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DIOD > SEC Filings for DIOD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for DIODES INC /DEL/

Form 10-Q for DIODES INC /DEL/


9-Nov-2012

Quarterly Report


Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, the matters addressed in this Item 2 constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company's management. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words "Diodes," the "Company," "we," "us" and "our" refer to Diodes Incorporated and its subsidiaries.

This management's discussion should be read in conjunction with the management's discussion included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with Securities and Exchange Commission.

Highlights

Net sales for the three months ended September 30, 2012 was $167 million, an increase of $6 million, or 4%, over the same period last year, and a sequential increase of 5% compared to the $159 million in the second quarter of 2012;

Net sales for the nine months ended September 30, 2012 was $471 million, a decrease of $21 million, or 4%, over the same period last year;

Gross profit for the three months ended September 30, 2012 was $44 million, a decrease of $2 million, or 4%, over the same period last year, and a sequential increase of 6% compared to the $41 million in the second quarter of 2012;

Gross profit for the nine months ended September 30, 2012 was $118 million, a decrease of $40 million, or 25%, over the same period last year;

Gross profit margin for the three months ended September 30, 2012 was 26%, a decrease of 2% over the same period last year, and the same as the second quarter of 2012;

Gross profit margin for the nine months ended September 30, 2012 was 25%, a decrease of 7% over the same period last year;

Net income attributable to common stockholders for the three months ended September 30, 2012 was $9 million, or $0.18 per diluted share, compared to the same period last year, which was $10 million, or $0.21 per diluted share, and second quarter of 2012 net income of $7 million, or $0.14 per diluted share;

Net income attributable to common stockholders for the nine months ended September 30, 2012 was $20 million, or $0.43 per diluted share, compared to the same period last year, which was $48 million, or $1.02 per diluted share;

Cash flows from operating activities was $18 million for the three months ended September 30, 2012;

Cash flows from operating activities was $48 million for the nine months ended September 30, 2012;

Gained a controlling financial interest in Eris Technology Corporation ("Eris"), and started consolidating their results as of September 1, 2012; and

Announced the agreement to acquire Power Analog Microelectronics, Inc ("PAM"), which closed on October 29, 2012.

Overview

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

We design, manufacture and market these semiconductors for diverse end-use applications. Semiconductors, which provide electronic signal amplification and switching functions, are basic building-block electronic components that are incorporated into almost every electronic device. We believe that our focus on standard semiconductor products provides us with a meaningful competitive advantage relative to other semiconductor companies.

First Three Quarters of 2012

Late in the first quarter of 2012, we began to see signs of a recovery in our end markets. We took advantage of this renewed strength by significantly reducing our lower margin finished goods inventory, which helped to support revenue and secure incremental market share gains. As a result, we achieved moderate sequential revenue growth, which was significantly better than the typical

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seasonal slowness. However, our decision to reduce inventory combined with the increased pricing pressure and lower utilization continued to impact margins during the quarter. We believed the first quarter represented the low point in the cycle and that overall demand was beginning to improve across all of our geographies. As such, we shifted our strategy back to our growth model to aggressively capture additional market share. We begun adding capacity for new, more advanced packaging at our Shanghai facilities to support our anticipated growth. As the demand and pricing environment improves further, we will transition available capacity to higher margin products to enhance our product mix and margins going forward.

During the second quarter of 2012, we had 10% sequential growth in net sales driven by improved demand across all of our geographies and end markets as we continued to gain market share. The second quarter benefited from the ramping of new projects for our products used in smartphones and tablets, where we are very well positioned. Our growth was particularly noteworthy considering our stronger than seasonal results in the first quarter, which traditionally is the low point in the demand cycle. Margins also improved in the second quarter as we began to slowly shift to higher margin products, while also benefiting from new product initiatives and manufacturing efficiency improvements. In addition, we have made targeted capital expenditures in our Shanghai facilities to increase capacity for specific packages and products.

Despite the slowdown in the general market during the third quarter of 2012, we were able to achieve 5% sequential growth and meet our expectations due to past design wins and new product initiatives that drove further market share gains. The third quarter represents our third consecutive quarter of growth as we continued to increase sales for our products used in smartphones and tablets, while also benefiting from a rebound in LED TVs and a strong quarter in automotive. Gross margin improved moderately in the third quarter but remained under pressure primarily due to the effects of the generally weak global economy. Although we are gaining market share for our more advanced packages as supported by the capital investments we made in the second and third quarters, we are still underloaded on our standard packages. The unstable demand environment also caused pricing to weaken in the third quarter and product mix to be less favorable than we had anticipated. However, our cost reductions and manufacturing efficiency improvements were able to largely offset these factors and contributed to margins improving slightly over the prior quarter.

