UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
Or
For the transition period from to .
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
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(Address of principal executive offices) |
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(Zip code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s Common Stock outstanding as of October 29, 2021 was
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Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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September 30, |
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December 31, |
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2021 |
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2020 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash |
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Short-term investments |
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Accounts receivable, net of allowances of $ |
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Inventories |
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Prepaid expenses and other |
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Total current assets |
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Property, plant and equipment, net |
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Deferred income tax |
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Goodwill |
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Intangible assets, net |
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Other long-term assets |
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Total assets |
$ |
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$ |
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Liabilities |
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Current liabilities: |
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Lines of credit |
$ |
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$ |
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Accounts payable |
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Accrued liabilities and other |
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Income tax payable |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt, net of current portion |
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Deferred tax liabilities |
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Other long-term liabilities |
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Total liabilities |
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(See Note 9) |
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Stockholders' equity |
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Preferred stock - par value $ |
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Common stock - par value $ per share; |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock at cost, |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total stockholders' equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and stockholders' equity |
$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements. |
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-3-
DIODES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net sales |
$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Operating expenses |
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Selling, general and administrative |
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Research and development |
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Amortization of acquisition related intangible assets |
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Other operating expense (income) |
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( |
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Total operating expense |
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Income from operations |
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Other income (expense) |
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Interest income |
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Interest expense |
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( |
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( |
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( |
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( |
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Foreign currency gain (loss), net |
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( |
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( |
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( |
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Unrealized gain on investments |
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- |
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- |
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Other income |
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Total other income (expense) |
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( |
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( |
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Income before income taxes and noncontrolling interest |
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Income tax provision |
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Net income |
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Less net income attributable to noncontrolling interest |
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( |
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( |
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( |
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( |
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Net income attributable to common stockholders |
$ |
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$ |
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$ |
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$ |
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Earnings per share attributable to common stockholders: |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Number of shares used in earnings per share computation: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
DIODES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income |
$ |
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$ |
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$ |
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$ |
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Unrealized gain (loss) on defined benefit plan, net of tax |
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( |
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Unrealized gain (loss) on swaps and collars, net of tax |
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( |
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Unrealized foreign currency (loss) gain, net of tax |
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( |
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Comprehensive income |
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Less: Comprehensive income attributable to noncontrolling interest |
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( |
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( |
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( |
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( |
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Total comprehensive income attributable to common stockholders |
$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
-5-
DIODES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
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Common stock |
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Treasury stock |
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Additional |
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Retained |
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Accumulated |
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Total Diodes |
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Noncontrolling |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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capital |
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earnings |
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loss |
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equity |
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interest |
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equity |
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Balance, June 30 2021 |
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$ |
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( |
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$ |
( |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Total comprehensive income |
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- |
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- |
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- |
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- |
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- |
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( |
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Net changes in noncontrolling interests |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Dividends to noncontrolling interests |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Common stock issued for share-based plans |
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295 |
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196 |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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- |
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- |
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Deferred compensation plan |
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- |
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- |
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( |
) |
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( |
) |
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- |
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- |
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- |
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Tax related to net share settlement |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
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- |
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( |
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Balance, September 30, 2021 |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Balance, December 31, 2020 |
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$ |
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( |
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$ |
( |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Total comprehensive income |
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- |
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- |
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- |
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- |
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- |
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Net changes in noncontrolling interests |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
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Dividends to noncontrolling interest |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Common stock issued for share-based plans |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Deferred compensation plan |
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- |
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- |
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( |
) |
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( |
) |
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- |
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- |
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- |
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Tax related to net share settlement |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
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- |
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( |
) |
Balance, September 30, 2021 |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
-6-
DIODES INCORPORATED AND SUBSIDIARIES (CONT.)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
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Common stock |
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Treasury stock |
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Additional |
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Retained |
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Accumulated |
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Total Diodes |
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Noncontrolling |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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capital |
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earnings |
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loss |
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equity |
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interest |
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equity |
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Balance, June 30, 2020 |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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|||||||
Total comprehensive income |
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- |
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- |
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- |
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- |
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- |
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Acquisition of noncontrolling interests |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Contributions from noncontrolling interests |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
|
Dividends to noncontrolling interests |
|
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
|
Common stock issued for share-based plans |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Deferred compensation plan |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Tax related to net share settlement |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Balance, September 30, 2020 |
|
|
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance, December 31, 2019 |
|
|
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Total comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Acquisition of noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Contributions from noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Dividends to noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Common stock issued for share-based plans |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|||||
Share-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|||
Deferred compensation plan |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Tax related to net share settlement |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Balance, September 30, 2020 |
|
|
|
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
-7-
DIODES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
Nine Months |
|
|||||
|
September 30, |
|
|||||
|
2021 |
|
|
2020 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions |
|
|
|
|
|
||
Depreciation |
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
||
Share-based compensation expense |
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
( |
) |
|
Investment gain |
|
( |
) |
|
|
- |
|
Other |
|
|
|
|
|
||
Changes in operating assets: |
|
|
|
|
|
||
Change in accounts receivable |
|
( |
) |
|
|
|
|
Change in inventory |
|
( |
) |
|
|
( |
) |
Change in other operating assets |
|
( |
) |
|
|
|
|
Changes in operating liabilities: |
|
|
|
|
|
||
Change in accounts payable |
|
|
|
|
|
||
Change in accrued liabilities |
|
|
|
|
( |
) |
|
Change in income tax payable |
|
|
|
|
( |
) |
|
Change in other operating liabilities |
|
( |
) |
|
|
( |
) |
Net cash flows provided by operating activities |
|
|
|
|
|
||
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Acquisitions, net of cash received |
|
( |
) |
|
|
|
|
Purchases of property, plant and equipment |
|
( |
) |
|
|
( |
) |
Proceeds from sale of property, plant and equipment |
|
|
|
|
- |
|
|
Proceeds from maturity of short-term investments |
|
|
|
|
|
||
Purchases of short-term investments |
|
( |
) |
|
|
( |
) |
Additional acquisition of noncontrolling interests |
|
|
|
|
( |
) |
|
Other |
|
( |
) |
|
|
|
|
Net cash and cash equivalents used in investing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Advances on lines of credit and short-term debt |
|
|
|
|
|
||
Repayments of lines of credit and short-term debt |
|
( |
) |
|
|
( |
) |
Proceeds from long-term debt |
|
|
|
|
|
||
Repayments of long-term debt |
|
( |
) |
|
|
( |
) |
Net proceeds from issuance of common stock |
|
|
|
|
|
||
Repayment of and proceeds from finance lease obligation |
|
( |
) |
|
|
( |
) |
Taxes paid related to net share settlement |
|
( |
) |
|
|
( |
) |
Dividend distribution to noncontrolling interests |
|
( |
) |
|
|
( |
) |
Capital contribution from noncontrolling interests |
|
|
|
|
- |
|
|
Other |
|
( |
) |
|
|
( |
) |
Net cash and cash equivalents (used in) provided by financing activities |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
||
Change in cash and cash equivalents, including restricted cash |
|
( |
) |
|
|
|
|
Cash and cash equivalents, beginning of period, including restricted cash |
|
|
|
|
|
||
Cash and cash equivalents, end of period, including restricted cash |
$ |
|
|
$ |
|
||
-8-
Supplemental Cash Flow Information |
|
|
|
|
|
||
Interest paid during the period |
$ |
|
|
$ |
|
||
Taxes paid during the period |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
||
Accounts payable balance related to the purchase of |
$ |
|
|
$ |
|
||
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the total of the same such amounts shown above. The Company’s restricted cash primarily consisted of the cash required to be on deposit under our Asia credit facilities to support outstanding loan and import/export guarantees. As of September 30, 2021, restricted cash of $
|
Nine Months Ended |
|||
|
September 30, |
|||
|
2021 |
|
2020 |
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
|
$ |
|
Restricted cash (included in other current assets) |
|
|||
Total cash, cash equivalents and restricted cash |
$ |
|
$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
-9-
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – Summary of Operations and Significant Accounting Policies
Summary of Operations
Diodes Incorporated, together with its subsidiaries (collectively “Diodes”, the “Company,” “we” or “our” (Nasdaq: DIOD), a Standard and Poor's Smallcap 600 and Russell 3000 Index company, is a leading global manufacturer and supplier of high-quality, application specific standard products within the broad discrete, logic, analog, and mixed-signal semiconductor markets. The Company serves the consumer electronics, computing, communications, industrial, and automotive markets.
