Diodes Annual Report 2004

FY2004 Annual Report · Diodes

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Diodes Incorporated Annual Report 2004

TRANSFORMING THE FUTURE

DIODES INCORPORATED
Corporate Ofﬁce
3050 East Hillcrest Drive
Westlake Village, CA 91362-3154 U.S.A.
tel: 805.446.4800
fax: 805.446.4850

European Ofﬁce
260, rue de la Sur
f-31700 Beauzelle, France
tel: +33/(0)5.62.30.94.06
fax: +33/(0)5.62.30.87.22

Diodes – Taiwan Ofﬁce
Diodes Incorporated Taiwan
Company, Ltd.
2nd Floor, 501-15 Chung-Cheng Road
Hsin-Tien, Taipei, Taiwan
tel: +886.22.218.0116

fax: +886.22.218.0119

Shanghai Ofﬁce
Room 508, No. 1158,
Changning Road
Shanghai, China
tel: +86.21.5241.4882
fax: +86.21.5241.4891

Shenzhen Ofﬁce
Room 706, 7/f, Cyber Times
Tower b
Tianan Cyber Park, Futian District
Shenzhen, China
tel: +86.755.8347.6971
fax: +86.755.8347.6972

Diodes Incorporated
Registered to iso 9001-2000
File Number a5109

MANUFACTURING FACILITIES
Diodes – China
Shanghai KaiHong Electronics Co., Ltd.
No. 999 Chenchun Road
Xingqiao Town
Songjiang County
Shanghai, China 201612

Diodes – Shanghai
Diodes Shanghai Company, Ltd.
Plant No. 1, Lane 18
San Zhuang Road
Songjiang Export Zone
Shanghai, China

Diodes – FabTech
777 N.W. Blue Parkway, Suite 350
Lee’s Summit, MO 64086-5709 U.S.A.

WWW.DIODES.COM

Diodes Incorporated and Subsidiaries
financial highlights

(in thousands, except per share data)

1998

1999

2000

2001

2002

2003

2004

Net sales
Gross proﬁt
Selling, general and administrative
expenses
Research and development expenses
Non-reoccurring expenses
Total operating expenses
Income (loss) from operations
Interest expense, net
Other income (expense)
Income (loss) before taxes and
minority interest
Income tax beneﬁt (provision)
Minority interest

Net income

Earnings per share: [1]
Basic
Diluted
Number of shares: [1]
Basic
Diluted

Total assets
Working capital
Long-term debt
Stockholders’ equity

Return on assets
Return on equity

$60,121 $78,245 $116,079 $ 93,210 $115,821 $136,905 $185,703
60,735
14,179
15,402

36,528

37,427

20,948

26,710

11,016
–
–
11,016
4,386
281
93

13,670
–
–
13,670
7,278
292
182

18,814
141
–
18,955
18,472
940
501

13,711
592
8
14,311
(132)
2,074
785

16,228
1,472
43
17,743
8,967
1,183
67

19,586
2,049
1,037
22,672
13,856
860
(5)

23,503
3,422
14
26,939
33,796
637
(418)

4,198
(1,511)
(14)

7,168
(1,380)
(219)

18,033
(2,496)
(642)

(1,421)
1,769
(224)

7,851
(1,729)
(320)

12,991
(2,460)
(436)

32,741
(6,514)
(676)

2,673

5,569

14,895

124

5,802

10,095

25,551

[ DISCRETE SOLUTIONS FOR ADVANCING TECHNOLOGIES ]

$ 0.24
0.22

$ 0.49
0.45

$ 1.23 $ 0.01 $ 0.47 $ 0.79 $ 1.91
1.65

0.01

0.70

1.08

0.44

11,315
12,085

11,438
12,306

12,107
13,833

12,216
13,322

12,277
13,297

12,731
14,406

13,404
15,471

$45,389
16,639
8,102
27,460

$62,407
15,903
6,984
34,973

$112,950 $103,258 $105,010 $123,795 $167,801
49,571
11,347
112,148

19,798
29,497
51,124

27,154
12,583
71,450

17,291
30,857
51,253

20,831
18,417
57,678

6.4%
10.3%

10.3%
17.8%

17.0%
34.5%

0.1%
0.2%

5.6%
10.7%

8.8%
15.6%

17.5%
27.8%

$185.7

$136.9

$116.1

$115.8

$93.2

$78.2

$60.1

$1.65

$112.1

$71.4

$57.7

$51.2 $51.1

$0.70

$35.0

$27.5

$1.08

$0.45

$0.44

$0.22

$0.01

NET SALES
(in millions)

EARNINGS PER SHARE1
(diluted)

STOCKHOLDERS’ EQUITY
(in millions)

[1] Adjusted for the effect of 3-for-2 stock splits in July 2000 and November 2003.

Design: bl o ch+c oulte r Design Group www.blochcoulter.com

Corporate Proﬁ le
Headquartered in Southern California with opera-

Diodes Incorporated...
...is a world class manufacturer of high performance

tions in North America, Asia, and Europe, Diodes

Incorporated is a leading manufacturer and supplier

Schottky rectiﬁ ers, including industry-leading high
efﬁ ciency, low VF and high voltage types.

of high quality discrete semiconductor products to

industry leaders in multiple-end markets, serving

the computer, industrial, consumer electronics,
communications and automotive markets.

Proven Management Team
The Company has an experienced management team

that combines signiﬁ cant operational track records

with entrepreneurial and technological vision.

Product Development and Manufacturing Focus
Diodes’ manufactures and supplies devices that are

essential building blocks of the electronics industry,

...offers a comprehensive portfolio of high density

diode, transistor, and application speciﬁ c arrays

in a variety of multi-pin sub-miniature surface
mount packages.

...is a leader in Zener technology, providing

performance tight tolerance and low test

current types.

...specializes in high power density packaging,

and has recently patented several breakthrough

PowerDI rectiﬁ er packages for a variety of Schottky,

Superfast and Standard Recovery Rectiﬁ ers, Zener

providing support and making electrical connections

and TVS product types.

to integrated circuits, for use in such products as

notebook computers, ﬂ at panel displays, digital audio

players and cameras, mobile handsets, set top boxes, DC

to DC converters, automotive applications, and more.

...brings to market a variety of Bipolar Junction

Transistors, Prebiased Transistors, Small Signal

MOSFETs and Transient Protection technologies;

Thyristor Surge Protection Devices, Silicon TVS,

and ESD protection arrays that round out Diodes’
product portfolio.

[ THREE DRIVERS OF DIODES’ CORPORATE STRATEGY ]

Driver #1
Position Diodes
as an
innovation
leader

Driver #2
Relentlessly
pursue
manufacturing
excellence

Driver #3
Apply rigorous ﬁ scal
discipline

Transforming through

INNOVATION LEADERSHIP

Diodes’ Corporate Strategy – Driver #1:

To position Diodes as an innovation leader for

discrete devices, by investing in developing next-

generation technologies that deliver meaningful

improvements in performance, size and power consumption –

for compact convenience products that define our modern world,

keeping us connected or surrounding us with orchestra-quality songs, and more.

[

As consumers’ needs increase for compact

performance benefits for the growing number

audio solutions, mobile communications, interactive

of next-generation portable and mobile

high-definition TVs and more, so does the demand

electronics that are vital to today’s busy lifestyles.

for discrete devices that deliver performance

Recognizing that product diversification is

in smaller packages. We are bringing to market a

a key to long-term success, we are growing our

broad range of products that offer size and

markets both vertically and horizontally.

[ DIODES INCORPORATED ]

[ BOSE CORPORATION ]

=
[ SMALLER PACKAGE, LARGER SOUND ]

[

Diodes is intensifying research and development initiatives in such innovative
product areas as application-specific multi-chip component arrays
and sub-micro packaging to support our customers’ advancing technologies.

]

Transforming through

MANUFACTURING EXCELLENCE

Diodes’ Corporate Strategy – Driver #2:

To relentlessly pursue manufacturing excellence

to ensure that our product quality, cost structure,

and ability to swiftly respond to changing customer

demands are the best in industry. To continue the pursuit of

uncompromising dedication to quality and innovation throughout

every aspect of Diodes’ product development chain.

[

From engineering to manufacturing and quality

we are a fully integrated manufacturer and total

assurance, we meet and surpass rigorous industry

solution provider of discrete semiconductors.

standards, while focusing on cost efﬁ ciencies and

By controlling the entire product lifecycle

market requirements. Our relentless pursuit of

and developing new chip technologies, we are

excellence has earned us quality certiﬁ cations and

producing wafer process and packaging technology

customer recognition. With our R&D expertise and ﬁ rst-tier

breakthroughs in performance discretes while

packaging and wafer manufacturing capabilities,

introducing proprietary products to the marketplace.

[ DIODES INCORPORATED ]

[ DANGER, INC ]

=
[ COOLER COMMUNICATIONS ]

[

By integrating research and development and wafer fabrication capabilities
with our manufacturing, we have become a total solution provider that can drive new
product innovations and support our customers with application-specific designs.

]

Transforming through

FISCAL DISCIPLINE

Diodes’ Corporate Strategy – Driver #3:

To apply strict financial discipline to maintain

tight controls over overhead, optimize working

capital management, and deploy capital judiciously.

At Diodes, we ensure that every dollar we invest in

capital equipment and research and development earns multiple

returns for you, our Shareholders.[

[

Exercising rigorous ﬁ scal discipline with absolute

positioned us as the go-to company when looking

transparency, according to the highest ethical

for a total solution provider in the semiconductor

standards of corporate governance, is of

industry. Streamlined production processes, lean

paramount importance to us. Our ongoing

management structures, and conservative

investment in the development of next-generation

ﬁ nancial policies enable us to build the resources

technologies, delivering meaningful improvements in

needed to strategically develop and expand our

performance, size, and power consumption, has

business, yielding maximum shareholder value.

[ DIODES INCORPORATED ]

[ ECHOSTAR COMMUNICATIONS ]

=
[ ON-DEMAND VIEWING ]

[

We provide top quality solutions at economical prices – that’s why Diodes’
discrete semiconductor components are the building blocks for success.

]

DEAR SHAREHOLDERS

We are pleased to inform you that 2004 was another

Second, to continually pursue manufacturing excellence

remarkable year for Diodes Incorporated.

in order to establish an industry-leading cost structure,

While the semiconductor industry generally
experienced a year of solid demand, we again
yielded record results. Our 36% growth in

maintain the ﬂexibility to rapidly respond to changing

customer needs, and sustain our unmatched reputation

for product quality.

revenues for 2004 once again exceeded the discrete

semiconductor sector by a factor of nearly two times.

Third, to exercise rigorous ﬁscal discipline in order to
ensure that our organization is lean, we optimize our

We continued to strengthen our balance sheet and

working capital performance, and every dollar we

generate positive cash from operations even as we

invest in capital equipment and research and development

built working capital in support of our growth and

earns multiple returns for our shareholders.

invested over $26 million in capital expenditures

to expand our manufacturing capacity for next-

generation devices.

Our strong performance is based on a core operating

strategy that has served us well in both strong and

weak markets over the past several years. This strategy

has three essential elements:

First, to position Diodes as an innovation leader
for discrete devices and provider of integrated

solutions. We have stepped up the pace of develop-

ment of core intellectual property that enables us

to transcend the current limits of performance,
size and power consumption.

These are the fundamental principles that have been

behind Diodes’ success in recent years – and we

believe they offer a compelling formula for sustained
performance in the future.

Our ﬁscal results are the tangible expression of this

success. In the past year:

•

Revenues increased 35.6% to a record $185.7 million.

This compares to the 2004 discrete semiconductor

growth of 18.1%.

Sales of new products reached a record level of 16%

of total sales.

We continued to diversify into higher-margin

product lines, improving our gross proﬁt margin

600 bps to 32.7%.

Raymond Soong
Chairman of the Board

C. H. Chen
President and
Chief Executive Ofﬁ cer

•

Selling, general and administrative expenses were

busy lives: Diodes’ products are used in computers,

among the lowest in our industry at 12.7% of

consumer electronics, industrial, automotive, and

revenue.

Investment in research and development increased

67% to $3.4 million or 1.8% of revenue.

Net income improved 153% to a record $25.6
million, or $1.65 per share.

communications devices in many of the conveniences

that have become staples in our modern world.

We realized early on that diversiﬁ cation is another

signiﬁ cant factor in long-term success, and we have

thus pursued a policy of growing our markets both

vertically and horizontally.

Our balance sheet is strong: in 2004, Diodes generated

cash ﬂ ow from operations of $29.3 million, a 56%

increase from 2003, which we used, in part, to reduce

our total debt by $3.6 million. We ended the year with

$19 million in cash and unused and available credit
facilities of $32 million. Finally, shareholders’ equity
increased to $112.1 million, a 57% increase.

These ﬁ nancial results reﬂ ect our continued dedication

to our strategy of producing leading-edge technology

We are also responding to an increasing demand,

especially from Europe and Asia, for environmentally-

friendly products by eliminating lead (Pb) from lead

plating. Therefore, as we continue to listen and respond

to our customers’ needs…

…We Are Transforming The Future.

You cannot talk of the future without revisiting the past.

So let us ﬁ rst review the highlights of the year 2004.

and running efﬁ cient, streamlined operations. In all

On the technological side, we developed a series of

we do, dedication and commitment are key. On the

sophisticated new products during the year:

technology side, our products keep getting smaller and

more energy-efﬁ cient while offering the same powerful

– and oftentimes even increased – performance. We

are bringing to market a broad range of products that

offer very real beneﬁ ts in both size and performance

for a growing number of next-generation portable and

mobile electronics that are vital to our end-consumers’

•

We launched a new line of subminiature SOT-563
discrete semiconductor components, continuing our

range of subminiature discretes and arrays targeted

to markets including mobile phone, digital-audio

player, and portable handheld electronics.

We introduced the patent-pending PowerDI™123

•

After this recapitulation of the 2004 highlights, let us

Compact Power Package. This high-current density

now focus on some speciﬁcs that have shaped this past

package type is one of the most thermally efﬁcient

year and will continue to transform the future:

compact rectiﬁer packages available on the market.

•

We released the new high-voltage PDS3200 and
PDS5100h Schottky Barrier Rectiﬁers in a new high-
current density package type, patent-pending

PowerDI™5. Able to accommodate larger die sizes

and higher amperage, it broadens the range of Diodes’

high-performance next-generation discrete devices.

On the logistics and sales side, we partnered with
several strategically important distribution partners.
In addition to our long-standing relationships with

Our Path to Becoming A Total Solutions Provider

Reviewing our path in the last ten years, we see a

stunning transformation. First, we went from being

a distributor of other companies’ products to a fully

integrated manufacturer with a state-of-the-art

packaging facility in Mainland China. Then we

acquired a wafer fabrication facility that gave us the

capability to control the entire product lifecycle and

provided us with a base to develop new chip technologies.

And just in the past three years, we have built a full

All American, Arrow, Avnet, Digi-Key, Future, and

scale R&D program that has produced breakthroughs

Jaco we:

Signed a contract with Mouser Electronics, Inc.,

•

one of the largest suppliers and distributors of

electronic components in North America whose

in both wafer processes and packaging technologies

that enables Diodes to extend the envelope of discrete

performance and introduce a number of proprietary

products to the discrete marketplace.

on-line catalog allows us the fastest ‘time to market’

Our ongoing investment in the development of

approach for our customer solutions and application-

next-generation technologies that deliver meaningful

speciﬁc products.

•

Expanded our distribution agreement with Arrow
Electronics into Southern Europe, adding 12
Mediterranean countries to our portfolio of global

markets. After ﬁrst entering the European market

in 2001, we have consistently grown our sales and

market share each year so this agreement was the

logical extension of our European activities.

PowerDI is a trademark of Diodes Incorporated.

improvements in performance, size, and power
consumption has positioned us as the go-to company
in quest of a total solution provider in the semi-

conductor industry. And our unwavering efforts to

offer the best, most innovative package of products

and service in the industry were acknowledged with

several prestigious customer, industry and media

awards in 2004, such as Digi-Key’s “Top Ten

Supplier Award” and Samsung’s “Outstanding
Supplier Award”. We were also listed in Forbes
Magazine’s “200 Best Small Companies,” recognized
by Deloitte Technology as part of the “Fast 50 Among

the Fastest Growing Technology Companies in Los
Angeles,” and included in the Business 2.0 Magazine’s
“Fastest Growing Technology Companies.”

