UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
Or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission file number: 002-25577
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
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)
(972) 987-3900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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
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:
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
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 6, 2024 was 46,122,904.
DIODES INCORPORATED AND SUBSIDIARIES
Table of Contents
Page
Part I – Financial Information
Item 1. Financial Statements (Unaudited)
3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
26
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
27
Signatures
28
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
March 31,
December 31,
2024
2023
Assets
Current assets:
Cash and cash equivalents
$
266,202
315,457
Restricted cash
4,358
3,026
Short-term investments
9,782
10,174
Accounts receivable, net of allowances of $8,254 and $5,641 at March 31, 2024 and December 31, 2023, respectively
391,508
371,930
Inventories
429,363
389,774
Prepaid expenses and other
100,016
97,024
Total current assets
1,201,229
1,187,385
Property, plant and equipment, net
723,478
746,169
Deferred tax assets
50,912
51,620
Goodwill
146,941
146,558
Intangible assets, net
59,952
63,937
Other long-term assets
173,660
171,990
Total assets
2,356,172
2,367,659
Liabilities
Current liabilities:
Lines of credit
48,928
40,685
Accounts payable
149,228
158,261
Accrued liabilities and other
164,570
179,674
Income tax payable
13,283
10,459
Current portion of long-term debt
1,270
4,419
Total current liabilities
377,279
393,498
Long-term debt, net of current portion
19,639
16,979
Deferred tax liabilities
10,509
13,662
Unrecognized tax benefits
34,035
Other long-term liabilities
89,899
99,808
Total liabilities
531,361
557,982
Commitments and contingencies (See Note 9)
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; and 46,114,753 shares and 45,938,383 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
36,936
36,819
Additional paid-in capital
509,401
509,861
Retained earnings
1,689,312
1,675,274
Treasury stock, at cost, 9,286,862 shares and 9,286,862 shares at March 31, 2024 and December 31, 2023, respectively
(337,986
)
Accumulated other comprehensive loss
(149,073
(143,227
1,748,590
1,740,741
Noncontrolling interest
76,221
68,936
Total equity
1,824,811
1,809,677
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
Net sales
301,972
467,241
Cost of goods sold
202,388
272,787
Gross profit
99,584
194,454
Operating expenses
Selling, general and administrative
53,735
70,991
Research and development
33,964
33,232
Amortization of acquisition related intangible assets
3,810
3,852
Gain on disposal of fixed assets
(4,872
(48
Other operating income
(1
Total operating expense
86,636
108,027
Income from operations
12,948
86,427
Other income (expense)
Interest income
4,614
1,772
Interest expense
(532
(2,132
Foreign currency gain (loss), net
972
(1,893
Unrealized gain on investments
370
3,889
Other income
434
530
Total other income (expense)
5,858
2,166
Income before income taxes and noncontrolling interest
18,806
88,593
Income tax provision
3,537
16,616
Net income
15,269
71,977
Less net income attributable to noncontrolling interest
(1,231
(827
Net income attributable to common stockholders
14,038
71,150
Earnings per share attributable to common stockholders:
Basic
0.30
1.56
Diluted
1.54
Number of shares used in earnings per share computation:
46,032
45,600
46,285
46,161
-4-
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Unrealized gain on defined benefit plan, net of tax
1,648
2,706
Unrealized gain (loss) on derivative instruments, net of tax
8,814
(3,342
Unrealized foreign currency (loss) gain, net of tax
(16,308
11,323
Comprehensive income
9,423
82,664
Less: Comprehensive income attributable to noncontrolling interest
Total comprehensive income attributable to common stockholders
8,192
81,837
-5-
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Common stock
Treasury stock
Additional paid-in
Retained
Accumulated other comprehensive
Total Diodes Incorporated stockholders'
Noncontrolling
Total
Shares
Amount
capital
earnings
loss
equity
interest
Balance, December 31, 2023
55,225
(9,287
Total comprehensive income (loss)
(5,846
1,231
Net changes in noncontrolling interest
6,054
Common stock issued for share-based plans
176
117
(117
Share-based compensation
5,049
Tax related to net share settlement
(5,392
Balance, March 31, 2024
55,401
Balance, December 31, 2022
54,751
36,503
(9,282
(337,490
494,773
1,448,092
(128,233
1,513,645
69,274
1,582,919
10,687
827
107
237
158
(158
9,652
(9,669
Balance, March 31, 2023
54,988
36,661
494,598
1,519,242
(117,546
1,595,465
70,208
1,665,673
-6-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash flows from operating activities, net of effects of acquisitions
