DIODES INCORPORATED
2017 LETTER TO STOCKHOLDERS
A YEAR IN REVIEW
2017 was a milestone year for Diodes in which we reached our goal of $1 billion in annual revenue. In addition to record revenue, we
achieved a record in gross profit and increased our market share. Our solid results reflect continued strength across all of our geographies
and target end markets as well as growth from our Pericom product lines. Revenue for the year increased approximately 12% to
$1.05 billion from $942.2 million in 2016, and GAAP gross profit was a record $356.8 million, or 33.8% of revenue, compared to $286.9 million,
or 30.5% of revenue, in the prior year. We also ended the fourth quarter of 2017 with GAAP gross margin reaching 35.9%, demonstrating
the ability to expand margins above our prior target model of 35% and toward our next target of 40%.
Also during the year, we generated record cash flow from operations of approximately $181 million, which allowed us to pay-down our
long-term debt by approximately $160 million and return capital to our stockholders through stock repurchases. We ended the year with
$208 million in cash, cash equivalents and short-term investments, and $415 million of working capital.
NEW PRODUCTS DRIVING GROWTH AND MARGIN EXPANSION
For the past several years, we have been highlighting our continued investment and focus on new products as well as process and
packaging technologies to expand our customer content and gross margin opportunities. Today, we continue to accelerate the pace at
which we are transitioning from prior generation products to new higher margin products that provide greater value to our customers. As a
result of these efforts, customer and design activity remained strong throughout the year across all regions, positioning Diodes for continued
growth in 2018. We also expect to make ongoing progress on design wins, new product introductions and margin expansion with our new
higher value products.
SHARE GAINS ACROSS TARGET END MARKETS
During the year, we continued to drive market share expansion across our end markets. In fact, we reached record revenue
levels in our automotive, industrial and communications markets, which served as the primary growth drivers in 2017. Leading
this growth, revenue from our automotive market grew almost 30% in 2017, which is particularly impressive considering the
50% increase in 2016. Our overall initiatives to expand content at new and existing customers have proven successful as we continue to
benefit from increasing cross-selling opportunities with the Pericom products. As we look forward, we are primarily focused on key end
market opportunities within automotive, industrial, high-end smartphones, IoT and high-end computing with our Pericom products.
ACHIEVING MANUFACTURING EFFICIENCIES
In regards to our manufacturing operations, we completed the shutdown of our wafer fab in Lee’s Summit, MO (KFAB) in mid-November
as planned. This action is expected to result in annual cost savings of between $10 and $15 million beginning in 2018. Also during the
fourth quarter, we completed the transfer of the KFAB wafer fab process into SFAB-1 and started to ramp production. We also completed
8-inch wafer qualifications in SFAB-2 and expect to ramp to 3,000 wafers per month by the end of the first quarter 2018 and to 8,000 to
10,000 wafers per month by the end of the year. This capacity expansion aligns with our growth projections for 2018 and the favorable
market environment.
FOCUSED ON PROFITABILITY GROWTH
With our achievement of $1 billion in annual revenue in 2017, we established our next long-term goals of $1 billion in gross profit, 40% gross
margins and 20% operating margins. We remain committed to increasing profitability as we benefit from solid operating leverage to drive
earnings expansion for the Company and our shareholders. Our business is also consistently generating a significant amount of cash. We
plan to continue allocating this cash toward reducing our long-term debt, while also maintaining the flexibility to support our future expansion
initiatives, potential strategic acquisitions as well as our existing share buyback plan.
Finally, we would like to take this opportunity to thank shareholders, customers, employees and suppliers for your continued support and
confidence in Diodes.
Sincerely,
Dr. Keh-Shew Lu
President & Chief Executive Officer
Raymond Soong
Chairman of the Board
FINANCIAL HIGHLIGHTS
2013
$827
2014
$891
2015
$849
2016
$942
2017
$1,054
2013
$27
2014
$64
2015
$24
2016
$16
2017
$(2)
2013
$50
2014
$70
2015
$42
2016
$38
2017
$69
2013
$703
2014
$768
2015
$795
2016
$776
2017
$832
NET SALES
in millions
NET INCOME
COMMON STOCKHOLDERS
in millions
NET INCOME
COMMON STOCKHOLDERS
[NON-GAAP ADJUSTED1]
in millions
STOCKHOLDERS’ EQUITY
in millions
(in thousands, except per share data)
NET SALES
YOY growth
GROSS PROFIT
Gross margin
Selling, general and administrative expenses
Research and development expenses
Amortization of acquisition-related intangible assets
Impairment of long-lived assets
Restructuring
Other
TOTAL OPERATING EXPENSES
Income from operations
Interest (expense)/income, net
Gain (loss) on securities carried at fair value
Foreign currency (loss) gain, net
Impairment of cost-basis investment
Other income (expense)
INCOME before income taxes and noncontrolling interest
Income tax provision (benefit)
Net income
Less: net income – noncontrolling interest
NET (LOSS) INCOME – COMMON STOCKHOLDERS (GAAP)
NET INCOME – COMMON STOCKHOLDERS (non-GAAP adjusted)1
(LOSS) EARNINGS PER SHARE, diluted (GAAP)
EARNINGS PER SHARE, diluted (non-GAAP adjusted)1
Number of diluted shares
Total assets
Working capital
Long-term debt, net of current portion
Total Diodes Incorporated stockholders’ equity
2017
$1,054,204
2016
$ 942,162
2015
$ 848,904
2014
$ 890,651
2013
$ 826,846
11.9%
11.0%
-4.7%
7.7%
30.5%
356,776
286,923
248,583
277,279
237,836
33.8%
30.5%
29.3%
31.1%
28.8%
167,639
77,877
18,798
2,211
10,137
(246)
276,416
80,360
(11,973)
—
(7,995)
—
2,199
62,591
62,325
266
(2,071)
(1,805)
69,121
(0.04)
1.37
50,340
$1,488,673
415,162
247,492
831,504
$
$
$
$
158,256
69,937
20,478
114
12
70
248,867
38,056
(11,900)
—
2,171
(3,218)
(74)
25,035
6,558
18,477
(2,542)
$ 15,935
$ 38,381
0.32
$
0.77
$
49,789
$1,528,552
547,409
413,126
776,019
139,245
57,027
8,596
1,672
—
(59)
206,481
42,102
(3,226)
400
1,257
—
62
40,595
14,082
26,513
(2,239)
$ 24,274
$ 42,345
0.49
$
0.86
$
49,500
$1,598,827
570,888
453,738
795,345
133,701
52,136
7,914
198
—
(1,181)
192,768
84,511
(2,862)
1,364
1,820
—
1,159
85,992
20,359
65,633
(1,955)
$ 63,678
$ 70,082
1.31
$
1.44
$
48,594
$1,179,157
526,239
140,787
768,275
132,106
48,302
8,078
5,358
1,533
178
195,555
42,281
(4,306)
601
(393)
—
402
38,585
14,481
24,104
2,428
$ 26,532
$ 50,131
0.56
$
1.05
$
47,658
$1,162,258
493,169
182,799
702,742
1 For a reconciliation of GAAP net income to non-GAAP adjusted net income, see “Additional Information” located near the end of this report.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission file number: 002-25577
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
4949 Hedgcoxe Road, Suite 200
Plano, Texas
(Address of principal executive offices)
95-2039518
(I.R.S. Employer
Identification No.)
75024
(Zip Code)
Registrants telephone number, including area code: (972) 987-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, Par Value $0.66 2/3
Name of each exchange on which registered
g
The NASDAQ Stock Market LLC
g
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:4)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (cid:3) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes (cid:3) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth
company in Rule 12b-2 of the Exchange Act:
(cid:3)
(cid:4) (Do not check if a smaller reporting company)
(cid:4)
Large accelerated filer
Non-accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:4) No (cid:3)
The aggregate market value of the 38,032,787 shares of Common Stock held by non-affiliates of the registrant, based on the closing price of $18.79
per share of the Common Stock on the Nasdaq Global Select Market on June 30, 2017, the last business day of the registrants most recently
completed second fiscal quarter, was approximately $714,636,068.
The number of shares of the registrants Common Stock outstanding as of February 9, 2018 was 49,140,136.
Accelerated filer
Smaller reporting company
(cid:4)
(cid:4)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed with the United States Securities and Exchange Commission (SEC) pursuant to
Regulation 14A in connection with the 2018 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report. The
proxy statement will be filed with the SEC not later than 120 days after the registrants fiscal year ended December 31, 2017.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS............................................................................................................................................................
ITEM 1A. RISK FACTORS...................................................................................................................................................
ITEM 1B. UNRESOLVED STAFF COMMENTS ...............................................................................................................
PROPERTIES .......................................................................................................................................................
ITEM 2.
LEGAL PROCEEDINGS .....................................................................................................................................
ITEM 3.
MINE SAFETY DISCLOSURES ........................................................................................................................
ITEM 4.
PART II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ITEM 6.
ITEM 7.
ISSUER PURCHASES OF EQUITY SECURITIES ......................................................................................
SELECTED FINANCIAL DATA ........................................................................................................................
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................................................................................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .....................................................................
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9.
FINANCIAL DISCLOSURE...........................................................................................................................
ITEM 9A. CONTROLS AND PROCEDURES.....................................................................................................................
ITEM 9B. OTHER INFORMATION ....................................................................................................................................
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .............................................
EXECUTIVE COMPENSATION........................................................................................................................
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
ITEM 12.
ITEM 13.
ITEM 14.
RELATED STOCKHOLDER MATTERS......................................................................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ..
PRINCIPAL ACCOUNTING FEES AND SERVICES.......................................................................................
PART IV
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES ....................................................................................
FORM 10-K SUMMARY ....................................................................................................................................
g
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47
Item 1. Business.
GENERAL
PART I
Diodes Incorporated and its subsidiaries (collectively, the Company or we or our) is a leading global manufacturer and
supplier of high-quality application specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor
markets. Diodes serves the consumer electronics, computing, communications, industrial, and automotive markets. Diodes products
include diodes, rectifiers, transistors, MOSFETs, protection devices, function-specific arrays, logic, amplifiers and comparators, Hall-
effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC
switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load
switches, voltage supervisors, and motor controllers. Diodes corporate headquarters and Americas sales office are located in Plano,
Texas and Milpitas, California. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taiwan; Taoyuan
City, Taiwan; Zhubei City, Taiwan; Manchester, England; and Neuhaus, Germany. Diodes wafer fabrication facilities are located in
Manchester and Shanghai, China. Diodes has assembly and test facilities located in Shanghai, Jinan, Chengdu, and Yangzhou, China,
as well as in Hong Kong, China, Neuhaus and Taipei. Additional engineering, sales, warehouse, and logistics offices are located in
Taipei; Hong Kong; Manchester; Shanghai; Shenzhen, China; Seongnam-si, South Korea; and Munich, Germany, with support offices
throughout the world. We were incorporated in 1959 in California and reincorporated in Delaware in 1968.
We design, manufacture and market these semiconductors for diverse end-use applications. Semiconductors, which provide
electronic signal amplification and switching functions, are basic building-blocks that are incorporated into almost every electronic
device. We believe that our focus on application-specific standard products utilizing innovative, highly efficient packaging and cost-
effective process technologies, coupled with our collaborative, customer-focused product development, gives us a meaningful
competitive advantage relative to other semiconductor companies.
Our product portfolio addresses the design needs of advanced electronic equipment, including high-volume consumer electronic
devices such as digital media players, smartphones, tablets, notebook computers, flat-panel displays, mobile handsets, digital cameras
and set-top boxes. We believe that we have particular strength in designing innovative, highly power efficient semiconductors in
miniature packaging for applications with a critical need to minimize product size while maximizing power density and overall
performance, and at a lower cost than alternative solutions. Our product line includes over 25,000 products, and we shipped
approximately 46 billion units, 41 billion units, and 40 billion units in 2017, 2016 and 2015, respectively. From 2012 to 2017, our net
sales grew from $633.8 million to $1.1 billion, representing a compound annual growth rate of greater than 10%.
BUSINESS OUTLOOK
During 2017, we achieved our goal of $1.0 billion in annual revenue. During 2017, we announced new goals for 2025 that
include revenue of $2.5 billion with gross margin of 40%, representing gross profit of $1.0 billion. Acquisitions remain a key part of
our growth strategy to reach our revenue goal. We have a solid pipeline of designs and expanded customer relationships across all
regions and product lines. The success of our business depends on, among other factors, the strength of the global economy and the
stability of the financial markets, our customers demand for our products, the ability of our customers to meet their payment
obligations, the likelihood of customers not canceling or deferring existing orders, and the strength of consumers demand for items
containing our products in the end-markets we serve. We believe the long-term outlook for our business remains generally favorable
despite the uncertainties in the global economy as we continue to execute on the strategy that has proven successful for us over the
years. See Managements Discussion and Analysis of Financial Condition and Results of Operations - Business Outlook in Part II,
Item 7 and Risk Factors The success of our business depends on the strength of the global economy and the stability of the financial
markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial
condition. in Part I, Item 1A of this Annual Report for additional information.
SEGMENT INFORMATION AND ENTERPRISE-WIDE DISCLOSURES
For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various design,
manufacturing and distribution facilities. We sell product primarily through our operations in Asia, North America and Europe. See
Note 15 of Notes to Consolidated Financial Statements of this Annual Report for addition information.
OUR INDUSTRY
Semiconductors are critical components used in the manufacture of a broad range of electronic products and systems. Since the
invention of the transistor in 1948, continuous improvements in semiconductor processes and design technologies have led to smaller,
more complex and more reliable devices at a lower cost per function. The availability of low-cost semiconductors, together with
- 1 -
increased customer demand for sophisticated electronic systems, has led to the proliferation of semiconductors in diverse end-use
applications.
OUR COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
ff
Flexible, scalable and cost-effective manufacturing Our manufacturing operations are a core element of our success, and we
have designed our manufacturing base to allow us to respond quickly to changes in demand trends in the end-markets we serve. For
example, we have structured our assembly and test facilities to enable us to rapidly and efficiently add capacity and adjust product mix
to meet shifts in customer demand and overall market trends. In 2011, we established an additional manufacturing facility for
semiconductor assembly and test in Chengdu, China, which became fully production capable during the second half of 2015.
Additionally, the Shanghai and Chengdu locations of our manufacturing operations provide us with access to a workforce at a
relatively low overall cost base while enabling us to better serve our leading customers, many of which are located in Asia. See Risk
FactorsDuring times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may
have a negative impact on our business, operating results and financial condition. in Part I, Item 1A of this Annual Report for
additional information.
ff
Integrated packaging expertise Our expertise in designing and manufacturing innovative and proprietary packaging
solutions enables us to package a variety of different device functions into an assortment of packages ranging from miniature chip-
scale packaging to packages that integrate multiple separate discrete and/or analog chips into a single semiconductor product called an
array. Our ability to design and manufacture multi-chip semiconductor solutions as well as advanced integrated devices provides our
customers with products of equivalent functionality with fewer individual parts, and at lower overall cost, than alternative products.
This combination of integration, functionality and miniaturization makes our products well suited for high-volume consumer
electronic devices such as LED televisions, LCD panels, set-top boxes and consumer portables such as smartphones, tablets and
notebooks.
Broad customer base and diverse end-markets Our customers are comprised of leading OEMs as well as major EMS
providers. Overall, we serve over 375 direct customers worldwide and tens of thousands of additional customers through our 122
distributors. Our products are ultimately used in end-products in a number of markets served by our broad customer base, which we
believe makes us less susceptible to market fluctuations driven by either specific customers or specific end-user applications.
Customer focused product development Effective collaboration with our customers and a commitment to customer service
are essential elements of our business. We believe focusing on dependable delivery and support tailored to specific end-user
applications has fostered deep customer relationships and created a key competitive advantage for us in the highly fragmented
discrete, logic and analog semiconductor marketplace. We believe our close relationships with our customers have provided us with
keener insight into our customers product needs. This results in a stronger demand for our product designs and often provides us with
insight into additional opportunities for new design wins in our customers products. See Risk Factors - We are and will continue to
be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect
our growth and profit margins in Part I, Item 1A of this Annual Report for additional information.
ff
Management experience The members of our executive team average over 30 years of industry experience, and the length of
their service has created significant institutional insight into our markets, our customers and our operations. See Risk FactorsWe
may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to operate
our business successfully, which could adversely affect our business, operating results and financial condition. in Part I, Item 1A of
this Annual Report for additional information.
OUR STRATEGY
Our strategy is to continue to enhance our position as a leading global designer, manufacturer and supplier of high-quality
application-specific standard semiconductor products, utilizing our innovative and cost-effective assembly and test (packaging)
technology and leveraging our process expertise and design excellence to achieve above-market growth in profitability.
The principal elements of our strategy include the following:
Continue to rapidly introduce innovative discrete, logic and analog semiconductor products We intend to maintain our
rapid pace of new product introductions, especially for high-volume, high-growth applications with short design cycles, such as LCD
and LED televisions and panels, set-top boxes, portables such as smartphones, tablets and notebooks along with other consumer
electronics and computing devices, as well as added emphasis on products for the LED lighting market and the industrial and
automotive markets. During 2017, we continued to achieve many significant new design wins at OEMs. Although a design win from a
customer does not necessarily guarantee future sales to that customer, we believe that continued introduction of new and well-defined
product solutions is critically important in maintaining and extending our market share in the highly competitive semiconductor
- 2 -
marketplace. See Risk Factors Obsolete inventories as a result of changes in demand for our products and change in life cycles of
our products could adversely affect our business, operating results and financial condition. in Part I, Item 1A of this Annual Report
for additional information.
ff
Expand our available market opportunities We believe we have many paths to increasing our addressable market
opportunity. From a product perspective, we intend to continue expanding our product portfolio by developing derivative and
enhanced performance devices that target adjacent markets and end-equipment. We will continue to cultivate new and emerging
customers within our targeted markets, further increasing our already broad customer base. As we focus on new customers, we try to
expand our product portfolio penetration within these new, as well as existing, customers. As we expand our extensive range of high
power efficiency and small form factor packages, we plan to introduce new and existing product functions in these new packages to
allow an even greater market range.
Maintain intense customer focus We intend to continue to strengthen and deepen our customer relationships. We believe
that continued focus on customer service is important and will help to increase our net sales, operating performance and market share.
To accomplish this, we intend to continue to closely collaborate with our customers to design products that meet their specific needs.
A critical element of this strategy is to further reduce our design cycle time in order to quickly provide our customers with innovative
products. Additionally, to support our customer-focused strategy, we continue to expand our sales force and field application
engineers, particularly in Asia and Europe, during periods of growth. See Risk Factors We are and will continue to be under
continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth
and profit margins. in Part I, Item 1A of this Annual Report for additional information.
ff
Enhance cost competitiveness A key element of our success is our overall low-cost manufacturing base. While we believe
our manufacturing facilities are among the most efficient in the industry, we will continue to refine our proprietary manufacturing
processes and technology to achieve additional cost efficiencies. In 2011, we commenced the expansion of our capacity further by
establishing an additional manufacturing facility for semiconductor assembly and test in Chengdu, China, that became fully
production capable in the second half of 2015.
Pursue selective strategic acquisitions As part of our strategy to expand our semiconductor product offerings and to maximize
our market opportunities, we may acquire technologies, product lines or companies in order to enhance our product portfolio and
accelerate our new product offerings. In 2015, we acquired Pericom Semiconductor Corporation. Pericom designs, develops and markets
high-performance ICs and FCPs used in many of todays advanced electronic systems. ICs include functions that support the
connectivity, timing and signal conditioning of high-speed parallel and serial protocols that transfer data among a systems
microprocessor, memory and various peripherals, such as displays and monitors, and between interconnected systems. FCPs are
electronic components that provide frequency references such as crystals and oscillators for computer, communication and consumer
electronic products. Analog, digital and mixed-signal ICs, together with FCPs enable higher system bandwidth and signal quality,
resulting in better operating reliability and signal integrity, and lower overall system cost in applications such as notebook computers,
servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS and digital media players.
See Risk Factors Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify
suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to
successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and
financial condition in Part I, Item 1A and Note 19 of Notes to Consolidated Financial Statements of this Annual Report for additional
information.
OUR PRODUCTS
Our product portfolio includes over 25,000 products that are designed for use in high-volume consumer electronic devices such
as LCD and LED televisions and LCD panels, set-top boxes and consumer portables such as smartphones, tablets and notebooks. Our
focus is on low pin count semiconductor devices with one or more active and/or passive components. We target and serve end-
equipment markets that we believe have larger volumes than other end-market segments served by the overall semiconductor industry.
Our broad product line includes:
• Discrete semiconductor products, including: performance Schottky rectifiers; performance Schottky diodes; Zener diodes and
performance Zener diodes, including tight tolerance and low operating current types; standard, fast, super-fast and ultra-fast
recovery rectifiers; bridge rectifiers; switching diodes; small signal bipolar transistors; prebiased transistors; MOSFETs;
thyristor surge protection devices; and transient voltage suppressors;
• Analog products, including: power management devices such as AC-DC and DC-DC converters, USB power switches, low
dropout and linear voltage regulators; standard linear devices such as operational amplifiers and comparators, current monitors,
voltage references, and reset generators; LED lighting drivers; audio amplifiers; and sensor products including Hall-effect
sensors and motor drivers;
- 3 -
• Standard logic products including low-voltage complementary metal-oxide-semiconductor (CMOS) and advanced high-speed
CMOS devices; ultra-low power CMOS logic; and analog switches;
• Multichip products and co-packaged discrete, analog and mixed-signal silicon in miniature packages;
• Silicon and silicon epitaxial wafers used in manufacturing these products; and
• With the Pericom acquisition we acquired FCPs used in many of todays advanced electronic systems. FCPs are electronic
components that provide frequency references such as crystals and oscillators for computer, communication and consumer
electronic products.
The following table lists the end-markets, some of the applications in which our products are used, and the percentage of net
sales for each end-market for the last three years:
End-Markets
2017
2016
2015
End product applications
Consumer Electronics
26%
29%
32%
Computing
18%
19%
18%
Industrial
23%
21%
21%
Communications
Automotive
25%
8%
24%
7%
24%
5%
Digital audio players and cameras, set-top boxes, LCD and LED
TVs, game consoles, portable GPS, fitness and health monitors,
action cameras, smart watches
NNotebooks, tablets, LCD monitors, printers, solid state and hard disk
drive, servers, mass storage, cloud
Lighting, power supplies, DC-DC conversion, security systems, motor
controls, DC fans, proximity sensors, solenoid and relay driving, solar
ppanel, HAVC/LED lighting, retrofit bulb
Mobile handsets, smartphones, IP in gateways, routers, switches,
hubs, fiber optics
Comfort controls, lighting, audio/video, GPS navigation, satellite
radios, electronics
PRODUCT PACKAGING
Our device packaging technology includes a wide variety of innovative surface-mounted packages. Our focus on the
development of smaller, more thermally efficient, and increasingly-integrated packaging, is a critical component of our product
development. We provide a comprehensive offering of miniature high power density packaging, enabling us to fit our components into
smaller and more efficient packages, while maintaining the same device functionality and power handling capabilities. Smaller
packaging provides a reduction in the height, weight and board space required for our components. Our products are well suited for
battery-powered, hand-held and wireless consumer electronic applications and high-volume consumer electronic devices such as LCD
and LED televisions and LCD panels, set-top boxes and consumer portables such as smartphones, tablets and notebooks.