The Company’s products include diodes, rectifiers, transistors, MOSFETs, GPP bridges, GPP rectifiers, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers. The Company also has timing, connectivity, switching, and signal integrity solutions for high-speed signals.
The Company’s corporate headquarters and Americas’ sales office are located in Plano, Texas, and Milpitas, California, respectively. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taoyuan City and Zhubei City, Taiwan; Shanghai; Yangzhou, China; Oldham, England; and Neuhaus, Germany. The Company’s wafer fabrication facilities are located in Oldham, England, Greenock, Scotland and Shanghai and Wuxi, China and Keelung and Hsinchu, Taiwan. The Company has assembly and test facilities located in Shanghai, Jinan, Chengdu and Wuxi, China as well as in Neuhaus, Germany and Jhongli and Keelung, Taiwan. Additional engineering, sales, warehouse, and logistics offices are located in Taipei, Taiwan; Hong Kong; Oldham, England; Shanghai, Shenzhen, Wuhan and Yangzhou, China; Seongnam-si, South Korea; and Munich, Frankfurt, Germany; with support offices throughout the world.
Our market focus is on high-growth, end-user applications in the following segments:
Basis of Presentation
The condensed consolidated financial data at December 31, 2020 are derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 22, 2021 (“Form 10-K”). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, operating results and cash flows in conformity with GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Form 10-K. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the operating results for the period presented have been included in the interim period. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2021.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. As permitted under GAAP, interim accounting for certain expenses, including income taxes, are based on full year forecasts. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates taking into consideration discrete items occurring in a quarter.
Dollar amounts and share amounts are presented in thousands, except per share amounts, unless otherwise noted. Certain prior year’s balances may have been reclassified to conform to the current condensed consolidated financial statement presentation.
-10-
NOTE 2 – Earnings per Share
The table below sets forth the reconciliation between net income and the weighted average shares outstanding used for calculating basic and diluted EPS:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Earnings (numerator) |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to common stockholders |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares (denominator) |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares outstanding (basic) |
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock options and stock awards outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted weighted average common shares outstanding (diluted) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options and stock awards excluded from EPS |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
NOTE 3 – Inventories
The table below sets forth inventories which are stated at the lower of cost or net realizable value:
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Finished goods |
$ |
|
|
$ |
|
||
Work-in-progress |
|
|
|
|
|
||
Raw materials |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
NOTE 4 – Goodwill and Intangible Assets
The table below sets forth the changes in goodwill:
Balance at December 31, 2020 |
$ |
|
|
Savitech acquisition |
|
( |
) |
Foreign currency translation adjustment |
|
|
|
Balance at September 30, 2021 |
$ |
|
The decrease in goodwill is related to the payment of contingent consideration in connection with the Savitech acquisition.
-11-
The table below sets forth the value of intangible assets, other than goodwill:
|
September 30, |
|
|
December 31, |
|
||
|
2021 |
|
|
2020 |
|
||
Intangible assets subject to amortization: |
|
|
|
|
|
||
Gross carrying amount |
$ |
|
|
$ |
|
||
Accumulated amortization |
|
( |
) |
|
|
( |
) |
Foreign currency translation adjustment |
|
( |
) |
|
|
( |
) |
Total |
|
|
|
|
|
||
Intangible assets with indefinite lives: |
|
|
|
|
|
||
Gross carrying amount |
|
|
|
|
|
||
Foreign currency translation adjustment |
|
( |
) |
|
|
( |
) |
Total |
|
|
|
|
|
||
Total intangible assets, net |
$ |
|
|
$ |
|
||
The table below sets forth amortization expense related to intangible assets subject to amortization:
Amortization expense |
|
2021 |
|
|
2020 |
|
||
Three Months Ended September 30, |
|
$ |
|
|
$ |
|
||
Nine Months Ended September 30, |
|
$ |
|
|
$ |
|
||
NOTE 5 – Income Tax Provision
The table below sets forth information related to our income tax expense:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Domestic pre-tax income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign pre-tax income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax provision |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Effective tax rate |
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Impact of tax holidays on tax expense |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Earnings per share impact of tax holidays: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The decrease in the effective tax rate for the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020, is primarily attributable to the change in pre-tax earnings during the comparable periods.
Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of certain European and Asian subsidiaries. Any future distributions of foreign earnings will not be subject to additional U.S. income tax, but may be subject to non-U.S. withholding taxes.
