Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as identified under the heading “Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995” herein. 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 our management. The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) 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 PSLRA. We undertake no obligation to publicly release the results of any revisions to our 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. Dollar amounts and share amounts are presented in thousands, except per share amounts, unless otherwise noted.
This management’s discussion should be read in conjunction with the management’s discussion included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“Form 10-K”), previously filed with Securities and Exchange Commission (“SEC”) on February 21, 2019.
Overview
We are a leading global manufacturer and supplier of high-quality, application-specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets. For detailed information, see Note 1 – Nature of Operations, Basis of Presentation, Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates, included in the condensed consolidated financial statements in Item 1 above. Our products are sold primarily throughout Asia, North America and Europe. We believe that our focus on application-specific standard products utilizing innovative, highly efficient packaging and cost-effective process technologies, coupled with our collaborative, customer-focused product development, provides us with a meaningful competitive advantage relative to other semiconductor companies.
Factors Relevant to Our Results of Operations for the Three Months Ended June 30, 2019
|
•
|
During the second quarter of 2019, net sales were $322.0 million, an increase of 5.9% from the $304.1 million in the second quarter of 2018 due to continued market share gains, and an increase of 6.5% from the $302.3 million in the first quarter of 2019;
|
|
•
|
Gross profit was $122.0 million, compared to $107.3 million of gross profit in the second quarter of 2018 and $112.4 million in the first quarter of 2019;
|
|
•
|
Gross profit margin was 37.9%, compared to gross profit margin of 35.3% in the second quarter of 2018 and 37.2% in the first quarter of 2019;
|
|
•
|
Net income was $36.3 million, or $0.70 per diluted share, compared to net income of $25.1 million, or $0.49 per diluted share, in the second quarter of 2018 and net income of $31.7 million, or $0.62 per diluted share, in the first quarter of 2019; and
|
|
•
|
Cash flow from operations was $40.6 million. Net cash flow was a negative $65.5 million, which includes a paydown of $44.1 million of long-term debt and $32.1 million of capital expenditures.
|
Recent Developments
April 1,
2019, we announced the closing of the previously announced agreement to acquire Texas Instruments’ (“TI”) wafer fabrication facility and operation located in Greenock, Scotland (“GFAB”). We are in the process of installing Diodes’ processes to fully use the additional 8” capacity and capability of GFAB, which we believe will support our growth expansion initiatives and future cost reduction initiatives.
-
23
-
Results of Operations for the Three Months Ended June 30, 2019 and 2018
The table below sets forth the consolidated statement of operations line items as a percentage of net sales.
|
Percent of Net Sales
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
100
|
%
|
|
|
100
|
%
|
Cost of goods sold
|
|
(62
|
)
|
|
|
(65
|
)
|
Gross profit
|
|
38
|
|
|
|
35
|
|
Total operating expense
|
|
23
|
|
|
|
23
|
|
Income from operations
|
|
15
|
|
|
|
12
|
|
Total other expense
|
|
-
|
|
|
|
-
|
|
Income before income taxes and noncontrolling interest
|
|
15
|
|
|
|
12
|
|
Income tax provision
|
|
(3
|
)
|
|
|
(4
|
)
|
Net income
|
|
12
|
|
|
|
8
|
|
Net income attributable to common stockholders
|
|
12
|
|
|
|
8
|
|
The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
|
Three Months Ended
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
Net sales
|
$
|
322,006
|
|
|
$
|
304,085
|
|
|
$
|
17,921
|
|
|
|
5.9
|
%
|
Cost of goods sold
|
|
200,018
|
|
|
|
196,817
|
|
|
|
3,201
|
|
|
|
1.6
|
%
|
Gross profit
|
|
121,988
|
|
|
|
107,268
|
|
|
|
14,720
|
|
|
|
13.7
|
%
|
Total operating expense
|
|
73,472
|
|
|
|
69,424
|
|
|
|
4,048
|
|
|
|
5.8
|
%
|
Interest income
|
|
633
|
|
|
|
443
|
|
|
|
190
|
|
|
|
42.9
|
%
|
Interest expense
|
|
(2,011
|
)
|
|
|
(2,544
|
)
|
|
|
(533
|
)
|
|
|
(21.0
|
%)
|
Foreign currency (loss) gain, net
|
|
(496
|
)
|
|
|
300
|
|
|
|
796
|
|
|
|
(265.3
|
%)
|
Other income
|
|
1,235
|
|
|
|
377
|
|
|
|
858
|
|
|
|
227.6
|
%
|
Income tax provision
|
|
11,174
|
|
|
|
10,753
|
|
|
|
421
|
|
|
|
3.9
|
%
|
Net sales increased approximately $17.9 million for the three months ended June 30, 2019, compared to the same period last year due to continued strong performance in Europe and North America as well as the automotive and industrial end markets. For the three months ended June 30, 2019, combined net sales in the automotive and industrial markets represented 39% of total sales. Excluding the frequency control business, our serial-connectivity business reached record levels of net sales in the first three months of 2019.
