Diodes Annual Report 2000

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FY2000 Annual Report · Diodes

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QUALITY PARTS

Discrete Semiconductors

MAKE

Successful Solutions

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FINANCIAL HIGHLIGHTS
(in thousands except per share data)

Net sales
Gross profit
Selling, general and

administrative expenses

Income from operations
Interest expense, net
Other income
Income before taxes and

minority interest

Provision for income taxes
Minority interest in joint

venture earnings

Net income
Earnings per share:

Basic
Diluted

1999

2000

change

$ 79,251
20,948

$118,462
37,427

+49.5%
+78.7%

13,670
7,278
292
182

18,955
18,472
940
501

+38.7%
+153.8%
+221.9%
+175.3%

7,168
(1,380)

18,033
(2,496)

+151.6%
+80.9%

(219)
5,569

(642)
14,895

193.2%
+167.5%

$
$

0.73
0.68

$ 1.85
1.62
$

+153.4%
+138.2%

Number of shares used in computation:

Basic
Diluted

7,625
8,204

8,071
9,222

+5.8%
+12.4%

1999

2000

change

Total assets
Working capital
Long-term debt
Stockholders’ equity

$ 62,407 $ 112,950
17,291
30,857
51,253

15,903
6,984
34,973

+80.9%
+8.7%
+341.8%
+46.6%

Diodes Incorporated (Nasdaq: DIOD) is a leading manufacturer and supplier of high-quality discrete semiconduc-

tor products, serving the communications, computer, electronics and automotive markets. The Company

operates two Far East subsidiaries, Diodes-China (QS-9000, ISO 9000 & ISO-14001 certified) in Shanghai and

Diodes-Taiwan (ISO-9000 certified) in Taipei. Diodes-China's manufacturing focus is on surface-mount devices

destined for wireless devices, notebook computers, pagers, PCMCIA cards and modems, among others. Diodes-

Taiwan is our Asia-Pacific sales, logistics and distribution center. The Company's newly acquired 5” wafer

foundry, FabTech (QS-9000 certified) located in Missouri, specializes in Schottky products. The Company’s

ISO-9000 corporate sales, marketing, engineering and logistics headquarters is located in Southern California.

Visit the Company’s website at www.diodes.com.

Outlook

To become a vertically integrated
manufacturer and supplier of discrete
semiconductors at the forefront of
next-generation discrete technology,
focused on providing solutions for
emerging electronics products.

Diodes Incorporated 2000 Annual Report

$118.5

$79.3

$67.0

$61.3

$57.7

1996

1997

1998

1999

2000

(CAGR) since 1996.

(in millions)

Net Sales have increased an average of 19.7%

$1.62

$.62

$.68

$.37

$.33

1996

1997

1998

1999

2000

138.2% over last year.

(diluted, adjusted for a three-for-two stock split in July 2000)

Earnings Per Share set records by increasing

$51.3

$35.0

$27.5

$24.5

$19.5

1996

1997

1998

1999

2000

increasing 46.6% from last year.

(in millions)

Stockholders’ Equity reached new highs,

2 Diodes Incorporated 2000 Annual Report

to our shareholders

The year 2000 was another year of record performance for Diodes Incorporated. Not only did we achieve

record financial results, but we also made significant strides toward securing the foundation for our

Company’s future success in the marketplace. At Diodes, Inc., we are committed to meeting the needs

and exceeding the expectations of our customer base, achieving consistent manufacturing excellence

and deploying our resources to generate the greatest value for the owners of this company, our share-

holders. We would like to take this opportunity to share some of the year’s highlights with you.

In 2000, revenues increased 50% to $118.5 million, as compared to $79.3 million in 1999. Net

income increased by 168% to $14.9 million, or $1.62 per share, as compared to $5.6 million, or

$0.68 per share last year. The fourth quarter of 2000 was our 43rd consecutively profitable quarter, an

outstanding record in the semiconductor industry. Just as important, our Return on Equity (ROE) was

29.1% and Return on Assets (ROA) was 13.2%. Both of these ratios, which measure the effectiveness

with which the Company deployed its resources to earn returns for our shareholders, are near the top

range for our industry.

One key to our record of profitability and product quality has been our investment of nearly $40 million

in the expansion of our manufacturing facilities in Mainland China. We are justifiably proud of the industry

certifications awarded our Diodes-China facilities for quality and environmental standards. In 2000,

Diodes-China produced close to 2 billion units and is expected to achieve capacity of over 3 billion

units by the end of this year. Contrast this with 21 million units produced in 1996 and you can see

just how far we have progressed. Building up more manufacturing capacity than we sell allows us to

rapidly respond to the demands of the marketplace and adjust our product mix accordingly. This in turn

positively impacts our all-important gross margins, which have increased from 25.1% in 1998 to 31.6%

for 2000.

The acquisition of FabTech in December of 2000 will allow Diodes, Inc. to become a vertically integrated

semiconductor supplier, the logical next step in building our company. By covering the full range of

marketing, manufacturing and product development, we are now able to position Diodes, Inc. as a total

solution provider in the discrete semiconductor industry. FabTech’s wafer foundry will provide us with

communication • computer • electronic • automotive

KEY MARKETS

Diodes Incorporated 2000 Annual Report

the manufacturing base to establish a world-class Research and Development team charged with the

task of developing innovative, higher-margin semiconductor products. This drive into proprietary new

product lines is a multi-year initiative that will make a significant contribution toward establishing

Diodes, Inc. at the forefront of next-generation discrete technology.

In June of last year, we were pleased to announce that our stock would commence trading on the

NASDAQ stock market. NASDAQ offers us an opportunity to align Diodes, Inc. with some of the world’s

most innovative technology companies. In listing on NASDAQ, and in instituting the three-for-two

stock split that accompanied the move, we demonstrated our continuing commitment to enhancing

value and liquidity for you, our shareholders.

