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DIOD > SEC Filings for DIOD > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for DIODES INC /DEL/


10-May-2013

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, 2012, previously filed with Securities and Exchange Commission.

Highlights

Net sales for the three months ended March 31, 2013 was $177 million, an increase of $32 million, or 22%, over the same period last year, and a sequential increase of 8% compared to the $163 million in the fourth quarter of 2012;

Gross profit for the three months ended March 31, 2013 was $46 million, an increase of $13 million, or 37%, over the same period last year, and a sequential increase of 7% compared to the $43 million in the fourth quarter of 2012;

Gross profit margin for the three months ended March 31, 2013 was 26%, an increase of 4% over the same period last year, and flat sequentially compared to the fourth quarter of 2012;

Income taxes for the three months ended March 31, 2013 was $7 million and included $5 million of tax expense regarding a tax audit by the China tax authorities;

Net loss attributable to common stockholders for the three months ended March 31, 2013 was $2 million, or $(0.04) per diluted share, compared to net income attributable to common stockholders of $5 million, or $0.10 per diluted share in the same period last year, and net income attributable to common stockholders of $4 million, or $0.09 per diluted share in the fourth quarter of 2012;

Cash flows from operating activities was $31 million for the three months ended March 31, 2013; and

Completed the acquisition of BCD Semiconductor Manufacturing Limited ("BCD"), the preliminary purchase price accounting adjustments of which were included in the three months ended March 31, 2013 and impacted net loss attributable to common stockholders.

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 Quarter of 2013

For the first quarter of 2013, we achieved record quarterly revenue despite the typical seasonal softness in the quarter and the slowdown at certain key original equipment manufacturers. Our sequential revenue growth was due to the result of our continued design win momentum, as well as, one month of revenue contribution from our acquisition of BCD. In addition, gross profit margin improved sequentially due to revenue increases in the higher margin regions of North America and Europe, but the improvements were offset by purchase price accounting adjustments in connections with the acquisition of BCD. Margins also benefited from a better than expected manufacturing recovery following the Chinese New Year holiday, lower gold prices and a more favorable product mix. Also during the quarter, we finalized our acquisition of BCD and the integration to-date has gone smoothly. This transaction, excluding purchase price accounting adjustments, was immediately accretive to earnings.

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Business Acquisition

On March 5, 2013, we completed the acquisition of BCD for an aggregate consideration of approximately $155 million, excluding acquisition costs, fees and expenses. In addition, a $5 million retention plan for employees of BCD, payable at the 12, 18 and 24 month anniversaries of the acquisition has been established. The acquisition was funded by a combination of cash resources and drawings on bank credit facilities. The results of operations of BCD have been included in the consolidated financial statements from March 1, 2013. The purpose of this acquisition is to further our strategy of expanding our market and growth opportunities through select strategic acquisitions. We expect this acquisition to enhance our analog product portfolio by expanding our standard linear and power management offerings, including AC/DC and DC/DC solutions for power adapters and chargers, as well as other electronic products. BCD's established presence in Asia, with a particularly strong local market position in China, offers us even greater penetration of the consumer, computing and communications markets. Likewise, we believe we can achieve increased market penetration for BCD's products by leveraging our global customer base and sales channels. In addition, BCD has in-house manufacturing capabilities in China, as well as a cost-effective development team, that can be deployed across multiple product families. We also believe we will be able to apply our packaging capabilities and expertise to BCD's products in order to improve cost efficiencies, utilization and product mix. See Note C of the Notes to Condensed Consolidated Financial Statements for additional information regarding the acquisition of BCD.

Business Outlook

We believe the first quarter sets the stage for continued growth and margin improvement in the second quarter, which also represents our first full quarter of BCD. For the second quarter of 2013, we expect continued growth with net sales increasing between $206 million and $218 million, or up 16% to 23% sequentially, including the first full quarter of net sales from BCD. Gross margin will include approximately $4 million relating to an inventory valuation adjustment pertaining to the inventory acquired as part of the BCD acquisition and is expected to be 27.0%, plus or minus 2%. Operating expenses are expected to be 23.6% of net sales, plus or minus 1% and will include amortization of intangible expenses, restructuring expenses, and BCD retention bonus accruals. We expect our income tax rate to range between 14% and 20%, and shares used to calculate earnings per share for the second quarter are anticipated to be approximately 47 million.