Business Outlook

Improvements in the demand and pricing environment are key factors in our ability to transition available capacity to higher margin products at a more rapid pace, which has been restrained by the slower recovery. Looking forward, the global environment continues to create uncertainty, especially as it relates to the timing of production ramps for many of our customers. Therefore, we remain cautious on our expectations and focused on further expanding our content at key customers, gaining market share and accelerating our design win momentum on new and existing products. For the fourth quarter of 2012, we are expecting a seasonally down quarter with revenue ranging between $160 million and $167 million, including $3.5 million of revenue contribution from PAM and Eris, or down 4% to flat sequentially. Gross margin is expected to be 25%, plus or minus 2%. Operating expenses are expected to be 23.5% of revenue, plus or minus 1%. The anticipated increase in operating expenses over the third quarter is due to the inclusion of PAM and a full quarter of Eris. We expect our income tax rate to range between 7% and 13%, and shares used to calculate GAAP EPS for the fourth quarter are anticipated to be approximately 47.0 million.

Factors Relevant to Our Results of Operations

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

Net sales for the nine months ended September 30, 2012 was $471 million, compared to $492 million in the same period last year. This decrease in net sales mainly reflects the decrease in average selling price ("ASP"), partially offset by an increase in units sold.

Our gross profit margin was 26% for the nine months ended September 30, 2012, compared to 32% in the same period last year. Our gross margin percentage decreased over the same period last year due to a weaker pricing environment and product mix coupled with increased manufacturing costs due mainly to raw materials cost increases, particularly gold, and lower equipment utilization. Future gross profit margins will depend primarily on market prices, our product mix, manufacturing cost savings, and the demand for our products.

For the nine months ended September 30, 2012, our capital expenditures, excluding capital expenditures related to our investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the "CDHT"), were approximately 8% of our net sales, which is lower than our historical 10% to 12% of net sales model. For 2012, we expect capital expenditures, excluding capital expenditures related to our investment agreement, to be lower than our historical model.

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For the nine months ended September 30, 2012 and 2011, the percentage of our net sales derived from our Asian subsidiaries was 78% and 74%, respectively. The increase in sales in Asia was helped by the increased demand for smartphones and tablets. Europe accounted for approximately 11% of our revenues for the nine months ended September 30, 2012, compared to 14% in the same period last year. The decrease in Europe was mainly due to continued economic uncertainty. In addition, North America accounted for approximately 11% of our revenues for the nine months ended September 30, 2012, compared to 12% in the same period last year. The decrease in North America was mainly due to the decline in the industrial market, particularly in the third quarter.

As of September 30, 2012, we had invested approximately $423 million in our manufacturing facilities in Asia. For the nine months ended September 30, 2012, we invested approximately $45 million in these manufacturing facilities, and we expect to continue to invest in our manufacturing facilities, although the amount to be invested will depend on, among other factors, product demand and new product developments.

For the nine months ended September 30, 2012, our original equipment manufacturers ("OEM") and electronic manufacturing services ("EMS") customers together accounted for approximately 47% of our net sales, while our global network of distributors accounted for approximately 53% of our net sales.

Results of Operations for the Three Months Ended September 30, 2012 and 2011

The following table sets forth, the percentage that certain items in the
statements of operations bear to net sales and the percentage dollar increase
(decrease) of such items from period to period.



                                                                                         Percentage Dollar
                                              Percent of Net Sales                           Increase
                                        Three Months Ended September 30,                    (Decrease)
                                        2012                        2011                    '11 to '12
Net sales                                     100 %                       100 %                           4
Cost of goods sold                            (74 )                       (72 )                           7

Gross profit                                   26                          28                            (4 )
Operating expenses                            (22 )                       (20 )                          13

Income from operations                          4                           8                           (44 )
Other income (expense)                          1                          (1 )                        (184 )

Income before income taxes
and noncontrolling interest                     5                           7                           (15 )
Income tax provision                           -                           -                             42

Net income                                      5                           7                           (17 )
Net income attributable to
noncontrolling interest                        -                           (1 )                         (49 )

Net income attributable to
common stockholders                             5                           6                           (14 )

The following discussion explains in greater detail our consolidated operating results and financial condition for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).