Depreciation
31,031
29,793
Amortization of intangible assets
Share-based compensation expense
5,072
9,820
Deferred income taxes
(318
(404
Investment gain
(376
(3,829
Gain on disposal of property, plant, and equipment
Other
(3,334
347
Changes in operating assets:
Change in accounts receivable
(17,731
1,544
Change in inventory
(40,435
20,759
Change in other operating assets
3,478
4,964
Changes in operating liabilities:
Change in accounts payable
(9,117
(17,718
Change in accrued liabilities
(15,469
(36,289
Change in income tax payable
2,857
13,932
Change in other operating liabilities
(1,008
1,111
Net cash flows from operating activities
(31,143
99,811
Cash flows from investing activities
Purchases of property, plant, and equipment
(20,381
(48,003
Proceeds from sale of property, plant, and equipment
122
99
Proceeds from short-term investments
1,563
807
Purchases of short-term investments
(1,483
(2,469
Proceeds from sales of securities
417
1,900
1,018
Net cash flows from investing activities
(18,279
(48,131
Cash flows from financing activities
Advances on lines of credit and short-term debt
8,926
8,173
Repayments of lines of credit and short-term debt
(10,139
Proceeds from long-term debt
3,155
263
Repayments of long-term debt
(3,439
(59,061
Repayment of and proceeds from finance lease obligation
(14
(7
Taxes paid related to net share settlement
171
(225
15
Net cash flows from financing activities
3,182
(70,318
Effect of exchange rate changes on cash and cash equivalents
(1,683
3,446
Change in cash and cash equivalents, including restricted cash
(47,923
(15,192
Cash and cash equivalents, beginning of period, including restricted cash
318,483
341,099
Cash and cash equivalents, end of period, including restricted cash
270,560
325,907
-7-
Supplemental Cash Flow Information
Interest paid during the period
463
1,941
Taxes paid during the period
2,562
5,388
Non-cash investing and financing activities:
Accounts payable balance related to the purchase of property, plant, and equipment
11,717
27,113
-8-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Summary of Operations and Significant Accounting Policies
Summary of Operations
Diodes Incorporated, together with its subsidiaries (collectively 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 industrial, automotive, computing, communications, and consumer markets.
The Company’s products include diodes; rectifiers; transistors; MOSFETs; Silicon Carbide (“SiC”) diodes and MOSFETs; protection devices; logic; photocoupler; voltage translators; amplifiers and comparators; sensors; and power management devices such as AC-DC converters, DC-DC switching, linear voltage regulators, voltage references, LED drivers, power switches, and voltage supervisors. We also have timing and connectivity solutions including clock ICs, crystal oscillators, PCIe packet switches, multi-protocol switches, interface products, and signal integrity solutions for high-speed signals.
Diodes’ corporate headquarters and Americas’ sales offices are located in Plano, Texas and Milpitas, California. Design, marketing, and engineering centers are located in Plano and Milpitas, U.S.; Taipei and Taoyuan City, Taiwan; Shanghai and Yangzhou, China; Oldham, England; and Neuhaus, Germany. Diodes’ wafer fabrication facilities are located in South Portland, Maine, U.S., Oldham, England, and Greenock, Scotland; Shanghai and Wuxi, China; and Keelung and Hsinchu, Taiwan. Diodes has assembly and test facilities located in Shanghai, Chengdu, and Wuxi, China; Neuhaus, Germany; and Jhongli, Taiwan. Additional engineering, sales, warehouse, and logistics offices are located in Frankfurt and Munich, Germany; Hong Kong, Shanghai, Beijing, Shenzhen, Wuhan, Yangzhou, and Qingdao, China; Milan, Italy; Oldham, England; Seongnam-si, South Korea; Singapore City, Singapore; Taipei and Kaohsiung, Taiwan; and Tokyo, Japan; with support offices throughout the world.
The Company’s manufacturing facilities have achieved certifications in the internationally recognized standards of ISO 9001:2015, ISO 14001:2015, and, for automotive products, IATF 16949:2016 and the Company is also C-TPAT certified. We believe these quality awards reflect the superior quality-control techniques established at the Company and further enhance our credibility as a vendor-of-choice to original equipment manufacturers ("OEMs") increasingly concerned with quality and consistency.
Our market focus is on high-growth, end-user applications in the following areas:
Basis of Presentation
The condensed consolidated financial data at December 31, 2023 are derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on February 9, 2024 (“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, 2024 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2024.
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
-9-
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.
