |
|
Nonvested at January 1, 2009 |
|
|
846 |
|
|
$ |
21.41 |
|
|
$ |
5,125 |
|
Granted |
|
|
151 |
|
|
|
14.78 |
|
|
|
|
|
Vested |
|
|
(390 |
) |
|
|
16.34 |
|
|
|
5,043 |
|
Forfeited |
|
|
(27 |
) |
|
|
25.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009 |
|
|
580 |
|
|
$ |
22.89 |
|
|
$ |
9,076 |
|
|
|
|
|
|
|
|
|
|
|
15
As of June 30, 2009, total unrecognized share-based compensation expense related to non-vested
stock awards, net of forfeitures, was approximately $12.9 million, before income taxes and is
expected to be recognized over a weighted average period of approximately 2.8 years.
NOTE L Segment Information and Enterprise-Wide Disclosure
For financial reporting purposes, the Company operates in a single segment, standard
semiconductor products, through the Companys various manufacturing and distribution facilities.
The Company aggregated its 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.
The Companys 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 |
|
|
|
|
|
|
Consolidated |
|
June 30, 2008 |
|
Asia |
|
|
America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
94,675 |
|
|
$ |
30,558 |
|
|
$ |
5,248 |
|
|
$ |
130,481 |
|
Inter-company sales |
|
|
(6,814 |
) |
|
|
(7,649 |
) |
|
|
|
|
|
|
(14,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
87,861 |
|
|
$ |
22,909 |
|
|
$ |
5,248 |
|
|
$ |
116,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
107,323 |
|
|
$ |
26,311 |
|
|
$ |
49,781 |
|
|
$ |
183,415 |
|
Assets |
|
$ |
344,715 |
|
|
$ |
386,095 |
|
|
$ |
223,122 |
|
|
$ |
953,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
North |
|
|
|
|
|
|
Consolidated |
|
June 30, 2009 |
|
Asia |
|
|
America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
86,483 |
|
|
$ |
19,678 |
|
|
$ |
25,034 |
|
|
$ |
131,195 |
|
Inter-company sales |
|
|
(6,252 |
) |
|
|
(4,969 |
) |
|
|
(16,076 |
) |
|
|
(27,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
80,231 |
|
|
$ |
14,709 |
|
|
$ |
8,958 |
|
|
$ |
103,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
97,652 |
|
|
$ |
30,888 |
|
|
$ |
40,479 |
|
|
$ |
169,019 |
|
Assets |
|
$ |
318,916 |
|
|
$ |
405,233 |
|
|
$ |
169,400 |
|
|
$ |
893,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
North |
|
|
|
|
|
|
Consolidated |
|
June 30, 2008 |
|
Asia |
|
|
America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
175,555 |
|
|
$ |
60,486 |
|
|
$ |
5,248 |
|
|
$ |
241,289 |
|
Inter-company sales |
|
|
(13,771 |
) |
|
|
(15,920 |
) |
|
|
|
|
|
|
(29,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
161,784 |
|
|
$ |
44,566 |
|
|
$ |
5,248 |
|
|
$ |
211,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
107,323 |
|
|
$ |
26,311 |
|
|
$ |
49,781 |
|
|
$ |
183,415 |
|
Assets |
|
$ |
344,715 |
|
|
$ |
386,095 |
|
|
$ |
223,122 |
|
|
$ |
953,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
North |
|
|
|
|
|
|
Consolidated |
|
June 30, 2009 |
|
Asia |
|
|
America |
|
|
Europe |
|
|
Segments |
|
Total sales |
|
$ |
147,922 |
|
|
$ |
36,674 |
|
|
$ |
44,450 |
|
|
$ |
229,046 |
|
Inter-company sales |
|
|
(9,693 |
) |
|
|
(10,117 |
) |
|
|
(27,288 |
) |
|
|
(47,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
138,229 |
|
|
$ |
26,557 |
|
|
$ |
17,162 |
|
|
$ |
181,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
97,652 |
|
|
$ |
30,888 |
|
|
$ |
40,479 |
|
|
$ |
169,019 |
|
Assets |
|
$ |
318,916 |
|
|
$ |
405,233 |
|
|
$ |
169,400 |
|
|
$ |
893,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
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 June 30, |
|
|
Net Sales |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
China |
|
$ |
34,983 |
|
|
$ |
30,486 |
|
|
|
30.2 |
% |
|
|
29.3 |
% |
Taiwan |
|
|
33,433 |
|
|
|
31,286 |
|
|
|
28.8 |
% |
|
|
30.1 |
% |
United States |
|
|
21,923 |
|
|
|
17,370 |
|
|
|
18.9 |
% |
|
|
16.7 |
% |
Korea |
|
|
5,832 |
|
|
|
6,792 |
|
|
|
5.0 |
% |
|
|
6.5 |
% |
Germany |
|
|
3,865 |
|
|
|
3,623 |
|
|
|
3.3 |
% |
|
|
3.5 |
% |
England |
|
|
3,779 |
|
|
|
3,320 |
|
|
|
3.3 |
% |
|
|
3.2 |
% |
Singapore |
|
|
4,099 |
|
|
|
2,878 |
|
|
|
3.5 |
% |
|
|
2.8 |
% |
All Others |
|
|
8,104 |
|
|
|
8,143 |
|
|
|
7.0 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
116,018 |
|
|
$ |
103,898 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
|
|
|
|
for the Six Months |
|
|
Percentage of |
|
|
|
Ended June 30, |
|
|
Net Sales |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
China |
|
$ |
61,085 |
|
|
$ |
52,843 |
|
|
|
28.9 |
% |
|
|
29.0 |
% |
Taiwan |
|
|
66,048 |
|
|
|
52,729 |
|
|
|
31.2 |
% |
|
|
29.0 |
% |
United States |
|
|
41,239 |
|
|
|
31,328 |
|
|
|
19.5 |
% |
|
|
17.2 |
% |
Korea |
|
|
11,090 |
|
|
|
11,786 |
|
|
|
5.2 |
% |
|
|
6.5 |
% |
Germany |
|
|
5,613 |
|
|
|
8,086 |
|
|
|
2.7 |
% |
|
|
4.4 |
% |
England |
|
|
6,000 |
|
|
|
7,100 |
|
|
|
2.8 |
% |
|
|
3.9 |
% |
Singapore |
|
|
6,867 |
|
|
|
4,948 |
|
|
|
3.2 |
% |
|
|
2.7 |
% |
All Others |
|
|
13,656 |
|
|
|
13,128 |
|
|
|
6.5 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,598 |
|
|
$ |
181,948 |
|
|
|
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 Zetex shareholders received 85.45 pence in cash per ordinary share, valuing the fully
diluted share capital of Zetex at approximately $176.1 million (based on a USD:GBP exchange rate of
1.9778), excluding acquisition costs, fees and expenses
17
As consideration for Zetex, the Company paid the following (in thousands):
|
|
|
|
|
Purchase price (cost of shares) |
|
$ |
176,138 |
|
Acquisition related costs |
|
|
4,054 |
|
|
|
|
|
Total purchase price |
|
$ |
180,192 |
|
|
|
|
|
In addition, in order to finance the acquisition, the Company entered into a margin loan
agreement with UBS Financial Services Inc. for $165 million, collateralized by the Companys ARS
portfolio. On November 4, 2008, the Company entered into a no net cost credit line (no net cost
loan)with UBS BANK USA, which replaced the margin loan.