Commitment to Quality and
Manufacturing Excellence

Hand in hand with an innovation leadership role

goes the dedication to quality. Quality is one of the

founding principles on which this Company is built,

and we realized from the beginning that it is one of

the non-negotiable elements of long-term success.

It is also the theme that runs through every step of

We are equally committed to rigorously and diligently

exercising our oversight responsibilities throughout the

Company, managing our affairs consistent with the

highest principles of business ethics, and exceeding the

Corporate Governance requirements of both federal

law and the NASDAQ Stock Market. Our culture

demands integrity and an unyielding commitment to

strong internal practices and policies.

the design, engineering, and quality control process.

We appreciate our shareholders’ conﬁdence in our

We relentlessly pursue manufacturing excellence to

future and work hard to not only deliver outstanding

ensure that product quality, cost structure and our

results quarter for quarter but we also believe in

ability to ﬂexibly and swiftly respond to changing

enhancing the return of capital through increased

customer demands are the best in the industry. This

accountability.

uncompromising dedication to quality and innovation

has over time earned us a number of ISO certiﬁcations.

While we are proud of our achievements over the years,

we will not rest on our laurels but will continuously

Corporate Governance and Financial Discipline

strive to surpass existing achievements and to identify

Despite the rapid growth and evolution of our

Company, we never lose sight of those who are the

driving force behind our endeavors: you, the investor.

We understand clearly that we owe you absolute

transparency and the highest ethical standards of
Corporate Governance. Ensuring that the ﬁnancial

results fairly reﬂect the results of our operations is of

paramount importance to us and to our investors. We

have always been diligent in maintaining compliance

with our established ﬁnancial accounting policies,

which are consistent with requirements of Generally

Accepted Accounting Principles (GAAP), and in

reporting our results with objectivity and the highest

degree of integrity. Our ﬁnancial information is

transparent, timely, complete, relevant, and accurate.

areas that will beneﬁt from improvements. We are

looking forward to this year 2005 and to bringing

continued positive results to you – our shareholders,

customers, suppliers, and employees.

Sincerely,

Raymond Soong

Chairman of the Board

C.H. Chen

President and
Chief Executive Ofﬁcer

- Audit Committee members meet regularly with
internal and external auditors, without the presence
of the Company’s management

- Internal Audit Manager reports directly to
Audit Committee

- Through internal audit control function, we
monitor compliance with our global ﬁnancial policies
and practices over critical areas, including: internal
controls, ﬁnancial accounting and reporting, ﬁduciary
accountability, and safeguarding of our corporate assets

- A whistle-blower hotline has been established as a
conﬁdential means for employees to address issues to the
Audit Committee regarding our Company’s accounting,
internal accounting controls and auditing practices

- The Board adopted a Code of Ethics for the Chief
Executive Ofﬁcer and all members of our ﬁnance
department, including the principal ﬁnancial/
accounting ofﬁcer

- Compensation Committee makes recommendations
to the Board regarding compensation, beneﬁts and
incentive arrangements for ofﬁcers

- Nominating Committee recommends director
nominees to be selected by the Board

Our culture demands integrity and an unyielding
commitment to strong internal practices and policies.

We thank you for the conﬁdence you have placed in us.

Corporate Governance Highlights

Investor conﬁdence in public companies is essential to
the functioning of the global economy. To enlist and
sustain investor conﬁdence in Diodes Incorporated,
the Company maintains an investor website at
www.diodes.com to provide public access to information
about our corporate governance policies. These policies
provide a framework for the proper operation of our
Company, consistent with the best interests of you,
our Shareholders, and the requirements of the law.

Key information about our corporate governance
policies and commitments includes:

- Majority of Board members and Board committee
members are independent

- Board adopted a Code of Business Conduct

- Board committee charters clearly establish respective
roles and responsibilities

- Audit Committee established policies for auditor
independence

- Moss Adams LLP, our independent accountants,
report directly to the Audit Committee, and any
non-audit services performed do not interfere with
their independence

- Audit Committee conducts an appropriate review
of all related party transactions for potential conﬂict of
interest situations on an ongoing basis and approves
such transactions

Distribution Network
Through innovative marketing strategies and
sophisticated logistics, we work with world-class
distributors to assist our customers in advancing
their technologies.

Photo of Bose® Lifestyle® 48 DVD home entertainment system on page 3
courtesy of Bose Corporation
Photo of the Hiptop2 on page 5 courtesy of Danger, Inc.
Photo of Dish Player DVR 510 on page 7 courtesy of EchoStar Communications Corporation

Diodes Incorporated and Subsidiaries
table of contents
ﬁnancial statements

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

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Corporate Information

Page

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

The following discussion of the Company’s ﬁnancial
condition and results of operations should be read together
with the consolidated ﬁnancial statements and the notes to
consolidated ﬁnancial statements included elsewhere in this
Form 10-K. Except for the historical information contained
herein, the matters addressed in this Item 7 constitute
“forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements may be identiﬁed by the use
of words such as “anticipate,” “believe,” “continue,”
“estimate,” “expect,” “intend,” “may,” “project,” “will”
and similar expressions. Such forward-looking statements
are subject to a variety of risks and uncertainties, including
those discussed above under the heading “Cautionary
Statement for Purposes of the “Safe Harbor” Provision of
the Private Securities Litigation Reform Act of 1995” and
elsewhere in this Annual Report on Form 10-K, that could
cause actual results to differ materially from those anticipated
by the Company’s management. The Private Securities
Litigation Reform Act of 1995 (the “Act”) provides certain
“safe harbor” provisions for forward-looking statements. All
forward-looking statements made in this Annual Report on
Form 10-K are made pursuant to the Act. The Company
does not undertake to update its forward-looking statements
to reﬂect actual events and outcomes or later events.

Overview
We sell a wide variety of discrete semiconductor prod-
ucts, as well as silicon wafers used in the manufacture
of these products, primarily to manufacturers in the
communications, computing, industrial, consumer
electronics and automotive markets, and to distributors
of electronic components to end-customers in these mar-
kets. Our technologies include high density diode and
transistor arrays in multi-pin surface-mount packages;
PowerDItm, high-performance surface-mount packages;
performance Schottkys, switching and rectiﬁer diodes;
single and dual pre-biased transistors; performance tight
tolerance and low current zener diodes; subminiature
surface-mount packages; transient voltage suppressors
(TVS and TSPD); small signal transistors and MOSFETs;
and standard, fast, ultra-fast, and super-fast rectiﬁers.

PowerDI is a trademark of Diodes Incorporated.

Our products are designed into a broad range of
end-products such as notebook computers, ﬂat-panel
displays, set-top boxes, game consoles, digital cameras,
cellular phones, PDAs, power supplies, security systems,
network routers and switches, as well as into automo-
tive safety controls, GPS navigation, satellite radios and
audio/video players.

The Company rapidly responds to the demands of
the global marketplace by continuing to increase its in-
vestment in research and development, and by focusing
on expanding its product portfolio and closely control-
ling product quality and time-to-market. As a result of
the Company shifting development priorities toward
specialized conﬁgurations, such as the Company’s
high-density array devices, the Company is introduc-
ing a range of new products that improve the trade-off
between size, performance and power consumption for
surface-mount packages.

The majority (66% in 2004) of our sales are to major
OEMs such as Intel Corporation, Cisco Systems Incor-
porated, Sony Corporation, Nortel Networks Corpora-
tion, Delphi Automotive, Bose Corporation, Scientiﬁc
Atlanta Incorporated, Samsung Electronics, Asustek
Computer, Inc., Quanta and LG Electronics, Inc. Our
distribution network (34% of 2004 sales) includes major
distributors such as Arrow Electronics, Inc., Avnet,
Inc., Digi-Key Corporation, Future Electronics, Ltd.,
Jaco Electronics, Inc., Reptron Electronics, Inc., and
All American Semiconductor, Inc.

Because of the electronics industry trend towards
moving manufacturing to lower operating cost coun-
tries in Asia, the Company has focused primarily on
customers in China, Taiwan, Korea and Hong Kong.
We sell to Asian customers (59% of 2004 sales) primarily
through our wholly owned subsidiaries, Diodes-Taiwan
and Diodes-Hong Kong. The Asian discrete semicon-
ductor market is the largest and fastest growing market
in which the Company participates. An increase in
the percentage of sales in Asia is expected as we have
signiﬁcantly increased our sales presence there and
believe there is greater potential to increase market
share in that region due to the expanding base of
electronics product manufacturers.

Our corporate headquarters located just outside Los
Angeles in Westlake Village, California, which provides
sales, marketing, engineering, logistics and warehousing
functions, sells primarily to North American manu-
facturers and distributors (38% of 2004 sales). Due to
the manufacturing shift, the North American discrete
semiconductor market is now the smallest market and
its growth rate is far less than all other markets. The
majority of our applications engineers are located in
the U.S. in order to work with the customers’ design
engineers. Whether the end-application is ultimately
manufactured in the U.S. or in Asia, our world-wide
sales organization is well positioned to provide sales and
support to the customer.

In order to take advantage of the relatively robust
European market, ofﬁces in Toulouse, France and Hat-
tenheim, Germany support our European sales expan-
sion (3% of 2004 sales).

Asian sales are also generated from Shanghai
KaiHong Electronics Co., Ltd. (“Diodes-China”
or “KaiHong”), and Diodes-Shanghai, 95% owned
manufacturing facilities in Shanghai, China, with
ofﬁces in Shanghai and Shenzhen, China, as well as
from FabTech Incorporated (“Diodes-FabTech” or
“FabTech”), a silicon wafer manufacturer acquired in
December 2000 located near Kansas City, Missouri.

Revenues were derived from the following countries
(All Others represents countries with less than 8% of total
revenues each) (in thousands):

2003

United States
Taiwan
China
Korea
All Others

Total

2004

United States
Taiwan
China
Korea
All Others

Total

Revenue

% of Total Revenue

$ 41,593
38,087
25,908
14,455
16,862

$ 136,905

30.4
27.8
18.9
10.6
12.3

100.0

Revenue

% of Total Revenue

$ 53,204
50.716
44,311
16,447
21,025

$ 185,703

28.6
27.3
23.9
8.9
11.3

100.0

Manufacturing and Signiﬁcant Vendors
Diodes-China and Diodes-Shanghai, both located in
Shanghai, China, are our 95% owned joint venture
manufacturing facilities. Since Diodes-China’s inception
in 1995, we have invested approximately $77 million in
plant and state-of-the-art equipment in China. Both facto-
ries manufacture product for sale by our U.S. and Asian
operations, and also sell to external customers as well.

At Diodes-China and Diodes-Shanghai, silicon wafers

are received and inspected in a highly controlled “clean
room” environment awaiting the assembly operation.
At the ﬁrst step of assembly, the wafers are sawn with
very thin, high speed diamond blades into tiny semi-
conductor “dice”, numbering as many as 200,000 per 5"
diameter wafer. Dice are then loaded onto a handler,
which automatically places the dice, one by one, onto
lead frames, which are package speciﬁc, where they are
bonded to the lead frame pad. Next, automatic wire
bonders make the necessary electrical connections from
the die to the leads of the lead frame, using micro-thin
gold wire. The fully automatic assembly machinery then
molds the epoxy case around the die and lead frame to
produce the desired semiconductor product. After a trim,
form, test, mark and re-test operation, the parts are
placed into special carrier housings and a cover tape seals
the parts in place. The taped parts are then spooled onto
reels and boxed for shipment.

Acquired from Lite-On Semiconductor Corporation

(“LSC”), our largest shareholder, in December 2000,
our wafer foundry, Diodes-FabTech, is located in Lee’s
Summit, Missouri. Diodes-FabTech manufactures
primarily 5-inch silicon wafers, which are the building
blocks for semiconductors. FabTech purchases polished
silicon wafers and then, by using various technologies
and patents, in conjunction with many chemicals and
gases, fabricates several layers on the wafers, including
epitaxial silicon, ion implants, dielectrics and metals,
with various patterns. Depending upon these layers and
the die size (which is determined during the photo-
lithography process and completed at the customer’s
packaging site where the wafer is sawn into square or
rectangular die), different types of wafers with various
currents, voltages and switching speeds are produced.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

In 2004, our largest external supplier of products was

LSC, a related party. Approximately 17.2% and 17.3%
of our sales were from product manufactured by LSC
in 2004 and 2003, respectively. Also, in 2004 and 2003,
approximately 3.5% and 4.6%, respectively, of our sales
were from product manufactured by companies owned
by Keylink International (a related party). In addition,
sales of products manufactured by Diodes-China and
Diodes-FabTech were approximately 49% and 20% in
2004, respectively, versus 39% and 23% in 2003, respec-
tively. We anticipate that Diodes-China will become an
increasingly valuable supplier. No other manufacturer
of discrete semiconductors accounted for more than 4%
and 9% of our sales in 2004 and 2003, respectively.

All of the raw materials we use in our manufacturing

operations are available both domestically and abroad.
Although we believe alternative sources exist for the
products of any of our suppliers, the loss of any one of
our principal suppliers or the loss of several suppliers in
a short period of time could have a materially adverse
effect on our ﬁnancial statements until an alternate
source is located and has commenced providing such
products or raw materials.

Related Parties
We conduct business with two related party companies,
LSC (and its subsidiaries) and Keylink International
(formerly Xing International) (and its subsidiaries).
LSC, a 32.3% shareholder, is our largest shareholder,
and Keylink International is owned by our 5% joint
venture partner in Diodes-China and Diodes-Shanghai.
C.H. Chen, our President and Chief Executive Ofﬁcer,
and a member of our Board of Directors, is also Vice-
Chairman of LSC. M.K. Lu, a member of our Board of
Directors, is President of LSC, while Raymond Soong,
our Chairman of the Board, is the Chairman of the Lite-
On Group, a signiﬁcant shareholder of LSC.

In addition to being our largest external supplier of
products, in 2004, we sold silicon wafers to LSC totaling
11.1% (10.7% in 2003) of our total sales, making LSC
our largest customer. The Company has a long-stand-
ing sales agreement where the Company is the exclusive
North American distributor for certain of LSC product
lines. In addition, the Company leases warehouse space
from LSC for its operations in Hong Kong. Such trans-
actions are on terms no less favorable to the Company
than could be obtained from unafﬁliated third parties.
The Audit Committee of the Board of Directors has
approved the contracts related to the transactions.

In December 2000, the Company acquired the
wafer foundry, FabTech, Inc., from LSC. As part of
the purchase price, at December 31, 2004, LSC holds a
subordinated, interest-bearing note for approximately
$3.8 million. In May 2002, the Company renegotiated
the terms of the note to extend the payment period from
two years to four years, and therefore, monthly pay-
ments of approximately $208,000 plus interest began in
July 2002. In connection with the terms of the acquisi-
tion, LSC entered into a volume purchase agreement to
purchase wafers from FabTech. In addition, as per the
terms of the stock purchase agreement, the Company
has entered into several management incentive agree-
ments with members of FabTech’s management. The
agreements provide members of FabTech’s manage-
ment guaranteed annual payments as well as contingent
bonuses based on the annual proﬁtability of FabTech,
subject to a maximum annual amount. Any portion of
the guaranteed and contingent liability paid by FabTech
is reimbursed by LSC. Year 2004 is the ﬁnal year of the
management incentive agreements, with ﬁnal payment
by March 31, 2005.

In addition to the 3.5% of our sales of product manu-
factured by companies owned by Keylink International,
in 2004, the Company sold silicon wafers to companies
owned by Keylink International totaling 0.9% (1.1% in
2003) of the Company’s total sales. In addition, Diodes-
China and Diodes-Shanghai both lease their manufac-
turing facilities from, and subcontract a portion of its
manufacturing process (metal plating and environmen-
tal services) to Keylink International. The Company

also pays a consulting fee to Keylink International.
Such transactions are on terms no less favorable to the
Company than could be obtained from unafﬁliated third
parties. The Audit Committee of the Board of Directors
has approved the contracts related to the transactions.

