Diodes(DIOD) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section details the company's financial statements, management's analysis, market risks, and internal controls Item 1. Financial Statements This section provides unaudited condensed consolidated financial statements and notes on accounting policies, key financial items Condensed Consolidated Balance Sheets The company's condensed consolidated balance sheets detail assets, liabilities, and equity at specific reporting dates Balance Sheet Summary | Metric | June 30, 2020 (Unaudited) ($ thousands) | December 31, 2019 ($ thousands) | | :--------------------------------------- | :-------------------------------------- | :------------------------------ | | Assets | | | | Cash and cash equivalents | $503,206 | $258,390 | | Total current assets | $1,126,485 | $809,959 | | Total assets | $1,937,163 | $1,639,384 | | Liabilities | | | | Total current liabilities | $325,335 | $285,322 | | Total liabilities | $741,536 | $486,601 | | Equity | | | | Total stockholders' equity | $1,143,385 | $1,106,424 | | Total equity | $1,195,627 | $1,152,783 | | Total liabilities and stockholders' equity | $1,937,163 | $1,639,384 | - Total assets increased by $297.8 million (18.2%) from December 31, 2019, to June 30, 2020, primarily driven by a significant increase in cash and cash equivalents[8] - Total liabilities increased by $254.9 million (52.4%) from December 31, 2019, to June 30, 2020, largely due to an increase in long-term debt[6] Condensed Consolidated Statements of Operations The company's condensed consolidated statements of operations detail net sales, gross profit, and net income for the reporting periods Statements of Operations Summary | Metric | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net sales | $288,669 | $322,006 | $569,386 | $624,299 | | Gross profit | $101,492 | $121,988 | $197,334 | $234,399 | | Income from operations | $30,869 | $48,516 | $56,721 | $90,639 | | Net income attributable to common stockholders | $21,033 | $36,284 | $41,201 | $68,000 | | Basic EPS | $0.41 | $0.72 | $0.80 | $1.35 | | Diluted EPS | $0.40 | $0.70 | $0.78 | $1.32 | - Net sales decreased by 10.4% for the three months ended June 30, 2020, and by 8.8% for the six months ended June 30, 2020, compared to the respective prior year periods[13] - Diluted EPS decreased by 42.9% for the three months ended June 30, 2020, and by 40.9% for the six months ended June 30, 2020, compared to the respective prior year periods[13] Condensed Consolidated Statements of Comprehensive Income The company's condensed consolidated statements of comprehensive income include net income and other comprehensive income components Statements of Comprehensive Income Summary | Metric | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net income | $21,388 | $36,703 | $41,788 | $68,439 | | Unrealized (loss) gain on defined benefit plan, net of tax | $(16,570) | $1,020 | $(6,851) | $(5,009) | | Unrealized gain (loss) on swaps and collars, net of tax | $817 | $503 | $(621) | $(3,406) | | Unrealized foreign currency gain (loss), net of tax | $6,733 | $(6,900) | $(2,881) | $(1,964) | | Total comprehensive income attributable to common stockholders | $12,013 | $30,907 | $30,848 | $57,621 | - Total comprehensive income attributable to common stockholders decreased significantly by 61.1% for the three months ended June 30, 2020, and by 46.5% for the six months ended June 30, 2020, primarily due to unrealized losses on defined benefit plans and foreign currency fluctuations[15] Condensed Consolidated Statements of Equity The company's condensed consolidated statements of equity detail changes in common stock, retained earnings, and other equity components Statements of Equity Summary | Metric | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :------------------------------------------------------------------------------------------------- | :-------------------------- | :------------------------------ | | Common stock amount | $35,389 | $35,111 | | Additional paid-in capital | $433,989 | $427,262 | | Retained earnings | $831,159 | $789,958 | | Treasury stock at cost | $(38,660) | $(37,768) | | Accumulated other comprehensive loss | $(118,492) | $(108,139) | | Total Diodes Incorporated Stockholders' equity | $1,143,385 | $1,106,424 | | Noncontrolling interest | $52,242 | $46,359 | | Total equity | $1,195,627 | $1,152,783 | - Total stockholders' equity increased by $36.96 million (3.3%) from December 31, 2019, to June 30, 2020, driven by an increase in retained earnings and additional paid-in capital, partially