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 the acquisition will strengthen and broaden the
Companys product offerings, including entry into the light-emitting diode (LED) lighting and
automotive markets and expand the Companys geographical footprint in the European markets.
The following summarizes the allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised |
|
|
|
|
|
|
|
|
|
purchase price |
|
|
|
|
|
|
|
|
|
allocation as of |
|
|
Changes in |
|
|
Revised purchase |
|
|
|
March 31, |
|
|
purchase price |
|
|
price allocation on |
|
|
|
2009 |
|
|
allocation |
|
|
acquisition date |
|
Assets acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
13,445 |
|
|
$ |
|
|
|
$ |
13,445 |
|
Inventory |
|
|
35,991 |
|
|
|
|
|
|
|
35,991 |
|
Prepaid expenses and other current assets |
|
|
4,363 |
|
|
|
|
|
|
|
4,363 |
|
Property, plant and equipment, net |
|
|
52,045 |
|
|
|
|
|
|
|
52,045 |
|
Other long-term assets |
|
|
136 |
|
|
|
|
|
|
|
136 |
|
Intangible assets |
|
|
48,274 |
|
|
|
|
|
|
|
48,274 |
|
Goodwill |
|
|
49,714 |
|
|
|
1,631 |
|
|
|
51,345 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
$ |
203,968 |
|
|
$ |
1,631 |
|
|
$ |
205,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,057 |
|
|
$ |
|
|
|
$ |
6,057 |
|
Accrued expenses and other liabilities |
|
|
16,806 |
|
|
|
1,172 |
|
|
|
17,978 |
|
Pension liability |
|
|
10,873 |
|
|
|
|
|
|
|
10,873 |
|
Deferred tax liabilities |
|
|
13,649 |
|
|
|
|
|
|
|
13,649 |
|
Other liabilities |
|
|
3,846 |
|
|
|
|
|
|
|
3,846 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
51,231 |
|
|
|
1,172 |
|
|
|
52,403 |
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
152,737 |
|
|
$ |
459 |
|
|
$ |
153,196 |
|
|
|
|
|
|
|
|
|
|
|
18
The fair values and lives for amortization purposes assigned to acquired intangible assets are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
useful life (in |
|
Intangible asset |
|
Fair value assigned |
|
|
years) |
|
IPR&D: |
|
|
|
|
|
|
|
|
Power management |
|
$ |
1,383 |
|
|
|
N/A |
|
Lighting |
|
|
3,952 |
|
|
|
N/A |
|
Other |
|
|
2,569 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Total IPR&D |
|
|
7,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology: |
|
|
|
|
|
|
|
|
Discretes |
|
|
16,007 |
|
|
|
10 |
|
Power management |
|
|
4,941 |
|
|
|
5 |
|
Lighting |
|
|
3,360 |
|
|
|
5 |
|
ASIC |
|
|
3,162 |
|
|
|
7 |
|
Other |
|
|
2,174 |
|
|
|
2-7 |
|
|
|
|
|
|
|
|
|
Total developed technology |
|
|
29,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
6,917 |
|
|
|
12 |
|
Trade name |
|
|
3,162 |
|
|
Indefinite |
Other intangibles |
|
|
647 |
|
|
Various |
|
|
|
|
|
|
|
|
Total intangibles acquired |
|
$ |
48,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to the acquisition, the Company evaluated and adjusted its inventory for a
reasonable profit allowance in accordance with SFAS No. 141, Business Combinations, 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 increased its acquired inventory from Zetex by approximately $5.4 million, and
subsequently recorded that increase, adjusted for foreign exchange rates, into cost of goods sold
in the amount of approximately $5.2 million during 2008.
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 2008, in accordance with SFAS No. 141, to
research and development expense. IPR&D consists of: (i) power management, which includes power
management chips that meet the requirements of a broad range of portable electronic equipment that
demands a balance of efficiency, functionality, and size; (ii) lighting, which includes LED drivers
that are developed for a range of applications including white LEDs for display backlighting,
safety and security lighting, camera flash, architectural lighting, and automotive lighting. The
technology maintains illumination while limiting battery power consumption; and (iii) other, which
includes items such as audio, which includes class D amplifiers that efficiently deliver high
quality audio. The risk adjusted discount rate used to determine the fair value of power
management, lighting and other was 26%, 28% and 28%, respectively.
For the six months ended June 30, 2009, approximately $1.8 million has been recorded as
amortization expense associated with the identified intangible assets. Amortization expense
associated with these identified intangible assets will approximate between $1.8 million and $3.8
million per year over the next 5 to 10 years. In addition, the Company expects goodwill to be
deductible for tax purposes.
The following unaudited pro forma consolidated results of operations for the three and six
months ended June 30, 2008 has been prepared as if the acquisition of Zetex had occurred at
January 1, 2008 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, 2008 |
|
June 30, 2008 |
Net sales |
|
$ |
149,331 |
|
|
$ |
276,495 |
|
Net income |
|
$ |
5,793 |
|
|
$ |
18,626 |
|
Net income per common share
Basic |
|
$ |
0.14 |
|
|
$ |
0.46 |
|
Net income per common share
Diluted |
|
$ |
0.14 |
|
|
$ |
0.44 |
|
19
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. 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 Convertible Senior Notes
On October 12, 2006, the Company issued and sold Convertible Senior Notes (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, beginning on April 1, 2007.
The Notes will be convertible into cash or, at the Companys option, cash and/or shares of the
Companys 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 will,
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.
During the first quarter of 2009, the Company repurchased $9.6 million principal amount of the
Notes for approximately $6.6 million in cash and during the second quarter of 2009, the Company
repurchased $15.0 million principal amount of the Notes in exchange for approximately $13.2 million
in Common Stock.
Effective January 1, 2009, the Company adopted FSP APB 14-1. This pronouncement 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. 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. Previous guidance
provided for accounting of this type of convertible debt instruments entirely as debt. All
adjustments are required to be made retrospectively as of the date of issuance of the Notes and
therefore, will be treated as if the Notes have always been accounted for in accordance with this
pronouncement. See Note B for this retrospective treatment and the impacts of previously issued
financial statements.
