Docoh
Loading...

DIOD Diodes

Filed: 21 Feb 21, 7:00pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

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 No.)

 

 

 

4949 Hedgcoxe Road, Suite 200

Plano, Texas

 

75024

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (972) 987-3900

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

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes     No  

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

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

The aggregate market value of the 42,101,268 shares of Common Stock held by non-affiliates of the registrant, based on the closing price of $50.70 per share of the Common Stock on the Nasdaq Global Select Market on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.1 billion.

The number of shares of the registrant’s Common Stock outstanding as of February 16, 2021 was 44,283,332.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the United States Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A in connection with the 2020 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report. The proxy statement will be filed with the SEC not later than 120 days after the registrant’s fiscal year ended December 31, 2020.

 

 

 

 


 

 

 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

 

  

PART I

  

 

 

 

ITEM 1.

  

BUSINESS

  

 

1

  

ITEM 1A.

  

RISK FACTORS

  

 

10

  

ITEM 1B.

  

UNRESOLVED STAFF COMMENTS

  

 

33

  

ITEM 2.

  

PROPERTIES

  

 

33

  

ITEM 3.

  

LEGAL PROCEEDINGS

  

 

33

  

ITEM 4.

  

MINE SAFETY DISCLOSURES

  

 

33

  

 

 

 

 

  

PART II

 

  

 

 

 

ITEM 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  

 

34

  

ITEM 6.

  

SELECTED FINANCIAL DATA

  

 

36

  

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

 

37

  

ITEM 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

 

46

  

ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  

 

47

  

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  

 

47

  

ITEM 9A.

  

CONTROLS AND PROCEDURES

  

 

47

  

ITEM 9B.

  

OTHER INFORMATION

  

 

48

  

 

 

 

 

  

PART III

 

  

 

 

 

ITEM 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  

 

49

  

ITEM 11.

  

EXECUTIVE COMPENSATION

  

 

49

  

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  

 

49

  

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

  

 

49

  

ITEM 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

  

 

49

  

 

 

 

 

  

PART IV

 

  

 

 

 

ITEM 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  

 

50

  

ITEM 16.    

 

FORM 10-K SUMMARY

 

 

50

 

 

 

 

 


 

 

PART I

 

Item 1.Business.

GENERAL

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. Diodes serves the consumer electronics, computing, communications, industrial, and automotive markets.

Diodes’ products include diodes, rectifiers, transistors, MOSFETs, GPP bridges, GPP Rectifiers, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers. Diodes also has timing, connectivity, switching, and signal integrity solutions for high-speed signals.

Diodes’ corporate headquarters and Americas’ sales office are located in Plano, Texas, and Milpitas, California. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taoyuan City, Zhubei City, Taiwan; Shanghai, Yangzhou, China; Oldham, England; and Neuhaus, Germany. Diodes’ wafer fabrication facilities are located in Oldham, Greenock, UK and Shanghai and Wuxi, China and Keelung and Hsinchu, Taiwan.  Diodes has assembly and test facilities located in Shanghai, Jinan, Chengdu and Wuxi, China as well as in Neuhaus, Germany and Jhongli and Keelung, Taiwan. Additional engineering, sales, warehouse, and logistics offices are located in Taipei, Taiwan; Hong Kong; Oldham, UK; Shanghai, Shenzhen, Wuhan and Yangzhou, China; Seongnam-si, South Korea; and Munich, Frankfurt, Germany; with support offices throughout the world.

The company’s manufacturing facilities have achieved certification in the internationally recognized standards of ISO9001:2015, IATF16949:2016, and ISO14001:2015.

Diodes Incorporated is also C-TPAT certified. 

We believe these Quality Awards reflect the superior quality-control techniques established at Diodes Incorporated and further enhance our credibility as a vendor-of-choice to OEMs increasingly concerned with quality and consistency.

Our product focus is on high-growth end-user equipment markets such as satellite TV set-top boxes, portable DVD players, datacom devices, ADSL modems, power supplies, medical devices (non-life support devices/systems), PCs and notebooks, flat panel displays, digital cameras, mobile handsets, AC-to-DC and DC-to-DC conversion, Wireless 802.11 LAN access points, brushless DC motor fans, serial connectivity, and automotive applications.

Our product line includes over 25,000 products, and we shipped approximately 43 billion units in 2020 and 2019 and approximately 46 billion units in 2018. From 2016 to 2020, our annual net sales grew from $942.2 million to $1.2 billion, representing a compound annual growth rate of approximately 7.7%.

BUSINESS OUTLOOK

During 2020 our annual revenue declined approximately $19.9 million or 1.6% from the revenue level achieved in 2019. This decrease in revenue for 2020 compared to 2019 reflects the impact of the COVID-19 pandemic outbreak on the Company and the world-wide economy. We continue to work towards our previously stated goals for 2025 of $1.0 billion in gross profit which represents $2.5 billion in revenue and a gross margin of 40%. Acquisitions remain a key part of our growth strategy to reach our revenue goal and in November 2020 we acquired Lite-On Semiconductor Corporation (“LSC”) and its subsidiaries.  The acquisition of LSC broadens our discrete product offerings, including providing us with a leadership position in glass-passivated bridges and rectifiers that will allow us to further extend our position in the automotive and industrial market spaces consistent with Diodes’ overall growth strategy.  Further, the acquisition expands our wafer fabrication and assembly and test capacity and provides us an opportunity to improve LSC’s profitability through operating and manufacturing improvements as well as increased factory utilization. 

We have a solid pipeline of designs and expanded customer relationships across all regions and product lines. The success of our business depends on, among other factors, the strength of the global economy and the stability of the financial markets, our customers’ demand for our products, the ability of our customers to meet their payment obligations, the likelihood of customers not canceling or deferring existing orders, and the strength of consumers’ demand for items containing our products in the end-markets we serve. We believe the long-term outlook for our business remains generally favorable, despite the uncertainties in the global economy, as we continue to execute on the strategy that has proven successful for us over the years. See “Management’s Discussion and Analysis of

1 -


 

Financial Condition and Results of Operations – Business Outlook” in Part II, Item 7 and “Risk Factors – The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.” in Part I, Item 1A of this Annual Report for additional information.  

SEGMENT INFORMATION AND ENTERPRISE-WIDE DISCLOSURES

For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various design, manufacturing and distribution facilities. We sell product primarily through our operations in Asia, North America and Europe. See Note 16 of “Notes to Consolidated Financial Statements” of this Annual Report for addition information.

OUR INDUSTRY

Semiconductors are critical components used to manufacture of a broad range of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor processes and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. The availability of low-cost semiconductors, together with increased customer demand for sophisticated electronic systems, has led to the proliferation of semiconductors in diverse end-use applications.

OUR COMPETITIVE STRENGTHS

We believe our competitive strengths include the following:

Flexible, scalable and cost-effective manufacturing – Our manufacturing operations are a core element of our success, and we have designed our manufacturing base to allow us to respond quickly to changes in demand trends in the end-markets we serve. For example, we have structured our assembly and test facilities to enable us to rapidly and efficiently add capacity and adjust product mix to meet shifts in customer demand and overall market trends. Our manufacturing facilities located in Shanghai and Chengdu provide us with access to a workforce at a relatively low overall cost base while enabling us to better serve our leading customers, many of which are located in Asia. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

Integrated packaging expertise – Our expertise in designing and manufacturing innovative and proprietary packaging solutions enables us to package a variety of different device functions into an assortment of packages ranging from miniature chip-scale packaging to packages that integrate multiple separate discrete and/or analog chips into a single semiconductor product called an array. Our ability to design and manufacture multi-chip semiconductor solutions as well as advanced integrated devices provides our customers with products of equivalent functionality with fewer individual parts, and at lower overall cost, than alternative products. This combination of integration, functionality and miniaturization makes our products well suited for high-volume consumer electronic devices such as appliances, chargers, digital cameras, DVD and Blu-Ray players, global positioning devices, lighting, LED televisions, LCD panels, set-top boxes and consumer portables such as smartphones, tablets and notebooks.

Broad customer base and diverse end-markets – Our customers are comprised of leading direct sales customers as well as major electronic manufacturing services (“EMS”) providers. Overall, we serve 334 direct sales customers worldwide and tens of thousands of additional customers through our 121 distributors. Our products are ultimately used in end-products in a number of markets served by our broad customer base, which we believe makes us less susceptible to market fluctuations driven by either specific customers or specific end-user applications.  

Customer-focused product development – Effective collaboration with our customers and a commitment to customer service are essential elements of our business. We believe focusing on dependable delivery and support tailored to specific end-user applications has fostered deep customer relationships and created a key competitive advantage for us in the highly fragmented discrete, logic and analog and mixed-signal semiconductor marketplace. We believe our close relationships with our customers have provided us with keener insight into our customers’ product needs. This results in a stronger demand for our product designs and often provides us with insight into additional opportunities for new design wins in our customers’ products. See “Risk Factors – 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” in Part I, Item 1A of this Annual Report for additional information.

Management experience –The members of our executive team average over 30 years of industry experience, and the length of their service has created significant institutional insight into our markets, our customers and our operations. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

2 -


 

OUR STRATEGY

Our strategy is to continue to enhance our position as a leading global designer, manufacturer and supplier of high-quality application-specific standard semiconductor products, utilizing our innovative and cost-effective assembly and test (packaging) technology and leveraging our process expertise and design excellence to achieve above-market growth in profitability.

The principal elements of our strategy include the following:

Continue to rapidly introduce innovative discrete, logic and analog and mixed-signal semiconductor products – We intend to maintain our rapid pace of new product introductions, especially for high-volume, high-growth applications with short design cycles, such as  LCD and LED televisions and panels, set-top boxes, portables such as smartphones, tablets and notebooks along with other consumer electronics and computing devices, as well as added emphasis on products for the LED lighting market and the industrial and automotive markets. During 2020 and 2019, we continued to achieve many significant new design wins with our direct sales customers. Although a design win from a customer does not necessarily guarantee future sales to that customer, we believe that continued introduction of new and well-defined product solutions is critically important in maintaining and extending our market share in the highly competitive semiconductor marketplace. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

Expand our available market opportunities – We believe we have many paths to increasing our addressable market opportunity. From a product perspective, we intend to continue expanding our product portfolio by developing derivative and enhanced performance devices that target adjacent markets and end-equipment. We will continue to cultivate new and emerging customers within our targeted markets, further increasing our already broad customer base. As we focus on new customers, we try to expand our product portfolio penetration within these new, as well as existing, customers. As we expand our extensive range of high power efficiency and small form factor packages, we plan to introduce new and existing product functions in these new packages to allow an even greater market coverage.

Maintain intense customer focus – We intend to continue to strengthen and deepen our customer relationships. We believe that continued focus on customer service is important and will help to increase our net sales, operating performance and market share. To accomplish this, we intend to continue to closely collaborate with our customers to design products that meet their specific needs. A critical element of this strategy is to further reduce our design cycle time in order to quickly provide our customers with innovative products. Additionally, to support our customer-focused strategy, we continue to expand our sales force and field application engineers, particularly in Asia and Europe, during periods of growth. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

Enhance cost competitiveness – A key element of our success is our overall low-cost manufacturing base. While we believe our manufacturing facilities are among the most efficient in the industry, we will continue to refine our proprietary manufacturing processes and technology to achieve additional cost efficiencies. We have continued to make capital expenditures to enhance our existing manufacturing capabilities.

Pursue selective strategic acquisitions As part of our strategy to expand our semiconductor product offerings and to maximize our market opportunities, we may acquire technologies, product lines or companies in order to enhance our product portfolio and accelerate our new product offerings. Since 2006 we have acquired a number of companies that enhanced our product portfolio, including Pericom Semiconductor Corporation (“Pericom”) in 2015. In 2019, we acquired from Texas Instruments a 200mm wafer fabrication facility and operations located in Greenock, Scotland (“GFAB”).  The acquisition of GFAB adds to our existing global footprint, but also provides expanded wafer capacity to support our product growth, in particular for the automotive market. In November 2020 we acquired Lite-On Semiconductor Corporation (“LSC”) and its subsidiaries.  The acquisition of LSC broadens our discrete product offerings, including providing us with a leadership position in glass-passivated bridges and rectifiers that will allow us to further extend our position in the automotive and industrial market spaces consistent with Diodes’ overall growth strategy.  Further, the acquisition expands our wafer fabrication and assembly and test capacity and provides us an opportunity to improve LSC’s profitability through operating and manufacturing improvements as well as increased factory utilization. 

See “Risk Factors – Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition” in Part I, Item 1A and Note 19 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

OUR PRODUCTS

Our product portfolio includes over 25,000 products that are designed for use in high-volume consumer electronic devices such as LCD and LED televisions and LCD panels, set-top boxes and consumer portables such as smartphones, tablets and notebooks. Our

3 -


 

focus is on low pin count semiconductor devices with one or more active and/or passive components. We target and serve end-equipment markets that we believe have larger volumes than other end-market segments served by the overall semiconductor industry.

Our broad product line includes:

 

Discrete semiconductor products, including: MOSFET, TVS, performance Schottky rectifiers; GPP Bridges, GPP Retifiers performance Schottky diodes; Zener diodes and performance Zener diodes, including tight tolerance and low operating current types; standard, fast, super-fast and ultra-fast recovery rectifiers; bridge rectifiers; switching diodes; small signal bipolar transistors; prebiased transistors; MOSFETs; thyristor surge protection devices; and transient voltage suppressors;;

 

Analog products, including: power management devices such as AC-DC and DC-DC converters, USB power switches, low dropout and linear voltage regulators; standard linear devices such as operational amplifiers and comparators, current monitors, voltage references, and reset generators; LED lighting drivers; audio amplifiers; and sensor products including Hall-effect sensors and motor drivers;

 

Mixed-signal products including:  High speed mux/demux, Digital Switches, Interface, Redelivers, Clock IC, Packet Switches;

 

Standard logic products including low-voltage complementary metal-oxide-semiconductor (“CMOS”) and advanced high-speed CMOS devices; ultra-low power CMOS logic; and analog switches;

 

Multichip products and co-packaged discrete, analog and mixed-signal silicon in miniature packages;

 

Silicon and silicon epitaxial wafers used in manufacturing these products; and

 

Frequency Control Products (“FCP”) used in many of today’s advanced electronic systems. FCPs are electronic components that provide frequency references such as crystals and crystal oscillators for automotive, industrial, computing, communication and consumer electronic products.

The following table lists the end-markets, some of the applications in which our products are used, and the percentage of net sales for each end-market for the last three years:

 End-Markets *

 

2020

 

 

2019

 

 

2018

 

 

End product applications

Industrial

 

23%

 

 

28%

 

 

26%

 

 

Lighting, power supplies, DC-DC conversion, security systems, motor controls, DC fans, proximity sensors, solenoid and relay driving, solar panel, HAVC/LED lighting, retrofit bulb

Consumer Electronics

 

25%

 

 

23%

 

 

25%

 

 

Digital audio players and cameras, set-top boxes, LCD and LED TV’s, game consoles, portable GPS, fitness and health monitors, action cameras, smart watches

Communications

 

21%

 

 

23%

 

 

24%

 

 

Mobile handsets, smartphones, IP in gateways, routers, switches, hubs, fiber optics

Computing

 

20%

 

 

16%

 

 

17%

 

 

Notebooks, tablets, LCD monitors, printers, solid state and hard disk drive, servers, mass storage, cloud

Automotive

 

11%

 

 

10%

 

 

9%

 

 

Comfort controls, lighting, audio/video, GPS navigation, satellite radios, electronics

* Amounts in the table may not total 100% due to rounding

PRODUCT PACKAGING

Our device packaging technology includes a wide variety of innovative surface-mounted packages. Our focus on the development of smaller, more thermally efficient, and increasingly-integrated packaging, is a critical component of our product development. We provide a comprehensive offering of miniature high power density packaging, enabling us to fit our components into smaller and more efficient packages, while maintaining the same device functionality and power handling capabilities. Smaller packaging provides a reduction in the height, weight and board space required for our components.  Our products are well suited for battery-powered, hand-held and wireless consumer electronic applications and high-volume consumer electronic devices such as LCD and LED televisions and LCD panels, set-top boxes and consumer portables such as smartphones, tablets and notebooks.

CUSTOMERS

We serve 334 direct customers worldwide, including major direct sales customers and EMS providers. Additionally, we have 121 distribution customers worldwide, through which we indirectly serve tens of thousands of customers. Our customers represent leading direct sales customers representing a broad range of industries, leading EMS providers and leading distributors.

4 -


 

For the years 2020, 2019 and 2018, our direct sales and EMS customers together accounted for 41%, 33% and 29%, respectively, of our net sales. One customer, a broad-based distributor serving thousands of customers, accounted for 10% or more of our net sales in 2019 and 2018, but not 10% of our outstanding accounts receivable at December 31, 2020 or 2019.  In addition, for information concerning our business with related parties, see “Business – Certain Relationships and Related Party Transactions.”

We believe that our close relationships with our customers have provided us with deeper insight into our customers’ product needs. In addition to seeking to expand relationships with our existing customers, our strategy is to pursue new customers and diversify our customer base by focusing on leading global consumer electronics companies and their EMS providers and distributors. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to certain exceptions, our standard warranty extends for a period of one year from the date of shipment. Warranty expense has not been significant. Generally, our customers may cancel orders on short notice without incurring a penalty. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

The tables below set forth net sales for the Company disaggregated into geographic locations based on shipment and by type (direct sales or distributor) for the twelve months ended December 31, 2020, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales by Type for the Twelve Months Ended December 31,

 

 

Net Sales by Region

 

2020

 

 

2019

 

 

2018

 

 

Asia

 

$

961,376

 

 

$

942,576

 

 

$

944,117

 

 

Europe

 

 

171,985

 

 

 

181,016

 

 

 

138,117

 

 

Americas

 

 

95,854

 

 

 

125,538

 

 

 

131,754

 

 

Total net sales

 

$

1,229,215

 

 

$

1,249,130

 

 

$

1,213,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales by Type

 

2020

 

 

2019

 

 

2018

 

 

Direct sales

 

$

419,024

 

 

$

407,851

 

 

$

346,997

 

 

Distributor sales

 

 

810,191

 

 

 

841,279

 

 

 

866,992

 

 

Total net sales

 

$

1,229,215

 

 

$

1,249,130

 

 

$

1,213,989

 

 

 

Many of our customers are based in Asia or have manufacturing facilities in Asia. Net sales from products shipped to China for the twelve months ended December 31, 2020, 2019 and 2018, was $649.9 million $633.8 million and $662.6 million, respectively.      

SALES AND MARKETING

We market and sell our products worldwide through a combination of direct sales and marketing personnel, independent sales representatives and distributors. We have direct sales personnel in the U.S., the U.K., France, Germany, Korea, Hong Kong, Taiwan and China. We also have independent sales representatives in the U.S., Asia, and Europe. In addition, we have distributors in the U.S., Asia, and Europe. As of December 31, 2020, our direct global sales and marketing organization consisted of approximately 452 employees operating out of 19 offices. We have sales and marketing offices or representatives in Taipei, Taiwan; Shanghai, Shenzhen, Wuhan, Guangzhou, Jinan, Qingdao, China; Gyeonggi, South Korea; Munich, Frankfurt, Germany; Oldham, U.K.; Tokyo, Japan; and Plano, Texas, USA. As of December 31, 2020, we also had approximately 18 independent sales representative firms marketing our products. 

Our marketing group focuses on our product strategy, product development roadmap, new product introduction process, demand assessment and competitive analysis. Our marketing programs include participation in industry tradeshows, technical conferences and technology seminars, sales training and public relations. Our marketing group works closely with our sales and research and development teams to align our product development roadmap. Our marketing group coordinates its efforts with our product development, operations and sales groups, as well as with our customers, sales representatives and distributors. We support our customers through our global field application engineering and customer support organizations.

Our website, www.diodes.com, features an extensive online product catalog with advanced search capabilities. This, coupled with a comprehensive competitor cross-reference search, facilitates quick and thorough product selection.  Our website also provides

5 -


 

easy access to our worldwide sales contacts and customer support and incorporates a distributor-inventory check to provide component inventory availability.

MANUFACTURING OPERATIONS AND FACILITIES

Historically we have operated two assembly and test facilities located in Shanghai, China, two in Chengdu, China and one in Neuhaus, Germany. We have two wafer fabrication facilities located in Shanghai, one 150mm and another capable of both 150mm and 200mm, a 150mm wafer fabrication facility located in Oldham, U.K. and GFAB, a 150mm and 200mm capable wafer fabrication facility located in Greenock, Scotland that we acquired in 2019.  With the acquisition of LSC in 2020 we added four wafer fabrication facilities, two in Taiwan and two in China, and three assembly facilities, two in China and one in Taiwan.

In 2010, we entered into an agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the “CDHT”). In connection with the agreement with CDHT, we formed a joint venture entity with a Chinese company, Chengdu Ya Guang Electronic Company Limited (“Ya Guang”), to establish a semiconductor assembly and test manufacturing facility in Chengdu, China. We currently own approximately 98% of the equity of the joint venture entity. The CDHT granted the joint venture entity a 50-year land lease, provides corporate and employee tax incentives, tax refunds, subsidies and other financial support. We believe this arrangement will be a long-term, multi-year project that will provide us additional capacity as needed. As of December 31, 2020, we have invested in this joint venture approximately $193.7 million, primarily for infrastructure, buildings and equipment-related capital expenditures. For the years ending December 31, 2020 and 2019, our total capital expenditures were approximately $75.8 million and $96.2 million, respectively. The majority of our capital expenditures are in China.

Our manufacturing processes use many raw materials, including silicon wafers, aluminum and copper lead frames, gold and copper wire and other metals, molding compounds and various chemicals and gases. We also rely on equipment and finished product suppliers.  We are continuously evaluating our raw material costs in order to reduce our consumption while protecting and maintaining product performance. We have no material agreements with any of our suppliers that impose minimum or continuing supply obligations. From time to time, suppliers may extend lead-times, limit supplies or increase prices due to capacity constraints or other factors. Although we believe that supplies of the raw materials we use are currently and will continue to be available, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

Our corporate headquarters is located in a facility we own in Plano, Texas. We also lease or own properties around the world for use as sales and administrative offices, research and development centers, manufacturing facilities, warehouses and logistics centers. The size or location of these properties can change from time to time based on our business requirements. See “Properties” in Part I, Item 2 of this Annual Report for additional information.

BACKLOG

The amount of backlog to be shipped during any period is dependent upon various factors, and orders are subject to cancellation or modification, usually with no penalty to the customer. Orders are generally booked from one month to greater than twelve months in advance of delivery. The rate of booking of new orders can vary significantly from month to month. We, and the industry as a whole, continue to experience a trend towards shorter customer-requested lead-times, and we expect this trend to continue. The amount of backlog at any date depends upon various factors, including the timing of the receipt of orders, fluctuations in orders of existing product lines, and the introduction of new product lines. Accordingly, we believe that the amount of our backlog at any date is not an accurate measure of our future sales. We strive to maintain proper inventory levels to support our customers’ just-in-time order expectations.  Our backlog of orders, based on expected ship date, was $618.3 million at December 31, 2020 and $278.7 million at December 31, 2019.

PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY RIGHTS AND LICENSES

We generally rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality agreements, license agreements and policies to protect our intellectual property rights and proprietary technology, and to maintain our competitive position.   Despite these measures, we may not always succeed in protecting our intellectual property or preventing misappropriation of our intellectual property rights.  Other companies may independently develop similar technologies or seek to challenge, invalidate or circumvent our intellectual property rights.  We acquired or licensed or sublicensed to numerous intellectual property rights in connection with our acquisitions over the years.  We have registered several of our trademarks in the U.S. and other countries, and seek to strengthen our brand to distinguish our products in the marketplace.   We maintain a patent portfolio comprised of both U.S. and foreign patents and have patent applications pending in the U.S. and other countries.   We expect to continue to file patent applications in the U.S. and abroad covering technologies and products considered to be important to our business.  We do not believe any individual patent, group of patents, or the expiration thereof would materially affect the operation of our business.   For

6 -


 

proprietary technology or related know-how that is not covered by our patent strategy, we seek to protect them as trade secrets through contracts and policies to maintain their secrecy and confidentiality.