2012 2011 Net Sales $ 166,617 $ 160,577

Net sales increased approximately $6 million for the three months ended September 30, 2012, compared to the same period last year. The 4% increase in net sales was due to a 5% increase in units sold, partially offset by an approximately 1% decrease in

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ASP. The revenue increase for the three months ended September 30, 2012 was attributable to general market slowdown on a global basis, primarily in the consumer and computing markets, causing larger than normal pricing declines and weaker product mix.

                                           2012           2011
                   Cost of goods sold    $ 123,012      $ 115,383
                   Gross profit          $  43,605      $  45,194
                   Gross profit margin          26 %           28 %

Cost of goods sold increased approximately $8 million, or 7%, for the three months ended September 30, 2012, compared to the same period last year. As a percent of sales, cost of goods sold increased to 74% for the three months ended September 30, 2012, compared to 72% in the same period last year, and our average unit cost ("AUP") was relatively flat.

For the three months ended September 30, 2012, gross profit decreased by approximately $2 million, or 4%, compared to the same period last year. Gross margin decreased to 26% for the three months ended September 30, 2012, compared to 28% for the same period last year. This decrease is mainly due to a weaker pricing environment and product mix, increased manufacturing costs and lower equipment utilization.

2012 2011 Operating expenses $ 36,083 $ 31,828

Operating expenses for the three months ended September 30, 2012 increased approximately $4 million compared to the same period last year. Of the components within operating expenses, selling, general and administrative expenses ("SG&A") increased approximately $2 million, and research and development expenses ("R&D") also increased approximately $2 million. SG&A, as a percentage of sales, was 15% for both the three months ended September 30, 2012, and the same period last year, and R&D, as a percentage of sales, was 5% for both the three months ended September 30, 2012 and the same period last year.

2012 2011 Other income (expenses) $ 1,923 $ (2,300 )

Other income for the three months ended September 30, 2012 was $2 million, compared to other expenses of approximately $2 million in the same period last year. For the three months ended September 30, 2012, other income included approximately $2 million for a non-cash gain for the remeasurement of the Eris investment prior to acquisition. For the three months ended September 30, 2011, other expense included approximately $2 million for the amortization of debt discount related to our convertible senior notes, which were repurchased in 2011.

2012 2011 Income tax provision $ 509 $ 359

We recognized income tax expense of approximately $1 million for the three months ended September 30, 2012, compared to approximately $0 million income tax expense in the same period last year. The estimated effective tax rate is 8% for the three months ended September 30, 2012, compared to 3% in the same period last year. Our effective tax rates for the three months ended September 30, 2012 and 2011, respectively, were lower than the U.S. statutory tax rate of 35%, principally from the impact of higher income in lower-taxed jurisdictions and the benefit of losses in higher-taxed jurisdictions.

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Results of Operations for the Nine Months Ended September 30, 2012 and 2011

The following table sets forth, the percentage that certain items in the
statements of operations bear to net sales and the percentage dollar increase
(decrease) of such items from period to period.



                                                                                           Percentage Dollar
                                                Percent of Net Sales                           Increase
                                           Nine Months Ended September 30,                    (Decrease)
                                          2012                        2011                    '11 to '12
Net sales                                       100 %                       100 %                          (4 )
Cost of goods sold                              (75 )                       (68 )                           6

Gross profit                                     25                          32                           (25 )
Operating expenses                              (20 )                       (19 )                           6

Income from operations                            5                          13                           (68 )
Other income (expense)                           -                           (1 )                        (138 )

Income before income taxes and
noncontrolling interest                           5                          12                           (59 )
Income tax provision                             -                           (2 )                         (80 )

Net income                                        5                          10                           (55 )
Net income attributable to
noncontrolling interest                          (1 )                        -                              3

Net income attributable to
common stockholders                               4                          10                           (58 )

The following discussion explains in greater detail our consolidated operating results and financial condition for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).

2012 2011 Net Sales $ 470,519 $ 491,938

Net sales decreased approximately $21 million for the nine months ended September 30, 2012, compared to the same period last year. The 4% decrease in net sales represented an approximately 11% decrease in ASP, partially offset by an 7% increase in units sold. The revenue decrease for the nine months ended September 30, 2012 was attributable to a general market slowdown on a global basis, primarily in the consumer and computing markets, causing larger than normal pricing declines and weaker product mix.

                                           2012           2011
                   Cost of goods sold    $ 352,180      $ 333,736
                   Gross profit          $ 118,339      $ 158,202
                   Gross profit margin          25 %           32 %

Cost of goods sold increased approximately $18 million, or 6%, for the nine months ended September 30, 2012, compared to the same period last year. As a percent of sales, cost of goods sold increased to 75% for the nine months ended September 30, 2012, compared to 68% in the same period last year, and AUP decreased 1% due to product mix.