In determining liability and the 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, 2009, 27 months remain over which the discount of the
liability will be amortized. As of June 30, 2009, the liability and equity components are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability |
|
Liability |
|
Liability |
|
Equity |
Component |
|
Component |
|
Component |
|
Component |
Principal |
|
Net Carrying |
|
Unamortized |
|
Carrying |
Amount |
|
Amount |
|
Discount |
|
Amount |
$158,915
|
|
$ |
138,687 |
|
|
$ |
20,228 |
|
|
$ |
34,118 |
|
As of June 30, 2009, 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
Companys Notes as of the Notes date of issuance. The amount of interest expense, including
amortization of debt discount for the liability component and debt issuance costs, for the six
months ended June 30, 2008 and 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
Notes contractual interest expense |
|
$ |
2,588 |
|
|
$ |
1,944 |
|
Amortization of debt discount |
|
|
5,325 |
|
|
|
4,490 |
|
Amortization of debt issuance costs |
|
|
466 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,379 |
|
|
$ |
6,777 |
|
|
|
|
|
|
|
|
NOTE O Credit Facilities
During the first quarter of 2009, the Company paid in full the outstanding balance of
approximately $2.5 million on its revolving credit commitment with Union Bank of California, N.A.
(Union Bank) and terminated the Amended and Restated Credit Agreement. Also in the first quarter
of 2009, the Company paid in full the outstanding balance of approximately $1.5 million on its
Union Bank term loan facility and terminated the Covenant Agreement.
20
NOTE P Commitments
Purchase Commitments As of June 30, 2009, the Company had approximately $2.1 million in
non-cancelable purchase contracts related to capital expenditures, primarily for manufacturing
equipment in China.
NOTE Q 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 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.
For the six months ended June 30, 2009, net period benefit costs associated with the defined
benefit were approximately $0.6 million.
The following tables set forth the benefit obligation, the fair value of plan assets, and the
funded status of the Companys plans for the six months ended June 30, 2009 (in thousands):
|
|
|
|
|
|
|
Defined Benefit Plan |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
83,268 |
|
|
|
|
|
|
Service cost |
|
|
164 |
|
|
|
|
|
|
Interest cost |
|
|
3,051 |
|
|
|
|
|
|
Actuarial loss |
|
|
21,202 |
|
|
|
|
|
|
Benefits paid |
|
|
(1,393 |
) |
|
|
|
|
|
Currency changes |
|
|
12,272 |
|
|
|
|
|
|
|
|
|
|
Benefit obligation at June 30, 2009 |
|
$ |
118,564 |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31, 2008 |
|
$ |
71,284 |
|
|
|
|
|
|
Actual return on plan assets |
|
|
(3,341 |
) |
|
|
|
|
|
Benefits paid |
|
|
(1,393 |
) |
|
|
|
|
|
Currency changes |
|
|
11,897 |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at June 30, 2009 |
|
$ |
78,447 |
|
|
|
|
|
|
|
|
|
|
Funded (underfunded) status at June 30, 2009 |
|
$ |
(40,117 |
) |
|
|
|
|
Based on an actuarial study performed as of June 30, 2009, the plan is underfunded and a
liability of approximately $40.1 million is reflected in the Companys consolidated financial
statements as a noncurrent liability. The amount recognized in accumulated other comprehensive
loss for the six months ended June 30, 2009 was a net loss of $26.3 million and the
weighted-average discount rate assumption used to determine benefit obligations as of June 30, 2009
was 5.9%.
The following are weighted-average assumptions used to determine net periodic benefit costs
for the six months ended June 30, 2009:
|
|
|
|
|
Discount rate |
|
|
6.4 |
% |
Expected long-term return on plan assets |
|
|
6.5 |
% |
21
The Company 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.
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.
Deferred Compensation
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,
2009, these investments totaled approximately $2.4 million. All gains and losses in these
investments are equally offset by corresponding gains and losses in the Deferred Compensation Plan
liabilities.
NOTE R - Related Parties
The Company conducts business with one related party company, Lite-On Semiconductor
Corporation and its subsidiaries and affiliates (LSC), that owns 20.2% of the Companys
outstanding Common Stock as of June 30, 2009. The Company also conducts business with one
significant company, Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates
(Keylink). Keylink is the Companys 5% joint venture partner in Shanghai Kai Hong Electronic
Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd.
The Audit Committee of the 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. The Company believes that all related party transactions are
on terms no less favorable than would be obtained from unaffiliated third parties.
Lite-On Semiconductor Corporation During the six months ended June 30, 2008 and 2009, the
Company sold products to LSC totaling 3.8% and 2.2% of its net sales, respectively, making LSC one
of its largest customers. Also, for the six months ended June 30, 2008 and 2009, 10.3% and 7.2%,
respectively, of the Companys net sales were from semiconductor products purchased from LSC for
subsequent sale, making LSC the Companys largest outside supplier. The Company also rents
warehouse space in Hong Kong from a member of the Lite-On Group, which also provides the Company
with warehousing services at that location. For the six months ended June 30, 2008 and 2009, the
Company paid this entity in aggregate amounts of $0.3 million and $0.4 million, respectively, for
their services. The Company believes such transactions are on terms no less favorable than could be
obtained from unaffiliated third parties.
Net sales to, and purchases from, LSC are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
Net sales |
|
$ |
4,160 |
|
|
$ |
2,686 |
|
|
$ |
8,030 |
|
|
$ |
4,080 |
|
Purchases |
|
$ |
14,400 |
|
|
$ |
7,559 |
|
|
$ |
27,166 |
|
|
$ |
13,127 |
|
Keylink
International (B.V.I.) Inc. During the six months ended June 30, 2008 and 2009, the
Company sold products to companies owned by Keylink totaling 0.5% and 3.1% of its net sales,
respectively. Also for the six months ended June 30, 2008 and 2009, 1.4% and 1.3%, respectively,
of the Companys net sales were from semiconductor products purchased from companies owned by
Keylink. In addition, the Companys subsidiaries in China lease their manufacturing facilities
from, and subcontract a portion of their manufacturing process (metal plating and environmental
services) to Keylink. The Company also paid a consulting fee to a Keylink affiliated company. For
the six months ended June 30, 2008 and 2009, the Company paid Keylink an aggregate of $5.3 million
and $4.4 million, respectively, with respect to these items. The Company believes such transactions
are on terms no less favorable than could be obtained from unaffiliated third parties.
22
Net sales to, and purchases from, companies owned by Keylink are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
Net sales |
|
$ |
317 |
|
|
$ |
3,150 |
|
|
$ |
994 |
|
|
$ |
5,556 |
|
Purchases |
|
$ |
1,588 |
|
|
$ |
1,326 |
|
|
$ |
3,410 |
|
|
$ |
2,375 |
|
Accounts receivable from, and accounts payable to, LSC and Keylink are as follows as of June
30, 2009 (in thousands):
|
|
|
|
|
|
|
June 30, |
|
|
|
2009 |
|
Accounts receivable |
|
|
|
|
LSC |
|
$ |
2,170 |
|
Keylink |
|
|
6,007 |
|
|
|
|
|
|
|
$ |
8,177 |
|
|
|
|
|
Accounts payable |
|
|
|
|
LSC |
|
$ |
5,437 |
|
Keylink |
|
|
3,085 |
|
|
|
|
|
|
|
$ |
8,522 |
|
|
|
|
|
23
|
|
|
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 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 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, 2008,
previously filed with Securities and Exchange Commission.