We are also gratified that Diodes, Inc. was lauded by influential voices within the business community.

We are honored that Forbes Magazine named us as one of the “200 Best Small Companies in the U.S.”

for 2000 in their annual list. We view this as further validation of our long-term goals of generating

shareholder value through the consistent application of innovation, flexibility and a singular dedication

to satisfying the needs of our customers.

Regarding year 2001, industry analysts remain sharply divided as to prospects for growth in the discrete

semiconductor industry. Like many companies in the technology sector, Diodes, Inc. experienced a

challenging 4th quarter in 2000 and an uncertain economic climate as we head into 2001. Whatever

rate our industry grows next year, our goal will be to surpass it. History is on our side. In both up

and down markets, this Company has been able to outgrow the discrete industry and win additional

market share.

Growth in the discrete industry has historically been driven by demand from the PC sector, but with

computing and access to digital information moving beyond the traditional confines of the desktop,

we are beginning to participate in a whole new growth sector in communications, wireless devices and

Internet infrastructure. Major new markets are opening up in areas such as broadband technology, the

wireless Internet, entertainment on demand, smart appliances and increasingly sophisticated automo-

tive electronics. All of the devices being developed for these sectors, from set-top boxes to DSL modems,

from wireless PDAs to Internet appliances, will require discrete semiconductors to function and in each

of these categories, Diodes, Inc. has secured recent design wins with leading manufacturers, such as

“...we are committed to meeting the needs

and exceeding the expectations of our customer base...”

4 Diodes Incorporated 2000 Annual Report

Motorola, Nortel, Sony, and Microsoft. Indeed we believe that our innovative focus on advanced surface

mount technology with sub-miniature packages and customized arrays allied to our competitive cost

structures leaves us ideally placed to capitalize on and expand our share in these markets.

In an industry that increasingly places a premium on fast turnaround and exceptional product reliability,

we are proud of our achievement in establishing the reputation of Diodes, Inc. as a service-driven,

highly flexible organization, committed to attaining and maintaining the highest levels of engineering

and manufacturing expertise. It is these qualities that strengthen Company confidence in our continued

ability to meet the evolving needs of a rapidly expanding customer base.

Our strategic objectives for 2001, designed to position Diodes, Inc. to capture these emerging

opportunities, include:

Integration of FabTech’s Schottky wafer product lines into our tier-one sales and marketing

organization. Leveraging our in-depth understanding of customer needs with FabTech’s existing

technology and engineering staff to build an R&D organization dedicated to developing

next-generation discrete technologies.

Expansion of our sales and marketing organization in Taiwan to increase our presence in the

growing Asian markets, while establishing our initial sales presence in Europe.

Completing the implementation of a company-wide Oracle Enterprise Resource Planning (ERP)

system that will allow us to integrate key business processes across the globe, contributing to

improved financial controls, greater business efficiencies and manufacturing flexibility.

Continuing to invest in the manufacturing excellence that has underlay our success over the

past several years.

Diodes, Inc. is a company that has proven itself time and again in both favorable and adverse market

conditions. The key to our success lies in our commitment first and foremost to the total satisfaction

of our customers. However, the competitive nature of the semiconductor industry requires us to main-

tain our exacting standards and continue to foster a culture of excellence within our organization. In

our drive to become a world-class company, we are constantly striving to improve the efficiency of our

operations, the innovation of our design and engineering, and the consistency of our customer service.

If we continue to deliver quality products, quality service and quality management, we will ensure that

we can maintain and build on our enviable record of robust growth and consistent profitability.

Diodes Incorporated 2000 Annual Report

Raymond Soong

Chairman of the Board

C.H. Chen

President and Chief Executive Officer

We would like to thank all those who continue to contribute to Diodes, Inc.’s success:

To our shareholders for the confidence and commitment you have demonstrated during

a sometimes volatile year.

To our customers for continued patronage and for driving us to provide yet higher levels

of service and product innovation.

To our distributors, employees, and suppliers, for continued dedication and hard work.

We are optimistic about what the future holds for Diodes, Inc. and we look forward to the growth

opportunities ahead as together we move forward to achieve our goals and objectives into Year 2001.

Sincerely

Raymond Soong

Chairman of the Board

C.H. Chen

President and Chief Executive Officer

6 Diodes Incorporated 2000 Annual Report

Fact:

Quick delivery of quality parts at
competitive prices is what our customers
have come to expect. Now, through
innovative product design and reliable
manufacturing, we can produce the total
customer solutions the market demands.

The FabTech acquisition closes our technology loop.

With its experienced engineering team, intellectual

property, and broad range of technologies well-suited

to our target markets, the 5-inch wafer foundry gives

Diodes, Inc. the wafer fabrication capacity needed to

control the full range of discrete device development

and manufacturing. We can now innovate not only in

packaging, but also in device development to offer

our customers a more complete solution.

FabTech

Closing the Technology Loop

DIODES
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Marketing

FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH

Research and
Development

FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH

Wafer
Manufacturing

FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH
FABTECH

DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA
DIODES-CHINA DIODES-CHINA

Package
Development

Assembly
and Testing

DIODES
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Sales

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Closing the Technology Loop

The addition of FabTech positions Diodes, Inc.

to become a vertically integrated

discrete semiconductor manufacturer and supplier

at the forefront of

next-generation discrete technology.

8 Diodes Incorporated 2000 Annual Report

Fact:

In a world enhanced by more and
more computer electronics, we see
remarkable growth opportunities
for the deployment of discrete
semiconductors, the essential
components for success.

In an industry that places a premium on fast

turnaround and exceptional product reliability, we

are proud of our commitment to engineering and

manufacturing excellence. As a result, a range of

high-quality diode and transistor arrays in

sub-miniature surface-mount packages, primarily

for the new generation of smaller, more powerful

products are being manufactured at our QS-9000

and ISO-9002 certified world class manufacturing

facility, Diodes-China.