In the ordinary course of business, we may become party to disputes involving intellectual property rights.  When we become aware of companies infringing our intellectual property rights, we seek to enforce our rights through appropriate actions.  We may receive claims of infringement or inquiries regarding possible infringement of the intellectual property rights of others, demands seeking royalty payments or other remedies, or cease and desist letters.  Depending on the situations, we may defend our position, seek to negotiate a license or engage in other acceptable resolution that is appropriate to our business.

We provide limited intellectual property indemnification for certain customers and may experience financial exposure related to intellectual property indemnity claims.  In certain situations, there are limits on our potential indemnification liability; however, we cannot reasonably estimate the amount of potential payments, if any.  Although to date we have not paid any significant amounts for intellectual property indemnity claims, there can be no assurance that we will not face significant exposure in the future.

From time to time, we may license our intellectual property rights in connection with the development or sale of our products.  We may license certain product technology from other companies, but we do not consider any particular licensed technology to be material to our operations or royalties paid by us to be material. We believe the duration and other terms of the licenses are appropriate for our current needs. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

Our foreign operations expose us to unique intellectual property technology risks compared to a company with fewer or no international operations.  For example, we are exposed to potential cyber security breaches that may target our employees or infrastructure outside the United States.  See “Risk Factors – Risks Related to Our International Operations” in Part I, Item 1A of this Annual Report for a more detailed summary of the intellectual property technology risks associated with our international business operations.

This Annual Report may include trade names and trademarks of other companies. Our use or display of other parties’ trade names, trademarks or products is not intended to, and does not imply a relationship with, or endorsement or sponsorship of us by, the trade names or trademark owners. All trademarks appearing in this Annual Report not owned by us are the property of their holders.

COMPETITION

Numerous semiconductor manufacturers and distributors serve the discrete, logic and analog semiconductor components market, making competition intense. Some of our larger competitors include Infineon Technologies A.G.,  ON Semiconductor Corporation, Vishay Intertechnology, Inc, Renesas Electronics Corporation, Texas Instruments, and Nexperia, formerly the Standard Products business of NXP Semiconductors N.V., many of which have greater financial, marketing, distribution, brand name recognition, research and development, manufacturing and other resources than we do. Accordingly, we, from time to time, may reposition product lines or decrease prices, which may affect our sales of, and profit margins on, such product lines. The price, features, availability and quality of our products, and our ability to design products and deliver customer service in keeping with our customers’ needs, determine the competitiveness of our products. We believe that our product focus, packaging expertise and our flexibility and ability to quickly adapt to customer needs affords us competitive advantages. See “Risk Factors – The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.” in Part I, Item 1A of this Annual Report for additional information.

ENGINEERING AND RESEARCH AND DEVELOPMENT

Our engineering and research and development groups consist of applications, circuit design, and product development engineers who assist in determining the direction of our future product lines. One of their key functions is to work closely with market-leading customers to further refine, expand and improve our product portfolio within our target product types and packages. In addition, customer requirements and acceptance of new package types are assessed and new, higher-density and more energy-efficient packages are developed to satisfy customers’ needs.

Product development engineers work directly with our semiconductor circuit design and layout engineers to develop and design products that match our customers’ requirements. We have the capability to capture the customers’ electrical and packaging requirements and translate those requirements into product specifications which can then be designed and manufactured to support customers’ end-system applications.

HUMAN CAPITAL MANAGEMENT

As an international semiconductor company with a global footprint, Diodes recognizes the important role its human capital plays in a talent-based economy, and what the impact of effective and efficient human capital management has on its long-term strategic success and sustainable growth. Our employees are our most critical asset—they contribute to our financial success for the benefit of all our stakeholders, they are the source of great idea generation that fuels the engine of product innovation, and they are collaborators

7 -


 

and contributors to the success of the communities in which we live and work. Human capital management affects many aspects of our operations, including recruitment and talent acquisition, retention, training, workforce optimization, performance management, workplace safety, employee health and wellness, employee engagement, and diversity and inclusion.  

Employee Communication - Developing two–way communications and deploying effective feedback mechanisms are critical components in our employee engagement process. We have an open door policy, and encourage employees to have regular conversations with their managers to share feedback and express concerns. We also solicit employee feedback informally through regular employee interactions. We hold our managers accountable for setting clear expectations and goals with their teams, for providing coaching, as well as identifying professional development opportunities for their teams, and for engaging in periodic performance reviews. We assist our managers with performance management tools as needed to help them effectively manage their teams and optimize workforce productivity. 

Employee Retention, Training and Coaching - Employee retention is a critical element in our sustainable success. To maintain a stable workforce, we provide skill advancement training and coaching, where appropriate, to help our employees enhance their existing skillsets. With our support and preparation, our employees can continue to grow in their current role and maximize the value they contribute to their current teams. Where a suitable rotation opportunity arises, we provide skill expansion training to equip employees for these new positions. By honing their skills, our employees can leverage their institutional knowledge and experience to contribute to the overall success of the organization. The availability of rotational opportunities can also help keep our employees motivated and engaged. 

Employee Safety - As an employer with a global workforce, we seek to provide safe working conditions and encourage our employees to engage in safe behaviors while completing their assigned job duties. We have programs to enhance the occupational health and safety of our employees and to promote employee wellness. These initiatives are designed yield positive business outcomes, such as less absenteeism, more motivated and engaged workforce, higher productivity, more consistent quality performance, and a better corporate image in our local communities—which in turn should help us attract talent and maintain a stable workforce.

Employee Demographics - We regularly review our workforce demographics and organizational structure to ensure that we have an efficient organization positioned to deliver cost-effective, high quality products to our customers and to serve the markets in which we operate. Diversity and inclusion considerations are embodied in many aspects of our operations, including pipeline opportunities.

 As of December 31, 2020, we employed 8,939 employees (including approximately 633 temporary labor or independent contractors). 7,915 of our employees were in Asia, 224 were in the U.S. and 800 were in Europe. The increase in our employee numbers during calendar year 2020 reflects, among other factors, the LSC acquisition in November 2020.  None of our employees in Asia or the U.S. are subject to a collective bargaining agreement and in Europe all our employees are covered by individual employment agreements with some collective bargaining agreements in place. We consider our relations with our employees to be satisfactory. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

ENVIRONMENTAL MATTERS

We are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in our manufacturing process in China and the U.K. where our wafer fabrication facilities are located, and in China, Taiwan and Germany where our assembly and test facilities are located. Any of these regulations could require us to acquire equipment or to incur substantial other costs to comply with environmental regulations or remediate problems. For the years ended December 31, 2020, 2019 and 2018, our capital expenditures for environmental controls have not been material. See “Risk Factors – 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.” in Part I, Item 1A of this Annual Report for additional information.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We conduct business with one related company, Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, “Nuvoton”). LSC was a related company until we acquired it in November 2020.  We conduct business with Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (collectively, “Keylink”).  Keylink is our 5% joint venture partner in our two Shanghai assembly and test facilities.  In addition, Ya Guang is our 2% joint venture partner in one of our Chengdu assembly and test facilities and our 5% joint venture partner in our other Chengdu assembly and test facility; however, we have no material transactions with Ya Guang, other than the joint venture.

Raymond Soong, the former Chairman of the Board of Directors of Diodes, was the Chairman of LSC, and was the Chairman of Lite-On Technology Corporation (“LTC”), which was a significant shareholder of LSC. C.H. Chen, our former President and Chief Executive Officer and currently the Vice Chairman of the Board of Directors, was also Vice Chairman of LSC and a board member of LTC. Dr. Keh-Shew Lu, our current Chairman of the Board of Directors, President and Chief Executive Officer, is a board member of

8 -


 

LTC, and a board member of Nuvoton. We consider our relationships Nuvoton to be mutually beneficial and we plan to continue our strategic alliance with Nuvoton.  We purchase wafers from Nuvoton for use in our production process. We also conduct business with Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, “Nuvoton”).   Dr. Keh-Shew Lu, our Chairman, President and Chief Executive Officer, is a board member of Nuvoton. We considered our relationship with Nuvoton to be mutually beneficial and we plan to continue our strategic alliance Nuvoton.  We purchase wafers from Nuvoton for use in our production process.

The Audit Committee of our Board of Directors reviews all related party transactions for potential conflict of interest situations on an ongoing basis. We believe that all related party transactions are on terms no less favorable to us than would be obtained from unaffiliated third parties.

OTHER INFORMATION

We were incorporated in 1959 in California and reincorporated in Delaware in 1968.

SEASONALITY

Historically, our net sales have been affected by the cyclical nature of the semiconductor industry, whereby typically the fourth quarter is the quarter of the calendar year with the smallest revenue.   In addition, our net sales have been subject to some seasonal variation with weaker net sales in the first and fourth calendar quarters. See Note 20 (unaudited) of “Notes to Consolidated Financial Statements” of this Annual Report for additional information on our quarterly results.

AVAILABLE INFORMATION

Our website address is http://www.diodes.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).

The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC.

Our website also provides investors access to financial and corporate governance information including our corporate governance guidelines, Code of Business Conduct, whistleblower hotline, and press releases. The contents of our website and any other information accessible through our website are not incorporated by reference into this Annual Report on Form 10-K.

Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995

Many of the statements, included in this Annual Report on Form 10-K, contain forward-looking statements and forward-looking information relating to our company. 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,” “project,” or similar phrases or the negatives of such terms. We base these statements on our management’s beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in the “Risk Factors” section of this Annual Report and the “Risk Factors” section of other documents we file with the SEC, as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.  Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements, made on this Annual Report on Form 10-K, are made pursuant to the Act.

 

 

 

 

 

9 -


 

 

Item 1A.  Risk Factors.

Investing in our Common Stock involves a high degree of risk. You should carefully consider the following risks and other information in this Annual Report before you make any trading decisions regarding our Common Stock. Our business, financial condition or operating results may suffer if any of the following risks are realized. Additional risks and uncertainties not currently known to us may also adversely affect our business, financial condition or operating results. If any of these risks or uncertainties occurs, the trading price of our Common Stock could decline and you could lose part or all of your investment.  

Summary

RISKS RELATED TO OUR BUSINESS

The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.

During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a negative impact on our business, operating results and financial condition.

Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating results and financial condition.

The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.

Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial condition.

We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth and profit margins.

Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales and may demand to audit our operations from time to time.  A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition.

Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.

New technologies could result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, operating results and financial condition.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our business, operating results and financial condition.

We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner.

If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition.

Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.

We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition.

We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, operating results and financial condition.

We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations.  

10 -


 

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.

If our direct sales customers or our distributors’ customers do not design our products into their applications, our net sales may be adversely affected.

We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which could adversely affect our business, operating results and financial condition.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or our counterparties might not perform as agreed.

We may have a significant amount of debt with various financial institutions worldwide. Any indebtedness could adversely affect our business, operating results, financial condition and our ability to meet payment obligations under such debt.

Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.

Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition.

We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial condition.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.

Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.

Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.

Compliance with government regulations and customer demands regarding the use of “conflict minerals” may result in increased costs and may have a negative impact on our business, operating results and financial condition.

There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our Common Stock.

RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

Our international operations subject us to risks that could adversely affect our operations.

We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results.

11 -


 

Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with ours or displace our products and components, resulting in an adverse impact on our Chinese business.

The U.K.’s exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would have a material adverse effect on our business, operating results and prospects.

Economic regulation in China could materially and adversely affect our business, operating results and prospects.

We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act, the U.K.’s Bribery Act 2010, China’s anti-corruption campaign and similar worldwide anti-bribery laws.

We are subject to foreign currency risk as a result of our international operations.

China is experiencing rapid social, political and economic change, which has increased labor costs and other related costs that could make doing business in China less advantageous than in prior years. Increased labor costs in China could adversely affect our business, operating results and financial condition.

We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net income.

The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net income.

We could be adversely affected by the compromise or theft of our technology, know-how, data or intellectual property or a requirement that we yield rights in technology, know-how, data stored in foreign jurisdictions or intellectual property that we use in such foreign jurisdictions.

RISKS RELATED TO OUR COMMON STOCK

Variations in our quarterly operating results may cause our stock price to be volatile.

We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the price of our Common Stock.

Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters.

We were formed in 1959, and our early corporate records are incomplete. As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.

Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities.

Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-over attempt.

Section 203 of Delaware General Corporation Law may deter a take-over attempt.

12 -


 

Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.

GENERAL RISK FACTORS

The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.

Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S. or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and adversely affect our stock price.

RISKS RELATED TO OUR BUSINESS

The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world (including countries where we maintain operations), and the duration, severity of its effects and ultimate impact to the world’s population and financial impact are currently unknown. National, state and local governments have responded to the COVID-19 pandemic in a variety of ways including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), ordering businesses to close or limit operations and ordering people to stay at home (i.e., shelter in place), and imposing travel restrictions (including quarantine requirements).

Given these governmental actions, there is no assurance that we will be permitted to operate under every current or future government order or other restriction and in every location where we maintain operations and may be required to limit our operations at, or close, certain locations in the future. Any such long-term limitations or closures would have a material adverse impact on our ability to service our customers and on our business, financial condition and results of operations.  In particular, any long-term limitations on, or long-term closures of, our manufacturing facilities in Asia or Europe would have a negative adverse impact on our ability to manufacture, sell and ship products and service customers and would have a material adverse impact on our business, financial condition and results of operations. In the first quarter of 2020, following the extended Chinese New Year, we delayed the start of our manufacturing production in China and at the end of the first quarter of 2020 we temporarily closed our wafer fabrication facilities located in the United Kingdom. As of the date of this report, our operations in China and the United Kingdom have both resumed full production.  However, we can provide no assurances that those facilities or any of our other facilities may not suffer similar closures or disruptions in the future.

While the Company has already experienced negative impacts from the COVID-19 pandemic to its results of operations, cash flows and financial condition, in light of the current level of uncertainty over the economic and operational impacts of COVID-19 we cannot reasonably estimate the total impact that COVID-19 will have on our results of operations, cash flows or financial condition at this time. Risks and complications in the Company’s business from COVID-19 include, but are not limited to, changes in ordering patterns and demand for our products and losses in efficiency due to travel limitations and regulations compelling employees to work from home.  While the Company has not experienced a material increase in technology spending, if employees are forced to continue working remotely it could become necessary to increase information technology spending.  Although the Company has not experienced a significant business disruption due to teleworking arrangements, the imposition of increased self-isolation protocols could negatively impact the ability of employees to travel to the Company’s production facilities and possibly create ongoing business disruptions.  The limitations could negatively affect the Company’s ability to produce, sell and transport its products.  The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of net sales and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, the Company’s goodwill, long-lived asset valuation and indefinite-lived intangible asset valuation; inventory valuation;

13 -


 

equity investment valuation; assessment of the annual effective tax rate; valuation of deferred income taxes and income tax contingencies; the allowance for doubtful accounts; measurement of compensation cost for certain share-based awards and cash bonus plans; and pension plan assumptions. In addition, depending on the extent and duration of the COVID-19 pandemic, healthcare insurance premiums could increase, increasing our healthcare costs.

In addition, the COVID-19 pandemic may cause disruptions, and in some cases severe disruptions, to the business and operations of our suppliers and customers as a result of quarantines, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.  Certain of our customers and suppliers may in the future be required to close down or operate at a lower capacity, which would adversely impact our business, financial condition and results of operations. Because of the rapid onset of the COVID-19 pandemic, some of our customers could experience financial difficulties resulting in such customers being unable to pay for products they ordered from us before the COVID-19 pandemic emerged. There can be no assurance that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future.

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.

The semiconductor industry is characterized by high fixed costs. Notwithstanding our utilization of third-party manufacturing capacity, most of our production requirements are met by our own manufacturing facilities. In difficult economic environments, we could be faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. During such periods, our manufacturing facilities do not operate at full capacity and the costs associated with this excess capacity are expensed immediately and not capitalized into inventory. When our utilization rates decline to abnormally low production levels, we generally experience lower gross margins. The market conditions in the future may adversely affect our utilization rates and consequently our future gross margins, and this, in turn, could have a material 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 industry is highly cyclical, and periodically experiences significant economic downturns characterized by diminished product demand, production overcapacity and excess inventory, which can result in rapid erosion in average selling prices. From time to time, the semiconductor industry experiences order cancellations and reduced demand for products, resulting in significant net sales declines, due to excess inventories at end-equipment manufacturers and general economic conditions, especially in the technology sector. The market for semiconductors may experience renewed, and possibly more severe and prolonged downturns, which may harm our operating results and financial condition.

In addition, we operate in a few narrow markets of the broader semiconductor market and, as a result, cyclical fluctuations may affect these segments to a greater extent than they affect the broader semiconductor market. This may cause us to experience greater fluctuations in our operating results and financial condition than compared to some of our broad line semiconductor competitors. In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, changes in end-user markets and the costs associated with the introduction of new products. The markets for our products depend on continued demand in the consumer electronics, computing, communications, industrial and automotive sectors. These end-user markets also tend to be cyclical and may also experience changes in demand that 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.

14 -


 

The semiconductor industry in which we operate is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability, technological innovation and customer service. We compete in various markets with companies of various sizes, many of which are larger and have greater resources or capabilities as it relates to financial, marketing, distribution, brand name recognition, research and development, manufacturing and other resources than we have. As a result, they may be better able to develop new products, market their products, pursue acquisition candidates and withstand adverse economic or market conditions. Most of our current major competitors are broad line semiconductor manufacturers who often have a wider range of product types and technologies than we do. In addition, companies not currently in direct competition with us may introduce competing products in the future. Some of our current major competitors are Infineon Technologies A.G., Nexperia, formerly the Standard Products business of NXP Semiconductors N.V., ON Semiconductor Corporation, Rohm Electronics USA, LLC, Toshiba Corporation and Vishay Intertechnology, Inc. We may not be able to compete successfully in the future, and competitive pressures 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.

Our manufacturing efficiency has been and will be an important factor in our future profitability, and we may not be able to maintain or increase our manufacturing efficiency. Our manufacturing and testing processes are complex, require advanced and costly equipment and are continually being modified in our efforts to improve product performance and cost. Difficulties in the manufacturing process can lower yields. Technical or other problems could lead to production delays, order cancellations and lost net sales. In addition, any problems in achieving acceptable yields, construction delays, or other problems in upgrading or expanding existing facilities, building new facilities, bringing new manufacturing capacity to full production or changing our process technologies, could also result in capacity constraints, production delays and a loss of future net sales and customers. Our operating results also could be adversely affected by any increase in fixed costs and operating expenses related to increases in production capacity if net sales do not increase proportionately, or in the event of a decline in demand for our products.  Any disruption at any of our wafer fabrication facilities or assembly and test facilities could have a material adverse effect on 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.

Prices for our products tend to decrease over their life cycle. There is substantial and continuing pressure from customers to reduce the total cost of purchasing our products. To remain competitive and retain our customers and gain new ones, we must continue to reduce our costs through design, product and manufacturing improvements. We must also strive to minimize our customers’ shipping and inventory financing costs and to meet their other goals for rationalization of supply and production. Our net sales growth and profit margins will suffer if we cannot effectively continue to reduce our costs and keep our product prices competitive.

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.

Prior to purchasing our products, our customers may require our products to undergo an extensive qualification process, which involves rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does not ensure any sales of the product to that customer. In addition, we are focusing more on the automotive and industrial markets. These markets, automotive in particular, require higher quality standards.  Although we are working to ensure our organization and products meet the more rigorous quality standards, there can be no assurances we will succeed.  Even after successful qualification and sales of a product to a customer, a subsequent revision to the product, changes in the product’s manufacturing process or the selection of a new supplier by us may require a requalification process, which may result in delayed net sales, foregone sales and excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may adversely affect our net sales, operating results and financial condition.

15 -


 

In addition, from time to time, our customers may demand an audit of our records, product manufacturing, qualification, and packaging processes, business practices and other related items to verify that we have complied with our business obligations, standard processes and procedures, product specifications and certain governing laws and regulations related to our business practices, and in accordance with the agreed terms and conditions of mutual business agreements.  If the audit shows any deficiency in any of these categories, our customers may require us to implement extensive protocols to remedy the deficiency, assess us significant penalties, refuse shipments of our products, return existing inventory, cancel orders, or terminate our business relationship, each of which will 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.

All of our customer orders are subject to cancellation or modification, usually with no penalty to the customer. Orders are generally made on a purchase order basis, rather than pursuant to long-term supply contracts, and are booked from immediate delivery to twelve months or more in advance of delivery. The rate of booking new orders can vary significantly from month to month. We, and the semiconductor industry as a whole, are experiencing a trend towards shorter customer-requested lead times, which is the amount of time between the date a customer places an order and the date the customer requires shipment. Furthermore, our industry is subject to rapid changes in customer outlook and periods of excess inventory due to changes in demand in the end-markets our industry serves. As a result, many of our purchase orders are revised, and may be cancelled, with little or no penalty and with little or no notice. However, we must still commit production and other resources to fulfilling these purchase orders even though they may ultimately be cancelled. If a significant number of purchase orders are cancelled or product quantities ordered are reduced, and we are unable to timely generate replacement orders, we may build up excess inventory and our net sales, operating results and financial condition may suffer.

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.

Our product range and new product development program are focused on low pin count semiconductor devices with one or more active or passive components. Our failure to develop new technologies, or anticipate or react to changes in existing technologies, either within or outside of the semiconductor market, could materially delay development of new products, which could result in a decrease in our net sales and a loss of market share to our competitors. The semiconductor industry is characterized by rapidly changing technologies and industry standards, together with frequent new product introductions. This includes the development of new types of technology or the improvement of existing technologies, such as analog and digital technologies that compete with, or seek to replace, discrete semiconductor technology. Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and product enhancements on a timely and cost-effective basis. New products often command higher prices and, as a result, higher profit margins. We may not successfully identify new product opportunities or develop and bring new products to market or succeed in selling them into new customer applications in a timely and cost-effective manner.

Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive, and since we operate primarily in a narrower segment of the broader semiconductor industry, this may have a greater effect on us than it would if we were a broad-line semiconductor supplier with a wider range of product types and technologies. Many of our competitors are larger and more established international companies with greater engineering and research and development resources than us. Our failure to identify or capitalize on any fundamental shifts in technologies in our product markets, relative to our competitors, could harm our business, have a material adverse effect on our competitive position within our industry and harm our relationships with our customers. In addition, to remain competitive, we must continue to reduce package sizes, improve manufacturing costs and expand our sales. We may not be able to accomplish these goals, 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.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted, and may in the future assert, patent, copyright, trademark and other intellectual property rights to technology that is important to our business and have demanded, and may in the future demand, that we license their patents and technology. Any litigation to determine the validity of allegations that our products infringe or may infringe these rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We may not prevail in litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If litigation results in an adverse ruling, we could be required to:

 

 

pay substantial damages for past, present and future use of the infringing technology;

 

cease manufacture, use or sale of infringing products;

16 -


 

 

 

discontinue the use of infringing technology;

 

expend significant resources to develop non-infringing technology;

 

pay substantial damages to our customers or end-users to discontinue use or replace infringing technology with non-infringing technology;

 

license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms, or at all; or

 

relinquish intellectual property rights associated with one or more of our patent claims, if such claims are held invalid or otherwise unenforceable.

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.

Our manufacturing operations depend upon obtaining adequate supplies of raw materials, manufacturing services, product and process development, parts and equipment on a timely basis from third parties. In some instances, a supplier may be our sole-source supplier.  Our operating results could be adversely affected if we are unable to obtain adequate supplies of raw materials, manufacturing services, product and process development, parts and equipment in a timely manner or if the costs charged to us were to increase significantly. Our business could also be adversely affected if there is a significant degradation in the quality of raw materials used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which could lead to an increase in customer returns or product warranty claims. Although we maintain rigorous quality control systems, errors or defects may arise from a supplied raw material and be beyond our detection or control. In addition, we may be subject to quality claims from customers who purchased goods from companies before we acquired those companies.  Any interruption in, or change in quality of, the supply of raw materials, manufacturing services, product and process development, parts or equipment needed to manufacture our products could adversely affect our reputation with customers, operating results and financial condition.

In addition, we sell finished products from other manufacturers. Our business could also be adversely affected if there are quality problems with the finished products we sell. From time to time, various suppliers may extend lead-times, limit supplies or increase prices due to capacity constraints or other factors. We have no long-term purchase contracts with any of these manufacturers and, therefore, have no contractual assurances of continued supply, pricing or access to finished products that we sell, and any such manufacturer could discontinue supplying to us at any time. Additionally, some of our suppliers of finished products or wafers compete directly with us and may, in the future, choose not to supply products to us.