Highlights
|
|
|
Revenue for the three and six months ended June 30, 2009 was $103.9 million and $181.9
million, respectively ; |
|
|
|
|
Gross profit margin for the three and six months ended June 30, 2009 was 26.3% and
23.0%, respectively; |
|
|
|
|
Second quarter 2009 revenues improved over first quarter 2009 revenues due to improved
demand, as production was ramped on previous design wins at new customers and new design
wins at existing customers for our products that are utilized in LCD televisions and
panels, set-top boxes, mobile handsets and netbooks; |
|
|
|
|
During the second quarter of 2009, we saw improvements in capacity utilization primarily
at our packaging facilities over the first quarter of 2009; and |
|
|
|
|
During the first quarter of 2009, we repurchased $9.6 million aggregated principal
amount of 2.25% Convertible Senior Notes due 2026 (Notes) for approximately $6.6 million
and during the second quarter of 2009, we repurchased $15.0 million aggregated principal
amount of Notes in exchange for Common Stock. |
Overview
We are a leading global designer, manufacturer and supplier of high-quality, application
specific standard products within the broad discrete and analog semiconductor markets, serving the
consumer electronics, computing, communications, industrial and automotive markets. These products
include diodes, rectifiers, transistors, MOSFETs, protection devices, functional specific arrays,
amplifiers and comparators, Hall effect sensors and temperature sensors, power management devices
(including LED drivers), DC-DC switching and linear voltage regulators, voltage references, special
function devices (including USB power switch, load switch, voltage supervisor and motor
controllers) and silicon wafers used to manufacture these products. The products are sold primarily
throughout North America, Asia 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 that provide a wider range of semiconductor
products.
During the first quarter of 2009, we strengthened our inventory position, completed the cost
reduction initiatives described in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and continued to focus on cash flows from operations. During the second quarter
of 2009, as we continued to focus on cash flows, we saw continued improvements in demand and order
rates, increased production ramps of previous design wins at new customers, the introduction of new
product applications for existing customers and improved capacity utilization primarily at our
packaging facilities. For the third quarter of 2009, we expect our business to benefit from the
increasing demand in China, the addition of our new design wins and improved capacity utilization,
while we continue to focus on cash flows. Our strategy is to continue to enhance our position as a
leading global manufacturer and supplier of high-quality semiconductor products, and to continue to
add other product lines, such as power management products, using our packaging technology
capability.
As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
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. |
24
In implementing these strategies, the following factors have affected, and, we believe, will
continue to affect, our results of operations:
|
|
|
Although we have seen increased demand for our products in the second quarter over the
first quarter of 2009, the recent economic downturn has decreased the demand for our
products as compared to 2008. For 2009, we do not expect to sustain our historical growth
rates, although for the remainder of 2009, we anticipate continued improvement in the
global environment with demand and order rates improving and improvements in capacity
utilization. For the three months ended June 30, 2009, our original equipment manufacturers (OEM) and electronic
manufacturing services (EMS) customers together accounted for 54% of our net sales, while our global network of distributors
accounted for 46% of our sales. |
|
|
|
|
We have experienced substantial pressure from our customers and competitors to reduce
the selling price for our products. Although we do not expect to sustain our historical
growth rates for 2009, we expect future improvements 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. |
|
|
|
|
The decrease in revenue for the six months ended June 30, 2009 compared to the same
period last year mainly reflects the impact of the overall weakening economy and the
decrease in demand for our products, 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. |
|
|
|
|
Our gross profit margin was 23.0% for the six months ended June 30, 2009, compared to
33.8% in the same period last year. Our gross margin percentage was lower than the same
period last year due to lower capacity utilization of our manufacturing operations mainly
due to the recent economic downturn and a decrease in demand for our products. Future
gross profit margins will depend primarily on our product mix, cost savings, and the demand
for our products. In addition, during the second quarter of 2008, we were at almost full
capacity utilization at our packaging facilities, which decreased to approximately 50%
during the first quarter of 2009 and we have seen improvement in our capacity utilization
during the second quarter of 2009 to approximately 75% and anticipate continued
improvements in capacity utilization at our packaging and wafer fab facilities in the third
quarter of 2009. |
|
|
|
|
For the six months ended June 30, 2009, our capital expenditures were approximately 5.2%
of our revenue, which is a reduction from our historical 10% to 12% model and in line with
our previously announced cost reduction initiatives. |
|
|
|
|
Sales of new products (products that have been sold for three years or less) for the six
months ended June 30, 2008 and 2009 amounted to 30.7% and 15.6% of total sales,
respectively, including the contribution of recent Zetex acquisition. The sales of new
products for 2009 were lower than those for 2008 due primarily to a portion of our analog
product revenue from Anachip Corp. developed in 2006 or earlier was no longer included in
the overall calculation of new products for 2009 as these products were developed more than
three years ago. New products generally have gross profit margins that are higher than the
margins of our standard products. We believe the sales from new products is an important
measure given the short life cycles of some of our products. 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 six months ended June 30, 2009, the percentage of our net sales derived from our
Asian subsidiaries was 76.0%, compared to 73.4% 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 have added significant revenue in Europe. As
such, Europe accounted for approximately 9.4% of our revenues for the six months ended June
30, 2009. |
|
|
|
|
As of June 30, 2009, we had invested approximately $203 million in our Asian
manufacturing facilities. For the six months ended June 30, 2009, we invested approximately
$5.4 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. |
|
|
|
|
We have increased our investment in research and development from $8.4 million, or 4.0%
of net sales, for the six months ended June 30, 2008 to $10.7 million, or 5.9% of net
sales, for the six months ended June 30, 2009 primarily as a result of the Zetex
acquisition and the reduction in net sales due to the current economic downturn. For the
remainder of 2009, we continue to realign our product development organization and
consolidate our design teams. |
25
Results of Operations for the Three Months Ended June 30, 2008 and 2009
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. Certain amounts have been adjusted to reflect the change in
accounting principle as described in Note B of the Notes to Consolidated Condensed Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Dollar |
|
|
Percent of Net Sales |
|
Increase |
|
|
Three months ended June 30 |
|
(Decrease) |
|
|
2008 |
|
2009 |
|
08 to 09 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
(65.9 |
) |
|
|
(73.7 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
34.1 |
|
|
|
26.3 |
|
|
|
(30.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
(19.1 |
) |
|
|
(20.7 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
15.0 |
|
|
|
5.6 |
|
|
|
(66.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2.2 |
|
|
|
1.3 |
|
|
|
(47.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and amorization of debt discount |
|
|
(4.2 |
) |
|
|
(4.0 |
) |
|
|
(30.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
(1.0 |
) |
|
|
(0.2 |
) |
|
|
(77.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and noncontrolling interest |
|
|
12.0 |
|
|
|
2.7 |
|
|
|
(80.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
1.5 |
|
|
|
4.9 |
|
|
|
192.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
10.5 |
|
|
|
(2.2 |
) |
|
|
(119.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
|
9.9 |
|
|
|
(2.8 |
) |
|
|
(125.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our consolidated operating results and
financial condition for the three months ended June 30, 2009, compared to the three months ended
June 30, 2008. This discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Net Sales |
|
$ |
116,018 |
|
|
$ |
103,898 |
|
Net sales decreased approximately $12.1 million for the three months ended June 30, 2009,
compared to the same period last year. The 10.4% decrease in net sales represents an approximately
12.9% decrease in units sold offset by a 2.8% increase in ASP. The ASP increase is primarily
attributable to the higher ASPs of the acquired Zetex product lines. The revenue decrease for the
three months ended June 30, 2009 was attributable to sales decreases in all industry segments,
primarily due to an overall weaker global economy, as well as our foundry and subcontracting
business, which is showing greater weakness than our core revenue drivers, partially offset by
additional sales from the Zetex acquisition as the three months of 2008 only includes one month of
Zetex sales. Significant price pressure and an unfavorable commodity-based product mix also
affected sales for the three months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Cost of goods sold |
|
$ |
76,400 |
|
|
$ |
76,528 |
|
Gross profit |
|
$ |
39,618 |
|
|
$ |
27,370 |
|
Gross profit margin |
|
|
34.1 |
% |
|
|
26.3 |
% |
26
Cost of goods sold remained substantially the same for the three months ended June 30, 2009
compared to the same period last year. As a percent of sales, cost of goods sold increased to
73.7% for the three months ended June 30, 2009 compared to 65.9% in the same period last year and
our average unit cost (AUP) increased 14.9%. The increase in cost of goods sold as a percentage
of sales was negatively affected by the lower capacity utilization in our manufacturing operations
mainly due to market conditions and planned reduction of our finished goods inventory.