The table below sets forth our revenue as a percentage of total revenue by end-user market for the three months ended June 30, 2019 and 2018:
|
Three Months Ended
|
|
|
June 30,
|
|
|
2019
|
|
|
2018
|
|
Industrial
|
|
29.0
|
%
|
|
|
27.0
|
%
|
Communications
|
|
23.0
|
%
|
|
|
23.0
|
%
|
Consumer
|
|
22.0
|
%
|
|
|
25.0
|
%
|
Computing
|
|
16.0
|
%
|
|
|
16.0
|
%
|
Automotive
|
|
10.0
|
%
|
|
|
9.0
|
%
|
-
24
-
Cost of goods sold increased approximately $3.2 million for the three months ended June 30, 2019, compared to the same period
last year. As a percent of sales, cost of goods sold was 62.0% for the three months ended June 30, 2019, compared to 64.7% for the same period last year. Average unit cost increased approximately 4.7% for the three months ended June 30, 2019, compared to
the same period last year. For the three months ended June 30, 2019, gross profit increased approximately 13.7% when compared to the same period last year. Gross profit margin for the three month periods ended June 30, 2019 and 2018 was 37.9% and 35.3%, r
espectively. The increase in gross profit margin was due to higher revenue contribution from the automotive and industrial markets as well as serial-connectivity products, which typically have higher gross profit margins.
Operating expenses for the three months ended June 30, 2019, increased approximately $4.0 million, or 5.8%, compared to the three months ended June 30, 2018. Selling, general and administrative expenses (“SG&A”) increased approximately $5.2 million and research and development expenses (“R&D”) decreased approximately $0.3 million. Amortization of acquisition related intangibles decreased $0.1 million. SG&A, as a percentage of sales, was 14.7% and 13.9% for the three months ended June 30, 2019 and 2018, respectively. R&D, as a percentage of sales, was 6.7% and 7.3% for the three months ended June 30, 2019 and 2018, respectively.
Interest income increased 42.9% for the three months ended June 30, 2019, compared to the same period last year, due to interest received on cross currency swaps. Interest expense decreased 21.0% for the three months ended June 30, 2019, compared to the same period last year. The decrease in interest expense for the three months ended June 30, 2019 was due to lower levels of debt partially offset by higher interest rates on the floating rate portion of the borrowings used to effect the Pericom acquisition in the fourth quarter of 2015. Foreign currency (loss) gain, net was a net loss of $0.5 million for the three months ended June 30, 2019, compared to a net gain of $0.3 million for the same period last year, reflecting the effectiveness of our currency hedges.
We recognized income tax expense of approximately $11.1 million and $10.8 million for the three months ended June 30, 2019 and 2018, respectively. The increase in income taxes for 2019 compared to 2018 was primarily attributable to an increase in pretax book income, partially offset by a net decrease in unfavorable U.S. permanent differences.
Results of Operations for the Six Months Ended June 30, 2019 and 2018
The table below sets forth the consolidated statement of operations line items as a percentage of net sales.