You’ll Find Our Products Everywhere

Our discrete semiconductors are integral

to the performance and assembly of such popular

consumer electronics products as the DIRECTV Receiver

with TiVo® TV personalization and convenience

services shown on the Sony SAT-T60 Digital Satellite

Receiver/Recorder.

TiVo—TV Your Way™

Sony SAT-T60, Courtesy of Sony Electronics Inc.

DIRECTV and the Cyclone Design logo are
trademarks of DIRECTV, Inc.

Diodes Incorporated 2000 Annual Report

Fact:

Increasingly, products are hitting the
market to meet our demand for quick
and easy access to global informa-
tion. Power in small sizes for speed,
efficiency and portability is critical,
and miniaturization in discrete
components is key.

Today’s communications and computer electronics

are becoming richer with features, yet smaller

in size. All require discrete semiconductors to

perform. As space and power constraints become

more critical, Diodes, Inc. has the flexibility,

agility, and willingness to respond to our customers’

needs. We believe that our innovative focus on

advanced surface mount technology with

sub-miniature packages and customized arrays can

support our customers’ advancing technologies.

Essential Ingredients for Success

Valued as building blocks of the electronics

and communications industries,

our components are used in everything from routers, modems,

Internet appliances and laptops to the
Palm™ VIIx Handheld.

About Diodes Incorporated

DISCRETE SEMICONDUCTORS are our focus business.

PRODUCTS are marketed under the Diodes Incorporated brand

and include: Schottky diodes and rectifiers, Switching diodes,

Zener diodes, Transient Voltage Suppressors (TVSs), Standard,

Fast, Ultra-fast and Super-fast recovery rectifiers, Bridge

rectifiers, Small signal transistors and MOSFETs, and

high-density diode and transistor arrays in ultra-miniature

surface mount packages.

MANUFACTURING FACILITIES, located in China and U.S.A. are

ISO-9000 & QS-9000 certified to ensure products of the highest

quality at competitive prices.

INDUSTRIES SERVED include communications, computing,

consumer, industrial, and automotive electronics.

DIRECT SALES & MARKETING are accomplished through an

ISO-9000 certified corporate office in Southern California, five

regional U.S. sales offices, and a sales office in Taiwan.

DISTRIBUTION is further enhanced through an extensive

network of manufacturers’ representatives and major distributors.

STRATEGIC ALLIANCE for manufacture and distribution with

The Lite-On Group.

A PUBLIC COMPANY dedicated to providing our customers

with reliable availability of high-quality products at

competitive prices.

FINANCIAL STATEMENTS

Management’s Discussion and Analysis

Consolidated Balance Sheets

Consolidated Statement of Income

Consolidated Statement of Stockholders’ Equity
Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

Independent Auditor’s Report

13
19
20
21
22
23
30

MANAGEMENT’S DISCUSSION & ANALYSIS

Diodes Incorporated 2000 Annual Report

The following discussion of the Company’s financial condition and

customers rather than a focused product line, silicon wafers will now be a

results of operations should be read together with the consolidated financial

focused product line supplied by FabTech to its current customer base, as well

statements and the notes to consolidated financial statements included else-

as to Diodes-China for use in its manufacturing process.

where in this Form 10-K. Except for the historical information contained herein,

the matters addressed in this Item 7 constitute “forward-looking statements”

Reporting Segments

within the meaning of Section 27A of the Securities Act of 1933, as amended,

For financial reporting purposes, the Company is deemed to engage

and Section 21E of the Securities Exchange Act of 1934, as amended. Such

in two industry segments: North America and the Far East. Both segments focus

forward-looking statements are subject to a variety of risks and uncertainties,

on discrete semiconductor devices. The North American segment includes the

including those discussed below under the heading "Cautionary Statement for

corporate offices in California (Diodes-North America) as well as FabTech, Inc.

Purposes of the “Safe Harbor” Provision of the Private Securities Litigation

(“FabTech” or “Diodes-FabTech”), the newly acquired 5-inch wafer foundry

Reform Act of 1995” and elsewhere in this Report on Form 10-K, that could

located in Missouri. Diodes-North America procures and distributes products

cause actual results to differ materially from those anticipated by the Company’s

primarily throughout North America and provides management, warehousing,

management. The Private Securities Litigation Reform Act of 1995 (the “Act”)

engineering and logistics support. Diodes-FabTech manufactures silicon wafers

provides certain “safe harbor” provisions for forward-looking statements. All

for use by Diodes-China as well as for sale to its customer base. The Far East

forward-looking statements made in this Annual Report on Form 10-K are made

segment includes the operations of Diodes-Taiwan and Diodes-China. Diodes-

pursuant to the Act.

General

China manufactures product for, and distributes product to, both the North

American and Taiwan segments, as well as to trade customers. Diodes-Taiwan

procures product from, and distributes product primarily to, customers in

Diodes Incorporated (the “Company”) is a manufacturer and distributor

Taiwan, Korea, Singapore, and Hong Kong.

of high-quality discrete semiconductor devices to leading manufacturers in the com-

munications, computer, electronics, and automotive industries, and to distributors

Diodes-Taiwan

of electronic components. The Company’s products include small signal transis-

Until October 2000, Diodes-Taiwan also manufactured product for

tors and MOSFETs, transient voltage suppressors (TVSs), zeners, diodes, rectifiers

sale to Diodes-North America and to trade customers. The Company moved

and bridges, as well as silicon wafers used in manufacturing these products.

its Taiwan manufacturing to China because the Taiwan manufactured products

Sales

were lower technology products, fairly labor intensive, and the cost savings of

moving the manufacturing to the Company’s qualified minority partner in

The Company’s products are sold primarily in North America and the Far

Diodes-China were attractive and necessary to meet market demand. In connec-

East, both directly to end users and through electronic component distributors.

tion with the manufacturing move, the Company sold approximately $150,000

In 2000, approximately 54% and 46% of the Company’s products were sold in

of equipment to the minority partner of Diodes-China. Diodes-Taiwan continues

North America and the Far East, respectively, compared to 56% and 44% in

as the Company’s Asia-Pacific sales, logistics and distribution center. Diodes-

1999, respectively. See Note 11 of “Notes to Consolidated Financial Statements”

China participates in final testing, inspection and packaging of these products,

for a description of the Company’s adoption of SFAS No. 131, Disclosures about

formerly manufactured by Diodes-Taiwan. Diodes-Taiwan also procures some

Segments of an Enterprise and Related Information. The increase in the

product for the Company’s North American operations.

percentage of sales in the Far East is expected to continue as the Company

believes there is greater potential to increase market share in that region

Vishay/LPSC

due to the expanding base of electronic product manufacturers.