For the three months ended June 30, 2009, gross profit decreased by approximately $12.2
million, or 30.9%, compared to the same period last year. Gross margin decreased to 26.3% for the
three months ended June 30, 2009, compared to 34.1% for the same period last year, primarily due to
the depreciation expense of fixed assets in connection with the Zetex acquisition and lower
capacity utilization in our manufacturing operations.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Selling, general and administrative expenses
(SG&A) |
|
$ |
17,052 |
|
|
$ |
15,240 |
|
SG&A for the three months ended June 30, 2009 decreased approximately $1.8 million, or 10.6%,
compared to the same period last year, primarily due to the decreases in overall expenses in
connection with our previously announced cost reduction initiatives and partially offset by
additional SG&A expenses related to the Zetex operations. SG&A as a percentage of sales, remained
the same at 14.7% for the three months ended June 30, 2009, compared to 14.7% in the same period
last year.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Research and development expenses (R&D) |
|
$ |
4,832 |
|
|
$ |
5,385 |
|
R&D for the three months ended June 30, 2009 was $5.4 million, an increase of approximately
$0.6 million from the same period last year due primarily to additional R&D expense related to the
Zetex operations mainly in the expense categories of wages and related benefits, depreciation,
facility, equipment, operating, travel and other expenses. R&D, as a percentage of sales, increased
to 5.2% for the three months ended June 30, 2009, compared 4.2% in the same period last year.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Amortization of acquisition-related intangibles |
|
$ |
237 |
|
|
$ |
1,118 |
|
Amortization of acquisition-related intangibles increased for the three months ended June 30,
2009 to $1.1 million, compared to $0.2 million in the same period last year, due to the acquisition
of Zetex.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Interest income |
|
$ |
2,554 |
|
|
$ |
1,345 |
|
Interest income decreased for the three months ended June 30, 2009 to $1.3 million, compared
to $2.6 million in the same period last year, due primarily to a decrease in interest income earned
on our short-term investment securities. Interest income for the three months ended June 30, 2009
has been impacted by the continued turmoil in the credit markets, and in particular with the
continued interruption in the auction rate securities (ARS) auction markets. In October 2008, we
reached a settlement agreement with UBS AG, whereby we were given the option to put the ARS
portfolio back to UBS AG at any time between June 30, 2010 and July 2, 2012 at par value. We
continue to earn interest on our ARS portfolio and expect the weighted average interest to be
earned during 2009 will be lower than earned in 2008.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Interest expense |
|
$ |
2,207 |
|
|
$ |
1,877 |
|
Interest expense for the three months ended June 30, 2009 was approximately $1.9 million,
compared to $2.2 million in the same period last year. The $0.3 million decrease in interest
expense is due primarily to the reduced interest paid due to the repurchase and retirement of $71.1
million par value of Notes during the fourth quarter of 2008, first quarter of 2009 and second
quarter of 2009. The decrease in interest expense was partially offset by the interest expense
charged in connection with our no net cost loan with the offsetting interest earned being
recorded in interest income.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Amortization of debt discount |
|
$ |
2,691 |
|
|
$ |
2,281 |
|
27
Amortization of debt discount for the three months ended June 30, 2009 was $2.3 million,
compared to $2.7 million in the same period last year. The amortization of debt discount was
recorded in accordance with FSP ABP 14-1. The $0.4 million decreased in amortization of debt
discount was due primarily to the repurchase and retirement of $71.1 million par value of Notes
during the fourth quarter of 2008, first quarter of 2009 and second quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Other expense |
|
$ |
1,202 |
|
|
$ |
275 |
|
Other expense for the three months ended June 30, 2009 was $0.3 million, compared to other
expense of $1.2 million in the same period last year. Included in other expense for the three
months ended June 30, 2009 was a $2.0 million foreign currency transaction losses due primarily to
the strengthening of the U.S. dollar versus the British Pound, negatively affecting foreign
currency hedges entered into by Zetex prior to our acquisition, and unfavorable Taiwan and China
currency exchange rate changes during the period, partially offset by a $1.5 million gain on
forgiveness of debt from government subsidies in China.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Income tax provision |
|
$ |
1,762 |
|
|
$ |
5,156 |
|
We recognized income tax expense of $5.2 million for the three months ended June 30, 2009,
compared to $1.8 million in the same period last year. Income taxes for the interim period ending
June 30, 2009 have been included in the accompanying financial statements on the basis of actual
year-to-date effective income tax rate. Income taxes for the interim period ending June 30, 2008
have been included in the accompanying financial statements on the basis of an estimated annual
effective rate. The estimated effective tax rate (excluding discrete items) is 181.1% for the
three months ended June 30, 2009, as compared to the annual effective tax rate for the same period
last year of 16.6%. The estimated effective tax rate for the three months ended June 30, 2009 was
impacted by the non-cash income tax expense of $4.9 million associated with repatriating earnings
of foreign subsidiaries to the U.S. parent.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Noncontrolling interest |
|
$ |
675 |
|
|
$ |
584 |
|
Noncontrolling interest represented the minority investors share of the earnings of our China
and Taiwan subsidiaries for the three months ended June 30, 2009 and 2008. The noncontrolling
interest in the subsidiaries and their equity balances are reported separately in the consolidation
of our financial statements, and the activities of these subsidiaries are included therein. Our
controlling interests in these subsidiaries have not changed since December 31, 2008.