In the second quarter of 2013, we initiated restructuring plans primarily relating to our U.K. development team and the closure of our New York sales office. We expect to reduce our U.K. workforce by approximately 10%, which is less than 1% of our total workforce. The amounts to be recorded are expected to be approximately $2 million, primarily relating to termination and severance costs. In addition, we expect these restructuring plans to provide cost savings going forward.

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 three months ended March 31, 2013 was $177 million, compared to $145 million in the same period last year. This increase in net sales mainly reflects the inclusion of one month of BCD revenue and an increase in units sold, partially offset by the decrease in average selling price ("ASP").

Our gross profit margin was 26% for the three months ended March 31, 2013, compared to 23% in the same period last year. Our gross margin percentage increased over the same period last year due to net sales increases in higher margin regions such as North America and Europe, lower gold prices and improved product mix. Future gross profit margins will depend primarily on market prices, our product mix, manufacturing cost savings, and the demand for our products.

For the three months ended March 31, 2013, 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 6% of our net sales, which is lower than our historical 10% to 12% of net sales model. For the remainder of 2013, we expect capital expenditures, excluding capital expenditures related to our investment agreement, to be lower than our historical model and range between 5% and 9%.

For the three months ended March 31, 2013 and 2012, the percentage of our net sales derived from our Asian subsidiaries was 79% and 77%, respectively. Europe accounted for approximately 11% of our revenues for the three months ended March 31, 2013, compared to 12% in the same period last year. In addition, North America accounted for approximately 10% of our revenues for the three months ended March 31, 2013, compared to 11% in the same period last year.

As of March 31, 2013, we had invested approximately $540 million in our manufacturing facilities in Asia, including through acquisitions. For the three months ended March 31, 2013, we invested approximately $11 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.

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For the three months ended March 31, 2013, our original equipment manufacturers ("OEM") and electronic manufacturing services ("EMS") customers together accounted for approximately 41% of our net sales, while our global network of distributors accounted for approximately 59% of our net sales. Compared to prior years, the percentage of net sales to our global network of distributors has increased mainly due to the fact that the majority of BCD net sales are to distributors.

Results of Operations for the Three Months Ended March 31, 2013 and 2012

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.



                                              Percent of Net Sales                      Percentage Dollar
                                                                                            Increase
                                          Three Months Ended March 31,                     (Decrease)
                                          2013                      2012                   '12 to '13
Net sales                                      100 %                    100 %                           22
Cost of goods sold                             (74 )                    (77 )                           18

Gross profit                                    26                       23                             37
Operating expenses                             (24 )                    (19 )                           50

Income from operations                           2                        4                            (31 )
Other income (expense)                          -                        -                             (24 )

Income before income taxes
and noncontrolling interest                      2                        4                            (31 )
Income tax provision                            (4 )                     -                             964

Net income                                      (2 )                      4                           (141 )
Net income attributable to
noncontrolling interest                         -                        -                            (150 )

Net income attributable to
common stockholders                             (2 )                      4                           (140 )

The following discussion explains in greater detail our consolidated operating results and financial condition for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands).

2013 2012 Net Sales $ 176,964 $ 144,663

Net sales increased approximately $32 million for the three months ended March 31, 2013, compared to the same period last year. The 22% increase in net sales was due to the inclusion of one month of BCD revenue and a 6% increase in units sold, partially offset by a 14% decrease in ASP.

                                           2013           2012
                   Cost of goods sold    $ 130,781      $ 110,957
                   Gross profit          $  46,183      $  33,706
                   Gross profit margin          26 %           23 %

Cost of goods sold increased approximately $20 million, or 18%, for the three months ended March 31, 2013, compared to the same period last year. As a percent of sales, cost of goods sold decreased to 74% for the three months ended March 31, 2013, compared to 77% in the same period last year, and our average unit cost ("AUP") decreased by 11%.