In July 1997, Vishay Intertechnology, Inc. (“Vishay”) and the Lite-On

Group, a Taiwanese consortium, formed a joint venture — Vishay/Lite-On Power

Beginning in 1998, the Company increased the amount of product

Semiconductor Pte., Ltd. (“Vishay/LPSC”) — to acquire Lite-On Power Semicon-

shipped to larger distributors. Although these sales were significant in terms

ductor Corp. (“LPSC”), the Company’s largest shareholder and a member of The

of total sales dollars and gross margin dollars, they generally were under agree-

Lite-On Group of the Republic of China. The Lite-On Group, with worldwide sales

ments that resulted in lower gross profit margins for the Company when com-

of approximately $4.5 billion, is a leading manufacturer of power semiconductors,

pared to sales to smaller distributors and OEM customers. As the consolidation

computer peripherals, and communication products. The Vishay/LPSC joint venture

of electronic component distributors continues, the Company anticipates that

included the worldwide discrete power semiconductor business of LPSC and the

a greater portion of its distributor sales will be to the larger distributors, and

Asian passive component business of Vishay. Vishay held a 65% controlling

thus may result in lower gross profit margins for this sales channel.

interest in the joint venture, and The Lite-On Group held the other 35%. In

March 2000, Vishay agreed to sell their 65% interest in Vishay/LPSC back to The

In 1999, Diodes-Taiwan began purchasing silicon wafers, a new product

Lite-On Group. In December 2000, LPSC merged with Dyna Image Corporation of

line, from FabTech for resale to customers in the Far East. Silicon wafer sales

Taipei, Taiwan, the world’s largest Contact Image Sensors (“CIS”) manufacturer.

were $9,837,000 and $4,005,000 in 2000 and 1999, respectively. The gross

CIS are primarily used in fax machines, scanners, and copy machines. C.H. Chen,

margin percentage on sales of silicon wafers is currently far below that of the

the Company’s President and CEO, remains Vice Chairman of the combined com-

Company’s standard product line. Initially a complementary service for some

pany now called Lite-On Semiconductor Corporation (“LSC”).

Diodes Incorporated 2000 Annual Report

MANAGEMENT’S DISCUSSION & ANALYSIS

Manufacturing and Vendors

FabTech purchases polished silicon wafers, and then by using the

The Company’s Far East subsidiary, Diodes-China, manufactures product

various technologies listed above, in conjunction with many chemicals and

for sale primarily to North America and Asia. Diodes-China’s manufacturing

gases, fabricates several layers on the wafers, including epitaxial silicon, ion

focuses on SOT-23 and SOD-123 products, as well as sub-miniature packages

implants, dielectrics, and metals, with various patterns. Depending upon these

such as SOT-363, SOT-563, and SC-75. These surface-mount devices (“SMD”)

layers and the die size (which is determined during the photolithography

are much smaller in size and are used primarily in the computer and communi-

process and completed at the customer’s packaging site where the wafer is

cation industries, destined for cellular phones, notebook computers, pagers,

sawed into square or rectangular die), different types of wafers with various

PCMCIA cards and modems, as well as in garage door transmitters, among

currents, voltages, and switching speeds are produced.

others. Diodes-China’s state-of-the-art facilities have been designed to develop

even smaller, higher-density products as electronic industry trends to portable

Recent Results

and hand-held devices continue. Diodes-China purchases silicon wafers from

Beginning in the second half of 1999, and continuing through the

FabTech, however, the majority are currently purchased from other wafer vendors.

first three quarters of 2000, industry demand exceeded industry capacity. The

Company’s gross profit margins reached a peak of 34.4% in the third quarter

Since 1997, the Company’s manufacturing focus has primarily been in

of 2000. In addition, OEM customers and distributors increased their inventory

the development and expansion of Diodes-China. To date, the Company and its

levels. As semiconductor manufacturers, including the Company, increased

minority partner have increased property, plant and equipment at the facility to

capacity, the U.S. economy slowed causing a sharp decline in sales in the

approximately $40 million. The equipment expansion allows for the manufac-

fourth quarter of 2000. Although gross profit margins for year 2000 were

ture of additional SOT-23 packaged components as well as other surface-mount

31.6%, the gross profit in the fourth quarter of 2000 decreased to 28.3%.

packaging, including the smaller SOD packages.

The excess capacity, coupled with the decreased demand and higher inventory

levels, has continued into 2001 and the Company expects further deterioration

The Company will continue its strategic plan of locating alternate

of its gross profit margins until such a time as demand increases and the

sources of its products and raw materials, including those provided by its major

Company utilizes more of its available capacity.

suppliers. Alternate sources include, but are not limited to, Diodes-China and

other sourcing agreements in place, as well as those in negotiation. The

The discrete semiconductor industry has been subject to severe pricing

Company anticipates that the effect of the loss of any one of its major suppliers

pressures, causing the Company’s gross profit margins to decline from 28.3%

will not have a material adverse effect on the Company’s operations, provided

in 1995 to 25.1% in 1998. Although manufacturing costs have been falling,

that alternate sources remain available. The Company continually evaluates

excess manufacturing capacity and over-inventory has caused selling prices to

alternative sources of its products to assure its ability to deliver high-quality,

fall to a greater extent than manufacturing cost. To compete in this highly

cost-effective products.