Income taxes
In accordance with the current taxation policies of
the People’s Republic of China (PRC), Diodes-China
received preferential tax treatment for the years ended
December 31, 1996 through 2004. Earnings were subject
to 0% tax rates from 1996 through 2000, and 12% from
2001 through 2004. Due to a $15.0 million permanent
re-investment of Diodes-China earnings in 2004, earn-
ings from 2005 through 2007 will continue to be taxed at
12% (one half the normal central government tax rate).
Also due to the permanent re-investment, the Company
recorded a $1.2 million tax refund (net of U.S. taxes) in
the fourth quarter of 2004. Earnings of Diodes-China
are also subject to tax of 3% by the local taxing authority
in Shanghai. The local taxing authority waived this tax
from 2001 through 2004, and is expected to waive this
tax in 2005, but can re-impose the tax at its discretion.
For 2004, Diodes-Shanghai’s effective tax rate was 15%.
As an incentive for the establishment of Diodes-Shang-
hai, beginning in 2005, earnings will be exempted from
income tax for two years. Then, beginning in 2007, earn-
ings will be subject to 50% of the standard 15% tax rate
for the following three years.

Earnings of Diodes-Taiwan are currently subject to a
tax rate of 35%, which is comparable to the U.S. Federal
tax rate for C corporations. Earnings of Diodes-Hong
Kong are currently subject to a 17.5% tax for local sales
and/or local source sales, all other sales are foreign
income tax-free.

In accordance with United States tax law, the Company
receives credit against its U.S. Federal tax liability for cor-
porate taxes paid in Taiwan and China. The repatriation
of funds from Taiwan and China to the Company may be
subject to Federal and state income taxes.

As of December 31, 2004, accumulated and undistrib-
uted earnings of Diodes-China are approximately $44.2
million, including $25.0 million of restricted earnings
(which are not available for dividends). Through March
31, 2002, the Company had not recorded deferred U.S.
Federal or state tax liabilities (estimated to be $8.9 mil-
lion as of March 31, 2002) on these cumulative earnings
since the Company, at that time, considered this invest-
ment to be permanent, and had no plans or obligation
to distribute all or part of that amount from China to
the United States. Beginning in April 2002, the Com-
pany began to record deferred taxes on a portion of the
earnings of Diodes-China in preparation of a dividend
distribution. In the year ended December 31, 2004, the
Company received a dividend of approximately $5.7
million from its Diodes-China subsidiary, for which the
tax effect is included in U.S. Federal and state taxable
income. As of December 31, 2004, the Company has
recorded $2.0 million in deferred taxes on the cumula-
tive earnings of Diodes-China.

The Company is evaluating the need to provide
additional deferred taxes for the future earnings of
Diodes-China, Diodes-Shanghai, and Diodes-Hong
Kong to the extent such earnings may be appropriated
for distribution to the Company’s corporate ofﬁce in
North America, and as further investment strategies
with respect to foreign earnings are determined. Should
the Company’s North American cash requirements
exceed the cash that is provided through the domestic
credit facilities, cash can be obtained from the Compa-
ny’s foreign subsidiaries. However, the distribution of
any unappropriated funds to the U.S. will require the
recording of income tax provisions on the U.S. entity,
thus reducing net income.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

On October 22, 2004, the President of the United
States signed the American Jobs Creation Act (AJCA)
into law. Originally intended to repeal the extraterrito-
rial income (ETI) exclusion, which had triggered tariffs
by the European Union, the AJCA expanded to cover a
wide range of business tax issues. Among other items,
the AJCA establishes a phased repeal of the ETI, a new
incentive tax deduction for U.S. corporations to repatri-
ate cash from foreign subsidiaries at a reduced tax rate
(a deduction equal to 85% of cash dividends received in
the year elected that exceeds a base-period amount) and
signiﬁcantly revises the taxation of U.S. companies do-
ing business abroad.

At December 31, 2004, the Company made a mini-
mum estimate for repatriating cash from its subsidiar-
ies in China and Hong Kong of $8.0 million under the
AJCA, and recorded an income tax expense of approxi-
mately $1.3 million. Under the guidelines of the AJCA,
the Company will develop a required domestic reinvest-
ment plan, covering items such as U.S. bank debt repay-
ment, U.S. capital expenditures and U.S. research and
development activities, among others, to cover the $8.0
million minimum dividend repatriation. In addition,
the Company will complete a quantitative analysis of the
beneﬁts of the AJCA, the foreign tax credit implications,
and state and local tax consequences of a dividend to
maximize the tax beneﬁts of a 2005 dividend.

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

Our ﬁlings may also be read and copied at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Wash-
ington, DC 20549. Information on the operation of the
Public Reference Room may be obtained by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and informa-
tion statements, and other information regarding issuers
that ﬁle electronically with the SEC. The address of that
site is www.sec.gov.

To support our global customer-base, particularly in
Asia and Europe, our website is language-selectable into
English, Chinese, Japanese, Korean and German, giving
us an effective marketing tool for worldwide markets.
With its extensive online Product (Parametric) Catalog
with advanced search capabilities, our website facilitates
quick and easy product selection. Our website provides
easy access to worldwide sales contacts and customer
support, and incorporates a distributor-inventory check
to provide component inventory availability and a small
order desk for overnight sample fulﬁllment. Our website
also provides access to current and complete investor ﬁnan-
cial information and corporate governance information
including our Code of Business Conduct, SEC ﬁlings
and press releases, as well as stock quotes.

Critical Accounting Policies and Estimates
The preparation of ﬁnancial statements in accordance
with accounting principles generally accepted in the
United States of America requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of con-
tingent assets and liabilities at the date of the ﬁnancial
statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going
basis, we evaluate our estimates, including those related
to revenue recognition, allowance for doubtful accounts,
inventory reserves and income taxes, among others. Our
estimates are based upon historical experiences, market
trends and ﬁnancial forecasts and projections, and upon
various other assumptions that management believes to
be reasonable under the circumstances and at that cer-
tain point in time. Actual results may differ, signiﬁcantly
at times, from these estimates under different assump-
tions or conditions.

Accounting for Income Taxes
As part of the process of preparing our consolidated
ﬁnancial statements, we are required to estimate our
income taxes in each of the tax jurisdictions in which
we operate. This process involves using an asset and
liability approach whereby deferred tax assets and
liabilities are recorded for differences in the ﬁnancial
reporting bases and tax bases of the Company’s assets
and liabilities. Signiﬁcant management judgment is
required in determining our provision for income
taxes, deferred tax assets and liabilities. Management
continually evaluates its deferred tax asset as to whether
it is likely that the deferred tax assets will be realized.
If management ever determined that its deferred tax
asset was not likely to be realized, a write-down of the
asset would be required and would be reﬂected as an
expense in the accompanying period.

Allowance for Doubtful Accounts
Management evaluates the collectability of our accounts
receivable based upon a combination of factors, includ-
ing the current business environment and historical
experience. If we are aware of a customer’s inability to
meet its ﬁnancial obligations to us, we record an allow-
ance to reduce the receivable to the amount we reason-
ably believe we will be able to collect from the customer.
For all other customers, we record an allowance based
upon the amount of time the receivables are past due.
If actual accounts receivable collections differ from these
estimates, an adjustment to the allowance may be neces-
sary with a resulting effect on operating expense.

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

Revenue Recognition
Revenue is recognized when there is persuasive evidence
that an arrangement exists, when delivery has occurred,
when our price to the buyer is ﬁxed or determinable and
when collectibility of the receivable is reasonably assured.
These elements are met when title to the products is
passed to the buyers, which is generally when our prod-
uct is shipped to both original equipment manufacturers
(OEMs) and electronics component distributors.

We reduce revenue in the period of sale for estimates

of product returns, distributor price adjustments and
other allowances, the majority of which are related to
our North American operations. Our reserve estimates
are based upon historical data as well as projections of
revenues, distributor inventories, price adjustments,
average selling prices and market conditions. Actual
returns and adjustments could be signiﬁcantly differ-
ent from our estimates and provisions, resulting in an
adjustment to revenues.

Inventory Reserves
Inventories are stated at the lower of cost or market
value. Cost is determined principally by the ﬁrst-in,
ﬁrst-out method. On an on-going basis, we evaluate
our inventory, both ﬁnished goods and raw material,
for obsolescence and slow-moving items. This evalua-
tion includes analysis of sales levels, sales projections,
and purchases by item, as well as raw material usage
related to our manufacturing facilities. Based upon
this analysis, as well as an inventory aging analysis,
we accrue a reserve for obsolete and slow-moving
inventory. If future demand or market conditions are
different than our current estimates, an inventory
adjustment may be required, and would be reﬂected
in cost of goods sold in the period the revision is made.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

Impairment of Long-lived Assets
As of December 31, 2004, goodwill was $5.1 million ($4.2
million related to the FabTech acquisition, and $0.9 mil-
lion related to Diodes-China). Beginning in ﬁscal 2002
with the adoption of SFAS No. 142 (“Goodwill and Other
Intangible Assets”), goodwill is no longer amortized, but
instead tested for impairment at least annually. As a
result of the Company’s adoption of SFAS No. 142, an
independent appraiser hired by the Company performed
the required impairment tests of goodwill annually and
has determined that the goodwill is fully recoverable.

We assess the impairment of long-lived assets, including
goodwill, on an ongoing basis and whenever events or
changes in circumstances indicate that the carrying value
may not be recoverable. Our impairment review process

is based upon (i) an income approach from a discounted
cash ﬂow analysis, which uses our estimates of revenues,
costs and expenses, as well as market growth rates, and
(ii) a market multiples approach which measures the
value of an asset through an analysis of recent sales or
offerings or comparable public entities. If ever the carry-
ing value of the goodwill is determined to be less than
the fair value of the underlying asset, a write-down of the
asset will be required, with the resulting expense charged
in the period that the impairment was determined.

Results of Operations
The following table sets forth, for the periods indicated,
the percentage that certain items in the statement of in-
come bear to net sales and the percentage dollar increase
(decrease) of such items from period to period.

Percent of Net Sales

Year Ended December 31,

Percentage Dollar Increase (Decrease)
Year Ended December 31,

2000

2001

2002

2003

2004

’00 to ’01

’01 to ’02

’02 to ’03

’03 to ’04

Net sales
Cost of goods sold

100.0 %
(67.8)

100.0 %
(84.8)

100.0 %
(76.9)

100.0 %
(73.3)

100.0 %
(67.3)

(19.7) %
0.5

24.3 %
12.8

18.2 %
12.6

35.6 %
24.5

Gross proﬁt

Operating expenses (1)

Income (loss) from operations
Interest expense, net
Other income (expense)

Income (loss) before taxes and
minority interest
Income tax beneﬁt (provision)

Minority interest

Net income

32.2

(16.3)

15.9
(0.8)
0.4

15.5
(2.2)

(0.6)

12.7

15.2

(15.4)

(0.2)
(2.2)
0.8

(1.6)
1.9

(0.2)

0.1

23.1

(15.4)

7.7
(1.0)
0.1

6.8
(1.5)

(0.3)

5.0

26.7

(16.6)

10.1
(0.6)
0.0

9.5
(1.8)

(0.3)

7.4

32.7

(14.5)

18.2
(0.3)
(0.2)

17.7
(3.5)

(0.4)

13.8

(1) Operating expenses include loss on sale and impairment of ﬁxed assets of
$43,000, $1,037,000 and $14,000 in 2002, 2003 and 2004, respectively.

(62.1)

(24.5)

(100.7)
120.6
56.7

(107.9)
(29.1)

(65.1)

88.4

24.0

36.8

27.8

66.3

18.8

6,893.2
(43.0)
(91.5)

54.5
(27.3)
(107.5)

143.9
(25.9)
8,260.0

652.5
(2.3)

42.9

65.5
42.3

36.3

74.0

152.0
164.8

54.9

153.1

(99.2)

4,578.9

The following discussion explains in greater detail
the consolidated ﬁnancial condition of the Company.
This discussion should be read in conjunction with
the consolidated ﬁnancial statements and notes thereto
appearing elsewhere herein. Earnings per share
discussion reﬂects three-for-two stock split in November
2003. All per share amounts have been adjusted to reﬂect
the stock split.

Year 2004 Compared to Year 2003
Net sales for 2004 increased $48.8 million to $185.7 mil-
lion from $136.9 million for 2003. The 35.6% increase
was due primarily to an approximately 40.0% increase
in units sold as a result of increased demand for the
Company’s products, as well as a more favorable pricing
environment compared to 2003. In 2004, average selling
prices (“ASPs”) for discrete products increased approxi-
mately 1% while ASPs for wafers fell approximately 9%;
consequently, overall ASPs decreased approximately 3%
from 2003.

Cost of goods sold increased $24.6 million, or 24.5%,

for 2004 compared to 2003. As a percent of sales, cost
of goods sold decreased from 73.3% for 2003 to 67.3%
for 2004. The Company’s average unit cost (“AUP”)
for discrete devices decreased approximately 7% from
2003, and AUPs for wafer products decreased approxi-
mately 12%. These cost decreases were due primarily to
improved manufacturing efﬁciencies.

Gross proﬁt for 2004 increased 66.3% to $60.7 mil-
lion from $36.5 million for 2003. Of the $24.2 million
increase, $13.0 million was due to the 600 basis point
increase in gross proﬁt margin from 26.7% in 2003 to
32.7% in 2004, while $11.2 million was due to the 35.6%
increase in net sales. Gross proﬁt increases in Asia were
the primary contributor to the gross proﬁt increase in
2004. Gross proﬁt margin in the both the third and
fourth quarter of 2004 increased to 33.9% due to en-
hanced capacity utilization, continuing manufacturing
efﬁciencies, relatively stable pricing, and a product mix
that continues to shift towards higher-value perfor-
mance discretes and arrays.

For 2004, selling, general and administrative expenses

(“SG&A”) increased $3.9 million to $23.5 million from
$19.6 million for 2003. The 20.0% increase in SG&A was
due primarily to higher sales commissions, incentives,
marketing and royalty expenses associated with the
35.6% increase in sales, and higher labor and beneﬁt
expenses. Also contributing to the increased SG&A were
higher corporate and administrative expenses, includ-
ing legal and accounting fees associated with Sarbanes-
Oxley compliance. However, as a percentage of sales,
SG&A decreased to 12.7% for 2004 from 14.3% last year.

Research and development expenses (“R&D”) in-
creased to $3.4 million, or 1.8% of sales, in 2004 from
$2.0 million, or 1.5% of sales, in 2003. R&D expenses are
primarily related to new product development at the
silicon wafer level, and, to a lesser extent, at the packag-
ing level. We continue to seek to hire qualiﬁed engineers
who ﬁt our focus on next-generation discrete processes
and packaging technologies. Our goal is to expand R&D
to 3% of revenue as we bring proprietary technology
and advanced devices to the market.

Net interest expense for 2004 decreased $223,000
to $637,000 from $860,000 in 2003, due primarily to a
decrease in the use of the Company’s credit facilities, as
well as lower interest rates. In 2004, the Company paid
down $3.6 million on its credit facilities, reducing the
balance from $21.1 million to $17.5 million.

Other expense for 2004 increased $413,000 compared
to last year, primarily due to approximately $400,000 in
currency exchange losses related to the weakened U.S.
dollar, primarily versus the Taiwan dollar recorded in
the fourth quarter of 2004.

The effective tax rate in 2004 was 19.9% compared to

18.9% in 2003. The Company recorded a provision for
income taxes in the amount of $6.5 million for the year
2004, compared to $2.5 million for 2003. Included in the
tax provision in 2004 is $1.3 million in deferred taxes re-
corded in the fourth quarter for a minimum $8 million
planned foreign dividend distribution in 2005 under
the American Jobs Creation Act of 2004, offset by a $1.2
million foreign investment tax refund (net of U.S. taxes),
and a $0.5 million research and development tax credit.

The minority interest in joint venture represents
the minority investor’s share of the Diodes-China and
Diodes-Shanghai joint venture’s income for the period.
The increase in the joint venture earnings for 2004 is
primarily the result of increased sales of higher margin
products. The joint venture investment is eliminated in
consolidation of the Company’s ﬁnancial statements, and
the activities of Diodes-China and Diodes-Shanghai are
included therein. As of December 31, 2004, the Compa-
ny had a 95% controlling interest in the joint ventures.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

The Company generated net income of $25.6 million

(or $1.91 basic earnings per share and $1.65 diluted
earnings per share) in 2004, as compared to $10.1 mil-
lion (or $0.79 basic earnings per share and $0.70 diluted
earnings per share) for 2003. This 153% increase is due
primarily to the 35.6% sales increase at gross proﬁt
margins of 32.7% compared to gross proﬁt margins of
26.7% in 2003.