-12-
NOTE 6 – Share-Based Compensation
For the three and nine months ended September 30, 2021, we recognized stock option expense of approximately $
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Cost of goods sold |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Share Grants – Restricted stock awards and restricted stock units generally vest in equal annual installments over a
Performance stock units (“PSUs”) are measured based on the fair market value of the underlying stock on the date of grant, and compensation expense is recognized over the
NOTE 7 – Segment Information and Net Sales
Segment Reporting. For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various manufacturing and distribution facilities. We aggregate our products because the products are similar and have similar economic characteristics, use similar production processes and share similar customer type. Our primary operations include operations in Asia, North America and Europe. During the three months ended September 30, 2021,
-13-
The tables below set forth net sales based on the location of the subsidiary producing the net sale:
Three Months Ended September 30, 2021 |
|
Asia |
|
|
Americas |
|
|
Europe |
|
|
Consolidated |
|
||||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intercompany elimination |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Three Months Ended September 30, 2020 |
|
Asia |
|
|
Americas |
|
|
Europe |
|
|
Consolidated |
|
||||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intercompany elimination |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
As of and for the |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Nine Months Ended September 30, 2021 |
|
Asia |
|
|
Americas |
|
|
Europe |
|
|
Consolidated |
|
||||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intercompany elimination |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
As of and for the |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Nine Months Ended September 30, 2020 |
|
Asia |
|
|
Americas |
|
|
Europe |
|
|
Consolidated |
|
||||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Intercompany elimination |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Disaggregation of Net Sales. We disaggregate net sales with customers into direct sales and distribution sales (“Distributors”) and by geographic area. Direct sales customers consist of those customers using our product in their manufacturing process, and Distributors are those customers who resell our products to third parties. We deliver our products to customers around the world for use in consumer electronics, computing, communications, industrial and automotive markets. Further, most of our contracts are fixed-price arrangements, and are short term in nature, ranging from days to several months.
-14-
The tables below set forth net sales for the Company disaggregated into geographic locations based on shipment and by type (direct sales or Distributor):
|
|
|
|
|
|
|
|
||
|
|
Three Months Ended |
|||||||
Net Sales by Region |
|
2021 |
|
|
2020 |
|
|
||
Asia |
|
$ |
|
|
$ |
|
|
||
Europe |
|
|
|
|
|
|
|
||
Americas |
|
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
||
Net Sales by Type |
|
|
|
|
|
|
|
||
Direct sales |
|
$ |
|
|
$ |
|
|
||
Distributor sales |
|
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
Nine Months Ended |
|
|
|||||
Net Sales by Region |
|
2021 |
|
|
2020 |
|
|
||
Asia |
|
$ |
|
|
$ |
|
|
||
Europe |
|
|
|
|
|
|
|
||
Americas |
|
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
||
Net Sales by Type |
|
|
|
|
|
|
|
||
Direct sales |
|
$ |
|
|
$ |
|
|
||
Distributor sales |
|
|
|
|
|
|
|
||
Total net sales |
|
$ |
|
|
$ |
|
|
||
Net sales from products shipped to China was $
NOTE 8 – Debt
Short-term debt
Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $
Long-term debt
The Company maintains a long-term credit facility (“Credit Agreement”) consisting of a term loan with a current balance of $
-15-
Borrowings outstanding as of September 30, 2021 and December 31, 2020, are set forth in the table below:
|
|
September 30, |
|
|
December 31, |
|
|
|
|
Current Amount |
||
Description |
|
2021 |
|
|
2020 |
Interest Rate |
|
Maturity |
||||
Short-term debt |
|
$ |
|
|
$ |
|
|
|
|
Various during 2021 -2022 |
||
|
|
|
|
|
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
||
Term loan and revolver |
|
$ |
|
|
$ |
|
|
|
|
May 2024 |
||
Notes payable to Bank of Taiwan |
|
|
|
|
|
|
|
|
June 2033 |
|||
Notes payable to Bank of Taiwan |
|
|
|
|
|
- |
|
|
|
September 2023 |
||
Notes payable to Bank of China Trust Company |
|
|
|
|
|
|
|
|
December 2021 |
|||
Notes payable to Bank of China Trust Company |
|
|
|
|
|
|
|
|
May 2024 |
|||
Notes payable to E Sun Bank |
|
|
|
|
|
|
|
|
|
December 2022 |
||
Notes payable to E Sun Bank |
|
|
|
|
|
|
|
|
|
June 2027 |
||
Notes payable to E Sun Bank |
|
|
|
|
|
|
|
|
|
June 2030 |
||
Notes payable to HSBC |
|
|
|
|
|
- |
|
|
|
|
January 2023 |
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
||
Less: Current portion of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Less: Unamortized debt costs |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
|
|
$ |
|
|
|
|
|
||
NOTE 9 – Commitments and Contingencies
Purchase commitments – As of September 30, 2021, we had approximately $
Defined Benefit Plan -
Contingencies – From time to time, we are involved in various legal proceedings that arise in the normal course of business. While we intend to defend any lawsuit vigorously, we presently believe that the ultimate outcome of any pending legal proceeding will not have any material adverse effect on our consolidated financial position, cash flows or operating results. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact our business and operating results for the period in which the ruling occurs or future periods. Based on information available, we evaluate the likelihood of potential outcomes of all pending disputes. We record an appropriate liability when the amount of any liability associated with a pending dispute is deemed probable and reasonably estimable. In addition, we do not accrue for estimated legal fees and other directly related costs as they are expensed as incurred. The Company is not currently a party to any pending litigation that the Company considers material.
Note 10 – Derivative Financial Instruments
We use derivative instruments to manage risks related to foreign currencies, interest rates and the net investment risk in our foreign subsidiaries. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of
-16-
these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
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. At September 30, 2021 and December 31, 2020, we had $
Hedges of Interest Rate and Net Investment Risk -
The table below sets forth the fair value of the Company’s interest rate related derivative financial instruments as well as their classification on our condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020:
|
|
Other Current Liabilities |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Interest rate swaps and collars |
|
$ |
|
|
$ |
|
||
The tables below set forth the effect of the Company’s derivative financial instruments on our condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020:
Derivative Instruments |
|
Amount of Gain or (Loss) Recognized in OCI on Derivative |
|
|
Location of Gain or (Loss) Reclassified from OCI into |
|
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Net Income |
|
|
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion Excluded from |
|
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|
|||||||||||||||
Designated as |
|
September 30, |
|
|
Accumulated |
|
September 30, |
|
|
Effectiveness |
|
September 30, |
|
|||||||||||||||
Hedging Instruments |
|
2021 |
|
|
2020 |
|
|
Income |
|
2021 |
|
|
2020 |
|
|
Testing) |
|
2021 |
|
|
2020 |
|
||||||
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate swaps and collars |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
- |
|
|
$ |
- |
|
|||
Cross currency swaps |
|
$ |
|
|
$ |
- |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
|
$ |
|
|
$ |
- |
|
||||
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate swaps and collars |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
- |
|
|
|
- |
|
||
Cross currency swaps |
|
$ |
|
|
$ |
- |
|
|
|
|
- |
|
|
|
- |
|
|
|
$ |
|
|
$ |
- |
|
||||
We estimate that $
-17-
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
|
Amount of Gain or (Loss) Recognized in Net Income |
|
|
|
|||||
|
|
September 30, |
|
|
|
|||||
Derivative Instruments Not Designated as Hedging Instruments |
|
2021 |
|
|
2020 |
|
|
Location of Gain or (Loss) Recognized in Net Income |
||
Three Months Ended |
|
|
|
|
|
|
|
|
||
Foreign currency forward contracts |
|
$ |
( |
) |
|
$ |
|
|
||
Nine Months Ended |
|
|
|
|
|
|
|
|
||
Foreign currency forward contracts |
|
$ |
|
|
$ |
( |
) |
|
||
As of September 30, 2021 and December 31, 2020, the Company had
NOTE 11 – Leases
The Company leases certain assets used in its business, including land, buildings and equipment. These leased assets are used for operational and administrative purposes.