CUSTOMERS
We serve over 375 direct customers worldwide,
including major OEMs and EMS providers. Additionally, we have
approximately 122 distributor customers worldwide, through which we indirectly serve tens of thousands of customers. Our customers
include: (i) leading OEMs in a broad range of industries, such as Continental AG, Delta Electronics, Honeywell, Osram, Phillips,
Arris, Emerson, Hella, LG Electronics, Lenovo, Quanta Computer, Seagate, Sagem Communication, and Samsung Electronics; (ii)
leading EMS providers, such as Celestica, Flextronics, Hon Hai Precision Industry, Inventec, Jabil Circuit, and Sanmina-SCI, who
build end-market products incorporating our semiconductors for companies such as Google, GoPro, Cisco, Dell, EMC, Intel,
Microsoft, Thompson, and Roche Diagnostics; and (iii) leading distributors such as Arrow, Avnet, Future Electronics, Rutronic,
Yosun Industrial, DigiKey, and Zenitron.
For the years 2017, 2016 and 2015, our OEM and EMS customers together accounted for 32%, 35% and 33%, respectively, of
our net sales. One customer accounted for 10% or more of our net sales in 2017, but not 10% of our outstanding accounts receivable at
December 31, 2017. No customers accounted for 10% or more of our net sales in 2016 or 2015. In addition, for information
concerning our business with related parties, see Business - Certain Relationships and Related Party Transactions.
We believe that our close relationships with our customers have provided us with deeper insight into our customers product
needs. In addition to seeking to expand relationships with our existing customers, our strategy is to pursue new customers and
diversify our customer base by focusing on leading global consumer electronics companies and their EMS providers and distributors.
See Risk Factors Our customers require our products to undergo a lengthy and expensive qualification process without any
assurance of product sales and may demand to audit our operations from time to time. A failure to qualify a product or a negative
- 4 -
audit finding could adversely affect our net sales, operating results and financial condition. in Part I, Item 1A of this Annual Report
for additional information.
We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and
materials and conform to our approved specifications. Subject to certain exceptions, our standard warranty extends for a period of one
year from the date of shipment. Warranty expense has not been significant. Generally, our customers may cancel orders on short
notice without incurring a penalty. See Risk Factors Our customer orders are subject to cancellation or modification usually with
no penalty. High volumes of order cancellation or reduction in quantities ordered could adversely affect our net sales, operating
results and financial condition in Part I, Item 1A of this Annual Report for additional information.
Many of our customers are based in Asia or have manufacturing facilities in Asia. Net sales by country consist of sales to
customers in that country based on the country to which products are shipped. We report net sales based on shipped to customer
locations as we believe this best represents where our customers business activities occur. The table below sets forth net sales by
country. All others represents countries with less than 3% of total net sales each.
China
U.S.
Korea
Germany
Singapore
Taiwan
All others
Total
2017
56%
8%
6%
7%
6%
6%
11%
100%
Percentage of Net Sales
2016
58%
8%
6%
7%
5%
6%
10%
100%
2015
60%
9%
8%
7%
6%
4%
6%
100%
SALES AND MARKETING
We market and sell our products worldwide through a combination of direct sales and marketing personnel, independent sales
representatives and distributors. We have direct sales personnel in the U.S., the U.K., France, Germany, Korea, Hong Kong, Taiwan
and China. We also have independent sales representatives in the U.S., Asia, and Europe. In addition, we have distributors in the U.S.,
Asia, and Europe.
As of December 31, 2017, our direct global sales and marketing organization consisted of approximately 366 employees
operating out of 14 offices. We have sales and marketing offices or representatives in Taipei, Taiwan; Shanghai and Shenzhen, China;
Gyeonggi, South Korea; and Munich, Germany; and we have regional sales offices in the U.S. As of December 31, 2017, we also had
approximately 18 independent sales representative firms marketing our products.
Our marketing group focuses on our product strategy, product development roadmap, new product introduction process, demand
assessment and competitive analysis. Our marketing programs include participation in industry tradeshows, technical conferences and
technology seminars, sales training and public relations. The marketing group works closely with our sales and research and
development teams to align our product development roadmap. The marketing group coordinates its efforts with our product
development, operations and sales groups, as well as with our customers, sales representatives and distributors. We support our
customers through our global field application engineering and customer support organizations.
Our website, www.diodes.com, features an extensive online product catalog with advanced search capabilities. This, coupled
with a comprehensive competitor cross-reference search, facilitates quick and thorough product selection. Our website also provides
easy access to our worldwide sales contacts and customer support and incorporates a distributor-inventory check to provide
component inventory availability.
MANUFACTURING OPERATIONS AND FACILITIES
We operate two assembly and test facilities located in Shanghai, China, one in Chengdu, China and one in Neuhaus, Germany.
We have two 150mm wafer fabrication facilities located in Shanghai and one 150mm wafer fabrication facility located in Oldham,
U.K. One of our Shanghai facilities has completed qualification on the production of 200mm wafers.
During the fourth quarter of 2017 we shut down our wafer manufacturing facility located in Lees Summit, MO. (KFAB) and
transferred those manufacturing activities to our wafer fabrication facilities located in Oldham and Shanghai or to outside foundries.
Total costs to shut down KFAB were approximately $10.1 million. We will continue to recognize costs associated with the KFAB
- 5 -
shutdown through March 2018. Because of lower costs and improved utilization of our internal wafer fabrication facilities we expect
our annual pretax savings to be approximately $10 million to $15 million, beginning in 2018.
In 2010, we announced an investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial
Development Zone (the CDHT). Under this agreement, we formed an entity with a Chinese partner, Chengdu Ya Guang Electronic
Company Limited (Ya Guang), to establish a semiconductor assembly and test manufacturing facility in Chengdu, China. In
December 2016, we increased our investment and currently own approximately 98% of the entity. The CDHT granted the entity a 50-
year land lease, provides corporate and employee tax
incentives, tax refunds, subsidies and other financial support. This is a long-term,
multi-year project that will provide us additional capacity as needed. As of December 31, 2017, we have invested approximately
$157.2 million, primarily for infrastructure, buildings and equipment related capital expenditures.
rr
For the years ending December 31, 2017 and 2016, our total capital expenditures were approximately $125.2 million and $52.2
million, respectively. The majority of our capital expenditures are in China.
Our manufacturing processes use many raw materials, including silicon wafers, aluminum and copper lead frames, gold and
copper wire and other metals, molding compounds and various chemicals and gases. We also rely on equipment and finished product
suppliers. We are continuously evaluating our raw material costs in order to reduce our consumption while protecting and maintaining
product performance. We have no material agreements with any of our suppliers that impose minimum or continuing supply
obligations. From time to time, suppliers may extend lead-times, limit supplies or increase prices due to capacity constraints or other
factors. Although we believe that supplies of the raw materials we use are currently and will continue to be available, shortages could
occur in various essential materials due to interruption of supply or increased demand in the industry. See Risk Factors We depend
on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and
equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial
condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner. in Part I, Item 1A of this
Annual Report for additional information.
Our corporate headquarters is located in a facility we own in Plano, Texas. We also lease or own properties around the world for
use as sales and administrative offices, research and development centers, manufacturing facilities, warehouses and logistics centers.
The size or location of these properties can change from time to time based on our business requirements. See Properties in Part I,
Item 2 of this Annual Report for additional information.
BACKLOG
The amount of backlog to be shipped during any period is dependent upon various factors, and orders are subject to cancellation
or modification, usually with no penalty to the customer. Orders are generally booked from one month to greater than twelve months
in advance of delivery. The rate of booking of new orders can vary significantly from month to month. We, and the industry as a
whole, continue to experience a trend towards shorter customer-requested lead-times, and we expect this trend to continue. The
amount of backlog at any date depends upon various factors, including the timing of the receipt of orders, fluctuations in orders of
is not
existing product lines, and the introduction of any new lines. Accordingly, we believe that the amount of our backlog at any dateaa
an accurate measure of our future sales. We strive to maintain proper inventory levels to support our customers just-in-time order
expectations. Our backlog of orders, based on expected ship date, was $407.4 million at December 31, 2017 and $175.7 million at
December 31, 2016.
PATENTS, TRADEMARKS AND LICENSES
Historically, patents and trademarks have not been material to our operations, but we expect them to become more important,
particularly as they relate to our miniature and power efficient packaging technologies.
Our initial product patent portfolio was primarily composed of discrete technologies. In the late 1990s, our engineers began to
research and develop innovative packaging technologies, which produced several important breakthroughs and patents, such as the
PowerDI® series of packaging technology to foster our growth in the semiconductor industry.
We acquired Anachip Corp., a fabless semiconductor company, in 2006, which initiated our presence in the analog product
market with a portfolio of standard linear and low dropout regulator products, among others.
Through our acquisition of the assets of APD Semiconductor, Inc. in 2006, we acquired the SBR® patents and trademark.
SBR® is a state-of-the-art integrated circuit wafer processing technology, which is able to integrate and improve the benefits of the
two existing rectifier technologies into a single device. The creation of a finite conduction cellular IC, combined with inherent design
uniformity, has allowed manufacturing costs to be kept competitive with the existing power device technology, and thus has produced
a breakthrough in rectifier technology.
- 6 -
PowerDI and SBR are registered trademarks of Diodes Incorporated
In 2008, we acquired Zetex, which subsequently increased our available discrete and analog technologies with patents and
trademarks for bipolar transistors and power management products such as LED drivers. LED drivers support a wide range of
applications for automotive, safety and security, architecture, and portable lighting and are highly efficient and cost-effective.
In 2012, we acquired PAM, a provider of advanced analog and high-voltage power ICs. PAMs product portfolio includes Class
D audio amplifiers, DC-DC converters and LED backlighting drivers, which has strengthened our position as a global provider of
high-quality and high-efficiency, space-saving analog products by expanding our product portfolio with innovative filter-less digital
audio amplifiers, application-specific power management ICs, as well as high-performance LED drivers and DC-DC converters.
In 2013, we acquired BCD, a leading supplier of standard linear and power management devices. BCD has a product portfolio
that includes AC/DC and DC/DC solutions for chargers and power adapters. BCDs established presence in Asia, with a particularly
strong local market position in China, offers us even greater participation in the consumer electronics, computing and communications
end-markets.
In 2015, we acquired Pericom. Pericom designs, develops and markets high-performance ICs and FCPs used in many of todays
advanced electronic systems. ICs include functions that support the connectivity, timing and signal conditioning of high-speed parallel
and serial protocols that transfer data among a systems microprocessor, memory and various peripherals, such as displays and
monitors, and between interconnected systems. FCPs are electronic components that provide frequency references such as crystals and
oscillators for computer, communication and consumer electronic products. Pericoms analog, digital and mixed-signal ICs, together
with our FCPs enable higher system bandwidth and signal quality, resulting in better operating reliability and signal integrity, and
lower overall system cost in applications such as notebook computers, servers, network switches and routers, storage area networks,
digital TVs, cell phones, GPS and digital media players.
Currently, our licensing of patents to other companies is not material. We do, however, license certain product technology from
other companies, but we do not consider licensed technology royalties to be material. We believe the duration and other terms of the
licenses are appropriate for our current needs. See Risk Factors We may be subject to claims of infringement of third-party
intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in
our intellectual property rights and a negative impact on our business, operating results and financial condition. in Part I, Item 1A
of this Annual Report for additional information.
COMPETITION
Numerous semiconductor manufacturers and distributors serve the discrete, logic and analog semiconductor components
market, making competition intense. Some of our larger competitors include Infineon Technologies A.G., Nexperia, formerly the
Standard Products business of NXP Semiconductors N.V., ON Semiconductor Corporation, Rohm Electronics USA, LLC, Toshiba
Corporation and Vishay Intertechnology, Inc., many of which have greater financial, marketing, distribution, brand name recognition,
research and development, manufacturing and other resources. Accordingly, we from time to time may reposition product lines or
decrease prices, which may affect our sales of, and profit margins on, such product lines. The price, features, availability and quality
of the products, and our ability to design products and deliver customer service in keeping with the customers needs, determine the
competitiveness of our products. We believe that our product focus, packaging expertise and our flexibility and ability to quickly
adapt to customer needs affords us competitive advantages. See Risk Factors The semiconductor business is highly competitive, and
increased competition may harm our business, operating results and financial condition. in Part I, Item 1A of this Annual Report for
additional information.
ff
ENGINEERING AND RESEARCH AND DEVELOPMENT
Our engineering and research and development groups consist of applications, circuit design, and product development
engineers who assist in determining the direction of our future product lines. One of their key functions is to work closely with
market-leading customers to further refine, expand and improve our product portfolio within our target product types and packages. In
addition, customer requirements and acceptance of new package types are assessed and new, higher-density and more energy-efficient
packages are developed to satisfy customers needs.
Product development engineers work directly with our semiconductor circuit design and layout engineers to develop and design
products that match our customers requirements. We have the capability to capture the customers electrical and packaging
requirements and translate those requirements into product specifications which can then be designed and manufactured to support
customers end-system applications.
- 7 -
For the years ended December 31, 2017, 2016 and 2015, our investment
in research and development activities was
approximately $77.9 million, $69.9 million and $57.0 million, respectively, or approximately 7% of net sales for each of the three
years.
EMPLOYEES
As of December 31, 2017, we employed 8,586 employees (including approximately 926 temporary labor or independent
contractors). 7,868 of our employees were in Asia, 249 were in the U.S. and 469 were in Europe. None of our employees in Asia or
the U.S. are subject to a collective bargaining agreement, but a majority of our employees in Europe is covered by local labor
agreements. We consider our relations with our employees to be satisfactory. See Risk Factors We may fail to attract or retain the
qualified technical, sales, marketing, finance and management/executive personnel required to operate our business successfully,
which could adversely affect our business, operating results and financial condition. in Part I, Item 1A of this Annual Report for
additional information.
ff
ENVIRONMENTAL MATTERS
We are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to the use,
storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in our manufacturing process
in China and the U.K. where our wafer fabrication facilities are located, and in China, Taiwan and Germany where our assembly and
test facilities are located. Any of these regulations could require us to acquire equipment or to incur substantial other costs to comply
with environmental regulations or remediate problems. For the years ended December 31, 2017, 2016 and 2015, our capital
expenditures for environmental controls have not been material. As of December 31, 2017, there were no known environmental claims
or recorded liabilities. See Risk Factors We are subject to many environmental laws and regulations that could result in significant
expenses and could adversely affect our business, operating results and financial condition. in Part I, Item 1A of this Annual Report
for additional information.
ff
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We conduct business with two related companies: Lite-On Semiconductor Corporation and its subsidiaries and affiliates
(collectively, LSC), and Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, Nuvoton). LSC owned
approximately 16% of our outstanding Common Stock as of December 31, 2017. We conduct business with a significant company,
Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (collectively, Keylink). Keylink is our 5% partner in our two
Shanghai assembly and test facilities. In addition, Ya Guang is our 2% partner in one of our Chengdu assembly and test facilities and
our 5% partner in our other Chengdu assembly and test facility; however, we have no material transactions with Ya Guang.
Raymond Soong, the Chairman of the Board of Directors, is also the Chairman of LSC and the Chairman of Lite-On
Technology Corporation (LTC), a significant shareholder of LSC. C.H. Chen, our former President and Chief Executive Officer and
currently the Vice Chairman of the Board of Directors, is also Vice Chairman of LSC and a board member of LTC. Dr. Keh-Shew Lu,
a member of our Board of Directors and our President and Chief Executive Officer, is also a board member of Nuvoton. In addition,
L.P. Hsu, a former member of our Board of Directors, is also a consultant to LTC and a supervisor of the board of Nuvoton.
The Audit Committee of the Board of Directors reviews all related party transactions for potential conflict of interest situations
on an ongoing basis. We believe that all related party transactions are on terms no less favorable to us than would be obtained from
unaffiliated third parties. For more information concerning our relationships with LSC, Keylink and Nuvoton, see Risk Factors One
of our external suppliers is also a related party. The loss of this supplier could harm our business, operating results and financial
condition. in Part I, Item 1A and Note 14 of Notes to Consolidated Financial Statements of this Annual Report for additional
information.
SEASONALITY
Historically, our net sales have been affected by the cyclical nature of the semiconductor industry.
In addition, our net sales
have been subject to some seasonal variation with weaker net sales in the first and fourth calendar quarters. See Note 20 (unaudited)
of Notes to Consolidated Financial Statements of this Annual Report for additional information on our quarterly results.
ff
AVAILABLE INFORMATION
Our website address is http://www.diodes.com. We make available, free of charge through our website, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission (the SEC).
p
- 8 -
Our filings may also be read and copied at the SECs Public Reference Room at 100 F Street NE, Room 1580 Washington, D.C.
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 a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file with the SEC.
g
p
Our website also provides investors access to financial and corporate governance information including our corporate
governance guidelines, Code of Business Conduct, whistleblower hotline, and press releases. The contents of our website are not
incorporated by reference into this Annual Report on Form 10-K.
Cautionary Statement for Purposes of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
Many of the statements, included in this Annual Report on Form 10-K, contain forward-looking statements and information
relating to our company. We generally identify forward-looking statements by the use of terminology such as may, will, could,
should, potential, continue, expect, intend, plan, estimate, anticipate, believe, project, or similar phrases or the
negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently
available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in Risk Factors, as
well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or
projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking
statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form
10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new
information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the Act) provides certain safe
harbor provisions for forward-looking statements. All forward-looking statements, made on this Annual Report on Form 10-K, are
made pursuant to the Act.
Item 1A. Risk Factors.
Investing in our Common Stock involves a high degree of risk. You should carefully consider the following risks and other
information in this report before you decide to buy our Common Stock. Our business, financial condition or operating results may
suffer if any of the following risks are realized. Additional risks and uncertainties not currently known to us may also adversely affect
our business, financial condition or operating results. If any of these risks or uncertainties occurs, the trading price of our Common
Stock could decline and you could lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
The success of our business depends on the strength of the global economy and the stability of the financial markets, and any
weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.
Weaknesses in the global economy and financial markets can lead to lower consumer discretionary spending and demand for
items that incorporate our products in the consumer electronics, computing, industrial, communications and the automotive sectors. A
decline in end-user demand can affect our customers demand for our products, the ability of our customers to meet their payment
obligations and the likelihood of customers canceling or deferring existing orders. Our net sales, operating results and financial
condition could be negatively affected by such actions.
During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a
negative impact on our business, operating results and financial condition.
The semiconductor industry is characterized by high fixed costs. Notwithstanding our utilization of third-party manufacturing
capacity, most of our production requirements are met by our own manufacturing facilities. In difficult economic environments, we
could be faced with a decline in the utilization rates of our manufacturing facilities due to decreases in product demand. During such
periods, our manufacturing facilities do not operate at full capacity and the costs associated with this excess capacity are expensed
immediately and not capitalized into inventory. When our utilization rates decline to abnormally low production levels, we generally
experience lower gross margins. The market conditions in the future may adversely affect our utilization rates and consequently our
future gross margins, and this, in turn, could have a material negative impact on our business, operating results and financial
condition.
- 9 -
Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating
results and financial condition.
The semiconductor industry is highly cyclical, and periodically experiences significant economic downturns characterized by
diminished product demand, production overcapacity and excess inventory, which can result in rapid erosion in average selling prices.
From time to time, the semiconductor industry experiences order cancellations and reduced demand for products, resulting in
significant net sales declines, due to excess inventories at end-equipment manufacturers and general economic conditions, especially
in the technology sector. The market for semiconductors may experience renewed, and possibly more severe and prolonged
downturns, which may harm our operating results and financial condition.
In addition, we operate in a few narrow markets of the broader semiconductor market and, as a result, cyclical fluctuations may
affect these segments to a greater extent than they affect the broader semiconductor market. This may cause us to experience greater
fluctuations in our operating results and financial condition than compared to some of our broad line semiconductor competitors. In
addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, changes
in end-user markets and the costs associated with the introduction of new products. The markets for our products depend on continued
demand in the consumer electronics, computing, communications, industrial and automotive sectors. These end-user markets also tend
to be cyclical and may also experience changes in demand that could adversely affect our operating results and financial condition.
The semiconductor business is highly competitive, and increased competition may harm our business, operating results and
financial condition.
The semiconductor industry in which we operate is highly competitive. We expect intensified competition from existing
competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability,
technological innovation and customer service. We compete in various markets with companies of various sizes, many of which are
larger and have greater resources or capabilities as it relates to financial, marketing, distribution, brand name recognition, research and
development, manufacturing and other resources than we have. As a result, they may be better able to develop new products, market
their products, pursue acquisition candidates and withstand adverse economic or market conditions. Most of our current major
competitors are broad line semiconductor manufacturers who often have a wider range of product types and technologies than we do.
In addition, companies not currently in direct competition with us may introduce competing products in the future. Some of our
formerly the Standard Products business of NXP
current major competitors are Infineon Technologies A.G., Nexperia,
Semiconductors N.V., ON Semiconductor Corporation, Rohm Electronics USA, LLC, Toshiba Corporation and Vishay
Intertechnology, Inc. We may not be able to compete successfully in the future, and competitive pressures may harm our business,
operating results and financial condition.
One of our external suppliers is also a related party. The loss of this supplier could harm our business, operating results and
financial condition.
In 2017, 2016 and 2015, LSC, our largest stockholder, accounted for approximately 1%-3% of our silicon wafer supply and our
finished goods supply. The loss of LSC as a supplier could materially harm our business, operating results and financial condition.
Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated
with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial
condition.
Our manufacturing efficiency has been and will be an important factor in our future profitability, and we may not be able to
maintain or increase our manufacturing efficiency. Our manufacturing and testing processes are complex, require advanced and costly
equipment and are continually being modified in our efforts to improve product performance and cost. Difficulties in the
manufacturing process can lower yields. Technical or other problems could lead to production delays, order cancellations and lost net
sales. In addition, any problems in achieving acceptable yields, construction delays, or other problems in upgrading or expanding
existing facilities, building new facilities, bringing new manufacturing capacity to full production or changing our process
technologies, could also result in capacity constraints, production delays and a loss of future net sales and customers. Our operating
results also could be adversely affected by any increase in fixed costs and operating expenses related to increases in production
capacity if net sales do not increase proportionately, or in the event of a decline in demand for our products. Any disruption at any of
our wafer fabrication facilities or assembly and test facilities could have a material adverse effect on our manufacturing efficiencies,
operating results and financial condition.
We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products,
which could adversely affect our growth and profit margins.
Prices for our products tend to decrease over their life cycle. There is substantial and continuing pressure from customers to
reduce the total cost of purchasing our products. To remain competitive and retain our customers and gain new ones, we must continue
- 10 -
to reduce our costs through product and manufacturing improvements. We must also strive to minimize our customers shipping and
inventory financing costs and to meet their other goals for rationalization of supply and production. Our net sales growth and profit
margins will suffer if we cannot effectively continue to reduce our costs and keep our product prices competitive.
Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product
sales and may demand to audit our operations from time to time. A failure to qualify a product or a negative audit finding could
adversely affect our net sales, operating results and financial condition.