28
Results of Operations for the Six Months Ended June 30, 2008 and 2009
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. Certain amounts have been adjusted to reflect the change in
accounting principle as described in Note B of the Notes to Consolidated Condensed Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Dollar |
|
|
Percent of Net Sales |
|
Increase |
|
|
Six months ended June 30 |
|
(Decrease) |
|
|
2008 |
|
2009 |
|
08 to 09 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(14.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
(66.2 |
) |
|
|
(77.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
33.8 |
|
|
|
23.0 |
|
|
|
(41.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
(19.1 |
) |
|
|
(24.2 |
) |
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
14.7 |
|
|
|
(1.2 |
) |
|
|
(106.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
3.8 |
|
|
|
1.7 |
|
|
|
(61.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and amorization of debt discount |
|
|
(4.3 |
) |
|
|
(4.7 |
) |
|
|
(13.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
(0.8 |
) |
|
|
0.1 |
|
|
|
(99.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling interest |
|
|
13.4 |
|
|
|
(4.1 |
) |
|
|
(126.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
1.4 |
|
|
|
3.1 |
|
|
|
86.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
12.0 |
|
|
|
(7.2 |
) |
|
|
(151.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
(46.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
|
11.4 |
|
|
|
(7.5 |
) |
|
|
(156.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our consolidated operating results and
financial condition for the six months ended June 30, 2009, compared to the six months ended June
30, 2008. This discussion should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this quarterly report (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Net Sales |
|
$ |
211,598 |
|
|
$ |
181,948 |
|
Net sales decreased approximately $29.7 million for the six months ended June 30, 2009,
compared to the same period last year. The 14% decrease in net sales represents an approximately
19.5% decrease in units sold offset by a 5.4% increase in ASP. The ASP increase is primarily
attributable to the higher ASPs of the acquired Zetex product lines. The revenue decrease for the
six months ended June 30, 2009 was attributable to sales decreases in all industry segments,
primarily due to an overall weaker global economy, as well as our foundry and subcontracting
business, which is showing greater weakness than our core revenue drivers, partially offset by
additional sales from the Zetex acquisition as the six months of 2008 only includes one month of
Zetex sales. Significant price pressure and an unfavorable commodity-based product mix also
affected sales for the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Cost of goods sold |
|
$ |
140,064 |
|
|
$ |
140,085 |
|
Gross profit |
|
$ |
71,534 |
|
|
$ |
41,863 |
|
Gross profit margin |
|
|
33.8 |
% |
|
|
23.0 |
% |
29
Cost of goods sold remained substantially the same for the six months ended June 30, 2009
compared to the same period last year. As a percent of sales, cost of goods sold increased to
77.0% for the six months ended June 30, 2009 compared to 66.2% in the same period last year and our
average unit cost (AUP) increased 24.3%. The increase in cost of goods sold as a percentage of
sales was negatively affected by the lower capacity utilization in our manufacturing operations
mainly due to market conditions and reduction of our finished goods inventory.
For the six months ended June 30, 2009, gross profit decreased by approximately $29.7 million,
or 41.5%, compared to the same period last year. Gross margin decreased to 23.0% for the six
months ended June 30, 2009, compared to 33.8% for the same period last year, primarily due to lower
capacity utilization in our manufacturing operations caused by the recent economic downturn.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Selling, general and administrative expenses
(SG&A) |
|
$ |
31,594 |
|
|
$ |
31,296 |
|
SG&A for the six months ended June 30, 2009 decreased approximately $0.3 million, or 0.9%,
compared to the same period last year, primarily due to the decrease in overall expenses in
connection with our previously announced cost reduction initiatives and partially offset by
additional SG&A expenses related to the Zetex acquisition. SG&A as a percentage of sales,
increased to 17.2% for the six months ended June 30, 2009, compared to 14.9% in the same period
last year.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Research and development expenses (R&D) |
|
$ |
8,406 |
|
|
$ |
10,660 |
|
R&D for the six months ended June 30, 2009 was $10.7 million, an increase of approximately
$2.3 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) $1.2 million in wages and related benefits and (ii) $1.1 million in depreciation,
facility, equipment and operating expenses. R&D as a percentage of sales, increased to 5.9% for
the six months ended June 30, 2009, compared 4.0% in the same period last year.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Amortization of acquisition-related intangibles |
|
$ |
471 |
|
|
$ |
2,209 |
|
Amortization of acquisition-related intangibles increased for the six months ended June 30,
2009 to $2.2 million, compared to $0.5 million in the same period last year, due to the acquisition
of Zetex.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Interest income |
|
$ |
8,002 |
|
|
$ |
3,102 |
|
Interest income decreased for the six months ended June 30, 2009 to $3.1 million, compared to
$8.0 million in the same period last year, due primarily to a decrease in interest income earned on
our short-term investment securities. Interest income for the six months ended June 30, 2009 has
been impacted by the continued turmoil in the credit markets, and in particular with the continued
interruption in the auction rate securities (ARS) auction markets. In October 2008, we reached a
settlement agreement with UBS AG, whereby we were given the option to put the ARS portfolio back
to UBS AG at any time between June 30, 2010 and July 2, 2012 at par value. We continue to earn
interest on our ARS portfolio and expect the weighted average interest to be earned during 2009
will be lower than earned in 2008.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Interest expense |
|
$ |
3,828 |
|
|
$ |
3,925 |
|
Interest expense for the six months ended June 30, 2009 was approximately $3.9 million,
compared to $3.8 million in the same period last year. The $0.1 million increase in interest
expense is due primarily to the interest expense charged in connection with our no net cost loan
with the offsetting interest earned being recorded in interest income. The increase in interest
expense was partially offset by the reduced interest paid due to the repurchase and retirement of
$71.1 million par value of Notes during the fourth quarter of 2008, first quarter of 2009 and
second quarter of 2009.
