diod-10q_20150630.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s Common Stock outstanding as of August 4, 2015 was 48,601,019.

	June 30,		December 31,
	2015		2014
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	194,592	$	243,000
Short-term investments		25,844		11,726
Accounts receivable, net		206,637		188,248
Inventories		195,274		182,026
Deferred income taxes, current		11,317		11,295
Prepaid expenses and other		47,882		50,510
Total current assets		681,546		686,805

PROPERTY, PLANT AND EQUIPMENT, net		341,538		309,931

DEFERRED INCOME TAXES, non-current		32,474		32,550

OTHER ASSETS
Goodwill		82,067		81,229
Intangible assets, net		41,278		45,028
Other		26,281		23,614
Total assets	$	1,205,184	$	1,179,157

The accompanying notes are an integral part of these consolidated condensed financial statements.

	June 30,			December 31,
	2015			2014
	(Unaudited)
CURRENT LIABILITIES
Lines of credit and short-term debt	$	979		$	1,064
Accounts payable		88,321			79,390
Accrued liabilities		76,957			60,436
Income tax payable		7,187			8,381
Total current liabilities		173,444			149,271

LONG-TERM DEBT, net of current portion		99,684			140,787

OTHER LONG-TERM LIABILITIES		77,115			78,932
Total liabilities		350,243			368,990

COMMITMENTS AND CONTINGENCIES (See Note H)

EQUITY
Diodes Incorporated stockholders' equity
Preferred stock - par value $1.00 per share; 1,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock - par value $0.66 2/3 per share; 70,000,000 shares authorized; 48,241,281 and 47,591,092 issued and outstanding at June 30, 2015 and December 31, 2014, respectively		32,162			31,729
Additional paid-in capital		330,339			314,942
Retained earnings		516,216			490,006
Accumulated other comprehensive loss		(67,118	)		(68,402	)
Total Diodes Incorporated stockholders' equity		811,599			768,275
Noncontrolling interest		43,342			41,892
Total equity		854,941			810,167
Total liabilities and equity	$	1,205,184		$	1,179,157

The accompanying notes are an integral part of these consolidated condensed financial statements.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
NET SALES	$	219,453		$	223,217		$	425,634		$	433,203
COST OF GOODS SOLD		150,016			152,913			292,284			301,318
Gross profit		69,437			70,304			133,350			131,885

OPERATING EXPENSES
Selling, general and administrative		31,882			33,291			63,613			65,621
Research and development		13,590			12,781			26,899			25,701
Other operating expenses		1,967			1,089			3,937			3,077
Total operating expenses		47,439			47,161			94,449			94,399

Income from operations		21,998			23,143			38,901			37,486

OTHER INCOME (EXPENSES)		(741	)		359			(1,681	)		(991	)
Income before income taxes and noncontrolling interest		21,257			23,502			37,220			36,495

INCOME TAX PROVISION		5,399			5,651			9,586			8,198

NET INCOME		15,858			17,851			27,634			28,297

Less: NET INCOME attributable to noncontrolling interest		(780	)		(466	)		(1,424	)		(710	)
NET INCOME attributable to common stockholders	$	15,078		$	17,385		$	26,210		$	27,587

EARNINGS PER SHARE attributable to common stockholders
Basic	$	0.31		$	0.37		$	0.55		$	0.59
Diluted	$	0.31		$	0.36		$	0.53		$	0.57
Number of shares used in computation
Basic		48,076			46,889			47,872			46,794
Diluted		49,250			48,423			49,091			48,223

The accompanying notes are an integral part of these consolidated condensed financial statements.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net income	$	15,858		$	17,851		$	27,634		$	28,297
Foreign currency translation adjustment		4,909			3,340			(1,251	)		(595	)
Unrealized gain (loss) on defined benefit plan, net of tax		4,448			(1,816	)		2,635			(550	)
Unrealized foreign currency gain (loss), net of tax		397			372			(101	)		450
Comprehensive income		25,612			19,747			28,917			27,602
Less: Comprehensive income attributable to noncontrolling interest		(780	)		(466	)		(1,424	)		(710	)
Total comprehensive income attributable to common stockholders	$	24,832		$	19,281		$	27,493		$	26,892

The accompanying notes are an integral part of these consolidated condensed financial statements.