Prior to purchasing our products, our customers may require our products to undergo an extensive qualification process, which
involves rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a
product by a customer does not ensure any sales of the product to that customer. In addition, we are focusing more on the automotive
and industrial markets. These markets, automotive in particular, require higher quality standards. Although we are working to ensure
our organization and products meet the more rigorous quality standards, there can be no assurances we will succeed. Even after
successful qualification and sales of a product to a customer, a subsequent revision to the product, changes in the products
manufacturing process or the selection of a new supplier by us may require a re-qualification process, which may result in delayed net
sales and excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the
customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we
devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products
with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such
failure or delay would preclude or delay sales of such product to the customer, which may adversely affect our net sales, operating
results and financial condition.
In addition, from time to time, our customers may demand an audit of our records, product manufacturing, qualification, and
packaging processes, business practices and other related items to verify that we have complied with our business obligations,
standard processes and procedures, product specifications and certain governing laws and regulations related to our business practices,
and in accordance with the agreed terms and conditions of mutual business agreements. If the audit shows any deficiency in any of
these categories, our customers may require us to implement extensive protocols to remedy the deficiency, assess us significant
penalties, refuse shipments of our products, return existing inventory, cancel orders, or terminate our business relationship, each of
which will adversely affect our net sales, operating results and financial condition.
Our customer orders are subject to cancellation or modification usually with no penalty. High volumes of order cancellation or
reduction in quantities ordered could adversely affect our net sales, operating results and financial condition.
All of our customer orders are subject to cancellation or modification, usually with no penalty to the customer. Orders are
generally made on a purchase order basis, rather than pursuant to long-term supply contracts, and are booked from immediate delivery
to twelve months or more in advance of delivery. The rate of booking new orders can vary significantly from month to month. We,
and the semiconductor industry as a whole, are experiencing a trend towards shorter customer-requested lead-times, which is the
amount of time between the date a customer places an order and the date the customer requires shipment. Furthermore, our industry is
subject to rapid changes in customer outlook and periods of excess inventory due to changes in demand in the end-markets our
industry serves. As a result, many of our purchase orders are revised, and may be cancelled, with little or no penalty and with little or
no notice. However, we must still commit production and other resources to fulfilling these purchase orders even though they may
ultimately be cancelled. If a significant number of purchase orders are cancelled or product quantities ordered are reduced, and we are
unable to timely generate replacement orders, we may build up excess inventory and our net sales, operating results and financial
condition may suffer.
Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other
extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our
customers demands and could adversely affect our operating results and financial condition.
A disruption in production at our manufacturing facilities could have a material adverse effect on our business. Disruptions
could occur for many reasons, including fire, floods, hurricanes, typhoons, droughts, tsunamis, volcanoes, earthquakes, disease or
other similar natural disasters, unplanned maintenance or other manufacturing problems, labor shortages, power outages or shortages,
telecommunications failures, strikes, transportation interruption, government regulation, terrorism or other extraordinary events. Such
disruptions may cause direct injury or damage to our employees and property and related internal controls with significant indirect
consequences. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may
take a significant time to start production, each of which could negatively affect our business and financial performance. If one of our
key manufacturing facilities is unable to produce our products for an extended period of time, our sales may be reduced by the
shortfall caused by the disruption, and we may not be able to meet our customers needs, which could cause them to seek other
suppliers. Such disruptions could have an adverse effect on our operating results and financial condition.
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New technologies could result in the development of new products by our competitors and a decrease in demand for our products,
and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market
share, operating results and financial condition.
Our product range and new product development program are focused on low pin count semiconductor devices with one or
more active or passive components. Our failure to develop new technologies, or anticipate or react to changes in existing technologies,
either within or outside of the semiconductor market, could materially delay development of new products, which could result in a
decrease in our net sales and a loss of market share to our competitors. The semiconductor industry is characterized by rapidly
changing technologies and industry standards, together with frequent new product introductions. This includes the development of
new types of technology or the improvement of existing technologies, such as analog and digital technologies that compete with, or
seek to replace, discrete semiconductor technology. Our financial performance depends on our ability to design, develop, manufacff
ture,
assemble, test, market and support new products and product enhancements on a timely and cost-effective basis. New products often
command higher prices and, as a result, higher profit margins. We may not successfully identify new product opportunities or develop
and bring new products to market or succeed in selling them into new customer applications in a timely and cost-effective manner.
Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive,
and since we operate primarily in a narrower segment of the broader semiconductor industry, this may have a greater effect on us than
it would if we were a broad-line semiconductor supplier with a wider range of product types and technologies. Many of our
competitors are larger and more established international companies with greater engineering and research and development resources
than us. Our failure to identify or capitalize on any fundamental shifts in technologies in our product markets, relative to our
competitors, could harm our business, have a material adverse effect on our competitive position within our industry and harm our
relationships with our customers. In addition,
improve
manufacturing costs and expand our sales. We may not be able to accomplish these goals, which would adversely affect our net sales,
market share, operating results and financial condition.
to remain competitive, we must continue to reduce package sizes,
We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash
flows, operating results and financial condition.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions.
We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely
basis, to coordinate our sales activities across all of our products and services and to coordinate our administrative activities. A
substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system
capacity limits from unexpected increases in our volume of business, outages or delays in our service) could result in delays in
receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems
might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins and similar
disruptions affecting the global Internet. There can be no assurance that such delays, problems, or costs will not have a material
adverse effect on our cash flows, operating results and financial condition.
As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and
infrastructure while maintaining the reliability and integrity of our systems and infrastructure. The expansion of our systems and
infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business
increases, with no assurance that the volume of business will increase. In particular, we have upgraded our financial reporting system
and are currently seeking to upgrade other information technology systems. These and any other upgrades to our systems and
information technology, or new technology, now and in the future, will require that our management and resources be diverted from
our core business to assist in compliance with those requirements. There can be no assurance that the time and resources our
management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded
technology (and related customer issues), or the impact on the reliability of our data from any new or upgraded technology will not
have a material adverse effect on our cash flows, operating results and financial condition.
A significant portion of our operations operate on a single Enterprise Resource Planning (ERP) platform. To manage our
international operations efficiently and effectively, we rely heavily on our ERP system,
internal electronic information and
communications systems and on systems or support services from third parties. Any of these systems are subject to electrical or
telecommunications outages, computer hacking or other general system failure. It is also possible that future acquisitions will operate
on different ERP systems and that we could face difficulties in integrating operational and accounting functions of new acquisitions.
Difficulties in upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could
adversely affect our cash flows, operating results and financial condition and could result in material weaknesses or significant
deficiencies in internal controls.
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We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party
technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our
business, operating results and financial condition.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to
time, third parties have asserted, and may in the future assert, patent, copyright, trademark and other intellectual property rights to
technology that is important to our business and have demanded, and may in the future demand, that we license their patents and
technology. Any litigation to determine the validity of allegations that our products infringe or may infringe these rights, including
claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless
of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We may not
prevail in litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If litigation results
in an adverse ruling, we could be required to:
• pay substantial damages for past, present and future use of the infringing technology;
• cease manufacture, use or sale of infringing products;
• discontinue the use of infringing technology;
• expend significant resources to develop non-infringing technology;
• pay substantial damages to our customers or end-users to discontinue use or replace infringing technology with non-infringing
technology;
• license technology from the third party claiming infringement, which license may not be available on commercially reasonable
terms, or at all; or
• relinquish intellectual property rights associated with one or more of our patent claims, if such claims are held invalid or
otherwise unenforceable.
We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process
development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers,
operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely
manner.
Our manufacturing operations depend upon obtaining adequate supplies of raw materials, manufacturing services, product and
process development, parts and equipment on a timely basis from third parties. In some instances, a supplier may be our sole-source
supplier. Our operating results could be adversely affected if we are unable to obtain adequate supplies of raw materials,
manufacturing services, product and process development, parts and equipment in a timely manner or if the costs charged to us were
to increase significantly. Our business could also be adversely affected if there is a significant degradation in the quality of raw
materials used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which
could lead to an increase in customer returns or product warranty claims. Although we maintain rigorous quality control systems,
errors or defects may arise from a supplied raw material and be beyond our detection or control. In addition, we may be subject to
quality claims from customers who purchased goods from companies before we acquired those companies. Any interruption in, or
change in quality of, the supply of raw materials, manufacturing services, product and process development, parts or equipment
needed to manufacture our products could adversely affect our reputation with customers, operating results and financial condition.
In addition, we sell finished products from other manufacturers. Our business could also be adversely affected if there are
quality problems with the finished products we sell. From time to time, various suppliers may extend lead-times, limit supplies or
increase prices due to capacity constraints or other factors. We have no long-term purchase contracts with any of these manufacturers
and, therefore, have no contractual assurances of continued supply, pricing or access to finished products that we sell, and any such
manufacturer could discontinue supplying to us at any time. Additionally, some of our suppliers of finished products or wafers
compete directly with us and may, in the future, choose not to supply products to us.
If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we
anticipate, which could adversely affect our ability to compete, our operating results and financial condition.
We are continuing to vertically integrate our business. Key elements of this strategy include continuing to expand our sales
organization, manufacturing capacity, wafer foundry and research and development capability and expand our marketing, product
development, package development and assembly and test operations in company-owned facilities or through the acquisition of
established contractors. There are certain risks associated with our vertical integration strategy, including:
• difficulties associated with owning a manufacturing business, including, but not limited to, the maintenance and management of
manufacturing facilities, equipment, employees and inventories and limitations on the flexibility of controlling overhead;
• difficulties in continuing expansion of our operations in Asia and Europe, because of the distance from our U.S. headquarters
and differing regulatory and cultural environments;
- 13 -
• the need for skills and techniques that are outside our traditional core expertise;
• less flexibility in shifting manufacturing or supply sources from one region to another;
• even when independent suppliers offer lower prices, we may continue to source wafers from our captive manufacturing
facilities, which may result in us having higher costs than our competitors;
• difficulties developing and implementing a successful research and development team; and
• difficulties developing, protecting, and gaining market acceptance of, our proprietary technology.
The risks of becoming a fully integrated manufacturer are amplified in an industry-wide slowdown because of the fixed costs
associated with manufacturing facilities. In addition, we may not realize the cost, operating and other efficiencies that we expect from
continued vertical integration. If we fail to successfully vertically integrate our business, our ability to compete, profit margins,
operating results and financial condition may suffer.
Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition
candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate
any acquired companies with our operations, which could adversely affect our business, operating results and financial condition.
A significant part of our growth strategy involves acquiring companies. For example, (i) in 2000, we acquired FabTech, Inc., a
wafer fabrication company, in order to have our own wafer manufacturing capabilities, (ii) in 2006, we acquired Anachip Corp. as an
entry into the analog market, (iii) in 2006, we acquired the net operating assets of APD Semiconductor, Inc., (iv) in 2008, we acquired
Zetex plc., (v) in 2012, we acquired over 50% of the outstanding common stock of Eris Technology Corporation, (vi) also in 2012, we
acquired Power Analog Microelectronics, Inc., (vii) in 2013, we acquired BCD Semiconductor Manufacturing Limited and (viii) in
2015, we acquired Pericom Semiconductor Corporation. In addition, from time to time, we may be in various stages of discussions
with potential acquisition targets as we intend to continue to expand and diversify our operations by making further acquisitions.
However, we may be unsuccessful in identifying suitable acquisition candidates, or we may be unable to consummate a desired
acquisition. To the extent we do make acquisitions, if we are unsuccessful in integrating these companies or their operations or
product lines with our operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a
material adverse effect on our business, operating results and financial condition. In addition, we may not realize all of the benefits we
anticipate from any such acquisitions. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from
acquisitions that we may make include those associated with:
• unexpected losses of key employees or customers of the acquired company;
• bringing the acquired companys standards, processes, procedures and controls into conformance with our operations;
• coordinating our new product and process development;
• hiring additional management and other critical personnel;
• increasing the scope, geographic diversity and complexity of our operations;
• difficulties in consolidating facilities and transferring processes and know-how;
• difficulties in reducing costs of the acquired entitys business;
• diversion of managements attention from the management of our business; and
• adverse effects on existing business relationships with customers.
We are subject to litigation risks, including securities class action litigation, which may be costly to defend and the outcome of
which is uncertain and could adversely affect our business and financial condition.
All industries, including the semiconductor industry, are subject to legal claims, with and without merit, including securities
class action litigation that may be particularly costly and which may divert the attention of our management and our resources in
general. We are involved in a variety of legal matters, most of which we consider either routine matters that arise in the normal course
of business or immaterial for our aggregate business operations. These routine matters typically fall into broad categories such as those
involving suppliers and customers, employment and labor, and intellectual property. We believe it is unlikely that the final outcome of
these legal claims will have a material adverse effect on our financial position, operating results or cash flows. However, defense and
settlement costs can be substantial, even with respect to claims that we believe have no merit. Due to the inherent uncertainty of the
litigation process, the resolution of any particular legal claim or proceeding could adversely affect our business, operating results and
financial condition.
From time to time, we have been, or may in the future be, involved in securities litigation or litigation arising from our
acquisitions. We can provide no assurance as to the outcome of any such litigation matter in which we are a party. These types of
matters are costly to defend and even if resolved in our favor, could have a material adverse effect on our business, financial
condition, operating results and cash flow. Such litigation could also substantially divert the attention of our management and our
resources in general. Uncertainties resulting from the initiation and continuation of securities or other litigation could harm our ability
to obtain credit and financing for our operations and to compete in the marketplace. Because the price of our Common Stock has been,
- 14 -
and may continue to be, volatile, we can provide no assurance that securities litigation will not be filed against us in the future. In
addition, we can provide no assurance that our past or future acquisitions will not subject us to additional litigation. See Part I, Item 3
Legal Proceedings of this Annual Report for more information on our legal proceedings.
We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our
business, operating results and financial condition.
We are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to the use,
storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in manufacturing our products
throughout the world. Some of these regulations in the U.S. include the Federal Clean Water Act, Clean Air Act, Resource
Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes
and regulations. Any of these regulations could require us to acquire equipment or to incur substantial other expenses to comply with
environmental regulations. If we were to incur such additional expenses, our product costs could significantly increase, materially
affecting our business, financial condition and operating results. Any failure to comply with present or future environmental laws,
rules and regulations could result in fines, suspension of production or cessation of operations, any of which could have a material
adverse effect on our business, operating results and financial condition. Our operations affected by such requirements include, among
others: the disposal of wastewater containing residues from our manufacturing operations through publicly operated treatment works
or sewer systems, and which may be subject to volume and chemical discharge limits and may also require discharge permits; and the
use, storage and disposal of materials that may be classified as toxic or hazardous. Any of these may result in, or may have resulted in,
environmental conditions for which we could be liable.
Some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on, or
emanating from, our currently or formerly owned, leased or operated properties, as well as for damages to property or natural
resources and for personal injury arising out of such contamination. Such liability may also be joint and several, meaning that we
could be held responsible for more than our share of the liability involved, or even the entire liability. In addition, the presence of
environmental contamination could also interfere with ongoing operations or adversely affect our ability to sell or lease our properties.
Environmental requirements may also limit our ability to identify suitable sites for new or expanded plants. Discovery of
contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are
enforced, could require us to incur additional costs for compliance or subject us to unexpected financial liabilities.
Our products, or products we purchase from third parties for resale, may be found to be defective and, as a result, warranty claims
and product liability claims may be asserted against us and we may not have recourse against our suppliers, which may harm our
business, reputation with our customers, operating results and financial condition.
Our products, or products we purchase from third parties for resale, are typically sold at prices that are an insignificant portion
of the overall value of the equipment or other goods in which they are incorporated. For example, our products that are incorporated
into a television may be sold for several cents, whereas the television maker might sell the television for several hundred dollars.
Although we maintain rigorous quality control systems, we receive warranty claims and product liability claims for some of these
products that are defective, or that do not perform to published specifications. Since a defect or failure in our products could give rise
to failures in the end-products that incorporate them (and consequential claims for damages against our customers from their
customers), we may face claims for damages that are disproportionate to the net sales and profits we receive from the products
involved. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the
countries where we do business. Even in cases where we do not believe we have legal liability for such claims, we may choose to pay
for them to retain a customers business or goodwill or to settle claims to avoid protracted litigation. Our operating results and
business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or
choose to pay for the damages that result. We may choose not to carry liability insurance, may not have sufficient insurance coverage,
or may not have sufficient resources, to satisfy all possible warranty claims and product liability claims. In addition, any perception
that our products are defective would likely result in reduced sales of our products, loss of customers and harm to our business,
reputation, operating results and financial condition.
We may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to
operate our business successfully, which could adversely affect our business, operating results and financial condition.
Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing, finance and
managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with these skills is intense. We
may not be able to retain existing key technical, sales, marketing, finance and managerial employees or be successful in attracting,
assimilating or retaining other highly qualified technical, sales, marketing, finance and managerial/executive personnel in the future.
For example, we have faced, and continue to face, intense competition for qualified technical and other personnel in China, where our
assembly and test facilities are located. A number of U.S. and multi-national corporations, both in the semiconductor industry and in
other industries, have recently established and are continuing to establish factories and plants in China, and the competition for
qualified personnel has increased significantly as a result. If we are unable to retain existing key employees or are unsuccessful in
- 15 -
attracting new highly qualified employees, our business, operating results and financial condition could be materially and adversely
affected.
We may not be able to achieve future growth, and any such growth may place a strain on our management and on our systems and
resources, which could adversely affect our business, operating results and financial condition.
Our ability to successfully grow our business requires effective planning and management. Our past growth, and our targeted
future growth, may place a significant strain on our management and on our systems and resources, including our financial and
managerial controls, reporting systems and procedures. In addition, we will need to continue to train and manage our workforce
worldwide. If we are unable to effectively plan and manage our growth effectively, our business and prospects will be harmed and we
will not be able to maintain our profitable growth, which could adversely affect our business, operating results and financial condition.
Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely
affect our business, operating results and financial condition.
The life cycles of some of our products depend heavily upon the life cycles of the end-products into which our products are
designed. End-market products with short life cycles require us to manage closely our production and inventory levels. Inventory may
also become obsolete because of adverse changes in end-market demand. We may in the future be adversely affected by obsolete or
excess inventories, which may result from unanticipated changes in the estimated total demand for our products or the estimated life
cycles of the end-products into which our products are designed. In addition, some customers restrict how far back the date of
manufacture for our products can be and certain customers may stop ordering products from us and go out of business due to adverse
economic conditions; therefore, some of our product inventory may become obsolete and, thus, adversely affect our business,
operating results and financial condition.
If OEMs do not design our products into their applications, our net sales may be adversely affected.
We expect an increasingly significant portion of net sales will come from products we design specifically for our customers.
However, we may be unable to achieve these design wins. In addition, a design win from a customer does not guarantee future sales to
that customer. Without design wins from OEMs, we would only be able to sell our products to these OEMs as a second source, which
usually means we are only able to sell a limited amount of product to them. Once an OEM designs another suppliers semiconductors
into one of its product platforms, it is more difficult for us to achieve future design wins with that OEMs product platform because
changing suppliers involves significant cost, time, effort and risk to an OEM. Achieving a design win with a customer does not ensure
that we will receive significant net sales from that customer, and we may be unable to convert design wins into actual sales. Even after
a design win, the customer is not obligated to purchase our products and can choose at any time to stop using our products, if, for
example, its own products are not commercially successful or if the customer can obtain a superior product or the product at a lower
cost from one of our competitors.
We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which
could adversely affect our business, operating results and financial condition.
We currently have a U.S. banking credit facility under which as of December 31, 2017 we had a remaining principal balance of
$165.8 million under a term loan, and had drawn $103.0 million on a $250.0 million revolver ($147.0 million of which remained
available as of December 31, 2017), with the possibility of an additional $200.0 million of borrowings. See Liquidity and Capital
Resources below and Note 7 of Notes to Consolidated Financial Statements of this Annual Report for additional information. A
rise in interest rates could have an adverse impact upon our cost of working capital and our interest expense. Based on our debt
balances at December, 31, 2017, an increase or decrease in interest rates by 1.0% for the year on our credit facilities would increase or
decrease our annual interest rate expense by less than $1.0 million, net of the amounts realized from our interest rate swaps.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or
our counterparties might not perform as agreed.
We use interest rate swaps and foreign exchange forward contracts to provide a level of protection against interest rate risks and
foreign exchange exposure, but no hedging strategy can protect us completely. The nature and timing of hedging transactions
influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or
inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs.
The hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility and our
hedging transactions may result in or magnify losses. Furthermore, interest rate and foreign exchange derivatives may not be available
on favorable terms or at all, particularly during economic downturns. Any of the foregoing risks could adversely affect our business,
financial condition and results of operations. We are exposed to counterparty credit risk in the event of non-performance by
counterparties to the interest rate swaps and foreign exchange contracts.
- 16 -
We may have a significant amount of debt with various financial institutions worldwide. Any indebtedness could adversely affect
our business, operating results, financial condition and our ability to meet payment obligations under such debt.
We may have a significant amount of debt and substantial debt service requirements on our borrowings, including our credit
facilities with various financial institutions worldwide. As of December 31, 2017 $268.8 million was outstanding under our U.S.
banking credit facility. In addition, we have short-term foreign credit facilities with borrowing capacities of approximately
$80.5 million with an unused amount of $78.7 million.
A significant amount of debt could have significant consequences on our future operations, including:
• making it more difficult for us to meet our payment and other obligations under our outstanding debt;
• resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt
agreements, which event of default could result in all of our debt becoming immediately due and payable and, in the case of an
event of default under our secured debt could permit the lenders to foreclose on our assets securing that debt;
• reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate
purposes, and limiting our ability to obtain additional financing for these purposes;
• subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates;
• limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in
which we operate and the general economy; and
• placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
Any of the above-listed factors could have an adverse effect on our business, operating results, financial condition and our
ability to meet our payment obligations under our debt.
Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital
in the future.
Our U.S. banking credit facility contains covenants imposing various restrictions on our business and financial activities. These
restrictions may affect our ability to operate our business and undertake certain financial activities and may limit our ability to take
advantage of potential business or financial opportunities as they arise. The restrictions these covenants place on us include limitations
on our ability to incur liens, incur indebtedness, make investments, dissolve or merge or consolidate with or into another entity,
dispose of certain property, make restricted payments (including dividends and share repurchases), issue or sell equity interests,
engage in other different material lines of business, conduct related party transactions, enter into certain burdensome contractual
obligations and use proceeds from any credit facility to purchase or carry margin stock or to extend credit to others for the same
purpose. Our U.S. banking credit facility also requires us to meet certain financial ratios, including a minimum consolidated fixed
charge coverage ratio and a maximum consolidated leverage ratio.
Our ability to comply with the U.S. banking credit facility may be affected by events beyond our control, including prevailing
economic, financial and industry conditions, and are subject to the risks stated in this section of the Annual Report. The breach of any
of these covenants or restrictions could result in an event of default under the facility. An event of default under the facility would
permit the lenders under the facility to declare all amounts owed under such facility to be immediately due and payable in full. Upon
acceleration of our indebtedness, we may be unable to repay the accelerated amount of principal and interest on the credit facilities
that would then be due. See Managements Discussion and Analysis of Financial Condition and Results of Operations Financial
Condition-Debt instruments in Part II, Item 7 of this Annual Report for additional information.
Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely
affect our operating results and financial condition.