30
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Amortization of debt discount |
|
$ |
5,325 |
|
|
$ |
4,490 |
|
Amortization of debt discount for the six months ended June 30, 2009 was $4.5 million,
compared to $5.3 million in the same period last year. The amortization of debt discount was
recorded in accordance with FSP ABP 14-1. The $0.8 million decreased in amortization of debt
discount was due primarily to the repurchase and retirement of $71.1 million par value of Notes
during the fourth quarter of 2008, first quarter of 2009 and second quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Other expense |
|
$ |
1,496 |
|
|
$ |
12 |
|
Other expense for the six months ended June 30, 2009 was $0.0 million, compared to other
expense of $1.5 million in the same period last year. Included in other expense for the six months
ended June 30, 2009 was (i) $1.4 million gain from extinguishment of debt from the repurchase and
retirement of Notes during the first and second quarter of 2009; (ii) $3.4 million foreign currency
transaction losses due primarily to the strengthening of the U.S. dollar versus the British Pound,
negatively affecting foreign currency hedges entered into by Zetex prior to our acquisition, and
partially offset by foreign currency transaction gain due primarily to favorable Taiwan and China
currency exchange rate changes during the period; and (iii) $1.5 million gain on forgiveness of
debt from government subsidies in China.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Income tax provision |
|
$ |
2,980 |
|
|
$ |
5,553 |
|
We recognized income tax expense of $5.6 million for the six months ended June 30, 2009,
compared to $3.0 million in the same period last year. Income taxes for the interim period ending
June 30, 2009 have been included in the accompanying financial statements on the basis of actual
year-to-date effective income tax rate. Income taxes for the interim period ending June 30, 2008
have been included in the accompanying financial statements on the basis of an estimated annual
effective rate. The estimated effective tax rate (excluding discrete items) is (81.7)% for the six
months ended June 30, 2009, as compared to the annual effective tax rate for the same period last
year of 12.4%. The estimated effective tax rate for the six months ended June 30, 2009 was
impacted by the non-cash income tax expense of $10.6 million associated with repatriating earnings
of foreign subsidiaries to the U.S. parent.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
Noncontrolling interest |
|
$ |
1,279 |
|
|
$ |
688 |
|
Noncontrolling interest represented the minority investors share of the earnings of our China
and Taiwan subsidiaries for the six months ended June 30, 2009 and 2008. The noncontrolling
interest in the subsidiaries and their equity balances are reported separately in the consolidation
of our financial statements, and the activities of these subsidiaries are included therein. Our
controlling interests in these subsidiaries have not changed since December 31, 2008.
31
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, funds from operations and
borrowings under our credit facilities. We currently have foreign credit facilities with borrowing
capacities of approximately $50 million and approximately $3.4 million borrowed. Our primary
liquidity requirements have been to meet our inventory and capital expenditure needs and to fund
on-going operations. At December 31, 2008 and June 30, 2009, our working capital was $212.6
million and $322.7 million, respectively. Our working capital increased in the first six months of
2009 mainly due to the reclassification of our investment securities and no net cost loan to
current assets and current liabilities, respectively, as of June 30, 2009 in connection with our
settlement with UBS AG and affiliates (UBS AG) as discussed below. 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.
In February 2009, as part of our review to maximize efficiencies and reduce costs, we paid in
full the outstanding balance on our U.S. revolving credit commitment and our term loan facility and
terminated our Amended and Restated Credit Agreement and Covenant Agreement with Union Bank of
California N.A. Should future business needs arise and the credit markets permit, we may seek to
obtain additional credit facilities. Given that we terminated our U.S. revolving credit agreement,
during the first quarter of 2009, we repatriated approximately $28.5 million of accumulated
earnings from one of our Chinese subsidiaries. The Company intends to permanently reinvest
overseas all of its remaining earnings from its foreign subsidiaries.
During the first quarter of 2009, we repurchased $9.6 million principal amount of our Notes
for approximately $6.6 million in cash and during the second quarter of 2009, we repurchased $15.0
million principal amount of our Notes in exchange for approximately $13.2 million in common stock.
As of June 30, 2009, we had $319.8 million invested in ARS, which are classified as
short-term, trading securities. While we continue to earn and receive interest on these
investments at the contractual rate, the estimated fair values of these ARS no longer approximate
par value. On October 29, 2008, we reached a settlement with UBS AG, in regard to our ARS
portfolio, which gives us the option to put the $319.8 million ARS portfolio back to UBS AG at
any time from June 30, 2010 through July 2, 2012 at par value in exchange for cash. See Notes F
and G of the Notes to Consolidated Condensed Financial Statements for information regarding the
fair values and the realized gains and losses of our ARS portfolio and put option as of June 30,
2009.
As part of our settlement with UBS AG, we have a no net cost loan with one of its
affiliates, which allows us to draw up to 75% of the market value of our ARS portfolio, as
determined by UBS BANK USA, and is subject to collateral requirements. The interest rate we pay on
the no net cost loan will not exceed the interest rate earned on the pledged ARS portfolio. As
of June 30, 2009, the balance of our no net cost loan was approximately $212 million and
classified as short-term debt. Since we have drawn up to the 75% limit and the market value of the
ARS has decreased, we cannot draw additional funds from the no net cost loan until 75% of the
market value of the ARS exceeds $212 million, at which time we can draw additional funds.
Capital expenditures for the six months ended June 30, 2008 and 2009 were $25.1 million and
$9.4 million, respectively. Our capital expenditures for these periods were primarily related to
manufacturing expansion in our facilities in China. Capital expenditures in the first six months
of 2009 were 5.2% of our revenue, which is a reduction from our historical 10% to 12% model and in
line with our previously announced cost reduction initiatives.
Discussion of Cash Flow
Cash and cash equivalents increased from $103.5 million at December 31, 2008, to $109.5
million at June 30, 2009 primarily from cash provided by operating activities, offset by cash used
in investing and financing activities.
Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2009 was
$24.6 million, resulting primarily from a $22.6 million reduction in inventory as well as $27.8
million in depreciation and amortization, offset partially by a $10.0 million reduction in accounts
receivable and a $11.4 million reduction in accounts payable and accrued liabilities.. Net cash
provided by operating activities was $23.2 million for the same period last year. Net cash
provided by operating activities increased $1.4 million for the six months ended June 30, 2009,
compared to the same period last year. This increase resulted primarily from an approximately
$36.4 million decrease in net operating assets and liabilities and a $3.4 million increase in
non-cash expense, offset by an approximately $38.4 million decrease in net income. 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.
32
Investing Activities
Net cash used in investing activities was $7.8 million for the six months ended June 30, 2009
compared to $175.3 million for the same period last year. The $167.5 million decrease in net cash
used by investing activities was due primarily to the $152.9 million decrease in acquisitions, net
of cash acquired, for the acquisition of Zetex in the second quarter of 2008 and reduction of
purchases of property, plant and equipment.
Financing Activities
Net cash provided by (used in) financing activities totaled $(13.5) million for the six months
ended June 30, 2009 compared to $181.4 million in the same period last year. This increase in used
funds is primarily the result of an approximately $11.9 million repayment on line of credit and
long-term debt mainly due to the termination of our credit facility with Union Bank and repurchase
of our Notes during the first quarter of 2009 for cash and $165.0 million of borrowings in
connection with the acquisition of Zetex in the second quarter of 2008.
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, 2008, filed on February 26, 2009, except for
the adoption of FSP APB 14-1. See Note N of the Notes to Consolidated Condensed Financial
Statements for further information.
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 since December 31,
2008, except for the repurchase of $9.6 million principal amount of our Notes for approximately
$6.6 million in cash during the first quarter of 2009 and the repurchase of $15.0 million principal
amount of our Notes in exchange for approximately $13.2 million in common stock during the second
quarter of 2009.
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.