	Six Months Ended
	June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES	$	52,951		$	80,066

CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in restricted cash		(2,611	)		972
Purchases of property, plant and equipment		(46,877	)		(23,668	)
Proceeds from sales of property, plant, and equipment		19			1,428
Purchases of equity securities		(3,241	)		(1,842	)
Purchases of short-term investments		(35,095	)		-
Proceeds from sale of equity securities and short-term investments		21,135			5,380
Other		(94	)		308
Net cash used in investing activities		(66,764	)		(17,422	)

CASH FLOWS FROM FINANCING ACTIVITIES
Advances on lines of credit and short-term debt		1,449			4,335
Repayments on lines of credit and short-term debt		(1,550	)		(7,622	)
Repayments of long-term debt		(41,145	)		(20,710	)
Net proceeds from issuance of common stock		8,274			2,913
Other		(139	)		(147	)
Net cash used in financing activities		(33,111	)		(21,231	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(1,484	)		(2,583	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(48,408	)		38,830
CASH AND CASH EQUIVALENTS, beginning of period		243,000			196,635
CASH AND CASH EQUIVALENTS, end of period	$	194,592		$	235,465

SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash financing activities:
Property, plant and equipment purchased on accounts payable	$	(18,963	)	$	(1,968	)

The accompanying notes are an integral part of these consolidated condensed financial statements.

NOTE A – Nature of Operations, Basis of Presentation and Recently Issued Accounting Pronouncements

Diodes Incorporated, together with its subsidiaries (collectively, the “Company,” “we” or “our”), is a leading global manufacturer and supplier of high-quality, application specific standard products within the broad discrete, logic and analog semiconductor markets, serving the consumer electronics, computing, communications, industrial and automotive markets throughout Asia, North America and Europe.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, operating results and cash flows in conformity with U.S. GAAP for complete financial statements. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the our Annual Report on Form 10-K for the year ended December 31, 2014. 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2015. The consolidated condensed financial data at December 31, 2014 is derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed on March 2, 2015.

The preparation of financial statements in conformity with U.S. 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 U.S. 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.

Certain prior year’s balances have been reclassified to conform to the current financial statement presentation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 was originally effective for us in the first quarter of 2017, but in July 2015 the FASB approved a proposal to defer the effective date to the first quarter of 2018. Under this proposal, early adoption is permitted as of the original effective time period of first quarter of 2017 and requires either a retrospective or a modified retrospective approach to adoption. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings per share is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.

The computation of basic and diluted earnings per common share is as follows (in thousands, except per share data):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
BASIC
Weighted average number of common shares outstanding used in computing basic earnings per share		48,076		46,889		47,872		46,794
Net income attributable to common stockholders	$	15,078	$	17,385	$	26,210	$	27,587
Earnings per share attributable to common stockholders	$	0.31	$	0.37	$	0.55	$	0.59

DILUTED
Weighted average number of common shares outstanding used in computing basic earnings per share		48,076		46,889		47,872		46,794
Add: Dilutive effect of stock options and stock awards outstanding		1,174		1,534		1,219		1,429
		49,250		48,423		49,091		48,223

Net income attributable to common stockholders	$	15,078	$	17,385	$	26,210	$	27,587
Earnings per share attributable to common stockholders	$	0.31	$	0.36	$	0.53	$	0.57

Inventories stated at the lower of cost or market value are as follows (in thousands):

	June 30,			December 31,
	2015			2014
Intangible assets subject to amortization:
Gross carrying amount	$	86,928		$	86,928
Accumulated amortization		(43,968	)		(40,164	)
Foreign currency translation adjustment		(7,439	)		(7,471	)
Total		35,521			39,293
Intangible assets with indefinite lives:
Gross carrying amount		6,403			6,403
Foreign currency translation adjustment		(646	)		(668	)
Total		5,757			5,735
Total intangible assets, net	$	41,278		$	45,028

Amortization expense related to intangible assets subject to amortization was approximately $2 million for both the three months ended June 30, 2015 and 2014, and approximately $4 million for both the six months ended June 30, 2015 and 2014.