The Chinese government has provided various incentives to technology companies, including our manufacturing facilities
located in Shanghai and Chengdu, China, in order to encourage development of the high-tech industry. These incentives include
reduced tax rates and other measures. As a result, we are entitled to a preferential enterprise income tax rate of 15% so long as our
manufacturing facilities continue to maintain their High and New Technology Enterprise (HNTE) status. One of our Shanghai
manufacturing facilities has been approved for HNTE status for the tax years 2015-2017. In addition, one of our wafer fabrication
facilities and one research and development facility located in Shanghai were approved for HNTE status for the tax years 2017-2019.
HNTE qualification requires, but is not limited to, metrics based on China research and development expenditures as well as research
and development headcount and overall college-degreed headcount. Any prior years that have already been approved are subject to
audit requirements. If we were to no longer meet the HNTE requirements, our statutory tax rate for our approved Shanghai assembly
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and test facility and wafer fabrication facility would increase to 25% for any period in which an audit shows we were not compliant,
which could adversely affect our operating results and financial condition.
In connection with our entity in Chengdu, China, we have qualified for tax incentives offered in the Go West Initiative (Go
West), where companies are entitled to a preferential income tax rate of 15% for doing business in western China. If we were to no
longer meet the Go West requirements, our statutory tax rate for this entity would increase to 25%, which could adversely affect our
operating results and financial condition.
The impact of our HNTE and Go West status, collectively called tax holidays, decreased our tax expense by approximately $3.7
million, $7.3 million and $2.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. The benefit of the tax
holidays on basic and diluted earnings per share for the twelve months ended December 31, 2017 was approximately $0.08. The
benefit of the tax holidays on both basic and diluted earnings per share for both twelve month periods ended December 31, 2016 and
2015 was approximately $0.15 and $0.06, respectively.
We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our
transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial
condition.
We conduct operations worldwide through our foreign subsidiaries and are, therefore, subject to complex transfer pricing
regulations in the jurisdictions in which we operate. Transfer pricing regulations generally require that, for tax purposes, transactions
between related parties be priced on a basis that would be comparable to an arms length transaction between unrelated parties. There
is uncertainty and inherent subjectivity in complying with these rules. To the extent that any foreign tax authorities disagree with our
transfer pricing policies, we could become subject to significant tax liabilities and penalties. Based on our current knowledge and
probability assessment of potential outcomes, we believe that we have provided for all tax exposures. However, the ultimate outcome
of a tax examination could differ materially from our provisions and could have a material adverse effect on our business, financial
condition, operating results and cash flows.
Our legal organizational structure could result in unanticipated unfavorable tax or other consequences which could have a
material adverse effect on our financial condition and operational results. In some countries, we maintain multiple entities for tax or
other purposes. Changes in tax laws, regulations, future jurisdictional profitability of us and our subsidiaries, and related regulatory
interpretations in the countries in which we operate may impact the taxes we pay or tax provision we record, which could have a
material adverse effect on our operating results. In addition, any challenges to how our entities are structured or realigned or their
business purpose by taxing authorities could result in us becoming subject to significant tax liabilities and penalties which could have
a material adverse effect on our business, financial condition, operating results and cash flows.
The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the
actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used.
Certain of our employees in the U.K. participate in a company-sponsored defined benefit plan, which is closed to new entrants
and is frozen with respect to future benefit accruals. The retirement benefit is based on the final average compensation and service of
each eligible employee. In accounting for these plans, we are required to make actuarial assumptions that are used to calculate the
earning value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in our consolidated
financial statements. Assumptions include, but are not limited to, the expected return on plan assets, discount rates, and mortality
rates. While we believe the underlying assumptions under the projected unit credit method are appropriate, the carrying value of the
related assets and liabilities and the actual amount of expenses recorded in the consolidated financial statements could differ materially
from the assumptions used.
Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plans asset value, require us to
increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition.
The assets of our defined benefit pension plan (the plan) in the U.K. provide pensions to employees and former employees.
The plans assets are invested in a diverse range of listed and unlisted securities, including corporate bonds and, mutual funds and are
determined, from time to time, based on their fair market value. The plans obligation to pay pensions is estimated by using actuarial
assumptions. To the extent that the plans assets are not sufficient to meet the estimated amount of the plans obligations, further
funding of the plan will be required by the plans sponsoring employers, Diodes Zetex Limited and Diodes Zetex Semiconductors
Limited, over an agreed upon deficit recovery period.
As of December 31, 2017, the benefit obligation of the plan was approximately $166.1 million and the total assets in such plan
were approximately $134.2 million. Therefore, the plan was underfunded by approximately $31.8 million. The difference between
plan obligations and assets, or the funded status of the plan, is a significant factor in determining the net periodic benefit costs of the
plan and the ongoing funding requirements of the plan.
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Any fluctuations in the U.K. equity markets and bond markets or changes in several key actuarial assumptions, including, but
not limited to, changes in discount rate, estimated return on the plan and mortality rates, can (i) affect the level of plan funding,
(ii) cause volatility in the net periodic pension cost, and (iii) increase our future funding requirements. In the event that actual results
differ from the actuarial assumptions or actuarial assumptions are changed, the funding status of the plan may change. Any deficiency
in the funding of the plan could result in additional charges to equity and an increase in future plan expense and cash contribution. A
significant increase in our funding requirements could have a negative impact on our cash flows, operating results and financial
condition.
u
During the first quarter of 2015, we agreed to a payment plan with the trustees of the defined benefit plan, under which we
would make annual contributions each year through 2030, of approximately 2 million British Pounds (GBP) (approximately $2.8
million based on a GBP:USD exchange rate of 1.4). The annual contributions were expected to meet the deficit disclosed in the plan
as of April 5, 2013, by December 31, 2030. The trustees are required to review the funding position every three years, and a further
review was carried out as of April 5, 2016. The outcome of the review, as agreed to with the trustees during the first quarter of 2017,
was that contributions would continue at the existing level, up to December 31, 2029.
If we fail to reach an agreement with the
trustees, as we are required to do every three years, the Pension Regulator in the U.K. could impose contributions on Diodes Zetex
Limited or Diodes Zetex Semiconductors Limited, or in limited circumstances could require financial support to be provided to the
plan from entities connected or associated with Diodes Zetex Limited or Diodes Zetex Semiconductors Limited. Furthermore, Diodes
Zetex Limited and Diodes Zetex Semiconductors Limited remain ultimately liable to fully fund the plan regardless of any failure to
agree upon future contributions in respect of a particular actuarial valuation, i.e., if either the plan or those companies were wound up,
a debt equal to each companys share of the entire outstanding deficit at that time (calculated on a statutory conservative basis) would
be owed by the relevant company. This could have a material adverse effect on our cash flows, operating results and financial
condition.
Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions
tt
that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating
results and financial condition.
Certain of our customers and suppliers require us to agree to comply with the Electronic Industry Code of Conduct (EICC) or
their own codes of conduct, which may include detailed provisions on labor, human rights, health and safety, environment, corporate
ethics and management systems. Certain of these provisions are not requirements under the laws of the countries in which we operate
and may be burdensome to comply with on a regular basis. Moreover, new provisions may be added or material changes may be made
to any these codes of conduct, and we may have to promptly implement such new provisions or changes, which may substantially
further increase the cost of our business, be burdensome to implement and adversely affect our operational efficiencies and operating
results. If we violate any such codes of conduct, we may lose further business with the customer or supplier and, in addition, we may
be subject to fines from the customer or supplier. While we believe that we are currently in compliance with our customers and
suppliers codes of conduct, there can be no assurance that, from time to time, if any one of our customers and suppliers audits our
compliance with such code of conduct, we would be found to be in full compliance. A loss of business from these customers or
suppliers could have a material adverse effect on our business, operating results and financial condition.
Compliance with government regulations and customer demands regarding the use of conflict minerals may result in increased
costs and may have a negative impact on our business, operating results and financial condition.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposes new disclosure requirements regarding the
use of certain minerals, which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals.
When these new requirements are fully implemented, they could affect the pricing, sourcing and availability of minerals used in the
manufacture of semiconductor devices (including our products). We are incurring additional costs associated with complying with the
disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply
chain is complex, and we may be unable to verify the origins for all metals used in our products. Customers may demand that the
products they purchase be free of conflict minerals. Therefore, we may encounter challenges with our customers and stockholders if
we are unable to certify that our products are conflict free. This requirement could affect the sourcing and availability of products we
purchase from suppliers. This may reduce the number of suppliers that may be able to provide conflict-free products, and may affect
our ability to obtain products in sufficient quantities to meet customer demand or at competitive prices.
There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or
any other problems encountered in connection with acquisitions.
The risks commonly encountered in acquisitions of companies include, among other things, higher than anticipated acquisition
costs and expenses, the difficulty and expense in integrating the operations and personnel of the companies, the difficulty of bringing
standards, procedures and controls, including disclosure controls and procedures and internal control over financial reporting, into
conformance with our operations, the ability to coordinate our new products and process development, the ability to hire additional
management and other critical personnel, the ability to increase the scope, geographic diversity and complexity of our operations,
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difficulties in consolidating facilities and transferring processes and know-how, difficulties in reducing costs, prolonged diversion of
our managements attention from the management of our business, the ability to clearly define our present and future strategies, the
loss of key employees and customers as a result of changes in management and any geographic distances may make integration slower
and more challenging. We may ultimately not be successful in overcoming these risks or any other problems encountered in
connection with acquisitions.
In addition, any acquisition may cause large one-time expenses as well as create goodwill and other intangible assets that may
result in significant asset impairment charges in the future.
If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial
reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the
trading price of our Common Stock.
Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent
financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. These
evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or
desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be
effective. There are inherent limitations on the effectiveness of internal controls, including collusion, management override, and
failure of human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to
maintain an effective system of internal controls or if management or our independent registered public accounting firm were to
discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud, which
could harm our financial condition and operating results, and could result in a loss of investor confidence and a decline in our stock
price.
Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S. or internationally, may affect the
markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.
Terrorist attacks, or threats or occurrences of other terrorist or related activities, whether in the U.S. or internationally, may
affect the markets in which our Common Stock trades, the markets in which we operate and our profitability. Future terrorist or related
activities could affect our domestic and international sales, disrupt our supply chains and impair our ability to produce and deliver our
products. Such activities could affect our physical facilities or those of our suppliers or customers. Such terrorist attacks could cause
seaports or airports, to or through which we ship, to be shut down, thereby preventing the delivery of raw materials and finished goods
to or from our manufacturing facilities in China, Taiwan and Germany and our wafer fabrication facilities in China, the U.S. and the
U.K., or to our regional sales offices. Due to the broad and uncertain effects that terrorist attacks have had on financial and economic
markets generally, we cannot provide any estimate of how these activities might negatively affect our future operating results and
financial condition.
System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal
operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and
adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or
compromise our confidential
information or that of third parties, create system disruptions or cause shutdowns. Computer
programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack
our websites, products or otherwise exploit any security vulnerabilities of our websites and products. In 2016 the Company became
aware of a cyber-intrusion.
In response to this cyber-intrusion we engaged an information technology security expert to assess the
information accessed by the intruder and to assist in designing security measures to prevent a recurrence. We completed the
assessment and have started enhancing our security measures. These efforts continue. At this time we have no reason to believe the
cyber intruder obtained any confidential or propriety information. The costs to us to eliminate or alleviate cyber or other security
problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to
address these problems may not be successful and could result in interruptions, delays, cessation of service, extortionate demands to
decrypt files and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical
functions and materially adversely affect our operating results, stock price and reputation.
We manage and store various proprietary information and sensitive or confidential data relating to our business and third party
business. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary
information or sensitive or confidential data about us or our partners or customers, including the potential loss, encryption or
disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our partners and
customers or the individuals affected to a risk of loss or misuse of this information, extortionate demands to decrypt files, result in
litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and
operational consequences of implementing further data protection measures could be significant. Delayed sales, significant costs or
- 20 -
lost customers resulting from these system security risks, data protection breaches, cyber-attacks and other related cyber-security
issues could materially adversely affect our operating results, stock price and reputation.
RISKS RELATED TO OUR INTERNATIONAL OPERATIONS
Our international operations subject us to risks that could adversely affect our operations.
We expect net sales from foreign markets to continue to represent a significant portion of our total net sales. In addition, the
majority of our manufacturing facilities are located in China. In each of the years ended 2017, 2016 and 2015, our Asian and European
subsidiaries represented approximately 90% of our net sales. There are risks inherent in doing business internationally, and any or all
of the following factors could cause harm to our business:
• changes in, or impositions of, legislative or regulatory requirements, including income tax or value added tax laws in the U.S.
and in the countries in which we manufacture or sell our products;
• compliance with trade or other laws in a variety of jurisdictions;
• trade restrictions, transportation delays, work stoppages, and economic and political instability;
• changes in import/export regulations, tariffs and freight rates;
• difficulties in collecting receivables and enforcing contracts;
• currency exchange rate fluctuations;
• restrictions on the transfer of funds from foreign subsidiaries to the U.S.;
• the possibility of international conflict, particularly between or among China, the U.K., Germany, Taiwan and the U.S.;
• legal, regulatory, political and cultural differences among the countries in which we do business;
• longer customer payment terms; and
• changes in U.S. or foreign tax regulations.
We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to
risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating
results.
We have a significant portion of our assets in mainland China, U.K., Germany, Hong Kong and Taiwan. Our ability to operate
in these countries may be adversely affected by changes in those jurisdictions laws and regulations, including those relating to
taxation, including, but not limited to income tax and value added tax, import and export tariffs, environmental regulations, land use
rights, property and other matters. In addition, our operating results and financial performance are subject to the economic and
political situations. We believe that our operations are in compliance with all applicable legal and regulatory requirements. However,
the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations
that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Changes in the political environment or government policies in those jurisdictions could result in revisions to laws or regulations
or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition,
a significant destabilization of relations between or among China, the U.K., Germany, Hong Kong, Taiwan and the U.S. could result
in restrictions or prohibitions on our operations or the sale of our products or the forfeiture of our assets in these jurisdictions. There
can be no certainty as to the application of the laws and regulations of these jurisdictions in particular instances. Enforcement of
existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high
degree of fragmentation among regulatory authorities, resulting in uncertainties as to which authorities have jurisdiction over
particular parties or transactions. The possibility of political conflict between these countries or with the U.S. could have an adverse
impact upon our ability to transact business in these jurisdictions and to generate profits.
Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or
economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material
adverse effect on us.
Changes to existing trade agreements, such as the North American Free Trade Agreement, greater restrictions on international
trade generally and significant increases in tariffs on goods imported into the United States, particularly from China, could materially
adversely affect our business and operations. Changes in U.S. social, political, regulatory and economic conditions or in laws and
policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently
develop, manufacture and sell products, and any negative reactions towards the United States as a result of such changes, could
adversely affect our business and operations. In addition, negative sentiments towards the U.S. among non-U.S. customers and among
non-U.S. employees or prospective employees could adversely affect our international sales or the hiring and retention of qualified
employees, respectively.
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The United Kingdom referendum to exit the European Union has also created political and economic uncertainty, particularly in
the U.K. and the European Union, and this uncertainty may last for years. Our business in the U.K. the European Union, and
worldwide could be adversely affected during this period of uncertainty, and, depending upon developments following completion of
the U.K. exit, may materially adversely affect our business and operations. Future events as a consequence of the U.K. exit, including
stresses within the U.K. itself, may cause significant volatility in global financial markets, including global currency and debt markets,
and result in a slowdown in economic activity in the U.K., Europe or globally, which could materially adversely affect our operating
results and growth prospects. In addition, our business and operations could be materially adversely affected by new or revised trade
agreements between countries in which we have operations or do business, including the U.S., the U.K., the European Union and
China, as well as by the possible impositions of tariffs or trade or other regulatory barriers by any nation where we have operations or
do business.
A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would
have a material adverse effect on our business, operating results and prospects.
We believe that an increase in demand in China for electronic devices that include our products will be an important factor in
our future growth. Continuing weakness in the Chinese economy could result in a decrease in demand for electronic devices
containing our products and, thereby, materially and adversely affect our business, operating results and prospects.
Economic regulation in China could materially and adversely affect our business, operating results and prospects.
We have a significant portion of our manufacturing capacity in mainland China. In addition, in 2017 approximately 56% of our
total sales were shipped to customers in China. In recent years, the Chinese economy has experienced periods of rapid expansion and
wide fluctuations in the rate of inflation. In response to these factors, the Chinese government has, from time to time, adopted
measures to regulate growth and contain inflation, including measures designed to restrict credit or control prices. Such actions in the
future could increase the cost of doing business in China or decrease the demand for our products in China and, thereby, have a
material adverse effect on our business, operating results and prospects.
We could be adversely affected by violations of the United States Foreign Corrupt Practices Act, the U.K.s Bribery Act 2010,
Chinas anti-corruption campaign and similar worldwide anti-bribery
laws.
The United States Foreign Corrupt Practices Act (FCPA), the United Kingdoms Bribery Act 2010 (the U.K. Bribery Act),
Chinas anti-corruption campaign and similar anti-bribery laws in other jurisdictions generally prohibit companies and their
intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our
policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that may have experienced
governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with
local customs and practices. We train our staff concerning FCPA, the U.K. Bribery Act and related anti-bribery laws. We have
established procedures and controls to monitor internal and external compliance. There can be no assurance that our internal controls
and procedures always will protect us from reckless or criminal acts committed by our employees or agents, and we have no third
party attestation to the effectiveness of our internal controls related to fraud and corruption. If we are found to be liable for FCPA, the
U.K. Bribery Act and other anti-bribery law violations (either due to our own acts or inadvertence, or due to the acts or inadvertence
of others), we could incur criminal or civil penalties or other sanctions, which could have a material adverse effect on our business and
operating results.
We are subject to foreign currency risk as a result of our international operations.
We face exposure to adverse movements in foreign currency exchange rates, principally the Chinese Yuan, the Taiwanese
dollar, the Euro and the British Pound Sterling and, to a lesser extent, the Japanese Yen and the Hong Kong dollar. Our income and
expenses are based on a mix of currencies and a decline in one currency relative to the other currencies could adversely affect our
operating results. Furthermore, our operating results are reported in U.S. dollars, which is our reporting currency. In the event the U.S.
dollar weakens against a foreign currency, we will experience a currency transaction loss, which could adversely affect our operating
results. Also, fluctuations in foreign currency exchange rates may have an adverse impact and be increasingly influential to ouruu overall
sales, profits and operating results as amounts that are measured in foreign currency are translated back to U.S. dollars for reporting
purposes. Our foreign currency risk may change over time as the level of activity in foreign markets grows and could have an adverse
impact upon our financial results, especially if the portion of our sales attributable to Europe increases. We have taken, and plan to
continue to take, efforts to mitigate some of our foreign currency exposure by entering into foreign exchange hedging agreements with
financial institutions to reduce exposures to some of the principal currencies in countries in which we conduct sales, acquire raw
materials, build products and make capital investments, but these efforts may not be successful. In this regard, these hedging
agreements do not cover all currencies in which we do business, do not eliminate foreign currency risk entirely for the currencies that
they do cover, and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.
- 22 -
China is experiencing rapid social, political and economic change, which has increased labor costs and other related costs that
could make doing business in China less advantageous than in prior years. Increased labor costs in China could adversely affect
our business, operating results and financial condition.
Historically, labor in China has been readily available at a lower cost compared to other countries. However, because China is
experiencing rapid social, political and economic change, there can be no assurance that labor will continue to be available in China at
costs consistent with historical levels. Any future increase in labor cost in China is likely to be higher than historical and projected
amounts and may occur multiple times in any given year. As a result of experiencing such rapid social, political and economic change,
China is also likely to enact new, and/or revise its existing, labor laws and regulations on employee compensation and benefits. These
changes in Chinese labor laws and regulations will likely to have an adverse effect on product manufacturing costs in China.
Furthermore, if China workers go on strike to demand higher wages, our operations could be disrupted. Many of our suppliers are
currently dealing with labor shortages in China, which may result in future supply delays and disruptions and may drive a substantial
increase in their labor costs that is likely to be shared by us in the form of price increases to us. New or revised government labor laws
or regulations, strikes or labor shortages could cause our product costs to rise and/or could cause manufacturing partners on whom we
rely to exit the business. These events could have a material adverse impact on our product availability and quality, which would
affect our business, operating results and financial condition.
We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net
income.
As an incentive for establishing our manufacturing subsidiaries in China, we receive preferential tax treatment. Governmental
changes in foreign tax law may cause us not to be able to continue receiving these preferential tax treatments in the future, which may
cause an increase in our income tax expense, thereby reducing our net income.
The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net
income.
As a result of enactment of the Tax Cuts and Jobs Act (the Tax Act) on December 22, 2017, all of our undistributed foreign
subsidiary earnings immediately became subject to U.S. income tax. We had not previously accrued U.S. taxes on these earnings, due
to our policy of indefinitely reinvesting the earnings overseas. Refer to the U.S. Tax Reform section in Item 7 and the Tax Cuts and
Jobs Act (the Tax Act) section in Note 11 of Notes to Consolidated Financial Statements of this Annual Report for further
discussion. Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions
related to earnings of European subsidiaries. Any future distributions of foreign earnings will not be subject to additional U.S. income
tax, but may be subject to foreign withholding taxes. As of December 31, 2017, we had undistributed earnings from non-U.S.
operations of approximately $770 million (including approximately $51 million of restricted earnings, which are not available for
dividends). Undistributed earnings of our China subsidiaries comprise $429 million of this total. Additional Chinese withholding
taxes of approximately $42 million would be required should the $429 million of such earnings be distributed out of China as
dividends. We continue to evaluate the potential effects the Tax Act may have on our long term plans for capital investment across the
geographies in which we operate.
In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the
accounting for the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects
will be reported as a component of income tax expense from continuing operations in the reporting period in which any such
adjustments are determined.
RISKS RELATED TO OUR COMMON STOCK
Variations in our quarterly operating results may cause our stock price to be volatile.
We have experienced substantial variations in net sales, gross profit margin and operating results from quarter to quarter. We
believe that the factors that influence this variability of quarterly results include:
• strength of the global economy and the stability of the financial markets;
• general economic conditions in the countries where we sell our products;
• seasonality and variability in the computing and communications market and our other end-markets;
• the timing of our and our competitors new product introductions;
• product obsolescence;
• the scheduling, rescheduling and cancellation of large orders by our customers;
• the cyclical nature of the demand for our customers products;
• our ability to develop new process technologies and achieve volume production at our fabrication facilities;
• changes in manufacturing yields;
• adverse movements in exchange rates, interest rates or tax rates; and
• the availability of adequate supply commitments from our outside suppliers or subcontractors.
- 23 -
Accordingly, a comparison of our operating results from period to period is not necessarily meaningful to investors and our
operating results for any period do not necessarily indicate future performance. Variations in our quarterly results may trigger volatile
changes in our stock price.
General or industry specific market conditions or stock market performance or domestic or international macroeconomic and
geopolitical factors unrelated to our performance also may affect the price of our stock. For these reasons, investors should not rely on
recent or historical trends to predict future stock prices, financial condition, operating results or cash flows. In addition, as discussed in
Part I, Item 3 Legal Proceedings of this Annual Report, we are involved in several lawsuits. Additional volatility in the price of our
securities could result in the filing of additional litigation, which could result in substantial costs and the diversion of management
time and resources.