If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition.

We are continuing to vertically integrate our business. Key elements of this strategy include continuing to expand our sales organization, manufacturing capacity, wafer foundry and research and development capability and expand our marketing, product development, package development and assembly and test operations in company-owned facilities or through the acquisition of established contractors. There are certain risks associated with our vertical integration strategy, including:

 

 

difficulties associated with owning a manufacturing business, including, but not limited to, the maintenance and management of manufacturing facilities, equipment, employees and inventories and limitations on the flexibility of controlling overhead;

 

difficulties in continuing expansion of our operations in Asia and Europe, because of the distance from our U.S. headquarters and differing regulatory and cultural environments;

 

the need for skills and techniques that are outside our traditional core expertise;

 

less flexibility in shifting manufacturing or supply sources from one region to another;

 

even when independent suppliers offer lower prices, we may continue to source wafers from our captive manufacturing facilities, which may result in us having higher costs than our competitors;

 

difficulties developing and implementing a successful research and development team; and

 

difficulties developing, protecting, and gaining market acceptance of, our proprietary technology.

The risks of becoming a fully integrated manufacturer are amplified in an industry-wide slowdown because of the fixed costs associated with manufacturing facilities. In addition, we may not realize the cost, operating and other efficiencies that we expect from continued vertical integration. If we fail to successfully vertically integrate our business, our ability to compete, profit margins, operating results and financial condition may suffer.

17 -


 

Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.

A significant part of our growth strategy involves acquiring companies. For example, (i) in 2000, we acquired FabTech, Inc., a wafer fabrication company, in order to have our own wafer manufacturing capabilities, (ii) in 2006, we acquired Anachip Corp. as an entry into the analog market, (iii) in 2006, we acquired the net operating assets of APD Semiconductor, Inc., (iv) in 2008, we acquired Zetex plc., (v) in 2012, we acquired over 50% of the outstanding common stock of Eris Technology Corporation, (vi) also in 2012, we acquired Power Analog Microelectronics, Inc., (vii) in 2013, we acquired BCD Semiconductor Manufacturing Limited  (viii) in 2015, we acquired Pericom Semiconductor Corporation, (vii) in 2019 we acquired Texas Instruments’ 200mm wafer fabrication facility and operations located in Greenock, Scotland and (viii) in November of 2020 we acquired LSC.  In addition, from time to time, we may be in various stages of discussions with potential acquisition targets as we intend to continue to expand and diversify our operations by making further acquisitions. However, we may be unsuccessful in identifying suitable acquisition candidates, or we may be unable to consummate a desired acquisition. To the extent we do make acquisitions, if we are unsuccessful in integrating these companies or their operations or product lines with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our business, operating results and financial condition. In addition, we may not realize all of the benefits we anticipate from any such acquisitions. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from acquisitions that we may make include those associated with:

 

unexpected losses of key employees or customers of the acquired company;

 

delays in obtaining customer qualification of acquired facilities;

 

bringing the acquired company’s standards, processes, procedures and controls into conformance with our operations;

 

coordinating our new product and process development;

 

hiring additional management and other critical personnel;

 

increasing the scope, geographic diversity and complexity of our operations;

 

difficulties in consolidating facilities and transferring processes and know-how;

 

difficulties in reducing costs of the acquired entity’s business;

 

diversion of management’s attention from the management of our business; and

 

adverse effects on existing business relationships with customers.

We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition.

All industries, including the semiconductor industry, are subject to legal claims, with and without merit, including securities class action litigation that may be particularly costly and which may divert the attention of our management and our resources in general. We are involved in a variety of legal matters, most of which we consider either routine matters that arise in the normal course of business or immaterial for our aggregate business operations. These routine matters typically fall into broad categories such as those involving suppliers and customers, employment and labor, and intellectual property. We believe it is unlikely that the final outcome of these legal claims will have a material adverse effect on our financial position, operating results or cash flows. However, defense and settlement costs can be substantial, even with respect to claims that we believe have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding could adversely affect our business, operating results and financial condition.

From time to time, we have been, or may in the future be, involved in securities litigation or litigation arising from our acquisitions. We can provide no assurance as to the outcome of any such litigation matter in which we are a party. These types of matters are costly to defend and even if resolved in our favor, could have a material adverse effect on our business, financial condition, operating results and cash flow. Such litigation could also substantially divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of securities or other litigation could harm our ability to obtain credit and financing for our operations and to compete in the marketplace. Because the price of our Common Stock has been, and may continue to be, volatile, we can provide no assurance that securities litigation will not be filed against us in the future. In addition, we can provide no assurance that our past or future acquisitions will not subject us to additional litigation. See Part I, Item 3 “Legal Proceedings” of this Annual Report for more information on our legal proceedings.

18 -


 

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 are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in manufacturing our products throughout the world. Some of these regulations in the U.S. include the Federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes and regulations. Any of these regulations could require us to acquire equipment or to incur substantial other expenses to comply with environmental regulations. If we were to incur additional expenses related to any potential or alleged violation or environmental regulations, our product costs could significantly increase, materially affecting our business, financial condition and operating results. Any failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations, any of which could have a material adverse effect on our business, operating results and financial condition. Our operations affected by such requirements include, among others: the disposal of wastewater containing residues from our manufacturing operations through publicly operated treatment works or sewer systems, and which may be subject to volume and chemical discharge limits and may also require discharge permits; and the use, storage and disposal of materials that may be classified as toxic or hazardous. Any of these may result in, or may have resulted in, environmental conditions for which we could be liable.

Some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on, or emanating from, our currently or formerly owned, leased or operated properties, as well as for damages to property or natural resources and for personal injury arising out of such contamination. Such liability may also be joint and several, meaning that we could be held responsible for more than our share of the liability involved, or even the entire liability. In addition, the presence of environmental contamination could also interfere with ongoing operations or adversely affect our ability to sell or lease our properties. Environmental requirements may also limit our ability to identify suitable sites for new or expanded plants. Discovery of contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur additional costs for compliance or subject us to unexpected financial liabilities.

We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations. 

Stakeholders such as investors, employees and the communities in which we operate have increased their focus on our ESG and sustainability related activities, specifically in the corporate social and environmental responsibility (“CSER”) areas.  Some investors may use our ESG and sustainability related information as well as the ESG ratings and metrics to guide their investment strategies and measure our corporate performance.  Potential and current investors may decrease or withdraw investment, or alternatively increase investment in our competitors if our CSER performance is perceived to be less than our competitors’ CSER performance. The qualitative and quantitative criteria adopted or published by third party ESG rating agencies and standards organization may continue to evolve.  We may incur additional costs to satisfy these evolving expectations and criteria, and may face additional risks associated with emerging regulations governing CSER performances.  We may communicate certain goals and projects regarding our CSER activities from time to time.  If we are unable to meet those goals or are perceived to fail to meet the goals as planned, or if our CSER policies and practices are perceived to be inadequate, we could face reputational damages and our financial results may be adversely affected.

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.

Our products, or products we purchase from third parties for resale, are typically sold at prices that are an insignificant portion of the overall value of the equipment or other goods in which they are incorporated. For example, our products that are incorporated into a television may be sold for several cents, whereas the television maker might sell the television for several hundred dollars. Although we maintain rigorous quality control systems, we receive warranty claims and product liability claims for some of these products that are defective, or that do not perform to published specifications. Since a defect or failure in our products could give rise to failures in the end-products that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the net sales and profits we receive from the products involved and we may not have recourse against our suppliers. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business. Even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill or to settle claims to avoid protracted litigation. Our operating results and business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay for the damages that result. We may choose not to carry liability insurance, may not have sufficient insurance coverage, or may not have sufficient resources, to satisfy all possible warranty claims and product liability claims. In addition, any perception that our products are defective would likely result in reduced sales of our products, loss of customers and harm to our business, reputation, operating results and financial condition.

19 -


 

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.

Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing, finance and managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with these skills is intense. We may not be able to retain existing key technical, sales, marketing, finance and managerial employees or be successful in attracting, assimilating or retaining other highly qualified technical, sales, marketing, finance and managerial/executive personnel in the future. For example, we have faced, and continue to face, intense competition for qualified technical and other personnel in China, where our assembly and test facilities are located. A number of U.S. and multi-national corporations, both in the semiconductor industry and in other industries, have recently established and are continuing to establish factories and plants in China, and the competition for qualified personnel has increased significantly as a result. If we are unable to retain existing key employees or are unsuccessful in attracting new highly qualified employees, our business, operating results and financial condition could be materially and adversely affected.

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.

Our ability to successfully grow our business requires effective planning and management. Our past growth, and our targeted future growth, may place a significant strain on our management and on our systems and resources, including our financial and managerial controls, reporting systems and procedures. In addition, we will need to continue to train and manage our workforce worldwide. If we are unable to effectively plan and manage our growth effectively, our business and prospects will be harmed and we will not be able to maintain our profitable growth, 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.

The life cycles of some of our products depend heavily upon the life cycles of the end-products into which our products are designed. End-market products with short life cycles require us to manage closely our production and inventory levels. Inventory may also become obsolete because of adverse changes in end-market demand. We may in the future be adversely affected by obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for our products or the estimated life cycles of the end-products into which our products are designed. In addition, some customers restrict how far back the date of manufacture for our products can be and certain customers may stop ordering products from us and go out of business due to adverse economic conditions; therefore, some of our product inventory may become obsolete and, thus, adversely affect our business, operating results and financial condition.

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 expect an increasingly significant portion of net sales will come from products we design specifically for our customers. However, we may be unable to achieve these design wins. In addition, a design win from a customer does not guarantee future sales to that customer. Without design wins from direct sales customers, we would only be able to sell our products to these direct sales customers as a second source, which usually means we are only able to sell a limited amount of product to them. Once a direct sales customer designs another supplier’s semiconductors into one of its product platforms, it is more difficult for us to achieve future design wins with that direct sales customer’s product platform because changing suppliers involves significant cost, time, effort and risk to a direct sales customer. Achieving a design win with a customer does not ensure that we will receive significant net sales from that customer, and we may be unable to convert design wins into actual sales. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to stop using our products, if, for example, its own products are not commercially successful or if the customer can obtain a superior product or the product at a lower cost from one of our competitors.

20 -


 

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.

We currently have a U.S. credit facility under which, as of December 31, 2020, we had a remaining principal balance of $282.3 million under a term loan, and had nothing drawn on a $150.0 million revolver, $150.0 million of which remained available as of December 31, 2020. In addition to our U.S. credit facility we have $140.6 million outstanding under short-term foreign credit facilities.  In addition to our U.S. credit facility and our short-term foreign credit facilities, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $30.0 million on a long-term basis from local Taiwan banks in order to make an investment.  See “Liquidity and Capital Resources” below and Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information. A rise in interest rates could have an adverse impact upon our cost of working capital and our interest expense. Based on our debt balances at December, 31, 2020, an increase or decrease in interest rates by 1.0% for the year on our credit facilities would increase or decrease our annual interest rate expense by less than $1.8 million, net of the amounts realized from our interest rate swaps.  

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 use interest rate swaps and foreign exchange forward contracts to provide a level of protection against interest rate risks and foreign exchange exposure, but no hedging strategy can protect us completely. The nature and timing of hedging transactions influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. The hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility and our hedging transactions may result in or magnify losses. Furthermore, interest rate and foreign exchange derivatives may not be available on favorable terms or at all, particularly during economic downturns. Any of the foregoing risks could adversely affect our business, financial condition and results of operations.  We are exposed to counterparty credit risk in the event of non-performance by counterparties to the interest rate swaps and foreign exchange contracts.

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.

 

We may have a significant amount of debt and substantial debt service requirements on our borrowings, including our credit facilities with various financial institutions worldwide. As of December 31, 2020, $282.3 million was outstanding under our U.S. credit facility. In addition, we have short-term foreign credit facilities with borrowing capacities of approximately $307.1 million with an unused amount of $168.9 million.

Our outstanding debt could have significant consequences on our future operations, including:

 

making it more difficult for us to meet our payment and other obligations under our outstanding debt agreements;

 

resulting in one or more events of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which events of default could result in all of our debt becoming immediately due and payable and, in the case of an event of default under our secured debt could permit the lenders to foreclose on our assets securing that debt;

 

reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

subjecting us to the risks of increased sensitivity to interest rate increases on our indebtedness with variable interest rates;

 

limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

 

placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have an adverse effect on our business, operating results, financial condition and our ability to meet our payment obligations under our debt agreements.

Our U.S. credit facility and our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin. In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.  The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by the ICE Benchmark Administration until mid-2023.  In response to concerns regarding the future of LIBOR, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“ARRC”) to identify alternatives to LIBOR.  The ARRC has recommended benchmark-

21 -


 

replacement procedures to assist issuers in continued capital market entry while safeguarding against LIBOR’s discontinuation.  The initial steps in the ARRC’s recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”).  Additionally, it is uncertain if applicable tenors of LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR.  At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement.  All of our existing debt obligations that are based on LIBOR will mature by the end of 2023, but in anticipation of LIBOR’s phase out, our U.S. credit facility (which matures May 29, 2023) was amended to provide for alternative benchmark rates (including a hard-wired SOFR-based alternative benchmark) as well as transition mechanisms for selecting another benchmark replacement rate for LIBOR, with such benchmark replacement rate to be mutually agreed with the lenders under the U.S. credit facility.  We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur.  Accordingly, the potential effect of the phase-out or replacement of LIBOR on our cost of capital cannot yet be determined. Further, the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital or otherwise have a material adverse impact on our business, financial condition or results of operations.

Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future.

Our U.S. credit facility contains covenants imposing various restrictions on our business and financial activities. These restrictions may affect our ability to operate our business and undertake certain financial activities and may limit our ability to take advantage of potential business or financial opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to incur liens, incur indebtedness, make investments, dissolve or merge or consolidate with or into another entity, dispose of certain property, make restricted payments (including dividends and share repurchases), issue or sell equity interests, engage in other different material lines of business, conduct related party transactions, enter into certain burdensome contractual obligations and use proceeds from our credit facility to purchase or carry margin stock or to extend credit to others for the same purpose. Our U.S. credit facility also requires us to meet certain financial ratios, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio.

Our ability to comply with the U.S. credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions, and are subject to the risks stated in this section of the Annual Report. The breach of any of these covenants or restrictions could result in an event of default under the facility. An event of default under the facility would permit the lenders under the facility to declare all amounts owed under such facility to be immediately due and payable in full. Upon acceleration of our indebtedness, we may be unable to repay the accelerated amount of principal and interest on the credit facilities that would then be due. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition-Debt instruments” in Part II, Item 7 of this Annual Report for additional information.

Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition.

The Chinese government has provided various incentives to technology companies, including our manufacturing facilities located in Shanghai and Chengdu, China, in order to encourage development of the high-tech industry. These incentives include reduced tax rates and other measures. As a result, we are entitled to a preferential enterprise income tax rate of 15% so long as our manufacturing facilities continue to maintain their High and New Technology Enterprise (“HNTE”) status. One of our manufacturing facilities and one of our wafer fabrication facilities located in Shanghai are approved for HNTE status for the tax years 2018-2020. The Company expected to continue to meet HTND requirements s in future years. HNTE qualification requires, but is not limited to, metrics based on China research and development expenditures as well as research and development headcount and overall college-degreed headcount.  Any prior years that have already been approved are subject to audit requirements. If we were to no longer meet the HNTE requirements, our statutory tax rate for our approved Shanghai facilities would increase to 23% for any period in which an audit shows we were not compliant, which could adversely affect our operating results and financial condition.

In connection with our joint venture in Chengdu, China, with Ya Guang, we have qualified for tax incentives offered in the Go West Initiative (“Go West”), where companies are entitled to a preferential income tax rate of 15% for doing business in western China. If we were to no longer meet the Go West requirements, our statutory tax rate for this joint venture would increase to 25%, which could adversely affect our operating results and financial condition since we own 98% of this joint venture entity.

22 -


 

The impact of our HNTE and Go West status, collectively called tax holidays, decreased our tax expense by approximately $0.9 million, $3.1 million and $1.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The benefit of the tax holidays on basic and diluted earnings per share for the twelve months ended December 31, 2020, 2019 and 2018 was approximately $0.02, $0.06 and $0.03, respectively.

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.

We conduct operations worldwide through our foreign subsidiaries and are, therefore, subject to complex transfer pricing regulations in the jurisdictions in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions between related parties be priced on a basis that would be comparable to an arm’s length transaction between unrelated parties. There is uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our transfer pricing policies, we could become subject to significant tax liabilities and penalties. Based on our current knowledge and probability assessment of potential outcomes, we believe that we have provided for all tax exposures. However, the ultimate outcome of a tax examination could differ materially from our provisions and could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our legal organizational structure could result in unanticipated unfavorable tax or other consequences which could have a material adverse effect on our financial condition and operational results. In some countries, we maintain multiple entities for tax or other purposes. Changes in tax laws, regulations, future jurisdictional profitability of us and our subsidiaries, and related regulatory interpretations in the countries in which we operate may impact the taxes we pay or tax provision we record, which could have a material adverse effect on our operating results. In addition, any challenges to how our entities are structured or realigned or their business purpose by taxing authorities could result in us becoming subject to significant tax liabilities and penalties which could have a material adverse effect on our business, financial condition, operating results and cash flows.

The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.

Certain of our employees in the U.K. participate in a company-sponsored defined benefit plan, which is closed to new entrants and is frozen with respect to future benefit accruals. The retirement benefit is based on the final average compensation and service of each eligible employee. In accounting for these plans, we are required to make actuarial assumptions that are used to calculate the earning value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in our consolidated financial statements. Assumptions include, but are not limited to, the expected return on plan assets, discount rates, and mortality rates. While we believe the underlying assumptions under the projected unit credit method are appropriate, the carrying value of the related assets and liabilities and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.

Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.

The assets of our defined benefit pension plan (the “plan”) in the U.K. provide pensions to employees and former employees.  The plan’s assets are invested in a diverse range of listed and unlisted securities, including corporate bonds and mutual funds and are determined, from time to time, based on their fair market value.  The plan’s obligation to pay pensions is estimated by using actuarial assumptions. To the extent that the plan’s assets are not sufficient to meet the estimated amount of the plan’s obligations, further funding of the plan will be required by the plan’s sponsoring employers, Diodes Zetex Limited and Diodes Zetex Semiconductors Limited, over an agreed upon deficit recovery period.

As of December 31, 2020, the benefit obligation of the plan was approximately $175.3 million and the total assets in such plan were approximately $147.9 million. Therefore, the plan was underfunded by approximately $27.4 million. The difference between plan obligations and assets, or the funded status of the plan, is a significant factor in determining the net periodic benefit costs of the plan and the ongoing funding requirements of the plan.

Any fluctuations in the U.K. equity markets and bond markets or changes in several key actuarial assumptions, including, but not limited to, changes in discount rate, estimated return on the plan and mortality rates, can (i) affect the level of plan funding, (ii) cause volatility in the net periodic pension cost, and (iii) increase our future funding requirements. In the event that actual results differ from the actuarial assumptions or actuarial assumptions are changed, the funding status of the plan may change. Any deficiency in the funding of the plan could result in additional charges to equity and an increase in future plan expense and cash contribution. A significant increase in our funding requirements could have a negative impact on our cash flows, operating results and financial condition.

The trustees under the plan are required to review the plan’s funding position every three years. The pension plan funding valuation as at March 31, 2019 resulted in a deficit of approximately GBP 26.7 million (approximately $34.7 million based on a GBP: USD exchange rate of 1:1.3). As a result of this valuation we 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 in annual installments with effect from April 1,

23 -


 

2020 to address the deficit revealed by the valuation (with the first payment to be made by March 31, 2021, and payments to be made by December 31 each year thereafter). These contributions, together with the assumed asset outperformance, are expected to eliminate the deficit by December 31, 2028. Further, we will pay GBP 0.2 million in annual installments effective April 1, 2020 to cover plan expenses. Moving the recovery plan from a 2030 deadline to a 2029 deadline could require us to increase our plan contributions.  If we fail to reach an agreement with the plan trustees, as we are required to do every three years, the pension regulator in the U.K. could impose contributions on Diodes Zetex Limited or Diodes Zetex Semiconductors Limited, or in limited circumstances could require financial support to be provided to the plan from entities connected or associated with Diodes Zetex Limited or Diodes Zetex Semiconductors Limited. Furthermore, Diodes Zetex Limited and Diodes Zetex Semiconductors Limited remain ultimately liable to fully fund the plan regardless of any failure to agree upon future contributions in respect of a particular actuarial valuation, i.e., if either the plan or those companies were wound up, a debt equal to each company’s share of the entire outstanding deficit at that time (calculated on a statutory conservative basis) would be owed by the relevant company. This could have a material adverse effect on our cash flows, operating results and financial condition.  

Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition.

Certain of our customers and suppliers require us to agree to comply with the Electronic Industry Code of Conduct (“EICC”) or their own codes of conduct, which may include detailed provisions on labor, human rights, health and safety, environment, corporate ethics and management systems. Certain of these provisions are not requirements under the laws of the countries in which we operate and may be burdensome to comply with on a regular basis. Moreover, new provisions may be added or material changes may be made to any these codes of conduct, and we may have to promptly implement such new provisions or changes, which may substantially further increase the cost of our business, be burdensome to implement and adversely affect our operational efficiencies and operating results. If we violate any such codes of conduct, we may lose further business with the customer or supplier and, in addition, we may be subject to fines from the customer or supplier. While we believe that we are currently in compliance with our customers and suppliers’ codes of conduct, there can be no assurance that, from time to time, if any one of our customers and suppliers audits our compliance with such code of conduct, we would be found to be in full compliance. A loss of business from these customers or suppliers could have a material adverse effect on our business, operating results and financial condition.

Compliance with government regulations and customer demands regarding the use ofconflict mineralsmay result in increased costs and may have a negative impact on our business, operating results and financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposes new disclosure requirements regarding the use of certain minerals, which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals. These requirements affect the pricing, sourcing and availability of minerals used in the manufacture of semiconductor devices (including our products). We are incurring additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex, and we may be unable to verify the origins for all metals used in our products. Customers may demand that the products they purchase be free of conflict minerals. Therefore, we may encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free. This requirement could affect the sourcing and availability of products we purchase from suppliers. This may reduce the number of suppliers that may be able to provide conflict-free products, and may affect our ability to obtain products in sufficient quantities to meet customer demand or at competitive prices.

There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

The risks commonly encountered in acquisitions of companies include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense in integrating the operations and personnel of the companies, the difficulty of bringing standards, procedures and controls, including disclosure controls and procedures and internal control over financial reporting, into conformance with our operations, the ability to coordinate our new products and process development, the ability to hire additional management and other critical personnel, the ability to increase the scope, geographic diversity and complexity of our operations, difficulties in consolidating facilities and transferring processes and know-how, difficulties in reducing costs, prolonged diversion of our management’s attention from the management of our business, the ability to clearly define our present and future strategies, the loss of key employees and customers as a result of changes in management and any geographic distances may make integration slower and more challenging. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

In addition, any acquisition may cause large one-time expenses as well as create goodwill and other intangible assets that may result in significant asset impairment charges in the future.

24 -


 

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.

Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and failure of human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which could harm our financial condition and operating results, and could result in a loss of investor confidence and a decline in our stock price.

RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

Our international operations subject us to risks that could adversely affect our operations.

We expect net sales from foreign markets to continue to represent a significant portion of our total net sales. In addition, the majority of our manufacturing facilities are located in China. For the twelve months ended 2020 our Asian and European subsidiaries represented approximately 78% of our net sales, while in 2019 and 2018, our Asian and European subsidiaries represented over 77% and 85%, respectively, of our net sales. The decline of net sales in our Asia and European based subsidiaries beginning in 2019 represents a shift in business practices to fulfill more orders from our non-Asia based subsidiaries. There are risks inherent in doing business internationally, and any or all of the following factors could cause harm to our business:

 

changes in, or impositions of, legislative or regulatory requirements, including income tax or value added tax laws in the U.S. and in the countries in which we manufacture or sell our products;

 

compliance with trade or other laws in a variety of jurisdictions;

 

trade restrictions, transportation delays, work stoppages, and economic and political instability;

 

changes in import/export regulations, tariffs and freight rates;

 

difficulties in collecting receivables and enforcing contracts;

 

currency exchange rate fluctuations;

 

restrictions on the transfer of funds from foreign subsidiaries to the U.S.;

 

the possibility of international conflict, particularly between or among China, the U.K., Germany, Taiwan and the U.S.;

 

legal, regulatory, political and cultural differences among the countries in which we do business;

 

longer customer payment terms; and

 

changes in U.S. or foreign tax regulations.

