diod-10q_20160930.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 ☒ 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 ☒ 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 ☒

The number of shares of the registrant’s Common Stock outstanding as of November 4, 2016 was 48,902,131.

	September 30,			December 31,
	2016			2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	220,526		$	218,435
Short-term investments		34,766			64,685
Accounts receivable, net of allowances of $2,670 and $2,625 at September 30, 2016 and December 31, 2015, respectively		239,278			218,496
Inventories		204,251			202,832
Prepaid expenses and other		40,691			46,103
Total current assets		739,512			750,551
Property, plant and equipment, net		415,618			439,340
Deferred income tax		50,702			45,120
Goodwill		131,661			132,913
Intangible assets, net		180,232			196,409
Other		34,715			34,494
Total assets	$	1,552,440		$	1,598,827

Liabilities
Current liabilities:
Accounts payable	$	90,548		$	86,463
Accrued liabilities		71,758			77,801
Income tax payable		-			5,117
Current portion of long-term debt		10,300			10,282
Total current liabilities		172,606			179,663
Long-term debt, net of current portion		407,052			453,738
Deferred tax liabilities		32,219			32,276
Other long-term liabilities		97,150			90,153
Total liabilities		709,027			755,830

Commitments and contingencies (See Note 8)

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; 48,816,264 and 48,148,077, issued and outstanding at September 30, 2016 and December 31, 2015, respectively		32,856			32,404
Additional paid-in capital		353,539			344,086
Retained earnings		528,947			514,280
Treasury stock, at cost, 466,010 shares held at September 30, 2016 and December 31, 2015		(11,009	)		(11,009	)
Accumulated other comprehensive loss		(105,735	)		(84,416	)
Total stockholders' equity		798,598			795,345
Noncontrolling interest		44,815			47,652
Total equity		843,413			842,997
Total liabilities and stockholders' equity	$	1,552,440		$	1,598,827


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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net sales	$	250,694		$	208,888		$	710,077		$	634,522
Cost of goods sold		170,071			147,252			490,417			439,536
Gross profit		80,623			61,636			219,660			194,986

Operating expenses
Selling, general and administrative		38,321			34,669			119,165			98,282
Research and development		17,088			13,745			52,247			40,644
Amortization of acquisition related intangible assets		5,117			1,828			15,379			5,630
Other operating expenses		144			1,421			184			1,556
Total operating expenses		60,670			51,663			186,975			146,112

Income from operations		19,953			9,973			32,685			48,874

Other income (expense)
Interest income		321			153			1,075			695
Interest expense		(3,684	)		(781	)		(9,880	)		(2,602	)
Loss on securities carried at fair value		-			(91	)		-			(145	)
Other income (expense)		(959	)		974			(1,494	)		626
Total other income (expense)		(4,322	)		255			(10,299	)		(1,426	)

Income before income taxes and noncontrolling interest		15,631			10,228			22,386			47,448
Income tax provision		4,097			6,593			5,941			16,179
Net income		11,534			3,635			16,445			31,269
Less net income attributable to noncontrolling interest		(886	)		(798	)		(1,778	)		(2,222	)
Net income attributable to common stockholders	$	10,648		$	2,837		$	14,667		$	29,047

Earnings per share attributable to common stockholders:
Basic	$	0.22		$	0.06		$	0.30		$	0.60
Diluted	$	0.21		$	0.06		$	0.30		$	0.59
Number of shares used in earnings per share computation:
Basic		48,814			48,586			48,496			48,114
Diluted		49,922			49,564			49,565			49,351

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net income	$	11,534		$	3,635		$	16,445		$	31,269
Foreign currency translation adjustment		1,546			(11,954	)		(6,246	)		(13,205	)
Unrealized (loss) gain on defined benefit plan, net of tax		(9,571	)		1,852			(14,732	)		4,487
Unrealized foreign currency loss, net of tax		(359	)		(343	)		(342	)		(444	)
Comprehensive income (loss)		3,150			(6,810	)		(4,875	)		22,107
Less: Comprehensive income attributable to noncontrolling interest		(886	)		(798	)		(1,778	)		(2,222	)
Total comprehensive income (loss) attributable to common stockholders	$	2,264		$	(7,608	)	$	(6,653	)	$	19,885