We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the
price of our Common Stock.
As part of our growth strategy, we expect to review acquisition prospects that would implement our vertical integration strategy
or offer other growth opportunities. From time to time, we may be in various stages of discussions and we may acquire businesses,
products or technologies in the future. In the event of future acquisitions, we could:
• use a significant portion of our available cash;
• issue equity securities, which would dilute current stockholders percentage ownership;
• incur substantial debt;
• incur or assume contingent liabilities, known or unknown;
• incur amortization expenses related to intangibles;
• incur large, immediate accounting write-offs; and
• create goodwill and other intangible assets that may require impairment charges in the future.
ff
Such actions by us could harm our operating results and adversely affect the price of our Common Stock.
Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to
conflicts with other stockholders over corporate transactions and other corporate matters.
Our directors, executive officers and our affiliate, LSC, beneficially own approximately 23% of our outstanding Common Stock,
including options to purchase shares of our Common Stock that are exercisable within 60 days of December 31, 2017. These
stockholders, acting together, will be able to influence significantly all matters requiring stockholder approval, including the election
of directors and significant corporate transactions such as mergers or other business combinations. This control may delay, deter or
prevent a third party from acquiring or merging with us, which could adversely affect the market price of our Common Stock.
LSC, our largest stockholder, owns approximately 16% (approximately 7.8 million shares) of our Common Stock. Some of our
directors and executive officers may have potential conflicts of interest because of their positions with LSC or their ownership of LSC
common stock.
Raymond Soong, the Chairman of the Board of Directors, is the Chairman of LSC, and is the Chairman of Lite-On Technology
Corporation (LTC), a significant shareholder of LSC. C.H. Chen, our former President and Chief Executive Officer and currently
the Vice Chairman of the Board of Directors, is also Vice Chairman of LSC and a board member of LTC. Dr. Keh-Shew Lu, a
member of our Board of Directors and our President and Chief Executive Officer, is a board member of LTC and a board member of
Nuvoton. L.P. Hsu, a former member of the Board of Directors since 2007, serves as a consultant to LTC and a supervisor of the
board of Nuvoton. Several of our directors and executive officers may own LSC common stock or hold options to purchase LSC
common stock. Service on our Board of Directors and as a director or officer of LSC, or ownership of LSC common stock by our
directors and executive officers, could create, or appear to create, actual or potential conflicts of interest when directors and officers
are faced with decisions that could have different implications for LSC and us. For example, potential conflicts could arise in
connection with decisions involving the Common Stock owned by LSC, or under the other agreements we may enter into with LSC.
In 2017, 2016 and 2015, LSC accounted for approximately between 1% and 3% of our silicon wafer supply and our finished good
supply. We may have difficulty resolving any potential conflicts of interest with LSC, and even if we do, the resolution may be less
favorable than if we were dealing with an unrelated third party.
- 24 -
We were formed in 1959, and our early corporate records are incomplete. As a result, we may have difficulty in assessing and
defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are
incomplete.
We were formed in 1959 under the laws of California and reincorporated in Delaware in 1968. We have had several transfer
agents since being formed. In addition, our early corporate records, including our stock ledger, are incomplete. As a result, we may
have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for
which our records are incomplete.
Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of
diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock
in such business activities.
We, from time to time, may utilize non-cash tender offers, debt equity swaps or equity exchanges in accordance with the
guidance and rules promulgated by the SEC to consummate our business activities. Such means to consummate our business activities
will likely involve issuance of our Common Stock in large quantities and will subsequently dilute the ownership interest of existing
stockholders, including stockholders who previously received shares of our Common Stock in such transactions. Any sales in the
public market of the newly issued Common Stock could adversely affect prevailing market prices of our Common Stock. In addition,
utilizing non-cash tender offers, debt equity swaps or equity exchanges may encourage short selling because such utilization could
depress the price of our Common Stock.
Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-
over attempt.
Some provisions of Delaware law, our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect
and may delay or prevent a tender offer or takeover attempt, including those attempts that might result in a premium over the market
price for the shares held by stockholders.
Section 203 of Delaware General Corporation Law may deter a take-over attempt.
Section 203 of the Delaware General Corporation Law prohibits transactions between a Delaware corporation and an interested
stockholder, which is defined as a person who, together with any affiliates or associates, beneficially owns, directly or indirectly,
15.0% or more of the outstanding voting shares of a Delaware corporation. This provision prohibits certain business combinations
between an interested stockholder and a Delaware corporation for a period of three years after the date the stockholder becomes an
interested stockholder, unless:
(i)
(ii)
either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is
approved by the corporations board of directors prior to the date the interested stockholder becomes an interested
stockholder;
the interested stockholder acquired at least 85.0% of the voting stock of the corporation (other than stock held by directors
who are also officers or by certain employee stock plans) in the transaction in which the stockholder became an interested
stockholder; or
(iii)
the business combination is approved by a majority of the board of directors and by the affirmative vote of 66-2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
For this purpose, business combinations include mergers, consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10.0% of the aggregate market value of the consolidated assets or outstanding stock of the corporation,
and certain transactions that would increase the interested stockholders proportionate share ownership in the corporation.
Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.
ii
Provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to
acquire control of us. In particular, our certificate of incorporation authorizes our Board of Directors to issue, without further action by
the stockholders, up to 1,000,000 shares of preferred stock with rights and preferences, including voting rights, designated from time
to time by the Board of Directors. The existence of authorized but unissued shares of preferred stock enables our Board of Directors to
render it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or
otherwise.
- 25 -
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
Our corporate headquarters are located in Plano, Texas. As of December 31, 2017, we own approximately 3.7 million square
feet of property and lease approximately 3.1 million square feet of property, with leases expiring at various times beginning in 2018
with land rights expiring in 2056. The table below sets forth the use, location and square footage of property either owned or leased
by the Company:
Primary use
Headquarters/R&D center
Land (future headquarters site)
Regional sales office
Regional sales office/Administrative office/R&D center & Apartment
Regional sales office/R&D center
Regional sales office/Administrative office
Land use right, manufacturing facilities/administrative/R&D center/Logistics
Regional sales office/R&D center/Warehouse
Administrative office/land use right/manufacturing facility/R&D center
Manufacturing facility/R&D center/Logistics/Dormitory/Manufacturing
facility/Sales/Administrative office/Land Use Right
Regional sales office
R&D center/Dormitory
Administrative/Logistics/Manufacturing/R&D center
Regional sales office
Manufacturing facility/R&D center
Regional sales offices
Apartment
Manufacturing facility/R&D center/Logistics/Administrative office
R&D center
Regional sales office
Regional sales office/Administrative office/Logistics/Regional Sales/Logistics
Regional sales office/Administrative office/Logistics
R&D center
We believe our current facilities are adequate for the foreseeable future.
Item 3. Legal Proceedings.
Location
USA - Plano, TX
USA - Plano, TX
USA - Amherst, New Hampshire
USA - Milpitas, California
USA - San Jose, California
USA - Westlake Village,
California
China - Chengdu
China - Hong Kong
China - Jinan, Shandong
China - Shanghai
China - Shenzhen
China - Yangzhou
England - Oldham
Germany - Munich
Germany - Neuhaus
South Korea - Seongnam-si
South Korea -Suwon-si
Taiwan - Hsinbei
Taiwan - Hsinchu
Taiwan - Kaohsiung
Taiwan - Taipei
Taiwan - Taoyuan
Taiwan - Zhunan
Sq. Ft.
41,780
696,960
600
86,321
4,060
1,295
1,689,474
360,395
1,059,907
2,322,424
17,318
7,095
156,076
6,297
52,508
2,990
646
120,441
25,372
355
52,348
78,899
1,272
From time to time, we are involved in various legal proceedings that arise in the normal course of business. While we intend to
defend any lawsuit vigorously, we presently believe that the ultimate outcome of any current pending legal proceeding will not have
any material adverse effect on our financial position, cash flows or operating results. However, litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact our
business and operating results for the period in which the ruling occurs or future periods. See Note 16 of the Notes to Consolidated
Financial Statements for detailed information regarding the status of our lawsuits.
Item 4. Mine Safety Disclosures.
Not Applicable.
- 26 -
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our Common Stock is traded on the Nasdaq Global Select Market (NasdaqGS) under the symbol DIOD. The following
table shows the range of high and low closing sales prices per share for our Common Stock for each fiscal quarter from January 1,
2016 as reported by NasdaqGS.
Calendar Quarter
Ended
Closing Sales Price of
Common Stock
First quarter 2018 (through February 9, 2018)
Fourth quarter 2017
Third quarter 2017
Second quarter 2017
First quarter 2017
Fourth quarter 2016
Third quarter 2016
Second quarter 2016
First quarter 2016
Holders and Recent Stock Price
$
High
30.85
35.09
29.93
27.15
26.28
26.96
21.57
20.36
22.30
$
Low
26.39
27.25
23.97
22.31
23.44
19.84
17.24
16.96
17.24
On February 9, 2018, the closing sales price of our Common Stock as reported by NasdaqGS was $29.22 and there were
approximately 273 holders of record of our Common Stock.
Dividends
We have never declared or paid dividends on our Common Stock, and currently do not intend to pay dividends in the
foreseeable future as we intend to retain any earnings for future use in our business. Our U.S. banking credit facility permits us to pay
dividends up to $3.0 million per fiscal year to our stockholders so long as we have not defaulted at the time of such dividend and no
default would result from declaring and paying such dividend. The payment of dividends is within the discretion of our Board of
Directors, and will depend upon, among other things, our earnings, financial condition, capital requirements, and general business
conditions.
Securities Authorized for Issuance Under Equity Compensation Plans
The information regarding our equity compensation plans required to be disclosed by Item 201(d) of Regulation S-K is
incorporated by reference from our 2018 definitive proxy statement into Item 12 of Part III of this Annual Report.
- 27 -
Performance Graph
The following graph compares the yearly percentage change in the cumulative total stockholder return of our Common Stock
against the cumulative total return of the Nasdaq Composite and the Nasdaq Industrial Index for the five calendar years ending
December 31, 2017. The graph is not necessarily indicative of future price performance.
The graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual
Report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2017
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
2014
2015
2016
2017
Diodes Incorporated
NASDAQ Industrials Index
NASDAQ Composite-Total Returns
Source: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2016.
The graph assumes $100 invested on December 31, 2012 in our Common Stock, the stock of the companies in the Nasdaq
Composite Index and the stock of companies in the Nasdaq Industrial Index, and that all dividends received within a quarter, if any,
were reinvested in that quarter.
DDecember 2017
Diodes Incorporated
NNASDAQ Industrial Index
NNASDAQ Composite-Total Returns
Return %
Cum $
Return %
Cum $
Return %
Cum $
2012
100
100
100
2013
35.79
135.79
44.54
144.54
40.12
140.12
2014
17.02
158.90
2.98
148.85
14.75
160.78
2015
(16.65)
132.45
9.56
163.08
6.96
171.97
2016
11.71
147.95
9.47
178.53
8.87
187.22
2017
11.69
165.24
25.21
223.54
29.64
242.71
- 28 -
Issuer Purchases of Equity Securities
The Company repurchases shares of its Common Stock from time to time pursuant to publicly announced share repurchase
programs. During December 2017, the Company repurchased 300,000 shares of its common shares at a cost of $8.7 million. All
purchases were made through open market transactions and were recorded as treasury stock. The following table contains information
for shares repurchased during the fourth quarter of 2017. None of the shares in this table were repurchased directly from any of our
officers or directors.
Total Number of Shares
Purchased (a)
Average Price Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
300,000
$
29.15
1,457,206
Maximum Approximate
Dollar Value of Shares that
May Yet Be Purchased
Under the Plans or Programs
$
62,260,855
Period
Dec-17
(a) Share repurchases are made pursuant to a share repurchase program authorized in November 2015 by the Companys Board of Directors to
repurchase up to an aggregate of $100,000,000 of the Companys outstanding Common Stock, $0.66 2/3 par value per share. The share
repurchase program is expected to continue through the end of 2019 unless extended or shortened by the Board of Directors. Average price
paid per share includes broker commissions.
- 29 -
Item 6.
Selected Financial Data.
The following selected consolidated financial data for the fiscal years ended December 31, 2017 through 2013 is qualified in its
entirety by, and should be read in conjunction with, the other information and consolidated financial statements, including the notes
thereto, appearing elsewhere herein. Certain immaterial amounts as presented in the accompanying consolidated financial statements
have been reclassified to conform to 2017 financial statement presentation.
(In thousands, except per share data)
Statement of Income Data
Net sales
Gross profit
Selling, general and administrative
Research and development
Amortization of acquisition related intangible assets
Impairment of fixed assets
Restructuring
Other operating expenses
Total operating expenses
Income from operations
Interest income
Interest expense
Gain on securities carried at fair value
Foreign currency (loss) gain, net
Impairment of cost-basis investment
Other income (expense)
Income before income taxes and noncontrolling interest
Income tax provision
Net income
Less: net (income) loss attributable to noncontrolling
interest
Net (loss) income attributable to common stockholders
(Loss) earnings per share attributable to common
stockholders
Basic
Diluted
NNumber of shares used in computation:
Basic
Diluted
Balance Sheet Data
Total assets
Working capital
Long-term debt, net of current portion
Total Diodes Incorporated stockholders' equity
$
$
$
$
$
2017
1,054,204
356,776
167,639
77,877
18,798
2,211
10,137
(246)
276,416
80,360
1,475
(13,448)
-
(7,995)
-
2,199
62,591
62,325
266
(2,071)
(1,805)
Twelve Months Ended December 31,
2015
2016
2014
$
942,162
286,923
158,256
69,937
20,478
114
12
70
248,867
38,056
1,357
(13,257)
-
2,171
(3,218)
(74)
25,035
6,558
18,477
(2,542)
15,935
$
848,904
248,583
139,245
57,027
8,596
1,672
-
(59)
206,481
42,102
1,006
(4,232)
400
1,257
-
62
40,595
14,082
26,513
(2,239)
24,274
$
890,651
277,279
133,701
52,136
7,914
198
-
(1,181)
192,768
84,511
1,470
(4,332)
1,364
1,820
-
1,159
85,992
20,359
65,633
(1,955)
63,678
(0.04)
(0.04)
$
$
0.33
0.32
$
$
0.50
0.49
$
$
1.35
1.31
$
$
48,824
48,824
48,597
49,789
48,210
49,500
47,184
48,594
2013
826,846
237,836
132,106
48,302
8,078
5,358
1,533
178
195,555
42,281
1,274
(5,580)
601
(393)
-
402
38,585
14,481
24,104
2,428
26,532
0.57
0.56
46,363
47,658
$
2017
1,488,673
415,162
247,492
831,504
2016
1,528,552
547,409
413,126
776,019
$
As of December 31,
2015
1,598,827
570,888
453,738
795,345
$
2014
1,179,157
526,239
140,787
768,275
$
2013
1,162,258
493,169
182,799
702,742
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following section discusses managements view of the financial condition, results of operations and cash flows of Diodes
Incorporated and its subsidiaries (collectively, the Company, our Company, we, our, ours, or us) and should be read
together with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form
10-K.
estimate, anticipate, believe, project,
The following discussion contains forward-looking statements and information relating to our Company. We generally identify
continue, expect,
forward-looking statements by the use of terminology such as may, will, could, should,
or similar phrases or the negatives of such terms. We base these
intend, plan,
statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to
risks, uncertainties and assumptions, including those identified in Part I, Item 1A.Risk Factors,
as well as other matters not yet
known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given
these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.
Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.
potential,
- 30 -
You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form
10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new
information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the Act
safea
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.
) provides certain
Summary of the Twelve Months Ended December 31, 2017
• Revenue grew to $1.1 billion, an increase of 12.0% over the $942.2 million in 2016 due to continued market share gains;
• Gross profit was $356.8 million compared to $286.9 million in 2016;
• Gross margin was 33.8% compared to 30.5% in 2016, an increase of 330 basis points;
• We had a net loss $1.8 million for the 12 months ended December 31, 2017. Included in this loss was total tax expense of $62.3
million, of which $45.9 million specifically related to the Tax Cuts and Jobs Act that was signed into law on December 22,
2017;
• We completed the shutdown of wafer fabrication facility located in Lees Summit, MO. (KFAB) and relocated the
manufacturing capacity to other wafer fabrication facilities;
• Selling and administrative expenses were $167.6 million due to increases in wages and benefits;
• Cash flow from operations was approximately $181.1 million compared to $124.7 million in 2016;
• During 2017 we paid down approximately $159.9 million of our outstanding debt;
• We repurchased approximately $8.7 million or 300,000 shares of our outstanding common stock; and
• We received qualification of 200mm wafers at one of our wafer fabrication facilities located in Shanghai.
Summary of the Twelve Months Ended December 31, 2016
• Revenue grew to $942.2 million, an increase of 11.0% over the $848.9 million in 2015;
• We had full year of Pericom included in our results;
• Gross profit was $286.9 million as compared to $248.6 million in 2015;
• Gross margin improved 120 basis points to 30.5% from 29.3% in 2015;
• Selling and administrative expenses were up $19.0 million, due to $26.5 million of incremental Pericom SG&A cost;
• Net income attributable to common stockholders was $15.9 million, or $0.32 per diluted share, compared to $24.3 million, or
$0.49 per diluted share in 2015;
• Cash flow from operations was $124.7 million compared to $118.1 million in 2015, an increase of 5.6%;
• We repurchased for approximately $18.0 million 691,196 shares of our outstanding common stock;
• We recorded $3.2 million of impairment on a cost-basis equity investment; and
• We suffered fire damage at KFAB leading to lower output and lower revenue and higher repair expenses related to the fire.
KFAB Shutdown
The Company ceased production operations at KFAB late in third quarter
During 2017 we completed the shutdown of KFAB. The Company ceased production operations at KFAB late in third quarter
2017 and vacated the premises during November 2017. Employees were provided retention and standard severance packages. Total
costs incurred for the shutdown were approximately $10.1 million.
Business Outlook
During 2017 we achieved our goal of $1 billion in annual revenue. During 2017, we announced new goals for 2025 that include
revenue of $2.5 billion and gross margin of 40%, representing gross profit of $1.0 billion. Acquisitions remain a key part of our
growth strategy to reach our revenue goal. We have a solid pipeline of designs and expanded customer relationships across all regions
and product lines. The success of our business depends on, among other factors, the strength of the global economy and the stability of
the financial markets, our customers demand for our products, the ability of our customers to meet their payment obligations, the
likelihood of customers not canceling or deferring existing orders, and the strength of consumers demand for items containing our
- 31 -
products in the end-markets we serve. We believe the long-term outlook for our business remains generally favorable despite the
uncertainties in the global economy as we continue to execute on the strategy that has proven successful for us over the years. See
Risk Factors The success of our business depends on the strength of the global economy and the stability of the financial markets,
and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition. in
Part I, Item 1A of this Annual Report for additional information.
ff
Factors Relevant to Our Results of Operations
In 2017, the following factors affected, and, we believe, will continue to affect, our results of operations:
• We closed our KFAB facility and relocated the operations to our other wafer fabrication facilities. We estimate that we will
have annual savings of between $10 million and $15 million beginning in 2018;
• We continue to experience pressure from our customers to reduce the selling price for our products, and we expect future
improvements in net income to result primarily from increases in sales volume and improvements in product mix, as well as
manufacturing cost reductions in order to offset any reduction in average selling prices of our products;
• In terms of our end markets, our automotive business reached 8% of revenue; and
• During 2017, we invested approximately $100.3 million in our manufacturing and wafer fabrication facilities in China, and we
expect to continue to invest in our facilities, although the amount to be invested will depend on product demand and new
product developments.
• Our wafer fabrication plants use epitaxial wafers. Currently there is a supply shortage of these types of wafers, which may
impact our ability to meet market demand for our products.
Description of Sales and Expenses
Net sales
The principal factors that have affected or could affect our net sales from period to period are:
• The condition of the economy in general and of the semiconductor industry in particular;
• Our customers adjustments in their order levels;
• Changes in our pricing policies or the pricing policies of our competitors or suppliers;
• The addition or termination of key supplier relationships;
• The rate of introduction and acceptance by our customers of new products;
• Our ability to compete effectively with our current and future competitors;
• Our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances,
• Changes in foreign currency exchange rates;
• A major disruption of our information technology infrastructure;
• Unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes; and
• Any other disruptions, such as change in the political or governmental policies, labor shortages, unplanned maintenance or other
r
manufacturing problems.
Cost of goods sold
Cost of goods sold includes manufacturing costs for our semiconductors and our wafers. These costs include raw materials used
in our manufacturing processes as well as labor costs and overhead expenses. Cost of goods sold is also impacted by yield
improvements, capacity utilization and manufacturing efficiencies. In addition, cost of goods sold includes the cost of products that we
purchase from other manufacturers and sell to our customers. Cost of goods sold is also affected by inventory obsolescence if our
inventory management is not efficient.
Selling, general and administrative
Selling, general and administrative expenses relate primarily to compensation and associated expenses for personnel in general
management, sales and marketing, information technology, engineering, human resources, procurement, planning and finance, and
sales commissions, as well as outside legal, investor relations, accounting, consulting and other operating expenses. Also included in
selling, general and administrative expenses are acquisition costs from business combinations.
Research and development
Research and development expenses consist of compensation and associated costs of employees engaged in research and
development projects, as well as materials and equipment used for these projects. Research and development expenses are primarily
- 32 -
associated with our wafer facilities in China, Lees Summit, Missouri and Oldham, U.K. and our manufacturing facilities in Taiwan
and China, as well as with our engineers in the U.S. and Taiwan. All research and development expenses are expensed as incurred.
Amortization of acquisition-related intangible assets
Amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer
relationships.
Impairment of fixed assets
Impairment of fixed assets consists of the impairment amount recognized as a result of the fair value of an asset being below its
recorded value.
Restructuring
Restructuring are one-time charges that must be paid by the Company due to reorganizing or restructuring a part of the business.
Interest income / expense
Interest income consists of interest earned on our cash and investment balances. Interest expense consists of interest payable on
our outstanding credit facilities and other debt instruments.
Gain (loss) on securities carried at fair value
From time to time we may hold investments in the form of common stock or some other similar equivalent and have elected fair
value accounting treatment.
Foreign currency (loss) gain, net
This income account is used to show the amount gained or lost as a result of foreign currency transactions.
Income tax provision
Our global presence requires us to pay income taxes in a number of jurisdictions. See Note 11 of Notes to Consolidated
Financial Statements for additional information.
Net income attributable to noncontrolling interest
This represents the minority investors share of our subsidiaries earnings.
Net income attributable to common stockholders
Net income attributable to common stockholders is net income less net income attributable to noncontrolling interest.
U.S. Tax Reform
The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate
tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were
previously tax deferred, provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and creates new
taxes on certain foreign sourced earnings. As of the completion of these financial statements and related disclosures, we have not
completed our accounting for the tax effects of the Tax Act; however, as described below, we have made a reasonable estimate of such
effects and recorded a provisional tax expense of approximately $45.9 million, which is included as a component of income tax
expense from continuing operations in the fourth quarter of 2017. This provisional tax expense incorporates assumptions made based
upon the Companys current interpretation of the Tax Act, and may change as we receive additional clarification and implementation
guidance and as the interpretation of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company
will finalize the accounting for the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the
provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which
any such adjustments are determined.