The components of lease expense are set forth in the table below:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense |
|
$ |
|
$ |
|
$ |
|
$ |
||||
Finance lease expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of assets |
|
|
|
|
|
|
|
|
||||
Interest on lease liabilities |
|
|
- |
|
|
|
|
|
|
|||
Short-term lease expense |
|
|
|
|
|
|
|
|
||||
Variable lease expense |
|
|
|
|
|
|
|
|
||||
Total lease expense |
|
$ |
|
$ |
|
$ |
|
$ |
||||
-18-
The table below sets forth supplemental balance sheet information related to leases. In our condensed consolidated balance sheets, right of use (“ROU”) assets are included in other long-term assets while lease liabilities are located in accrued liabilities and other for the current portion and other long-term liabilities for the non-current portion:
|
|
September 30, 2021 |
|
December 31, 2020 |
Operating leases: |
|
|
|
|
Operating lease ROU assets |
|
$ |
|
$ |
|
|
|
|
|
Current operating lease liabilities |
|
|
||
Noncurrent operating lease liabilities |
|
|
||
Total operating lease liabilities |
|
$ |
|
$ |
|
|
|
|
|
Finance leases: |
|
|
|
|
Finance lease ROU assets |
|
$ |
|
$ |
Accumulated amortization |
|
( |
|
( |
Finance lease ROU assets, net |
|
$ |
|
$ |
|
|
|
|
|
Current finance lease liabilities |
|
$ |
|
$ |
Non-current finance lease liabilities |
|
|
||
Total finance lease liabilities |
|
$ |
|
$ |
|
|
|
|
|
Weighted average remaining lease term (in years): |
|
|
|
|
Operating leases |
|
|
||
Finance leases |
|
|
||
|
|
|
|
|
Weighted average discount rate: |
|
|
|
|
Operating leases |
|
|
||
Finance leases |
|
|
The table below sets forth supplemental cash flow and other information related to leases:
|
|
Nine Months Ended |
||
|
|
September 30, 2021 |
|
September 30, 2020 |
Cash paid for the amounts included in the measurements of lease liabilities: |
|
|
|
|
Operating cash outflows from operating leases |
|
$ |
|
$ |
Operating cash outflows from finance leases |
|
|
||
Financing cash outflow from finance leases |
|
|
||
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities incurred: |
|
|
|
|
Operating leases |
|
|
||
The table below sets forth information about lease liability maturities:
|
|
September 30, 2021 |
||||
|
|
Operating Leases |
|
Finance Leases |
||
Remainder of 2021 |
|
$ |
|
$ |
||
2022 |
|
|
|
|
||
2023 |
|
|
|
|
||
2024 |
|
|
|
|
||
2025 |
|
|
|
|
- |
|
2026 |
|
|
|
|
- |
|
2027 and thereafter |
|
|
|
|
- |
|
Total lease payments |
|
|
|
|
||
Less: imputed interest |
|
|
( |
|
|
( |
Total lease obligations |
|
|
|
|
||
Less: current obligations |
|
|
( |
|
|
( |
Long-term lease obligations |
|
$ |
|
$ |
||
-19-
NOTE 12 – Employee Benefit Plans
NOTE 13 – Related Parties
We historically conducted business with a related party company, Lite-On Semiconductor Corporation (“LSC”), and its subsidiaries and affiliates.
We conduct business with Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (“Keylink”).
The Audit Committee of the Board reviews all related party transactions for potential conflict of interest situations on an ongoing basis, all in accordance with such procedures as the Audit Committee may adopt from time to time.