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For the three months ended March 31, 2013, gross profit increased by approximately $13 million, or 37%, compared to the same period last year. Gross margin increased to 26% for the three months ended March 31, 2013, compared to 23% for the same period last year. This increase is mainly due to net sales increases in higher margin regions such as North America and Europe, lower gold prices and improved product mix.

2013 2012 Operating expenses $ 42,704 $ 28,206

Operating expenses for the three months ended March 31, 2013 increased approximately $14 million compared to the same period last year. Of the components within operating expenses, selling, general and administrative expenses ("SG&A") increased approximately $8 million, and research and development expenses ("R&D") increased approximately $3 million. SG&A, as a percentage of sales, was 17% for the three months ended March 31, 2013, compared to 15% for the same period last year. R&D, as a percentage of sales, was 6% for the three months ended March 31, 2013, compared to 5% for the same period last year. Both SG&A and R&D for the three months ended March 31, 2013 increased due primarily to the acquisition of BCD, the acquisition of Eris Technology Corporation in the third quarter of 2012 and the acquisition of Power Analog Microelectronics, Inc. in the fourth quarter of 2012. Also included in operating expenses for the three months ended March 31, 2013 was an increase of approximately $1 million for amortization of acquisition related intangibles due to recent acquisitions, compared to the same period last year. The three months ended March 31, 2012 included a $2 million gain on sale of assets for a sale of an intangible asset in Europe.

2013 2012 Other income $ 521 $ 687

Other income for both the three months ended March 31, 2013 and 2012 was $1 million. For the three months ended March 31, 2013, other income included approximately $1 million of interest expense due to the increase in long-term debt incurred in connection with the BCD acquisition, which was offset by foreign currency gains of approximately $1 million.

2013 2012 Income tax provision $ 6,574 $ 618

We recognized income tax expense of approximately $7 million for the three months ended March 31, 2013, compared to approximately $1 million income tax expense in the same period last year. The effective tax rate is 153% for the three months ended March 31, 2013, compared to 10% in the same period last year. Income tax expense for the three months ended March 31, 2013 was impacted by $5 million additional tax expense in regard to a tax audit of the China tax authorities. Our effective tax rates for the three months ended March 31, 2013 and 2012, excluding discrete items, 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.

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 $300 million revolving senior credit facility (the "Revolver"), which includes a $10 million swing line sublimit, a $10 million letter of credit sublimit, and a $20 million alternative currency sublimit. As of March 31, 2013, approximately $210 million was outstanding under the Revolver. The Revolver matures on January 8, 2018, and the amount available for additional borrowings as of March 31, 2013 is $90 million. In addition, we have foreign credit facilities with borrowing capacities of approximately $143 million with $4 million in outstanding borrowings and $12 million used for import and export guarantees and bank acceptance notes. Our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations. At December 31, 2012 and March 31, 2013 our working capital was $378 million and $453 million, respectively. Our working capital increased in the first three months of 2013 primarily due to the consolidation of BCD's net assets as a result of the acquisition. 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.

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 surface-mounted component production, assembly and test in Chengdu, 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 at least $48 million to the joint venture by December 31, 2013. As of March 31, 2013, we have contributed approximately $25 million, of which $21 million has been invested in capital expenditures and expect to contribute the full $48 million on or before December 31, 2013.

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Capital expenditures for the three months ended March 31, 2013 and 2012 were $13 million and $16 million, respectively, which includes $1 million and $8 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 three months of 2013 were approximately 6% of our net sales and were primarily related to the expansion of our Shanghai sales and design office.