offset by an increase in accumulated other comprehensive loss[18] Condensed Consolidated Statements of Cash Flows The company's condensed consolidated statements of cash flows categorize cash movements from operating, investing, and financing activities Statements of Cash Flows Summary | Metric | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :---------------------------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash flows provided by operating activities | $86,734 | $110,488 | | Net cash and cash equivalents used in investing activities | $(34,048) | $(82,517) | | Net cash and cash equivalents provided by (used in) financing activities | $241,784 | $(32,955) | | Net increase in cash and cash equivalents, including restricted cash | $295,114 | $(5,019) | | Cash and cash equivalents, end of period, including restricted cash | $554,621 | $236,814 | - Net cash provided by operating activities decreased by $23.75 million (21.5%) for the six months ended June 30, 2020, compared to the same period in 2019[21] - Net cash provided by financing activities significantly increased to $241.8 million in the first six months of 2020, compared to a net cash outflow of $33.0 million in the prior year, primarily due to increased debt facilities for the LSC acquisition[21][136] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed notes explaining the significant accounting policies and specific financial statement line items NOTE 1 – Summary of Operations and Significant Accounting Policies This note outlines the company's business, significant accounting policies, and recent accounting pronouncement adoptions - Diodes Incorporated (Nasdaq: DIOD) is a global manufacturer and supplier of high-quality, application-specific standard products in the discrete, logic, analog, and mixed-signal semiconductor markets[28] - The company serves consumer electronics, computing, communications, industrial, and automotive markets with products including diodes, rectifiers, transistors, MOSFETs, and power management devices[28] - The company adopted ASU No. 2016-13 on January 1, 2020, regarding expected credit losses, which did not materially impact financial statements[33] - In Q2 2020, the company elected to apply hedge accounting expedients under ASU No. 2020-04 for reference rate reform, specifically for probability and effectiveness assessments of LIBOR-indexed cash flows[31] NOTE 2 – Earnings per Share This note details the calculation of basic and diluted earnings per share, showing a decrease in EPS for the reporting periods Earnings per Share Data | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to common stockholders ($ thousands) | $21,033 | $36,284 | $41,201 | $68,000 | | Weighted average common shares outstanding (basic) (thousands) | 51,527 | 50,658 | 51,431 | 50,529 | | Adjusted weighted average common shares outstanding (diluted) (thousands) | 52,569 | 51,620 | 52,517 | 51,566 | | Basic EPS | $0.41 | $0.72 | $0.80 | $1.35 | | Diluted EPS | $0.40 | $0.70 | $0.78 | $1.32 | - Diluted EPS decreased by 42.9% for the three months ended June 30, 2020 ($0.40 vs $0.70 in 2019)[35] - Diluted EPS decreased by 40.9% for the six months ended June 30, 2020 ($0.78 vs $1.32 in 2019)[35] NOTE 3 – Inventories This note describes inventory valuation and presents the breakdown of finished goods, work-in-progress, and raw materials Inventory Breakdown | Inventory Category | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :----------------- | :-------------------------- | :------------------------------ | | Finished goods | $69,174 | $62,900 | | Work-in-progress | $53,457 | $55,082 | | Raw materials | $133,197 | $118,490 | | Total | $255,828 | $236,472 | - Total inventories increased by $19.36 million (8.2%) from December 31, 2019, to June 30, 2020[36] NOTE 4 – Goodwill and Intangible Assets This note details changes in goodwill and intangible assets, including amortization expense, influenced by the Savitech acquisition Goodwill and Intangible Assets Data | Metric | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :-------------------------------- | :-------------------------- | :------------------------------ | | Goodwill | $152,140 | $141,318 | | Total intangible assets, net | $118,076 | $119,523 | | Amortization expense (3 months) | $4,021 | $4,536 | | Amortization expense (6 months) | $8,242 | $9,020 | - Goodwill increased by $10.82 million (7.7%) from December 31, 2019, to June 30, 2020, mainly due to the Savitech acquisition ($12.7 million)[37] - Amortization expense for intangible assets decreased by 11.4% for the three months