NOTE 2 – Earnings per Share
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 month periods ended March 31, 2024 and March 31, 2023, 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:
Earnings (numerator)
Shares (denominator)
Weighted average common shares outstanding (basic)
Dilutive effect of stock options and stock awards outstanding
253
561
Adjusted weighted average common shares outstanding (diluted)
Earnings per share attributable to common stockholders
Stock options and stock awards excluded from EPS calculation because the effect would be anti-dilutive
326
75
NOTE 3 – Inventories
The table below sets forth inventories which are stated at the lower of cost or net realizable value:
March 31, 2024
December 31, 2023
Finished goods
169,980
129,802
Work-in-progress
74,432
72,876
Raw materials
184,951
187,096
NOTE 4 – Goodwill and Intangible Assets
The table below sets forth the changes in goodwill:
Balance at December 31, 2023
Acquisition
1,857
Foreign currency translation adjustment
(1,474
Balance at March 31, 2024
-10-
The table below sets forth the value of intangible assets, other than goodwill:
Intangible assets subject to amortization:
Gross carrying amount
250,747
Accumulated amortization
(191,630
(187,820
(8,333
(8,170
Total intangible assets subject amortization
50,784
54,757
Intangible assets with indefinite lives:
10,303
(1,135
(1,123
Total intangible assets with indefinite lives
9,168
9,180
Total intangible assets, net
The table below sets forth amortization expense related to intangible assets subject to amortization:
Amortization expense
Three Months Ended March 31,
NOTE 5 – Income Tax Provision
The table below sets forth information related to our income tax expense:
Domestic pre-tax income
(1,574
54,724
Foreign pre-tax income
20,380
33,869
Effective tax rate
18.8
%
Impact of tax holidays on tax expense
(93
(74
Earnings per share impact of tax holidays:
The effective tax rate for the three months ended March 31, 2024 is consistent when compared to the three months ended March 31, 2023, primarily due to the impact of the geographical mix of pre-tax income and loss across tax jurisdictions relative to the Company’s consolidated pre-tax income on the estimated annual effective income tax rate.
Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to certain 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 2012. We are no longer subject to China income tax examinations by tax authorities for tax years before 2013. 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 2017. 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, 2024, the gross amount of unrecognized tax benefits was approximately $50.5 million.
Several jurisdictions in which we operate have either enacted, or announced plans to enact, legislation consistent with the Organization for Economic Co-operation and Development Global Anti-Base Erosion Model Rules (“Pillar Two”) which introduced a global minimum effective tax rate of 15% applied on a jurisdiction-by-jurisdiction basis. We have analyzed enacted legislation and do not anticipate that it will have a material impact on our effective tax rate for 2024; however, we continue to monitor future tax legislative changes in the jurisdictions in which we operate in order to evaluate the impacts on the consolidated financial statements.
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.
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NOTE 6 – Share-Based Compensation
The table below sets forth information related to our share-based compensation expense:
450
452
3,354
8,362
1,268
1,006
Total share-based compensation expense
Share Grants. Share grants consist of restricted stock awards, restricted stock units (“RSUs”) and performance stock units (“PSUs”). Restricted stock awards and RSUs generally vest in equal annual installments over a four-year period and are measured based on the fair market value of the underlying stock on the date of grant. Compensation expense is recognized on a straight-line basis over the requisite four-year service period. All new grants are awarded under the Company’s 2022 Equity Incentive Plan.
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 three-year performance period, with adjustments made to the expense to recognize the probable payout percentage.
As of March 31, 2024, total unrecognized share-based compensation expense related to share grants was approximately $61.6 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.3 years.
Stock Modification. During the three months ended March 31, 2023 we modified previously granted stock awards for two corporate officers who retired. The result of the modifications resulted in the acceleration of the vesting of 54,525 stock awards for the corporate officers. The incremental expense recorded for this modification was approximately $2.1 million, which was expensed in selling, general, and administrative (“SG&A”) expense in the three months ended March 31, 2023.
NOTE 7 – Enterprise Wide 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, the Americas, and Europe. During the three months ended March 31, 2024, one customer accounted for approximately $42.7 million or 14.2% of our net sales. During the three months ended March 31, 2023, two customers accounted for $51.8 million, or 11.1%, and $51.6 million, or 11.0%, of our net sales. One customer accounted for approximately 17.3% of our outstanding accounts receivable at March 31, 2024. All customers that accounted for 10% or more of our net sales during any period presented in this Quarterly Report on Form 10-Q are broad-based global distributors that sell to thousands of different end users.