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

	Nine Months Ended
	September 30,
	2016			2015
Cash flows from operating activities	$	74,935		$	98,453

Cash flows from investing activities
(Increase) decrease in restricted cash		(311	)		527
Purchases of property, plant and equipment		(47,054	)		(94,994	)
Proceeds from sales of property, plant, and equipment		84			129
Purchase of equity securities		-			(4,553	)
Proceeds from sales of equity securities		-			3,968
Purchases of short-term investments		(17,482	)		(36,784	)
Proceeds from maturity of short-term investments		46,352			23,156
Purchase of TF Semiconductor Solutions, net of cash acquired		-			(1,033	)
Other		(1,400	)		304
Net cash and cash equivalents used in investing activities		(19,811	)		(109,280	)

Cash flows from financing activities
Advances on lines of credit and short-term debt		9,000			1,713
Taxes paid related to net share settlement		(2,528	)		-
Repayments on lines of credit and short-term debt		(9,000	)		(2,512	)
Debt issuance costs		(435	)		(1,158	)
Proceeds from long-term debt		23,500			-
Repayments of long-term debt		(70,714	)		(47,216	)
Net proceeds from issuance of common stock		5			9,906
Repayment of capital lease obligation and other		(4,116	)		(178	)
Net cash and cash equivalents used in financing activities		(54,288	)		(39,445	)

Effect of exchange rate changes on cash and cash equivalents		1,255			(3,973	)
Increase (decrease) in cash and cash equivalents		2,091			(54,245	)
Cash and cash equivalents, beginning of period		218,435			243,000
Cash and cash equivalents, end of period	$	220,526		$	188,755

Supplemental disclosure
Non-cash financing activities:
Property, plant and equipment purchased on accounts payable	$	7,459		$	(24,907	)

Acquisition of TF Semiconductor Solutions:
Total assets acquired	$	-		$	8,697
Total liabilities assumed	$	-		$	86

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

NOTE 1 – Nature of Operations, Basis of Presentation and Recently Issued Accounting Pronouncements

Diodes Incorporated, together with its subsidiaries (collectively, the “Company,” “we” or “our”), (Nasdaq: DIOD), 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. We serve the consumer electronics, computing, communications, industrial, and automotive markets. Our products include diodes, rectifiers, transistors, MOSFETs, 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. Our corporate headquarters and Americas’ sales office are located in Plano, Texas and Milpitas, California. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei; Taoyuan City and Zhubei City, Taiwan; Manchester, England; and Neuhaus, Germany. Our wafer fabrication facilities are located in Kansas City, Missouri and Manchester, with an additional facility located in Shanghai, China. We have assembly and test facilities located in Shanghai, Jinan, Chengdu, and Yangzhou, China, as well as in Hong Kong, Neuhaus and Taipei. Additional engineering, sales, warehouse, and logistics offices are located in Taipei; Hong Kong; Manchester; Shanghai; Shenzhen, China; Seongnam-si, South Korea; and Munich, Germany, with support offices throughout the world. On November 24, 2015, we completed our acquisition of Pericom Semiconductor Corporation (“Pericom”). Pericom is not included in the Company’s 2015 results presented in this Form 10-Q.

The condensed consolidated financial data at December 31, 2015 is derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on March 11, 2016 (“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, 2016 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2016.

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 have been reclassified to conform to the current financial statement presentation.

The Financial Accounting Standards Board (“FASB”) issued the following Accounting Standards Updates (“ASU”) which could have potential impact to the Company’s financial statements:

ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (“ASU 2015-03”). This standard requires that costs associated with the issuance of debt previously recorded as deferred assets on the balance sheet now are reported as a direct reduction of the related debt balance. This standard is effective for interim and annual periods beginning January 1, 2016, but early adoption is permitted. We adopted this standard in the first quarter of 2016 and applied the standard retrospectively to all prior periods presented. The adoption of ASU 2015-03 resulted in a $2.2 million retrospective reduction of both our other assets and long-term notes payable, net of current portion, as of December 31, 2015. Adoption of this standard had no impact on the consolidated statements of operations.

ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16"). This standard eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. These changes became effective for fiscal years beginning after December 31, 2015. We adopted this standard in the first quarter of 2016 and had adjustments to the previously reported fair values recorded related to the Pericom transaction. See Note 11 for additional information related to these adjustments. Adoption of this standard had no impact on the consolidated statements of operations.

ASU No. 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory. This standard requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in this standard are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is evaluating the effect this new standard will have on its financial statements.

Earnings per share (“EPS”) are calculated by dividing net income attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted EPS are calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive. A total of 1.7 million and 2.0 million stock options and stock awards outstanding during the three months ended September 30, 2016 and 2015, respectively, and 1.9 million and 0.9 million stock options and stock awards during nine months ended September 30, 2016 and 2015, respectively, were excluded from the calculation because the effect was anti-dilutive.

The table below sets forth the reconciliation between net income and the weighted average shares outstanding used for calculating basic and diluted EPS for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Earnings (numerator)
Net income attributable to common stockholders	$	10,648	$	2,837	$	14,667	$	29,047

Shares (denominator)
Weighted average common shares outstanding (basic)		48,814		48,586		48,496		48,114
Dilutive effect of stock options and stock awards outstanding		1,108		978		1,069		1,237
Adjusted weighted average common shares outstanding (diluted)		49,922		49,564		49,565		49,351

Earnings per share attributable to common stockholders
Basic	$	0.22	$	0.06	$	0.30	$	0.60
Diluted	$	0.21	$	0.06	$	0.30	$	0.59

The table below sets forth inventories which are stated at the lower of cost or market value:

	September 30,			December 31,
	2016			2015
Intangible assets subject to amortization:
Gross carrying amount	$	232,047		$	232,047
Reclassification from intangible assets with indefinite lives		700			-
Accumulated amortization		(64,146	)		(48,828	)
Foreign currency translation adjustment		(8,289	)		(7,725	)
Total		160,312			175,494
Intangible assets with indefinite lives:
Gross carrying amount		21,703			21,703
Reclassification to intangible assets subject to amortization		(700	)		-
Foreign currency translation adjustment		(1,083	)		(788	)
Total		19,920			20,915
Total intangible assets, net	$	180,232		$	196,409

Amortization expense related to intangible assets subject to amortization was approximately $5.1 million and $15.4 million for the three and nine months ended September 30, 2016, respectively. Amortization expense related to intangible assets subject to amortization was approximately $1.8 million and $5.6 million for the three and nine months ended September 30, 2015, respectively.

Income tax expense for the three and nine months ended September 30, 2016 was $4.1 million and $5.9 million, respectively. Income tax expense for the three and nine months ended September 30, 2015 was $6.6 million and $16.2 million, respectively, resulting in an effective income tax rate of 26.5% for the nine months ended September 30, 2016, compared to 34.1% for the same period last year. The decrease in the effective tax rate over these comparable nine month periods is primarily attributable to a significant change in the proportion of income generated in North America, Europe and Asia, and in both periods the effective tax rates were lower than the U.S. statutory rate of 35%, principally from the impact of income from lower-taxed jurisdictions.

For the nine months ended September 30, 2016, the Company reported domestic and foreign pre-tax (loss)/income of approximately $(25.5) million and $47.9 million, respectively. Funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. The Company intends to permanently reinvest overseas all of its earnings from its 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 $5.1 million for the nine months ended September 30, 2016 and $1.6 million for the nine months ended September 30, 2015. The benefit of the tax holidays on both basic and diluted earnings per share for both the nine months ended September 30, 2016 and 2015 was approximately $0.10 and $0.03, respectively. The increase in the impact of tax holidays over these comparable nine month periods is primarily attributable to an increase in income generated by Chinese subsidiaries that qualify for a reduced income tax rate.

