diod-10q_20190331.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 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). Yes ☒ No ☐

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:

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 ☐ No ☒

The number of shares of the registrant’s Common Stock outstanding as of May 3, 2019 was 50,613,957.

	March 31,			December 31,
	2019			2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	301,167		$	241,053
Short-term investments		6,751			7,499
Accounts receivable, net of allowances of $4,258 and $4,102 at March 31, 2019 and December 31, 2018, respectively		215,229			228,405
Inventories		216,569			215,435
Prepaid expenses and other		41,274			42,446
Total current assets		780,990			734,838
Property, plant and equipment, net		441,215			446,835
Deferred income tax		31,830			31,652
Goodwill		135,669			132,437
Intangible assets, net		133,506			137,935
Other		89,788			42,674
Total assets	$	1,612,998		$	1,526,371

Liabilities
Current liabilities:
Line of credit	$	12,330		$	10,254
Accounts payable		107,078			117,808
Accrued liabilities and other		86,880			82,605
Income tax payable		21,452			15,744
Current portion of long-term debt		28,403			27,613
Total current liabilities		256,143			254,024
Long-term debt, net of current portion		187,378			186,143
Deferred tax liabilities		18,003			17,993
Other long-term liabilities		134,176			90,779
Total liabilities		595,700			548,939

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; 50,596,756 and 50,221,035, issued and outstanding at March 31, 2019 and December 31, 2018, respectively		34,704			34,454
Additional paid-in capital		410,163			399,915
Retained earnings		668,424			636,708
Treasury stock, at cost, 1,457,206 shares held at March 31, 2019 and December 31, 2018		(37,768	)		(37,768	)
Accumulated other comprehensive loss		(106,848	)		(101,846	)
Total stockholders' equity		968,675			931,463
Noncontrolling interest		48,623			45,969
Total equity		1,017,298			977,432
Total liabilities and stockholders' equity	$	1,612,998		$	1,526,371

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

	Three Months Ended
	March 31,
	2019			2018
Net sales	$	302,293		$	274,512
Cost of goods sold		189,882			175,917
Gross profit		112,411			98,595

Operating expenses
Selling, general and administrative		43,688			47,150
Research and development		22,170			20,200
Amortization of acquisition related intangible assets		4,484			4,767
Other operating income		(54	)		(462	)
Total operating expense		70,288			71,655

Income from operations		42,123			26,940

Other income (expense)
Interest income		875			514
Interest expense		(2,145	)		(2,757	)
Foreign currency loss, net		(64	)		(3,029	)
Other income		1,245			4,635
Total other expense		(89	)		(637	)

Income before income taxes and noncontrolling interest		42,034			26,303
Income tax provision		10,298			7,783
Net income		31,736			18,520
Less net (income) loss attributable to noncontrolling interest		(20	)		6
Net income attributable to common stockholders	$	31,716		$	18,526

Earnings per share attributable to common stockholders:
Basic	$	0.63		$	0.38
Diluted	$	0.62		$	0.37
Number of shares used in earnings per share computation:
Basic		50,398			49,337
Diluted		51,462			50,622

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

	Common stock				Treasury stock						Additional paid-in			Retained		Accumulated other comprehensive			Total Diodes Incorporated Stockholders'			Noncontrolling			Total
(Amounts in thousands)	Shares		Amount		Shares			Amount			capital			earnings		loss			equity			interest			equity
Balance, December 31, 2017		50,587	$	33,727		(1,457	)	$	(37,768	)	$	386,338		$	532,687	$	(83,480	)	$	831,504		$	42,414		$	873,918
Total comprehensive income		-		-		-			-			-			18,526		18,639			37,165			(6	)		37,159
Noncontrolling interests		-		-		-			-			-			-		-			-			-			-
Dividends to noncontrolling interest		-		-		-			-			-			-		-			-			(1,152	)		(1,152	)
Common stock issued for share-based plans		441		294		-			-			574			-		-			868			-			868
Share-based compensation		-		-		-			-			6,280			-		-			6,280			-			6,280
Tax related to net share settlement		-		-		-			-			(7,264	)		-		-			(7,264	)		-			(7,264	)
Balance, March 31, 2018		51,028	$	34,021		(1,457	)	$	(37,768	)	$	385,928		$	551,213	$	(64,841	)	$	868,553		$	41,256		$	909,809