The table below sets forth net sales to and purchases from related parties:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
LSC |
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Purchases |
$ |
- |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Nuvoton |
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
Purchases |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Keylink |
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Purchases |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
JCP |
|
|
|
|
|
|
|
|
|
|
|
||||
Purchases |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
-20-
The table below sets forth accounts receivable from, and accounts payable to, related parties:
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Nuvoton |
|
|
|
|
|
||
Accounts receivable |
$ |
|
|
$ |
|
||
Accounts payable |
$ |
|
|
$ |
|
||
Keylink |
|
|
|
|
|
||
Accounts receivable |
$ |
|
|
$ |
|
||
Accounts payable |
$ |
|
|
$ |
|
||
JCP |
|
|
|
|
|
||
Accounts payable |
$ |
|
|
$ |
|
||
Note 14 –Acquisitions and Divestitures
Privately Held Wafer Design Company
During July 2021, the Company acquired an interest in an early stage privately held fabless wafer design company by purchasing $
Manufacturing Subsidiary Located in China
In March 2021 the Company entered into an agreement to sell one of its manufacturing subsidiaries in China for total consideration of approximately $
Management determined that the disposal group met the held-for-sale criteria and reclassified the carrying value of the disposal group to assets held-for-sale, which is included in prepaid expenses and other in the consolidated balance sheet. The Company recognized
Assets |
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable, net |
|
|
|
|
Inventories, net |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Deferred income tax |
|
|
|
|
Other long-term assets |
|
|
|
|
Assets classified as held for sale |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts payable |
|
|
|
|
Accrued liabilities and other |
|
|
|
|
Other long-term liabilities |
|
|
|
|
Liabilities classified as held for sale |
|
|
|
|
|
|
|
|
|
Valuation allowance for accrued loss |
|
|
( |
) |
Net assets classified as held for sale (included in prepaid expenses and other) |
|
$ |
|
|
LSC Acquisition
On
-21-
reacquire the
The Company recorded the purchase of LSC as a business combination, with the Company owning
The table below sets forth the fair value of the LSC assets acquired and liabilities assumed based on relative fair value at the date of acquisition, after measurement period adjustments, and the corresponding line item in the Company’s consolidated balance sheet at the date of acquisition. During the period from January 1, 2021 through September 30, 2021, measurement period adjustments were made to inventories, property, plant and equipment, income tax payable, and accrued liabilities and other. During the period, the Company derecognized a liability that was initially recognized on the opening balance sheet related to dividend payable accrual of approximately $
Cash and cash equivalents |
|
$ |
|
|
|
Accounts receivable |
|
|
|
|
|
Inventories |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
Deferred income tax |
|
|
|
|
|
Other long-term assets |
|
|
|
|
|
Total assets acquired |
|
|
|
|
|
Line of credit |
|
|
|
|
|
Accounts payable |
|
|
|
|
|
Accrued liabilities and other |
|
|
|
|
|
Income tax payable |
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
|
Non-controlling interest |
|
|
|
( |
) |
Net assets acquired |
|
$ |
|
|
Savitech Acquisition
On
The Company recorded the purchase of Savitech as a business acquisition and consolidates Savitech into its operations, based on the voting model, with a non-controlling interest related to the interest the Company does not own in Savitech. The Company made its
-22-
investment in Savitech in order to increase the Company’s integrated circuit business. Total purchase consideration recorded was $
Cash and cash equivalents |
|
$ |
|
|
Prepaid expenses and other |
|
|
|
|
Goodwill |
|
|
|
|
Intangible assets, net |
|
|
|
|
Other long-term assets |
|
|
|
|
Accrued liabilities and other |
|
|
|
|
Noncontrolling interest |
|
|
|
Other
In August 2021, the Company entered into a joint venture located in Taiwan. The Company's investment will be $
-23-
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, 2020 (“Form 10-K”), previously filed with Securities and Exchange Commission (“SEC”) on February 22, 2021.
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 – Summary of Operations and Significant Accounting Policies, included in the condensed consolidated financial statements in Item 1 above. Our products are sold primarily throughout Asia, the Americas 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 September 30, 2021
-24-
Recent Developments
LSC Acquisition
On November 30, 2020, the Company closed the acquisition of Lite-On Semiconductor Corporation (“LSC”), a Taiwan-based supplier of “green” power-related discrete analog semiconductor devices. Since the close of the acquisition the Company has focused on the integration of LSC into its operations. The Company believes that the integration of LSC is progressing well as we have already begun to realize some of the benefits of manufacturing synergies from improved factory loading with both LSC and Diodes’ products. Our global manufacturing footprint is serving as a key advantage at a time when the broader semiconductor industry is challenged by supply and capacity constraints.
COVID-19
We remain focused on the safety and well-being of our stakeholders and on the service to our customers. We will continuously review and assess the rapidly-changing COVID-19 pandemic and its impacts on our customers, our suppliers and our business so that we can seek to address those impacts. We previously temporarily closed a manufacturing facility due to COVID-19, and no assurances can be provided that we will not be required to close or reduce our manufacturing production in the future in response to the COVID-19 pandemic or other events beyond our control.
As of September 30, 2021, our cash, cash equivalents, and short-term investments were $287.9 million, and we had access to additional borrowing capacity of $150.0 million under the revolving portion our Credit Agreement, which we believe assures us adequate liquidity to manage the impacts of the COVID-19 pandemic on our business and to cover cash needs for working capital, capital expenditures and acquisitions for at least the next 12 months.
See “Risk Factors - The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.” in Item 1A of this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.
Results of Operations for the Three Months Ended September 30, 2021 and 2020
The table below sets forth the condensed consolidated statement of operations line items as a percentage of net sales.
|
Percent of Net Sales |
|
|||||
|
Three Months Ended September 30, |
|
|||||
|
2021 |
|
|
2020 |
|
||
Net sales |
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
(62 |
) |
|
|
(64 |
) |
Gross profit |
|
38 |
|
|
|
36 |
|
Total operating expense |
|
22 |
|
|
|
24 |
|
Income from operations |
|
16 |
|
|
|
12 |
|
Total other expense |
|
2 |
|
|
|
(1 |
) |
Income before income taxes and noncontrolling interest |
|
18 |
|
|
|
11 |
|
Income tax provision |
|
(3 |
) |
|
|
(2 |
) |
Net income |
|
15 |
|
|
|
9 |
|
Net income attributable to common stockholders |
|
15 |
|
|
|
9 |
|
-25-
The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. 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 |
|
|||||||||||||
|
September 30, |
|
|
|
|
|
|
|
|||||||
|
2021 |
|
|
2020 |
|
|
Increase/(Decrease) |
|
|
% Change |
|
||||
Net sales |
$ |
471,422 |
|
|
$ |
309,459 |
|
|
$ |
161,963 |
|
|
|
52.3 |
% |
Cost of goods sold |
|
290,191 |
|
|
|
198,369 |
|
|
|
91,822 |
|
|
|
46.3 |
% |
Gross profit |
|
181,231 |
|
|
|
111,090 |
|
|
|
70,141 |
|
|
|
63.1 |
% |
Total operating expense |
|
103,984 |
|
|
|
73,235 |
|
|
|
30,749 |
|
|
|
42.0 |
% |
Interest income |
|
765 |
|
|
|
138 |
|
|
|
627 |
|
|
|
454.3 |
% |
Interest expense |
|
(1,417 |
) |
|
|
(3,745 |
) |
|
|
(2,328 |
) |
|
|
(62.2 |
%) |
Foreign currency gain (loss), net |
|
805 |
|
|
|
(2,618 |
) |
|
|
(3,423 |
) |
|
|
(130.7 |
%) |
Unrealized gain on investments |
|
5,922 |
|
|
|
- |
|
|
|
5,922 |
|
|
N/A |
|
|
Other income |
|
2,244 |
|
|
|
1,627 |
|
|
|
617 |
|
|
|
(37.9 |
%) |
Income tax provision |
|
14,766 |
|
|
|
5,871 |
|
|
|
8,895 |
|
|
|
151.5 |
% |
Net sales increased approximately $162.0 million, or 52.3%, for the three months ended September 30, 2021, compared to the same period last year. The 52.3% increase in net sales for the three months ended September 30, 2021 was driven by 27.8% organic growth attributable to the Company’s legacy business that existed prior to the LSC acquisition and 24.6% related to LSC. Revenue grew in all regions. Contributing the Company's growth in net sales has been the success of our content expansion initiatives, particularly in the automotive market where revenue grew over 65% when compared to the same period last year, and 7% when compared to the three months ended June 30, 2021, contributing to a 8-year CAGR of 30%. Additionally, our Pericom products continued to set new revenue records, achieving 5 consecutive quarters of growth primarily driven by high-end computing applications. The Company has also experienced growth in higher-margin end markets which, when combined with increased loading at LSC facilities has enabled the Company to increase its net sales and margins, even in the midst of this supply-constrained environment.