Income tax expense of approximately $5 million and $6 million was recorded for the three months ended June 30, 2015 and 2014, respectively, and income tax expense of approximately $10 million and $8 million was recorded for the six months ended June 30, 2015 and 2014, respectively. This resulted in an effective tax rate of 25.8% for the six months ended June 30, 2015, as compared to 22.5% in the same period last year and compared to 23.7% for the full year of 2014. The effective tax rate for the six months ended June 30, 2015 includes an immaterial charge for various discrete items. The estimated annual tax rate for 2015 is expected to be approximately 25%, excluding discrete items. Our effective tax rates for the six months ended June 30, 2015 and 2014, excluding discrete items, were lower than the U.S. statutory tax rate of 35%, principally from the impact of income in lower-taxed jurisdictions.

For the three months ended June 30, 2015, we reported domestic and foreign pre-tax income of approximately $3 million and $18 million, respectively. For the six months ended June 30, 2015, we reported domestic and foreign pre-tax income/(loss) of approximately $(3) million and $40 million, respectively. Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. We intend to permanently reinvest overseas all of our earnings from our foreign subsidiaries, except to the extent such undistributed earnings have previously been subject to US tax; accordingly, deferred U.S. taxes are not recorded on undistributed foreign earnings.

The impact of tax holidays decreased our tax expense by approximately $2 million and $1 million for the six months ended June 30, 2015 and 2014, respectively. The benefit of the tax holidays on both basic and diluted earnings per share for the six months ended June 30, 2015 and 2014 was approximately $0.04 and $0.03, respectively.

We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2007, or for the 2010 tax year. We are no longer subject to China income tax examinations by tax authorities for tax years before 2005. With respect to state and local jurisdictions and countries outside of the U.S. (other than China), with limited exceptions, we are no longer subject to income tax audits for years before 2006. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties, if any, have been provided for in our reserve for any adjustments that may result from tax audits. We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense. As of June 30, 2015, the gross amount of unrecognized tax benefits was approximately $19 million.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

The following table shows the total compensation expensed for share-based compensation plans, including stock options and share grants, recognized in the statements of operations (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Cost of goods sold	$	122	$	107	$	245	$	203
Selling, general and administrative		3,389		2,979		6,594		5,829
Research and development		364		305		716		578

Total share-based compensation expense	$	3,875	$	3,391	$	7,555	$	6,610

Stock Options. Stock options generally vest in equal annual installments over a four-year period and expire eight years after the grant date, and expense was estimated on the date of grant using the Black-Scholes-Merton option pricing model.

The total net cash proceeds received from stock option exercises during the six months ended June 30, 2015 was approximately $8 million. Stock option expense was approximately $1 million for both the three months ended June 30, 2015 and 2014, and $3 million and $2 million for the six months ended June 30, 2015 and 2014, respectively.

Stock Options	Shares (000)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (yrs)		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2015		2,736		$	21.26		4	$	17,840
Granted		-			-
Exercised		(534	)		15.49				6,976
Forfeited or expired		(16	)		-
Outstanding at June 30, 2015		2,186		$	22.65		4	$	6,309
Exercisable at June 30, 2015		1,849		$	22.37		4	$	5,833

The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount option holders would have received if all options had been exercised on the last business day of the period indicated, based on our closing stock price.

As of June 30, 2015, total unrecognized share-based compensation expense related to unvested stock options, net of forfeitures, was approximately $4 million, before income taxes, and is expected to be recognized over a weighted average period of approximately two years.

Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.

Share grant expense for both the three months ended June 30, 2015 and 2014 was approximately $3 million, and share grant expense for the six months ended June 30, 2015 and 2014 was approximately $6 million and $5 million, respectively.

As of June 30, 2015, total unrecognized share-based compensation expense related to non-vested stock awards, net of forfeitures, was approximately $22 million, before income taxes, and is expected to be recognized over a weighted average period of approximately three years.

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 the same customer type.

Net sales are attributed to geographic areas based on the location of subsidiaries producing the net sales (in thousands):

Three Months Ended	Asia			North America			Europe			Consolidated
June 30, 2015
Total sales	$	202,731		$	39,921		$	45,115		$	287,767
Inter-company sales		(30,718	)		(17,402	)		(20,194	)		(68,314	)
Net sales	$	172,013		$	22,519		$	24,921		$	219,453


Three Months Ended	Asia			North America			Europe			Consolidated
June 30, 2014
Total sales	$	200,955		$	38,304		$	47,383		$	286,642
Inter-company sales		(25,518	)		(15,650	)		(22,257	)		(63,425	)
Net sales	$	175,437		$	22,654		$	25,126		$	223,217

As of and for the Six Months Ended	Asia			North America			Europe			Consolidated
June 30, 2015
Total sales	$	394,019		$	79,162		$	88,236		$	561,417
Inter-company sales		(61,557	)		(34,042	)		(40,184	)		(135,783	)
Net sales	$	332,462		$	45,120		$	48,052		$	425,634

Property, plant and equipment, net	$	295,555		$	25,600		$	20,383		$	341,538
Total assets	$	894,645		$	131,885		$	178,654		$	1,205,184

As of and for the Six Months Ended	Asia			North America			Europe			Consolidated
June 30, 2014
Total sales	$	390,322		$	75,089		$	88,929		$	554,340
Inter-company sales		(48,802	)		(30,387	)		(41,948	)		(121,137	)
Net sales	$	341,520		$	44,702		$	46,981		$	433,203

Property, plant and equipment, net	$	262,186		$	28,016		$	22,340		$	312,542
Total assets	$	866,715		$	130,085		$	188,935		$	1,185,735

Net sales were derived from (shipped to) customers located in the following countries (in thousands):

Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Page
Part I – Financial Information		-1-
Item 1 – Financial Statements		-1-
Consolidated Condensed Balance Sheets as of June 30, 2015 and December 31, 2014		-1-
Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014		-3-
Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014		-4-
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014		-5-
Notes to Consolidated Condensed Financial Statements		-6-
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		-15-
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		-24-
Item 4 – Controls and Procedures		-25-
Part II – Other Information		-26-
Item 1 – Legal Proceedings		-26-
Item 1A – Risk Factors		-26-
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		-26-
Item 3 – Defaults Upon Senior Securities		-26-
Item 4 – Mine Safety Disclosures		-26-
Item 5 – Other Information		-26-
Item 6 – Exhibits		-27-
Signature		-28-

	June 30, 2015		December 31, 2014
Raw materials	$	85,715	$	73,564
Work-in-progress		45,645		42,417
Finished goods		63,914		66,045
Total	$	195,274	$	182,026

Share Grants	Shares (000)			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value ($000)
Non-vested at January 1, 2015		1,535		$	23.32	$	42,324
Granted		312			26.19
Vested		(116	)		25.72		3,016
Forfeited		(27	)		26.00
Non-vested at June 30, 2015		1,704		$	23.70	$	40,936

	Net Sales
	for the Three Months				Percentage of
	Ended June 30,				Net Sales
	2015		2014		2015			2014
China	$	130,216	$	139,703		59	%		63	%
United States		21,200		21,765		10	%		10	%
Korea		17,981		14,110		8	%		6	%
Germany		16,205		16,372

Balance at December 31, 2014	$	81,229
Foreign currency translation adjustment		838
Balance at June 30, 2015	$	82,067