Year 2003 Compared to Year 2002
Net sales for 2003 increased $21.1 million to $136.9 mil-
lion from $115.8 million for 2002. The 18.2% increase
was due primarily to a 19.5% increase in units sold as a
result of increased demand for the Company’s prod-
ucts, as well as a more favorable pricing environment
compared to 2002. In 2003, ASPs for discrete products
increased 4% while ASPs for wafers fell 7%; conse-
quently, overall ASPs decreased 1%.

Gross proﬁt for 2003 increased 36.8% to $36.5 million
from $26.7 million for 2002. Of the $9.8 million increase,
$5.0 million was due to the increase in gross proﬁt
margin from 23.1% in 2002 to 26.7% in 2003, while $4.8
million was due to the 18.2% increase in net sales. Gross
proﬁt increases in Asia were the primary contributor
to the gross proﬁt increase in 2003. Gross proﬁt margin
in the fourth quarter of 2003 increased to 29.5% due to
increased capacity utilization, continuing manufactur-
ing efﬁciencies, relatively stable pricing, and a product
mix that continues to shift towards higher-value perfor-
mance discretes and arrays.

For 2003, SG&A increased $3.4 million to $19.6 mil-

lion from $16.2 million for 2002. The 20.7% increase
in SG&A was due primarily to higher sales commis-
sions associated with the 18.2% increase in sales, and
higher labor beneﬁts expenses. Also contributing to the
increased SG&A were higher corporate and adminis-
trative expenses, including legal and accounting fees
associated with Sarbanes-Oxley compliance. SG&A, as
a percentage of sales, increased to 14.3% for 2003 from
14.0% in 2002.

R&D expenses increased to $2.0 million, or 1.5%
of sales, in 2003 from $1.5 million, or 1.3% of sales, in
2002. R&D expenses are primarily related to new
product development at the silicon wafer level, and,
to a lesser extent, at the packaging level.

In 2003, operating proﬁt margins were negatively
affected by a $1.0 million reserve for ﬁxed asset impair-
ment, primarily as a result of the re-engineering of
our wafer production lines. During the year, we took
advantage of opportunities to purchase more efﬁcient
equipment at discounts. As a result, we retired
un-depreciated equipment that was replaced.

Net interest expense for 2003 decreased $323,000
to $860,000 from $1.2 million in 2002, due primarily
to a decrease in the use of the Company’s credit facilities,
as well as lower interest rates. In 2003, the Company
paid down $5.8 million on its long-term debt, reducing
the balance, net of current portion from $12.6 million
to $6.8 million.

Other expense for 2003 increased $72,000 compared

to last year, primarily due to the discontinuance of
income Diodes-FabTech was receiving from an external
company’s use of its testing facilities in 2002, a decrease
in high-technology grant income received at Diodes-
China in 2003, and currency exchange losses primarily
in Asia in 2003, partly offset by a severance payment in
accordance with the terms of a separation agreement in
2002, as well as the reduction in the expense recorded
for the management incentive agreement at Diodes-
FabTech in 2003.

The effective tax rate in 2003 was 18.9% compared to

22.0% in 2002, due primarily to a higher proportion of
income earned by our Asian subsidiaries in lower tax ju-
risdictions. The Company is beneﬁting from its Diodes-
Hong Kong subsidiary, established in 2002, not only due
to its lower tax rates, but also as another entry point into
the Asia market. The Company recorded a provision
for income taxes in the amount of $2.5 million for the
year 2003, compared to $1.7 million for 2002. Included
in the tax provision in 2003 is $840,000 in deferred taxes
recorded for a portion of the 2003 earnings at Diodes-
China, and $200,000 for a portion of the 2003 earnings at
Diodes-Hong Kong.

The minority interest in joint venture represents
the minority investor’s share of the Diodes-China joint
venture’s income for the period. The increase in the joint
venture earnings for 2003 is primarily the result of in-
creased sales. The joint venture investment is eliminated
in consolidation of the Company’s ﬁnancial statements,
and the activities of Diodes-China are included therein.
As of December 31, 2003, the Company had a 95% con-
trolling interest in the joint venture.

The Company generated net income of $10.1 million

(or $0.79 basic earnings per share and $0.70 diluted
earnings per share) in 2003, as compared to $5.8 million
(or $0.47 basic earnings per share and $0.44 diluted
earnings per share) for 2002. This 74.0% increase is due
primarily to the 18.2% sales increase at gross proﬁt
margins of 26.7% compared to gross proﬁt margins of
23.1% in 2002.

Financial Condition
Liquidity and Capital Resources
The Company’s liquidity requirements arise from the
funding of its working capital needs, primarily inven-
tory, work-in-process and accounts receivable, as well as
capital expenditures. The Company’s primary sources
for working capital and capital expenditures are cash
ﬂow from operations and borrowings under the Com-
pany’s bank credit facilities. Any withdrawal of support
from its banks could have adverse consequences on the
Company’s liquidity. The Company’s liquidity depends,
in part, on customers paying within credit terms, and
any extended delays in payments or changes in credit
terms given to major customers may have an impact
on the Company’s cash ﬂow. In addition, any abnormal
product returns or pricing adjustments may also affect
the Company’s source of short-term funding.

At December 31, 2004 the Company had cash and
cash equivalents totaling $19.0 million, an increase of
$6.1 million from December 31, 2003. Cash provided by
operating activities in 2004 was $29.3 million compared
to $18.8 million in 2003 and $20.0 million in 2002. The
primary sources of cash ﬂows from operating activities
in 2004 were net income of $25.6 million and deprecia-
tion and amortization of $13.2 million. The primary
sources in 2003 were depreciation and amortization of

$11.1 million and net income of $10.1 million. The pri-
mary sources of cash ﬂows from operating activities in
2002 were depreciation and amortization of $9.7 million
and net income of $5.8 million. The primary use of cash
ﬂows from operating activities in 2004 was an increase
in accounts receivable of $13.2 million and an increase
of inventory of $6.1 million. The primary use of cash
ﬂows from operating activities in 2003 was an increase
in accounts receivable of $8.5 million. The primary use
of cash ﬂows from operating activities in 2002 was an
increase in accounts receivable of $4.8 million.

For the year ended December 31, 2004, accounts
receivable increased 43.2% compared to the 35.6%
increase in sales, as days sales outstanding increased
from 70 to 82 days due primarily to a trend in longer
payment terms, primarily from Far East customers as
well as major distributors. The Company continues to
closely monitor its credit terms, while at times providing
extended terms as required. The ratio of the Company’s
current assets to current liabilities on December 31, 2004
was 2.16 to 1, compared to a ratio of 1.67 to 1 and 1.69 to
1 as of December 31, 2003 and 2002, respectively.

Cash used by investing activities was $26.1 million in
2004, compared to $15.3 million in 2003 and $6.8 million
in 2002. The primary investments were for additional
manufacturing equipment and expansion at the Diodes-
China and Diodes-Shanghai manufacturing facilities,
and to a lesser extent, for capacity increases at Diodes-
FabTech.

On December 1, 2000, the Company purchased all the

outstanding capital stock of FabTech Incorporated, a
5-inch wafer foundry located in Lee’s Summit, Missouri
from LSC, the Company’s largest stockholder. The
acquisition purchase price consisted of approximately $5
million in cash, plus FabTech was obligated to repay an
aggregate of approximately $19 million of debt, consist-
ing of (i) an approximately $13.6 million note payable
to LSC, (ii) an approximately $2.6 million note payable
to the Company, and (iii) an approximately $3.0 million
note payable to a ﬁnancial institution (which was repaid
on December 4, 2000 with the proceeds of a capital
contribution by the Company). The acquisition was
ﬁnanced internally and through bank credit facilities.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

In June 2001, according to the Company’s U.S. bank
covenants, Diodes-FabTech was not permitted to make
regularly scheduled principal and interest payments to
LSC on the remaining $10.0 million payable related to
the FabTech acquisition note, but was, however, able
to renegotiate with LSC the terms of the note. Under
the terms of the amended and restated subordinated
promissory note, monthly payments of approximately
$417,000 plus interest were scheduled to begin again
in July 2002, provided the Company met the terms of
its U.S. bank’s covenants. In May 2002, the Company
renegotiated the terms of the note with LSC to extend
the payment period from two years to four years, and
accordingly, monthly payments of approximately
$208,000 plus interest began in July 2002.

Cash provided by ﬁnancing activities was $2.2 mil-
lion in 2004, compared to $1.9 million in 2003, and cash
used by ﬁnancing activities of $14.0 million in 2002.
The primary source of cash in 2004 was the receipt of
$5.8 million from stock option exercises. At December
31, 2004, the Company’s total bank credit facility of
$46.5 million encompasses one major U.S. bank, three
banks in Mainland China and ﬁve in Taiwan. As of
December 31, 2004, the total credit lines were $12.5
million, $25.0 million, and $9.0 million, for the U.S.
facility secured by substantially all assets, the unsecured
Chinese facilities, and the unsecured Taiwanese facili-
ties, respectively. As of December 31, 2004, the available
credit was $5.1 million, $19.0 million, and $9.0 million,
for the U.S. facility, the Chinese facilities, and the Tai-
wanese facilities, respectively.

In February 2003, the Company and its U.S. bank
renewed its $7.5 million revolving credit line, extending
it for two years. In July 2004, Diodes-FabTech obtained
a $5.0 million credit facility to be used for capital expen-
diture requirements at its wafer fabrication facility. This
$5.0 million facility brought the Company’s total credit
facility to $46.5 million, with the total available and
unused credit at December 31, 2004 of $32.3 million.

The credit agreements have certain covenants and
restrictions, which, among other matters, require the
maintenance of certain ﬁnancial ratios and operating
results, as deﬁned in the agreements, and prohibit the
payment of dividends. The Company was in compli-
ance with its covenants as of December 31, 2004.

The Company has used its credit facilities primar-

ily to fund the capacity expansion at Diodes-China
and Diodes-Shanghai and to a lesser extent Diodes-
FabTech, as well as for the FabTech acquisition, and to
support all operations. The Company believes that the
continued availability of these credit facilities, together
with internally generated funds, will be sufﬁcient to
meet the Company’s current foreseeable operating cash
requirements.

The Company had entered into an interest rate swap

agreement with a major U.S. bank which expired No-
vember 30, 2004, to hedge its exposure to variability in
expected future cash ﬂows resulting from interest rate
risk related to a portion of its long-term debt. The in-
terest rate under the swap agreement was ﬁxed at 6.8%
and is based on the notional amount. The swap contract
was inversely correlated to the related hedged long-
term debt and was therefore considered an effective
cash ﬂow hedge of the underlying long-term debt. The
level of effectiveness of the hedge is measured by the
changes in the market value of the hedged long-term
debt resulting from ﬂuctuation in interest rates. As a
matter of policy, the Company does not enter into de-
rivative transactions for trading or speculative purposes.

Total working capital increased 82.6% to $49.6
million as of December 31, 2004, from $27.2 million
as of December 31, 2003. The Company believes that
such working capital position will be sufﬁcient for
foreseeable operations and growth opportunities. The
Company’s total debt to equity ratio improved to 0.50
at December 31, 2004, from 0.73 at December 31, 2003.
It is anticipated that this ratio may increase should the
Company use its credit facilities to fund additional
inventory sourcing opportunities.

The Company has no material plans or commitments

for capital expenditures other than in connection with
manufacturing expansion at Diodes-China, Diodes-
Shanghai and Diodes-FabTech. However, to ensure

that the Company can secure reliable and cost effective
inventory sourcing to support and better position itself
for growth, the Company is continuously evaluating
additional internal manufacturing expansion, as well as
additional outside sources of products. The Company
believes its ﬁnancial position will provide sufﬁcient
funds should an appropriate investment opportunity
arise and thereby, assist the Company in improving
customer satisfaction and in maintaining or increasing
market share. Based upon plans for new product intro-
ductions, product mixes, capacity restraints on certain
product lines and equipment upgrades, the Company
anticipates that year 2005 capital expenditures for the
manufacturing facilities will be $12-16 million.

Contractual
Obligations

Long-term debt
Capital leases
Operating leases
Purchase obligations

Total obligations

Off-Balance Sheet Arrangements
The Company does not have any transactions, arrange-
ments and other relationships with unconsolidated
entities that will affect our liquidity or capital resources.
We have no special purpose entities that provided off-
balance sheet ﬁnancing, liquidity or market or credit
risk support, nor do we engage in leasing, hedging
(except for the interest rate swap agreement), or
research and development services, that could expose
us to liability that is not reﬂected on the face of the
ﬁnancial statements.

Contractual Obligations
The following table represents the Company’s contrac-
tual obligations as of December 31, 2004:

Payments due by period (in thousands)

Total

$11,347
2,777
13,498
2,927

$30,549

Less than
1 year

$ 3,514
230
3,461
2,927

$10,132

1-3 years

3-5 years

$ 7,250
460
6,420
0

$14,130

$ 583
460
3,617
0

$4,660

More than
5 years

$ 0
1,627
0
0

$1,627

Inﬂation did not have a material effect on net sales or net income in ﬁscal years 2002 through 2004. A signiﬁcant

increase in inﬂation could affect future performance.

Recently Issued Accounting Pronouncements and
Proposed Accounting Changes
In November 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue No. 03-13,
Applying the Conditions in Paragraph 42 of FASB Statement
No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” in Determining Whether to Report
Discontinued Operations. The consensus provides guid-
ance in determining: (a) which cash ﬂows should be
taken into consideration when assessing whether the
cash ﬂows of the disposal component have been or will
be eliminated from the ongoing operations of the entity,

(b) the types of involvement ongoing between the
disposal component and the entity disposing of the
component that constitute continuing involvement in
the operations of the disposal component, and
(c) the appropriate (re)assessment period for purposes of
assessing whether the criteria in paragraph 42 have been
met. The consensus was ratiﬁed by the FASB at their
November 30, 2004 meeting and should be applied to a
component of an enterprise that is either disposed of or
classiﬁed as held for sale in ﬁscal periods beginning after
December 15, 2004. The Company does not anticipate
a material impact on the ﬁnancial statements from the
adoption of this consensus.

Diodes Incorporated and Subsidiaries
management’s discussion and analysis of ﬁnancial condition
and results of operations

In December 2004, the FASB issued FASB Statement

No. 153, Exchanges of Nonmonetary Assets – An Amend-
ment of APB Opinion No. 29. The amendments made
by Statement No. 153 are based on the principle that
exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further,
the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges
of nonmonetary assets that do not have “commercial
substance.” The provisions in Statement No. 153 are
effective for nonmonetary asset exchanges occurring in
ﬁscal periods beginning after June 15, 2005. Adoption of
this standard is not expected have a material impact on
the consolidated ﬁnancial statements.

In September 2004, the EITF reached a consensus on
EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131
in Determining Whether to Aggregate Operating Segments
That Do Not Meet the Quantitative Thresholds. The
consensus states that operating segments that do not
meet the quantitative thresholds can be aggregated only
if aggregation is consistent with the objective and basic
principles of SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, the segments have
similar economic characteristics, and the segments share
a majority of the aggregation criteria (a)-(e) listed in
paragraph 17 of SFAS No. 131. The effective date of the
consensus in this Issue is for ﬁscal years ending after
October 13, 2004. If the Financial Accounting Standards
Board (FASB) ratiﬁes EITF Issue No. 04-10, the
Company does not anticipate a material impact on the
ﬁnancial statements.

In March 2004, the EITF reached a consensus on
the remaining portions of EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application
to Certain Investments with an effective date of June 15,
2004. EITF 03-01 provides new disclosure requirements
for other-than-temporary impairments on debt and
equity investments. Investors are required to

disclose quantitative information about: (i) the aggre-
gate amount of unrealized losses, and (ii) the aggregate
related fair values of investments with unrealized losses,
segregated into time periods during which the invest-
ment has been in an unrealized loss position of less than
12 months and greater than 12 months. In addition, in-
vestors are required to disclose the qualitative informa-
tion that supports their conclusion that the impairments
noted in the qualitative disclosure are not other-than
temporary. The Company determined that EITF 03-01
would not have a material impact on the ﬁnancial state-
ments.