|
Percent of Net Sales
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
100
|
%
|
|
|
100
|
%
|
Cost of goods sold
|
|
(62
|
)
|
|
|
(64
|
)
|
Gross profit
|
|
38
|
|
|
|
36
|
|
Total operating expense
|
|
23
|
|
|
|
25
|
|
Income from operations
|
|
15
|
|
|
|
11
|
|
Total other expense
|
|
-
|
|
|
|
-
|
|
Income before income taxes and noncontrolling interest
|
|
15
|
|
|
|
11
|
|
Income tax provision
|
|
(3
|
)
|
|
|
(3
|
)
|
Net income
|
|
12
|
|
|
|
8
|
|
Net income attributable to common stockholders
|
|
12
|
|
|
|
8
|
|
-
25
-
The following table and discussion explains in greater detail our consolidated operating results and financial condition for the six months ended June 30, 2019,
compared to the six months ended June 30, 2018. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
|
Six Months Ended
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Increase/(Decrease)
|
|
|
% Change
|
|
Net sales
|
$
|
624,299
|
|
|
$
|
578,597
|
|
|
$
|
45,702
|
|
|
|
7.9
|
%
|
Cost of goods sold
|
|
389,900
|
|
|
|
372,734
|
|
|
|
17,166
|
|
|
|
4.6
|
%
|
Gross profit
|
|
234,399
|
|
|
|
205,863
|
|
|
|
28,536
|
|
|
|
13.9
|
%
|
Total operating expense
|
|
143,760
|
|
|
|
141,079
|
|
|
|
2,681
|
|
|
|
1.9
|
%
|
Interest income
|
|
1,508
|
|
|
|
957
|
|
|
|
551
|
|
|
|
57.6
|
%
|
Interest expense
|
|
(4,156
|
)
|
|
|
(5,301
|
)
|
|
|
(1,145
|
)
|
|
|
(21.6
|
%)
|
Foreign currency (loss) gain, net
|
|
(560
|
)
|
|
|
(2,729
|
)
|
|
|
(2,169
|
)
|
|
|
(79.5
|
%)
|
Other income
|
|
2,480
|
|
|
|
5,012
|
|
|
|
(2,532
|
)
|
|
|
(50.5
|
%)
|
Income tax provision
|
|
21,472
|
|
|
|
18,536
|
|
|
|
2,936
|
|
|
|
15.8
|
%
|
Net sales increased approximately $45.7 million for the six months ended June 30, 2019, compared to the same period last year due to continued market share gains. We experienced record net sales in Europe and record net sales in both the automotive and industrial end markets. For the six months ended June 30, 2019, combined net sales in the automotive and industrial markets represented 39% of total sales. Excluding the frequency control business, our serial-connectivity business reached record levels of net sales in the first three months of 2019.
The table below sets forth our revenue as a percentage of total revenue by end-user market for the six months ended June 30, 2019 and 2018:
|
Six Months Ended
|
|
|
June 30,
|
|
|
2019
|
|
|
2018
|
|
Industrial
|
|
29.0
|
%
|
|
|
25.1
|
%
|
Communications
|
|
23.0
|
%
|
|
|
23.5
|
%
|
Consumer
|
|
22.5
|
%
|
|
|
25.9
|
%
|
Computing
|
|
15.5
|
%
|
|
|
16.5
|
%
|
Automotive
|
|
10.0
|
%
|
|
|
9.0
|
%
|
Cost of goods sold increased approximately $17.2 million for the six months ended June 30, 2019, compared to the same period last year. As a percent of sales, cost of goods sold was 62.1% for the six months ended June 30, 2019 compared to 64.4% for the same period last year. Average unit cost increased approximately 6.0% for the six months ended June 30, 2019, compared to the same period last year. For the three months ended June 30, 2019, gross profit increased approximately 13.9% when compared to the same period last year. Gross profit margin for the six month periods ended June 30, 2019 and 2018 was 37.6% and 35.6%, respectively. The increase in gross profit margin was due to higher revenue contribution from the automotive and industrial markets as well as serial-connectivity products, which typically have higher gross profit margins.
Operating expenses for the six months ended June 30, 2019, increased approximately $2.7 million, or 1.9%, compared to the three months ended June 30, 2018. Selling, general and administrative expenses (“SG&A”) increased approximately $1.7 million and research and development expenses (“R&D”) increased approximately $1.6 million. Amortization of acquisition related intangibles decreased $0.4 million. SG&A, as a percentage of sales, was 14.6% and 15.4% for the six months ended June 30, 2019 and 2018, respectively. R&D, as a percentage of sales, was 7.0% and 7.3% for the six months ended June 30, 2019 and 2018, respectively.