ended June 30, 2020, and by 8.6% for the six months ended June 30, 2020, compared to the prior year periods[39] NOTE 5 – Income Tax Provision This note details the income tax provision and effective tax rates, which decreased due to lower non-U.S. withholding taxes Income Tax Provision and Effective Tax Rates | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax provision ($ thousands) | $4,670 | $11,174 | $9,226 | $21,472 | | Effective tax rate | 17.9% | 23.3% | 18.1% | 23.9% | | Impact of tax holidays on tax expense ($ thousands) | $(241) | $572 | $(1,315) | $849 | | Basic EPS impact of tax holidays | $0.01 | $(0.01) | $0.03 | $(0.02) | | Diluted EPS impact of tax holidays | $0.01 | $(0.01) | $0.03 | $(0.02) | - The effective tax rate decreased from 23.3% to 17.9% for the three months ended June 30, 2020, and from 23.9% to 18.1% for the six months ended June 30, 2020, primarily due to lower non-U.S. withholding taxes and favorable U.S. permanent differences[40] - The company does not expect the CARES Act to have a material impact on its financial statements[44] NOTE 6 – Share-Based Compensation This note details share-based compensation expense, including restricted stock awards and the impact of a director's RSU modification Share-Based Compensation Expense | Expense Category | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Cost of goods sold | $259 | $259 | $530 | $384 | | Selling, general and administrative | $4,309 | $4,309 | $10,426 | $7,946 | | Research and development | $730 | $730 | $1,438 | $1,445 | | Total share-based compensation expense | $5,298 | $5,298 | $12,394 | $9,775 | - Total share-based compensation expense increased by 26.8% for the six months ended June 30, 2020, compared to the same period in 2019[45] - A modification to a director's unvested RSU grants in Q2 2020 resulted in an additional expense of approximately $1.7 million[45] - As of June 30, 2020, total unrecognized share-based compensation expense was approximately $43.5 million, to be recognized over a weighted average period of approximately 2.1 years[47] NOTE 7 – Segment Information and Net Sales This note confirms the company's single operating segment and disaggregates net sales by region and customer type - The company operates in a single segment: standard semiconductor products[48] Net Sales by Region | Net Sales by Region | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | | :------------------ | :--------------------------------------------- | :--------------------------------------------- | | Asia | $223,056 | $239,082 | | Europe | $43,145 | $46,050 | | Americas | $22,468 | $36,874 | | Total net sales | $288,669 | $322,006 | Net Sales by Type | Net Sales by Type | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :---------------- | :------------------------------------------- | :------------------------------------------- | | Direct sales | $280,581 | $195,289 | | Distributor sales | $288,805 | $429,010 | | Total net sales | $569,386 | $624,299 | - Net sales from products shipped to China were $152.4 million for the three months ended June 30, 2020, a decrease from $160.3 million in the prior year[53] NOTE 8 – Debt This note details the company's debt, including credit facilities and a significant increase in borrowing capacity for the LSC acquisition - Asia subsidiaries maintain $165.5 million in credit facilities, with $63.7 million outstanding and $101.4 million unused as of June 30, 2020[54] - A Second Amended and Restated Credit Agreement was entered into on May 29, 2020, increasing aggregate credit facilities to $670 million (from $500 million), including a $340 million acquisition draw term, $180 million initial term, and a $150 million revolver, all maturing May 29, 2023[55][57] - The amendment resulted in a $52.2 million debt extinguishment and a $0.7 million loss on extinguishment and third-party fees[55] Debt Summary | Debt Type | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--------------------------------------- | :-------------------------- | :------------------------------ | | Short-term debt | $63,668 | $13,342 | | Total long-term debt | $297,958 | $98,641 | | Less: Current portion of long-term debt | $(13,052) | $(33,105) | | Less: Unamortized debt costs | $(2,635) | $(1,135) | | Total long-term debt, net of current portion | $282,271 | $64,401 | NOTE 9 – Commitments and Contingencies This note outlines commitments for capital expenditures, wafer purchases, UK defined benefit plan liability, and legal proceedings - As of June 30, 2020, the company had $26.8 million in non-cancelable capital