In January 2003, the FASB issued Interpretation No.

46, Consolidation of Variable Interest Entities – an Inter-
pretation of ARB No. 51, which provides guidance on
the identiﬁcation of and reporting for variable interest
entities. Interpretation No. 46 expands the criteria for
consideration in determining whether a variable inter-
est Interpretation No. 46 is effective immediately for
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise
obtains an interest after that date. Interpretation No. 46
was effective for the Company in 2004 because the Com-
pany entered into a joint venture for Diodes-Shanghai.
The Company has a 95% interest. The Interpretation
requires unconsolidated variable interest entities to be
consolidated by their primary beneﬁciaries. The primary
beneﬁciary is the party that assumes the majority of the
risk, which includes, but is not limited to, the entity’s ex-
pected losses. Management concluded that its investment
in Diodes-Shanghai did not meet the criteria for consoli-
dation under the standard. Based upon our review, we
concluded that management’s analysis and the conclu-
sions contained therein appeared reasonable.

In December 2004, the FASB also issued SFAS

No. 151, “Inventory Costs, an amendment of ARB No. 43,
Chapter 4,” which will become effective for the Com-
pany beginning January 1, 2006. This standard clariﬁes
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material should be expensed
as incurred and not included in overhead. In addition,
this standard requires that the allocation of ﬁxed pro-
duction overhead costs to inventory be based on the

new tax law changes in the period of enactment. FSP
109-2 provides companies additional time to determine
the amount of earnings, if any, that they intend to repa-
triate under the Jobs Creation Act’s provisions. See Note
8 for more discussion of the impact of the Jobs Creation
Act, including the Company’s status on the repatriation
of foreign earnings.

In December 2004, the FASB issued SFAS No.

123(R). This new standard requires companies to adopt
the fair value methodology of valuing stock-based
compensation and recognizing that valuation in the
ﬁnancial statements from the date of grant. Accordingly,
the adoption of SFAS No. 123(R)’s fair value method
will have a signiﬁcant impact on the Company’s results
of operations, although it will have no impact on the
Company’s overall ﬁnancial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at
this time because it will partially depend on levels of
share-based payments granted in the future. However,
had the Company adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have ap-
proximated the impact of SFAS No. 123 as shown in
the Stock-based Compensation table (see Note 1). SFAS
No. 123(R) also requires the beneﬁts of tax deductions in
excess of recognized compensation cost to be reported as
a ﬁnancing cash ﬂow, rather than as an operating cash
ﬂow as required under current literature. The Company
is currently evaluating several option valuation models
in order to calculate the required compensation expense.
The Company has elected to adopt the provisions of
SFAS No. 123(R) on a modiﬁed prospective application
method effective July 1, 2005, with no restatement of
any prior periods. SFAS No. 123(R) is effective for the
Company as of the beginning of the ﬁrst interim report-
ing period that begins after June 15, 2005.

normal capacity of the production facilities. The Com-
pany is currently evaluating the potential impact of this
standard on its ﬁnancial position and results of opera-
tions, but does not believe the impact of the change will
be material.

On October 22, 2004, a new tax law was passed, the
American Jobs Creation Act of 2004 (the “Jobs Creation
Act”), which raised a number of issues with respect to
accounting for income taxes. In response, on December
21, 2004, the FASB issued two FASB Staff Positions
(FSP), FSP 109-1 – “Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduc-
tion on Qualiﬁed Production Activities Provided by the
American Jobs Creation Act of 2004” and FSP 109-2
– “Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004,” which became effective for the
Company upon issuance.

The Jobs Creation Act provides a deduction for
income from qualiﬁed domestic production activities, to
be phased in from 2005 through 2010, which is intended
to replace the existing extra-territorial income exclusion
for foreign sales. In FSP 109-1, the FASB decided the
deduction for qualiﬁed domestic production activities
should be accounted for as a special deduction under
SFAS No. 109, rather than as a rate reduction. Accord-
ingly, any beneﬁt from the deduction will be reported
in the period in which the deduction is claimed on the
tax return and no adjustment to deferred taxes at
December 31, 2004, is required.

The Jobs Creation Act also creates a temporary
incentive for U.S. corporations to repatriate accumu-
lated income earned abroad by providing an 85 percent
dividends received deduction for certain dividends from
controlled foreign corporations. The deduction is sub-
ject to a number of limitations and uncertainty remains
as to how to interpret numerous provisions in the Act.
FSP 109-2 addresses when to reﬂect in the ﬁnancial
statements the effects of the one-time tax beneﬁt on the
repatriation of foreign earnings. Under SFAS No. 109,
companies are normally required to reﬂect the effect of

Diodes Incorporated and Subsidiaries
consolidated balance sheets

December 31,
Assets
Current Assets
Cash
Accounts receivable

Trade customers
Related parties

Allowance for doubtful accounts

Inventories
Deferred income taxes, current
Prepaid expenses and other
Prepaid income taxes

Total current assets

Property, Plant and Equipment, net
Deferred Income Taxes, non-current
Other Assets

Goodwill
Other

Total assets
Liabilities and Stockholders’ Equity
Current Liabilities
Line of credit
Accounts payable
Trade
Related parties
Accrued liabilities
Current portion of long-term debt

Related party
Others

Current portion of capital lease obligations

Total current liabilities

Long-Term Debt, net of current portion

Related party
Others

Capital Lease Obligations, net of current portion
Minority Interest in Joint Venture
Stockholders’ Equity

Class A convertible preferred stock – par value $1.00 per share;
1,000,000 shares authorized; no shares issued and outstanding
Common stock – par value $0.66 2⁄3 per share; 30,000,000 shares authorized;
14,627,284 and 15,763,266 shares issued at 2003 and 2004, respectively
Additional paid-in capital
Retained earnings

Less:

Treasury stock – 1,613,508 shares of common stock, at cost
Accumulated other comprehensive loss (gain)

Total stockholders’ equity
Total liabilities and stockholders’ equity

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

2003

2004

$ 12,847,000

$ 18,970,000

27,010,000
3,938,000
30,948,000
(375,000)
30,573,000
16,164,000
5,547,000
2,256,000
446,000
67,833,000
47,893,000
1,816,000

38,682,000
5,526,000
44,208,000
(432,000)
43,776,000
22,238,000
2,453,000
4,243,000
406,000
92,086,000
60,857,000
7,970,000

5,090,000
1,163,000
$123,795,000

5,090,000
1,798,000
$167,801,000

$ 8,488,000

$ 6,167,000

14,029,000
3,453,000
8,715,000

2,500,000
3,333,000
161,000
40,679,000

3,750,000
3,000,000
2,334,000
2,582,000

17,274,000
3,936,000
11,459,000

2,500,000
1,014,000
165,000
42,515,000

1,250,000
6,583,000
2,172,000
3,133,000

–

6,502,000
11,192,000
55,779,000
73,473,000

1,782,000
241,000
2,023,000
71,450,000
$123,795,000

7,260,000
24,765,000
81,330,000
113,355,000

1,782,000
(575,000)
1,207,000
112,148,000
$167,801,000

Diodes Incorporated and Subsidiaries
consolidated statements of income

Years ended December 31,
Net Sales

Cost of Goods Sold

Gross proﬁt

Operating Expenses

Selling, general and administrative
Research and development
Impairment of ﬁxed assets
Loss on disposal of ﬁxed assets

Total operating expenses

Income from operations

Other Income (Expenses)
Interest expense, net
Other

Total other expenses

Income before income taxes and minority interest

Income Tax Provision

Income before minority interest

Minority Interest in Earnings of Joint Venture
Net Income
Earnings Per Share

Basic

Diluted

Number of shares used in computation

Basic

Diluted

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

2002

2003

2004

$115,821,000

$136,905,000

$185,703,000

89,111,000

26,710,000

16,228,000
1,472,000
–
43,000

17,743,000

8,967,000

(1,183,000)
67,000

(1,116,000)

7,851,000

(1,729,000)

6,122,000

(320,000)

100,377,000

36,528,000

124,968,000

60,735,000

19,586,000
2,049,000
1,000,000
37,000

22,672,000

13,856,000

(860,000)
(5,000)

(865,000)

12,991,000

(2,460,000)

10,531,000

(436,000)

23,503,000
3,422,000
–
14,000

26,939,000

33,796,000

(637,000)
(418,000)

(1,055,000)

32,741,000

(6,514,000)

26,227,000

(676,000)

$ 5,802,000

$ 10,095,000

$ 25,551,000

$ 0.47

$ 0.79

$ 1.91

$ 0.44

$ 0.70

$ 1.65

12,276,899

13,297,490

12,730,808

14,406,054

13,404,276

15,471,438

Diodes Incorporated and Subsidiaries
consolidated statements of stockholders’ equity

Years ended
December 31,
2002, 2003, and 2004

Balance,
December 31, 2001

Comprehensive income, net of tax:
Net income for the year

ended December 31, 2002

Translation adjustments
Change in unrealized loss on
derivative instruments,
net of tax of $400

Total comprehensive income

Management fee from LSC
Exercise of stock options

including $98,000 income
tax beneﬁt

Balance,
December 31, 2002

Comprehensive income, net of tax:
Net income for the year

ended December 31, 2003

Translation adjustments
Change in unrealized loss on
derivative instruments,
net of tax of $27,000

Total comprehensive income

Management fee from LSC
Exercise of stock options

including $1,139,000 income
tax beneﬁt

Balance,
December 31, 2003

Comprehensive income, net of tax:
Net income for the year

ended December 31, 2004

Translation adjustments
Change in unrealized loss on
derivative instruments,
net of tax of $9,000

Total comprehensive income

Management fee from LSC
Exercise of stock options

including $8,514,000 income
tax beneﬁt

Balance,
December 31, 2004

Common Stock

Shares in
Treasury

Amount

Common
Stock in
Treasury

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Compre-
hensive
Gain (Loss)

Total

13,841,496

1,613,508

$6,151,000 $(1,782,000) $ 7,310,000 $ 39,882,000

$(437,000) $ 51,124,000

5,802,000

(40,000)

5,802,000
(40,000)

375,000

(1,000)

5,761,000
375,000

97,650

–

44,000

–

375,000

–

419,000

13,939,146

1,613,508

$6,195,000 $(1,782,000) $ 8,060,000 $45,684,000

$(478,000) $ 57,679,000

10,095,000

10,095,000
169,000

169,000

286,000

68,000

10,332,000
286,000

688,138

–

307,000

–

2,846,000

–

3,153,000

14,627,284

1,613,508

$6,502,000 $(1,782,000) $11,192,000 $ 55,779,000

$(241,000) $ 71,450,000

25,551,000

25,551,000
793,000

793,000

180,000

23,000

26,367,000
180,000

1,135,982

–

758,000

–

13,393,000

–

14,151,000

15,763,266

1,613,508

$7,260,000 $(1,782,000) $24,765,000 $81,330,000

$ 575,000 $112,148,000

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

Diodes Incorporated and Subsidiaries
consolidated statements of cash ﬂows

Years ended December 31,
Cash Flows From Operating Activities

Net income

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

Depreciation and amortization

Minority interest earnings

Loss on impairment and disposal of property,

plant and equipment

Changes in operating assets and liabilities

2002

2003

2004

$ 5,802,000

$ 10,095,000

$ 25,551,000

9,747,000
320,000

11,073,000
436,000

13,173,000
676,000

43,000

1,037,000

14,000

Accounts receivable
Inventories
Prepaid expenses and other
Deferred income taxes
Accounts payable
Accrued liabilities
Income taxes payable

(4,779,000)
2,139,000
(711,000)
646,000
3,153,000
3,481,000
149,000

(8,490,000)
(1,248,000)
(388,000)
270,000
5,082,000
–
954,000

Net cash provided by operating activities

19,990,000

18,821,000

Cash Flows From Investing Activities

Purchases of property, plant and equipment
Proceeds from sales of property, plant and equipment
Net cash used by investing activities

Cash Flows From Financing Activities

Advances (repayments) on line of credit, net
Net proceeds from the issuance of common stock
Management incentive reimbursement from LSC

Proceeds from long-term debt
Repayments of long-term debt

Minority shareholder investment in subsidiary
Repayments of capital lease obligations
Dividend to minority shareholders

Net cash provided (used) by ﬁnancing activities

Effect of Exchange Rate Changes on
Cash and Cash Equivalents

Increase (Decrease) in Cash
Cash, beginning of year
Cash, end of year
Supplemental Disclosure of Cash Flow Information

Cash paid during the year for:

Interest

Income taxes

Non-cash activities:
Tax beneﬁt related to stock options credited to
paid-in capital

Building acquired through capital lease obligation

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

(6,777,000)
3,000

(6,774,000)

(3,478,000)
321,000
375,000
–
(11,080,000)
–
(133,000)
–

(13,995,000)

(40,000)

(819,000)
8,103,000

(15,646,000)
357,000

(15,289,000)

5,463,000
2,014,000
375,000
–
(5,833,000)
–
(157,000)
–

1,862,000

169,000

5,563,000
7,284,000

$ 7,284,000

$ 12,847,000

$ 18,970,000

$ 1,229,000

$ 965,000

$ 876,000

$ 999,000

$ 683,000

$ 2,504,000

$ 98,000

$ 2,785,000

$ 1,139,000

$ –

$ 8,514,000

$ –

(13,203,000)
(6,074,000)
(2,474,000)
5,463,000
3,728,000
1,468,000
978,000

29,300,000

(26,201,000)
68,000

(26,133,000)

(2,321,000)
5,628,000
375,000
3,583,000
(4,819,000)
175,000
(158,000)
(300,000)

2,163,000

793,000

6,123,000
12,847,000

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 1 – Summary of Operations and Signiﬁcant
Accounting Policies

Nature of operations – Diodes Incorporated and its
subsidiaries manufacture and distribute discrete semi-
conductor devices to manufacturers in the communica-
tions, computing, industrial, consumer electronics and
automotive markets. The Company’s products include
small-signal transistors and MOSFETs, transient voltage
suppressors (TVSs), zeners, Schottkys, diodes, rectiﬁers,
bridges and silicon wafers. The products are sold pri-
marily throughout North America, Asia and Europe.

Principles of consolidation – The consolidated ﬁnancial
statements include the accounts of the parent company,
Diodes Incorporated (Diodes-North America), its wholly-
owned subsidiaries; Diodes Taiwan Corporation, Ltd.
(Diodes-Taiwan), Diodes Hong Kong, Ltd. (Diodes-Hong
Kong) and FabTech, Inc. (FabTech or Diodes-FabTech);
and its majority (95%) owned subsidiaries, Shanghai
KaiHong Electronics Co., Ltd. (Diodes-China) and
Diodes Shanghai Company, Ltd. (Diodes-Shanghai).
All signiﬁcant intercompany balances and transactions
have been eliminated in consolidation.

Revenue recognition – Revenue is recognized when
there is persuasive evidence that an arrangement exists,
when delivery has occurred, when our price to the buyer
is ﬁxed or determinable and when collectibility of the
receivable is reasonably assured. These elements are met
when title to the products is passed to the buyers, which
is generally when our product is shipped to both origi-
nal equipment manufacturers (OEMs) and electronics
component distributors. The Company reduces revenue
in the period of sale for estimates of product returns and
other allowances.

In 2003, Diodes-China received approximately $254,000
in high-technology grants as an incentive for further invest-
ment from the local Chinese government. The grants
were unrestricted and available upon receipt to fund the
operations of Diodes-China. The Company recognized
this grant income when received and recorded them
within “other income” on the accompanying statements
of income. No grant income was received in 2004 and the
Company does not expect this type of income in the future.

Product warranty – The Company generally warrants
its products for a period of one year from the date of sale.
Historically, warranty expense has not been signiﬁcant.

Inventories – Inventories are stated at the lower of cost
or market value. Cost is determined principally by the
ﬁrst-in, ﬁrst-out method. On an on-going basis both
ﬁnished goods inventory and raw material inventory
is evaluated for obsolescence and slow-moving items.
This evaluation includes analysis of sales levels, sales
projections, and purchases by item, as well as raw mate-
rial usage related to our manufacturing facilities. Based
upon this analysis, as well as an inventory aging analysis,
a reserve for obsolete and slow-moving inventory is
accrued (see Note 2).