FabTech

competitive industry, in recent years, the Company has committed substantial

resources to the development and implementation of two areas of operation:

(i) sales and marketing, and (ii) manufacturing. Emphasizing the Company’s

Acquired on December 1, 2000, FabTech’s wafer foundry is located in

focus on customer service, additional personnel and programs have been added.

Lee’s Summit, Missouri. FabTech manufactures primarily 5-inch silicon wafers

In order to meet customers’ needs at the design stage of end-product develop-

which are the building blocks for semiconductors. FabTech has full foundry

ment, the Company has employed additional applications engineers. These

capabilities including processes such as silicon epitaxy, silicon oxidation,

applications engineers work directly with customers to assist them in “designing

photolithography and etching, ion implantation and diffusion, low pressure

in” the correct products to produce optimum results. Regional sales managers,

and plasma enhanced chemical vapor deposition, sputtered and evaporated

working closely with manufacturers’ representative firms and distributors, have

metal deposition, wafer backgrinding, and wafer probe and ink.

also been added in the U.S. and the Far East to help satisfy customers’ require-

ments. In addition, the Company has continued to develop relationships with

The FabTech purchase price consisted of approximately $6 million in

major distributors who inventory and sell the Company’s products.

cash and an earnout of up to $30 million if FabTech meets specified earnings

targets over a four-year period. In addition, FabTech is obligated to repay an

Beginning late in the fourth quarter of 2000, the Company and the

aggregate of approximately $19 million, consisting of (i) approximately $13.6

semiconductor industry as a whole experienced a sharp inventory correction

million payable, together with interest at LIBOR plus 1%, to LSC through March

primarily in two key markets, communications and computers. This downturn

31, 2002, (ii) approximately $2.6 million payable, together with interest at

has continued into the first quarter of 2001. Although the Company’s market

LIBOR plus 1.1%, to the Company through February 28, 2001 and (iii) approxi-

share has remained stable, market conditions for its core product lines have not

mately $3.0 million payable to a financial institution, which amount was repaid

improved, while demand for silicon wafers, the fundamental raw materials used

on December 4, 2000 with the proceeds of a capital contribution by the Com-

in manufacturing discrete semiconductors, has deteriorated further.

pany. The acquisition was financed internally and through bank credit facilities.

MANAGEMENT’S DISCUSSION & ANALYSIS

Diodes Incorporated 2000 Annual Report

The negative impact to earnings is largely attributable to reduced

indications from the local taxing authority in Shanghai that the 0% tax holiday

capacity utilization of the Company’s manufacturing assets and changes in

may be extended beyond 2000, but currently, no assurances can be made

product mix, both of which have had a negative impact on gross margins. Due

regarding the preferential tax treatment extension. In addition, it is currently

to market conditions, capacity utilization at Diodes’ FabTech subsidiary has

not known whether the taxing authority for the central government of the

decreased 45% as compared to the previous year, while Diodes-China’s utiliza-

People’s Republic of China (“PRC”) will participate in this extended tax holiday

tion has decreased 15%.

arrangement. Based upon expected tax rates in the U.S., Taiwan and China,

and the expected profitability of each of the Company’s four business segments

The risks of becoming a fully integrated manufacturer are amplified in

during the balance of the year, it is anticipated that for 2001 the provision

an industry-wide slowdown because of the fixed costs associated with manufac-

for income taxes should be in the range of 10% to 20% of pre-tax income.

turing facilities. The Company has responded to this cyclical downturn by imple-

menting programs to cut operating costs, including reducing its worldwide

In accordance with tax treaty arrangements, the Company receives full

workforce by 26%, primarily at the FabTech and Diodes-China manufacturing

credit against its U.S. Federal tax liability for corporate taxes paid in Taiwan

facilities. The Company will continue to actively adjust its cost structure as

and China. The repatriation of funds from Taiwan and China to the Company

dictated by market conditions.

may be subject to state income taxes. In the years ending December 31, 1999

and 2000, Diodes-Taiwan distributed dividends of approximately $1.5 million

Although no clear short-term change in market conditions exist, long

and $2.6 million, respectively, which is included in Federal and state taxable

term, the Company believes that it will continue to generate value for share-

income. Deferred taxes have been provided for all remaining undistributed earn-

holders and customers, not just from its expanded Diodes-China manufacturing

ings. As of December 31, 2000, accumulated and undistributed earnings of

and FabTech’s foundry assets, but also by the addition of a true technology

Diodes-China is approximately $17 million. The Company has not recorded

component to the Company. Although market conditions changed just as the

deferred Federal or state tax liabilities (estimated to be $6.8 million) on these

new initiative started, the Company will continue to pursue its goal of becom-

earnings since the Company considers its investment in Diodes-China to be per-

ing a total solution provider. This is a multi-year initiative that will increase the

manent, and has no plans, intentions or obligation to distribute any part or all

Company’s ability to serve its customers’ needs, while establishing the Company

of that amount from China to the United States.

at the forefront of the next generation of discrete technologies.

Results of Operations

The Company’s overall effective tax rate decreased to 13.8% in 2000

The following table sets forth, for the periods indicated, the percent-

from 19.3% in 1999. The decrease in the Company’s effective tax rate is due

age that certain items in the statement of income bear to net sales and the

primarily to Diodes-China’s increased net income at a preferential tax rate of

percentage dollar increase (decrease) of such items from period to period.