expenditure purchase contracts and a $29.8 million commitment for wafer purchases[61] - The unfunded liability for the UK defined benefit plan was approximately $28.7 million as of June 30, 2020[62] - Annual contributions of GBP 2.0 million (approximately $2.4 million) are scheduled from April 1, 2020, to eliminate the defined benefit plan deficit by December 31, 2028[64] - The company is not currently a party to any pending litigation considered material[65] NOTE 10 – Derivative Financial Instruments This note details the company's use of derivative instruments, including foreign currency forwards and interest rate swaps, to manage market risks - The company uses foreign currency forward agreements, interest rate swaps, and interest rate collars to manage foreign currency and interest rate risks[66][67][68] - As of June 30, 2020, $93.0 million in foreign currency forward contracts were outstanding, not designated for hedge accounting[67] Derivative Financial Instruments Impact | Derivative Type | Three Months Ended June 30, 2020 (Gain/Loss in OCI) ($ thousands) | Three Months Ended June 30, 2020 (Reclassified to Income) ($ thousands) | Six Months Ended June 30, 2020 (Gain/Loss in OCI) ($ thousands) | Six Months Ended June 30, 2020 (Reclassified to Income) ($ thousands) | | :-------------------------- | :---------------------------------------------------------------- | :---------------------------------------------------------------------- | :-------------------------------------------------------------- | :---------------------------------------------------------------------- | | Interest rate swaps and collars | $(180) | $(2) (Interest expense) | $(1,571) | $(73) (Interest expense) | | Cross currency swaps | $0 | $0 | $0 | $0 | | Foreign currency forward contracts (not designated) | N/A | $(391) (Foreign currency loss, net) | N/A | $(2,538) (Foreign currency loss, net) | - An estimated $0.6 million of net derivative gains in AOCI as of June 30, 2020, are expected to be reclassified into expense within the next 12 months[70] NOTE 11 – Leases This note details the company's lease arrangements for land, buildings, and equipment, including expenses, ROU assets, and liabilities Lease Expense Summary | Lease Expense Category | Three Months Ended June 30, 2020 ($ thousands) | Three Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | | :--------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Operating lease expense | $3,669 | $3,773 | $7,399 | $7,477 | | Finance lease expense (amortization) | $209 | $245 | $418 | $489 | | Finance lease expense (interest) | $6 | $13 | $13 | $28 | | Short-term lease expense | $122 | $98 | $216 | $134 | | Variable lease expense | $738 | $802 | $1,449 | $1,420 | | Total lease expense | $4,744 | $4,931 | $9,495 | $9,548 | Lease Balance Sheet Items | Balance Sheet Item | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :----------------------------------- | :-------------------------- | :------------------------------ | | Operating lease ROU assets | $51,739 | $57,427 | | Total operating lease liabilities | $34,350 | $40,099 | | Finance lease ROU assets, net | $627 | $1,472 | | Total finance lease liabilities | $593 | $1,041 | - Weighted average remaining lease term for operating leases is 4.2 years (4.4 years at Dec 31, 2019), and for finance leases is 0.8 years (1.3 years at Dec 31, 2019)[74] NOTE 12 – Employee Benefit Plans This note describes the company's Non-Qualified Deferred Compensation Plan for executives and board members, with obligations offset by investments - The company maintains a Non-Qualified Deferred Compensation Plan for executive officers, key employees, and Board of Directors members[77] - Investments offsetting plan obligations totaled approximately $11.2 million as of June 30, 2020, down from $12.9 million at December 31, 2019[77] NOTE 13 – Related Parties This note details transactions with related parties, including LSC, Nuvoton, and Keylink, and the ongoing acquisition of LSC - LSC is the company's largest stockholder, owning approximately 15% of outstanding Common Stock as of June 30, 2020[78] - The acquisition of LSC for approximately $444.4 million is anticipated to close in the second half of 2020, pending regulatory approval in China[78] Related Party Transactions (Sales and Purchases) | Related Party | Transaction Type | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | | :------------ | :--------------- | :--------------------------------------------- | :------------------------------------------- | | LSC | Net sales | $171 | $299 | | LSC | Purchases | $3,806 | $6,554 | | Nuvoton | Purchases | $2,011 | $3,655 | | Keylink | Net sales | $4,975 | $8,960 | | Keylink | Purchases | $426 | $831 | | JCP | Purchases | $291 | $447 | Related Party Balances (Accounts Receivable and Payable) | Related Party | Balance Sheet Item | June 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :------------ | :----------------- | :-------------------------- | :------------------------------ | | LSC | Accounts receivable | $171 | $184 | | LSC | Accounts payable | $2,799 | $2,154 | | Nuvoton | Accounts payable | $1,071 | $1,055 | | Keylink | Accounts receivable | $36,960 | $31,598 | | Keylink | Accounts payable | $32,029 | $28,244 | | JCP | Accounts payable | $326 | $173 | NOTE 14 – Acquisitions This note details recent acquisitions, including Savitech Corporation and the GFAB wafer fabrication facility, and their impact on goodwill - On February 5, 2020, the company agreed to acquire at least 51% of Savitech Corporation for up to approximately $14.2 million[83] - The first tranche of $5.6 million for Savitech, providing 33.6% ownership, was completed on March 4, 2020[83] - Total purchase consideration recorded for Savitech was $13.9 million, including $12.7 million in goodwill[85][86] - On April 1, 2019, the company acquired a wafer fabrication facility (GFAB) in Greenock, Scotland, for $33.2 million, recording $0.9 million in goodwill[87][88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and results of operations, highlighting impacts from global slowdown, COVID-19, and the LSC acquisition Overview This overview introduces Diodes Incorporated as a global semiconductor manufacturer and highlights its competitive advantages - Diodes Incorporated is a leading global manufacturer and supplier of high-quality, application-specific standard products in the discrete, logic, analog, and mixed-signal semiconductor markets[92] - The company's focus on innovative packaging, cost-effective process technologies, and customer-focused product development provides a competitive advantage[92] Factors Relevant to Our Results of Operations for the Three Months Ended June 30, 2020 This section discusses key factors influencing operating results for Q2 2020, including sales, profit, and EPS trends Key Operating Metrics | Metric | Q2 2020 ($ millions) | Q2 2019 ($ millions) | Q1 2020 ($ millions) | | :------------------- | :------------------- | :------------------- | :------------------- | | Net sales | $288.7 | $322.0 | $280.7 | | Gross profit | $101.5 | $122.0 | $95.8 | | Gross profit margin | 35.2% | 37.9% | 34.1% | | Net income | $21.0 | $36.3 | $20.2 | | Diluted EPS | $0.40 | $0.70 | $0.38 | | Cash flow from operations | $33.1 | N/A | N/A | | Net cash flow | $283.7 | N/A | N/A | - Net sales decreased by 10.3% YoY but increased by 2.8% QoQ[93] - Net income decreased by 42.1% YoY but increased by 4.0% QoQ[93] - The company benefited from growth in the computing market and serial-connectivity products despite overall net sales decrease[104] Recent Developments This section highlights recent significant developments, including the LSC acquisition and the company's response to the COVID-19 pandemic LSC Acquisition This section details the ongoing acquisition of Lite-On Semiconductor Corporation (LSC), including its status, consideration, and related financing - The acquisition of Lite-On Semiconductor Corporation (LSC) is expected to be completed in the second half of 2020, pending regulatory approval in China[95] - The aggregate consideration for LSC is approximately $444.4 million, subject to Taiwan dollar to US dollar exchange rate fluctuations at closing[95] - A $200.0 million draw-down under the new credit agreement was made as a partial currency hedge for the LSC acquisition[95] COVID-19 This section discusses the impact of the COVID-19 pandemic on operations, including temporary facility closures and the company's liquidity - The duration and severity of COVID-19's effects on the business, financial condition, and results of operations are currently unknown[97] - Manufacturing facilities in China and the United Kingdom experienced temporary closures but have since resumed full production[98] - As of June 30, 2020, the company had $506.9 million in cash, cash equivalents, and short-term investments, plus $150 million in available revolving credit, providing adequate liquidity for at least 12 months[99] Results of Operations for the Three Months Ended June 30, 2020 and 2019 This section analyzes operating results for Q2 2020, highlighting decreases in net sales, gross profit, and changes in