Property, plant and equipment – Property, plant and
equipment are depreciated using straight-line and accel-
erated methods over the estimated useful lives, which
range from 20 to 55 years for buildings and 3 to 10 years
for machinery and equipment. Leasehold improvements
are amortized using the straight-line method over 3 to 5
years (see Note 3).

Goodwill – Beginning in ﬁscal 2002 with the adoption
of Statement of Financial Accounting Standards (SFAS)
No. 142 (“Goodwill and Other Intangible Assets”), goodwill
is no longer amortized, but instead tested for impairment
at least annually. As a result of the Company’s adoption
of SFAS No. 142, an independent appraiser hired by the
Company, performed the required impairment tests of
goodwill as of January 1, 2004 and 2005, and has deter-
mined that the goodwill is fully recoverable. No good-
will was acquired or impaired during the years ended
December 31, 2002, 2003 and 2004. As of December 31,
2004, goodwill for Diodes-FabTech and Diodes-China
was $4.2 million and $0.9 million, respectively. Prior to
ﬁscal 2002, goodwill was amortized using the straight-
line method over its estimated period of beneﬁt.

Impairment on long-lived assets – Certain long-lived
assets of the Company are reviewed at least annually as
to whether their carrying values have become impaired
in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”

Management considers assets to be impaired if the carry-
ing value exceeds the undiscounted projected cash ﬂows
from operations. If impairment exists, the assets are writ-
ten down to fair value or the projected discounted cash
ﬂows from related operations. As of December 31, 2004,
the Company expects the remaining carrying value of
assets to be recoverable.

Earnings per share – Earnings per share are based upon
the weighted average number of shares of common
stock and common stock equivalents outstanding, net
of common stock held in treasury. Earnings per share
is computed using the “treasury stock method” under
the Financial Accounting Standards Board (FASB)
Statement No. 128.

For the years ended December 31, 2002, 2003 and 2004,
options outstanding for 824,000 shares, 1,195,000 shares,
and 0 shares of common stock have been excluded from
the computation of diluted earnings per share because
their effect was anti-dilutive.

Year Ended December 31,

2002

2003

2004

Net income for earnings
per share computation

$ 5,802,000 $10,095,000 $25,551,000

Basic
Weighted average number

of common shares
outstanding during
the year

12,276,899

12,730,808

13,404,276

Basic earnings per share

$ 0.47 $ 0.79 $ 1.91

Diluted
Weighted average number

of common shares
outstanding used in
calculating basic earnings
per share

12,276,899

12,730,808

13,404,276

Add: additional shares

issuable upon exercise of
stock options

1,020,591

1,675,246

2,067,162

Weighted average number
of common shares used
in calculating diluted
earnings per share

13,297,490

14,406,054

15,471,438

Diluted earnings per share $ 0.44 $ 0.70 $ 1.65

Income taxes – Income taxes are accounted for using an
asset and liability approach whereby deferred tax assets
and liabilities are recorded for differences in the ﬁnancial
reporting bases and tax bases of the Company’s assets
and liabilities (see Note 8).

Concentration of credit risk – Financial instruments,
which potentially subject the Company to concentrations
of credit risk, include trade accounts receivable. Credit risk
is limited by the dispersion of the Company’s customers
over various geographic areas, operating primarily in the
electronics manufacturing and distribution industries. The
Company performs on-going credit evaluations of its cus-
tomers and generally requires no collateral from its cus-
tomers. Historically, credit losses have not been signiﬁcant.

The Company currently maintains substantially all of
its day-to-day operating cash balances with major ﬁnan-
cial institutions. Cash balances are usually in excess of
Federal and/or foreign deposit insurance limits.

Use of estimates – The preparation of ﬁnancial state-
ments in conformity with accounting principles gener-
ally accepted in the United States of America requires
that management make estimates and assumptions that
affect the amounts reported in the consolidated ﬁnancial
statements and accompanying notes. Actual results could
differ materially from those estimates.

Stock split – On November 25, 2003, the Company
affected a three-for-two stock split for shareholders of
record as of November 14, 2003 in the form of a 50%
stock dividend. All share and per share amounts in the
accompanying ﬁnancial statements and footnotes reﬂect
the effect of this stock split.

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 1 – Summary of Operations and Signiﬁcant
Accounting Policies (continued)

Stock-based compensation – The Company maintains
stock-based compensation plans for its board of direc-
tors, ofﬁcers, and key employees, which provide for
non-qualiﬁed and incentive stock options. The plans
are described more fully in Note 9. With the issuance
in mid-December 2004 by FASB of SFAS No. 123(R),
“Share-Based Payments,” which is a revision to SFAS No.
123, “Accounting for Stock-Based Compensation,” which
was issued in 1995, the Company will begin reporting
the fair value of stock-based compensation as an expense
in its ﬁnancial statements beginning in 2005 (see discus-
sion in “Recently Issued Accounting Pronouncements
and Proposed Accounting Changes” below). Prior to

For the years ended December 31,

implementation of this new standard, the Company
accounted for those plans under the recognition and
measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related
Interpretations. No compensation cost was reﬂected
in net income for stock options, as all options granted
under those plans have an exercise price equal to
or greater than the market value of the underlying
common stock on the date of the grant. As required
by SFAS No. 148, “Accounting for Stock-Based
Compensation – Transition and Disclosure, an amendment
of FASB Statement No. 123,” the following table illus-
trates the effect on net income and earnings per com-
mon share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
compensation for each period presented:

Net income
Deduct: stock-based

compensation expense
determined under fair
value method, net of tax

Amounts Per Share

2002

Basic

Diluted

2003

Basic

Diluted

2004

Basic

Diluted

$ 5,802,000

$ 0.47

$ 0.44

$10,095,000

$ 0.79

$ 0.70

$25,551,000

$ 1.91

$ 1.65

(1,918,000)

(0.15)

(1,397,000)

(0.11)

(0.10)

(1,642,000)

(0.13)

(0.10)

Pro forma net income

$ 3,884,000

$ 0.32

$ 0.29

$ 8,698,000

$ 0.68

$ 0.60

$23,909,000

$ 1.78

$ 1.55

The pro forma information recognizes as compensa-
tion the value of stock options granted using the Black-
Scholes option pricing model which takes into account as
of the grant date, the exercise price and expected life of
the option, the current price of underlying stock and its

expected volatility, expected dividends on the stock,
expected forfeitures and the risk-free interest rate for
the term of the option. The following is the weighted
average of the data used to calculate the estimated fair
value:

December 31,

2004
2003
2002

Risk-free
interest rate

3.64%
3.31%
4.03%

Expected life

Expected volatility

Expected forfeitures

Expected dividends

5.0 years
5.0 years
5.0 years

68.36%
66.18%
75.61%

2.64%
2.77%
2.77%

0%
0%
0%

The Company’s valuations are based upon a single
option valuation approach using the Black-Scholes option
valuation model. The Black-Scholes option valuation
model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and
are fully transferable and negotiable in a free trading
market. In addition, option valuation models require the

input of highly subjective assumptions, including the
expected stock price volatility and expected life of the
option. Because the Company’s stock options have charac-
teristics signiﬁcantly different from those of freely traded
options, and changes in the subjective input assumptions
can materially affect the Company’s fair value estimate

of those stock options, in the Company’s opinion, exist-
ing valuations models, including Black-Scholes, are not
reliable single measures and may misstate the fair value
of the Company’s stock options. Because Company stock
options do not trade on a secondary exchange, recipients
can receive no value nor derive any beneﬁt from holding
stock options under these plans without an increase,
above the grant price, in the market price of the
Company’s stock. Such an increase in stock price would
beneﬁt all stockholders commensurately.

Comprehensive income – Accounting principles gener-
ally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain
changes in assets and liabilities are reported as a separate
component of the equity section of the balance sheet,
such items, along with net income, are components
of comprehensive income. The components of other
comprehensive income include foreign currency transla-
tion adjustments and changes in the unrealized loss on
derivative instruments from swap liability.

Recently issued accounting pronouncements and
proposed accounting changes – In November 2004, the
Emerging Issues Task Force (EITF) reached a consen-
sus on EITF Issue No. 03-13, Applying the Conditions
in Paragraph 42 of FASB Statement No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” in
Determining Whether to Report Discontinued Operations.
The consensus provides guidance in determining: (a)
which cash ﬂows should be taken into consideration
when assessing whether the cash ﬂows of the disposal
component have been or will be eliminated from the
ongoing operations of the entity, (b) the types of involve-
ment ongoing between the disposal component and
the entity disposing of the component that constitute
continuing involvement in the operations of the dis-
posal component, and (c) the appropriate (re)assessment
period for purposes of assessing whether the criteria in
paragraph 42 have been met. The consensus was rati-
ﬁed by the FASB at their November 30, 2004 meeting
and should be applied to a component of an enterprise
that is either disposed of or classiﬁed as held for sale in
ﬁscal periods beginning after December 15, 2004. The
Company does not anticipate a material impact on the
ﬁnancial statements from the adoption of this consensus.

Derivative ﬁnancial instrument – The Company used an
interest rate swap agreement to hedge its exposure to
variability in expected future cash ﬂows resulting from
interest rate risk related to a portion of its long-term debt.
The interest rate swap agreement applied to 25% of the
Company’s long-term debt and expired November 30,
2004. Market value of the swap as of December 31, 2003
and 2004 is included in “Accumulated Other Comprehensive
Loss”. The swap contract is inversely correlated to the
related hedged long-term debt and is therefore considered
an effective cash ﬂow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured
by the changes in the market value of the hedged long-
term debt resulting from ﬂuctuation in interest rates. As
a matter of policy, the Company does not enter into
derivative transactions for trading or speculative purposes.

Functional currencies and foreign currency translation –
Through its subsidiaries, the Company maintains opera-
tions in Taiwan, Hong Kong and China. The Company
believes the New Taiwan (“NT”) dollar as the functional
currency at Diodes-Taiwan most appropriately reﬂects
the current economic facts and circumstances of the
operations. The Company continues to use the U.S. dol-
lar as the functional currency in Diodes-China, Diodes-
Shanghai and Diodes-Hong Kong, as substantially all
monetary transactions are made in that currency, and
other signiﬁcant economic facts and circumstances cur-
rently support that position. As these factors may change
in the future, the Company will periodically assess its
position with respect to the functional currency of its
foreign subsidiaries. Included in net income are foreign
currency exchange losses of approximately $82,000,
$115,000, and $424,000 for the years ended December
31, 2002, 2003 and 2004, respectively.

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 1 – Summary of Operations and Signiﬁcant
Accounting Policies (continued)

In December 2004, the FASB issued FASB Statement

No. 153, Exchanges of Nonmonetary Assets – An Amend-
ment of APB Opinion No. 29. The amendments made
by Statement No. 153 are based on the principle that
exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further,
the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of
nonmonetary assets that do not have “commercial sub-
stance.” The provisions in Statement No. 153 are effec-
tive for nonmonetary asset exchanges occurring in ﬁscal
periods beginning after June 15, 2005. Adoption of this
standard is not expected have a material impact on the
consolidated ﬁnancial statements.

In September 2004, the EITF reached a consensus on
EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131
in Determining Whether to Aggregate Operating Segments
That Do Not Meet the Quantitative Thresholds. The con-
sensus states that operating segments that do not meet
the quantitative thresholds can be aggregated only if
aggregation is consistent with the objective and basic
principles of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the segments
have similar economic characteristics, and the segments
share a majority of the aggregation criteria (a)-(e) listed
in paragraph 17 of SFAS No. 131. The effective date
of the consensus in this Issue is for ﬁscal years ending
after October 13, 2004. If the Financial Accounting
Standards Board (FASB) ratiﬁes EITF Issue No. 04-10,
the Company does not anticipate a material impact on the
ﬁnancial statements.

In March 2004, the EITF reached a consensus on
the remaining portions of EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application
to Certain Investments, with an effective date of June 15,
2004. EITF 03-01 provides new disclosure requirements

for other-than-temporary impairments on debt and
equity investments. Investors are required to disclose
quantitative information about: (i) the aggregate amount
of unrealized losses, and (ii) the aggregate related fair
values of investments with unrealized losses, segregated
into time periods during which the investment has been
in an unrealized loss position of less than 12 months
and greater than 12 months. In addition, investors are
required to disclose the qualitative information that sup-
ports their conclusion that the impairments noted in the
qualitative disclosure are not other-than temporary. The
Company determined that EITF 03-01 would not have a
material impact on the ﬁnancial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities – an
Interpretation of ARB No. 51, which provides guidance
on the identiﬁcation of and reporting for variable inter-
est entities. Interpretation No. 46 expands the criteria for
consideration in determining whether a variable interest
Interpretation No. 46 is effective immediately for vari-
able interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains
an interest after that date. Interpretation No. 46 was
effective for the Company in 2004 because the Company
entered into a joint venture for Diodes-Shanghai. The
Company has a 95% interest. The Interpretation requires
unconsolidated variable interest entities to be consoli-
dated by their primary beneﬁciaries. The primary ben-
eﬁciary is the party that assumes the majority of the risk,
which includes, but is not limited to, the entity’s expected
losses. Management concluded that its investment in
Diodes-Shanghai did not meet the criteria for consolida-
tion under the standard. Based upon our review, we con-
cluded that management’s analysis and the conclusions
contained therein appeared reasonable.

In December 2004, the FASB also issued SFAS No.

151, “Inventory Costs, an amendment of ARB No. 43,
Chapter 4,” which will become effective for the Company
beginning January 1, 2006. This standard clariﬁes that
abnormal amounts of idle facility expense, freight, han-
dling costs and wasted material should be expensed as
incurred and not included in overhead. In addition, this
standard requires that the allocation of ﬁxed production
overhead costs to inventory be based on the normal

capacity of the production facilities. The Company is
currently evaluating the potential impact of this stan-
dard on its ﬁnancial position and results of operations,
but does not believe the impact of the change will be
material.

amount of earnings, if any, that they intend to repatriate
under the Jobs Creation Act’s provisions. See Note 8 for
more discussion of the impact of the Jobs Creation Act,
including the Company’s status on the repatriation of
foreign earnings.

On October 22, 2004, a new tax law was passed, the
American Jobs Creation Act of 2004 (the “Jobs Creation
Act”), which raised a number of issues with respect to
accounting for income taxes. In response, on December
21, 2004, the FASB issued two FASB Staff Positions
(FSP), FSP 109-1 – “Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on
Qualiﬁed Production Activities Provided by the American
Jobs Creation Act of 2004” and FSP 109-2 – “Accounting
and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation
Act of 2004,” which became effective for the Company
upon issuance.

The Jobs Creation Act provides a deduction for
income from qualiﬁed domestic production activi-
ties, to be phased in from 2005 through 2010, which is
intended to replace the existing extra-territorial income
exclusion for foreign sales. In FSP 109-1, the FASB
decided the deduction for qualiﬁed domestic production
activities should be accounted for as a special deduction
under SFAS No. 109, rather than as a rate reduction.
Accordingly, any beneﬁt from the deduction will be
reported in the period in which the deduction is claimed
on the tax return and no adjustment to deferred taxes at
December 31, 2004, is required.

The Jobs Creation Act also creates a temporary incen-

tive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85 percent divi-
dends received deduction for certain dividends from
controlled foreign corporations. The deduction is subject
to a number of limitations and uncertainty remains as to
how to interpret numerous provisions in the Act. FSP
109-2 addresses when to reﬂect in the ﬁnancial state-
ments the effects of the one-time tax beneﬁt on the repa-
triation of foreign earnings. Under SFAS No. 109, com-
panies are normally required to reﬂect the effect of new
tax law changes in the period of enactment. FSP 109-2
provides companies additional time to determine the

In December 2004, the FASB issued SFAS No. 123(R).

This new standard requires companies to adopt the fair
value methodology of valuing stock-based compensation
and recognizing that valuation in the ﬁnancial state-
ments from the date of grant. Accordingly, the adoption
of SFAS No. 123(R)’s fair value method will have a sig-
niﬁcant impact on the Company’s results of operations,
although it will have no impact on the Company’s overall
ﬁnancial position. The impact of adoption of SFAS
No. 123(R) cannot be predicted at this time because it
will partially depend on levels of share-based payments
granted in the future. However, had the Company
adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact
of SFAS No. 123 as shown in the table above (see discus-
sion in Stock-Based Compensation above). SFAS No.
123(R) also requires the beneﬁts of tax deductions in
excess of recognized compensation cost to be reported as
a ﬁnancing cash ﬂow, rather than as an operating cash
ﬂow as required under current literature. The Company
is currently evaluating several option valuation models
in order to calculate the required compensation expense.
The Company has elected to adopt the provisions of
SFAS No. 123(R) on a modiﬁed prospective application
method effective July 1, 2005, with no restatement of
any prior periods. SFAS No. 123(R) is effective for the
Company as of the beginning of the ﬁrst interim report-
ing period that begins after June 15, 2005.