Interest income increased 57.6% for the six months ended June 30, 2019, compared to the same period last year, due to interest received on cross currency swaps. Interest expense decreased 21.6% for the six months ended June 30, 2019, compared to the same period last year. The decrease in interest expense for the six months ended June 30, 2019 was due to lower levels of debt partially offset by higher interest rates on the floating rate portion of the borrowings used to effect the Pericom acquisition in the fourth quarter of 2015. Foreign currency (loss) gain, net was a net loss of $0.6 million for the six months ended June 30, 2019, compared to a net loss of $2.7 million for the same period last year, reflecting the effectiveness of our currency hedges.
-
26
-
We recognized an income tax expense of approximately $21.4 million and $18.6 million for the six months ended June 30, 2019 and 2018, respectively. The increase
in income taxes for 2019 compared to 2018 is primarily attributable to an increase in pretax book income, partially offset by a net decrease in unfavorable U.S. permanent differences.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under our credit facilities.
Short-term debt
Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $121.4 million. At June 30, 2019, borrowings were $15.5 million and letters of credit were $0.4 million under the Asia credit facilities. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, repayable on demand, terminable by the lender at any time and contain no restrictive covenants. These credit facilities bear interest at LIBOR or similar indices plus a specified margin. Interest payments are due quarterly on outstanding amounts under the credit lines. In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $19.6 million on a long-term basis from local Taiwan banks in order to make an investment. The first loan of $4.3 million matures in 2033, while the second loan of $15.3 million matures in 2024.
Long-term debt
We currently have a U.S. banking credit facility (the “U.S. Credit Facility”) under which we may draw up to $250 million on a revolving basis, in addition to a $250 million term loan. The U.S. Credit Facility matures October 26, 2021. The remaining portion of the term loan of the U.S. Credit Facility is repayable in part through quarterly installments that increase over time from $6.3 million in the first three quarters of 2019 to $9.4 million per quarter in the final year of the U.S. Credit Facility. We may, from time to time, request increases in the aggregate commitments under the U.S. Credit Facility of up to $200 million, subject to the lenders electing to increase their commitments or by means of the addition of new lenders, and subject to at least half of each increase in aggregate commitments being in the form of term loans, with the remaining amount of each increase being an increase in the amount of the revolving portion of the U.S. Credit Facility. The U.S. Credit Facility contains certain financial and non-financial covenants, including, but not limited to, a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases). The obligations of the Company and the other borrowers under the U.S. Credit Facility are secured by substantially all of the assets of the Company, including controlling interests in its first-tier subsidiaries, and by specified assets of certain of its subsidiaries.
-
27
-
The details of our borrowings outstanding as of June 30, 2019 are set forth in the table below:
Description
|
|
Amount outstanding
|
|
Interest Rate
|
|
Maturity Date
|
Short-term debt:
|
|
|
|
|
|
|
Foreign credit lines
|
|
$15,454
|
|
Libor or other similar indices plus a specified margin
|
|
Various during
2019 - 2020
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
Notes payable to Bank of Taiwan
|
|
4,256
|
|
Two-year savings rate +0.1148%
|
|
June 2033
|
Notes payable to CTBC Bank
|
|
15,325
|
|
TAIBOR 3 month rate +.05%
|
|
May 2024
|
U.S. Credit facility;
|
|
|
|
|
|
|
Revolving portion
|
|
41,500
|
|
Libor + a specified margin
|
|
October 2021
|
Term portion
|
|
112,000
|
|
Libor + a specified margin
|
|
October 2021
|
Total long-term debt
|
|
173,081
|
|
|
|
|
Less: Current portion of long-term debt
|
|
(29,988)
|
|
|
|
|
Less: Unamortized debt issuance costs
|
|
(1,174)
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$141,919
|
|
|
|
|
Our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations. At June 30, 2019 and December 31, 2018, our working capital was $481.2 million and $480.8 million, respectively. We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to cover cash needs for working capital and capital expenditures for at least the next 12 months.
Capital expenditures for the six months ended June 30, 2019 and 2018 were $52.7 million and $47.5 million, respectively. For the first six months of 2019 capital expenditures were approximately 8.4% of our net sales, which is in line with our capital spending target range of 5% to 9% of net sales.
Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European subsidiaries. As of June 30, 2019, our foreign subsidiaries held approximately $128.0 million of cash, cash equivalents and investments of which approximately $21.4 million would be subject to a potential non-U.S. withholding tax if distributed outside the country in which the cash is currently held. Of this total, $11.6 million is held in China.