On March 5, 2013 we completed the acquisition of BCD for an aggregate consideration of approximately $155 million, excluding acquisition costs, fees and expenses. In addition, a $5 million retention plan for employees of BCD, payable at the 12, 18 and 24 month anniversaries of the acquisition has been established. The acquisition was funded by a combination of the Company's cash resources and drawings on bank credit facilities. As part of our strategy to expand our semiconductor product offerings and to maximize our market opportunities, we may acquire product lines or companies in order to enhance our portfolio and accelerate our new offerings, which could have a material impact on liquidity and require us to draw down on our credit facilities or increase our borrowings and limits. See Note C of the "Notes to Consolidated Condensed Financial Statements" of this Quarterly Report for additional information about the acquisition of BCD and Part I, Item 1 of our Annual Report for additional information about our strategy.

Prior to the acquisition, BCD entered into foreign currency forward contracts with various banks located in China. The contracted notional amount for forward contracts is $61 million, of which $56 million was outstanding as of March 31, 2013. In accordance with certain forward contracts, we are required to have on deposit 3% to 5% of the notional amount outstanding and in certain situations the required deposit could be 100% of the notional amount of the outstanding contracts. Restricted cash is pledged as collateral when we enter into agreements with banks for certain banking facilities. As of March 31, 2013, restricted cash of $10 million was pledged as collateral for issuance of bank acceptance notes, letters of credit and foreign currency forward contracts. See Notes C and D of the "Notes to Consolidated Condensed Financial Statements" of this Quarterly Report for additional information about our restricted cash and foreign currency forward contracts.

Discussion of Cash Flow

Cash and cash equivalents increased from $157 million at December 31, 2012 to $200 million at March 31, 2013 primarily from cash provided by operating and financing activities, offset in part by cash used by investing activities.

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

                                                          Three Months Ended March 31,
                                                     2013             2012            Change
Net cash provided by operating activities         $   31,328        $ 13,447        $   17,881
Net cash used by investing activities               (133,252 )        (9,658 )        (123,594 )
Net cash provided by financing activities            145,276          42,765           102,511
Effect of exchange rates on cash and cash
equivalents                                             (268 )           664              (932 )

Net increase in cash and cash equivalents         $   43,084        $ 47,218        $   (4,134 )

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Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2013 was $31 million, resulting primarily from $18 million in depreciation and amortization, a decrease in inventories, and increases in accrued liabilities and income tax payable, offset partially by a decrease in accounts payable. Net cash provided by operating activities was $13 million for the same period last year, resulting primarily from $6 million of net income, $16 million in depreciation and amortization and a decrease in inventories, offset partially by an increase in accounts receivable.

Investing Activities

Net cash used by investing activities was $133 million for the three months ended March 31, 2013, compared to net cash used by investing activities of $10 million for the same period last year. This increase in net cash used was due primarily to approximately $125 million for the acquisition of BCD, net of cash acquired for the three months ended March 31, 2013.

Financing Activities

Net cash provided by financing activities was $145 million for the three months ended March 31, 2013, compared to net cash provided by financing activities of $43 million in the same period last year. Net cash provided by in 2013 was due primarily to a $180 million draw down on the Credit Agreement, offset by repayments on lines of credit. The net cash provided by in 2012 was due primarily to a $40 million draw down on our term loan.

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, 2012, filed on February 27, 2013.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, swap agreements, or outsourcing of research and development services, that could expose us to liability that is not reflected on the face of our financial statements.

Contractual Obligations

There have been no material changes in any of our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 27, 2013, except for an increase of $170 million in long-term debt to a total of $210 million as of March 31, 2013, due to the draw down of our Credit Agreement to pay for the acquisition of BCD. In addition, operating leases increased $5 million to $23 million in connection with the acquisition of BCD.

Critical Accounting Policies

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, relate to revenue recognition, inventories, accounting for income taxes, goodwill and long-lived assets, share-based compensation, fair value measurements, defined benefit plan and contingencies. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 27, 2013.

Recently Issued Accounting Pronouncements

See Note A of the Notes to Consolidated Condensed Financial Statements for detailed information regarding the status of recently issued accounting pronouncements.

Available Information

Our Internet address is http://www.diodes.com. We make available, free of charge through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the "SEC"). Our website also provides access . . .

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