0%. From 2001 through 2003, the tax rate at Diodes-China should be 13.5%

(one-half of the normal tax rate of 27%). The Company, however, has received

Percent of Net Sales
Year Ended December 31,

Percentage Dollar Increase (Decrease)
Year Ended December 31,

1996

1997

1998

1999

2000

‘96 to ‘97

97 to ‘98

‘98 to ‘99

‘99 to ‘00

Net sales

100.0 %

16.1 %

(8.5) %

29.2 %

49.5 %

Cost of goods sold

(73.9)

(72.1)

(74.9)

(73.6)

(68.4)

Gross profit

26.1

27.9

25.1

26.4

31.6

Operating expenses

(18.0)

(16.6)

(18.0)

(17.2)

(16.0)

Income from operations

Interest expense, net

Other income

Income before taxes and

minority interest

Income taxes

Minority interest

Net income

8.1

(0.6)

0.1

7.6

2.9

0.4

5.1

11.3

(0.1)

0.4

11.6

3.9

(0.1)

7.6

7.2

(0.5)

0.2

6.8

2.4

0.0

4.4

0.2

9.0

1.7

(0.3)

7.0

13.2

24.2

7.2

61.9

(4.9)

(17.8)

(1.1)

(42.2)

9.2

15.6

(0.4)

(0.8)

(82.3)

353.2

0.4

279.7

(61.7)

26.9

36.0

24.1

65.9

3.9

95.7

39.0

78.7

38.7

153.8

221.9

175.3

15.2

2.1

76.6

57.3

(46.0)

(42.6)

70.7

151.6

(8.7)

80.9

(0.5)

(106.3)

(6.7)

(1,464.3)

(193.2)

12.6

72.8

(47.8)

108.3

167.5

Diodes Incorporated 2000 Annual Report

MANAGEMENT’S DISCUSSION & ANALYSIS

The following discussion explains in greater detail the consolidated financial

Other income for 2000 increased approximately $319,000 compared to

condition of the Company. This discussion should be read in conjunction

the same period last year, due primarily to currency exchange gains at the

with the consolidated financial statements and notes thereto appearing

Company’s subsidiaries in Taiwan and China.

elsewhere herein.

2000 Compared to 1999

The Company’s overall effective tax rate decreased to 13.8% in 2000

from 19.3% in 1999. The decrease in the Company’s effective tax rate is due

Net sales for 2000 increased approximately $39,211,000 to

primarily to Diodes-China’s increased net income at a preferential tax rate of

$118,462,000 from $79,251,000 for 1999. The 49.5% increase was due primari-

0%. From 2001 through 2003, the tax rate at Diodes-China should be 13.5%

ly to (i) a 41.7% increase in units sold, as a result of an increased demand for

(one-half of the normal tax rate of 27%). The Company, however, has received

the Company’s products, primarily in the Far East and (ii) sales of silicon wafers

indications from the local taxing authority in Shanghai that the 0% tax holiday

totaling $9,837,000, versus $4,005,000 in 1999. Diodes-China’s trade sales in

may be extended beyond 2000, but currently, no assurances can be made

2000 were $6,610,000, compared to $3,389,000 in the same period last year. A

regarding the preferential tax treatment extension. In addition, it is currently

6.3% increase in the Company’s average selling price, primarily in the Far East,

not known whether the taxing authority for the central government of the

also contributed to increased sales. Due to an industry-wide slowdown that

People’s Republic of China (“PRC”) will participate in this extended tax holiday

began late in the fourth quarter, the Company anticipates pricing pressures will

arrangement. Based upon expected tax rates in the U.S., Taiwan and China, and

increase significantly in 2001.

the expected profitability of each of the Company’s four business segments dur-

Gross profit for 2000 increased 78.7% to $37,427,000 from

income taxes should be in the range of 10% to 20% of pre-tax income.

ing the balance of the year, it is anticipated that for 2001 the provision for

$20,948,000 for 1999. Of the $16,479,000 increase, $10,365,000 was due to

the 49.5% increase in net sales while $6,113,000 was due to the increase in

For the years ended December 31, 1999 and 2000, Diodes-Taiwan dis-

gross margin percentage from 26.4% in 1999 to 31.6% in 2000. Manufacturing

tributed dividends of approximately $1.5 million and $2.6 million, respectively,

profit at Diodes-China at higher gross profit margins was the primary contributor

which is included in Federal and state taxable income for the respective years.

to the increase, partially offset by an increase in the sale of wafers at a generally

Deferred taxes have been provided for all remaining undistributed earnings in

lower margin than then Company’s other products, as well as increased sales to

excess of statutory permanent capital requirements of Diodes-Taiwan. As of

larger distributors. Although gross profit margins strengthened in 2000, pricing

December 31, 2000, accumulated and undistributed earnings of Diodes-China is

pressures continue to exist on many of the Company’s product lines and gross

approximately $17 million. The Company has not recorded deferred Federal or

profit margin is expected to decrease in 2001. Average selling prices in 2000

state tax liabilities (estimated to be $6.8 million) on these earnings since the

increased approximately 6.3%. As the trend of consolidation among electronic

Company considers its investment in Diodes-China to be permanent, and has no

component distributors continues, the Company anticipates that a greater

plans, intentions or obligation to distribute any part or all of that amount from

portion of its distributor sales will be to larger distributors, usually under

China to the United States.

agreements resulting in lower than historical gross profit margins.

For 2000, selling, general and administrative expenses (“SG&A”)

therefore, the $642,000 minority interest in joint venture represents the minority

increased $5,285,000 to $18,955,000 from $13,670,000 for 1999. The 38.7%

investor’s 5% share of the joint venture’s profit. The increase in the joint ven-

increase in SG&A was due primarily to increases in management expenses at

ture earnings for 2000 is primarily the result of increased sales. The joint ven-

Diodes-China, higher Company-wide marketing and advertising expenses,

ture investment is eliminated in consolidation of the Company’s financial state-

increased sales commissions at Diodes-Taiwan, and additional sales and engi-

ments and the activities of Diodes-China are included therein. As of December

neering personnel. SG&A as a percentage of sales decreased to 16.0% from

31, 2000, the Company had a 95% controlling interest in the joint venture.