Balance, December 31, 2018		51,678	$	34,454		(1,457	)	$	(37,768	)	$	399,915		$	636,708	$	(101,846	)	$	931,463		$	45,969		$	977,432
Total comprehensive income		-		-		-			-			-			31,716		(5,002	)		26,714			20			26,734
Noncontrolling interests		-		-		-			-			-			-		-			-			2,755			2,755
Dividends to noncontrolling interest		-		-		-			-			-			-		-			-			(121	)		(121	)
Common stock issued for share-based plans		376		250		-			-			6,417			-		-			6,667			-			6,667
Share-based compensation		-		-		-			-			4,476			-		-			4,476			-			4,476
Tax related to net share settlement		-		-		-			-			(645	)		-		-			(645	)		-			(645	)
Balance, March 31, 2019		52,054	$	34,704		(1,457	)	$	(37,768	)	$	410,163		$	668,424	$	(106,848	)	$	968,675		$	48,623		$	1,017,298

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

	Three Months Ended
	March 31,
	2019			2018
Net cash flows provided by operating activities	$	69,889		$	53,959

Cash flows from investing activities
Purchases of property, plant and equipment		(18,639	)		(31,636	)
Purchases of short-term investments		(3,153	)		(237	)
Proceeds from maturity of short-term investments		3,982			1,027
Other		658			1,411
Net cash and cash equivalents used in investing activities		(17,152	)		(29,435	)

Cash flows from financing activities
Advances on lines of credit and short-term debt		3,568			3,414
Repayments of line of credit and short-term debt		(1,461	)		-
Taxes paid related to net share settlement		(645	)		(7,264	)
Proceeds from long-term debt		85,000			91,000
Repayments of long-term debt		(83,089	)		(137,482	)
Net proceeds from issuance of common stock		6,667			866
Repayment of finance lease obligation		(293	)		(603	)
Other		(120	)		227
Net cash and cash equivalents provided by (used in) financing activities		9,627			(49,842	)

Effect of exchange rate changes on cash and cash equivalents		(1,890	)		3,971
Change in cash and cash equivalents, including restricted cash		60,474			(21,347	)
Cash and cash equivalents, beginning of period, including restricted cash		241,833			205,202
Cash and cash equivalents, end of period, including restricted cash	$	302,307		$	183,855

Supplemental Cash Flow Information
Interest paid during the period	$	2,095		$	2,790
Taxes paid during the period	$	4,323		$	4,139

Non-cash investing and financing activities:
Decrease in accounts payable related to the purchase of property, plant and equipment	$	2,366		$	6,917
Increase in dividend accrued for noncontrolling interest	$	-		$	(1,000	)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the total of the same such amounts shown above:

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

NOTE 1 – Nature of Operations, Basis of Presentation, Recently Issued Accounting Pronouncements and Updates to Accounting Policies and Estimates

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 offices 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; Oldham, England; and Neuhaus, Germany. Our wafer fabrication facilities are located in Oldham and Shanghai, China and Greenock, Scotland. We have assembly and test facilities located in Shanghai, Jinan and Chengdu, China, as well as in Hong Kong, Neuhaus and Taipei. Additional engineering, research and development, sales, warehouse, and logistics offices are located in Taipei; Hong Kong; Oldham; Shanghai; Shenzhen and Yangzhou, China; Seongnam-si, South Korea; Munich, Germany; and Tokyo, Japan, with support offices throughout the world.

The condensed consolidated financial data at December 31, 2018 is derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019 (“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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2019.

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 financial statement presentation.

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

ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) – In February 2016, the FASB issued ASU 2016-02, which amends the accounting treatment for leases and requires, among other things, lessees to recognize a right-of-use (“ROU”) asset and lease liability for most lease arrangements. The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective transition approach, under which financial results reported in periods prior to 2018 are unchanged. We elected the following allowed practical expedients as permitted under the transition guidance within the new standard:

Upon adoption of ASU 2016-02, the Company recorded ROU assets of $68.3 million, including land-use rights of $17.1 million previously recorded in other assets and $2.5 million previously recorded in property, plant and equipment and ROU liabilities of $50.4 million. For additional information related to the Company’s leases, see Note 10.

ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") - In June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 was effective for the Company on January 1, 2019. The adoption of this standard did not have a material effect on our condensed consolidated financial statements or disclosures.

ASU No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) -In August 2017, the FASB issued ASU No. 2017-12 to better align hedge accounting with risk management strategies, and as a result, more hedging strategies will be eligible for hedge accounting. Public business entities will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge’s effectiveness. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. The amendments are effective for fiscal years beginning after December 15, 2018 and the Company adopted the new standard January 1, 2019. The new standard had no impact on the Company’s financial statements.