We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results.

We have a significant portion of our assets in mainland China, U.K., Germany, Hong Kong and Taiwan. Our ability to operate in these countries may be adversely affected by changes in those jurisdictions’ laws and regulations, including those relating to taxation, including, but not limited to income tax and value added tax, import and export tariffs, environmental regulations, land use rights, property and other matters. In addition, our operating results and financial performance are subject to the economic and political situations. We believe that our operations are in compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Changes in the political environment or government policies in those jurisdictions could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, a significant destabilization of relations between or among China, the U.K., Germany, Hong Kong, Taiwan and the U.S. could result in restrictions or prohibitions on our operations or the sale of our products or the forfeiture of our assets in these jurisdictions. There can be no certainty as to the application of the laws and regulations of these jurisdictions in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high

25 -


 

degree of fragmentation among regulatory authorities, resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions. The possibility of political conflict between these countries or with the U.S. could have an adverse impact upon our ability to transact business in these jurisdictions and to generate profits.

Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.

Changes to existing trade agreements, such as the North American Free Trade Agreement, greater restrictions on international trade generally and significant increases in tariffs on goods imported into the United States, particularly from China, could materially adversely affect our business and operations. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop, manufacture and sell products, and any negative reactions towards the United States as a result of such changes, could adversely affect our business and operations. In addition, negative sentiments towards the U.S. among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect our international sales or the hiring and retention of qualified employees, respectively.

The United Kingdom exit from the European Union has also created political and economic uncertainty, particularly in the U.K. and the European Union, and this uncertainty may last for years. Our business and operations in the U.K. the European Union, and worldwide could be materially adversely affected by the U.K. exit. Future events as a consequence of the U.K. exit, including stresses within the U.K. itself, may cause significant volatility in global financial markets, including global currency and debt markets, and may result in a slowdown in economic activity in the U.K., Europe or globally, which could materially adversely affect our operating results and growth prospects. In addition, our business and operations could be materially adversely affected by new or revised trade agreements between countries in which we have operations or do business, including the U.S., the U.K., the European Union and China, as well as by the possible impositions of tariffs or trade or other regulatory barriers by any nation where we have operations or do business.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with ours or displace our products and components, resulting in an adverse impact on our business in China.

In May 2019, at the direction of the President of the United States, the United States increased the level of tariffs from 10% to 25% on approximately $200 billion worth of Chinese imports. The President also ordered the U.S. Trade Representative to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion. These tariffs are in addition to the new or higher tariffs on specified products imported from China in response to what the U.S. characterizes as unfair trade practices. China responded to the earlier increased tariffs by proposing new or higher tariffs on specified products imported from the United States.  Negotiations between the U.S. and China to resolve the issues that precipitated the impositions of these tariffs are reported to be ongoing, but the situation is dynamic and the timing and nature of any ultimate resolution is currently uncertain. In June 2019, President Trump and Chinese President Xi Jinping agreed that they did not plan more tariffs against each other’s countries, but on August 1, 2019, President Trump announced that on September 1, 2019, the U.S. would put an additional tariff of 10% on $300 billion of goods and products coming from China to the U.S.

On August 23, 2019, in response to China announcing additional tariffs on U.S. products, President Trump instructed the U.S. Trade Representative to increase by 5% the tariffs on approximately $550 billion worth of Chinese imports to the U.S. This would have increased the tariff rate on $250 billion worth of Chinese imports, effective October 1, 2019 to 30% and raised the tariff rate to 15% on $300 billion worth of Chinese imports previously announced, but on September 11, 2019 President Trump announced that the effective date would be extended to October 15, 2019 as “a gesture of goodwill.” On October 12, 2019, President Trump announced that the U.S. would halt the October 15, 2019 tariff increase after positive negotiations with the China representatives in Washington, D.C.  On January 15, 2020, the U.S. and China signed a Phase One trade deal pursuant to which, among other things, the U.S. agreed to modify its Section 301 tariff actions (described in this risk factor) in a significant way. On December 31, 2020, a majority of the previously imposed tariff exclusions expired resulting in an increase in the taxes paid by US companies on imports of many products from China.  In addition, in December 2020, then President-Elect Joe Biden publicly stated that he was not planning to make immediate moves with respect to tariffs.  Given the change in power in the U.S. government in January 2021, significant uncertainty remains regarding tariffs and their impact on our Company as President Biden’s administration begins to implement new or revised U.S.-China trade policies.  

Most of our products are manufactured in China and then a portion of those products are imported into the U.S. The impacts on us of the recently imposed and proposed tariffs are uncertain because of the dynamic nature of governmental actions and responses, as well as possible exemptions for certain products. If the U.S. and China are able to negotiate the issues to restore a mutually advantageous and fair trading regime, the increased tariffs could be eliminated, but given the uncertainties, there can be no assurance of whether, or when, this will be accomplished. We have taken actions, and may take additional steps, to mitigate those impacts and protect our competitive position in the marketplace.  If we determine to pass some or all of these new tariff burdens on to our

26 -


 

customers, the result may be a degradation of our competitive position and a loss of customers that would adversely affect our operating performance. It is not clear at this time what the ultimate outcome of these tariff actions and our mitigation efforts will be, but given the importance of our Chinese operations and related sales, and the impacts of existing and possible future restrictions with regard to transactions with Chinese entities, it is very possible that our operating results and/or financial condition may be adversely affected.

On August 25, 2019, President Trump advised American companies to seek alternatives to China for the manufacture of their products, citing the U.S. “International Emergency Economic Powers Act of 1977” as a possible basis for applying a sanction of this sort. Given the inauguration of Mr. Biden as President of the United States in January 2021, it is not clear when, whether or in what form, this threat will be put into action, but if it does materialize our results of operations and financial condition likely will be materially adversely affected.

In addition to the ongoing issues regarding tariffs, China has been stepping up efforts to design and manufacture semiconductors itself rather than buy from U.S. companies, amid fears that sanctions might cripple its high-tech industry. U.S. restrictions on exports to Chinese telecoms equipment makers have sharpened Beijing’s focus on semiconductor self-sufficiency. China’s ministry of finance announced tax breaks “to support the development of integrated circuit design and the software industry,” cancelling corporate taxes for some domestic Chinese companies for two years. Although the outcome of these efforts is uncertain, the development of such capacity in China would likely have a material adverse effect on our profitability and results of operations.

The U.K.’s exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

On June 23, 2016, the U.K. voted to exit from the E.U. (commonly referred to as “Brexit”). The U.K. exited the E.U. on January 31, 2020.  The U.K.’s exit from the E.U. is to be followed by an 11-month transition period to allow the U.K. and the E.U. to finalize new trade, security, data, fishing and transport policies to shape their new relationship. The impacts of the implementation of Brexit and the resulting relationship between the U.K. and the E.U. are uncertain for companies doing business both in the U.K. and the overall global economy. The U.K. vote impacted global markets, including various currencies, and resulted in a sharp decline in the value of the British Pound as compared to the U.S. dollar and other major currencies.  The fluctuation of currency exchange rates may expose us to gains and losses on non-U.S. currency transactions. Volatility in the securities markets and in currency exchange rates may continue as the U.K. and the E.U. finalize the new trade, security data, fishing and transport policies. While we have not experienced any material financial impact from Brexit on our business to date, we cannot predict its future implications. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the U.K. conducts.

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.

We believe that an increase in demand in China for electronic devices that include our products will be an important factor in our future growth. Continuing weakness in the Chinese economy could result in a decrease in demand for electronic devices containing our products and, thereby, materially and adversely affect our business, operating results and prospects.

Economic regulation in China could materially and adversely affect our business, operating results and prospects.

We have a significant portion of our manufacturing capacity in mainland China. In addition, in 2020 approximately 53% of our total sales were shipped to customers in China. In recent years, the Chinese economy has experienced periods of rapid expansion and wide fluctuations in the rate of inflation. In response to these factors, the Chinese government has, from time to time, adopted measures to regulate growth and contain inflation, including measures designed to restrict credit or control prices. Such actions in the future could increase the cost of doing business in China or decrease the demand for our products in China and, thereby, have a material adverse effect on 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.

The United States’ Foreign Corrupt Practices Act (“FCPA”), the United Kingdom’s Bribery Act 2010 (the “U.K. Bribery Act”), China’s anti-corruption campaign and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that may have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We train our staff concerning FCPA, the U.K. Bribery Act and related anti-bribery laws. We have established procedures and controls to monitor internal and external compliance. There can be no assurance that our internal controls and procedures always will protect us from reckless or criminal acts committed by our employees or agents, and we have no third party attestation to the effectiveness of our internal controls related to fraud and corruption. If we are found to be liable for FCPA, the U.K. Bribery Act and other anti-bribery law violations (either due to our own acts or inadvertence, or due to the acts or inadvertence of others), we could incur criminal or civil penalties or other sanctions, which could have a material adverse effect on our business and operating results.

27 -


 

We are subject to foreign currency risk as a result of our international operations.

We face exposure to adverse movements in foreign currency exchange rates, principally the Chinese Yuan, the Taiwanese dollar, the Euro and the British Pound Sterling and, to a lesser extent, the Japanese Yen and the Hong Kong dollar. Our income and expenses are based on a mix of currencies and a decline in one currency relative to the other currencies could adversely affect our operating results. Furthermore, our operating results are reported in U.S. dollars, which is our reporting currency. In the event the U.S. dollar weakens against a foreign currency, we will experience a currency transaction loss, which could adversely affect our operating results. Also, fluctuations in foreign currency exchange rates may have an adverse impact and be increasingly influential to our overall sales, profits and operating results as amounts that are measured in foreign currency are translated back to U.S. dollars for reporting purposes. Our foreign currency risk may change over time as the level of activity in foreign markets grows and could have an adverse impact upon our financial results, especially if the portion of our sales attributable to Europe increases. We have taken, and plan to continue to take, efforts to mitigate some of our foreign currency exposure by entering into foreign exchange hedging agreements with financial institutions to reduce exposures to some of the principal currencies in countries in which we conduct sales, acquire raw materials, build products and make capital investments, but these efforts may not be successful. In this regard, these hedging agreements do not cover all currencies in which we do business, do not eliminate foreign currency risk entirely for the currencies that they do cover, and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.

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.

Historically, labor in China has been readily available at a lower cost compared to other countries. However, because China is experiencing rapid social, political and economic change, there can be no assurance that labor will continue to be available in China at costs consistent with historical levels. Any future increase in labor cost in China is likely to be higher than historical and projected amounts and may occur multiple times in any given year. As a result of experiencing such rapid social, political and economic change, China is also likely to enact new, and/or revise its existing, labor laws and regulations on employee compensation and benefits. These changes in Chinese labor laws and regulations will likely to have an adverse effect on product manufacturing costs in China. Furthermore, if China workers go on strike to demand higher wages, our operations could be disrupted. Many of our suppliers are currently dealing with labor shortages in China, which may result in future supply delays and disruptions and may drive a substantial increase in their labor costs that is likely to be shared by us in the form of price increases to us. New or revised government labor laws or regulations, strikes or labor shortages could cause our product costs to rise and/or could cause manufacturing partners on whom we rely to exit the business. These events could have a material adverse impact on our product availability and quality, which would 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.

As an incentive for establishing our manufacturing subsidiaries in China, we receive preferential tax treatment. Governmental changes in foreign tax law may cause us not to be able to continue receiving these preferential tax treatments in the future, which may cause an increase in our income tax expense, thereby 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.

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 foreign withholding taxes. As of December 31, 2020, we had undistributed earnings from non-U.S. operations of approximately $1.6 billion (including approximately $287 million of restricted earnings, which are not available for dividends). Undistributed earnings of our China subsidiaries comprise $469 million of this total.  Additional Chinese withholding taxes of approximately $45 million would be required should the $469 million of such earnings be distributed out of China as dividends.

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.

In general, we rely on the intellectual property and unfair competition laws and contractual restrictions to protect our technology, know-how, data and intellectual property in the foreign jurisdictions in which we operate. We believe our technology, know-how, data and other intellectual property rights are important to our success. Any unauthorized use of our technology, know-how, data and other intellectual property rights could harm our competitive advantages and business. For example, some jurisdictions have not protected intellectual property rights to the same extent as the United States, and infringement of intellectual property rights continues to pose a serious risk of doing business in such jurisdictions. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of laws governing intellectual property rights in certain foreign jurisdictions is uncertain and evolving, and could involve substantial risks to us. Infringement of our patents or required technology or know-how transfers to

28 -


 

foreign entities could create competition for us, and such competition could have a material adverse effect on our longer-term profitability and success.

RISKS RELATED TO OUR COMMON STOCK

Variations in our quarterly operating results may cause our stock price to be volatile.

We have experienced substantial variations in net sales, gross profit margin and operating results from quarter to quarter. We believe that the factors that influence this variability of quarterly results include:

 

 

strength of the global economy and the stability of the financial markets;

 

general economic conditions in the countries where we sell our products;

 

seasonality and variability in the computing and communications market and our other end-markets;

 

the timing of our and our competitors’ new product introductions;

 

product obsolescence;

 

the scheduling, rescheduling and cancellation of large orders by our customers;

 

the cyclical nature of the demand for our customers’ products;

 

our ability to develop new process technologies and achieve volume production at our fabrication facilities;

 

changes in manufacturing yields;

 

adverse movements in exchange rates, interest rates or tax rates; and

 

the availability of adequate supply commitments from our outside suppliers or subcontractors.

Accordingly, a comparison of our operating results from period to period is not necessarily meaningful to investors and our operating results for any period do not necessarily indicate future performance. Variations in our quarterly results may trigger volatile changes in our stock price.

General or industry-specific market conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to our performance also may affect the price of our stock. For these reasons, investors should not rely on recent or historical trends to predict future stock prices, financial condition, operating results or cash flows. In addition, as discussed in Part I, Item 3 “Legal Proceedings of this Annual Report, we are involved in various legal proceedings that arise in the normal course of business. Additional volatility in the price of our securities could result in litigation matters, which could result in substantial costs and the diversion of management time and resources.

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.

As part of our growth strategy, we expect to review acquisition prospects that would implement our vertical integration strategy or offer other growth opportunities. From time to time, we may be in various stages of discussions and we may acquire businesses, products or technologies in the future. In the event of future acquisitions, we could:

 

 

use a significant portion of our available cash;

 

issue equity securities, which would dilute current stockholders’ percentage ownership;

 

incur substantial debt;

 

incur or assume contingent liabilities, known or unknown;

 

incur amortization expenses related to intangibles;

 

incur large, immediate accounting write-offs;

 

incur substantial expense and diversion of management attention, regardless of the success of the acquisition; and

 

create goodwill and other intangible assets that may require impairment charges in the future.

Such actions by us could harm our operating results and adversely affect the price of our Common Stock.

29 -


 

Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters.

Our directors and executive officers beneficially own approximately 19% of our outstanding Common Stock, including options to purchase shares of our Common Stock that are exercisable within 60 days of December 31, 2020. These stockholders, acting together, will be able to influence significantly all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control may delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our Common Stock.

We were formed in 1959, and our early corporate records are incomplete. As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.

We were formed in 1959 under the laws of California and reincorporated in Delaware in 1968. We have had several transfer agents since being formed. In addition, our early corporate records, including our stock ledger, are incomplete. As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.

Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities.

We, from time to time, may utilize non-cash tender offers, debt equity swaps or equity exchanges in accordance with the guidance and rules promulgated by the SEC to consummate our business activities. Such means to consummate our business activities will likely involve issuance of our Common Stock in large quantities and will subsequently dilute the ownership interest of existing stockholders, including stockholders who previously received shares of our Common Stock in such transactions. Any sales in the public market of the newly issued Common Stock could adversely affect prevailing market prices of our Common Stock. In addition, utilizing non-cash tender offers, debt equity swaps or equity exchanges may encourage short selling because such utilization could depress the market 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.

Some provisions of Delaware law, our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay or prevent a tender offer or takeover attempt, including those attempts that might result in a premium over the market price for the shares held by stockholders.

Section 203 of Delaware General Corporation Law may deter a take-over attempt.

Section 203 of the Delaware General Corporation Law prohibits transactions between a Delaware corporation and an “interested stockholder,” which is defined as a person who, together with any affiliates or associates, beneficially owns, directly or indirectly, 15.0% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations between an interested stockholder and a Delaware corporation for a period of three years after the date the stockholder becomes an interested stockholder, unless:

(i)   either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is approved by the corporation’s board of directors prior to the date the interested stockholder becomes an interested stockholder;

(ii)  the interested stockholder acquired at least 85.0% of the voting stock of the corporation (other than stock held by directors who are also officers or by certain employee stock plans) in the transaction in which the stockholder became an interested stockholder; or

(iii)  the business combination is approved by a majority of the board of directors and by the affirmative vote of 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder.

For this purpose, business combinations include mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10.0% of the aggregate market value of the consolidated assets or outstanding stock of the corporation, and certain transactions that would increase the interested stockholder’s proportionate share ownership in the corporation.

Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.

Provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire control of us. In particular, our certificate of incorporation authorizes our Board of Directors to issue, without further action by the stockholders, up to 1.0 million shares of preferred stock with rights and preferences, including voting rights, designated from time to time by the Board of Directors. The existence of authorized but unissued shares of preferred stock enables our Board of Directors to

30 -


 

render it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

GENERAL RISK FACTORS

The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.

Weaknesses in the global economy and financial markets can lead to lower consumer discretionary spending and demand for items that incorporate our products in the consumer electronics, computing, industrial, communications and the automotive sectors. A decline in end-user demand can affect our customers’ demand for our products, the ability of our customers to meet their payment obligations and the likelihood of customers canceling or deferring existing orders. Our net sales, operating results and financial condition could be negatively affected by such actions.

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.

A disruption in production at our manufacturing facilities could have a material adverse effect on our business. Disruptions could occur for many reasons, including fire, floods, hurricanes, typhoons, droughts, tsunamis, volcanoes, earthquakes, disease or other similar natural disasters, unplanned maintenance or other manufacturing problems, labor shortages, power outages or shortages, telecommunications failures, strikes, transportation interruption, government regulation, terrorism or other extraordinary events, including epidemics (such as the outbreak of the COVID-19 virus) and related travel restrictions,. Such disruptions may cause direct injury or damage to our employees and property and related internal controls with significant indirect consequences. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance. If one of our key manufacturing facilities is unable to produce our products for an extended period of time, our sales may be reduced by the shortfall caused by the disruption, and we may not be able to meet our customers’ needs, which could cause our customers to seek other suppliers. Such disruptions could have an adverse effect on our operating results and financial condition.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions. We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales activities across all of our products and services and to coordinate our administrative activities. A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins and similar disruptions affecting the Internet generally. There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our cash flows, operating results and financial condition.

As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. In particular, we have upgraded our financial reporting system and are currently seeking to upgrade other information technology systems. These and any other upgrades to our systems and information technology, or new technology, now and in the future, will require that our management and resources be diverted from our core business to assist in compliance with those requirements. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and related customer issues), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our cash flows, operating results and financial condition.

A significant portion of our operations operate on a single Enterprise Resource Planning (“ERP”) platform. To manage our international operations efficiently and effectively, we rely heavily on our ERP system, internal electronic information and communications systems and on systems or support services from third parties. Any of these systems are subject to electrical or telecommunications outages, computer hacking or other general system failure. It is also possible that future acquisitions will operate on different ERP systems and that we could face difficulties in integrating operational and accounting functions of new acquisitions. Difficulties in upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could adversely affect our cash flows, operating results and financial condition and could result in material weaknesses or significant deficiencies in internal controls.

31 -


 

 

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.

Terrorist attacks, or threats or occurrences of other terrorist or related 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 profitability. Future terrorist or related activities could affect our domestic and international sales, disrupt our supply chains and impair our ability to produce and deliver our products. Such activities could affect our physical facilities or those of our suppliers or customers. Such terrorist attacks could cause seaports or airports, to or through which we ship, to be shut down, thereby preventing the delivery of raw materials and finished goods to or from our manufacturing facilities in China, Taiwan and Germany and our wafer fabrication facilities in China, the U.S. and the U.K., or to our regional sales offices. Due to the broad and uncertain effects that terrorist attacks have had on financial and economic markets generally, we cannot provide any estimate of how these activities might negatively affect our future 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.

Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our confidential information or those of third parties, create system disruptions, compromise physical assets or intellectual property, or misappropriate monetary assets or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our websites or exploit any security vulnerabilities of our websites and information systems. Our international operations and business relationships could exacerbate these potential risks. In September 2019, our anti-virus defenses identified a malware infection and brute force password attack. Breach resolution was accomplished by our internal IT staff. We do not believe that any confidential or proprietary information was exposed or that there was any material impact on production. In response to this cyber-intrusion, we engaged an information technology security company to assess the timetable and scope of the intrusion, identify any weaknesses in our IT systems, and assist in designing security measures to strengthen our protection against, and preparation for identifying and responding to, such attacks. We are reviewing this assessment and have enhanced and continue to enhance our security measures. Specific measures we have taken include strengthening our global network access control to further prevent unauthorized or non-compliant devices from accessing our internal networks and developing policies and procedures to more timely respond to intrusions.`

The costs to the Company to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our ongoing efforts to prevent and address these problems may not be successful.  Such problems could result in interruptions, delays, cessation of service, extortionate demands to decrypt files and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions and materially adversely affect our operating results, stock price and reputation.

We manage and store various proprietary information and sensitive or confidential data relating to our business and third party business. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our partners or customers, including the potential loss, encryption or disclosure of such information or data or the unauthorized transfer of monetary assets as a result of fraud, trickery or other forms of deception, could expose us, our partners and customers or the individuals affected to a risk of loss or misuse of this information, extortionate demands to decrypt files, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Delayed sales, significant costs or lost customers resulting from these system security risks, data protection breaches, cyber-attacks and other related cyber-security issues could materially adversely affect our operating results, stock price and reputation.

Cyber and other security problems could originate from within the United States or in foreign countries.  Our foreign operations expose us to additional cyber security risks compared to a company with a smaller international footprint.

 


32 -


 

 

Item 1B.  Unresolved Staff Comments.

None

Item 2.Properties.

Our corporate headquarters are located in Plano, Texas.  As of December 31, 2020, we own approximately 5.3 million square feet of property and lease approximately 3.1 million square feet of property, with leases expiring at various times between 2021 and 2028 and with land rights expiring in 2056.  We also own and lease properties around the world for use as sales offices, design centers, research and development labs, warehouses, logistic centers, and manufacturing support. The size and/or location of these properties change from time to time based on business requirements. The table below sets forth the largest of the properties either owned or leased by the Company:  

 

Primary use

Location

Sq. Ft.

 

Headquarters/R&D center

USA - Plano, TX

 

41,780

 

Regional sales office/Administrative office/R&D center/apartment

USA - Milpitas, California

 

86,321

 

Land use right/Manufacturing facilities/Administrative office/R&D center/Logistics

China - Chengdu

 

1,689,474

 

Regional sales office/R&D center/Warehouse

China - Hong Kong

 

360,395

 

Administrative office/Land use right/manufacturing facility/R&D center

China - Jinan, Shandong

 

1,059,907

 

Manufacturing facility/R&D center/Logistics/Dormitory/Manufacturing facility/Sales/Administrative office/Land use right

China - Shanghai

 

2,322,424

 

Regional sales office

China - Shenzhen

 

17,318

 

Administrative office/Logistics/Manufacturing/R&D center

England - Oldham

 

156,076

 

Manufacturing facility/R&D center

Germany - Neuhaus

 

52,508

 

Manufacturing facility/R&D center/Logistics/Administrative office

Scotland, Greenock

 

318,782

 

Manufacturing facility/R&D center/Logistics/Administrative office

Taiwan - Hsinbei

 

120,441

 

R&D center

Taiwan - Hsinchu

 

25,372

 

Regional sales office/Administrative office/Logistics/Regional Sales/Logistics

Taiwan - Taipei

 

52,348

 

Regional sales office/Administrative office/Logistics

Taiwan - Taoyuan

 

78,899

 

Manufacturing

China - Shanghai

 

168,381

 

Manufacturing

China - Wuxi

 

548,469

 

Manufacturing

Taiwan - Keelung

 

115,798

 

Manufacturing

Taiwan - Hsinchu

 

478,737

 

 

We believe our current facilities are adequate for the foreseeable future.