In 2000, Diodes-China contributed to the Company’s profitability and,

17.2% in the comparable period last year, primarily due to the 49.5% increase

in net sales.

The Company generated net income of $14,895,000 (or $1.85 basic

earnings per share, $1.62 diluted earnings per share) in 2000, as compared to

Net interest expense for 2000 increased $940,000, due primarily to

$5,569,000 (or $0.73 basic earnings per share, $0.68 diluted earnings per

an increased use of the Company’s credit facility to support the expansion of

share) for 1999. This $9,326,000 or 167.5% increase is due primarily to the

Diodes-China versus the same period last year. The Company’s interest expense

49.5% sales increase at gross profit margins of 31.6% compared to gross profit

is primarily the result of the term loan by which the Company is financing (i)

margins of 26.4% in 1999.

the investment in Diodes-China’s manufacturing facility and (ii) the acquisition

of FabTech. Interest income is primarily the interest charged to FabTech for the

1999 Compared to 1998

first 11 months of 2000, under the Company’s formal loan agreement, as well

Net sales for 1999 increased approximately $17,923,000 to

as earnings on its cash balances.

$79,251,000 from $61,328,000 for 1998. The 29.2% increase was due primarily

to (i) a 36.0% increase in units sold, as a result of an increased demand for

the Company’s products, primarily in the Far East and (ii) $4,005,000 sales of

MANAGEMENT’S DISCUSSION & ANALYSIS

Diodes Incorporated 2000 Annual Report

silicon wafers, a new product line. Diodes-China’s trade sales in 1999 were

The Company’s overall effective federal, state, and foreign tax rate

$3,389,000, compared to $280,000 in the same period last year. The increase in

decreased to 19.3% in 1999 from 36.0% in 1998. This decrease is due primarily

units sold was partly offset by a 7.1% decrease in the Company’s average sell-

to Diodes-China’s increase in net income at a tax rate of 0%. Through December

ing price, primarily in the Far East. In the fourth quarter of 1999, average sell-

31, 1997, the Company had undistributed earnings at Diodes-Taiwan for which

ing prices rose 3.6% and 5.0%, compared to the fourth quarter 1998 and the

no deferred income tax liability had been recorded since, at that time, manage-

third quarter 1999, respectively. The Company anticipates pricing pressures

ment considered this investment to be permanent, and no plans or intentions

could continue, though the severity may slowly diminish.

existed to distribute the capital of its Taiwan subsidiary. Changes in Taiwan

In 1999, Diodes-Taiwan began purchasing silicon wafers, a new product

strategies in the fourth quarter of 1998 for current and future earnings at

line, from FabTech for resale to customers in the Far East. The gross margin per-

Diodes-Taiwan. While a portion of its investment will remain in Taiwan, a

centage on sales of silicon wafers, though still profitable, is far below that of

distribution of approximately $4.5 million will be made by Diodes-Taiwan to

the Company’s standard product line. Silicon wafer sales are a complementary

the Company. Approximately $1.5 million was distributed in 1999, and the

service for some customers, rather than a focused product line.

remaining is scheduled to be distributed in 2000. The decision was made, in

income tax policies in 1998 caused management to reconsider its investment

part, because the changes in Taiwan income tax policies made it less favorable

Gross profit for 1999 increased $5,546,000 to $20,948,000 from

to accumulate earnings at Diodes-Taiwan and, in part, to allow the Company

$15,402,000 for 1998. The 36.0% increase was due primarily to the 29.2%

to redirect its financial resources from Diodes-Taiwan to its expansion of

increase in net sales. Manufacturing profit at Diodes-China at higher gross profit

Diodes-China.

margins contributed to an increase in gross margin percentage to 26.4% for

1999 compared to 25.1% for 1998. Although gross profit margins strengthened

In 1999, Diodes-China contributed to the Company’s profitability

in the third and fourth quarters of 1999, pricing pressures continue to exist

and, therefore, the $219,000 minority interest in joint venture represents the

on many of the Company’s product lines, and there can be no guarantee that

minority investor’s 5% share of the joint venture’s profit. The increase in the

margins will continue to improve. Average selling prices in 1999 decreased

joint venture earnings for 1999 is primarily the result of increased sales. The

approximately 7.1%, which represents decreases in average selling prices in

joint venture investment is eliminated in consolidation of the Company’s

the Far East and North America of approximately 18.3% and 7.9%, respectively,

financial statements and the activities of Diodes-China are included therein.

compared to 1998. In addition, as the trend of consolidation among electronic

As of December 31, 1999, the Company had a 95% controlling interest in the

component distributors continues, the Company anticipates that a greater

joint venture.

portion of its distributor sales will be to larger distributors, usually under

agreements resulting in lower than historical gross profit margins.

The Company generated net income of $5,569,000 (or $0.73 basic

earnings per share, $0.68 diluted earnings per share), as compared to

For 1999, selling, general and administrative expenses (“SG&A”)

$2,673,000 (or $0.35 basic earnings per share, $0.33 diluted earnings per

increased $2,654,000 to $13,670,000 from $11,016,000 for 1998. The 24.1%

share) for 1998. This $2,896,000 or 108.3% increase is due primarily to the

increase in SG&A was due primarily to increases in management expenses at

29.2% sales increase at gross profit margins of 26.4% compared to gross

Diodes-China, higher Company-wide marketing and advertising expenses,

profit margins of 25.1% in 1998.

increased sales commissions at Diodes-Taiwan, and additional sales and

engineering personnel. SG&A as a percentage of sales decreased to 17.2%

Financial Condition

from 18.0% in the comparable period last year, primarily due to the 29.2%

increase in net sales.