expenses Q2 Operating Results as Percentage of Net Sales | Metric | Q2 2020 (% of Net Sales) | Q2 2019 (% of Net Sales) | | :----------------------------------------- | :----------------------- | :----------------------- | | Net sales | 100% | 100% | | Cost of goods sold | (65)% | (62)% | | Gross profit | 35% | 38% | | Total operating expense | 24% | 23% | | Income from operations | 11% | 15% | | Net income attributable to common stockholders | 7% | 12% | Q2 Operating Results Comparison | Metric | Q2 2020 ($ thousands) | Q2 2019 ($ thousands) | Change ($ thousands) | % Change | | :------------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Net sales | $288,669 | $322,006 | $(33,337) | (10.4%) | | Gross profit | $101,492 | $121,988 | $(20,496) | (16.8%) | | Total operating expense | $70,623 | $73,472 | $(2,849) | (3.9%) | | Interest income | $168 | $633 | $(465) | (73.5%) | | Interest expense | $(2,653) | $(2,011) | $642 | 31.9% | | Foreign currency loss, net | $(3,600) | $(496) | $3,104 | 625.8% | | Income tax provision | $4,670 | $11,174 | $(6,504) | (58.2%) | Q2 End-User Market Revenue Distribution | End-User Market | Q2 2020 (% of Total Revenue) | Q2 2019 (% of Total Revenue) | | :---------------- | :--------------------------- | :--------------------------- | | Industrial | 22.0% | 29.0% | | Communications | 22.0% | 23.0% | | Consumer | 27.0% | 22.0% | | Computing | 19.0% | 16.0% | | Automotive | 10.0% | 10.0% | - Gross profit margin decreased from 37.9% to 35.2% due to decreased net sales and increased unit costs from lower manufacturing capacity utilization[107] Results of Operations for the Six Months Ended June 30, 2020 and 2019 This section analyzes operating results for H1 2020, detailing decreases in net sales, gross profit, and shifts in expenses H1 Operating Results as Percentage of Net Sales | Metric | H1 2020 (% of Net Sales) | H1 2019 (% of Net Sales) | | :----------------------------------------- | :----------------------- | :----------------------- | | Net sales | 100% | 100% | | Cost of goods sold | (65)% | (62)% | | Gross profit | 35% | 38% | | Total operating expense | 25% | 23% | | Income from operations | 10% | 15% | | Net income attributable to common stockholders | 7% | 12% | H1 Operating Results Comparison | Metric | H1 2020 ($ thousands) | H1 2019 ($ thousands) | Change ($ thousands) | % Change | | :------------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Net sales | $569,386 | $624,299 | $(54,913) | (8.8%) | | Gross profit | $197,334 | $234,399 | $(37,065) | (15.8%) | | Total operating expense | $140,613 | $143,760 | $(3,147) | (2.2%) | | Interest income | $441 | $1,508 | $(1,067) | (70.8%) | | Interest expense | $(3,898) | $(4,156) | $(258) | (6.2%) | | Foreign currency loss, net | $(3,525) | $(560) | $2,965 | 529.5% | | Income tax provision | $9,226 | $21,472 | $(12,246) | (57.0%) | H1 End-User Market Revenue Distribution | End-User Market | H1 2020 (% of Total Revenue) | H1 2019 (% of Total Revenue) | | :---------------- | :--------------------------- | :--------------------------- | | Industrial | 24.0% | 29.0% | | Communications | 22.5% | 23.0% | | Consumer | 25.0% | 22.5% | | Computing | 18.0% | 15.5% | | Automotive | 10.5% | 10.0% | - Average unit cost increased approximately 7.1% for the six months ended June 30, 2020, partly due to manufacturing facility shutdowns during the extended Chinese New Year period[115] Financial Condition This section assesses the company's financial condition, focusing on liquidity, capital resources, cash flow, and derivative instrument usage Liquidity and Capital Resources This section details liquidity sources, working capital, capital expenditures, and foreign cash holdings - Primary liquidity sources are cash and cash equivalents, funds from operations, and credit facilities[119] - Working capital increased to $801.2 million at June 30, 2020, from $524.6 million at December 31, 2019[127] - A $200.0 million draw-down under the new credit agreement was made as a partial currency hedge for the anticipated LSC acquisition[127] - Capital expenditures for the first six months of 2020 were $28.3 million, approximately 5.0% of net sales, aligning with the target range of 5% to 9%[128] - Foreign subsidiaries held approximately $469.5 million in cash, cash equivalents, and investments as of June 30, 2020, with $9.7 million potentially subject to non-U.S. withholding tax if distributed[129] Discussion of Cash Flow This section analyzes cash flow movements from operating, investing, and financing activities, highlighting the impact of LSC acquisition