The table below reflects the significant components of the provisional amount of tax expense recorded in the fourth quarter of
2017 and included as a component of income tax expense from continuing operations:
Component
Provisional Amount
Remeasurement of U.S. deferred tax assets and liabilities
Transition tax on foreign earnings
Foreign tax credits used to offset transition tax
Other adjustments
Total net tax expense related to the Tax Act
- 33 -
$
$
2,913
104,327
(58,975)
(2,357)
45,908
The Company expects to use net operating loss carryforwards and tax credits to completely offset any cash tax obligations
resulting from the transition tax. The other components shown above represent noncash adjustments to tax expense.
Remeasurement of U.S. deferred tax assets and liabilities
We remeasured certain U.S. deferred tax assets and liabilities using the lower corporate income tax rate of 21%. However, we
are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these
deferred tax balances.
Transition tax on foreign earnings
The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S.
income taxes, and is net of indirect effects of unrecognized tax benefits. We have not yet completed our analysis of the total post-1986
E&P for the majority of our foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in
cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously
deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax,
or any additional outside basis difference inherent in these entities. Our undistributed foreign earnings, including those subject to the
transition tax, continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European
subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not
subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the
one-time transition tax) is not practicable. We continue to evaluate the potential effects the Tax Act may have on our long-term plans
for capital investment across the geographies in which we operate.
Foreign tax credits used to offset transition tax
The Company is able to claim foreign tax credits against the incremental U.S. tax due on its previously deferred foreign earnings.
However, we have not yet completed our calculation of the total amount of foreign taxes previously paid or accrued by the majority of
our foreign subsidiaries that may be creditable against the transition tax. We expect these tax credits to generally be available to offset
any cash tax liability resulting from the transition tax.
Other adjustments
We have not yet completed our analysis of the direct and indirect implications of the Tax Act on the Companys tax attributes,
such as tax credit carryforwards. Included in the provisional tax expense is the estimated effect of our change in judgment regarding
realizability of foreign tax credits and R&D credits.
- 34 -
Results of Operations
The following table sets forth, for the periods indicated, the percentage that certain items in the statements of income bear to net
sales:
NNet sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Interest income
Interest expense
Foreign currency (loss) gain, net
Impairment of cost-basis investment
Other income (expenses)
Income before income
taxes and noncontrolling interest
Income tax provision
NNet income
NNet (income) loss attributable to noncontrolling interest
NNet income attributable to common stockholders
Percent of Net Sales
Twelve Months Ended December 31,
2017
2016
2015
100%
(66.2)
33.8
(26.2)
7.6
0.1
(1.3)
(0.8)
-
0.3
5.9
5.9
-
(0.2)
(0.2)
100%
(69.5)
30.5
(26.4)
4.1
0.1
(1.4)
0.2
(0.3)
-
2.7
0.7
2.0
(0.3)
1.7
100%
(70.7)
29.3
(24.3)
5.0
0.1
(0.5)
0.2
-
-
4.7
1.7
3.1
(0.2)
2.9
The following discussion explains in greater detail our consolidated operating results and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report
(in thousands).
2017 Compared to 2016
NNet sales
Cost of goods sold
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Amortization of acquisition related intangible assets
Impairment of fixed assets
Restructuring
Other operating expenses
Other (expense)/income
Interest income
Interest expense
Foreign currency (loss) gain, net
Impairment of cost-basis investment
Other income (expense)
Income tax provision
Twelve Months Ended
December 31,
2017
$ 1,054,204
697,428
356,776
$
2016
942,162
655,239
286,923
g
Increase/(Decrease) % Change
11.9%
112,042
$
6.4%
42,189
24.3%
69,853
167,639
77,877
18,798
2,211
10,137
(246)
1,475
(13,448)
(7,995)
-
2,199
62,325
158,256
69,937
20,478
114
12
70
1,357
(13,257)
2,171
(3,218)
(74)
6,558
9,383
7,940
(1,680)
2,097
10,125
(316)
118
191
10,166
3,218
2,273
55,767
5.9%
11.4%
(8.2%)
N/A
N/A
N/A
8.7%
1.4%
N/A
N/A
N/A
850.4%
- 35 -
Net Sales
Net sales increased for the twelve months ended December 31, 2017, compared to the same period last year due to continued
market share gains and strength across all our geographies, growth in our automotive, industrial and communications end markets as
well as growth from our Pericom products.
Cost of Goods Sold
Cost of goods sold increased approximately $42.2 million for the twelve months ended December 31, 2017 compared to the
same period last year. Cost of goods primarily increased as a result of our increased sales. A portion of the increase in cost of goods
sold was $2.7 million of KFAB inventory that was expensed, as it will not be used in the future, and other inventory that was
scrapped. Cost of goods was positively impacted in 2017 by receipt of $3.9 million of business interruption insurance and $0.6 million
of inventory insurance recovery received related to the fire at KFAB. As a percent of sales, cost of goods sold was 66.2% for the
twelve months ended December 31, 2017 compared to 69.5% for the same period last year. Average unit cost decreased 7% for the
twelve months ended December 31, 2017, compared to the same period last year, due to increased production facility utilization. For
the twelve months ended December 31, 2017, gross profit increased approximately 24.3% when compared to the same period last
year. Gross profit margin for the twelve month periods ended December 31, 2017 and 2016 was 33.8% and 30.5%, respectively.
Operating expenses
Operating expenses for the twelve months ended December 31, 2017 increased approximately $27.5 million, or 11.1%,
compared to the same period last year. Selling, general and administrative expenses (SG&A) increased approximately $9.4
million. The increase in SG&A was driven by an increase in wages and benefits, partially offset by decreases in other SG&A expense
categories. Research and development expenses (R&D) increased approximately $7.9 million, tracking with the increase in sales.
Amortization of acquisition- related intangibles decreased approximately $1.7 million reflecting the overall reduction in the balance of
intangible assets subject to amortization. During the twelve months ended December 31, 2017, we recognized impairment of fixed
assets of $2.2 million, primarily related to the KFAB shutdown, and also recognized restructuring costs of $10.1 million related to the
KFAB shutdown. SG&A, as a percentage of sales, was 15.9% and 16.8% for the twelve months ended December 31, 2017 and 2016,
respectively. R&D, as a percentage of sales, was constant at 7.4% for the twelve months ended December 31, 2017 and 2016.
Other (expense)/income
Interest income increased for the twelve months ended December 31, 2017 due to a higher amount of invested funds. The
increase in interest expense for the twelve months ended December 31, 2017 is due to higher interest rates on the borrowing to effect
the Pericom acquisition. Foreign currency losses increased during the twelve months ended December 31, 2017 due to the weakness
of the U.S. dollar when compared to the currencies in the foreign countries in which we operate. These losses were partially offset by
$1.5 million in hedging gains.
ff
- 36 -
Income tax provision
We recognized an income tax expense of approximately $62.3 million for the twelve months ended December 31, 2017 and
income tax expense of approximately $6.6 million for the twelve months ended December 31, 2016, resulting in effective income tax
rates of 99.6% and 26.2%, respectively. The increase in income taxes for 2017 compared to 2016 is primarily attributable the impact
of the Tax Act. The Tax Act increased our tax expense by approximately $45.9 million. The remainder of the increase in our tax
expense is primarily due to the increase in pretax earnings from 2016 to 2017.
2016 Compared to 2015
NNet sales
Cost of goods sold
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Amortization of acquisition related intangible assets
Impairment of fixed assets
Restructuring
Other operating expenses
Other (expense)/income
Interest income
Interest expense
Gain on securities carried at fair value
Impairment on cost-basis investment
Foreign currency (loss) gain, net
Other income (expense)
Income tax provision
Twelve Months Ended
December 31,
$
2016
942,162
655,239
286,923
$
2015
848,904
600,321
248,583
Increase/(Decrease) % Change
93,258
$
54,918
38,340
11.0%
9.1%
15.4%
158,256
69,937
20,478
114
12
70
1,357
(13,257)
-
(3,218)
2,171
(74)
6,558
139,245
57,027
8,596
1,672
-
(59)
1,006
(4,232)
400
-
1,257
62
14,082
19,011
12,910
11,882
(1,558)
12
129
351
9,025
(400)
(3,218)
914
(136)
(7,524)
13.7%
22.6%
138.2%
(93.2%)
N/A
(218.6%)
34.9%
213.3%
(100.0%)
N/A
72.7%
(219.4%)
(53.4%)
In 2016, we had twelve months of Pericom results included in our results of operations, compared to approximately one month
of Pericom results included in our 2015 results of operations.
Net Sales
Net sales increased for the twelve months ended December 31, 2016, compared to the same period last year due to an
incremental Pericom contribution of approximately $110.6 million. This increase was partially offset by the impact of the fire at
KFAB and weaker consumer market and weaker domestic demand in China.
Cost of Goods Sold
Cost of goods sold increased approximately $54.9 million for the twelve months ended December 31, 2016, compared to the
same period last year. The increase in cost of goods sold was driven by cost of goods sold from Pericom of $69.3 million for the
twelve months ended December 31, 2016 compared to Pericom cost of goods sold of $10.7 million in 2015. The increase in cost of
goods sold related to Pericom was partially offset by the impact of the KFAB fire resulting in lower costs and the related business
interruption insurance recovery. As a percent of sales, cost of goods sold was 69.5% and 70.7% for the twelve months ended
December 31, 2016 and 2015, respectively. Excluding Pericom, average unit cost decreased 1.4% for the twelve months ended
December 31, 2016, compared to the same period last year. Including Pericom, average unit cost increased 6.6% for the twelve
months ended December 31, 2016, compared to the same period last year. For the twelve months ended December 31, 2016, gross
profit increased approximately 15.4% when compared to the same period last year. Gross profit margin for the twelve months ended
December 31, 2016 and 2015 was 30.5% and 29.3%, respectively.
Operating expenses
Operating expenses for the twelve months ended December 31, 2016 increased approximately $42.4 million, or 20.5%,
compared to the same period last year. The increase in operating expense reflects approximately $56.7 million of incremental
operating expenses from Pericom. SG&A increased approximately $19.0 million due primarily to an increase of $26.5 million of
incremental Pericom SG&A recognized in 2016 partially offset by lower stock compensation and change in control expense. R&D
- 37 -
increased approximately $12.9 million due to an increase in Pericom R&D expense of $18.0 million recognized in 2016. The increase
in R&D expense of $12.9 million was partially offset by reversals of previously recorded liability reserves resulting from prior
acquisitions. Amortization of acquisition- related intangibles increased approximately $11.9 million reflecting the amortization of the
intangible assets acquired in the Pericom acquisition. SG&A, as a percentage of sales, was 16.8% and 16.4% for the twelve months
ended December 31, 2016 and 2015, respectively. R&D, as a percentage of sales, was 7.4% and 6.7% for the twelve months ended
December 31, 2016 and 2015, respectively.
Other (expense)/income
Interest income increased for the twelve months ended December 31, 2016 due to a higher amount of invested funds, reflecting
the investments acquired in the Pericom acquisition. The increase in interest expense for the twelve months ended December 31, 2016
was due to higher levels of borrowing to effect the Pericom acquisition. During 2016 we recognized the impairment of a cost-basis
equity investment of $3.2 million. During 2015, we recognized losses on the sale of marketable securities that was not repeated in
2016.
Income tax provision
We recognized an income tax expense of approximately $6.6 million for the twelve months ended December 31, 2016 and
income tax expense of approximately $14.1 million for the twelve months ended December 31, 2015, resulting in effective income tax
rates of 26.2% and 34.7%, respectively. The decrease in income taxes for 2016 compared to 2015 was primarily attributable to
changes in the proportion of income generated in North America, Europe and Asia, respectively.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under
our credit facilities. We currently have a U.S. banking credit facility (the U.S. Credit Facility) under which we may draw up to $250
million on a revolving basis, in addition to a $250 million term loan included in the U.S. Credit Facility. The U.S. Credit Facility
matures October 26, 2021. The term loan portion of the U.S. Credit Facility is repayable in part through quarterly installments that
increase over time from $3.1 million per quarter in 2016 to $9.4 million per quarter in the final year of the U.S. Credit Facility. We
may from time to time request increases in the aggregate commitments under the U.S. Credit Facility of up to $200 million, subject to
the lenders electing to increase their commitments or by means of the addition of new lenders, and subject to at least half of each
increase in aggregate commitments being in the form of term loans, with the remaining amount of each increase being an increase in
the amount of the revolving portion of the U.S. Credit Facility. The U.S. Credit Facility bears interest at LIBOR or similar indices
plus a specified margin. The U.S. Credit Facility contains certain financial and non-financial covenants, including, but not limited to,
a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness,
investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases). At December
31, 2017, we owed $268.8 million under the U.S. Credit Facility, $103.0 million of which was drawn under the revolving portion and
$165.8 million of which was outstanding under the term loan.
Our Asia subsidiaries maintain credit facilities with several financial institutions worldwide totaling $80.5 million. In some
cases, our foreign credit lines are unsecured, uncommitted and may be repayable on demand. These credit facilities bear interest at
LIBOR plus a specified margin with interest payments due quarterly. In addition, we have short-term foreign credit facilities with
borrowing capacities of approximately $80.5 million with an unused amount of $78.7 million.
Our primary liquidity requirements have been to meet our capital expenditure needs and to fund on-going operations. For 2017,
In 2017, our working
2016, and 2015, our working capital was $415.2 million, $547.4 million, and $570.9 million, respectively.
capital decreased due to the use of cash and short-term investments to pay down our long-term debt.
In 2016 our working capital
decreased due to decreases in short-term investments and a decrease in inventories. We expect cash generated by our operations
together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to satisfy our
working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing
operations for at least the next 12 months.
a
In 2017, 2016 and 2015, our capital expenditures were approximately $125.2 million, $52.2 million and $137.7 million,
respectively, which includes approximately $23.8 million, $10.5 million and $62.1 million of capital expenditures related to the
investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the CDHT) for
2017, 2016 and 2015, respectively. Our capital expenditures for these periods were primarily related to manufacturing expansion in
our facilities in China and, to a lesser extent, our office buildings. Capital expenditures in 2017 were approximately 11.8% of our net
sales.
- 38 -
In 2010, we announced an investment agreement with the Management Committee of the CDHT. Under this agreement, we
formed an entity with a Chinese partner, Chengdu Ya Guang Electronic Company Limited (Ya Guang), to establish a semiconductor
assembly and test facility in Chengdu, China. In December 2016, we increased our investment and currently own approximately 98%
of the entity. The CDHT granted the entity a 50 year land lease, provides corporate and employee tax incentives, tax refunds, subsidies
and other financial support. This is a long-term, multi-year project that will provide us additional capacity as needed. As of
December 31, 2017, we have invested $157.2 million, primarily for infrastructure, buildings and equipment related capital
expenditures.
u
As a result of enactment of the Tax Cuts and Jobs Act (the Tax Act) on December 22, 2017, all of our undistributed foreign
subsidiary earnings immediately became subject to U.S. income tax. We had not previously accrued U.S. taxes on these earnings, due
to our policy of indefinitely reinvesting the earnings overseas. Refer to the U.S. Tax Reform section in Item 7 and the Tax Cuts and
Jobs Act section in Note 11 of the Notes to Consolidated Financial Statements in this Annual Report for further discussion. Our
undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings
of European subsidiaries. Any future distributions of foreign earnings will not be subject to additional U.S. income tax, but may be
subject to foreign withholding taxes. As of December 31, 2017, our foreign subsidiaries held approximately $197 million of cash,
cash equivalents and investments of which approximately $92 million would be subject to foreign withholding tax if distributed
outside the country in which the related earnings were generated.
Restricted cash is pledged as collateral when we enter into agreements with banks for certain banking facilities. As of
December 31, 2017, restricted cash of $1.4 million was pledged as collateral for issuance of bank acceptance notes and letters of
credit.
As of December 31, 2017, we had short-term investments of approximately $4.6 million. These investments are highly liquid
with maturity dates greater than three months at the date of purchase. The decrease from $29.8 million in 2016, to $4.6 million in
2017 reflects the liquidation of a portion of the short-term investment portfolio acquired as part of Pericom, as we used the funds to
reduce our debt and purchase our Common Stock. We generally can access these investments in a relatively short amount of time but
in doing so we generally forfeit a portion of interest income.
Discussion of Cash Flows
Cash and cash equivalents decreased approximately $44.0 million to $203.8 million in 2017 from $247.8 million in 2016. The
decrease was primarily due to cash being used for capital expenditures and the repayment of long-term debt undertaken to purchase
Pericom. Cash and cash equivalents increased approximately $29.4 million to $247.8 million in 2016 from $218.4 million in 2015.
The increase was due to higher cash flow from operations and lower levels of cash used in investing and financing activities when
compared to the prior year.
Net cash provided by operating activities
Net cash used by investing activities
Net cash provided by (used by) financing
activities
Effect of exchange rates on cash and cash
equivalents
Net increase (decrease) in cash and cash
equivalents
Operating Activities
Twelve Months Ended December 31,
$
2017
181,123
(78,287)
$
2016
124,742
(27,351)
Change
$
56,381
(50,936)
$
2016
124,742
(27,351)
$
2015
118,111
(459,446)
Change
$
6,631
432,095
(158,184)
(63,458)
(94,726)
(63,458)
321,362
(384,820)
11,366
(4,566)
15,932
(4,566)
(4,592)
26
$
(43,982)
$
29,367
$
(73,349)
$
29,367
$
(24,565)
$
53,932
Net cash provided by operating activities for 2017 was approximately $181.1 million, due primarily to $96.2 million of
depreciation and amortization, $25.3 million of deferred tax assets, $18.6 million from non-cash share-based compensation, and an
increase in working capital accounts of $40.6 million. Net cash provided by operating activities for 2016 was approximately $124.7
million, due primarily to $18.5 million of net income, $100.9 million in depreciation and amortization, $14.0 million from non-cash
share-based compensation and a net increase in operating capital assets and liabilities of $5.5 million. These positive effects to
operating cash flow were partially offset by the negative effect of a change in deferred income taxes of $14.9 million. Net cash
provided by operating activities for 2015 was approximately $118.1 million, due primarily to $26.5 million of net income, $80.8
million in depreciation and amortization, $19.0 million from non-cash share-based compensation, partially offset by a total of
approximately $9.9 million net decrease in other operating asset and operating liability accounts.
- 39 -
Investing Activities
Net cash used by investing activities for 2017 was approximately $78.3 million, due primarily to $111.2 million in cash capital
expenditures, $12.2 million in purchases of short-term investments and a $7.0 million grant from a foreign government, partially offset
by a $38.6 million sale of short-term investments. Net cash used by investing activities for 2016 was approximately $27.4 million, due
primarily to $58.5 million used for purchases of property, plant and equipment. This use of cash for investing was partially offset by a
net decrease in short-term investments of $32.7 million. Net cash used by investing activities for 2015 was approximately
Included in our investing activities is $348.9 million of acquisitions, net of cash acquired. We had capital
$459.4 million.
expenditures of $133.2 million. We had sales of short-term investments, net of purchases of approximately $18.0 million.
ff
ff
Financing Activities
Net cash used by financing activities for 2017 was approximately $158.1 million, due primarily to a $159.9 million net
reduction of debt and an $8.7 million repurchase of Common Stock, partially offset by $13.6 million in proceeds from stock option
exercises. Net cash used in financing activities for 2016 was approximately $63.5 million, due primarily to the net repayment of long-
term debt of $36.4 million, the repurchase of 691,196 shares of the Companys common stock for $18.0 million, the payment of
dividends to noncontrolling interest of $4.9 million, payment of taxes on net share settlement of $2.5 million related to vesting of
Diodes stock awards for Pericom employees and payment of $2.0 million of debt issuance costs from refinancing our long-term debt.
Net cash provided by financing activities for 2015 was approximately $321.4 million, due primarily to the additional debt of
approximately $391.2 million we incurred to purchase Pericom. This increase was partially offset by the repayment of approximately
$66.0 million of long-term debt during 2015.
Debt instruments
The U.S. Credit Facility contains certain financial and non-financial covenants, including, but not limited to, a maximum
Consolidated Leverage Ratio, a minimum Consolidated Fixed Charge Coverage Ratio, and restrictions on liens, indebtedness,
investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases).
As of December 31, 2017, our Asia subsidiaries had unused and available credit lines of up to an aggregate of approximately
$78.7 million, with several financial institutions. In some cases, our foreign credit lines are unsecured, uncommitted and may be
repayable on demand, except for two Taiwanese credit facilities that are collateralized by assets. Our foreign credit lines bear interest
at LIBOR or similar indices plus a specified margin. At December 31, 2017, $1.0 million was outstanding under these lines of credit.
See Liquidity and Capital Resources above and Note 7 of Notes to Consolidated Financial Statements of this Annual Report for
additional information.
ff
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity
or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk
support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not
reflected on the face of our financial statements.
Contractual Obligations
The following table represents our contractual obligations as of December 31, 2017 (in thousands):
Debt
Interest on long-term debt 1
Operating leases
Capital leases
Defined benefit obligations
Purchase obligations
Total obligations
Total
270,083
35,689
31,855
1,068
33,442
23,476
395,613
$
$
$
$
Less than
1 year
1-3 years
4-5 years
More than
5 years
20,636
11,227
9,187
658
2,787
23,476
67,971
$
$
60,039
14,299
13,304
410
5,574
-
93,626
$
$
189,408
10,163
7,296
-
5,574
-
212,441
$
$
-
-
2,068
-
19,507
-
21,575
(1)
Interest on long-term debt assumes there is no change in current interest rates and no change in long-term debt from the balance outstanding as of December 31,
2017, other than required principal payments. The Revolver and Term Loan mature in October 2021.
Tax liabilities are not included in the above contractual obligations as we cannot make reasonable estimates of the amount and
taxes below and Note 11 of Notes to Consolidated
period in which those tax liabilities would be paid. See Accounting for income
Financial Statements of this Annual Report for additional information. In addition to these purchase commitments, we have equity
- 40 -
investment obligations for our Chengdu facilities of $50 million, $25 million and $25 million for 2018, 2019 and 2020, respectively,
and capital investment obligations of $62 million, $25 million and $29 million for 2018, 2019 and 2020, respectively.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of net sales and expenses during the reporting period. On an on-going basis, we evaluate
our estimates, which 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 at that certain point in time. Actual results may
differ, significantly at times, from these estimates under different assumptions or conditions.
We believe the following critical accounting policies and estimates affect the significant estimates and judgments we use in the
preparation of our consolidated financial statements, and may involve a higher degree of judgment and complexity than others.
Revenue recognition
Net sales (revenue) are recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred,
when the price to the buyer is fixed or determinable and when collectability of the receivable is reasonably assured. These elements
are met when title to the products is passed to the buyer, which is generally when product is shipped to the customer or when product
is delivered to the customer. Generally, we recognize net sales upon shipment to manufacturers (direct ship) as well as upon sales to
distributors using the sell in model, which is when product is shipped to the distributors (point of purchase).