Disaggregation of Net Sales. We disaggregate net sales with customers into direct sales to end customers and distribution sales to distributors (“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 the industrial, automotive, computing, consumer, and communications markets. Further, most of our contracts are fixed-price arrangements, and are short term in nature, ranging from days to several months. The tables below set forth net sales based on the location of the subsidiary producing the net sale:
As of and for the
Three Months Ended March 31, 2024
Asia
Americas
Europe
Consolidated
Total sales
329,426
223,773
66,387
619,586
Intercompany elimination
(148,884
(136,430
(32,300
(317,614
180,542
87,343
34,087
Property, plant and, equipment, net
529,187
82,838
111,453
1,617,774
502,459
235,939
Three Months Ended March 31, 2023
424,162
331,407
100,045
855,614
(181,465
(175,151
(31,757
(388,373
242,697
156,256
68,288
550,373
92,729
112,605
755,707
1,590,485
442,763
252,313
2,285,561
-12-
The tables below set forth net sales for the Company disaggregated into geographic locations based on shipment destination and by type (direct sales or Distributor):
For the Three Months Ended March 31,
Net Sales by Region
228,420
324,167
47,450
76,990
26,102
66,084
Total net sales
Net Sales by Type
Direct sales
118,164
134,945
Distributor sales
183,808
332,296
Net sales from products shipped to China was $138.5 million and $179.7 million for the three months ended March 31, 2024 and 2023, respectively.
NOTE 8 – Debt
Borrowings outstanding as of March 31, 2024 and December 31, 2023 are set forth in the table below:
Current Amount
Description
Interest Rate
Maturity
Short-term debt
Various indices plus margin
Various during 2024
Long-term debt
Notes payable to Bank of Taiwan
1,763
1,880
2-yr deposit rate floating plus 0.1148%
June 2033
1,626
2-yr deposit rate floating plus 0.082%
September 2025
Notes payable to CTBC Bank
3,125
3,252
TAIBOR 3M plus 0.5%
March 2026
12,411
13,098
May 2028
Notes payable to E Sun Bank
194
217
1-M deposit rate floating plus 0.08%
July 2027
1,228
1,325
625
September 2026
Total long-term debt
20,909
21,398
Less: Current portion of long-term debt
(1,270
(4,419
Total long-term debt, net of current portion
Our Asia subsidiaries maintain short-term credit facilities with several financial institutions through our foreign entities worldwide totaling $153.1 million as of March 31, 2024. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, and contain no restrictive covenants. These credit facilities bear interest at SOFR or similar indices plus a specified margin. Interest payments are due monthly on outstanding amounts under the credit lines. The unused and available credit under the various short-term credit facilities as of March 31, 2024 was approximately $103.7 million, net of $48.9 million advanced under our foreign credit lines and $0.4 million of credit used for import and export guarantee.
The Company maintains a long-term credit facility (“Credit Agreement”). The Credit Agreement consists of a Revolving Credit Facility in the amount of $225.0 million, including a swing line sublimit equal to the lesser of $50.0 million and the Revolving Credit Facility, a letter of credit sublimit equal to the lesser of $100.0 million and the Revolving Credit Facility, and an alternative currency sublimit equal to the lesser of $40.0 million and the Revolving Credit Facility. The Company has the option to increase the Credit Facility and/or incur Incremental Term Loans in an aggregate principal amount of up to $350.0 million. The Credit Agreement bears interest at Term SOFR or similar other indices plus a specified margin and matures in May 2028. There was no outstanding balance at March 31, 2024.
NOTE 9 – Commitments and Contingencies
Purchase Commitments. We have entered into non-cancelable purchase contracts for capital expenditures, primarily for manufacturing equipment, for approximately $23.5 million at March 31, 2024. As of March 31, 2024, we also had a commitment to purchase approximately $40.2 million of wafers to be used in our manufacturing process. These wafer purchases are scheduled to occur through 2025.
Defined Benefit Plan. We have a contributory defined benefit plan that covers certain employees in the United Kingdom. As of March 31, 2024, the underfunded liability for this defined benefit plan was approximately $10.1 million. We have agreed to a revised schedule of contributions of GBP 2.0 million (approximately $2.6 million based on a GBP: USD exchange rate of 1:1.3) to be paid annually with effect from January 1, 2023 to address the deficit revealed by the valuation (with the annual payments to be made by December 31, 2023 through December 31, 2028). A final payment of GBP 1.5 million (approximately $2.0 million based on a GBP: USD rate of 1:1.3) will be made by December 31, 2029.
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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 and future periods. Based on available 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 we consider 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 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. As of March 31, 2024 and December 31, 2023, we had $400.8 million and $230.4 million, respectively, of outstanding foreign currency forward agreements that are intended 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 Accounting Standards Codification (“ASC”) No. 815.
Hedges of Interest Rate and Net Investment Risk. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, 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. The Company makes use of cross-currency swaps and foreign-currency forward contracts to decrease the foreign exchange risk inherent in the Company’s investment in some of its foreign subsidiaries.