Item 3. Legal Proceedings.

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 current 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. In addition, our foreign operations expose us to unique intellectual property technology risks compared to a company with fewer or no international operations.  Such risks could lead to litigation or other disputes that would not be applicable to a company with limited or no international operations and could have a material and adverse effect on our financial condition and results of operations.  See “Risk Factors – Risks Related to Our International Operations” in Part I, Item 1A of this Annual Report for a more detailed summary of the intellectual property technology risks associated with our international business operations.

Item 4.Mine Safety Disclosures.

Not Applicable.

 

 

33 -


 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our Common Stock is traded on the Nasdaq Global Select Market (“NasdaqGS”) under the symbol “DIOD.”

Holders

As of February 16, 2021, the approximate number of common stockholders was 226.

Dividends

We have never declared or paid dividends on our Common Stock, and currently do not intend to pay dividends in the foreseeable future as we intend to retain any earnings for future use in our business.  Our U.S. banking facility permits us to pay dividends up to $25.0 million per fiscal year to our stockholders so long as we have not defaulted at the time of such dividend and no default would result from declaring and paying such dividend. The payment of dividends is within the discretion of our Board of Directors, and will depend upon, among other things, our earnings, financial condition, capital requirements, and general business conditions.

Securities Authorized for Issuance Under Equity Compensation Plans

The information regarding our equity compensation plans required to be disclosed by Item 201(d) of Regulation S-K is incorporated by reference from our 2021 definitive proxy statement, which we expect to file with the SEC in April 2021, in Item 12 of Part III of this Annual Report.

Performance Graph

The following graph compares the yearly percentage change in the cumulative total stockholder return of our Common Stock against the cumulative total return of the Nasdaq Composite and the Nasdaq Industrial Index for the five calendar years ending December 31, 2020. The graph is not necessarily indicative of future price performance.

The graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

Source: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2019.

The graph assumes $100 invested on December 31, 2014 in our Common Stock, the stock of the companies in the Nasdaq Composite Index and the stock of companies in the Nasdaq Industrial Index, and that all dividends received within a quarter, if any, were reinvested in that quarter.

 

34 -


 

��

December 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

2016

 

 

 

2017

 

 

 

2018

 

 

 

2019

 

 

 

2020

 

Diodes Incorporated

Return %

 

 

 

 

 

 

11.71

 

 

 

11.69

 

 

 

12.52

 

 

 

74.74

 

 

 

25.07

 

 

Cum $

 

100

 

 

 

111.71

 

 

 

124.76

 

 

 

140.38

 

 

 

245.30

 

 

 

306.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NASDAQ Industrial Index

Return %

 

 

 

 

 

 

9.47

 

 

 

25.21

 

 

 

(1.13

)

 

 

27.17

 

 

 

52.72

 

 

Cum $

 

100

 

 

 

109.47

 

 

 

137.07

 

 

 

135.52

 

 

 

172.34

 

 

 

263.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NASDAQ Composite-Total Returns

Return %

 

 

 

 

 

 

8.87

 

 

 

29.64

 

 

 

(2.84

)

 

 

36.69

 

 

 

44.92

 

 

Cum $

 

100

 

 

 

108.87

 

 

 

141.13

 

 

 

137.12

 

 

 

187.44

 

 

 

271.64

 

Issuer Purchases of Equity Securities

During the fourth quarter of 2020, as part of the Lite-On Semiconductor acquisition, the Company reacquired 7,765,778 shares of its Common Stock.

35 -


 

 

Item 6. Selected Financial Data.

The following selected consolidated financial data for the fiscal years ended December 31, 2016 through 2020, is qualified in its entirety by, and should be read in conjunction with, the other information and consolidated financial statements, including the notes thereto, appearing elsewhere herein. Certain immaterial amounts as presented in the accompanying consolidated financial statements have been reclassified to conform to 2020 financial statement presentation.

(In thousands, except per share data)

Twelve Months Ended December 31,

 

Statement of Income Data

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Net sales

$

1,229,215

 

 

$

1,249,130

 

 

$

1,213,989

 

 

$

1,054,204

 

 

$

942,162

 

Income from operations

 

134,332

 

 

 

200,608

 

 

 

154,482

 

 

 

79,409

 

 

 

37,991

 

Net income (loss) attributable to common stockholders

 

98,088

 

 

 

153,250

 

 

 

104,021

 

 

 

(1,805

)

 

 

15,935

 

Earnings (loss) per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.92

 

 

$

3.02

 

 

$

2.09

 

 

$

(0.04

)

 

$

0.33

 

Diluted

$

1.88

 

 

$

2.96

 

 

$

2.04

 

 

$

(0.04

)

 

$

0.32

 

Number of shares used in computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,004

 

 

 

50,787

 

 

 

49,841

 

 

 

48,824

 

 

 

48,597

 

Diluted

 

52,133

 

 

 

51,860

 

 

 

50,935

 

 

 

48,824

 

 

 

49,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

Balance Sheet Data

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Total assets

$

1,979,457

 

 

$

1,639,384

 

 

$

1,526,371

 

 

$

1,488,673

 

 

$

1,528,552

 

Working capital

 

514,225

 

 

 

524,637

 

 

 

480,814

 

 

 

415,162

 

 

 

547,409

 

Long-term debt, net of current portion

 

288,179

 

 

 

64,401

 

 

 

186,143

 

 

 

247,492

 

 

 

413,126

 

Total Diodes Incorporated stockholders' equity

 

963,820

 

 

 

1,106,424

 

 

 

931,463

 

 

 

831,504

 

 

 

776,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended December 31,

 

Cash Flow Data

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Net cash and cash equivalents provided by operating activities

$

187,220

 

 

$

229,772

 

 

$

185,566

 

 

$

181,123

 

 

$

124,742

 

Capital expenditures

$

75,813

 

 

 

98,505

 

 

 

87,507

 

 

 

111,161

 

 

 

58,549

 

 

In addition, during the periods presented we made the following acquisitions considered significant to our operations (a) in 2020 we acquired LSC and (b) in 2019 we acquired GFAB.

36 -


 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following section discusses management’s view of the financial condition, results of operations and cash flows of Diodes Incorporated and its subsidiaries (collectively, “the Company,” “our Company,” “we,” “our,” “ours,” or “us”) and should be read together with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form 10-K.

The following discussion contains forward-looking statements and information relating to our Company. 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,” “project,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in Part I, Item 1A.“Risk Factors,” as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act.

This discussion and analysis does not address certain items in respect of fiscal 2018 in reliance on amendments to disclosure requirements adopted by the SEC in 2019. A discussion and analysis of fiscal 2018 may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 12, 2020, and such discussion and analysis is hereby incorporated into this Form 10-K by this reference .

Summary for the Twelve Months Ended December 31, 2020

 

Revenue was $1.23 billion, a decrease of 1.6% over the $1.25 billion in 2019;

 

Gross profit was $431.1 million, a 7.4%  decrease, compared to the $465.8 million in 2019;

 

Gross margin was 35.1% , a decrease of 220 basis points, compared to 37.3% in 2019;

 

Operating income decreased 33.0% to $134.3 million, or 10.9% of revenue, compared to $200.6 million, or 16.1%, of revenue in 2019;

 

Net income was a $98.1 million, or $1.88 per diluted share, compared to $153.3 million, or $2.96 per share, in 2019; and

 

Achieved $187.2 million cash flow from operations.  We had $75.8 million of capital expenditures, or 6.2% of revenue. Net cash flow was a positive $61.0 million.

Summary of the Twelve Months Ended December 31, 2019

 

Revenue grew to a record $1.25 billion, an increase of 2.9% over the $1.21 billion in 2018;

 

Gross profit was a record $465.8 million, a 7.0%  increase, compared to the $435.3 million in 2018;

 

Gross margin improved 140 basis points to a record 37.3% from 35.9% in 2018;

 

Operating income increased 29.9% to a record $200.6 million, or 16.1% of revenue, compared to $154.5 million, or 12.7%, of revenue in 2018;

 

Net income was a record $153.3 million, or $2.96 per diluted share, compared to $104.0 million, or $2.04 per share, in 2018; and

 

Achieved $229.8 million cash flow from operations.  We had $98.5 million of capital expenditures, or 7.9% of revenue. Net cash flow was a positive $17.7 million, which includes the net pay down of $117.3 million of long-term debt.

37 -


 

 

Business Outlook and Factors Relevant to Our Results of Operations

In spite of the negative impact COVID-19 had on our fiscal year 2020 results, we continue to pursue our previously announced goals of achieving revenue of $2.5 billion and gross margin of 40%, representing gross profit of $1.0 billion, all by 2025. Acquisitions will continue to be a key part of our growth strategy to reach our 2025 revenue goal. We have a solid pipeline of designs and expanded customer relationships across all regions and product lines. The success of our business depends on, among other factors, the strength of the global economy and the stability of the financial markets, our customers’ demand for our products, the ability of our customers to meet their payment obligations, the likelihood of customers not canceling or deferring existing orders, and the strength of consumers’ demand for items containing our products in the end-markets we serve. We believe the long-term outlook for our business remains generally favorable despite the uncertainties in the global economy as we continue to execute on the strategy that has proven successful for us over the years. In November 2020, the Company completed the acquisition of LSC and in April 2019, we completed the acquisition of GFAB.  See “Risk Factors – The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.” in Part I, Item 1A of this Annual Report for additional information.

 

Description of Sales and Expenses

Net sales

The principal factors that have affected or could affect our net sales from period to period are:

 

The condition of the economy in general and of the semiconductor industry in particular;

 

Political tension, including the implementation of tariffs, among and between the countries in which we do business;

 

Our customers’ adjustments in their order levels;

 

Changes in our pricing policies or the pricing policies of our competitors or suppliers;

 

The addition or termination of key supplier relationships;

 

The rate of introduction and acceptance by our customers of new products;

 

Our ability to compete effectively with our current and future competitors;

 

Our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances;

 

Changes in foreign currency exchange rates;

 

A major disruption of our information technology infrastructure;

 

Unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes; and

 

Any other disruptions, such as change in the political or governmental policies, labor shortages, unplanned maintenance or other manufacturing problems.

Cost of goods sold

Cost of goods sold includes manufacturing costs for our semiconductors and our wafers. These costs include raw materials used in our manufacturing processes as well as labor costs and overhead expenses. Cost of goods sold is also impacted by yield improvements, capacity utilization and manufacturing efficiencies. In addition, cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient.

Selling, general and administrative

Selling, general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, sales and marketing, information technology, engineering, human resources, procurement, planning and finance, and sales commissions, as well as outside legal, investor relations, accounting, consulting and other operating expenses.  Also included in selling, general and administrative expenses are acquisition costs from business combinations.

Research and development

Research and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for these projects. Research and development expenses are primarily associated with our wafer facilities in China and the U.K. and our manufacturing facilities in Taiwan and China, as well as with our engineers in the China, U.K., U.S. and Taiwan. All research and development expenses are expensed as incurred.

38 -


 

Amortization of acquisition-related intangible assets

Amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer relationships.

Impairment of fixed assets

Impairment of fixed assets consists of the impairment amount recognized as a result of the fair value of an asset being below its recorded value.

Restructuring

Restructuring are one-time charges that must be paid by the Company due to reorganizing or restructuring a part of the business.

Interest income / expense

Interest income consists of interest earned on our cash and investment balances. Interest expense consists of interest payable on our outstanding credit facilities and other debt instruments.

Gain (loss) on securities carried at fair value

We may hold investments in the form of common stock or some other similar equivalent and have elected fair value accounting treatment.

Foreign currency (loss) gain, net

This income account is used to show the amount gained or lost as a result of foreign currency transactions.

Income tax provision

Our global presence requires us to pay income taxes in a number of jurisdictions. See Note 12 of “Notes to Consolidated Financial Statements” for additional information.

Net income attributable to noncontrolling interest

This represents the minority investors’ share of our subsidiaries’ earnings.

Net income attributable to common stockholders

Net income attributable to common stockholders is net income less net income attributable to noncontrolling interest.

Results of Operations

The following table sets forth, for the periods indicated, the percentage that certain items in the statements of income bear to net sales:

 

 

Percent of Net Sales

 

 

Twelve Months Ended December 31,

 

 

 

2020

 

 

 

2019

 

Net sales

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

(64.9

)

 

 

(62.7

)

Gross profit

 

35.1

 

 

 

37.3

 

Operating expenses

 

(24.1

)

 

 

(21.2

)

Income from operations

 

10.9

 

 

 

16.1

 

Interest income

 

0.1

 

 

 

0.2

 

Interest expense

 

(1.0

)

 

 

(0.6

)

Foreign currency (loss) gain, net

 

(0.8

)

 

 

(0.3

)

Other income (expenses)

 

0.5

 

 

 

0.6

 

Income before income taxes and noncontrolling interest

 

9.8

 

 

 

15.9

 

Income tax provision

 

1.7

 

 

 

3.5

 

Net income

 

8.1

 

 

 

12.3

 

Net (income) loss attributable to noncontrolling interest

 

(0.1

)

 

 

(0.1

)

Net income  attributable to common stockholders

 

8.0

 

 

 

12.3

 

The following discussion explains in greater detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report (in thousands).

39 -


 

 

Twelve Months Ended

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Increase/(Decrease)

 

 

% Change

 

Net sales

$

1,229,215

 

 

$

1,249,130

 

 

$

(19,915

)

 

 

(1.6

%)

Cost of goods sold

 

798,094

 

 

 

783,323

 

 

 

14,771

 

 

 

1.9

%

Gross profit

 

431,121

 

 

 

465,807

 

 

 

(34,686

)

 

 

(7.4

%)

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

185,067

 

 

 

181,343

 

 

 

3,724

 

 

 

2.1

%

Research and development

 

94,288

 

 

 

88,517

 

 

 

5,771

 

 

 

6.5

%

Amortization of acquisition-related intangible assets

 

16,261

 

 

 

18,041

 

 

 

(1,780

)

 

 

(9.9

%)

Loss (gain) on disposal of fixed assets

 

106

 

 

 

(24,429

)

 

 

24,535

 

 

 

(100.4

%)

Other operating income

 

1,067

 

 

 

1,727

 

 

 

660

 

 

 

38.2

%

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,066

 

 

 

2,189

 

 

 

(1,123

)

 

 

(51.3

%)

Interest expense

 

(11,662

)

 

 

(7,893

)

 

 

3,769

 

 

 

47.8

%

Foreign currency loss

 

(9,814

)

 

 

(3,737

)

 

 

6,077

 

 

 

162.6

%

Other income

 

6,419

 

 

 

7,079

 

 

 

(660

)

 

 

(9.3

%)

Income tax provision

 

21,112

 

 

 

44,131

 

 

 

(23,019

)

 

 

(52.2

%)

Net Sales

Net sales decreased for the twelve months ended December 31, 2020, compared to the same period last year due to the negative effect of COVID-19 on the global economy and our business.  This decrease in net sales was partially offset by $16.9 million of net sales from LSC.

The table below sets forth our revenue as a percentage of total revenue by end-user market:

 

Twelve Months Ended

 

 

December 31,

 

 

2020

 

 

2019

 

 

2018

 

Industrial

 

23

%

 

 

28

%

 

 

26

%

Consumer electronics

 

25

%

 

 

23

%

 

 

25

%

Communications

 

21

%

 

 

23

%

 

 

24

%

Computing

 

20

%

 

 

16

%

 

 

17

%

Automotive

 

11

%

 

 

10

%

 

 

9

%

Cost of Goods Sold

Cost of goods sold increased approximately $14.8 million for the twelve months ended December 31, 2020 compared to the same period last year, primarily as a result of operations at GFAB for four quarters of 2020 compared to three quarters of 2019 and the one month of operations at LSC during 2020. As a percent of sales, cost of goods sold was 64.9% for the twelve months ended December 31, 2020, compared to 62.7% for the same period last year. Average unit cost increased 1.5% for the twelve months ended December 31, 2020, compared to the same period last year, due to lower capacity utilization for the year, driven by COVID-19 pandemic related manufacturing plant closures and the associated slowdown in customer demand in early 2020. For the twelve months ended December 31, 2020, gross profit decreased approximately 7.4% when compared to the same period last year. Gross profit margin for the twelve month periods ended December 31, 2020 and 2019, was 35.1% and 37.3%, respectively.

Operating expenses

Operating expenses for the twelve months ended December 31, 2020 increased approximately $31.6 million, or 11.9%, compared to the same period last year.  A significant contributing factor to the increase in 2020 compared to 2019 was a $24.3 million one-time gain we realized in 2019 upon selling land.  The land was acquired in past years in anticipation of building a new corporate headquarters building in Texas.  Selling, general and administrative expenses (“SG&A”) increased approximately $3.7 million. The increase in SG&A was driven by increases in wages and benefits and freight and duty charges, partially offset by reductions in travel and entertainment expenses. Research and development expenses (“R&D”) increased approximately $5.8 million primarily due to increases in wages and benefits and depreciation, associated with new product and new process development activities. Amortization of acquisition-related intangibles decreased approximately $1.8 million reflecting the overall reduction in the balance of intangible assets subject to amortization.  SG&A, as a percentage of sales, was 15.1% and 14.5% for the twelve-month periods ended December 31, 2020 and 2019, respectively. R&D, as a percentage of sales, was 7.7% and 7.1% for the twelve-month periods ended December 31, 2020 and 2019, respectively.

40 -


 

Other (expense)/income

Interest income decreased $1.1 million for the twelve months ended December 31, 2020, due to a lower amount of invested funds.  Interest expense increased $3.8 million or 47.8% for the twelve months ended December 31, 2020. The increase in interest expense for the twelve months ended December 31, 2020 was due to higher levels of debt resulting from the draws on our U.S. credit facility to finance the closing of the LSC acquisition. The increase in interest expense due to higher levels of debt was partially offset by lower interest rates. Foreign currency losses increased $6.1 million during the twelve months ended December 31, 2020.  

Income tax provision

We recognized income tax expense of approximately $21.1 million for the twelve months ended December 31, 2020, and income tax expense of approximately $44.1 million for the twelve months ended December 31, 2019, resulting in effective income tax rates of 17.5 % and 22.3%, respectively. The decrease in the effective tax rate for 2020 compared to 2019 is primarily attributable to decrease in non-U.S. withholding taxes. 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 foreign withholding taxes.  As of December 31, 2020, our foreign subsidiaries held approximately $267 million of cash, cash equivalents and investments of which approximately $9.5 million would be subject to foreign withholding tax if distributed outside the country in which the related earnings were generated.

Financial Condition

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, short-term investments, funds from operations and, if necessary, borrowings under our credit facilities. 

Liquidity requirements

Our primary liquidity requirements have been to meet our capital expenditure needs and to fund ongoing operations. For 2020 and 2019 our working capital was $514.2 million and $524.6 million, respectively. In 2020, our working capital decreased due to increases in short-term debt and other current liabilities assumed as a result of the LSC acquisition. We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations for at least the next 12 months.

Short-term investments

As of December 31, 2020, we had short-term investments of approximately $6.1 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 amount of time but in doing so we generally forfeit a portion of interest income.

Short-term debt

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $307.1 million. At December 31, 2020, borrowings were $140.6 million and letters of credit were $0.5 million under our Asia credit facilities. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, repayable on demand, terminable by the lender at any time and contain no restrictive covenants.  These credit facilities bear interest at LIBOR or similar indices plus a specified margin.  Interest payments are due monthly on outstanding amounts under the credit lines.

Long-term debt

On May 29, 2020, the Company, Diodes Holding B.V. (the “Foreign Borrower” and, collectively with the Company, the “Borrowers”), and certain subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) that amends and restates that certain Amended and Restated Credit Agreement dated as of October 26, 2016 (as amended, modified and/or supplemented from time to time prior to May 29, 2020, the “Existing Credit Agreement”).  On December 31, 2020, Diodes Holding B.V. merged into Diodes Holdings UK Limited, which following the merger became the Foreign Borrower under the Credit Agreement, and in connection with the merger, the parties to the Second Amended and Restated Credit Agreement entered into a Consent and Amendment No. 2 to Second Amended and Restated Credit Agreement (“Consent and Amendment No. 2”; the Second Amended and Restated Credit Agreement as amended by Consent and Amendment No. 2 is referred to as the “Credit Agreement”). Certain capitalized terms used in this description of the Credit Agreement have the meanings given to them in the Credit Agreement, the current form of which is set forth in Exhibit A to Consent and Amendment No. 2, which is attached as an exhibit to this report.  The Company analyzed the amendment and restatement of the Existing Credit Agreement pursuant to the guidance in ASC No. 470-50, Debt—Modifications and Extinguishments.  The Company determined that certain lenders had changes in cash flows which were substantially different as a result of the amendment and

41 -


 

restatement of the Existing Credit Agreement, which resulted in a debt extinguishment of $52.2 million and a loss on extinguishment and third-party fees of $0.7 million being expensed in the nine-month period ended September 30, 2020.

The Second Amended and Restated Credit Agreement rebalanced the Company’s then-existing senior credit facilities under the Existing Credit Agreement from (x) aggregate credit facilities of $500,000,000, consisting of (A) a $250,000,000 revolving senior credit facility, which included a $10,000,000 swing line sublimit, a $10,000,000 letter of credit sublimit, and a $20,000,000 alternative currency sublimit, and (B) a $250,000,000 term loan to (y) aggregate credit facilities of $670,000,000 consisting of (A) an acquisition draw term commitment of $340,000,000 (the “Acquisition Draw Term Commitment”), (B) an initial term commitment of $180,000,000 (the “Initial Term Commitment” and, together with the Acquisition Draw Term Commitment, the “Term Loan”) and (C) a $150,000,000 revolving senior credit facility (the “Revolver”), which includes a $20,000,000 uncommitted swing line sublimit, a $10,000,000 letter of credit sublimit, and a $40,000,000 alternative currency sublimit.

The Revolver and the Term Loan mature on May 29, 2023 (the “Maturity Date”).  Both the term loan portion and the revolving portion of the Credit Agreement bear an interest rate at LIBOR or similar other indices plus a specified margin. The Company used a portion of the proceeds available under the Revolver and the Term Loan (i) to finance the Company’s acquisition of Lite-On Semiconductor Corporation, which is described more fully elsewhere in this report, (ii) to refinance certain existing indebtedness of the Borrowers and their subsidiaries under the Existing Credit Agreement and (iii) for working capital, capital expenditures, and other lawful corporate purposes, including, without limitation, financing permitted acquisitions.

The Credit Agreement contains certain financial and non-financial covenants, including, but not limited to, a maximum Consolidated Leverage Ratio, a minimum Consolidated Fixed Charge Coverage Ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases). These covenants are generally similar to the corresponding covenants in the Existing Credit Agreement, except that certain amounts permitted as exceptions to negative covenants restricting liens, indebtedness, investments, dispositions and restricted payments have been revised, and additional exceptions to certain negative covenants have been added, including increased capacity for certain intercompany Indebtedness and Investment (including existing Lite-On Indebtedness), and the right to enter into certain securitization transactions and receivables facilities, subject to limitations set forth in the Credit Agreement.  Furthermore, under the Credit Agreement, restricted payments, including dividends and share repurchases, are permitted in certain circumstances, including while the pro forma Consolidated Leverage Ratio is, both before and after giving effect to any such restricted payment, at least 0.25 to 1.00 less than the maximum permitted under the Credit Agreement.

Capital expenditures and investments

In 2020 and 2019, our capital expenditures were approximately $75.8 million and $96.2 million, respectively, which includes approximately $15.4 million and $9.3 million of capital expenditures related to the investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the “CDHT”) for 2020 and 2019, respectively. Our capital expenditures for these periods were primarily related to manufacturing expansion in our facilities in China and, to a lesser extent, our office buildings. Capital expenditures in 2020 were approximately 6.2% of our net sales.