Our critical accounting policies, as described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, relate to revenue recognition, inventories, accounting for
income taxes, allowance for doubtful accounts, goodwill and long-lived assets, share-based
compensation, fair value measurements, defined benefit plan, asset retirement obligations,
investments in joint ventures and contingencies. There have been no material changes to our
critical accounting policies since December 31, 2008, except for the changes described below.
Convertible Senior Notes
On January 1, 2009, we adopted FSP APB 14-1 to account for our Notes. This pronouncement
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. 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. Previous
guidance provided for accounting of this type of convertible debt instruments entirely as debt. All
adjustments are required to be made retrospectively as of the date of issuance of the
33
Notes and therefore, will be treated as if the Notes have always been accounted for in
accordance with this pronouncement. See Note B and Note N of the Notes to Consolidated Condensed
Financial Statements for further information.
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 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 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
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Ø
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Global economic weakness and the current financial market uncertainty has had, and is
expected to continue to have, through at least 2009, a material adverse effect on our
business. |
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Ø
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In the current difficult market conditions, our fixed costs combined with lower revenues
have negatively impacted our results. |
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Ø
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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. |
34
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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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Our customers require our products to undergo a lengthy and expensive qualification
process without any assurance of product sales. |
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Ø
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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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Ø
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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. |
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Ø
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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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Ø
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We may be adversely affected by any disruption in our information technology systems. |
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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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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Ø
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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. |
35
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Ø
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We had a significant amount of debt following the offering of convertible 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
or other debt. |
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Ø
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Our Auction Rate Securities (ARS) are currently illiquid and we cancelled our bank
credit facility in the U.S.; therefore, we must rely solely upon existing cash reserves,
available foreign credit facilities and funds from existing operations to finance future
operations. |
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Ø
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UBS AG may not honor its part of the settlement agreement with us to purchase our entire
ARS portfolio at any time beginning from June 30, 2010 to July 2, 2012 at par value. |
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Ø
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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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Ø
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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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Ø
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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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Ø
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There are risks associated with our acquisition of Zetex. |
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Ø
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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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Ø
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Our management certification and auditor attestation regarding the effectiveness of our
internal control over financial reporting as of 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 may not be effective. |
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Ø
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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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Ø
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Our international operations subject us to risks that could adversely affect our operations. |
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Ø
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We may be adversely affected by any international health conditions, including outbreaks or health epidemics. |
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Ø
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We have significant operations and assets in China, Taiwan, Hong Kong and England 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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Ø
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We could be adversely affected by violations of the United States Foreign Corrupt
Practices Act and similar worldwide anti-bribery laws. |
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Ø
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We are subject to foreign currency risk as a result of our international operations. |
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Ø
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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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Ø
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The distribution of any earnings of our foreign subsidiaries to the United States may be
subject to U.S. income taxes, thus reducing our net income. |
Risks Related To Our Common Stock
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Ø
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Variations in our quarterly operating results may cause our stock price to be volatile. |
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Ø
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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. |
36
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Ø |
|
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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Ø |
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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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Ø
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Conversion of our convertible senior notes will dilute the ownership interest of
existing stockholders, including holders who had previously converted their notes. |
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Ø
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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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Ø
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Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws. |
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Ø
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Section 203 of Delaware General Corporation Law. |
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Ø
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Certificate of Incorporation and Bylaw Provisions. |
37
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
As a multinational corporation, we are subject to certain market risks including foreign
currency fluctuations, interest rates, government actions, liquidity and inflation. We consider a
variety of practices to manage these market risks. 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, 2008,
filed on February 26, 2009.
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Item 4. |
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Controls and Procedures |
Disclosure Controls and Procedures
Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Richard D. White, 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.
38
PART II OTHER INFORMATION
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Item 1. |
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Legal Proceedings |
There have been no material changes from the legal proceedings disclosed in the Legal
Proceedings section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
filed on February 26, 2009.
We are currently a party to Integrated Discrete Devices, LLC. v. Diodes Incorporated, C.A. No.
08-888 (GMS) (D. Del.). While we intend to defend the lawsuit vigorously and presently believe
that the ultimate outcome of the legal proceeding will not have a material adverse effect on our
financial position, cash flows or overall results of operations, litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary
damages or an injunction prohibiting us from selling one or more products. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on our business or
results of operations for the period in which the ruling occurs or future periods.
From time to time, the Company is involved in various routine legal proceedings incidental to
the conduct of its business. The Companys management does not believe that any of these legal
proceedings will have a material adverse impact on the business, financial condition or results of
operations of the Company.
There have been no 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, 2008, filed on
February 26, 2009.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
We may from time to time seek to repurchase our outstanding Notes in the open market, in
privately negotiated transactions or otherwise. Such repurchases, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual restrictions and other
factors. The amounts involved may be material.
The following table provides information regarding the repurchases of our Notes during the
second quarter of 2009:
ISSUER PURCHASES OF EQUITY SECURITIES
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(a) Total Principal |
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(b) Average Price Paid |
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Amount of Notes |
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per $1.00 Principal |
Period |
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Purchased |
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Amount |
June 1, 2009 to June
30, 2009 |
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$ |
15,000,000 |
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$ |
0.87 |
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Total |
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$ |
15,000,000 |
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$ |
0.87 |
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On June 9, 2009, the Company issued 852,272 shares of Common Stock in exchange for the
foregoing $15 Million principal amount of Notes. See Item 1.01. Entry into a Material Definitive
Agreement; Item 3.02. Unregistered Sales of Equity Securities; and Item 9.01. Financial
Statements and Exhibits, on Form 8-K filed June 15, 2009 for additional information regarding the
foregoing repurchases of Notes.
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Item 3. |
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Defaults Upon Senior Securities |
There are no matters to be reported under this heading.
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
See Item 8.01, Other Events, on Form 8-K filed June 2, 2009 for information regarding the
matters to be reported under this heading.
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Item 5. |
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Other Information |
There are no matters to be reported under this heading.
39
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Exhibit |
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Filed |
Number |
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Description |
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Form |
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Date of First Filing |
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Number |
|
Herewith |
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3.1
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Certificate of Incorporation, as amended
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S-3
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September 8, 2005
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3.1 |
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3.2
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Amended By-laws of the Company dated July 19, 2007
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8-K
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July 23, 2007
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3.1 |
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4.1
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Form of Certificate for Common Stock, par value
$0.66 2/3 per share
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S-3
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August 25, 2005
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4.1 |
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4.2
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Form of 2.25% Convertible Senior Notes due 2026
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S-3
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October 4, 2006
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4.1 |
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4.3
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Form of Indenture for the 2.25% Convertible Senior
Notes due 2026
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S-3
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October 4, 2006
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4.3 |
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10.1
|
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Exchange Agreement dated June 9, 2009, between
Diodes Incorporated and Acqua Wellington
Opportunity, Ltd.
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|
8-K
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June 15, 2009
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10.1 |
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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.
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DIODES INCORPORATED (Registrant) |
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By: /s/ Richard D. White |
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RICHARD D. WHITE
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August 7, 2009 |
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer) |
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