The table below sets forth the fair value of the Company’s derivative financial instruments as well as their classification on our condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023:
Fair Value
Other Assets
Other Liabilities
Cross-currency swaps
2,588
4,497
6,936
Foreign-currency forward contracts
414
5,830
10,202
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:
Operating lease expense
3,533
3,273
Finance lease expense:
Amortization of assets
8
7
Interest on lease liabilities
1
Short-term lease expense
551
178
Variable lease expense
1,245
1,031
Total lease expense
5,338
4,490
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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:
Operating leases:
Operating lease ROU assets
50,746
50,833
Current operating lease liabilities
9,769
8,840
Noncurrent operating lease liabilities
26,404
27,289
Total operating lease liabilities
36,173
36,129
Finance leases:
Finance lease ROU assets
2,715
2,717
(2,585
(2,573
Finance lease ROU assets, net
130
144
Current finance lease liabilities
52
Non-current finance lease liabilities
80
94
Total finance lease liabilities
132
146
Weighted average remaining lease term (in years):
Operating leases
7.3
7.8
Finance leases
3.5
3.6
Weighted average discount rate:
4.1
The table below sets forth supplemental cash flow and other information related to leases:
March 31, 2023
Cash paid for the amounts included in the measurements of lease liabilities:
Operating cash outflows from operating leases
5,241
3,871
Operating cash outflows from finance leases
Financing cash outflow from finance leases
14
ROU assets obtained in exchange for lease liabilities incurred:
3,613
12,616
The table below sets forth information about lease liability maturities:
Operating Leases
Finance Leases
8,469
42
2025
41
2026
6,744
21
2027
4,039
19
2028
1,965
17
2029
1,427
2030 and thereafter
10,020
Total lease payments
42,484
140
Less: imputed interest
(6,311
(8
Total lease obligations
Less: current obligations
(9,769
(52
Long-term lease obligations
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NOTE 12 – Employee Benefit Plans
We maintain a Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) for executive officers, key employees, and members of the Board of Directors. The Deferred Compensation Plan allows eligible participants to defer the receipt of eligible compensation, including equity awards, until designated future dates. We offset our obligations under the Deferred Compensation Plan primarily by investing in the actual underlying investments. At March 31, 2024 and December 31, 2023, these investments totaled approximately $15.8 million and $14.6 million, respectively.
NOTE 13 – Related Parties
We conduct business with the following related parties: Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (“Keylink”), Nuvoton Technology Corporation (“Nuvoton”), Jiyuan Crystal Photoelectric Frequency Technology Ltd. (“JCP”), and Atlas Magnetics, Co. (“Atlas”).
Keylink is a 5% joint venture partner in our Shanghai assembly and test facilities. We sell products to, and purchase inventory from, companies owned by Keylink. In addition, our subsidiaries in China lease their manufacturing facilities in Shanghai from, and subcontract a portion of our manufacturing process (metal plating and environmental services) to, Keylink. We also pay a consulting fee to Keylink.
Warren Chen, a member of the Company’s board of directors serves as a member of the Nuvoton board of directors. We purchase wafers from Nuvoton for use in our production process. We have an agreement to purchase approximately $15.8 million of wafers from Nuvoton that ends in the fourth quarter of 2025. We consider our relationship with Nuvoton to be mutually beneficial, and plan to continue our strategic alliance with Nuvoton.
JCP is a frequency control product manufacturing company from which we purchase material and in which we have made an equity investment that we account for using the equity method of accounting.
Atlas is an early stage privately held fabless wafer design company in which the Company holds a majority interest. The Company determined that Atlas is a variable interest entity (“VIE”) and the Company does not have the power to direct the activities that most significantly impact Atlas. The Company has therefore determined that the Company is not the primary beneficiary. Consequently, we do not consolidate the assets and liabilities of Atlas in the Company’s financial statements. For additional information related to Atlas see Note 14 - Equity Investments - Unconsolidated VIE, below.
The tables below set forth the revenues, expenses, accounts receivable and accounts payable with our related parties:
Keylink:
2,115
3,407
Purchases
356
Plating, rental and consulting expense
3,938
4,425
Nuvoton:
4
1,975
2,978
JCP:
81
Atlas:
389
The table below sets forth accounts receivable from, and accounts payable to, related parties:
Accounts receivable
32,644
34,774
32,510
33,882
1,180
924
89
159
219
133
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Note 14 - Equity Investments
The Company maintains equity investments in companies which are accounted for under the measurement alternative described in ASC 321-10-35-2 for equity securities that lack readily determinable fair values. As of March 31, 2024, the Company had $55.6 million of investments accounted for under the measurement alternative.