On January 1, 2019, the Company adopted ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”. The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815, in addition to the currently permissible benchmark interest rates. This ASU provides the Company the ability to utilize the OIS rate based on SOFR as the benchmark interest rate on certain hedges of interest rate risk. The new standard had no impact on the Company’s financial statements.

The FASB has issued the following relevant standards, effective in future years, which are not expected to have a material impact on our consolidated condensed financial statements:

In April 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements and disclosures.

All other issued and not yet effective accounting standards are not expected to be relevant to the Company.

The Company determines if an arrangement is a lease at inception. ROU assets are included in Other assets in the Company’s condensed consolidated balance sheets. Current ROU liabilities are included in Accrued liabilities and other and long-term ROU liabilities are included in Other long-term liabilities, in our condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. To determine the present value of the lease payments, we estimate our incremental borrowing rate based on information available at the lease commencement date.

The Company’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. Our leases typically do not contain any residual value guarantees. For real estate, we account for the lease and non-lease components as a single lease component.

Earnings per share (“EPS”) 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 EPS is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive. During the three months ended March 31, 2019 and 2018 we paid no dividends on our Common Stock.

The table below sets forth the reconciliation between net income and the weighted average shares outstanding used for calculating basic and diluted EPS:

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

The increase in goodwill is related to the preliminary purchase price accounting allocation of an investment in Canyon Semiconductor. This amount possibly will be changed when the purchase price allocation becomes final later in 2019.

The table below sets forth amortization expense related to intangible assets subject to amortization:

The decrease in the effective tax rate for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018, is primarily attributable to an increase in estimated full year global pretax book income and a net decrease in unfavorable U.S. permanent differences.

Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of 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.

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 2008, or for the 2010 and 2011 tax years. We are no longer subject to China income tax examinations by tax authorities for tax years before 2008. 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 2013. 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 currently pending tax audits. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense. As of March 31, 2019, the gross amount of unrecognized tax benefits was approximately $34.0 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:

Stock Options. Approximately $6.7 million in cash proceeds was received from stock option exercises during the three months ended March 31, 2019.

As of March 31, 2019, we had no unrecognized share-based compensation expense related to unvested stock options.

Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period. We also have share grants that are performance-based and time-based that vest upon achievement of certain performance criteria over time.

As of March 31, 2019, total unrecognized share-based compensation expense related to share grants was approximately $40.1 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.1 years.

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 the same customer type. Our primary operations include operations in Asia, North America and Europe. During the three months ended March 31, 2019, no customer accounted for 10% or more or our net sales. During the three months ended March 31, 2018, one customer, a broad-based global distributor that sells to thousands of different end users, accounted for 10.3% or $28.4 million of our net sales. This customer did not account for 10% or greater of our outstanding accounts receivable at March 31, 2018.

The tables below set forth net sales based on the location of the subsidiary producing the net sale.

Delaware		95-2039518
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4949 Hedgcoxe Road, Suite 200, Plano, Texas		75024
(Address of principal executive offices)		(Zip code)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, Par Value $0.66 2/3		DIOD		The NASDAQ Stock Market LLC

		Page
Part I – Financial Information
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30
Part II – Other Information
Item 1. Legal Proceedings		31
Item 1A. Risk Factors		31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3. Defaults Upon Senior Securities		31
Item 4. Mine Safety Disclosures		31
Item 5. Other Information		31
Item 6. Exhibits		32
Signatures		33

	Three Months Ended
	March 31,
	2019	2018
Current assets:
Cash and cash equivalents	$301,167	$182,411
Restricted cash (included in other current assets)	1,140	1,444
Total cash, cash equivalents and restricted cash	$302,307	$183,855

Standard No.	Standard Name	Standard Effective Date
2018-13	Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement	January 1, 2020
2018-14	Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans	January 1, 2020

	March 31, 2019		December 31, 2018
Finished goods	$	55,493	$	59,244
Work-in-progress		64,243		59,166
Raw materials		96,833		97,025
Total	$	216,569	$	215,435

Balance at December 31, 2018	$	132,437
Acquisition		2,570
Foreign currency translation adjustment		662
Balance at March 31, 2019	$	135,669

Amortization expense		2019				2018
Three months ended March 31		$	4,484			$	4,767

Three Months Ended
March 31, 2019	Asia			North America			Europe			Consolidated
Total sales	$	273,900		$	101,280		$	51,052		$	426,232
Intercompany elimination		(73,597	)		(37,916	)		(12,426	)		(123,939	)
Net sales	$	200,303		$	63,364		$	38,626		$	302,293