financing - Cash and cash equivalents increased from $258.4 million to $503.2 million at June 30, 2020, reflecting funds for the LSC acquisition[131] Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Change ($ thousands) | | :---------------------------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------- | | Net cash flows provided by operating activities | $86,734 | $110,488 | $(23,754) | | Net cash and cash equivalents used in investing activities | $(34,048) | $(82,517) | $48,469 | | Net cash and cash equivalents provided by (used in) financing activities | $241,784 | $(32,955) | $274,739 | | Net increase in cash and cash equivalents, including restricted cash | $295,114 | $(5,019) | $300,133 | - Net cash used in investing activities decreased by $48.47 million, primarily due to lower purchases of property, plant, and equipment and the absence of a large acquisition like GFAB in 2019[135] Use of Derivative Instruments and Hedging This section describes the company's use of derivative instruments to manage interest rate and foreign exchange risks - The company uses interest rate swaps, foreign exchange forward contracts, and cross-currency swaps to manage interest rate and foreign exchange exposure[137] - Interest rate derivatives, primarily swaps and collars, are used to stabilize interest expense and manage interest rate movements[138] - Foreign currency forward agreements are used to preserve the economic value of foreign currency denominated monetary assets and liabilities but are not designated for hedge accounting[139] Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements that would significantly impact liquidity or capital resources - The company does not have any transactions, arrangements, or relationships with unconsolidated entities that affect liquidity or capital resources[140] - No special purpose entities are used for off-balance sheet financing, liquidity, or market/credit risk support[140] Contractual Obligations No material changes to contractual obligations have occurred since the Annual Report on Form 10-K for FY2019 - No material changes to contractual obligations have occurred since the Annual Report on Form 10-K for FY2019[142] Critical Accounting Policies This section confirms consistency of critical accounting policies with prior reports and refers to Note 1 for new pronouncements - Critical accounting policies are consistent with those disclosed in the FY2019 Annual Report on Form 10-K[143] - New or updated accounting policies are discussed in Note 1 – Summary of Operations and Significant Accounting Policies[143][144] Recently Issued Accounting Pronouncements Details on recently issued accounting pronouncements are available in Note 1 – Summary of Operations and Significant Accounting Policies - Details on recently issued accounting pronouncements are available in Note 1 – Summary of Operations and Significant Accounting Policies[144] Available Information This section informs stakeholders about the availability of SEC filings and investor information on the company's website - SEC filings (10-K, 10-Q, 8-K, proxy statements) are available free of charge on the company's website (www.diodes.com)[145](index=145&type=chunk) Cautionary Statement for Purposes of the "Safe Harbor" Provision of the Private Securities Litigation Reform Act of 1995 This section provides a cautionary statement regarding forward-looking statements, emphasizing inherent risks and non-obligation to update - The report contains forward-looking statements, identified by specific terminology, subject to risks and uncertainties that could cause actual results to differ materially[146] - All forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA)[146] - The company undertakes no obligation to update forward-looking statements to reflect subsequent events or circumstances[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks have occurred since the Annual Report on Form 10-K for FY2019 - No material changes to market risks have occurred since the Annual Report on Form 10-K for FY2019[193] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control - As of June 30, 2020, disclosure controls and procedures were deemed effective at a reasonable assurance level[194] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2020[196] PART II – OTHER INFORMATION This part covers other essential information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section confirms the absence of material pending litigation and management's assessment of routine legal proceedings - The company is not a party to any pending