Unconsolidated VIE
During July 2021, the Company acquired an interest in Atlas, an early stage privately held fabless wafer design company located in the western United States. The Company’s initial investment in July 2021 was $10.0 million of preferred stock and a $5.0 million convertible promissory note. In April 2023, the Company acquired an additional interest in Atlas by purchasing $13.9 million of preferred stock. The primary purpose for providing the additional investment in Atlas was for continued access to developing technology with potential future benefit to the Company. As part of the April 2023 agreement, the Company’s previously held convertible note converted to $5.2 million of preferred stock and at March 31, 2024, the Company owned more than 50% of Atlas. The Company determined that Atlas is a VIE and a related party. While the Company does own more that 50% of Atlas, according to the voting agreement governing the transaction, the Company does not have the power to control the board of directors or direct the activities that most significantly impact Atlas, including:
• The hiring and firing of officers (i.e., CEO, CFO, etc.) – The hiring and firing of personnel responsible for making the key daily decisions and implementing the strategic operating direction will determine the success the Company has in their initiatives, thereby affecting the economic performance;
• Determining the business plan and budget, including incurring additional indebtedness or issuing additional equity interests – As Atlas is thinly capitalized, the decisions around when and how to obtain cash will influence whether AM can continue operating; and
• Determining the strategic operating direction of Atlas – The decisions made around the significant operating direction of Atlas will significantly impact the overall performance of the Company by determining where and how Atlas limited capital is spent without having significant revenues to keep the Company operating.
As the Company is not the primary beneficiary of Atlas, the Company did not consolidate the assets and liabilities of Atlas in our financial statements and instead accounts for the investment under the measurement alternative described in ASC 321-10-35-2 using the available measurement alternative for equity securities that lack readily determinable fair value. As such, the Company’s investment is measured at cost less impairment, and adjusted to fair value if there are any observable price changes for identical or similar investment of the same issuer.
Atlas is funded through debt and equity. The Company's maximum exposure to loss is limited to its investment in Atlas and notes receivable and accrued interest owed to the Company from Atlas. The following is a summary of the Company’s holdings in Atlas, a VIE, in which we are not the primary beneficiary:
The following is a summary of the Company’s holdings in the Atlas, a VIE, in which we are not the primary beneficiary:
VIE total assets
26,465
26,445
VIE total liabilities
4,709
4,532
Diodes' equity in VIE
44,420
Diodes' note receivable from VIE
4,000
Diodes' interest receivable from VIE
95
45
Diodes' maximum exposure to loss
48,515
48,465
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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 in the subsection “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our most recent Annual Report on Form 10-K, and similar discussions 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 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, 2023 (“Form 10-K”), previously filed with Securities and Exchange Commission (“SEC”) on February 9, 2024.
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. The Company serves the industrial, automotive, computing, communications, and consumer markets. For more information about our product and markets we serve, 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.
Summary for the Three Months Ended March 31, 2024
As of March 31, 2024, our cash, cash equivalents, and short-term investments were $276.0 million, and we had access to additional borrowing capacity of $225.0 million under the revolving portion of our U.S. Credit Agreement. We believe our liquidity and our borrowing capacity will allow us to manage the impacts of the recent industry challenges on our business and to cover our cash needs for working capital, capital expenditures, and acquisitions for at least the next 12 months.
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Results of Operations for the Three Months Ended March 31, 2024 and 2023
The table below sets forth the condensed consolidated statement of operations line items as a percentage of net sales:
Percent of Net Sales
100
(67
(58
33
(29
(23
2
6
(4
5
The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. 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.
Increase/(Decrease)
% Change
(165,269
(35.4
%)
(70,399
(25.8
(94,870
(48.8
(21,391
(19.8
2,842
160.4
(1,600
(75.0
2,865
151.3
(3,519
(90.5
(96
(18.1
(13,079
(78.7
Net sales decreased approximately $165.3 million, or 35.4%, for the three months ended March 31, 2024, compared to the same period last year. Revenue in the three months ended March 31, 2024, reflected the slower than expected recovery in the consumer, computing and communications markets coupled with typical first quarter seasonality due to the Chinese New Year holiday. However, late in the quarter the Company began to experience some signs of demand improvement with distributor inventory levels starting to stabilize. During the three months ended March 31, 2024, the automotive and industrial end markets, combined product revenue remained above the Company’s target model of 40% but continues to be affected by inventory adjustments and softness in certain areas. More broadly, the slower overall demand environment in the quarter contributed to reduced loading at our manufacturing facilities both internal production as well as from our manufacturing service agreements, temporarily impacting gross margin.
During the three months ended March 31, 2024, weighted-average sales price decreased 27.6%, when compared to the same period in 2023.