Certain customers have limited rights of return or are entitled to price adjustments on products held in their inventory or upon
sale to their end customers. We reduce net sales in the period of sale for estimates of product returns, distributor price adjustments and
other allowances. Our reserve estimates are based upon historical data as well as projections of sales, distributor inventories, price
adjustments, average selling prices and market conditions. Actual returns and adjustments could be significantly different from our
estimates and provisions, resulting in an adjustment to net sales.
We record allowances/reserves for the following items: (i) ship and debit, which arise when we, from time to time based on
market conditions, issue credit to certain distributors upon their shipments to their end customers; (ii) stock rotation, which are
contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical
shipments to them in exchange for an equal and offsetting order; and (iii) price protection, which arise when market conditions cause
average selling prices to decrease and we issue credit to certain distributors on their inventory.
Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable. Stock
rotation reserves are recorded as a reduction to net sales with a corresponding reduction to cost of goods sold for the estimated cost of
inventory that is expected to be returned. Price protection reserves are recorded as a reduction to net sales with a corresponding
increase in accrued liabilities.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in, first-out method.
On an on-going basis, we evaluate our inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales
levels, sales projections, and purchases by item, as well as raw material usage related to our manufacturing facilities. If our review
indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis. If future demand or market
conditions are different than our current estimates, an inventory adjustment may be required, and would be reflected in cost of goods
sold in the period the revision is made.
Accounting for income taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each
of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets
and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. A valuation
allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. This
analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.
The benefit of a tax position is recognized only if it is more likely than not that the tax position would be sustained based on its
technical merits in a tax examination, using the presumption the tax authority has full knowledge of all relevant facts regarding the
- 41 -
position. The amount of benefit recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on
ultimate settlement with the tax authority. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Goodwill and other indefinite lived intangible assets
Goodwill and other indefinite lived assets are tested for impairment on an annual basis or when an event or changes in
circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which
is defined as an operating segment or one level below the operating segment. Diodes has one operating segment. Goodwill is reviewed
for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative
assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we
perform the quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill. If fair value of
exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference
would be recognized as an impairment loss.
Defined benefit plan
We maintain a pension plan covering certain of our employees in the U.K. For financial reporting purposes, the net pension and
supplemental retirement benefit obligations and the related periodic pension costs are calculated based upon, among other things,
assumptions of the discount rate for plan obligations, estimated return on pension plan assets and mortality rates. These obligations
and related periodic costs are measured using actuarial techniques and assumptions. The projected unit credit method is the actuarial
cost method used to compute the pension liabilities and related expenses.
Contingencies
From time to time, we are involved in a variety of legal matters that arise in the normal course of business. Based on
information available, we evaluate the likelihood of potential outcomes. We record the appropriate liability when the amount is
deemed probable and reasonably estimable. In addition, we do not accrue for estimated legal fees and other directly related costs as
they are expensed as incurred.
Derivative Instruments and Hedging Activities
Accounting Standards Codification 815, Derivatives and Hedging (ASC 815), provides the disclosure requirements for
derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how
and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c)
how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows.
Further, qualitative disclosures are required that explain the entitys objectives and strategies for using derivatives, as well as
quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in
the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative
in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply
hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the
timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a
cash flow hedge.
Recently Issued Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements of this Annual Report for additional information regarding the
status of recently issued accounting pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates, primarily in Asia and Europe. Our foreign currency
risk may change over time as the level of activity in foreign markets grows and could have a material adverse impact upon our
financial results. Certain of our assets, including certain bank accounts and accounts receivable, and liabilities exist in nonnn U.S. dollar
denominated currencies, which are sensitive to foreign currency exchange fluctuations. These currencies are principally the Chinese
Yuan, the Taiwanese dollar, the Euro, and the British Pound Sterling and, to a lesser extent, the Japanese Yen and the Hong Kong
- 42 -
dollar. We have entered into hedging arrangements designed to mitigate foreign currency fluctuations. See Risk Factors We are
subject to foreign currency risk as a result of our international operations. in Part I, Item 1A of this Annual Report for additional
information.
Effect on Reporting Income
Certain of our subsidiaries have a functional currency that differs from the currencies in which some of their expenses are
denominated. Our income and expenses are based on a mix of currencies and a decline in one currency relative to the other currencies
could adversely affect our results of operations. Furthermore, our results of operations are reported in U.S. dollars, which is our
reporting currency. In the event the U.S. dollar weakens against a foreign currency, we will experience a currency transaction loss,
which could adversely affect our results of operations. Based on our results for the twelve months ended December 31, 2017, if a
foreign currency were to weaken (or strengthen) by 1.0% against the U.S. dollar, we would experience currency transaction gain (or
loss) of approximately $1 million.
Foreign Currency Transaction Risk
We also are subject to foreign currency risk arising from intercompany transactions that are expected to be settled in cash in the
near term where the cash balances are held in denominations other than our subsidiaries functional currency. If exchange rates
weaken against the functional currency, we would incur a remeasurement gain in the value of the cash balances, and if the exchange
rates strengthen against the functional currency, we would incur a remeasurement loss in the value of the cash balances, assuming the
net monetary asset balances remained constant. Our ultimate realized gain or loss with respect to currency fluctuations will generally
depend on the size and type of transaction, the size and currencies of the net monetary assets and the changes in the exchange rates
associated with these currencies. Based on balances at December, 31, 2017, if the Chinese Yuan, the Taiwanese dollar, the Euro and
the British Pound Sterling were to weaken (or strengthen) by 1.0% against the U.S. dollar, we would experience currency transaction
gain (or loss) of less than $1 million per quarter. Net foreign exchange transaction gains (or losses) are included in other income and
expense.
Foreign Currency Translation Risk
When our foreign subsidiaries books are maintained in their functional currency, fluctuations in foreign currencies impact the
amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars
for reporting purposes. All elements of the subsidiaries financial statements, except for stockholders equity accounts, are translated
using a currency exchange rate. Assets and liabilities denominated in foreign currencies are translated at the exchange rate on the
balance sheet date. Income and expense accounts denominated in foreign currencies are translated at the weighted-average exchange
rate during the period presented. Resulting translation adjustments are recorded as a separate component of accumulated other
comprehensive income or loss within stockholders equity in the consolidated balance sheets, which are accumulated in this account
until sale or liquidation of the foreign entity investment, at which time they are reported as adjustments to the gain or loss on sale of
investment.
Foreign Currency Denominated Defined Benefit Plans
We have a contributory defined benefit plan that covers certain employees in the U.K., which is closed to new entrants and
frozen with respect to future benefit accruals. The retirement benefit is based on the final average compensation and service of each
eligible employee. December 31 is our annual measurement date, and on the measurement date, defined benefit plan assets are
determined based on fair value. Defined benefit plan assets consist primarily of high quality corporate bonds and stocks that are
denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the
related pension liability. The net pension and supplemental retirement benefit obligations and the related periodic costs are based on,
among other things, assumptions of the discount rate, estimated return on plan assets and mortality rates. These obligations and related
periodic costs are measured using actuarial techniques and assumptions. The projected unit credit method is the actuarial cost method
used to compute the pension liabilities and related expenses.
- 43 -
As of December 31, 2017, the plan was underfunded and a liability of approximately $31.8 million was reflected in our
consolidated financial statements as a noncurrent liability. The amount recognized in accumulated other comprehensive income was a
net loss of $44.0 million. If the British Pound Sterling were to (weaken) or strengthen by 1.0% against the U.S. dollar, we would
experience currency translation liability (decrease) or increase of less than $1 million. The weighted-average discount rate assumption
used to determine benefit obligations as of December 31, 2017 was 2.6%. A 0.2% increase/(decrease) in the discount rate used to
calculate the net period benefit cost for the year would reduce/increase annual benefit cost by less than $0.5 million. A 0.2%
increase/(decrease) in the discount rate used to calculate the year-end projected benefit obligation would increase/(decrease) the yearrr
end projected benefit obligation by approximately $6.4 million. The expected return on plan assets is determined based on historical
and expected future returns of the various assets classes and as such, each 1.0% increase/(decrease) in the expected rate of return
assumption would increase/(decrease) the net period benefit cost by approximately $1.3 million. The asset value of the defined benefit
plan has been volatile in recent years due primarily to wide fluctuations in the U.K. equity markets and bond markets. See Risk
Factors - Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plans asset value, require
us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition
in Part I, Item 1A of this Annual Report for additional information.
Interest Rate Risk
We have credit facilities with financial institutions in the U.S., Asia and Europe as well as other debt instruments with interest rates
equal to LIBOR or similar indices plus a negotiated margin. A rise in interest rates could have an adverse impact upon our cost of
working capital and our interest expense. Through the use of financial instruments, we have hedged $220.0 million of our floating
rate debt. As a matter of policy, we do not enter into derivative transactions for speculative purposes. As of December 31, 2017, our
outstanding principal debt included $268.8 million outstanding under our revolving senior credit facility and term loan, $1.3 million
outstanding under foreign long term liabilities and $0.9 million used for import and export guarantees and bank acceptance notes.
Based on our debt balances at December, 31, 2017, an increase or decrease in interest rates by 1.0% for the year on our credit facilities
would increase or decrease our annual interest rate expense by less than $1.0 million, net of the amounts realized from our interest rate
swaps. See Risk Factors, We are subject to interest rate risk that could have an adverse effect on our cost of working capital and
interest expenses, which could adversely affect our business, operating results and financial condition in Part I, Item 1A of this
Annual Report for additional information.
Political Risk
We have a significant portion of our assets in mainland China, Taiwan and the U.K. The possibility of political conflict between
any of these countries or with the U.S. could have a material adverse impact upon our ability to transact business through these
important business channels and to generate profits. See Risk Factors Risks Related to our International Operations in Part I,
Item 1A of this Annual Report for additional information.
Inflation Risk
Inflation did not have a material effect on net sales or net income in fiscal year 2017. A significant increase in inflation could
affect future performance.
Credit Risk
The success of our business depends, among other factors, on the strength of the global economy and the stability of the
financial markets, which in turn affect our customers demand for our products, the ability of our customers to meet their payment
obligations, the likelihood of customers canceling or deferring existing orders and the strength of consumer demand for items
containing our products in the end-markets we serve. We provide credit to customers in the ordinary course of business and perform
ongoing credit evaluations, while at times providing extended terms. We believe that our exposure to concentrations of credit risk with
respect to trade receivables is largely mitigated by dispersion of our customers over various geographic areas, operating primarily in
electronics manufacturing and distribution. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks.
Item 8.
Financial Statements and Supplementary Data.
See Part IV, Item 15 Exhibits and Financial Statement Schedules for our consolidated financial statements and the notes and
schedules thereto filed as part of this Annual Report.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
- 44 -
Item 9A.
Controls and Procedures.
Disclosure Controls and Procedures
Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Richard D. White, with the participation of our
management, carried out an evaluation as of December 31, 2017 of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, our disclosure
controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report
is:
•
•
recorded, processed, summarized and reported within the time period specified in the Commissions rules and forms
and
accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial
Officer, to allow timely decisions regarding disclosure.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of
achieving an entitys disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure
controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer
and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles in the United States of America (U.S. GAAP).
Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and
that receipts and expenditures of ours are being made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and the Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and
issued by the Committee of Sponsoring Organizations of the
criteria established in Internal Controlll
Integrated Framework (2013)
testing of operating
Treadway Commission (COSO). This evaluation included review of the documentation of controls,
effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that our internal
control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Moss Adams
LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 of this Annual Report on
Form 10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting, known to the Chief Executive Officer or the Chief
Financial Officer, that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.
- 45 -
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information concerning our directors, executive officers and corporate governance is incorporated herein by reference from
the section entitled Proposal One Election of Directors contained in our definitive proxy statement to be filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934 within 120 days after our fiscal year end of December 31, 2017, for our annual
stockholders meeting for 2018 (the Proxy Statement).
We have adopted a code of ethics that applies to our Chief Executive Officer and senior financial officers. The code of ethics
has been posted on our website under the Corporate Governance portion of the Investor Relations section at www.diodes.com. We
intend to satisfy disclosure requirements regarding amendments to, or waivers from, any provisions of our code of ethics on our
website.
Item 11.
Executive Compensation.
The information concerning executive compensation is incorporated herein by reference from the sections entitled
Compensation Discussion and Analysis, Executive Compensation, and Compensation Committee Interlocks and Insider
Participation contained in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information concerning the security ownership of certain beneficial owners and management and related stockholder
matters is incorporated herein by reference from the sections entitled General Information Security Ownership of Certain
Beneficial Owners and Management, and Executive Compensation - Equity Compensation Plan Information contained in the
Proxy Statement.
Item 13.
Certain Relationships, Related Transactions and Director Independence.
The information concerning certain relationships, related transactions and director independence is incorporated herein by
reference from the sections entitled Corporate Governance Certain Relationships and Related Person Transactions and Corporate
Governance Director Independence and Proposal One Election of Directors contained in the Proxy Statement.
Item 14.
Principal Accounting Fees and Services.
The information concerning our principal accountants fees and services is incorporated herein by reference from the section
entitled Ratification of the Appointment of Independent Registered Public Accounting Firm contained in the Proxy Statement.
- 46 -
Item 15.
Exhibits, Financial Statement Schedules.
,
(a)
Financial Statements and Schedules
PART IV
Our consolidated financial statements are as set forth under Item 8 of this report on Form 10-K.
(1)
Financial statements:
Report of Independent Registered Public Accounting Firm .......................................................................
Consolidated Balance Sheets at December 31, 2017, and 2016 .................................................................
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015.................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and
2015 ........................................................................................................................................................
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015 ..................
Page
48
50
51
52
53
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015..........
54 to 55
Notes to Consolidated Financial Statements ...............................................................................................
56 to 84
(2)
Schedules:
None
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is
shown in the financial statements and note thereto.
(b) Exhibits
The exhibits listed on the Index to Exhibits are filed as exhibits or incorporated by reference to this Annual Report.
(c)
Financial Statements of Unconsolidated Subsidiaries and Affiliates
Not Applicable.
Item 16. Form 10-K Summary.
None
- 47 -
Report of Independent Registered Public Accounting Firm
To the stockholders and the Board of Directors of
Diodes Incorporated
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Diodes Incorporated and Subsidiaries (the Company) as of
December 31, 2017 and 2016, the related consolidated statements of income, comprehensive (loss) income, equity, and cash flows for
each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the consolidated
financial statements). We also have audited the Companys internal control over financial reporting as of December 31, 2017, based
on criteria established in
Treadway Commission (COSO).
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
a
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is
to express an opinion on the Companys consolidated financial statements and an opinion on the Companys internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
- 48 -
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
ff
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Moss Adams LLP
We have served as the Companys auditor since 1993.
Los Angeles, California
February 19, 2018
- 49 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $4,480 and $2,141 at
December 31, 2017 and December 31, 2016, respectively
Inventories
Prepaid expenses and other
Total current assets
Property, plant and equipment, net
Deferred income tax
Goodwill
Intangible assets, net
Other
Total assets
Liabilities
Current liabilities:
Line of credit
Accounts payable
Accrued liabilities
Income tax payable
Current portion of long-term debt
Total current liabilities
Long-term debt, net of current portion
Deferred tax liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (See Note 16)
Stockholders' equity
Preferred stock - par value $1.00 per share; 1,000,000 shares authorized; no
shares issued or outstanding
Common stock - par value $0.66 2/3 per share; 70,000,000 shares authorized;
49,130,090 and 48,219,376, issued and outstanding at December 31, 2017
and December 31, 2016, respectively
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 1,457,206 and 1,157,206 shares held at December 31, 2017
and December 31, 2016, respectively
Accumulated other comprehensive loss
Total stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and stockholders' equity
December 31,
2017
2016
203,820
4,558
$
247,802
29,842
200,112
216,506
37,328
662,324
459,169
40,580
134,187
156,445
35,968
1,488,673
1,008
108,001
99,301
18,216
20,636
247,162
247,492
25,176
94,925
614,755
$
$
217,217
193,483
44,438
732,782
401,988
56,047
129,412
174,876
33,447
1,528,552
-
87,600
71,562
11,855
14,356
185,373
413,126
28,213
81,373
708,085
-
-
33,727
386,338
532,687
(37,768)
(83,480)
831,504
42,414
873,918
1,488,673
$
32,919
354,574
530,215
(29,023)
(112,666)
776,019
44,448
820,467
1,528,552
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
- 50 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Amortization of acquisition related intangible assets
Impairment of fixed assets
Restructuring
Other operating expenses
Total operating expenses
Income from operations
Other (expense)/income
Interest income
Interest expense
Gain on securities carried at fair value
Foreign currency (loss) gain, net
Impairment of cost-basis investment
Other income (expense)
Total other (expense) income
Income before income taxes and noncontrolling interest
Income tax provision
Net income
Less: net (income) loss attributable to noncontrolling interest
Net (loss) income attributable to common stockholders
(Loss) earnings per share attributable to common stockholders
Basic
Diluted
Number of shares used in computation
Basic
Diluted
$
$
$
$
Twelve Months Ended December 31,
2016
2015
2017
1,054,204
697,428
356,776
167,639
77,877
18,798
2,211
10,137
(246)
276,416
80,360
1,475
(13,448)
-
(7,995)
-
2,199
(17,769)
62,591
62,325
266
(2,071)
(1,805)
(0.04)
(0.04)
48,824
48,824
$
$
$
$
$
$
$
$
942,162
655,239
286,923
158,256
69,937
20,478
114
12
70
248,867
38,056
1,357
(13,257)
-
2,171
(3,218)
(74)
(13,021)
25,035
6,558
18,477
(2,542)
15,935
0.33
0.32
48,597
49,789
848,904
600,321
248,583
139,245
57,027
8,596
1,672
-
(59)
206,481
42,102
1,006
(4,232)
400
1,257
-
62
(1,507)
40,595
14,082
26,513
(2,239)
24,274
0.50
0.49
48,210
49,500
The accompanying notes are an integral part of these consolidated financial statements.
- 51 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Twelve Months Ended December 31,
2016
2015
2017
NNet income
Unrealized (loss) gain on defined benefit plan, net of tax
Unrealized gain on interest rate swap, net of tax
Unrealized foreign currency gain (loss), net of tax
Comprehensive income (loss)
Less: Comprehensive income attributable to noncontrolling interest
Total comprehensive income (loss) attributable to common stockholders
$
$
266
(4,897)
1,018
33,065
29,452
(2,071)
27,381
$
$
18,477
(7,777)
1,506
(21,979)
(9,773)
(2,542)
(12,315)
$
$
26,513
4,399
-
(20,413)
10,499
(2,239)
8,260
The accompanying notes are an integral part of these consolidated financial statements.
- 52 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Accumulated
other
comprehensive
loss
Total Diodes
Incorporated
Stockholders' Noncontrolling
equity
interest
(68,402)
(16,014)
768,275
8,260
41,892
2,239
Retained
earnings
490,006
24,274
Total
equity
810,167
10,499
(Amounts in thousands)
Balance, December 31, 2014
Total comprehensive income
Acquisition of noncontrolling
interest
Common stock issued for share-
bbased plans
NNet excess tax benefit from share-
bbased compensation
Stock buyback
Share-based compensation
Restricted awards related to
Pericom acquisition
Balance, December 31, 2015
Total comprehensive income
Dividends to noncontrolling interest
Common stock issued for share-
bbased plans
NNet excess tax benefit from share-
bbased compensation
Stock buyback
Share-based compensation
Tax related to net share settlement
Balance, December 31, 2016
Total comprehensive income
Noncontrolling interests
Noncontrolling interests
Dividends to noncontrolling interest
Adoption of new accounting
standard, ASU 2016-09
Common stock issued for share-
bbased plans
Stock buyback
Share-based compensation
Tax related to net share settlement
Balance, December 31, 2017
Common stock
Shares Amount Shares Amount
-
47,591
Treasury stock
31,729
-
-
-
-
-
1,023
675
-
-
-
-
-
-
-
-
-
-
-
-
-
(466)
-
-
(11,009)
-
Additional
paid-in
capital
314,942
-
-
9,523
(4,029)
-
18,970
-
-
-
-
-
-
-
-
-
-
-
-
-
-
48,614 $ 32,404
-
-
-
-
762
515
-
-
-
-
-
-
-
-
49,376 $ 32,919
-
-
-
-
-
-
-
-
1,211
-
-
-
808
-
-
-
50,587 $ 33,727
-
-
4,680
(466) $(11,009) $ 344,086 $514,280 $
(84,416) $
-
-
15,935
-
(28,250)
-
-
-
-
-
-
-
-
(691)
-
-
-
(18,014)
-
-
(395)
(567)
-
13,978
(2,528)
-
-
-
-
-
(1,157) $(29,023) $ 354,574 $530,215 $
-
-
-
-
-
-
-
-
-
(165)
-
(1,805)
-
-
771
4,277
-
(300)
-
-
-
(8,745)
-
-
12,798
-
18,638
(278)
-
-
-
-
-
-
-
-
-
(112,666) $
29,186
-
-
-
-
-
-
-
(1,457) $(37,768) $ 386,338 $532,687 $
(83,480) $
-
3,521
3,521
10,198
(4,029)
(11,009)
18,970
4,680
795,345 $
(12,315)
-
-
-
-
-
10,198
(4,029)
(11,009)
18,970
-
4,680
47,652 $842,997
2,542
(5,746)
(9,773)
(5,746)
120
-
120
(567)
(18,014)
13,978
(2,528)
776,019 $
27,381
(165)
-
-
-
-
-
(567)
(18,014)
13,978
(2,528)
44,448 $820,467
29,452
2,071
641
476
(4,746)
(4,746)
5,048
-
5,048
13,606
(8,745)
18,638
(278)
831,504 $
-
-
-
-
13,606
(8,745)
18,638
(278)
42,414 $873,918
The accompanying notes are an integral part of these consolidated financial statements.
- 53 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities,
net of effects of acquisitions:
Twelve Months Ended December 31,
2015
2016
2017
$
266
$
18,477
$
26,513
Depreciation
Amortization of intangibles
Amortization of debt issuance costs
Share-based compensation
Excess tax benefit from share-based compensation
(Gain) loss on disposal of property, plant and equipment
(Gain) on securities carried at fair value
Deferred income taxes
Other
Changes in operating assets:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Changes in operating liabilities:
Accounts payable
Accrued liabilities
Other liabilities
Income taxes (refundable) payable
Net cash provided by operating activities
Investing Activities
Acquisitions, net of cash acquired
(Increase) decrease in restricted cash
Purchases of short-term investments
Sales of short-term investments
Purchases of equity securities
Proceeds from sale of equity securities
Purchases of property, plant and equipment
Proceeds from sales of property, plant and equipment
Subsidies and grants
Other
Net cash used in investing activities
Financing Activities
Advance on lines of credit and short-term debt
Repayments on lines of credit and short-term debt
Taxes related to net share settlement
Net proceeds from the issuance of common stock
Excess taxes (paid) benefit from share-based compensation
Proceeds from long-term debt
Debt issuance costs
Repayments of long-term debt
Repayments of capital lease obligations
Purchase of treasury stock
Dividend distribution to noncontrolling interest
Other
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
76,883
18,798
514
18,609
-
1,969
-
25,326
(1,814)
22,261
(17,199)
1,494
17,313
13,079
4,495
(871)
181,123
-
624
(12,205)
38,600
-
-
(111,161)
1,219
6,968
(2,332)
(78,287)
3,375
(2,391)
-
13,606
(278)
44,500
(111)
(204,374)
(587)
(8,745)
(5,754)
2,575
(158,184)
78,482
20,483
1,889
14,029
(1,078)
1,091
-
(15,978)
1,811
533
5,176
2,456
2,640
(3,158)
(8,623)
6,512
124,742
-
(944)
(23,459)
56,168
-
-
(58,549)
156
-
(723)
(27,351)
9,000
(9,000)
(2,528)
120
1,078
43,500
(2,045)
(79,913)
(19)
(18,014)
(4,869)
(768)
(63,458)
11,366
(43,982)
247,802
203,820
(4,566)
29,367
218,435
247,802
$
$
$
71,504
8,596
660
18,970
(829)
1,440
(400)
1,484
(135)
(9,710)
(2,165)
12,115
(8,617)
8,365
(1,015)
(8,665)
118,111
(348,887)
786
(57,878)
75,834
(4,553)
8,652
(133,244)
143
380
(679)
(459,446)
1,228
(4,287)
-
10,192
829
391,200
(1,270)
(65,986)
(218)
(11,009)
-
683
321,362
(4,592)
(24,565)
243,000
218,435
The accompanying notes are an integral part of these consolidated financial statements.