Reclassiﬁcations – Certain prior year amounts as well as
unaudited quarterly ﬁnancial data presented in the accom-
panying consolidated ﬁnancial statements have been reclas-
siﬁed to conform to the current year ﬁnancial statement
presentation. These reclassiﬁcations had no impact on pre-
viously reported net income or stockholders’ equity.

Finished goods
Work-in-progress
Raw materials

Less: reserves

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 2 – Inventories
Inventories, stated at the lower of cost or market value,
at December 31 were:

Note 3 – Property, Plant and Equipment
Property, plant and equipment at December 31 were:

2003

2004

Buildings and leasehold improvements
Construction in-progress
Machinery and equipment

$ 5,894,000
2,810,000
74,171,000

$ 7,126,000
2,989,000
90,151,000

2003

2004

$ 9,920,000
1,818,000
6,519,000

$13,118,000
2,025,000
9,240,000

18,257,000

(2,093,000)

24,383,000
(2,145,000)

Less: Accumulated depreciation

and amortization

$16,164,000

$22,238,000

Land

82,875,000

100,266,000

(35,244,000)

(39,671,000)

47,631,000
262,000

60,595,000
262,000

$ 47,893,000 $ 60,857,000

The Company implemented an Enterprise Resource

Planning software system for which approximately
$2,511,000 and $0 is capitalized within construction
in-progress in 2003 and 2004, respectively.

Note 4 – Bank Credit Agreements and
Long-Term Debt

Line of credit – The Company maintains credit
facilities with several ﬁnancial institutions through
its afﬁliated entities in the United States and Asia.

The credit unused and available under the various
facilities as of December 31, 2004, totals $32.3 million,
as follows:

2004 Credit Facility

Terms

$ 7,500,000

$ 5,000,000

$25,000,000

$ 8,960,000

Revolving, collateralized by all assets, variable interest (prime rate,
approximately 5.25% at December 31, 2004) due monthly
Term loan, collateralized by all assets, variable interest (LIBOR +
variable margin, approximately 3.8% at December 31, 2004) due monthly
Unsecured, interest at LIBOR plus margin (approximately 2.3% at
December 31, 2004) due quarterly
Unsecured, variable interest plus margin (approximately 1.7% to 2.3% at
December 31, 2003) due monthly

$46,460,000
Less: Long-term debt, net of Related Party (included in table below)

Line of credit

Outstanding at December 31,

2003

2004

$ 5,782,000

$ 3,167,000

3,333,000

4,597,000

3,000,000

6,000,000

2,706,000

14,821,000
(6,333,000)

–

13,764,000
(7,597,000)

$ 8,488,000

$ 6,167,000

Long-term debt – The balances remaining as of December 31, consist of the following:

Note payable to LSC, a major stockholder of the Company (see Note 10), due in equal monthly
installments of $208,000 plus interest beginning July 31, 2002, through June 30, 2006. The
unsecured note bears interest at LIBOR plus 2% (approximately 4.1% at December 31, 2004)
and is subordinated to the interest of the Company’s primary lender.

Term note portion of $25,000,000 China credit facility due in 2006.
Note payable to U.S. bank, collateralized by all assets, due in aggregate monthly principal payments of

$278,000 plus interest at 6.8% ﬁxed by hedge contract through November 2004.

Note payable to U.S. bank, collateralized by all assets, due in aggregate monthly principal payments of

$83,000 plus interest at approximately 3.8% at December 31, 2004.

2003

2004

$ 6,250,000
3,000,000

3,333,000

$ 3,750,000
3,000,000

–

4,597,000

12,583,000
(5,833,000)

11,347,000
(3,514,000)

$ 6,750,000

$ 7,833,000

Less: Current portion

Long-term debt, net of current portion

The credit facilities contain certain covenants and
restrictions, which, among other matters, require the
maintenance of certain ﬁnancial ratios and attainment
of certain ﬁnancial results, and prohibit the payment
of dividends.

The aggregate maturities of long-term debt for future

years ending December 31 are:

2005
2006
2007
2008
2009

$ 3,514,000
5,250,000
1,000,000
1,000,000
583,000

$11,347,000

In July 2001, the Company entered into an interest
rate swap agreement with a bank to hedge its interest
exposure. The interest rate under the swap agreement,
which expired November 30, 2004, was ﬁxed at 6.8% and
based on the notional amount, which was $2,292,000 at
December 31, 2003.

Note 5 – Capital Lease Obligations
Future minimum lease payments under capital lease
agreements are summarized as follows:

For years ending December 31,

2005
2006
2007
2008
2009
Thereafter

Less: Interest

Present value of minimum lease payments
Less: Current portion

Long-term portion

$ 230,000
230,000
230,000
230,000
230,000
1,627,000

2,777,000
(440,000)

2,337,000
(165,000)

$2,172,000

At December 31, 2004, property under capital leases

had a cost of $2,785,000, and the related accumulated
depreciation amounted to $557,000.

Note 6 – Accrued Liabilities
Accrued liabilities at December 31 were:

2003

2004

Employee compensation and payroll taxes $4,501,000
Equipment purchases
1,875,000
Taxes payable
–
Sales commissions
686,000
Refunds to product distributors
334,000
Other
1,319,000

$ 5,779,000
2,012,000
978,000
437,000
219,000
2,034,000

$8,715,000 $11,459,000

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 7 – Valuation of Financial Instruments
The Company’s ﬁnancial instruments include cash,
accounts receivable, accounts payable, working capital line
of credit, and long-term debt. The Company estimates the
carrying amounts of all ﬁnancial instruments described
above to approximate fair value based upon current mar-
ket conditions, maturity dates and other factors.

Note 8 – Income Taxes
The components of the income tax provisions are
as follows:

2002

2003

2004

Current tax provision
Federal
Foreign
State

$ – $1,167,000
1,183,000
40,000

1,231,000
1,000

$ 4,922,000
4,745,000
461,000

Deferred tax expense (beneﬁt)

1,232,000
497,000

2,390,000
70,000

10,128,000
(3,614,000)

Total income tax provision $1,729,000 $2,460,000

$ 6,514,000

Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2002,

2003, and 2004 are as follows:

2002

2003

2004

Amount

Percent of
pretax earnings

Amount

Percent of
pretax earnings

Federal tax
State franchise tax, net of Federal beneﬁt
Foreign income tax rate difference
Other

$ 2,669,000
455,000
(1,409,000)
14,000

34.0
5.8
(18.0)
0.2

$ 4,417,000
753,000
(2,808,000)
98,000

34.0
5.8
(21.6)
0.8

Amount

$11,131,000
1,588,000
(6,629,000)
424,000

Income tax provision

$ 1,729,000

22.0

$ 2,460,000

19.0

$ 6,514,000

Percent of
pretax earnings

34.0
4.8
(20.2)
1.3

19.9

In accordance with the current taxation policies of
the People’s Republic of China (PRC), Diodes-China
received preferential tax treatment for the years ended
December 31, 1996 through 2004. Earnings were subject
to 0% tax rates from 1996 through 2000, and 12% from
2001 through 2004. Due to a $15.0 million permanent
re-investment of Diodes-China earnings in 2004, earn-
ings from 2005 through 2007 will continue to be taxed at
12% (one half the normal central government tax rate).
Also due to the permanent re-investment, the Company
recorded a $1.2 million tax refund (net of U.S. taxes) in
the fourth quarter of 2004. Earnings of Diodes-China
are also subject to tax of 3% by the local taxing authority
in Shanghai. The local taxing authority waived this tax
from 2001 through 2004, and is expected to waive this
tax in 2005, but can re-impose the tax at its discretion.
For 2004, Diodes-Shanghai’s effective tax rate was 15%.

As an incentive for the establishment of Diodes-Shang-
hai, beginning in 2005, earnings will be exempted from
income tax for two years. Then, beginning in 2007,
earnings will be subject to 50% of the standard tax rate
of 15% for the following three years.

In accordance with United States tax law, the
Company receives credit against its U.S. Federal tax
liability for corporate taxes paid in Taiwan and China.
The repatriation of funds from Taiwan and China to
the Company may be subject to Federal and state
income taxes.

As of December 31, 2004, accumulated and undistrib-

uted earnings of Diodes-China and Diodes-Shanghai
are approximately $44.2 million, including $25.0 mil-
lion of restricted earnings (which are not available for
dividends). Through March 31, 2002, the Company had
not recorded deferred U.S. Federal or state tax liabilities
(estimated to be $8.9 million as of March 31, 2002) on
these cumulative earnings since the Company, at that
time, considered this investment to be permanent, and
had no plans or obligation to distribute all or part of that
amount from China to the United States. Beginning in
April 2002, the Company began to record deferred taxes
on a portion of the China earnings in preparation of a
dividend distribution. In the year ended December 31,
2004, the Company received a dividend of approximately
$5.7 million from its Diodes-China subsidiary, for which
the tax effect is included in U.S. Federal and state tax-
able income. As of December 31, 2004, the Company has
recorded approximately $2.0 million in deferred taxes on
the cumulative earnings of Diodes-China and Diodes-
Shanghai.

The Company is evaluating the need to provide addi-
tional deferred taxes for the future earnings of Diodes-
China, Diodes-Shanghai, and Diodes-Hong Kong
to the extent such earnings may be appropriated for
distribution to the Company’s corporate ofﬁce in North
America, and as further investment strategies with
respect to foreign earnings are determined. Should the
Company’s North American cash requirements exceed
the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company’s for-
eign subsidiaries. However, the distribution of any unap-
propriated funds to the U.S. will require the recording of
income tax provisions on the U.S. entity, thus reducing
net income.

incentive tax deduction for U.S. corporations to repatri-
ate cash from foreign subsidiaries at a reduced tax rate
(a deduction equal to 85% of cash dividends received in
the year elected that exceeds a base-period amount) and
signiﬁcantly revises the taxation of U.S. companies doing
business abroad.

At December 31, 2003 and 2004, the Company’s
deferred tax assets and liabilities are comprised of the
following items:

2003

2004

Deferred tax assets, current
Inventory cost
Accrued expenses and accounts receivable
Net operating loss carryforwards,
foreign tax credits and other

$ 272,000
566,000

$ 364,000
702,000

4,709,000

1,387,000

Deferred tax assets, non-current
Plant, equipment and intangible assets
Net operating loss carryforwards,
foreign tax credits and other

$ 5,547,000

$ 2,453,000

$(2,380,000) $(2,632,000)

4,196,000

10,602,000

$ 1,816,000

$ 7,970,000

At December 31, 2004, the Company had Federal and
state net operating loss (NOL) carryforwards of approxi-
mately $17.0 million and $20.2 million, respectively,
available to offset future regular and alternative mini-
mum taxable income. The Federal NOL carryforwards
will begin to expire in 2016 and the state NOL carryfor-
wards will begin to expire in 2006.

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 8 – Income Taxes (continued)

At December 31, 2004, the Company had Federal
and state tax credit carryforwards (primarily relating to
foreign tax credits, and to a lesser extent to research and
development tax credits) of approximately $6.6 million
and $0.1 million, respectively, available to offset future
regular income and partially offset alternative minimum
taxable income. The Federal credit carryforwards will
begin to expire in 2009 and the state credit carryforwards
will begin to expire in 2020.

Note 9 – Employee Beneﬁt Plans

Employee Savings and Retirement Plans – The
Company maintains a 401(k) proﬁt sharing plan (the
Plan) for the beneﬁt of qualiﬁed employees at its North
American locations. Employees who participate may
elect to make salary deferral contributions to the Plan
up to 100% of the employees’ eligible payroll subject to
annual Internal Revenue Code maximum limitations.
The Company makes a matching contribution of $1 for
every $2 contributed by the participant up to 6% (3%
maximum matching) of the participant’s eligible payroll.
In addition, the Company may make a discretionary
contribution to the entire qualiﬁed employee pool, in
accordance with the Plan.

As stipulated by the regulations of the PRC, the
Company maintains a retirement plan pursuant to the
local Municipal Government for its employees in China.
The Company is required to make contributions to the
retirement plan at a rate of 22.5% of the employee’s
eligible payroll.

Pursuant to the Taiwan Labor Standard Law and
Factory Law, the Company maintains a retirement
plan for its employees in Taiwan. The Company
makes contributions at a rate of 6% of the employee’s
eligible payroll.

For the years ended December 31, 2002, 2003,
and 2004, the Company’s total contributions to all
plans were approximately $917,000, $1,241,000, and
$1,428,000, respectively.

Stock Option Plans – The Company maintains stock
option plans for directors, ofﬁcers, and key employ-
ees, which provide for non-qualiﬁed and incentive
stock options. The Compensation and Stock Option
Committee of the Board of Directors determines the
option price (not to be less than fair market value of
the underlying common stock at the date of grant for
incentive stock options) at the date of grant. The options
generally expire ten years from the date of grant and are
exercisable (vested) over the period stated in each option.
Approximately 440,600 shares were available for future
grants under the plans as of December 31, 2004. A sum-
mary of stock option transactions for the plans follows:

Outstanding Options

Exercise Price
Per Share

Weighted
Average

Range

Number

Balance, December 31, 2001
Granted
Exercised
Canceled

3,172,641
515,550
(97,650)
(5,400)

$ 0.83-15.94
5.69-6.38
0.83-5.55
5.55-5.69

Balance, December 31, 2002
Granted
Exercised
Canceled

3,585,141
502,950
(688,141)
(15,325)

0.83-15.94
10.63-13.04
0.83-15.94
5.55-15.94

Balance, December 31, 2003
Granted
Exercised
Canceled

3,384,625
526,900
(1,136,725)
(35,600)

2.22-15.94
18.32-21.85
2.22-15.94
5.55-18.32

$ 5.85
5.72
3.28
5.62

5.90
13.03
2.93
7.84

7.56
18.35
4.96
13.64

Balance, December 31, 2004

2,739,200

$ 2.22-21.85

$10.63

As of December 31, 2004, approximately 1,737,200 of
the 2,739,200 options outstanding were exercisable. The
following summarizes information about stock options
outstanding at December 31, 2004:

Range of
exercise
prices

’93 NQO’
’93 ISO
’01 Plan

$2.67-15.94
2.22-15.94
4.77-21.85

Number
outstanding

631,950
705,400
1,401,850

Total

$2.22-21.85

2,739,200

Weighted
average
contractual
life (years)

Weighted
average
exercise
price

4.6
4.9
8.6

6.7

$ 9.42
7.45
12.77

$10.63

The following summarizes information about stock

options exercisable at December 31, 2004:

Range of
exercise prices

Number
exercisable

Weighted average
exercise price

‘93 NQO
‘93 ISO
‘01 Plan

$2.67-15.94
2.22-15.94
5.55-13.04

630,300
668,550
438,350

Total

$2.22-15.94

1,737,200

$9.43
$7.53
$8.09

$8.36

Stock Bonus Plan – The Company also maintains
an incentive stock bonus plan, which reserves shares of
stock for issuance to key employees. As of December
31, 2004, there were 279,000 shares available for issu-
ance under this plan. No shares were issued under this
incentive bonus plan for years ended December 31, 2002
through 2004.

Note 10 – Related Party Transactions
Lite-On Semiconductor Corporation (LSC) – In July
1997, Vishay Intertechnology, Inc. (Vishay) and the
Lite-On Group, a Taiwanese consortium, formed a
joint venture – Vishay/Lite-On Power Semiconductor
Pte., LTD. (Vishay/LPSC) – to acquire Lite-On Power
Semiconductor Corp. (LPSC), a then 37% shareholder
of the Company and a member of the Lite-On Group
of the Republic of China. The Lite-On Group is a lead-
ing manufacturer of power semiconductors, computer
peripherals, and communication products.