litigation considered material[199] - Management believes the ultimate outcome of any pending legal proceeding will not have a material adverse effect on financial position, cash flows, or operating results[200] Item 1A. Risk Factors This section details various risk factors, including the uncertain impact of COVID-19, global economic conditions, and operational challenges - The ultimate impact of the COVID-19 pandemic cannot be estimated but may have a material adverse effect on the business, financial condition, and results of operations[202][205] - Risks include changes in ordering patterns, demand for products, efficiency losses due to travel limitations, and potential increases in IT spending or healthcare costs[205][207] - Disruptions to suppliers and customers due to quarantines, worker absenteeism, and social distancing measures could adversely impact the business[208] RISKS RELATED TO OUR BUSINESS This section outlines business-specific risks, including economic dependency, industry cyclicality, competition, production disruptions, and personnel - Success depends on global economy and financial market stability; weaknesses can adversely affect net sales, operating results, and financial condition[150] - Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect operating results and financial condition[151] - The semiconductor business is highly competitive, and increased competition may harm business, operating results, and financial condition[151] - Production disruptions at manufacturing facilities due to natural disasters or technical malfunctions could prevent meeting customer demands[155] - Failure to attract or retain qualified personnel could adversely affect business, operating results, and financial condition[164] RISKS RELATED TO OUR INTERNATIONAL OPERATIONS This section details risks associated with international operations, including governmental policies, trade restrictions, Brexit, and foreign currency - International operations, particularly in China, the U.K., Germany, Hong Kong, and Taiwan, expose the company to inherent risks in those jurisdictions[178] - Uncertainties related to changes in governmental policies, international trading partnerships, or economic unions could have a material adverse effect[179] - Tariffs or other restrictions imposed by the United States Trade Representative may disrupt operations and impact profitability[180] - The U.K.'s exit from the European Union (Brexit) continues to have uncertain effects and could adversely impact business[181] - A slowdown in the Chinese economy could limit demand for electronic devices containing products, materially affecting business[181] - The company is subject to foreign currency risk as a result of its international operations[183] RISKS RELATED TO OUR COMMON STOCK This section addresses risks related to the company's common stock, including price volatility, acquisition impacts, and anti-takeover provisions - Variations in quarterly operating results may cause stock price volatility[187] - Future acquisitions and related actions could adversely affect the price of Common Stock[187] - Directors, executive officers, and significant stockholders hold a substantial portion of Common Stock, potentially leading to conflicts with other stockholders[187] - Anti-takeover provisions in Delaware law and the company's Certificate of Incorporation and Bylaws may hinder takeover attempts[189][190][191] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[210] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report for the period - No defaults upon senior securities to report[212] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the company[212] Item 5. Other Information No other information to report for the period - No other information to report[212] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report, including corporate governance documents, credit agreements, and certifications - Exhibits include corporate governance documents (Certificate of Incorporation, By-laws), credit agreements, and Sarbanes-Oxley Act certifications[214][215] - Inline XBRL documents are provided for interactive data filing[215][216] - A cautionary note advises against relying solely on representations and warranties in exhibits, as they may be subject to contractual materiality standards and risk allocation[217] SIGNATURES This section confirms the official signing of the Quarterly Report on Form 10-Q by the Principal Executive and Financial Officers - The report was signed by Keh-Shew Lu, President and CEO, and Brett R. Whitmire, CFO, on August 6, 2020[220]