The table below sets forth our revenue as a percentage of total revenue by end-user market for the three months ended September 30, 2021 and 2020:
|
Three Months Ended |
|||
|
September 30, |
|||
|
2021 |
|
2020 |
|
Industrial |
24% |
|
22% |
|
Communications |
16% |
|
21% |
|
Consumer |
18% |
|
27% |
|
Computing |
30% |
|
19% |
|
Automotive |
12% |
|
11% |
|
With respect of total net sales by end-user markets, the LSC contribution to automotive, industrial, consumer and communication end-user markets was 6% or less for the three months ended September 30, 2021. The LSC contribution to the computing end-user market for the three months ended September 30, 2021 was approximately 46% of total computing net sales.
The industrial end-user market grew as we experienced strong demand for our products for low-dropout regulators for power tools, eMeters and other industrial applications. In the communications end-user market the Company has continued to focus on mobile, smartphone, and 5G applications. In the consumer end-user market the Company experienced increasing growth momentum in the IoT space. The computing end-user market grew due to continued demand for notebooks, Chromebooks, high-end PCs, servers and datacenter applications. The automotive end-user market grew as we captured both increasing market share and content gains as the Company penetrated new and existing automotive customers and applications.
Cost of goods sold increased approximately $91.8 million for the three months ended September 30, 2021, compared to the same period last year, due to the increased net sales during the third quarter of 2021. As a percent of sales, cost of goods sold was 61.6% for the three months ended September 30, 2021, compared to 64.1% for the same period last year. Average unit cost increased approximately 10.7% for the three months ended September 30, 2021, compared to the same period last year due to cost increases from various subcontractors and foundries. For the three months ended September 30, 2021, gross profit increased approximately 63.1% when compared to the same period last year. Gross profit margin for the three month periods ended September 30, 2021 and 2020 was 38.4% and 35.9%, respectively.
-26-
Operating expenses for the three months ended September 30, 2021, increased $30.7 million when compared to the three months ended September 30, 2020. Operating expenses as a percentage of net sales was 22.1% and 23.7% for the three months ended September 30, 2021 and 2020, respectively. Selling, general and administrative expenses (“SG&A”) increased approximately $23.2 million, due to increases in wages and benefits, selling expenses and freight and duty expenses as compared to the same period last year. Research and development expenses (“R&D”) increased approximately $7.0 million due to increases in wages and benefits and professional services as compared to the same period last year. SG&A, as a percentage of net sales, was 14.4% for the three months ended September 30, 2021 and 2020. R&D, as a percentage of net sales, was 6.7% and 7.9% for the three months ended September 30, 2021 and 2020, respectively.
Interest income increased 454.3% for the three months ended September 30, 2021, compared to the same period last year, due to increased revenue related to cross currency swaps. Interest expense decreased 62.2% for the three months ended September 30, 2021, compared to the same period last year, due to a decrease in the interest rate on our floating rate debt and lower borrowing levels. Unrealized gain on investments increased from 2020 due to investment income from an investment the Company acquired in the LSC acquisition.
We recognized income tax expense of approximately $14.8 million and $5.9 million for the three months ended September 30, 2021 and 2020, respectively. The increase in income taxes for 2021 compared to 2020 was primarily attributable to an increase in pretax book income.
Results of Operations for the Nine Months Ended September 30, 2021 and 2020
The table below sets forth the condensed consolidated statement of operations line items as a percentage of net sales.
|
Percent of Net Sales |
|
|||||
|
Nine Months Ended September 30, |
|
|||||
|
2021 |
|
|
2020 |
|
||
Net sales |
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
(64 |
) |
|
|
(65 |
) |
Gross profit |
|
36 |
|
|
|
35 |
|
Total operating expense |
|
22 |
|
|
|
24 |
|
Income from operations |
|
14 |
|
|
|
11 |
|
Total other income (expense) |
|
1 |
|
|
|
(1 |
) |
Income before income taxes and noncontrolling interest |
|
16 |
|
|
|
10 |
|
Income tax provision |
|
(3 |
) |
|
|
(2 |
) |
Net income |
|
13 |
|
|
|
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 nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. 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.
|
Nine Months Ended |
|
|||||||||||||
|
September 30, |
|
|
|
|
|
|
|
|||||||
|
2021 |
|
|
2020 |
|
|
Increase/(Decrease) |
|
|
% Change |
|
||||
Net sales |
$ |
1,324,991 |
|
|
$ |
878,845 |
|
|
$ |
446,146 |
|
|
|
50.8 |
% |
Cost of goods sold |
|
845,322 |
|
|
|
570,421 |
|
|
|
274,901 |
|
|
|
48.2 |
% |
Gross profit |
|
479,669 |
|
|
|
308,424 |
|
|
|
171,245 |
|
|
|
55.5 |
% |
Total operating expense |
|
289,675 |
|
|
|
213,848 |
|
|
|
75,827 |
|
|
|
35.5 |
% |
Interest income |
|
2,351 |
|
|
|
579 |
|
|
|
1,772 |
|
|
|
306.0 |
% |
Interest expense |
|
(6,298 |
) |
|
|
(7,643 |
) |
|
|
(1,345 |
) |
|
|
(17.6 |
%) |
Foreign currency gain (loss), net |
|
(984 |
) |
|
|
(6,143 |
) |
|
|
(5,159 |
) |
|
|
(84.0 |
%) |
Unrealized gain on investments |
|
14,838 |
|
|
|
- |
|
|
|
14,838 |
|
|
N/A |
|
|
Other income |
|
6,398 |
|
|
|
2,902 |
|
|
|
3,496 |
|
|
|
120.5 |
% |
Income tax provision |
|
36,320 |
|
|
|
15,097 |
|
|
|
21,223 |
|
|
|
140.6 |
% |
-27-
Net sales increased approximately $446.1 million for the nine months ended September 30, 2021, compared to the same period last year, setting a record both organically and on a consolidated basis. The 50.8% increase in net sales for the nine months ended September 30, 2021 was driven by 26.4% organic growth and 24.3% related to LSC. The Company achieved growth in global point-of-sale revenue, automotive and computing end-user markets combined with revenue growth for our Pericom branded products for high-end personal computers, servers and data center applications. For the nine months ended September 30, 2021, weighted-average sales price increased 6.4% when compared to the same period last year.