The table below sets forth our product revenue as a percentage of total product revenue by end-user market for the three months ended March 31, 2024 and 2023:
Industrial
23%
29%
Automotive
18%
Computing
25%
22%
Consumer
20%
Communications
14%
13%
Cost of goods sold decreased approximately $70.4 million for the three months ended March 31, 2024, compared to the same period last year, due to the decreased net sales during the three months ended March 31, 2024. As a percent of sales, cost of goods sold was 67.0% for the three months ended March 31, 2024, compared to 58.4% for the same period last year. Average unit cost decreased
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approximately 16.9% for the three months ended March 31, 2024, compared to the same period last year. For the three months ended March 31, 2024, gross profit decreased approximately 48.8% when compared to the same period last year. Gross profit margin for the three month periods ended March 31, 2024 and 2023 was 33.0% and 41.6%, respectively.
Operating expenses for the three months ended March 31, 2024, decreased $21.4 million when compared to the three months ended March 31, 2023. Operating expenses as a percentage of net sales was 28.7% and 23.1% for the three months ended March 31, 2024 and 2023, respectively. SG&A decreased approximately $17.3 million as compared to the same period last year driven primarily by decreases in wages and selling expenses. These decreases were partially offset by increases in SG&A operating expenses. SG&A, as a percentage of net sales, was 17.8% and 15.2% for the three months ended March 31, 2024 and 2023, respectively. Research and development expenses (“R&D”) increased approximately $0.7 million due to increases in professional services and supplies expenses as compared to the same period last year. R&D, as a percentage of net sales, was 11.2% and 7.1% for the three months ended March 31, 2024 and 2023, respectively. Gain on disposal of fixed assets increased $4.8 million the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.
Interest income increased $2.8 million for the three months ended March 31, 2024, compared to the same period last year due to income earned on financial instruments to hedge the Company’s net investment risk as well as higher interest rates earned on short-term investments. Interest expense decreased $1.6 million, or 75.0% for the three months ended March 31, 2024, compared to the same period last year due to lower debt levels partially offset by higher interest rates. Unrealized gain on investments decreased from 2023 due to mark to market adjustments on investments recorded in 2023 and not repeated in 2024.
We recognized an income tax expense of approximately $3.5 million and $16.6 million for the three months ended March 31, 2024, and 2023, respectively. The decrease in income taxes for 2024 compared to 2023 was primarily attributable to a decrease in pretax book income.
Financial Condition
Liquidity and Capital Resources
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 $318.5 million at December 31, 2023 to $270.6 million at March 31, 2024. This decrease in cash, cash equivalents, and restricted cash reflects normal operations of the Company. As of March 31, 2024, we had short-term investments totaling $9.8 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.
At March 31, 2024 and December 31, 2023, our working capital was $824.0 million and $793.9 million, respectively. We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available borrowing under credit facilities to be sufficient to cover our cash needs for working capital, capital expenditures and acquisitions for at least the next 12 months.
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 March 31, 2024, our foreign subsidiaries held approximately $197.3 million of cash, cash equivalents and investments of which approximately $58.9 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 $58.9 million is held in Germany, China, Korea, and Taiwan.
Our Asia subsidiaries maintain short-term credit facilities with several financial institutions through our foreign entities worldwide totaling $153.1 million. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, and contain no restrictive covenants. These credit facilities bear interest at SOFR or similar indices plus a specified margin. Interest payments are due monthly on outstanding amounts under the credit lines. The unused and available credit under the various facilities as of March 31, 2024, was approximately $103.7 million, net of $48.9 million advanced under our foreign credit lines and $0.4 million of credit used for import and export guarantee.
The Company maintains a long-term credit facility (“Credit Agreement”). The Credit Agreement consists of a Revolving Credit Facility in the amount of $225.0 million, including a swing line sublimit equal to the lesser of $50.0 million and the Revolving Credit Facility, a letter of credit sublimit equal to the lesser of $100.0 million and the Revolving Credit Facility, and an alternative currency sublimit equal to the lesser of $40.0 million and the Revolving Credit Facility. The Company has the option to increase the Revolving Credit Facility and/or incur Incremental Term Loans in an aggregate principal amount of up to $350.0 million. The Credit Agreement bears interest at Term SOFR or similar other indices plus a specified margin and matures in May 2028. There was no outstanding balance under the Credit Agreement at March 31, 2024.
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Because some of our outstanding debt is subject to variable interest rates, the recent rise in interest rates will potentially increase our overall debt service cost. If interest rates continue to rise globally, our cost of capital may increase in the future.
Discussion of Cash Flows
The table below sets forth a summary of the condensed consolidated statements of cash flows:
Operating Activities
Net cash flows used in operating activities for the three months ended March 31, 2024 was $31.1 million. Net cash flows used in operating activities for the three months ended March 31, 2024 resulted from net income of $15.3 million, depreciation and amortization of intangible assets of $34.8 million and share-based compensation of $5.1 million. The increases were offset by a decrease in operating asset and liability accounts of $77.4 million and a gain on disposal of property plant and equipment of $4.9 million. Net cash flows provided by operating activities for the three months ended March 31, 2023 was $99.8 million. Net cash flows provided by operating activities for the three months ended March 31, 2023 resulted from net income of $72.0 million, depreciation and amortization of intangible assets of $33.6 million and share-based compensation of $9.8 million. The increases were partially offset by a decrease in operating asset and liability accounts of $11.7 million and a non-cash investment gain of $3.8 million.