In 2010, we announced an investment agreement with the Management Committee of the CDHT. Under this agreement, we formed a joint venture with a Chinese partner, Chengdu Ya Guang Electronic Company Limited (“Ya Guang”), to establish a semiconductor assembly and test facility in Chengdu, China. In December 2016, we increased our investment and currently own approximately 98% of the joint venture entity. The CDHT granted the joint venture a 50 year land lease, provides corporate and employee tax incentives, tax refunds, subsidies and other financial support. We believe that this will be a long-term, multi-year project that will provide us additional capacity as needed. As of December 31, 2020, we have invested $193.7 million in this joint venture, primarily for infrastructure, buildings and equipment related capital expenditures.

The Company’s restricted cash primarily consisted of the cash required to be on deposit under contractual agreements with banks to support outstanding loan and import/export guarantees. As of December 31, 2020, restricted cash of $52.5 million was pledged as collateral for issuance of bank loans, bank acceptance notes and letters of credit.

Our foreign operations expose us to unique intellectual property technology risks compared to a company with fewer or no international operations.  For example, we are exposed to potential cyber security breaches that may target our employees or infrastructure outside the United States.  These risks may result in material and adverse impacts on our financial condition and results of operations.  See “Risk Factors – Risks Related to Our International Operations” in Part I, Item 1A of this Annual Report for a more detailed summary of the intellectual property technology risks associated with our international business operations.

42 -


 

Discussion of Cash Flows

Cash and cash equivalents, including restricted cash, increased approximately $61.0 million to $320.5 million in 2020 from $259.5 million in 2019.  The table below sets forth summary information from our statements of cash flows:

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

Change

 

Net cash provided by operating activities

$

187,220

 

 

$

229,772

 

 

$

(42,552

)

Net cash used in investing activities

 

(106,772

)

 

 

(100,426

)

 

 

(6,346

)

Net cash used in financing activities

 

(54,302

)

 

 

(112,432

)

 

 

58,130

 

Effect of exchange rates on cash and cash equivalents,

   including restricted cash

 

34,876

 

 

 

760

 

 

 

34,116

 

Net increase in cash and cash equivalents, including restricted cash

$

61,022

 

 

$

17,674

 

 

$

43,348

 

Operating Activities

Net cash provided by operating activities for 2020 was approximately $187.2 million, due primarily to $99.2 million of net income, $108.0 million in depreciation and amortization of intangible assets and $25.3 million from non-cash share-based compensation.  These increases were partially offset by a decrease in deferred taxes of $14.5 million, and a net decrease in operating capital assets and liabilities of $31.4 million.  

Investing Activities

Net cash used in investing activities for 2020 was approximately $106.8 million, due to the purchase of property, plant and equipment of $75.8 million, acquisitions net of cash acquired of $24.6 million, primarily LSC, and $6.1 used for purchase of equity securities.

Financing Activities

Net cash used in financing activities for 2020 was approximately $54.3 million, due $296.8 million related to the Diodes shares reacquired in connection with the LSC acquisition and the payment of taxes on net share settlement of $8.3 million.  These outflows of cash were partially offset by an inflow form a net increase in borrowing of $249.1 million to close the LSC acquisition.

Debt instruments

The U.S. credit facility contains certain financial and non-financial covenants, including, but not limited to, a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases).

As of December 31, 2020, our Asia subsidiaries had unused and available credit lines of up to an aggregate of approximately $166.0 million, with several financial institutions. In some cases, our foreign credit lines are unsecured, uncommitted and may be repayable on demand, except for two Taiwanese credit facilities that are collateralized by assets. Our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin. At December 31, 2020, $140.6 million was outstanding under these lines of credit.  In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), has long-term debt of $30.0 million on a long-term basis from local Taiwan banks.  The ERIS debt matures in various periods from 2021 through 2033. See “Liquidity and Capital Resources” above and Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected on the face of our financial statements.

43 -


 

Contractual Obligations

The following table represents our contractual obligations as of December 31, 2020 (in thousands):

 

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

More than

 

 

 

Total

 

 

1 year

 

 

1-3 years

 

 

4-5 years

 

 

5 years

 

Debt

 

$

312,247

 

 

$

21,861

 

 

$

272,514

 

 

$

17,872

 

 

$

-

 

Interest on long-term debt 1

 

 

22,810

 

 

 

8,048

 

 

 

14,551

 

 

 

211

 

 

 

-

 

Operating leases

 

 

44,795

 

 

 

11,842

 

 

 

15,618

 

 

 

6,101

 

 

 

11,234

 

Finance leases

 

 

175

 

 

 

151

 

 

 

21

 

 

 

3

 

 

 

-

 

Defined benefit contribution obligations

 

 

24,031

 

 

 

3,004

 

 

 

6,008

 

 

 

6,008

 

 

 

9,011

 

Purchase obligations

 

 

74,911

 

 

 

74,911

 

 

 

-

 

 

 

-

 

 

 

-

 

Total obligations

 

$

478,969

 

 

$

119,817

 

 

$

308,712

 

 

$

30,195

 

 

$

20,245

 

(1)

Interest on long-term debt assumes there are no changes in current interest rates and no changes in long-term debt from the balance outstanding as of December 31, 2020, other than required principal payments. The Revolver and Term Loan mature in May 2023.

Tax liabilities are not included in the above contractual obligations as we cannot make reasonable estimates of the amount and period in which those tax liabilities would be paid. See “Accounting for income taxes” below and Note 12 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information. In addition to these purchase commitments, we have been party to an agreement in which we were obligated to make equity investments and capital investments in our Chengdu facilities.  That agreement is expired, but we anticipate renewing it later in 2021.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted principles in the United States of American (“U.S. GAAP”) requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, which are based upon historical experiences, market trends and financial forecasts and projections, and upon various assumptions that management believes to be reasonable under the circumstances at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.

We believe the following critical accounting policies and estimates affect the significant estimates and judgments we use in the preparation of our consolidated financial statements, and may involve a higher degree of judgment and complexity than others.

Revenue recognition

We generate revenue primarily through the sale of semiconductor products either directly to a customer or to a distributor.  We typically have contracts with our direct customers and distributors and in determining whether a contract exists we evaluate the terms of the agreement, the relationship with the direct customer or distributor and their ability to pay.

Under revenue recognition guidance, a performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is considered the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally speaking, our primary performance obligation is the delivery of a specific good through the purchase order submitted by our customer and revenue is recognized at the time of shipment or delivery, depending on the contract terms.

We record allowances/reserves for the following items: (i) ship and debit, which arise when we, from time to time based on market conditions, issue credit to certain distributors upon their shipments to their end customers; (ii) stock rotation, which are contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical shipments to them in exchange for an equal and offsetting order; and (iii) price protection, which arise when market conditions cause average selling prices to decrease and we issue credit to certain distributors on their inventory.  Ship and debit accruals comprise both claims in process and anticipated claims arising from the eventual sale of distribution inventory that is subject to claim activity.  Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable. Stock rotation reserves are recorded as a reduction to net sales with a corresponding reduction to cost of goods sold for the estimated cost of inventory that is expected to be returned. Price protection reserves are recorded as a reduction to net sales with a corresponding increase in accrued liabilities.

We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience, their financial condition and the condition of the global economy and financial markets. Payment terms and conditions typically vary depending on negotiations with the customer.

44 -


 

Certain customers have limited rights of return or are entitled to price adjustments on products held in their inventory or upon sale to their end customers. We reduce net sales in the period of sale for estimates of product returns, distributor price adjustments and other allowances. Our reserve estimates are based upon historical data as well as projections of sales, distributor inventories, price adjustments, average selling prices and market conditions. Actual returns and adjustments could be significantly different from our estimates and provisions, resulting in an adjustment to net sales.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in, first-out method. On an ongoing basis, we evaluate our inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to our manufacturing facilities. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis. If future demand or market conditions are different than our current estimates, an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.

Accounting for income taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.

The benefit of a tax position is recognized only if it is more likely than not that the tax position would be sustained based on its technical merits in a tax examination, using the presumption the tax authority has full knowledge of all relevant facts regarding the position. The amount of benefit recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on ultimate settlement with the tax authority. For tax positions not meeting the more likely than not test, no tax benefit is recorded.

Goodwill and other indefinite lived intangible assets

Goodwill and other indefinite lived assets are tested for impairment on an annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Diodes has one operating segment. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill. If fair value of exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. 

Business Combinations

We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

For significant acquisitions we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.

Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed. The Company makes estimates and assumptions about conditions of the assets, other costs not captured in the base costs, and consideration for entrepreneurial profit, depreciation, functional obsolescence, and economic obsolescence allocated to the various property, plant and equipment categories considering the perspective of marketplace participants.

While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, which could result in subsequent impairments.

Recently Issued Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information regarding the status of recently issued accounting pronouncements.

 

45 -


 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Risk

We face exposure to adverse movements in foreign currency exchange rates, primarily in Asia and Europe. Our foreign currency risk may change over time as the level of activity in foreign markets grows and could have a material adverse impact upon our financial results. Certain of our assets, including certain bank accounts and accounts receivable, and liabilities exist in non–U.S. dollar denominated currencies, which are sensitive to foreign currency exchange fluctuations. These currencies are principally the Chinese Yuan, the Taiwanese dollar, the Euro, and the British Pound Sterling and, to a lesser extent, the Japanese Yen and the Hong Kong dollar. We have entered into hedging arrangements designed to mitigate foreign currency fluctuations. See “Risk Factors – We are subject to foreign currency risk as a result of our international operations.” in Part I, Item 1A of this Annual Report for additional information.

Foreign Currency Transaction Risk

We are subject to foreign currency risk arising from intercompany transactions that are expected to be settled in cash in the near term where the cash balances are held in denominations other than our subsidiaries’ functional currency. If exchange rates weaken against the functional currency, we would incur a remeasurement gain in the value of the cash balances, and if the exchange rates strengthen against the functional currency, we would incur a remeasurement loss in the value of the cash balances, assuming the net monetary asset balances remained constant. Our ultimate realized gain or loss with respect to currency fluctuations will generally depend on the size and type of transaction, the size and currencies of the net monetary assets and the changes in the exchange rates associated with these currencies. Based on balances at December, 31, 2020, if the Chinese Yuan, the Taiwanese dollar, the Euro and the British Pound Sterling were to weaken (or strengthen) by 1.0% against the U.S. dollar, we would experience currency transaction gain (or loss) of approximately $2.4 million (partially offset by any foreign currency hedges). Net foreign exchange transaction gains (or losses) are included in other income and expense.

Foreign Currency Translation Risk

For our subsidiaries that maintain their books in a foreign currency, fluctuations in that foreign currency will impact the amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. All elements of the subsidiaries’ financial statements, except for stockholders’ equity accounts, are translated using a currency exchange rate. Assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Income and expense accounts denominated in foreign currencies are translated at the weighted-average exchange rate during the period presented. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income or loss within stockholders’ equity in the consolidated balance sheets, which are accumulated in this account until sale or liquidation of the foreign entity investment, at which time they are reported as adjustments to the gain or loss on sale of investment.

Foreign Currency Denominated Defined Benefit Plans

We have a contributory defined benefit plan that covers certain employees in the U.K., which is closed to new entrants and frozen with respect to future benefit accruals. The retirement benefit is based on the final average compensation and service of each eligible employee. December 31 is our annual measurement date, and on the measurement date, defined benefit plan assets are determined based on fair value. Defined benefit plan assets consist primarily of high quality corporate bonds and stocks that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. The net pension and supplemental retirement benefit obligations and the related periodic costs are based on, among other things, assumptions of the discount rate, estimated return on plan assets and mortality rates. These obligations and related periodic costs are measured using actuarial techniques and assumptions. The projected unit credit method is the actuarial cost method used to compute the pension liabilities and related expenses.

As of December 31, 2020, the plan was underfunded and a liability of approximately $27.4 million was reflected in our consolidated financial statements as a noncurrent liability. The amount recognized in accumulated other comprehensive income was a net loss of $50.3 million. If the British Pound Sterling were to (weaken) or strengthen by 1.0% against the U.S. dollar, we would experience currency translation liability (decrease) or increase of less than $0.5 million. The weighted-average discount rate assumption used to determine benefit obligations as of December 31, 2020, was 1.3%. A 0.2% increase/(decrease) in the discount rate used to calculate the net period benefit cost for the year would reduce/increase annual benefit cost by less than $0.5 million. A 0.2% increase/(decrease) in the discount rate used to calculate the year-end projected benefit obligation would increase/(decrease) the year–end projected benefit obligation by approximately $7.1 million. The expected return on plan assets is determined based on historical and expected future returns of the various assets classes and as such, each 1.0% increase/(decrease) in the expected rate of return assumption would increase/(decrease) the net period benefit cost by approximately $1.3 million. The asset value of the defined benefit plan has been volatile in recent years due primarily to wide fluctuations in the U.K. equity markets and bond markets. See “Risk Factors – Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition” in Part I, Item 1A of this Annual Report for additional information.

46 -


 

Interest Rate Risk

We have credit facilities with financial institutions in the U.S., Asia and Europe as well as other debt instruments with interest rates equal to LIBOR or similar indices plus a negotiated margin. A rise in interest rates could have an adverse impact upon our cost of working capital and our interest expense.  Through the use of financial instruments, we have hedges in place designed to offset the interest rate risk for $140.0 million of floating rate debt.  As a matter of policy, we do not enter into derivative transactions for speculative purposes. As of December 31, 2020, our outstanding principal debt included $282.3 million outstanding under our revolving senior credit facility and term loan, $140.6 million outstanding under foreign long term liabilities and $0.5 million used for import and export guarantees and bank acceptance notes. Based on our debt balances at December, 31, 2020, an increase or decrease in interest rates by 1.0% for the year on our credit facilities would increase or decrease our annual interest rate expense by less than $1.7 million, net of the amounts realized from our interest rate swaps. See “Risk Factors,” – “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” in Part I, Item 1A of this Annual Report for additional information.

Political Risk

We have a significant portion of our assets in mainland China, Taiwan and the U.K. The possibility of political conflict between any of these countries or with the U.S. could have a material adverse impact upon our ability to transact business through these important business channels and to generate profits. See “Risk Factors” – Risks Related to our International Operations” in Part I, Item 1A of this Annual Report for additional information.

Inflation Risk

Inflation did not have a material effect on net sales or net income in fiscal year 2019. A significant increase in inflation could affect future performance.

Credit Risk

The success of our business depends, among other factors, on the strength of the global economy and the stability of the financial markets, which in turn affect our customers’ demand for our products, the ability of our customers to meet their payment obligations, the likelihood of customers canceling or deferring existing orders and the strength of consumer demand for items containing our products in the end-markets we serve. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations, while at times providing extended terms. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by dispersion of our customers over various geographic areas, operating primarily in electronics manufacturing and distribution. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

Item 8.Financial Statements and Supplementary Data.

See Part IV, Item 15 “Exhibits and Financial Statement Schedules” for our consolidated financial statements and the notes and schedules thereto filed as part of this Annual Report.

Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

Not Applicable.

Item 9A.Controls and Procedures.

Disclosure 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 December 31, 2020, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer believe that, as of the end of the period covered by this report, our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report is:

 

recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms and

 

accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding disclosure.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

 

47 -


 

 

Management's Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of ours are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including our Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). This evaluation included review of the documentation of controls, testing of operating effectiveness of controls and a conclusion on this evaluation. In fiscal year 2020, we completed the acquisition of Lite-On Semiconductor Corp (“LSC”). We have excluded LSC‘s business, which was accounted for as a business combination, from our assessment of the effectiveness of internal control over financial reporting. Total assets for LSC represent $353.0 million, or 17.8%, of total assets as of $1,979.5 million. Total net sales for LSC represent $16.9 million, or 1.3%, of net sales for the year ended December 31, 2020.

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of our internal control over financial reporting as of December 31, 2020, has been audited by Moss Adams LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the acquisition of LSC during the fourth quarter of 2020.

Item 9B.Other Information.

None.

 

 

 

48 -


 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

The information concerning our directors, executive officers and corporate governance is incorporated herein by reference from the section entitled “Proposal One – Election of Directors” contained in our definitive proxy statement to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934 within 120 days after our fiscal year end of December 31, 2020, for our annual stockholders’ meeting for 2021 (the “Proxy Statement”).

We have adopted a code of ethics that applies to our Chief Executive Officer and senior financial officers. The code of ethics has been posted on our website under the Corporate Governance portion of the Investor Relations section at www.diodes.com. We intend to satisfy disclosure requirements regarding amendments to, or waivers from, any provisions of our code of ethics on our website.

Item 11.Executive Compensation.

The information concerning executive compensation is incorporated herein by reference from the sections entitled “Compensation Discussion and Analysis,” “Executive Compensation,” and “Compensation Committee Interlocks and Insider Participation” contained in the Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information concerning the security ownership of certain beneficial owners and management and related stockholder matters is incorporated herein by reference from the sections entitled “General Information – Security Ownership of Certain Beneficial Owners and Management,” and “Executive Compensation – Equity Compensation Plan Information” contained in the Proxy Statement.

Item 13.Certain Relationships, Related Transactions and Director Independence.

The information concerning certain relationships, related transactions and director independence is incorporated herein by reference from the sections entitled “Corporate Governance – Certain Relationships and Related Person Transactions” and “Corporate Governance – Director Independence” and “Proposal One – Election of Directors” contained in the Proxy Statement.

Item 14.Principal Accounting Fees and Services.

The information concerning our principal accountant’s fees and services is incorporated herein by reference from the section entitled “Ratification of the Appointment of Independent Registered Public Accounting Firm” contained in the Proxy Statement.

 

 

 

49 -


 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules.

(a)

Financial Statements and Schedules

Our consolidated financial statements are as set forth under Item 8 of this report on Form 10-K.

 

(2)     Schedules:

         None

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements and note thereto.

(b)

Exhibits

The exhibits listed on the Index to Exhibits are filed as exhibits or incorporated by reference to this Annual Report.

(c)

Financial Statements of Unconsolidated Subsidiaries and Affiliates

Not Applicable.

 

Item 16.  Form 10-K Summary.

None

 

50 -


 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of

Diodes Incorporated

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Diodes Incorporated and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As discussed in Management’s Annual Report on Internal Control over Financial Reporting, on November 30, 2020, the Company acquired Lite-On Semiconductor Corporation (“LSC”). For the purposes of assessing internal control over financial reporting, management excluded LSC, whose financial statements constitute 17.8% of the Company’s

51 -


 

consolidated total assets and 1.3% of consolidated net sales as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting of LSC.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current year audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee of the Company’s board of directors and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue – Ship and Debit Reserve

 

As described in Note 1, the Company records reserves related to estimated customer incentives, such as “ship and debit”, which arise when the Company, from time to time based on market conditions, issue credits to certain distributors upon their shipments to their end customers. The ship and debit reserve comprehends both claims in process and anticipated claims arising from the eventual sale of distribution inventory that is subject to claim activity. The Company performs a look-back analysis of revenues and credits issued to distributors. Using their look-back analysis, the Company adjusts their assumptions and estimated reserves each quarter. The resulting ship and debit reserve is recorded as a reduction to revenue for the year ended December 31, 2020 with a corresponding reduction to accounts receivable, which approximated $48.8 million as of December 31, 2020.

 

Estimating the ship and debit reserve involves the application of models which require management to make certain assumptions including historical customer ship and debit credit rates and credit lag times on such revenues. These assumptions could be affected by current and future economic and market conditions. We identified the ship and debit reserve as a critical audit matter because auditing management’s estimate of the ship and debit reserve was complex and judgmental due to the significant estimation required by management.

 

The primary procedures we performed to address this critical audit matter included:

 

Obtaining an understanding, evaluating the design and testing the operating effectiveness of internal controls over the measurement of the ship and debit reserve, including testing controls over management’s review of the reserve calculation and the underlying assumptions used to develop the estimate.

52 -


 

 

Testing select distributor balances.

 

Vouching revenues and ship and debit credits to supporting documents.

 

Evaluating the reasonableness of management’s assumptions by comparing the significant assumptions used to historical customer trends and current industry and market trends, including testing the completeness and accuracy of the underlying data.

 

Performing sensitivity analyses on the significant assumptions to evaluate the potential changes in the ship and debit reserve that would result from changes in the assumptions.

 

Business Combinations – Preliminary Determination of Fair Value of Assets Acquired

 

As described in Note 1 and Note 19, a significant component of the purchase of LSC included property, plant and equipment. The preliminary valuation of the property, plant and equipment was conducted primarily using the cost approach and the sales comparison approach was used to estimate the underlying land value. The Company makes estimates and assumptions about economic obsolescence allocated to the various property, plant and equipment categories considering the perspective of marketplace participants. The resulting preliminary value of property, plant and equipment was estimated to be approximately $68.0 million as of November 30, 2020.

 

We identified the property, plant and equipment preliminary valuation, inclusive of the economic obsolescence estimate, as a critical audit matter since the assumptions as described above involve high levels of management judgment and in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s valuation methods and significant assumptions.  In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.  

 

The primary procedures we performed to address this critical audit matter included:

 

Obtaining an understanding, evaluating the design and testing the operating effectiveness of internal controls over the measurement of the estimated fair values of the acquired fixed assets, including testing controls over management’s review of the valuation calculation and the underlying assumptions used to develop the estimate.

 

Evaluating the appropriateness of management’s valuation methodologies.

 

Assessing the reasonableness of various inputs of the cost approach and the sales comparison approach.

 

Assessing the reasonableness of any economic obsolescence allocated to the various property, plant and equipment categories.

 

Involving the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained, including economic obsolescence.

 

 

/s/ Moss Adams LLP

 

Los Angeles, California

February 19, 2021

 

We have served as the Company’s auditor since 1993.