The table below sets forth our revenue as a percentage of total revenue by end-user market for the nine months ended September 30, 2021 and 2020:
|
Nine Months Ended |
|||
|
September 30, |
|||
|
2021 |
|
2020 |
|
Industrial |
23% |
|
23% |
|
Communications |
17% |
|
22% |
|
Consumer |
18% |
|
26% |
|
Computing |
30% |
|
18% |
|
Automotive |
12% |
|
11% |
|
With respect of total net sales by end-user markets, the LSC contribution to automotive, industrial, consumer and communication end-user markets was 7% or less for the nine months ended September 30, 2021. The LSC contribution to the computing end-user market for the nine months ended September 30, 2021 was approximately 46% of total computing net sales.
Contributing to the Company's growth in net sales has been the success of our content expansion initiatives, particularly in the automotive market and in our Pericom products, which continued to set new revenue records. The Company has also experienced growth in higher-margin end markets which, when combined with increased loading at LSC facilities, has enabled us to increase our top-line revenue and margins, even in the midst of this supply-constrained environment.
Cost of goods sold increased approximately $274.9 million for the nine months ended September 30, 2021, compared to the same period last year, due to the increased net sales during 2021. As a percent of sales, cost of goods sold was 63.8% for the nine months ended September 30, 2021, compared to 64.9% for the same period last year. Average unit cost increased approximately 4.6% for the nine months ended September 30, 2021, compared to the same period last year due to cost increases from various subcontractors and foundries. For the nine months ended September 30, 2021, gross profit increased approximately 55.5% when compared to the same period last year. Gross profit margin for the nine month periods ended September 30, 2021 and 2020 was 36.2% and 35.1%, respectively.
Operating expenses for the nine months ended September 30, 2021, increased $75.8 million when compared to the nine months ended September 30, 2020. Operating expenses as a percentage of net sales was 21.9% and 24.3% for the nine months ended September 30, 2021 and 2020, respectively. SG&A increased approximately $54.2 million, due to higher levels of wages and benefits, selling costs, freight and duty and operating expenses. R&D increased approximately $19.6 million due to higher levels of wages and benefits, professional services, operating expense and depreciation, as compared to the same period last year. Amortization of acquisition related intangibles decreased $0.1 million, compared to the same period last year. SG&A, as a percentage of net sales, was 14.1% and 15.0% for the nine months ended September 30, 2021 and 2020, respectively. R&D, as a percentage of net sales, was 6.7% and 7.9% for the nine months ended September 30, 2021 and 2020, respectively.
Interest income increased 306.0% for the nine months ended September 30, 2021, compared to the same period last year, due to increased revenue related to cross currency swaps. Interest expense decreased 17.6% for the nine months ended September 30, 2021, compared to the same period last year. The decrease in interest expense for the three months ended September 30, 2021 was due to a decrease in the interest rate on our floating rate debt, lower borrowing levels. Unrealized gain on investments increased from 2020 due to investment income from an investment the Company acquired in the LSC acquisition.
We recognized income tax expense of approximately $36.3 million and $15.1 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in income taxes for 2021 compared to 2020 was primarily attributable to an increase in pretax book income.
-28-
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 $117.1 million. At September 30, 2021, outstanding borrowings were $15.7 million, attributable to ERIS and outstanding letters of credit were $1.4 million under the Asia credit facilities.
Long-term debt
The Company maintains a long-term credit facility (“Credit Agreement”) consisting of a term loan with a current balance of $108.4 million and a $150.0 million revolving senior credit facility, of which nothing was drawn on September 30, 2021. The Credit Agreement matures in May 2023.
In addition to the liquidity provided by the Credit Agreement ERIS borrowed $30.0 million on a long-term basis from local Taiwan banks. The ERIS debt matures in periods through 2033.
At September 30, 2021 and December 31, 2020, our working capital was $619.3 million and $514.2 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, capital expenditures and acquisitions for at least the next 12 months.
Capital expenditures (including accrued capital expenditures) for the nine months ended September 30, 2021 and 2020 were $100.3 million and $47.5 million, respectively. For the first nine months of 2021 capital expenditures were approximately 7.6% of our net sales. Capital expenditures for the nine months ended September 30, 2021, 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 certain European and Asian subsidiaries. As of September 30, 2021, our foreign subsidiaries held approximately $257.7 million of cash, cash equivalents and investments of which approximately $28.3 million would be subject to a potential non-U.S. withholding tax if distributed outside the country in which the cash is currently held. The $28.3 million is held in Germany, China, Korea, and Taiwan.
As of September 30, 2021, we had short-term investments totaling $7.4 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.
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 and restricted cash decreased from $320.5 million at December 31, 2020 to $284.8 million at September 30, 2021. This decrease is cash, cash equivalents and restricted cash reflects normal operations of the Company.
The table below sets forth a summary of the condensed consolidated statements of cash flows:
|
Nine Months Ended September 30, |
|
|||||
|
2021 |
|
|
2020 |
|
||
Net cash flows provided by operating activities |
$ |
260,989 |
|
|
$ |
126,435 |
|
Net cash and cash equivalents used in investing activities |
|
(89,299 |
) |
|
|
(51,776 |
) |
Net cash and cash equivalents (used in) provided by financing activities |
|
(210,259 |
) |
|
|
294,680 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
2,878 |
|
|
|
10,988 |
|
Net increase in cash and cash equivalents, including restricted cash |
$ |
(35,691 |
) |
|
$ |
380,327 |
|
-29-
Operating Activities
Net cash flows provided by operating activities for the nine months ended September 30, 2021 was $261.0 million. Net cash flows provided by operating activities for the nine months ended September 30, 2021 resulted from net income of $170.0 million, depreciation and amortization of intangible assets of $91.9 million, share-based compensation of $24.9 million and an increase in deferred taxes of $1.0 million. The increases were partially offset by a noncash gain on an investment of $15.1 million and a decrease in noncash working capital accounts of $12.5 million. Net cash flows provided by operating activities for the nine months ended September 30, 2020 was $126.4 million. Net cash flows provided by operating activities for the nine months ended September 30, 2020 resulted from net income of $69.2 million, depreciation and amortization of intangible assets of $80.4 million, and share-based compensation of $18.7 million, partially offset by a decrease in deferred taxes of $10.2 million, a decrease in inventories of $20.5 million and a decrease in noncash working capital accounts, excluding inventory, of $20.3 million.