The Company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2007, or for the 2010 tax year. The Company is 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, the Company is no longer subject to income tax audits for years before 2006. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties, if any, have been provided for in the Company’s reserve for any adjustments that may

result from tax audits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense. As of September 30, 2016, the gross amount of unrecognized tax benefits was approximately $28.5 million.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s 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 table below sets forth the line items where share-based compensation expense was recorded for the three and nine months ended September 30, 2016 and 2015:

The table below sets forth share-based compensation expense by type for the three and nine months ended September 30, 2016 and 2015:

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

There were no cash proceeds received from stock option exercises during the nine months ended September 30, 2016.

The table below sets forth a summary of stock option activity for the nine months ended September 30, 2016:

Stock Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2016		2,063		$	23.03		3.9	$	4,111
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited or expired		(210	)		22.39		-		-
Outstanding at September 30, 2016		1,853		$	23.10		3.6	$	2,712
Exercisable at September 30, 2016		1,726		$	22.86		3.5	$	2,712

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 September 30, 2016, total unrecognized share-based compensation expense related to unvested stock options, net of estimated forfeitures, was approximately $1.5 million, before income taxes, and is expected to be recognized over a weighted average period of approximately one year.

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

The table below sets forth a summary of restricted stock awards and restricted stock units for the nine months ended September 30, 2016:

As of September 30, 2016, total unrecognized share-based compensation expense related to non-vested restricted stock awards and restricted stock units, net of estimated forfeitures, was approximately $49.2 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. Our primary operations include operations in Asia, North America and Europe.

The tables below set forth net sales based on the location of subsidiaries producing the net sales:

Three Months Ended
September 30, 2016	Asia			North America			Europe			Consolidated
Total sales	$	239,447		$	30,067		$	38,451		$	307,965
Intercompany elimination		(37,228	)		(5,726	)		(14,317	)		(57,271	)
Net sales	$	202,219		$	24,341		$	24,134		$	250,694

Three Months Ended
September 30, 2015	Asia			North America			Europe			Consolidated
Total sales	$	194,642		$	33,880		$	40,380		$	268,902
Intercompany elimination		(27,874	)		(15,015	)		(17,125	)		(60,014	)
Net sales	$	166,768		$	18,865		$	23,255		$	208,888

As of and for the Nine Months Ended
September 30, 2016	Asia			North America			Europe			Consolidated
Total sales	$	671,252		$	91,176		$	121,501		$	883,929
Intercompany elimination		(107,268	)		(21,390	)		(45,194	)		(173,852	)
Net sales	$	563,984		$	69,786		$	76,307		$	710,077

Property, plant and equipment, net	$	341,320		$	58,408		$	15,890		$	415,618
Total assets	$	956,647		$	422,041		$	173,752		$	1,552,440

As of and for the Nine Months Ended

Large accelerated filer	☒	Accelerated filer	☐

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

		Page
Part I – Financial Information		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4. Controls and Procedures		26
Part II – Other Information		28
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3. Defaults Upon Senior Securities		29
Item 4. Mine Safety Disclosures		29
Item 5. Other Information		29
Item 6. Exhibits		30
Signatures		31

	September 30, 2016		December 31, 2015
Raw materials	$	86,427	$	86,103
Work-in-progress		45,323		46,061
Finished goods		72,501		70,668
Total	$	204,251	$	202,832

Balance at December 31, 2015	$	132,913
Pericom measurement period adjustments (See Note 11)		2,741
Foreign currency translation adjustment		(3,993	)
Balance at September 30, 2016	$	131,661

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Stock options	$	304	$	517	$	1,212	$	1,999
Share grants		3,453		3,582		11,625		9,656
Total share-based compensation expense	$	3,757	$	4,099	$	12,837	$	11,655

Share Grants	Shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Non-vested at January 1, 2016		2,679		$	23.51	$	61,247
Granted		873			18.60		-
Vested		(789	)		19.54		15,227
Forfeited		(57	)		20.59		-
Non-vested at September 30, 2016		2,706		$	21.05	$	57,742