 

53 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

December 31,

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

268,065

 

 

$

258,390

 

Restricted cash

 

52,464

 

 

 

1,117

 

Short-term investments

 

6,142

 

 

 

4,825

 

Accounts receivable, net of allowances of $3,806 and $4,866 at

  December 31, 2020 and 2019, respectively

 

320,061

 

 

 

260,322

 

Inventories

 

307,062

 

 

 

236,472

 

Prepaid expenses and other current assets

 

70,193

 

 

 

48,833

 

Total current assets

 

1,023,987

 

 

 

809,959

 

Property, plant and equipment, net

 

530,815

 

 

 

469,574

 

Deferred income tax

 

57,841

 

 

 

17,516

 

Goodwill

 

158,331

 

 

 

141,318

 

Intangible assets, net

 

110,591

 

 

 

119,523

 

Other long-term assets

 

97,892

 

 

 

81,494

 

Total assets

$

1,979,457

 

 

$

1,639,384

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Line of credit

$

140,563

 

 

$

13,342

 

Accounts payable

 

168,045

 

 

 

122,148

 

Accrued liabilities

 

160,117

 

 

 

100,571

 

Income tax payable

 

19,177

 

 

 

16,156

 

Current portion of long-term debt

 

21,860

 

 

 

33,105

 

Total current liabilities

 

509,762

 

 

 

285,322

 

Long-term debt, net of current portion

 

288,179

 

 

 

64,401

 

Deferred tax liabilities

 

34,598

 

 

 

16,333

 

Other long-term liabilities

 

130,795

 

 

 

120,545

 

Total liabilities

 

963,334

 

 

 

486,601

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Preferred stock - par value $1.00 per share; 1,000,000 shares authorized; 0

  shares issued or outstanding

 

-

 

 

 

-

 

Common stock - par value $0.66 2/3 per share; 70,000,000 shares

authorized;  44,276,194 and 51,206,969, issued and outstanding at

December 31, 2020 and 2019,  respectively

 

35,692

 

 

 

35,111

 

Additional paid-in capital

 

449,598

 

 

 

427,262

 

Retained earnings

 

888,046

 

 

 

789,958

 

Treasury stock, at cost;  9,259,858 and 1,457,206, issued and outstanding at

December 31, 2020 and 2019,  respectively

 

(335,910

)

 

 

(37,768

)

Accumulated other comprehensive loss

 

(73,606

)

 

 

(108,139

)

Total stockholders' equity

 

963,820

 

 

 

1,106,424

 

Noncontrolling interest

 

52,303

 

 

 

46,359

 

Total equity

 

1,016,123

 

 

 

1,152,783

 

Total liabilities and stockholders' equity

$

1,979,457

 

 

$

1,639,384

 

 

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

 

54 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Net sales

$

1,229,215

 

 

$

1,249,130

 

 

$

1,213,989

 

Cost of goods sold

 

798,094

 

 

 

783,323

 

 

 

778,713

 

Gross profit

 

431,121

 

 

 

465,807

 

 

 

435,276

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

185,067

 

 

 

181,343

 

 

 

176,197

 

Research and development

 

94,288

 

 

 

88,517

 

 

 

86,286

 

Amortization of acquisition-related intangible assets

 

16,261

 

 

 

18,041

 

 

 

18,351

 

Loss (gain) on disposal of fixed assets

 

106

 

 

 

(24,429

)

 

 

(636

)

Other operating expense

 

1,067

 

 

 

1,727

 

 

 

596

 

Total operating expenses

 

296,789

 

 

 

265,199

 

 

 

280,794

 

Income from operations

 

134,332

 

 

 

200,608

 

 

 

154,482

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,066

 

 

 

2,189

 

 

 

1,978

 

Interest expense

 

(11,662

)

 

 

(7,893

)

 

 

(9,901

)

Foreign currency loss, net

 

(9,814

)

 

 

(3,737

)

 

 

(3,701

)

Other income

 

6,419

 

 

 

7,079

 

 

 

7,104

 

Total other expense

 

(13,991

)

 

 

(2,362

)

 

 

(4,520

)

   Income before income taxes and noncontrolling interest

 

120,341

 

 

 

198,246

 

 

 

149,962

 

Income tax provision

 

21,112

 

 

 

44,131

 

 

 

44,556

 

Net income

 

99,229

 

 

 

154,115

 

 

 

105,406

 

Less: net income attributable to noncontrolling interest

 

(1,141

)

 

 

(865

)

 

 

(1,385

)

Net income attributable to common stockholders

$

98,088

 

 

$

153,250

 

 

$

104,021

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.92

 

 

$

3.02

 

 

$

2.09

 

Diluted

$

1.88

 

 

$

2.96

 

 

$

2.04

 

 

 

 

 

 

 

 

 

 

 

 

 

  Number of shares used in computation

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,004

 

 

 

50,787

 

 

 

49,841

 

Diluted

 

52,133

 

 

 

51,860

 

 

 

50,935

 

 

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

 

 

 

55 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Net income

$

99,229

 

 

$

154,115

 

 

$

105,406

 

Unrealized (loss) gain on defined benefit plan, net of tax

 

(3,723

)

 

 

(4,142

)

 

 

3,440

 

Unrealized (loss) gain on hedge instruments, net of tax

 

(3,183

)

 

 

(3,652

)

 

 

737

 

Unrealized foreign currency gain (loss), net of tax

 

41,439

 

 

 

1,501

 

 

 

(22,543

)

Comprehensive income

 

133,762

 

 

 

147,822

 

 

 

87,040

 

Less: Comprehensive income attributable to noncontrolling interest

 

(1,141

)

 

 

(865

)

 

 

(1,385

)

Total comprehensive income attributable to common stockholders

$

132,621

 

 

$

146,957

 

 

$

85,655

 

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

 

 

 

56 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

 

 

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

104,021

 

 

 

(18,366

)

 

 

85,655

 

 

 

1,385

 

 

 

87,040

 

Contributions from noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,902

 

 

 

4,902

 

Dividends to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,732

)

 

 

(2,732

)

Common stock issued for share-based plans

 

 

1,091

 

 

 

727

 

 

 

-

 

 

 

-

 

 

 

4,134

 

 

 

-

 

 

 

-

 

 

 

4,861

 

 

 

-

 

 

 

4,861

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,736

 

 

 

-

 

 

 

-

 

 

 

20,736

 

 

 

-

 

 

 

20,736

 

Tax related to net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,293

)

 

 

-

 

 

 

-

 

 

 

(11,293

)

 

 

-

 

 

 

(11,293

)

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

153,250

 

 

 

(6,293

)

 

 

146,957

 

 

 

865

 

 

 

147,822

 

Contributions from noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,343

 

 

 

3,343

 

Dividends to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,818

)

 

 

(3,818

)

Common stock issued for share-based plans

 

 

986

 

 

 

657

 

 

 

-

 

 

 

-

 

 

 

11,244

 

 

 

-

 

 

 

-

 

 

 

11,901

 

 

 

-

 

 

 

11,901

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,535

 

 

 

-

 

 

 

-

 

 

 

20,535

 

 

 

-

 

 

 

20,535

 

Tax related to net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,432

)

 

 

-

 

 

 

-

 

 

 

(4,432

)

 

 

-

 

 

 

(4,432

)

Balance, December 31, 2019

 

 

52,664

 

 

$

35,111

 

 

 

(1,457

)

 

$

(37,768

)

 

$

427,262

 

 

$

789,958

 

 

$

(108,139

)

 

$

1,106,424

 

 

$

46,359

 

 

$

1,152,783

 

Total comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

98,088

 

 

 

34,533

 

 

 

132,621

 

 

 

1,141

 

 

 

133,762

 

Acquisition of noncontrolling interest Yea Shin

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,225

)

 

 

-

 

 

 

-

 

 

 

(1,225

)

 

 

(4,930

)

 

 

(6,155

)

Contributions from noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,832

 

 

 

11,832

 

Dividends to noncontrolling interests

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,099

)

 

 

(2,099

)

Common stock issued for share-based plans

 

 

872

 

 

 

581

 

 

 

-

 

 

 

-

 

 

 

6,249

 

 

 

-

 

 

 

-

 

 

 

6,830

 

 

 

-

 

 

 

6,830

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24,177

 

 

 

-

 

 

 

-

 

 

 

24,177

 

 

 

-

 

 

 

24,177

 

Deferred compensation plan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Tax related to net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,302

)

 

 

-

 

 

 

-

 

 

 

(8,302

)

 

 

-

 

 

 

(8,302

)

Stock buyback related to the LSC acquisition

 

 

-

 

 

 

-

 

 

 

(7,766

)

 

 

(296,705

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(296,705

)

 

 

-

 

 

 

(296,705

)

Stock buyback related to deferred compensation plan

 

 

-

 

 

 

-

 

 

 

(37

)

 

 

(1,437

)

 

 

1,437

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance December 31, 2020

 

 

53,536

 

 

$

35,692

 

 

 

(9,260

)

 

$

(335,910

)

 

$

449,598

 

 

$

888,046

 

 

$

(73,606

)

 

$

963,820

 

 

$

52,303

 

 

$

1,016,123

 

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

 

 

 

57 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

Net income

$

99,229

 

 

$

154,115

 

 

$

105,406

 

Adjustments to reconcile net income to net cash provided by operating activities,

   net of effects of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

91,747

 

 

 

91,543

 

 

 

86,291

 

Amortization of  intangible assets

 

16,260

 

 

 

18,041

 

 

 

18,353

 

Amortization of debt issuance costs

 

1,455

 

 

 

521

 

 

 

522

 

Share-based compensation

 

25,260

 

 

 

20,535

 

 

 

20,736

 

Loss (gain) on disposal of property, plant and equipment

 

119

 

 

 

(24,429

)

 

 

(636

)

Deferred income taxes

 

(14,456

)

 

 

9,904

 

 

 

3,674

 

Other

 

(949

)

 

 

(187

)

 

 

(2,335

)

Changes in operating assets:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(10,501

)

 

 

(30,775

)

 

 

(29,478

)

Inventories

 

(4,560

)

 

 

(11,325

)

 

 

(2,154

)

Prepaid expenses and other current assets

 

(9,067

)

 

 

(6,630

)

 

 

(11,119

)

Changes in operating liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

7,422

 

 

 

3,513

 

 

 

9,977

 

Accrued liabilities

 

(9,198

)

 

 

7,369

 

 

 

(13,445

)

Other liabilities

 

(2,182

)

 

 

(2,694

)

 

 

345

 

Income taxes payable (refundable)

 

(3,359

)

 

 

271

 

 

 

(571

)

Net cash and cash equivalents provided by operating activities

 

187,220

 

 

 

229,772

 

 

 

185,566

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

(24,593

)

 

 

(33,028

)

 

 

(41

)

Purchases of short-term investments

 

(11,486

)

 

 

(19,271

)

 

 

(15,901

)

Sales of short-term investments

 

10,277

 

 

 

21,847

 

 

 

12,576

 

Purchase of equity securities

 

(6,131

)

 

 

-

 

 

 

-

 

Purchases of property, plant and equipment

 

(75,813

)

 

 

(98,505

)

 

 

(87,507

)

Proceeds from sales of property, plant and equipment

 

232

 

 

 

29,366

 

 

 

429

 

Other

 

742

 

 

 

(835

)

 

 

1,500

 

Net cash and cash equivalents used by investing activities

 

(106,772

)

 

 

(100,426

)

 

 

(88,944

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

Advances on lines of credit and short-term debt

 

77,483

 

 

 

9,954

 

 

 

9,151

 

Repayments on lines of credit and short-term debt

 

(40,498

)

 

 

(7,362

)

 

 

(2,797

)

Proceeds from long-term debt

 

956,363

 

 

 

405,540

 

 

 

465,656

 

Repayments of long-term debt

 

(744,237

)

 

 

(522,860

)

 

 

(522,473

)

Debt issuance costs

 

(2,477

)

 

 

(223

)

 

 

-

 

Repayments of finance lease obligations

 

(919

)

 

 

(1,082

)

 

 

1,198

 

Net proceeds from the issuance of common stock

 

6,830

 

 

 

11,901

 

 

 

4,862

 

Capital contribution from noncontrolling interest

 

10

 

 

 

-

 

 

 

6,255

 

Dividend distribution to noncontrolling interest

 

(2,112

)

 

 

(3,818

)

 

 

(2,694

)

Repurchase of common stock

 

(296,705

)

 

 

-

 

 

 

-

 

Taxes related to net share settlement

 

(8,302

)

 

 

(4,432

)

 

 

(11,294

)

Other

 

262

 

 

 

(50

)

 

 

225

 

Net cash and cash equivalents used by financing activities

 

(54,302

)

 

 

(112,432

)

 

 

(51,911

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents, including restricted  cash

 

34,876

 

 

 

760

 

 

 

(8,078

)

Increase (decrease) in cash and cash equivalents, including restricted cash

 

61,022

 

 

 

17,674

 

 

 

36,633

 

Cash and cash equivalents, beginning of year, including restricted cash

 

259,507

 

 

 

241,833

 

 

 

205,200

 

Cash and cash equivalents, end of year, including restricted cash

$

320,529

 

 

$

259,507

 

 

$

241,833

 

 

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

 

 

58 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

 

Interest

$

10,219

 

 

$

7,235

 

 

$

9,962

 

Income taxes

$

48,040

 

 

$

37,158

 

 

$

33,265

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash activities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable balance related to the purchase of property, plant and equipment

$

7,297

 

 

$

10,167

 

 

$

12,598

 

 

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

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

268,065

 

 

$

258,390

 

 

$

241,053

 

Restricted cash (included in other current assets)

 

52,464

 

 

 

1,117

 

 

 

780

 

Total cash, cash equivalents and restricted cash

$

320,529

 

 

$

259,507

 

 

$

241,833

 

 

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

 

 

 

59 -


 

 

DIODES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands except per share data)

 

Note 1 – Summary of Operations and Significant Accounting Policies

Nature of operations

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. Diodes serves the consumer electronics, computing, communications, industrial, and automotive markets.

Diodes’ products include diodes, rectifiers, transistors, MOSFETs, GPP bridges, GPP Rectifiers, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers. Diodes also has timing, connectivity, switching, and signal integrity solutions for high-speed signals.

Diodes’ corporate headquarters and Americas’ sales office are located in Plano, Texas, and Milpitas, California. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taoyuan City, Zhubei City, Taiwan; Shanghai, Yangzhou, China; Oldham, England; and Neuhaus, Germany. Diodes’ wafer fabrication facilities are located in Oldham, Greenock, UK and Shanghai and Wuxi, China and Keelung and Hsinchu, Taiwan.  Diodes has assembly and test facilities located in Shanghai, Jinan, Chengdu and Wuxi, China as well as in Neuhaus, Germany and Jhongli and Keelung, Taiwan. Additional engineering, sales, warehouse, and logistics offices are located in Taipei, Taiwan; Hong Kong; Oldham, UK; Shanghai, Shenzhen, Wuhan and Yangzhou, China; Seongnam-si, South Korea; and Munich, Frankfurt, Germany; with support offices throughout the world.

Our product focus is on high-growth end-user equipment markets such as satellite TV set-top boxes, portable DVD players, datacom devices, ADSL modems, power supplies, medical devices (non-life support devices/systems), PCs and notebooks, flat panel displays, digital cameras, mobile handsets, AC-to-DC and DC-to-DC conversion, Wireless 802.11 LAN access points, brushless DC motor fans, serial connectivity, and automotive applications.

Significant Accounting Policies

Principles of consolidation – The consolidated financial statements include the accounts of Diodes Incorporated, its wholly-owned subsidiaries and its controlled majority-owned subsidiaries. We account for equity investments in companies over which we have the ability to exercise significant influence, but do not hold a controlling interest, under the equity method, and we record our proportionate share of income or losses in Interest and other, net in the consolidated statements of income. All significant intercompany balances and transactions have been eliminated.

Use of estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires that management make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results may differ from these estimates in amounts that may be material to the consolidated financial statements and accompanying notes.

Revenue recognition Effective January 1, 2018, we adopted the comprehensive new revenue recognition standard ASC 606. ASC 606 defines a performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and under ASC 606 is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally speaking, our performance obligations represent a promise to transfer various semiconductor products, and have the same pattern of revenue recognition. Our performance obligations are satisfied at either a point in time, or over time as work progresses. The vast majority of our revenue from products and services is accounted for at a point in time. Substantially all of our revenue in direct and Distributor sales is recognized at a point in time. Further, the payment terms on our sales are based on negotiations with our customers.

Our customers can order different types of semiconductors in a single contract (purchase order), and each line on a purchase order represents a separate performance obligation. Depending on the terms of an arrangement, we may also be responsible for shipping and handling activities. In accordance with ASC 606-10-25-18B, we have elected to account for shipping and handling as activities to fulfill our promise to transfer the good(s). As such, shipping and handling activities do not represent a separate performance obligation, and are accrued as a fulfillment cost. Further, although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended.

- 60 -


 

Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

We record allowances/reserves for a number of items.  The following items are the largest dollar items for which we record allowances/reserves, with ship and debit making up the vast majority: (i) ship and debit, which arise when we issue credit to certain distributors upon their shipments to their end customers; (ii) stock rotation, which are contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical shipments to them in exchange for an equal and offsetting order; and (iii) price protection, which arise when market conditions cause average selling prices to decrease and we issue credit to certain distributors on their inventory. Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable. Stock rotation reserves and price protection reserves are recorded as a reduction to net sales with a corresponding increase in accrued liabilities.

We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience, their financial condition and the condition of the global economy and financial markets. Payment terms and conditions typically vary depending on negotiations with the customer.

Net sales are reduced in the period of sale for estimates of product returns and other allowances including distributor adjustments, which were approximately $194.7 million, $163.9 million and $158.8 million in 2020, 2019 and 2018, respectively.    

Product warranty – We generally warrant our products for a period of one year from the date of sale. Historically, warranty expense has not been material.

Cash, cash equivalents, and short-term investments – We consider all highly liquid investments with maturity of three months or less at the date of purchase to be cash equivalents. We currently maintain substantially all of our day-to-day operating cash balances with major financial institutions.  We hold short-term investments consisting of time deposits, which are highly liquid with maturity dates greater than three months at the date of purchase. Generally, we can access these investments in a relatively short amount of time but in doing so we generally forfeit a portion of interest income.  See Note 3 below for additional information regarding fair value of financial instruments.

Allowance for doubtful accounts – We evaluate the collectability of our accounts receivable based upon a combination of factors, including the current business environment and historical experience. If we are aware of a customer’s inability to meet its financial obligations, we record an allowance to reduce the receivable to the amount we reasonably believe will be collected from the customer. For all other customers, we record an allowance based upon the amount of time the receivables are past due. If actual accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting effect on operating expense. Accounts receivable are presented net of valuation allowance, which were approximately $3.8 million at December 31, 2020 and $4.9 million at December 31, 2019.

Inventories – Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in, first-out method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Any write-down of inventory to the lower of cost or net realizable value at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances. On an on-going basis, we evaluate inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to our manufacturing facilities. If our review indicates a reduction in utility below carrying value, we reduce inventory to a new cost basis. If future demand or market conditions are different than our current estimates, an inventory adjustment to write down inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

Property, plant and equipment – Purchased property, plant and equipment is recorded at historical cost, and property, plant and equipment acquired in a business combination is recorded at fair value on the date of acquisition. Property, plant and equipment is depreciated using straight-line methods over the estimated useful lives, which range from 20 to 55 years for buildings and 3 to 10 years for machinery and equipment. The estimated lives of leasehold improvements range from 3 to 5 years, and are amortized over the shorter of the remaining lease term or their estimated useful lives.

Goodwill and other indefinite lived intangible assets – Goodwill and indefinite lived assets are tested for impairment on an annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment.  Diodes has 1 operating segment. NaN goodwill impairment occurred in 2020, 2019, or 2018. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill. If fair value exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.            

61 -


 

Impairment of long-lived assets – Our long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We consider assets to be impaired if the carrying value exceeds the undiscounted projected cash flows from operations. If impairment exists, the assets are written down to fair value or to the projected discounted cash flows from related operations. As of December 31, 2020, we expect the remaining carrying value of assets to be recoverable.

 

Business combinations – We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

For significant acquisitions we may use independent third-party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed.

Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed. The Company makes estimates and assumptions about conditions of the assets, other costs not captured in the base costs, and consideration for entrepreneurial profit, depreciation, functional obsolescence, and economic obsolescence allocated to the various property, plant and equipment categories considering the perspective of marketplace participants.

While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, which could result in subsequent impairments.

During the normal course of business the Company pursues acquisitions. See Note 19 for additional information regarding business combinations.

Income taxes – Income taxes are accounted for using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. If it is more likely than not that some portion of deferred tax assets will not be realized, a valuation allowance is recorded.

GAAP prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. All deferred income taxes are classified as noncurrent assets or noncurrent liabilities on the consolidated balance sheet as of December 31, 2020 and 2019, respectively. 

Research and development costs – Internally-developed research and development costs are expensed as incurred. Acquired in-process research and development (“IPR&D”) is capitalized as an indefinite-lived intangible asset and evaluated periodically for impairment. When the project is completed, an expected life is determined and the IPR&D is amortized as an expense over the expected life.

Shipping and handling costs – Shipping and handling costs for products shipped to customers, which are included in selling, general and administrative expenses, were approximately $16.6 million, $13.9 million and $14.8 million for the twelve months ended December 31, 2020, 2019 and 2018, respectively.

Concentration of credit risk – Financial instruments, which potentially subject us to concentrations of credit risk, include trade accounts receivable. Credit risk is limited by the dispersion of our customers over various geographic areas, operating primarily in electronics manufacturing and distribution. We perform a credit evaluation of new customers and monitor the accounts receivable aging of our existing customers. Generally we require no collateral from our customers and historically credit losses have been insignificant.

We currently maintain substantially all of our day-to-day cash balances and short-term investments with major financial institutions. Cash balances are usually in excess of Federal and/or foreign deposit insurance limits.

62 -


 

Valuation of financial instruments – The carrying value of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, credit line, and long-term debt approximate fair value due to their current market conditions, maturity dates and other factors.

Share-based compensation – We use the Black-Scholes-Merton model to determine the fair value of stock options on the date of grant and recognize compensation expense for stock options on a straight-line basis. Restricted stock grants are measured based on the fair market value of the underlying stock on the date of grant and compensation expense is recognized on a straight-line basis over the requisite four-year service period.  Performance stock units 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.

The amount of compensation expense recognized using the Black-Scholes-Merton model requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants. The fair value calculated by this model is a function of several factors, including the grant price, the expected future volatility, the expected term of the option and the risk-free interest rate of the option. The expected term and expected future volatility of the options require judgment. In addition, we estimate the expected forfeiture rate and only recognize expense for those stock options expected to vest. We estimate the forfeiture rate based on historical experience, and to the extent our actual forfeiture rate is different from our estimate, share-based compensation expense is adjusted accordingly.

Treasury stock – Under a program previously authorized by our board of directors we purchased shares of our common stock. This program expired on December 31, 2019, and there currently is no authorized plan to repurchase our shares of common stock. Shares that are reacquired are recorded as treasury stock, at cost, the measurement date of cost being date of purchase, as a reduction to stockholder’ equity.

During the fourth quarter of 2020, as part of the Lite-On Semiconductor acquisition, the Company reacquired 7,765,778 shares of its Common Stock.

Functional currencies and foreign currency translation – We translate the assets and liabilities of our non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates on the balance sheet date. Net sales and expense for these subsidiaries are translated at the weighted-average exchange rate during the period presented. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income or loss within stockholders’ equity in the consolidated balance sheets. Included in other income are foreign exchange losses of approximately $9.8 million for the twelve month ended December 31, 2020, and approximately $ 3.7 million for the twelve months periods ended December 31, 2019 and 2018, respectively.

Defined benefit plan – We maintain plans covering certain of our employees in the U.K. The overfunded or underfunded status of pension and postretirement benefit plans are recognized on the balance sheet. Actuarial gains and losses, and prior service costs or credits, are recognized in other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit cost. For financial reporting purposes, the net pension and supplemental retirement benefit obligations and the related periodic pension costs are calculated based upon, among other things, assumptions of the discount rate for plan obligations, estimated return on pension plan assets and mortality rates. These obligations and related periodic costs are measured using actuarial techniques and assumptions. The projected unit credit method is the actuarial cost method used to compute the pension liabilities and related expenses.  The expected long-term return on plan assets was determined based on historical and expected future returns of the various asset classes. The plan’s investment policy includes a mandate to diversify assets and invest in a variety of asset classes to achieve its expected long-term return and is currently invested in a variety of funds representing most standard equity and debt security classes. Trustees of the plan may make changes at any time.  As part of the LSC acquisition we have assumed the liability associated with a defined benefit plan for certain LSC employees.  The net liability assumed was approximately $4.7 million, as of December 31, 2020.

Noncontrolling interest - Noncontrolling interest primarily relates to the minority investors’ share of the earnings of certain China and Taiwan subsidiaries. Noncontrolling interests are a separate component of equity and not a liability.  Increases or decreases in noncontrolling interest, due to changes in our ownership interest of the subsidiaries that leave control intact, are recorded as equity transactions. The noncontrolling interest in our subsidiaries and their equity balances are reported separately in the consolidated financial statements, and activities of these subsidiaries are included therein.

Contingencies – From time to time, we may be involved in a variety of legal matters that arise in the normal course of business. Based on information available, we evaluate the likelihood of potential outcomes. We record and disclose the appropriate liability when the amount 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.

Comprehensive income (loss) – GAAP generally requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income or loss. The components of

63 -


 

accumulated other comprehensive income or loss include foreign currency translation adjustments and unrealized gain or loss on defined benefit plan. Accumulated other comprehensive loss was approximately $73.6 million, $108.1 million and $101.8 million at December 31, 2020, 2019 and 2018, respectively.

As of December 31, the accumulated balance for each component of comprehensive income is as follows:

 

 

2020

 

 

2019

 

Unrealized foreign currency losses

$

(21,614

)

 

$

(63,053

)

Unrealized gain on cross currency and interest rate swaps, net of tax

$

(3,574

)

 

$

(391

)

Unrealized loss on defined benefit plan

$

(48,418

)

 

$

(44,695

)

 

Reclassifications – Certain immaterial amounts from prior periods have been reclassified to conform to the current years’ presentation.

Recently Issued Accounting Pronouncements

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

 

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the second quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.  