For the nine months ended September 30, 2012, gross profit decreased by approximately $40 million, or 25%, compared to the same period last year. Gross margin decreased to 25% for the nine months ended September 30, 2012, compared to 32% for the same period last year. This decrease is mainly due to a weaker pricing environment and product mix coupled with increased manufacturing costs due mainly to raw material cost increases, particularly gold, and lower equipment utilization.

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2012 2011 Operating expenses $ 97,013 $ 91,152

Operating expenses for the nine months ended September 30, 2012 increased approximately $6 million compared to the same period last year. Of the components within operating expenses, selling, general and administrative expenses ("SG&A") increased approximately $5 million, and research and development expenses ("R&D") also increased approximately $4 million. In addition, included in other operating (income) expenses for 2012 is a gain of approximately $4 million on the sale of assets. SG&A, as a percentage of sales, increased to 15% for the nine months ended September 30, 2012, compared to 14% in the same period last year, and R&D, as a percentage of sales, increased to 5% for the nine months ended September 30, 2012, compared to 4% in the same period last year.

2012 2011 Other expenses $ 2,861 $ 7,444

Other expenses for the nine months ended September 30, 2012 was approximately $3 million, compared to other expenses of approximately $7 million in the same period last year. For the nine months ended September 30, 2012, other income included approximately $2 million for a non-cash gain for the fair value of the Eris investment prior to acquisition. For the nine months ended September 30, 2011, other expense included approximately $6 million for the amortization of debt discount related to our convertible senior notes, which were repurchased in 2011.

2012 2011 Income tax provision $ 1,983 $ 9,912

We recognized income tax expense of approximately $2 million for the nine months ended September 30, 2012, compared to approximately $10 million in the same period last year. The estimated effective tax rate is approximately 8% for the nine months ended September 30, 2012, compared to approximately 17% in the same period last year. Our effective tax rates for the nine months ended September 30, 2012 and 2011 were lower than the U.S. statutory tax rate of 35%, due primarily from the impact of higher income in lower-taxed jurisdictions and the benefit of losses in higher-taxed jurisdictions.

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Financial Condition

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under our credit facilities. We currently have a U.S. credit agreement consisting of a $10 million revolving credit facility and a $10 million uncommitted facility with no outstanding borrowings, and an outstanding $40 million term loan. The revolving credit facility and the uncommitted facility have a maturity date of January 17, 2013 and the term loan has a maturity date of January 17, 2015. In addition, we have foreign credit facilities with borrowing capacities of approximately $56 million with $11 million outstanding borrowings and $1 million used for import and export guarantees. Our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations. At December 31, 2011 and September 30, 2012, our working capital was $317 million and $385 million, respectively. Our working capital increased in the first nine months of 2012 primarily due to the increase in cash and cash equivalents, mainly due to a draw down on our $40 million term loan, and an increase in accounts receivable and inventories, which were partially offset by the increase in accounts payable and accrued liabilities. The consolidation of Eris as a result of the acquisition also helped increase working capital. We expect cash generated by our operations, together with existing cash, cash equivalents and available credit facilities, to be sufficient to cover cash needs for working capital and capital expenditures for at least the next 12 months.

Capital expenditures for the nine months ended September 30, 2012 and 2011 were $49 million and $74 million, respectively, which includes $13 million and $15 million, respectively, of capital expenditures related to the investment agreement with the Management Committee of the CDHT. Capital expenditures, excluding capital expenditures related to the investment agreement, in the first nine months of 2012 were approximately 8% of our net sales and were primarily related to manufacturing expansion in our facilities in China.

During 2010, we entered into an investment agreement with the Management Committee of the CDHT. Under this agreement, we agreed to form a joint venture with a Chinese partner, Chengdu Ya Guang Electronic Company Limited, to establish a semiconductor manufacturing facility for the purpose of providing surface mounted component production, assembly and testing, and integrated circuit assembly and testing in Chengdu, People's Republic of China. This is a long-term, multi-year project that will provide additional capacity for us as needed. In order to qualify for certain financial incentives, we are obligated to contribute approximately $48 million in invested capital by December 14, 2012. As of September 30, 2012, we have contributed approximately $33 million, of which $32 million has been invested in capital expenditures. We intend to contribute the remaining required amount through one of our subsidiaries, however, our plan to contribute the remaining required amount is currently pending the approval from the Chinese government for the completion of the . . .

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