Investing Activities
Net cash and cash equivalents used in investing activities was $89.3 million for the nine months ended September 30, 2021. Net cash and cash equivalents used in investing activities for the nine months ended September 30, 2021 was primarily due to the purchase of property, plant and equipment of $86.1 million, $15.0 million of investment in an early stage, privately held fabless wafer facility, consisting of $10.0 million of preferred stock and a $5.0 million convertible promissory note, and the net purchase of short-term investments of $1.1 million, partially offset by the proceeds from the sale of property, plant and equipment of $3.1 million and other investing cash inflows of $11.0 million for the nine months ended September 30, 2021. Net cash and cash equivalents used in investing activities was $51.8 million for the nine months ended September 30, 2020. Net cash and cash equivalents used in investing activities for the nine months ended September 30, 2020 was primarily due to the purchase of property, plant and equipment of $48.5 million and the additional investment by the Company’s subsidiary ERIS in Yea-Shin of $6.1 million, bring ERIS’ ownership of Yea-Shin to approximately 99.5%. These outflows of cash were partially offset by net proceeds from the maturity of short-term investments of $1.9 million for the nine months ended September 30, 2020.
Financing Activities
Net cash and cash equivalents used in financing activities was $210.3 million for the nine months ended September 30, 2021. Net cash used in financing activities in the nine months ended September 30, 2021 consisted primarily of $201.2 million of net reductions in our debt and taxes paid on net share settlements of $14.7 million, partially offset by a capital contribution for a noncontrolling interest of $4.0 million. Net cash and cash equivalents provided by financing activities was $294.7 million for the nine months ended September 30, 2020. Net cash provided by financing activities in the nine months ended September 30, 2020 consisted primarily of $305.7 million, net advances on our debt facilities, including $305.0 million in anticipation of closing the LSC acquisition, which happened in November 2020, partially offset by taxes paid on net share settlements of $8.2 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.
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 No. 815. The fair value of our foreign exchange hedges approximates zero.
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,
-30-
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, 2020, filed with the SEC on February 22, 2021.
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 fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021. 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 – Summary of Operations and Significant Accounting Policies. 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 - Summary of Operations and Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements, for detailed information regarding the status of recently issued accounting pronouncements, if any.
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.
Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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 Quarterly Report The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
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Risk Factors
RISKS RELATED TO OUR BUSINESS
The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.
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.
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.
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.
New technologies could result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, 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.
We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations.
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.
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If our direct sales customers or our distributors’ 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.
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.
China has been experiencing electricity rationing, leading to higher electricity prices and which could lead to electricity curtailments
affecting our ability to operate our China-based manufacturing facilities.
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., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with ours or displace our products and components, resulting in an adverse impact on our Chinese business.
The U.K.’s exit from the European Union 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.
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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.
China is experiencing rapid social, political and economic change, which has increased labor costs 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.
We could be adversely affected by the compromise or theft of our technology, know-how, data or intellectual property or a requirement that we yield rights in technology, know-how, data stored in foreign jurisdictions or intellectual property that we use in such foreign jurisdictions.
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.
GENERAL RISK FACTORS
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.
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.
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.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.
Item 4. Controls and Procedures.
Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Brett R. Whitmire, with the participation of our management, carried out an evaluation, as of September 30, 2021, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this Quarterly Report is:
recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms; and
accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions on required disclosure.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
Changes in Internal Controls over Financial Reporting
There was no change in our internal control over financial reporting, known to our Chief Executive Officer or Chief Financial Officer, that occurred in the three months ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending litigation that we consider material.
From time to time, we are involved in various legal proceedings that arise in the normal course of business. While we intend to defend any lawsuit vigorously, we presently believe that the ultimate outcome of any pending legal proceeding will not have any material adverse effect on our financial position, cash flows or operating results. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact our business and operating results for the period in which the ruling occurs or future periods.
Item 1A. Risk Factors.
There have been no material changes to our risk factors from those disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 22, 2021, other than the additional risk factor below related to electricity demand in China referred to below..
China has been experiencing electricity rationing, leading to higher electricity prices and which could lead to electricity curtailments affecting our ability to operate our China-based manufacturing facilities.
Due to a shortage of coal to operate its coal-fueled power plants and high demand for Chinese manufactured goods that creates a higher demand for power, China has been experiencing power rationing and rising electricity prices. Continued shortages of electricity and/or rising electricity prices could lead to the Company not being able to operate its China-based manufacturing facilities at the level desired and/or could lead to the Company paying more for electricity in China. The inability to operate plants at desired capacity and/or an increase in electricity prices could adversely affect our cash flows, operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
Number |
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Description |
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Form |
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Date of First Filing |
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Exhibit |
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Filed |
3.1 |
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10-K |
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February 20, 2018 |
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3.1 |
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3.2 |
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|
8-K |
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January 11, 2016 |
|
3.1 |
|
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4.1 |
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Form of Certificate for Common Stock, par value $0.66 2/3 per share |
|
S-3 |
|
August 25, 2005 |
|
4.1 |
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31.1 |
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|
X |
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31.2 |
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|
X |
32.1* |
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X |
32.2* |
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X |
101.INS |
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Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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|
X |
101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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X |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
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X |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
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|
X |
101.LAB |
|
Inline XBRL Taxonomy Extension Labels Linkbase |
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|
X |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
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|
X |
104 |
|
Cover Page Interactive Data File, formatted in Inline XBRL |
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X |
* A certification furnished pursuant to Item 601(b)(32) of the Regulation S-K will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
PLEASE NOTE: It is inappropriate for investors to assume the accuracy of any covenants, representations or warranties that may be contained in agreements or other documents filed as exhibits to this Quarterly Report on Form 10-Q. In certain instances the disclosure schedules to such agreements or documents contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants. Moreover, some of the representations and warranties may not be complete or accurate as of a particular date because they are subject to a contractual standard of materiality that is different from those generally applicable to stockholders and/or were used for the purpose of allocating risk among the parties rather than establishing certain matters as facts. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
DIODES INCORPORATED |
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(Registrant) |
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November 3, 2021 |
By: /s/ Keh-Shew Lu |
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Date |
KEH-SHEW LU |
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Chairman, President and Chief Executive Officer |
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(Principal Executive Officer) |
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November 3, 2021 |
By: /s/ Brett R. Whitmire |
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Date |
BRETT R. WHITMIRE |
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Chief Financial Officer |
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(Principal Financial Officer) |
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