As of June 30, 2019, we had short-term investments totaling $6.6 million. These investments are highly liquid with maturity dates greater than three months at the date of purchase. We generally can access these investments in a relatively short time frame but in doing so we generally forfeit all earned and future interest income.
Share Repurchase Program
During 2015, our Board of Directors (“Board”) approved a stock repurchase program. The Board authorized the repurchase of up to an aggregate of $100.0 million of our outstanding Common Stock. The share repurchase program is expected to continue through the end of 2019 unless extended or shortened by the Board. Currently there is approximately $62.3 million available for repurchase of outstanding Common Stock under this publicly announced repurchase program. No shares were repurchased during the three months ended June 30, 2019.
-
28
-
Discussion of Cash Flow
Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and our credit facilities. Our cash and cash equivalents decreased from $241.1 million at December 31, 2018 to $235.4 million at June 30, 2019.
The table below sets forth a summary of the condensed consolidated statements of cash flows:
|
Six Months Ended June 30,
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Net cash flows provided by operating activities
|
$
|
110,488
|
|
|
$
|
88,381
|
|
|
$
|
22,107
|
|
Net cash and cash equivalents used in investing activities
|
|
(82,517
|
)
|
|
|
(53,627
|
)
|
|
|
(28,890
|
)
|
Net cash and cash equivalents used in financing activities
|
|
(32,955
|
)
|
|
|
(83,430
|
)
|
|
|
50,475
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(35
|
)
|
|
|
(2,753
|
)
|
|
|
2,718
|
|
Net decrease in cash and cash equivalents, including restricted cash
|
$
|
(5,019
|
)
|
|
$
|
(51,429
|
)
|
|
$
|
46,410
|
|
Operating Activities
Net cash flows provided by operating activities for the six months ended June 30, 2019 was $110.5 million. Net cash flows provided by operating activities resulted from net income of $68.4 million, depreciation and amortization of intangible assets of $54.4 million, share-based compensation of $9.8 million and a decrease in noncash working capital accounts of $21.5 million. Cash flows from operating activities for the six months ended June 30, 2018 was $88.4 million. Cash flows from operating activities resulted from net income of $44.2 million, depreciation and amortization of $51.3 million, share-based compensation of $11.1 million and a decrease in noncash working capital accounts of $17.6 million.
Investing Activities
Net cash and cash equivalents used in investing activities was $82.5 million for the six months ended June 30, 2019. Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $50.7 and the acquisition of GFAB for $33.2 million during the six months ended June 30, 2019.
Net cash and cash equivalents used in investing activities was $53.6 million for the six months ended June 30, 2018. Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $53.0 million during the six months ended June 30, 2018.
Financing Activities
Net cash and cash equivalents used in financing activities was $33.0 million for the six months ended June 30, 2019. Net cash used in financing activities in the six months ended June 30, 2019 consisted primarily of $42.1 million net repayments of long-term debt, taxes paid on net share settlement of $1.6 million and dividend distributions to noncontrolling interests of $1.2 million. These uses of cash were partially offset by inflows of $6.7 million related to stock option exercises and $5.3 million of net increases in lines of credit and short-term debt.
Net cash and cash equivalents used in financing activities was $83.4 million for the six months ended June 30, 2018. Net cash and cash equivalents used in the six months ended June 30, 2018 consisted primarily of repayments of long-term debt, net of $82.5 million and taxes paid on net share settlement of $8.6 million, partially offset by proceeds from short-term line of credit of $3.4 million.
Use of Derivative Instruments and Hedging
We use interest rate swaps, foreign exchange forward contracts and cross currency swaps to provide a level of protection against interest rate risks and foreign exchange exposure.
Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps, including interest rate collars, as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
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Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our different functional currencies. We use foreign currency forward agreements to manage this exposure and to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instruments are not designated for hedge accounting treatment in accordance with ASC 815. The fair value of our foreign exchange hedges approximates zero.