In March 2001, Vishay agreed to sell its 65% interest
in the Vishay/LPSC joint venture to the Lite-On Group,
the 35% joint venture partner. Because of this transac-
tion, the Lite-On Group, through LPSC, its wholly-
owned subsidiary, indirectly owned approximately 37%
of the Company’s common stock. In December 2001,
LPSC merged with Dyna Image Corporation of Taipei,
Taiwan. Dyna Image is the world’s largest manufacturer
of Contact Image Sensors (CIS), which are used in fax
machines, scanners, and copy machines. The combined
company is called Lite-On Semiconductor Corporation
(LSC). At December 31, 2004, LSC owned approximately
32.5% of the Company’s common stock. The Company
considers its relationship with LSC to be mutually ben-
eﬁcial and the Company and LSC plans to continue its
strategic alliance as it has since 1991.

The Company also leases warehouse space from LSC
for its operations in Hong Kong. Such transactions are
on terms no less favorable to the Company than could be
obtained from unafﬁliated third parties. As required by
Nasdaq, the Audit Committee of the Board of Directors
has approved the contracts associated with the related
party transactions. The Company buys product from,
and sells products to, LSC.

Net sales to, and purchases from, LSC were as follows

for years ended December 31:

Net sales
Purchases

2002

2003

2004

$16,147,000 $14,628,000 $20,675,000
14,292,000 18,667,000
22,368,000

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 10 – Related Party Transactions (continued)

As a result of the acquisition of FabTech from LSC,

the Company is indebted to LSC in the amount of
$3,750,000 as of December 31, 2004. Terms of the debt
are indicated in Note 4. As per the terms of the acquisi-
tion agreement, LSC entered into a volume purchase
agreement with FabTech pursuant to which LSC is obli-
gated to purchase from FabTech, and FabTech is
obligated to manufacture and sell to LSC, silicon wafers.

As part of the FabTech acquisition, the Company
entered into management incentive agreements with
several members of FabTech’s management. The agree-
ments provide a guaranteed aggregate $375,000 annual
payment as well as contingent bonuses based on the
annual proﬁtability of FabTech (subject to a maximum
annual amount). Any portion of the guaranteed and con-
tingent liability paid by FabTech is reimbursed by LSC.
Guaranteed and maximum contingent bonus payments
provided for by the management incentive agreements
for the year ended December 31, 2004 (the ﬁnal year of
the agreements) were $375,000 and $1.2 million, respec-
tively. Because the proﬁtability targets were not met, no
contingent bonus was earned or paid in the years 2002
through 2004.

Other related party – The Company sells product to,
and purchases inventory from, companies owned by its
5% minority shareholder, Keylink International (for-
merly Xing International), in Diodes-China and Diodes-
Shanghai. In addition, Diodes-China and Diodes-
Shanghai each leases its manufacturing facilities from,
subcontracts a portion of its manufacturing process
(metal plating and environmental services) to, and pays
a consulting fee to, its 5% minority shareholder. Total
amounts for these services for the years ended December
31, 2002, 2003, and 2004 were $2,699,000, $3,464,000, and
$4,760,000. Such transactions are on terms no less favor-
able to the Company than could be obtained from unaf-
ﬁliated third parties. As required by Nasdaq, the Audit
Committee of the Board of Directors has approved the
contracts associated with the related party transactions.

Net sales to, and purchases from, companies owned
by Keylink International were as follows for years ended
December 31:

2002

2003

2004

Net sales

Purchases

$1,885,000

$1,484,000

$1,677,000

4,394,000

2,961,000

4,789,000

Accounts receivable from, and accounts payable to,

related parties were as follows as of December 31:

Accounts receivable
LSC
Other

Accounts payable
LSC
Other

2003

2004

$3,111,000
827,000

$4,180,000
1,346,000

$3,938,000

$5,526,000

$2,914,000
539,000

$3,308,000
628,000

$3,453,000

$3,936,000

Note 11 – Geographic Information
An operating segment is deﬁned as a component of an
enterprise about which separate ﬁnancial information
is available that is evaluated regularly by the chief deci-
sion maker, or decision-making group, in deciding how
to allocate resources and in assessing performance. The
Company’s chief decision-making group consists of the
President and Chief Executive Ofﬁcer, Chief Financial
Ofﬁcer, Vice President of Sales and Marketing, and
Senior Vice President of Operations. The Company
operates in a single segment, discrete semiconductor
devices, through its various manufacturing and distribu-
tion facilities.

The Company’s operations include the domestic oper-
ations (Diodes, Inc. and FabTech) located in the United
States and the Asian operations (Diodes-Taiwan located
in Taipei, Taiwan, Diodes-China and Diodes-Shanghai
both located in Shanghai, China, and Diodes-Hong
Kong located in Hong Kong, China). European opera-
tions are consolidated within the U.S. operations.

The accounting policies of the operating entities are the same as those described in the summary of signiﬁcant
accounting policies. Revenues are attributed to geographic areas based on the location of the market producing
the revenues.

2004
Total sales
Intercompany sales

Net sales

Assets
Property, plant & equipment, net

2003
Total sales
Intercompany sales

Net sales

Assets
Property, plant & equipment, net

2002
Total sales
Intercompany sales

Net sales

Assets
Property, plant & equipment, net

Asia

U.S.A.

Consolidated

$185,308,000
(75,527,000)

$ 92,634,000
(16,712,000)

$277,942,000
(92,239,000)

$109,781,000

$ 75,922,000

$185,703,000

$116,729,000
48,589,000

$ 51,072,000
12,268,000

$167,801,000
60,857,000

$124,412,000
(48,378,000)

$ 72,188,000
(11,317,000)

$196,600,000
(59,695,000)

$ 76,034,000

$ 60,871,000

$136,905,000

$ 82,142,000
35,941,000

$ 41,653,000
11,952,000

$123,795,000
47,893,000

$ 95,081,000
(39,592,000)

$ 66,338,000
(6,006,000)

$161,419,000
(45,598,000)

$ 55,489,000

$ 60,332,000

$115,821,000

$ 63,721,000
32,313,000

$ 41,289,000
12,380,000

$105,010,000
44,693,000

Note 12 – Commitments and Contingencies

Operating leases – The Company leases its ofﬁces,
manufacturing plants and warehouses under operat-
ing lease agreements expiring through December 2009.
Rent expense amounted to approximately $2,711,000,
$2,455,000, and $2,938,000 for the years ended December
31, 2002, 2003, and 2004, respectively.

Future minimum lease payments under non-

cancelable operating leases for years ending December
31 are:

2005
2006
2007
2008
2009

$ 3,461,000
3,481,000
2,939,000
2,520,000
1,097,000

$13,498,000

Diodes Incorporated and Subsidiaries
notes to consolidated ﬁnancial statements

Note 13 – Selected Quarterly Financial Data (Unaudited)

Quarter Ended

March 31

June 30

Sept. 30

Dec. 31

Fiscal 2004
Net sales
Gross proﬁt
Net income
Earnings per share

Basic
Diluted

Fiscal 2003
Net sales
Gross proﬁt
Net income
Earnings per share

Basic
Diluted

Fiscal 2002
Net sales
Gross proﬁt
Net income
Earnings per share

Basic
Diluted

$41,435,000
12,750,000
4,856,000

$ 0.37
0.32

$29,446,000
7,461,000
1,923,000

$ 0.15
0.14

$26,924,000
4,345,000
208,000

$ 0.02
0.02

$47,017,000
15,028,000
6,123,000

$ 0.46
0.40

$33,316,000
8,346,000
2,172,000

$ 0.17
0.15

$29,946,000
7,098,000
1,564,000

$ 0.13
0.12

$49,364,000
16,746,000
7,242,000

$ 0.54
0.47

$34,941,000
9,162,000
2,563,000

$ 0.20
0.18

$30,287,000
7,862,000
1,767,000

$ 0.14
0.13

$47,887,000
16,211,000
7,330,000

$ 0.53
0.47

$39,202,000
11,559,000
3,437,000

$ 0.27
0.23

$28,664,000
7,405,000
2,263,000

$ 0.18
0.17

Diodes Incorporated and Subsidiaries
report of independent registered public accounting ﬁrm

Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries

We have audited the accompanying consolidated bal-
ance sheets of Diodes Incorporated and Subsidiaries as
of December 31, 2004 and 2003 and the related consoli-
dated statements of income, stockholders’ equity and
cash ﬂows for each of the years in the three-year period
ended December 31, 2004. These ﬁnancial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these ﬁnancial
statements based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the consolidated ﬁnancial statements are
free of material misstatement. An audit includes examin-
ing, on a test basis, evidence supporting the amounts and
disclosures in the consolidated ﬁnancial statements.

An audit also includes assessing the accounting
principles used and signiﬁcant estimates made by
management, as well as evaluating the overall ﬁnancial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the ﬁnancial statements referred to

above present fairly, in all material respects, the con-
solidated ﬁnancial position of Diodes Incorporated and
Subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and cash ﬂows
for each of the years in the three year period ended
December 31, 2004, in conformity with accounting
principles generally accepted in the United States of
America.

Los Angeles, California
January 28, 2005

Diodes Incorporated and Subsidiaries
corporate information

Board of Directors
Raymond Soong 3N
Chairman of the Board, Diodes Incorporated
Chairman of the Board, The Lite-On Group

C.H. Chen 3N, 4C
President & Chief Executive Ofﬁcer, Diodes Incorporated
Vice Chairman, Lite-On Semiconductor Corporation

Michael R. Giordano 1C, 2C, 4
Senior Vice President, UBS Incorporated

Dr. Keh-Shew Lu 1, 2, 3C, 4
Retired Senior Vice President, Texas Instruments, Inc.

M.K. Lu
President, Lite-On Semiconductor Corporation

Dr. Shing Mao 3
Retired Chairman of the Board, Lite-On Incorporated
John M. Stich 1, 2, 3, 4
President & Chief Executive Ofﬁcer, The Asian Network
Retired Chief Marketing Ofﬁcer, Texas Instruments, Inc.– Japan

Executive Ofﬁcers
C.H. Chen
President & Chief Executive Ofﬁcer

Joseph Liu
Senior Vice President, Operations

Mark A. King
Vice President, Sales & Marketing

Carl C. Wertz
Chief Financial Ofﬁcer, Secretary & Treasurer

1 – Member, Audit Committee
2 – Member, Compensation & Stock Options Committee
3 – Member, Nominating Committee
4 – Member, Strategic Planning Committee
C – Committee Chair
N – Non-Voting Member

Shareholder Information
Diodes Incorporated common stock is listed and traded
on the Nasdaq National Market (Nasdaq: DIOD).

No cash dividends have been declared or paid.
The Company currently intends to retain any earnings
for use in its businesses.

Form 10-K
A copy of the Company’s Form 10-K, as ﬁled with the
U.S. Securities and Exchange Commission, is available
at www.diodes.com or upon written request to:

Investor Relations
Cofﬁn Communications Group
15300 Ventura Boulevard, Suite 303
Sherman Oaks, California 91403-3039
Primary Contact: Crocker Coulson
Tel: 818.789.0100
Fax: 818.789.1152
e-mail: Crocker.Coulson@ccgir.com
or diodes-ﬁn@diodes.com

Calendar Quarter Ended

Fourth Quarter 2004
Third Quarter 2004
Second Quarter 2004
First Quarter 2004

Fourth Quarter 2003
Third Quarter 2003
Second Quarter 2003
First Quarter 2003

Closing Sales Price
of Common Stock

High

$ 29.230
25.859
24.800
25.160

20.600
16.053
14.360
8.200

Low

$ 21.590
16.830
20.840
19.010

13.867
12.100
7.180
6.367

Independent Accountants
Moss Adams, LLP
11766 Wilshire Boulevard, Suite 900
Los Angeles, California 90025

Transfer Agent & Registrar
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
Tel: 212-509-4000

General Counsel
Sheppard, Mullin, Richter & Hampton
333 S. Hope Street, 42nd Floor
Los Angeles, California 90071-1448

Financial Information Online
World Wide Web users can access Company
information on the Diodes, Inc. Investor page
at www.diodes.com.

Diodes Incorporated and Subsidiaries
financial highlights

(in thousands, except per share data)

1998

1999

2000

2001

2002

2003

2004

Net income

Earnings per share: [1]
Basic
Diluted
Number of shares: [1]
Basic
Diluted

Total assets
Working capital
Long-term debt
Stockholders’ equity

Return on assets
Return on equity

$60,121 $78,245 $116,079 $ 93,210 $115,821 $136,905 $185,703
60,735
14,179
15,402

20,948

37,427

36,528

26,710

11,016
–
–
11,016
4,386
281
93

13,670
–
–
13,670
7,278
292
182

18,814
141
–
18,955
18,472
940
501

13,711
592
8
14,311
(132)
2,074
785

16,228
1,472
43
17,743
8,967
1,183
67

19,586
2,049
1,037
22,672
13,856
860
(5)

23,503
3,422
14
26,939
33,796
637
(418)

4,198
(1,511)
(14)

7,168
(1,380)
(219)

18,033
(2,496)
(642)

(1,421)
1,769
(224)

7,851
(1,729)
(320)

12,991
(2,460)
(436)

32,741
(6,514)
(676)

2,673

5,569

14,895

124

5,802

10,095

25,551

[ DISCRETE SOLUTIONS FOR ADVANCING TECHNOLOGIES ]

$ 0.24
0.22

$ 0.49
0.45

$ 1.23 $ 0.01 $ 0.47 $ 0.79 $ 1.91
1.65

0.01

0.70

1.08

0.44

11,315
12,085

11,438
12,306

12,107
13,833

12,216
13,322

12,277
13,297

12,731
14,406

13,404
15,471

$45,389
16,639
8,102
27,460

$62,407
15,903
6,984
34,973

$112,950 $103,258 $105,010 $123,795 $167,801
49,571
11,347
112,148

19,798
29,497
51,124

27,154
12,583
71,450

17,291
30,857
51,253

20,831
18,417
57,678

6.4%
10.3%

10.3%
17.8%

17.0%
34.5%

0.1%
0.2%

5.6%
10.7%

8.8%
15.6%

17.5%
27.8%

$185.7

$136.9

$116.1

$115.8

$93.2

$78.2

$60.1

$1.65

$112.1

$71.4

$57.7

$51.2 $51.1

$0.70

$35.0

$27.5

$1.08

$0.45

$0.44

$0.22

$0.01

NET SALES
(in millions)

EARNINGS PER SHARE1
(diluted)

STOCKHOLDERS’ EQUITY
(in millions)

[1] Adjusted for the effect of 3-for-2 stock splits in July 2000 and November 2003.

Design: bl o ch+c oulte r Design Group www.blochcoulter.com

Diodes Incorporated Annual Report 2004

TRANSFORMING THE FUTURE

DIODES INCORPORATED
Corporate Ofﬁce
3050 East Hillcrest Drive
Westlake Village, CA 91362-3154 U.S.A.
tel: 805.446.4800
fax: 805.446.4850

European Ofﬁce
260, rue de la Sur
f-31700 Beauzelle, France
tel: +33/(0)5.62.30.94.06
fax: +33/(0)5.62.30.87.22

Diodes – Taiwan Ofﬁce
Diodes Incorporated Taiwan
Company, Ltd.
2nd Floor, 501-15 Chung-Cheng Road
Hsin-Tien, Taipei, Taiwan
tel: +886.22.218.0116

fax: +886.22.218.0119

Shanghai Ofﬁce
Room 508, No. 1158,
Changning Road
Shanghai, China
tel: +86.21.5241.4882
fax: +86.21.5241.4891

Shenzhen Ofﬁce
Room 706, 7/f, Cyber Times
Tower b
Tianan Cyber Park, Futian District
Shenzhen, China
tel: +86.755.8347.6971
fax: +86.755.8347.6972

Diodes Incorporated
Registered to iso 9001-2000
File Number a5109

MANUFACTURING FACILITIES
Diodes – China
Shanghai KaiHong Electronics Co., Ltd.
No. 999 Chenchun Road
Xingqiao Town
Songjiang County
Shanghai, China 201612

Diodes – Shanghai
Diodes Shanghai Company, Ltd.
Plant No. 1, Lane 18
San Zhuang Road
Songjiang Export Zone
Shanghai, China

Diodes – FabTech
777 N.W. Blue Parkway, Suite 350
Lee’s Summit, MO 64086-5709 U.S.A.