In June 2016, the FASB issued ASU No. 2016-13, which requires measurement and recognition of expected credit losses for financial assets held. We adopted ASU No. 2016-13 effective January 1, 2020. The adoption of ASU No. 2016-13 did not have a material impact on our consolidated financial statements and related disclosures.

Note 2 – Earnings per Share

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

 

 

Twelve Months Ended December 31,

 

 

2020

 

 

2019

 

 

2018

 

Earnings (numerator)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

98,088

 

 

$

153,250

 

 

$

104,021

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares (denominator)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

51,004

 

 

 

50,787

 

 

 

49,841

 

Dilutive effect of stock options and stock awards outstanding

 

1,129

 

 

 

1,073

 

 

 

1,094

 

Adjusted weighted average common shares outstanding (diluted)

 

52,133

 

 

 

51,860

 

 

 

50,935

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to common

   stockholders

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.92

 

 

$

3.02

 

 

$

2.09

 

Diluted

$

1.88

 

 

$

2.96

 

 

$

2.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and stock awards excluded from EPS

   calculation because their inclusion would be

   anti-dilutive

 

137

 

 

 

101

 

 

 

1,103

 

64 -


 

 

 

Note 3 – Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. These two types of inputs create a three-tier fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

As of December 31, 2020, we had short-term and long-term investments. Long-term investments are included with Other long-term assets on the consolidated balance sheet.  Trading securities held at December 31, 2020, were purchased on the open market and unrealized gains and losses are included in Other income (expense). The trading securities are valued under the fair value hierarchy using Level 1 Inputs. Short-term investments consist of investments such as time deposits, which are highly liquid with maturity dates greater than three months at the date of purchase. Generally, we can access these short-term investments in a relatively short amount of time but in doing so we generally forfeit a portion of earned and future interest income. Long-term investments consist of certain equity securities acquired as part of the LSC acquisition.  Deferred compensation investments consist of the Company’s stock, mutual funds and cash. See Note 13 for additional information related to our deferred compensation program and Note 18 for additional information related to our interest rate swaps and foreign currency hedges.  The short-term investments, long-term investments and deferred compensation investments are valued under the fair value hierarchy using Level 1 and Level 2 Inputs.

Financial assets and liabilities carried at fair value as of December 31, 2020, are classified in the following table:

 

Description

Fair Market Value

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs     (Level 3)

 

 

Total Changes in Fair Values Included in Current Period Earnings

 

Short-term investments

$

6,142

 

 

$

6,142

 

 

$

-

 

 

$

-

 

 

$

-

 

Long-term investments

 

18,295

 

 

 

18,295

 

 

 

-

 

 

 

-

 

 

 

-

 

Cross-currency swap liability

 

2,305

 

 

 

-

 

 

 

2,305

 

 

 

-

 

 

 

-

 

Interest rate swap liability

 

1,626

 

 

 

-

 

 

 

1,626

 

 

 

-

 

 

 

-

 

Deferred compensation investments

 

12,829

 

 

 

691

 

 

 

12,138

 

 

 

-

 

 

 

-

 

65 -


 

 

 

Financial assets and liabilities carried at fair value as of December 31, 2019 are classified in the following table:

 

Description

Fair Market Value

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs     (Level 3)

 

 

Total Changes in Fair Values Included in Current Period Earnings

 

Short-term investments

$

4,825

 

 

$

4,825

 

 

$

-

 

 

$

-

 

 

$

-

 

Interest rate swap assets

 

51

 

 

 

-

 

 

 

51

 

 

 

-

 

 

 

-

 

Deferred compensation investments

 

12,912

 

 

 

2,534

 

 

 

10,378

 

 

 

-

 

 

 

-

 

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). We believe our long-term debt under our revolving credit facility approximates fair value and is valued under the fair value hierarchy using Level 2 Inputs. Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at December 31, 2020 and 2019.

We also are responsible for a pension plan in the U.K. that holds investments carried at fair value.  See Note 13 for additional information related to these pension plan investments.

 

Note 4 – Inventories

Inventories, stated at the lower of cost or market value, at December 31 were:

 

 

2020

 

 

2019

 

  Finished goods

$

85,506

 

 

$

62,900

 

  Work-in-progress

 

73,466

 

 

 

55,082

 

  Raw materials

 

148,090

 

 

 

118,490

 

 

$

307,062

 

 

$

236,472

 

 

Note 5 – Property, Plant and Equipment

Property, plant and equipment at December 31 were:

 

 

2020

 

 

2019

 

Buildings and leasehold improvements

$

267,700

 

 

$

228,522

 

Machinery and equipment

 

942,405

 

 

 

863,771

 

 

 

1,210,105

 

 

 

1,092,293

 

Less:  Accumulated depreciation and amortization

 

(791,348

)

 

 

(706,658

)

 

 

418,757

 

 

 

385,635

 

Construction in-progress

 

45,060

 

 

 

30,747

 

Land

 

66,998

 

 

 

53,192

 

 

$

530,815

 

 

$

469,574

 

Depreciation and amortization of property, plant and equipment was $91.7 million, $91.5 million and $86.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.  During the fourth quarter of 2019 the Company recorded a $24.3 million gain realized upon selling land.  The land was acquired in a previous period in anticipation of building a new corporate headquarters building.  

 

 

66 -


 

Note 6 – Intangible Assets

Intangible assets subject to amortization at December 31 were as follows:

 

December 31, 2020

 

Intangible Assets

 

Useful life

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Currency Exchange

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

5-15 years

 

$

13,040

 

 

$

(11,409

)

 

$

(139

)

 

$

1,492

 

Developed product technology

 

2-10 years

 

 

164,300

 

 

 

(89,027

)

 

 

(5,891

)

 

 

69,382

 

Customer relationships

 

7-12 years

 

 

62,093

 

 

 

(34,597

)

 

 

(1,688

)

 

 

25,808

 

Software license and other

 

3-4 years

 

 

5,743

 

 

 

(5,677

)

 

 

(63

)

 

 

3

 

Total amortized intangible assets

 

 

 

 

245,176

 

 

 

(140,710

)

 

 

(7,781

)

 

 

96,685

 

Intangible assets with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In process research and development

 

Indefinite

 

 

4,580

 

 

 

-

 

 

 

-

 

 

 

4,580

 

Trademarks and trade names

 

Indefinite

 

 

10,303

 

 

 

-

 

 

 

(977

)

 

 

9,326

 

Total Intangible assets with indefinite lives

 

 

 

 

14,883

 

 

 

-

 

 

 

(977

)

 

 

13,906

 

Total intangible assets

 

 

 

$

260,059

 

 

$

(140,710

)

 

$

(8,758

)

 

$

110,591

 

 

December 31, 2019

 

Intangible Assets

 

Useful life

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Currency Exchange

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

5-15 years

 

$

12,931

 

 

$

(10,634

)

 

$

(254

)

 

$

2,043

 

Developed product technology

 

2-10 years

 

 

159,129

 

 

 

(77,915

)

 

 

(7,857

)

 

 

73,357

 

Customer relationships

 

7-12 years

 

 

62,093

 

 

 

(30,138

)

 

 

(1,682

)

 

 

30,273

 

Software license and other

 

3-4 years

 

 

5,822

 

 

 

(5,765

)

 

 

(49

)

 

 

8

 

Total amortized intangible assets

 

 

 

 

239,975

 

 

 

(124,452

)

 

 

(9,842

)

 

 

105,681

 

Intangible assets with indefinite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In process research and development

 

Indefinite

 

 

4,580

 

 

 

-

 

 

 

-

 

 

 

4,580

 

Trademarks and trade names

 

Indefinite

 

 

10,303

 

 

 

-

 

 

 

(1,041

)

 

 

9,262

 

Total Intangible assets with indefinite lives

 

 

 

 

14,883

 

 

 

-

 

 

 

(1,041

)

 

 

13,842

 

Total intangible assets

 

 

 

$

254,858

 

 

$

(124,452

)

 

$

(10,883

)

 

$

119,523

 

Amortization expense related to intangible assets subject to amortization was $16.3 million, $18.0 million and $18.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.   In process research and development is transferred to amortized intangible assets at the time the product becomes viable.

The weighted amortization period for intangible assets subject to amortization is 9.8 years. The schedule below sets future amortization expense of our currently owned intangible assets:

 

2021

 

$

16,606

 

2022

 

 

15,981

 

2023

 

 

15,716

 

2024

 

 

15,359

 

2025

 

 

14,483

 

2026 and thereafter

 

 

18,540

 

Total

 

$

96,685

 

 

67 -


 

 

Note 7 – Goodwill

Changes in goodwill for the years ended December 31, were as follows:

 

Balance at December 31, 2018

 

$

132,437

 

Acquisitions:

 

 

 

 

Wafer fabrication in Greenock, Scotland

 

 

931

 

Canyon Investment

 

 

1,671

 

ERIS acquisition of Yea Shin Technology Corporation

 

 

4,320

 

Foreign currency translation adjustment

 

 

1,959

 

Balance at December 31, 2019

 

 

141,318

 

Acquisitions:

 

 

 

 

Savitech

 

 

13,962

 

Foreign currency translation adjustment

 

 

3,051

 

Balance at December 31, 2020

 

$

158,331

 

 

 

Note 8 – Bank Credit Agreements and Other Short-term and Long-term Debt  

Short-term debt

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $307.1 million. The increase from 2019 to 2020 reflects $147.6 million short-term facility assumed as part of the LSC acquisition. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, repayable on demand, terminable by the lender at any time and contain no restrictive covenants.  These credit facilities bear interest at LIBOR 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 December 31, 2020, was approximately $166.0 million, net of a $140.6 million advanced under our foreign credit lines and $0.5 million credit used for import and export guarantee.   

Long-term debt

On May 29, 2020, the Company, Diodes Holding B.V. (the “Foreign Borrower” and, collectively with the Company, the “Borrowers”), and certain subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second and Amended Credit Agreement”) that amends and restates that certain Amended and Restated Credit Agreement dated as of October 26, 2016 (as amended, modified and/or supplemented from time to time prior to May 29, 2020, the “Existing Credit Agreement”).  On December 31, 2020, Diodes Holding B.V. merged into Diodes Holdings UK Limited, which following the merger became the Foreign Borrower under the Credit Agreement, and in connection with the merger, the parties to the Second Amended and Restated Credit Agreement entered into a Consent and Amendment No. 2 to Second Amended and Restated Credit Agreement (“Consent and Amendment No. 2”; the Second Amended and Restated Credit Agreement as amended by Consent and Amendment No. 2 is referred to as the “Credit Agreement”). Certain capitalized terms used in this description of the Credit Agreement have the meanings given to them in the Credit Agreement, the current form of which is set forth in Exhibit A to Consent and Amendment No. 2, which is attached as an exhibit to this report.  The Company analyzed the amendment and restatement of the Existing Credit Agreement pursuant to the guidance in ASC No. 470-50, Debt—Modifications and Extinguishments. The Company determined that certain lenders had changes in cash flows which were substantially different as a result of the amendment and restatement of the Existing Credit Agreement, which resulted in a debt extinguishment of $52.2 million and a loss on extinguishment and third-party fees of $0.7 million being expensed in the nine-month period ended September 30, 2020.  

The Second Amended and Restated Credit Agreement rebalanced the Company’s existing senior credit facilities under the Existing Credit Agreement from (x) aggregate credit facilities of $500,000,000, consisting of (A) a $250,000,000 revolving senior credit facility, which included a $10,000,000 swing line sublimit, a $10,000,000 letter of credit sublimit, and a $20,000,000 alternative currency sublimit, and (B) a $250,000,000 term loan to (y) aggregate credit facilities of $670,000,000 consisting of (A) an acquisition draw term commitment of $340,000,000 (the “Acquisition Draw Term Commitment”), (B) an initial term commitment of $180,000,000 (the “Initial Term Commitment” and, together with the Acquisition Draw Term Commitment, the “Term Loan”) and (C) a $150,000,000 revolving senior credit facility (the “Revolver”), which includes a $20,000,000 uncommitted swing line sublimit, a $10,000,000 letter of credit sublimit, and a $40,000,000 alternative currency sublimit.

The Revolver and the Term Loan mature on May 29, 2023 (the “Maturity Date”).  Both the term loan portion and the revolving portion of the Credit Agreement bear an interest rate at LIBOR or similar other indices plus a specified margin. The Company used a portion of the proceeds available under the Revolver and the Term Loan (i) to finance the Company’s acquisition of Lite-On Semiconductor Corporation, which is described more fully elsewhere in this report, (ii) to refinance certain existing indebtedness of

68 -


 

the Borrowers and their subsidiaries under the Existing Credit Agreement and (iii) for working capital, capital expenditures, and other lawful corporate purposes, including, without limitation, financing permitted acquisitions.

The Credit Agreement contains certain financial and non-financial covenants, including, but not limited to, a maximum Consolidated Leverage Ratio, a minimum Consolidated Fixed Charge Coverage Ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases). These covenants are generally similar to the corresponding covenants in the Existing Credit Agreement, except that certain amounts permitted as exceptions to negative covenants restricting liens, indebtedness, investments, dispositions and restricted payments have been revised, and additional exceptions to certain negative covenants have been added, including increased capacity for certain intercompany Indebtedness and Investment (including existing Lite-On Indebtedness), and the right to enter into certain securitization transactions and receivables facilities, subject to limitations set forth in the Credit Agreement.  Furthermore, under the Credit Agreement, restricted payments, including dividends and share repurchases, are permitted in certain circumstances, including while the pro forma Consolidated Leverage Ratio is, both before and after giving effect to any such restricted payment, at least 0.25 to 1.00 less than the maximum permitted under the Credit Agreement. In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), has short-term debt of $12.3 million and long-term debt of $30.0 million on a long-term basis from local Taiwan banks.  The ERIS debt matures in various periods from 2021 through 2033.  

Borrowings outstanding as of December 31, 2020 and December 31, 2019, are set forth in the table below:

 

 

 

December 31,

 

 

 

 

 

Description

 

2020

 

 

2019

 

 

Interest Rate

 

Current Amount Maturity

Short-term debt

 

$

140,567

 

 

$

13,342

 

 

Libor plus margin

 

Various during 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable to Bank of Taiwan

 

$

4,154

 

 

$

4,242

 

 

Variable, 1.3% base

 

June 2033

Notes payable to Bank of China Trust Company

 

 

3,511

 

 

 

-

 

 

Taibor 3 month rate + 0.5%

 

December 2021

Notes payable to Bank of China Trust Company

 

 

16,714

 

 

 

19,212

 

 

Taibor 3 month rate + 0.5%

 

May 2024

Notes payable to E Sun Bank

 

 

3,511

 

 

 

-

 

 

1-M deposit rate plus 0.08%

 

December 2022

Notes payable to E Sun Bank

 

 

386

 

 

 

-

 

 

1-M deposit rate plus 0.08%

 

June 2027

Notes payable to E Sun Bank

 

 

1,721

 

 

 

-

 

 

1-M deposit rate plus 0.08%

 

June 2030

Term loan and revolver

 

 

282,250

 

 

 

75,187

 

 

Libor plus margin

 

May 2023

Total long-term debt

 

 

312,247

 

 

 

98,641

 

 

 

 

 

Less:  Current portion of long-term debt

 

 

(21,860

)

 

 

(33,105

)

 

 

 

 

Less:  Unamortized debt-issuance costs

 

 

(2,208

)

 

 

(1,135

)

 

 

 

 

Total long-term debt, net of current portion

 

$

288,179

 

 

$

64,401

 

 

 

 

 

 

 

The table below sets forth the annual contractual maturities of long-term debt at December 31, 2020:

 

2021

 

$

21,861

 

2022

 

 

22,333

 

2023

 

 

250,181

 

2024

 

 

13,636

 

2025

 

 

4,236

 

Total long-term debt

 

$

312,247

 

 

 

 

 

 


69 -


 

Note 9 – 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 table below sets forth the components of lease expense for the years ended December 31:

 

 

 

2020

 

 

2019

 

Operating lease expense

 

 

$

15,111

 

 

$

14,824

 

Finance lease expense:

 

 

 

 

 

 

 

 

 

Amortization of assets

 

 

 

836

 

 

 

978

 

Interest on lease liabilities

 

 

 

14

 

 

 

48

 

Short-term lease expense

 

 

 

525

 

 

 

336

 

Variable lease expense

 

 

 

2,940

 

 

 

2,663

 

Total lease expense

 

 

$

19,426

 

 

$

18,849

 

 

The table below sets forth supplemental balance sheet information related to leases as of December 31:

 

 

 

2020

 

 

 

2019

 

Operating leases:

 

 

 

 

 

 

 

 

Operating lease ROU assets

 

$

54,457

 

 

$

57,427

 

 

 

 

 

 

 

 

 

 

Current operating lease liabilities

 

 

10,663

 

 

 

12,554

 

Noncurrent operating lease liabilities

 

 

27,041

 

 

 

27,545

 

Total operating lease liabilities

 

$

37,704

 

 

$

40,099

 

 

 

 

 

 

 

 

 

 

Finance leases:

 

 

 

 

 

 

 

 

Finance lease ROU assets

 

$

2,507

 

 

$

3,396

 

Accumulated amortization

 

 

(2,298

)

 

 

(1,924

)

Finance lease ROU assets, net

 

$

209

 

 

$

1,472

 

 

 

 

 

 

 

 

 

 

Current finance lease liabilities

 

$

149

 

 

$

903

 

Non-current finance lease liabilities

 

 

24

 

 

 

138

 

Total finance lease liabilities

 

$

173

 

 

$

1,041

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term (in years):

 

 

 

 

 

 

 

 

Operating leases

 

 

7.6

 

 

 

4.4

 

Finance leases

 

 

0.6

 

 

 

1.3

 

 

 

 

 

 

 

 

 

 

Weighted average discount rate:

 

 

 

 

 

 

 

 

Operating leases

 

 

4.0

%

 

 

3.8

%

Finance leases

 

 

3.1

%

 

 

3.0

%

 The table below sets forth supplemental cash flow and other information related to leases for the twelve months ended December 31:

 

 

2020

 

 

2019

 

Cash paid for the amounts included in the measurements of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash outflows from operating leases

 

$

15,943

 

 

$

18,325

 

Operating cash outflows from finance leases

 

 

19

 

 

 

48

 

Financing cash outflow from finance leases

 

 

919

 

 

 

1,082

 

 

 

 

 

 

 

 

 

 

ROU assets obtained in exchange for lease liabilities incurred:

 

 

 

 

 

 

 

 

Operating leases

 

 

6,339

 

 

 

3,956

 

70 -


 

 

The table below sets forth information about lease liability maturities:

 

 

December 31, 2020

 

 

 

Operating Leases

 

 

Finance Leases

 

2021

 

$

 

11,842

 

 

$

 

151

 

2022

 

 

 

9,993

 

 

 

 

12

 

2023

 

 

 

5,626

 

 

 

 

10

 

2024

 

 

 

3,102

 

 

 

 

2

 

2025

 

 

 

2,999

 

 

 

 

-

 

2026

 

 

 

2,585

 

 

 

 

-

 

2027 and thereafter

 

 

 

8,648

 

 

 

 

-

 

Total lease payments

 

 

 

44,795

 

 

 

 

175

 

Less: imputed interest

 

 

 

(7,091

)

 

 

 

(2

)

Total lease obligations

 

 

 

37,704

 

 

 

 

173

 

Less: current obligations

 

 

 

(10,663

)

 

 

 

(149

)

Long-term lease obligations

 

$

 

27,041

 

 

$

 

24

 

 

 

Note 10 – Accrued Liabilities and Other Long-Term Liabilities

Accrued liabilities and other current liabilities at December 31 were:

 

 

2020

 

 

2019

 

Accrued expenses

$

60,322

 

 

$

30,761

 

Compensation and payroll taxes

 

48,748

 

 

 

34,043

 

Equipment purchases

 

7,297

 

 

 

10,167

 

Operating lease

 

10,663

 

 

 

12,554

 

Finance lease

 

149

 

 

 

903

 

Accrued pricing adjustments

 

7,891

 

 

 

5,617

 

Accrued professional services

 

3,708

 

 

 

3,258

 

Tax payable - non-income tax related

 

7,858

 

 

 

2,972

 

Other

 

13,481

 

 

 

296

 

 

$

160,117

 

 

$

100,571

 

Other long-term liabilities at December 31 were:

 

 

2020

 

 

2019

 

Accrued defined benefit plan

$

35,316

 

 

$

28,795

 

Unrecognized tax benefits

 

27,965

 

 

 

28,215

 

Operating lease

 

27,041

 

 

 

27,545

 

Finance lease

 

24

 

 

 

138

 

Deferred grants and subsidy

 

11,924

 

 

 

12,774

 

Deferred compensation

 

14,833

 

 

 

12,166

 

Tax contingencies

 

8,787

 

 

 

8,631

 

Other

 

4,905

 

 

 

2,281

 

 

$

130,795

 

 

$

120,545

 

 

71 -


 

 

Note 11 – Stockholders’ Equity

We have never declared or paid cash dividends on our Common Stock. Our U.S. Credit Facility permits us to pay dividends up to $25.0 million per fiscal year to its stockholders so long as we have not defaulted under the U.S. Credit Facility at the time of such dividend and no default would result from declaring or paying such dividend. The payment of dividends is within the discretion of our Board of Directors. See Note 8 for additional information regarding our credit agreements.

During November 2015, the Company’s board of directors authorized a share repurchase plan to repurchase up to an aggregate of $100 million of the Company’s outstanding common stock.  This repurchase plan expired December 31, 2019, and was not renewed.

During 2020, in connection with the LSC acquisition, the Company acquired approximately 7.8 million shares of its stock that was owned by LSC.  These shares are reflected as treasury stock in the consolidated balance sheet.

 

Note 12 – Income Taxes  

The table below sets forth our (loss) income before taxes for the years ended December 31:

 

Income (loss) before income taxes

2020

 

 

2019

 

 

2018

 

U.S.

$

45,526

 

 

$

73,352

 

 

$

(24,141

)

Foreign

 

74,815

 

 

 

124,894

 

 

 

174,103

 

Total

$

120,341

 

 

$

198,246

 

 

$

149,962

 

 

The table below sets forth the components of our income tax provision (benefit) for the years ended December 31:

 

 

2020

 

 

2019

 

 

2018

 

Current tax provision

 

 

 

 

 

 

 

 

 

 

 

Federal

$

631

 

 

$

259

 

 

$

-

 

Foreign

 

17,115

 

 

 

28,829

 

 

 

42,726

 

State

 

56

 

 

 

92

 

 

 

24

 

 

 

17,802

 

 

 

29,180

 

 

 

42,750

 

Deferred tax provision (benefit)

 

 

 

 

 

 

 

 

 

 

 

Federal

 

6,411

 

 

 

886

 

 

 

2,400

 

Foreign

 

(6,210

)

 

 

11,994

 

 

 

(3,107

)

State

 

65

 

 

 

30

 

 

 

56

 

 

 

266

 

 

 

12,910

 

 

 

(651

)

 

 

 

 

 

 

 

 

 

 

 

 

Liability for unrecognized tax benefits

 

3,044

 

 

 

2,041

 

 

 

2,457

 

Total income tax provision

$

21,112

 

 

$

44,131

 

 

$

44,556

 

72 -


 

 

 

Effective Tax Rate Reconciliation

The table below sets forth a reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31:

 

 

2020

 

 

2019

 

 

2018

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

of pretax

 

 

 

 

 

 

of pretax

 

 

 

 

 

 

of pretax

 

 

Amount

 

 

earnings*

 

 

Amount

 

 

earnings*

 

 

Amount

 

 

earnings*

 

Federal tax

$

25,272

 

 

 

21.0

 

 

$

41,632

 

 

 

21.0

 

 

$

31,488

 

 

 

21.0

 

State income taxes, net of federal tax

   provision

 

(378

)

 

 

(0.3

)

 

 

1,389

 

 

 

0.7

 

 

 

(375

)

 

 

(0.3

)

Foreign income taxed at different tax rates

 

81

 

 

 

0.1

 

 

 

(5,786

)

 

 

(2.9

)

 

 

(2,844

)

 

 

(1.9

)

U.S. tax impact of foreign operations

 

(3,031

)

 

 

(2.5

)

 

 

(3,340

)

 

 

(1.7

)

 

 

4,140

 

 

 

2.8

 

Foreign withholding taxes

 

(1,798

)

 

 

(1.5