Net Investment Hedges
During 2019, we used cross currency swaps to hedge our foreign exchange exposure related to our investment in our foreign subsidiaries. These instruments were subject to market fluctuations due to changes in foreign exchange rates and at times may be in a loss position. Market fluctuations were recorded to other comprehensive income/loss since these instruments are subject to hedge accounting. If these instruments are in a loss position at maturity, or if we decided to exit these instruments while they are in a loss position, we would have to make a cash payment in the amount of the loss position. During the second quarter of 2019, we decided to exit our positions in cross currency swaps. As a result of exiting this position we were required to make a cash payment of approximately $0.3 million.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements or 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 our Contractual Obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 21, 2019.
Critical Accounting Policies
Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 21, 2019. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q in Note 1 – Nature of Operations, Basis of Presentation, Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the condensed consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Recently Issued Accounting Pronouncements
See Note 1 - Nature of Operations, Basis of Presentation, Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates, of the Notes to Condensed Consolidated Financial Statements, for detailed information regarding the status of recently issued accounting pronouncements.
Available Information
Our Internet address is
http://www.diodes.com
. Information included on, or accessible through, our website shall not be deemed to form a part of the Quarterly Report on Form 10-Q. We make available, free of charge through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website also provides access to investor financial information, including SEC filings and press releases, as well as stock quotes and information on corporate governance compliance.
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Cautionary Statemen
t 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 Exchange Act of 1934. 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 “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and in other reports we file with the SEC from time to time, that could cause actual results to differ materially from those anticipated by our management. The PSLRA 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 PSLRA.
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 our 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 we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
Risk Factors
RISKS RELATED TO OUR BUSINESS
The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.
During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a negative impact on our business, operating results and financial condition.
Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating results and financial condition.
The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.
One of our external suppliers is also a related party. The loss of this supplier could harm our business, operating results and financial condition.
Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial condition.
We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth and profit margins.
Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales and may demand to audit our operations from time to time. A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition.
Our customer orders are subject to cancellation or modification usually with no penalty. High volumes of order cancellation or reduction in quantities ordered could adversely affect our net sales, operating results and financial condition.
Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.
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New technologies coul
d result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, operating resul
ts and financial condition.
We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.
We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our business, operating results and financial condition.
We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner.
If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition.
Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.
We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition.
We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, operating results and financial condition.
Our products, or products we purchase from third parties for resale, may be found to be defective and, as a result, warranty claims and product liability claims may be asserted against us and we may not have recourse against our suppliers, which may harm our business, reputation with our customers, operating results and financial condition.
We may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to operate our business successfully, which could adversely affect our business, operating results and financial condition.
We may not be able to achieve future growth, and any such growth may place a strain on our management and on our systems and resources, which could adversely affect our business, operating results and financial condition.
Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely affect our business, operating results and financial condition.
If our direct sales customers do not design our products into their applications, our net sales may be adversely affected.
We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which could adversely affect our business, operating results and financial condition.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or our counterparties might not perform as agreed.
We may have a significant amount of debt with various financial institutions worldwide. Any indebtedness could adversely affect our business, operating results, financial condition and our ability to meet payment obligations under such debt.
Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.
Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition.
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We operate a global business through numerous
foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial condition.
The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.
Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.
Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.
Compliance with government regulations and customer demands regarding the use of “conflict minerals” may result in increased costs and may have a negative impact on our business, operating results and financial condition.
There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.
If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control 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.
Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S. or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.
System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and adversely affect our stock price.
RISKS RELATED TO OUR INTERNATIONAL OPERATIONS
Our international operations subject us to risks that could adversely affect our operations.
We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results.
Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.
Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S. and may disrupt our activities in the U.S. and may have an adverse impact on our profitability and results of operations.
The U.K.’s referendum to exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.
A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would have a material adverse effect on our business, operating results and prospects.
Economic regulation in China could materially and adversely affect our business, operating results and prospects.
We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act, the U.K.’s Bribery Act 2010, China’s anti-corruption campaign and similar worldwide anti-bribery laws.
We are subject to foreign currency risk as a result of our international operations.
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China is experiencing rapid social, political and economic change, which has increased labor co
sts and other related costs that could make doing business in China less advantageous than in prior years. Increased labor costs in China could adversely affect our business, operating results and financial condition.
We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net income.
The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net income.
RISKS RELATED TO OUR COMMON STOCK
Variations in our quarterly operating results may cause our stock price to be volatile.
We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the price of our Common Stock.
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.
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.
Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities.
Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-over attempt.
Section 203 of Delaware General Corporation Law may deter a take-over attempt.
Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.
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