Liquidity and Capital Resources

Cash provided by operating activities in 2000 was $10.2 million com-

Net interest expense for 1999 increased $11,000, due primarily to

pared to $8.0 million in 1999 and $5.5 million in 1998. The primary sources of

an increased use of the Company’s credit facility to support the expansion of

cash flows from operating activities in 2000 were net income of $14.9 million

Diodes-China versus the same period last year. The Company’s interest expense

and depreciation of $5.0 million. The primary sources of cash flows from operat-

is primarily the result of the term loan by which the Company is financing (i)

ing activities in 1999 were net income of $5.6 million and an increase in

the investment in Diodes-China’s manufacturing facility and (ii) the $2.6 million

accounts payable of $5.3 million. The primary use of cash flows from operating

receivable, including accrued interest, advanced to FabTech. Interest income is

activities in 2000 was an increase in inventories of $9.3 million and an increase

primarily the interest charged to FabTech, a related party, under the Company’s

in accounts receivable of $2.2 million. The primary use of cash flows from oper-

formal loan agreement, as well as earnings on its cash balances.

ating activities in 1999 was an increase in accounts receivable of $5.4 million

Other income for 1999 increased approximately $89,000 compared to

flows from operating activities in 1998 were net income of $2.7 million and

the same period last year, due primarily to currency exchange gains at the

a decrease in accounts receivable of $1.8 million. The primary use of cash

Company’s subsidiaries in Taiwan and China.

flows from operating activities in 1998 was a decrease in accounts payable

and an increase in inventories of $2.8 million. The primary sources of cash

of $1.3 million.

Diodes Incorporated 2000 Annual Report

MANAGEMENT’S DISCUSSION & ANALYSIS

Since December 31, 1999, accounts receivable from customers has

The working capital line of credit expires July 1, 2002. During 2000,

increased 31.8% due to a slowing trend in payments from major distributors,

average and maximum borrowings outstanding on the line of credit were

as well as from the 49.5% increase in sales. The Company does not expect

$3,645,000 and $6,691,000, respectively. The weighted average interest rate

this trend to result in additional bad debt expense. The Company continues

on outstanding borrowings was 8.9% for the year ended December 31, 2000.

to closely monitor its credit policies, while at times providing more flexible

terms, primarily to its Far East customers, when necessary. The ratio of the

In addition, Diodes-China operates with two unsecured working capital

Company’s current assets to current liabilities on December 31, 2000 was 1.4

credit facilities. One credit facility provides for advances of up to $3 million

to 1, compared to a ratio of 1.7 to 1 and 2.6 to 1 as of December 31, 1999

with interest at 7.0% per annum. The second credit facility provides for

and 1998, respectively.

advances of RMB$9.3 million ($1,002,000 as of December 31, 2000) with inter-

est of 5.6% to 6.7% per annum. As of December 31, 2000 the balance on these

Cash used by investing activities was $21.4 million in 2000, compared

notes was $4,003,000.

to $9.3 million in 1999 and $9.8 million in 1998. The primary investment in all

three years was for additional manufacturing equipment and expansion at the

The Company has used its credit facility primarily to fund the expan-

Diodes-China manufacturing facility.

sion at Diodes-China and for the FabTech acquisition, as well as to support its

On December 1, 2000, the Company purchased all the outstanding

facility, together with internally generated funds, will be sufficient to meet the

capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee’s

Company’s current foreseeable operating cash requirements.

operations. The Company believes that the continued availability of this credit

Summit, Missouri from Lite-On Semiconductor Corporation (“LSC”), the

Company’s largest shareholder. The purchase price consisted of approximately

Total working capital increased approximately 8.7% to $17.3 million

$6 million in cash and an earnout of up to $30 million if FabTech meets speci-

as of December 31, 2000, from $15.9 million as of December 31, 1999. The

fied earnings targets over a four-year period. In addition, FabTech is obligated

Company believes that such working capital position will be sufficient for fore-

to repay an aggregate of approximately $19 million, consisting of (i) approxi-

seeable growth opportunities. The Company’s debt to equity ratio increased to

mately $13.6 million payable, together with interest at LIBOR plus 1%, to LSC

1.20 at December 31, 2000, from 0.78 at December 31, 1999. It is anticipated

through March 31, 2002, (ii) approximately $2.6 million payable, together with

that this ratio may increase as the Company continues to use its credit facili-

interest at LIBOR plus 1.1%, to the Company through February 28, 2001 and

ties to fund additional inventory sourcing opportunities.

(iii) approximately $3.0 million payable to a financial institution, which

amount was repaid on December 4, 2000 with the proceeds of a capital contri-

As of December 31, 2000, the Company has no material plans or com-

bution by the Company. The acquisition was financed internally and through

mitments for capital expenditures other than in connection with the expansion

bank credit facilities.

at Diodes-China and the Company’s implementation of an Oracle Enterprise

Resource Planning software package, planned for late 2001. However, to ensure

Cash provided by financing activities was $12.1 million in 2000,

that the Company can secure reliable and cost effective inventory sourcing to

compared to $2.4 million in 1999 and $4.3 million in 1998. Diodes has a

support and better position itself for growth, the Company is continuously

$26.6 million credit agreement with a major bank providing a working capital

evaluating additional internal manufacturing expansion, as well as additional

line of credit up to $9 million, term commitment notes up to $10 million for

outside sources of products. The Company believes its financial position will

plant expansion and financing the acquisition of FabTech, and $7.6 million for

provide sufficient funds should an appropriate investment opportunity arise

Diodes-China operations. Interest on outstanding borrowings under the credit

and thereby, assist the Company in improving customer satisfaction and in

agreement is payable monthly at LIBOR plus a negotiated margin. Fixed bor-

maintaining or increasing market share.

rowings require fixed principal plus interest payments for sixty months there-

after. The agreement has certain covenants and restrictions, which, among

Inflation did not have a material effect on net sales or net income in

other matters, requires the maintenance of certain financial ratios and operat-

fiscal years 1998, 1999 or 2000. A significant increase in inflation would affect

ing results, as defined in the agreement. The Company was in compliance with

future performance.

the covenants as of December 31, 2000.