Investing Activities
Net cash and cash equivalents used in investing activities was $18.3 million for the three months ended March 31, 2024. Net cash and cash equivalents used in investing activities for the three months ended March 31, 2024 was primarily due to purchases of property, plant and equipment of $20.4 million, or 6.7% of net sales. We expect capital expenditures for the twelve months ended December 31, 2024 to be within our target model of 5% to 9% of net sales. Net cash and cash equivalents used in investing activities was $48.1 million for the three months ended March 31, 2023. Net cash and cash equivalents used in investing activities for the three months ended March 31, 2023 was primarily due to purchases of property, plant, and equipment of $48.0 million, or 10.3% of net sales, due to the expansion of a wafer fabrication facility located in Hsinchu Science Park in Taiwan.
Financing Activities
Net cash and cash equivalents provided by financing activities was $3.2 million for the three months ended March 31, 2024. Net cash provided by financing activities in the three months ended March 31, 2024 consisted primarily of $8.6 million of net increases in our debt, partially offset by taxes paid on net share settlements of $5.4 million. Net cash and cash equivalents used in financing activities was $70.3 million for the three months ended March 31, 2023. Net cash used in financing activities in the three months ended March 31, 2023 consisted primarily of $60.8 million of net reductions in our debt and taxes paid on net share settlements of $9.7 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 these objectives, 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.
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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.
Hedges of Net Investment Risk
The Company makes use of cross-currency swaps and foreign-currency forward contracts to decrease the foreign exchange risk inherent in the Company’s investment in some of its foreign subsidiaries.
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, 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, 2023, filed with the SEC on February 9, 2024.
Critical Accounting Estimates
Our critical accounting estimates 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, 2023, filed with the SEC on February 9, 2024. Any new accounting estimates or updates to existing accounting estimates 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 estimates 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.
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 in the subsection “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our most recent Annual Report on Form 10-K, and similar discussions 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 Part I. 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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Significant Risks and Uncertainties That may affect Forward-Looking Statements
Risks Related to Our Business
The impact of the continuing COVID-19 pandemic may have a material adverse effect on our business, financial condition, and results of operations.
Shanghai, China experienced government-imposed lockdowns due to a resurgence of the COVID-19 virus.
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.
Our customer orders are subject to cancellation or modification, usually with no penalty. High volumes of order cancellation or reduction in quantities ordered 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.
A significant part of our growth strategy involves acquiring companies and businesses. 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 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 with 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.
Certain of our employees in the U.K. participate in a company-sponsored defined benefit plan which subjects the Company to risks associated with the estimates and assumptions used in calculating expense and funding requirements recorded in the Company’s consolidated financial statements. Inaccuracies or changes in these estimates could require material changes in the expense and funding required.
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.
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.
Risks Related to our International Operations
Our international operations subject us to risks that could adversely affect our operations.
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.
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.
Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws may hinder a take-over attempt.
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General Risks
The invasion of Ukraine by Russia could negatively impact our business.
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.
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.
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, 2023, filed with the SEC on February 9, 2024.
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 March 31, 2024, 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:
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 March 31, 2024, 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, 2023, filed with the Securities and Exchange Commission on February 9, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
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Item 6. Exhibits.
Number
Form
Date of First Filing
ExhibitNumber
FiledHerewith
3.1
Certificate of Incorporation, as amended
10-K
February 20, 2018
3.2
Amended By-laws of the Company as of January 6, 2016
8-K
January 11, 2016
Form of Certificate for Common Stock, par value $0.66 2/3 per share
S-3
August 25, 2005
10.1
Facility Agreement Amendment Deed, dated December 30, 2023, effective January 23, 2024, by and among The Hongkong and Shanghai Banking Corporation Limited, Diodes Hong Kong Limited, and Diodes Incorporated
X
31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification Pursuant to Rule 13a-14(a) /15d-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification Pursuant to 18 U.S.C. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
101.INS
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.
101.SCH
Inline XBRL Taxonomy Extension Schema
104
Cover Page Interactive Data File, formatted in Inline XBRL
*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.
(Registrant)
May 9, 2024
By: /s/ Keh-Shew Lu
Date
KEH-SHEW LU
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Brett R. Whitmire
BRETT R. WHITMIRE
Chief Financial Officer
(Principal Financial Officer)
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