- 54 -
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Supplemental Cash Flow Information
Cash paid during the year for:
Interest
Income taxes
Non-cash activities:
(Increase) decrease property, plant and equipment purchased on accounts payable
Decrease (increase) in dividend accrued for noncontrolling interest
Share-based awards issued for Pericom acquisition
Acquisition:
Fair value of assets acquired
Fair value of liabilities assumed
Less cash acquired
Net assets acquired
Twelve Months Ended December 31,
2015
2016
2017
$
$
$
$
$
$
$
13,547
30,447
(14,081)
1,008
-
-
-
-
-
$
$
$
$
$
$
$
11,708
17,099
6,393
(1,008)
-
-
-
-
-
$
$
$
$
$
$
$
2,799
17,229
(4,498)
-
(4,680)
496,625
(88,284)
(54,774)
353,567
The accompanying notes are an integral part of these consolidated financial statements.
- 55 -
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Note 1 SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations Diodes Incorporated and its subsidiaries (collectively, the Company or we or our) is a leading
global manufacturer and supplier of high-quality application specific standard products within the broad discrete, logic, analog and
mixed-signal semiconductor markets. Diodes serves the consumer electronics, computing, communications, industrial, and automotive
markets. Diodes products include diodes, rectifiers, transistors, MOSFETs, protection devices, function-specific arrays, logic,
amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC
converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices,
such as USB power switches, load switches, voltage supervisors, and motor controllers. Diodes corporate headquarters and Americas
sales office are located in Plano, Texas and Milpitas, California. Design, marketing, and engineering centers are located in Plano;
Milpitas; Taipei, Taiwan; Taoyuan City, Taiwan; Zhubei City, Taiwan; Manchester, England; and Neuhaus, Germany. Diodes wafer
fabrication facilities are located in Manchester and Shanghai, China. Diodes has assembly and test facilities located in Shanghai,
Jinan, Chengdu, and Yangzhou, China, as well as in Hong Kong, Neuhaus and Taipei. Additional engineering, sales, warehouse, and
logistics offices are located in Taipei; Hong Kong; Manchester; Shanghai; Shenzhen, China; Seongnam-si, South Korea; and Munich,
Germany, with support offices throughout the world. Our products are sold primarily throughout Asia, North America and Europe.
During 2017, we shut down and transferred our wafer fabrication operation located in Lees Summit, MO, (KFAB) to other
Company-owned wafer fabrication plants and external foundries. See Note 18 below for additional information related to the KFAB
shutdown.
On November 24, 2015 we acquired Pericom Semiconductor Corporation. Pericom designs, develops and markets high-
performance integrated circuits (ICs) and frequency control products (FCPs) used in many of todays advanced electronic
systems. ICs include functions that support the connectivity, timing and signal conditioning of high-speed parallel and serial protocols
that transfer data among a systems microprocessor, memory and various peripherals, such as displays and monitors, and between
interconnected systems. FCPs are electronic components that provide frequency references such as crystals and oscillators for
computer, communication and consumer electronic products. Analog, digital and mixed-signal ICs, together with FCPs enable higher
system bandwidth and signal quality, resulting in better operating reliability, signal integrity, and lower overall system cost in
applications such as notebook computers, servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS
and digital media players. Analog, digital and mixed-signal ICs, together with FCPs enable higher system bandwidth and signal
quality, resulting in better operating reliability and signal integrity, and lower overall system cost in applications such as notebook
computers, servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS and digital media players.
Principles of consolidation The consolidated financial statements include the accounts of Diodes Incorporated, its wholly-
owned subsidiaries and its controlled majority-owned subsidiaries. We account for equity investments in companies over which we
have the ability to exercise significant influence, but do not hold a controlling interest, under the equity method, and we record our
proportionate share of income or losses in interest and other, net
in the consolidated statements of income. All significant
intercompany balances and transactions have been eliminated.
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America (GAAP) requires that management make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The level of uncertainty in estimates and assumptions increases with the
length of time until the underlying transactions are completed. Actual results may differ from these estimates in amounts that may be
material to the consolidated financial statements and accompanying notes.
Revenue recognition Net sales (revenue) are recognized when there is persuasive evidence that an arrangement exists, when
delivery has occurred, when the price to the buyer is fixed or determinable and when collectability of the receivable is reasonably
assured. These elements are met when title to the products is passed to the buyers, which is generally when product is shipped to the
customers. Generally, we recognize net sales upon shipment to manufacturers (direct ship) as well as upon sales to distributors using
the sell in model, which is when product is shipped to the distributors (point of purchase).
Certain customers have limited rights of return and/or are entitled to price adjustments on products held in their inventory or
upon sale to their end customers. We reduce net sales in the period of sale for estimates of product returns, distributor price
adjustments and other allowances. Our reserve estimates are based upon historical data as well as projections of sales, distributor
inventories, price adjustments, average selling prices and market conditions.
We record allowances/reserves for the following items: (i) ship and debit, which arise when we, from time to time based on
market conditions, issue credit to certain distributors upon their shipments to their end customers; (ii) stock rotation, which are
- 56 -
contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical
shipments to them in exchange forff
an equal and offsetting order; and (iii) price protection, which arise when market conditions cause
average selling prices to decrease and we issue credit to certain distributors on their inventory.
Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable. Stock
rotation reserves are recorded as a reduction to net sales with a corresponding reduction to cost of goods sold for the estimated cost of
inventory that is expected to be returned. Price protection reserves are recorded as a reduction to net sales with a corresponding
increase in accrued liabilities. Net sales are reduced in the period of sale for estimates of product returns and other allowances
including distributor adjustments, which were approximately $158.1 million, $132.9 million and $113.5 million in 2017, 2016 and
2015, respectively.
Product warranty We generally warrant our products for a period of one year from the date of sale. Historically, warranty
expense has not been material.
Cash, cash equivalents, and short-term investments We consider all highly liquid investments with maturity of three
months or less at the date of purchase to be cash equivalents. We currently maintain substantially all of our day-to-day operating cash
balances with major financial institutions. We hold short-term investments consisting of time deposits, which are highly liquid with
maturity dates greater than three months at the date of purchase. Generally, we can access these investments in a relatively short
amount of time but in doing so we generally forfeit a portion of interest income. See Note 2 below for additional information
regarding fair value of financial instruments.
Allowance for doubtful accounts We evaluate the collectability of our accounts receivable based upon a combination of
factors, including the current business environment and historical experience. If we are aware of a customers inability to meet its
financial obligations, we record an allowance to reduce the receivable to the amount we reasonably believe will be collected from the
customer. For all other customers, we record an allowance based upon the amount of time the receivables are past due. If actual
accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting effect on
operating expense. Accounts receivable are presented net of valuation allowance, which were approximately $4.5 million in 2017 and
$2.1 million 2016.
ff
Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in,
first-out method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories.
Any write-down of inventory to the lower of cost or net realizable value at the close of a fiscal period creates a new cost basis that
subsequently would not be marked up based on changes in underlying facts and circumstances. On an on-going basis, we evaluate
inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases
by item, as well as raw material usage related to our manufacturing facilities. If our review indicates a reduction in utility below
carrying value, we reduce inventory to a new cost basis. If future demand or market conditions are different than our current estimates,
an inventory adjustment to write down inventory may be required, and would be reflected in cost of goods sold in the period the
revision is made.
Property, plant and equipment Purchased property, plant and equipment is recorded at historical cost, and property, plant
and equipment acquired in a business combination is recorded at fair value on the date of acquisition. Property, plant and equipment is
depreciated using straight-line methods over the estimated useful lives, which range from 20 to 55 years for buildings and 3 to 10
years for machinery and equipment. The estimated lives of leasehold improvements range from 3 to 5 years, and are amortized over
the shorter of the remaining lease term or their estimated useful lives.
Goodwill and other indefinite lived intangible assets Goodwill and indefinite lived assets are tested for impairment on an
annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. Goodwill
impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment.
Diodes has one operating segment. No goodwill impairment occurred in 2017, 2016, or 2015. Goodwill is reviewed for impairment
using either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and
determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the
quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill. If fair value of exceeds
carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be
recognized as an impairment loss.
Impairment of long-lived assets Our long-lived assets are reviewed whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. We consider assets to be impaired if the carrying value exceeds the undiscounted
projected cash flows from operations. If impairment exists, the assets are written down to fair value or to the projected discounted cash
flows from related operations. As of December 31, 2017, we expect the remaining carrying value of assets to be recoverable. During
2017 we had recognized an impairment of long-lived assets related to the KFAB fixed assets. See Note 18 below for additional
information related to the KFAB shut down.
- 57 -
Business combinations The Company recognizes all (and only) the assets acquired and liabilities assumed in the transaction
and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions prescribe, among other things, the determination of acquisition-date fair value of consideration paid
in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring
costs from acquisition accounting. During the normal course of business the Company makes acquisitions. In the event that an
individual acquisition (or an aggregate of acquisitions) is material, appropriate disclosure of such acquisition activity is provided. See
Note 19 for additional information regarding business combinations.
Income taxes Income taxes are accounted for using an asset and liability approach whereby deferred tax assets and liabilities
are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. If it is more likely than not that
some portion of deferred tax assets will not be realized, a valuation allowance is recorded.
GAAP prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax return. Tax positions shall initially be recognized in the
financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax
positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. All deferred
income taxes are classified as noncurrent assets or noncurrent liabilities on the consolidated balance sheet as of December 31, 2017
and 2016, respectively.
The Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate
tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were
previously tax deferred, provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and creates new
taxes on certain foreign sourced earnings. As of the completion of these financial statements and related disclosures, we have not
completed our accounting for the tax effects of the Tax Act; however, as described below, we have made a reasonable estimate of such
effects and recorded a provisional tax expense of approximately $45.9 million, which is included as a component of income tax
expense from continuing operations in the fourth quarter of 2017. This provisional tax expense incorporates assumptions made based
upon the Companys current interpretation of the Tax Act, and may change as we receive additional clarification and implementation
guidance and as the interpretation of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company
will finalize the accounting for the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the
provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which
any such adjustments are determined. See Note 11 for additional information.
Research and development costs Internally-developed research and development costs are expensed as incurred. Acquired
in-process research and development (IPR&D) is capitalized as an indefinite-lived intangible asset and evaluated periodically for
impairment. When the project is completed, an expected life is determined and the IPR&D is amortized as an expense over the
expected life.
Shipping and handling costs Shipping and handling costs for products shipped to customers, which are included in selling,
general and administrative expenses, were approximately $15.2 million, $14.2 million and $8.3 million for the twelve months ended
December 31, 2017, 2016 and 2015, respectively.
Concentration of credit risk Financial instruments, which potentially subject us to concentrations of credit risk, include trade
accounts receivable. Credit risk is limited by the dispersion of our customers over various geographic areas, operating primarily in
electronics manufacturing and distribution. We perform on-going credit evaluations of our customers, and generally require no
collateral. Historically, credit losses have not been significant.
We currently maintain substantially all of our day-to-day cash balances and short-term investments with major financial
institutions. Cash balances are usually in excess of Federal and/or foreign deposit insurance limits.
Derivative instruments and hedging activities - The Company records all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected
to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the
criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in
expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally
provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the
hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to
economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge
- 58 -
accounting. We maintain derivative financial instruments with major financial institutions of investment grade credit rating and
monitor the amount of credit exposure to any one issuer. We believe there are no significant concentrations of risk associated with our
derivative financial instruments.
Valuation of financial instruments The carrying value of our financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, credit line, and long-term debt approximate fair value due to their
current market conditions, maturity dates and other factors.
Earnings per share Basic earnings per share is calculated by dividing net earnings attributable to common stockholders by
the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings per share is calculated
similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-
dilutive. Earnings per share are computed using the treasury stock method.
For the twelve months ended December 31, 2017, 2016 and 2015, options and share grants outstanding totaling approximately
3.5 million shares, 1.4 million shares and 1.4 million shares have been excluded from the computation of diluted earnings per share
because their effect was anti-dilutive.
Twelve Months Ended December 31,
2016
2015
2017
Earnings (numerator)
Net (loss) income attributable to common stockholders
$
(1,805)
$
15,935
$
24,274
Shares (denominator)
Weighted average common shares outstanding (basic)
Dilutive effect of stock options and stock awards outstanding
Adjusted weighted average common shares outstanding (diluted)
(Loss) earnings per share attributable to common stockholders
Basic
Diluted
48,824
-
48,824
48,597
1,192
49,789
$
$
(0.04)
(0.04)
$
$
0.33
0.32
$
$
48,210
1,290
49,500
0.50
0.49
Share-based compensation We use the Black-Scholes-Merton model to determine the fair value of stock options on the date
of grant and recognize compensation expense for stock options on a straight-line basis. Restricted stock grants are measured based on
the fair market value of the underlying stock on the date of grant and compensation expense is recognized on a straight-line basis over
the requisite four-year service period.
The amount of compensation expense recognized using the Black-Scholes-Merton model requires us to exercise judgment and
make assumptions relating to the factors that determine the fair value of our stock option grants. The fair value calculated by this
model is a function of several factors, including the grant price, the expected future volatility, the expected term of the option and the
risk-free interest rate of the option. The expected term and expected future volatility of the options require judgment. In addition, we
are required to estimate the expected forfeiture rate and only recognize expense for those stock options expected to vest. We estimate
the forfeiture rate based on historical experience, and to the extent our actual forfeiture rate is different from our estimate, share-based
compensation expense is adjusted accordingly.
Treasury stock Under a program authorized by our board of directors we have purchased shares of our common stock. These
shares are recorded as treasury stock, at cost, as a reduction to stockholder equity.
Functional currencies and foreign currency translation We translate the assets and liabilities of our non-U.S. dollar
functional currency subsidiaries into U.S. dollars using exchange rates on the balance sheet date. Net sales and expense for these
subsidiaries are translated at the weighted-average exchange rate during the period presented. Resulting translation adjustments are
recorded as a separate component of accumulated other comprehensive income or loss within stockholders equity in the consolidated
balance sheets. Included in other income are foreign exchange (losses) and gains of $(8.0) million, $2.2 million and $1.3 million for
the twelve months ended December 31, 2017, 2016 and 2015, respectively.
Defined benefit plan We maintain pension plans covering certain of our employees in the U.K. The overfunded or
underfunded status of pension and postretirement benefit plans are recognized on the balance sheet. Actuarial gains and losses, and
prior service costs or credits, are recognized in other comprehensive income (loss), net of tax effects, until they are amortized as a
component of net periodic benefit cost. For financial reporting purposes, the net pension and supplemental retirement benefit
obligations and the related periodic pension costs are calculated based upon, among other things, assumptions of the discount rate for
plan obligations, estimated return on pension plan assets and mortality rates. These obligations and related periodic costs are measured
- 59 -
using actuarial techniques and assumptions. The projected unit credit method is the actuarial cost method used to compute the pension
liabilities and related expenses. The expected long-term return on plan assets was determined based on historical and expected futur
e
returns of the various asset classes. The plans investment policy includes a mandate to diversify assets and invest in a variety of asset
classes to achieve its expected long-term return and is currently invested in a variety of funds representing most standard equity and
debt security classes. Trustees of the plan may make changes at any time.
ff
Investment in joint ventures Investment in joint ventures over which we have the ability to exercise significant influence and
that, in general, are at least 20 percent owned are accounted for using the equity method of accounting. These investments are
evaluated for impairment, in which an impairment loss would be recorded whenever a decline in the value of an equity investment
below its carrying amount is determined to be other than temporary. In judging other than temporary, we consider the length of
time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and
longer-term operating and financial prospects of the investee, and our longer-term intent of retaining the investment in the investee.
Noncontrolling interest - Noncontrolling interest primarily relates to the minority investors share of the earnings of certain
China and Taiwan subsidiaries. Noncontrolling interests are a separate component of equity and not a liability.
Increases or decreases
in noncontrolling interest, due to changes in our ownership interest of the subsidiaries that leave control intact, are recorded as equity
transactions. The noncontrolling interest in our subsidiaries and their equity balances are reported separately in the consolidated
financial statements, and activities of these subsidiaries are included therein.
Contingencies From time to time, we may be involved in a variety of legal matters that arise in the normal course of business.
Based on information available, we evaluate the likelihood of potential outcomes. We record and disclose the appropriate liability
when the amount is deemed probable and reasonably estimable. In addition, we do not accrue for estimated legal fees and other
directly related costs as they are expensed as incurred.
Comprehensive income (loss) GAAP generally requires that recognized revenue, expenses, gains and losses be included in
net income. Although certain changes in assets and liabilities are reported as separate components of the equity section of the
consolidated balance sheet, such items, along with net income, are components of comprehensive income or loss. The components of
accumulated other comprehensive income or loss include foreign currency translation adjustments and unrealized gain or loss on
defined benefit plan. Accumulated other comprehensive loss was approximately $83.5 million, $112.7 million and $84.4 million at
December 31, 2017, 2016 and 2015, respectively.
There is no income tax expense or benefit associated with each component of comprehensive income. As of December 31, the
accumulated balance for each component of comprehensive income is as follows:
Unrealized foreign currency losses
Unrealized gain on interest rate swap, net of tax
Unrealized loss on defined benefit plan
2017
2016
(42,010)
2,524
(43,994)
$
$
$
(75,075)
1,506
(39,097)
$
$
$
Reclassifications Certain immaterial amounts from prior periods have been reclassified to conform to the current years
presentation.
Recently Accounting Pronouncements - The Financial Accounting Standards Board (FASB) issued the following
Accounting Standards Updates (ASU) which could have potential impact to the Companys financial statements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides
a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for
annual and interim reporting periods beginning after December 15, 2017. We will adopt this standard in the first quarter of 2018, and
will apply the standard using the modified retrospective method. Further, we will elect the following applicable practical expedients;
•
Recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of
the asset that the entity otherwise would have recognized is one year or less;
• Use the portfolio approach, in estimating variable consideration, which specifies the accounting for an individual
contract with a customer;
Continue to expense shipping and handling as fulfillment activities; and
Continue to exclude sales taxes from the transaction price.
•
•
Our key revenue streams are Distribution and Original Equipment Manufacturer (OEM) sales, that combined comprise the
majority of our business. The current pattern of revenue recognition for these revenue streams is point-in-time, and that will not
change upon the adoption of the new standard. Further, we have identified a number of variable consideration components within our
contracts with customers, and have determined there will be no related impact. We have also determined that the impact of accounting
- 60 -
for costs incurred to obtain a contract is immaterial. The adoption of this standard will not have a material effect on our consolidated
financial statements, but will require the Company to provide additional and revised disclosures beginning with our Form 10-Q filing
for the first quarter of 2018.
) -
ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, which amends the
accounting treatment for leases. The amendments are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full
retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of
ASU 2016-02 may have on its consolidated financial statements and has not elected early adoption as of the period ended December
31, 2017. During the second quarter of 2017 we engaged outside accounting consultants to assist us in the implementation of this new
standard. The Company is in the process of assessing its outstanding leases.
ASU No. 2016-09, CompensationStock Compensation (Topic 718) Improvements to Employee Share-Based Payment
Accounting - In March 2016, the FASB issued guidance to simplify the accounting for share-based payment transactions by requiring
all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings, thus eliminating the requirement
to classify the excess tax benefit and deficiencies as additional paid-in capital. Under the new guidance, an entity makes an accounting
policy election to either estimate the expected forfeiture awards or account for forfeitures as they occur. We adopted ASU No. 2016-
09 during the first quarter of 2017 and as a result will account for forfeitures as they occur. The effect of the adoption related to the
income tax portion was an increase of $4.8 million to retained earnings and to deferred income tax assets. The effect of the adoption
related to forfeitures was an increase to additional paid in capital of $0.8 million, an increase to deferred tax assets of $0.3 million and
a decrease to retained earnings of $0.5 million.
ASU No. 2017-09, Compensation Stock Compensation (Topic 718) Scope of Modification Accounting - In May 2017, the
FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a
modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the
classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective
prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. We early
adopted this standard in the third quarter of 2017. Adoption of this standard had no impact on the Companys financial statements.
the FASB issued guidance that eliminates the requirement
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
to separately measure and report hedge
In August 2017,
ineffectiveness. The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including
interim periods within those years. Early adoption is permitted in any interim period or fiscal period before the effective date. The
Company adopted ASU No. 2017-12 during the third quarter of 2017. In accordance with ASU 2017-12, the Company recognizes all
reclassifications out of other comprehensive income (other than those related to a hedged transaction becoming probable of not
occurring) in the same income statement line item in which the earnings effect of the hedged item is being presented, which is
consistent with the Companys current policy. Adoption of this standard had no impact on the Companys financial statements.
ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11
This standard requires in scope inventory to
be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. The amendments do not apply to inventory that
is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is
measured using first-in, first-out (FIFO) or average cost. The standard is effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years and requires prospective application. We adopted this standard in the first
quarter of 2017. The adoption had no material impact on our financial statements.
).
ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments - In
November 2016, the FASB issued an accounting standard update related to the presentation of restricted cash in the Companys
Consolidated Statement of Cash Flows. The update requires that the Consolidated Statement of Cash Flows explain the change during
the period in cash, cash equivalents, and restricted cash. Restricted cash should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows. This
accounting guidance is effective for the Company beginning in the first quarter of 2018. The Company will adopt this guidance for our
fiscal year beginning January 1, 2018, and the guidance will result in changes to the Companys Consolidated Statement of Cash
Flows such that restricted cash amounts will be included in the beginning-of-period and end-of-period cash and cash equivalents totals,
and will have no impact on our results of operations.
- 61 -
ASU No. 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory. This standard requires that
an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset
has been sold to an outside party. The amendments in this standard are effective for annual reporting periods beginning after
December 15, 2017, including interim reporting periods within those annual reporting periods. The Company does not expect the
adoption of this new standard to have a material effect on its financial statements.
ASU No. 2017-01, Clarifying the Definition of a Business. This standard classifies the definition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. This update is effective for annual periods beginning after December 15, 2017, including interim
periods within those annual reporting periods, and would only apply to future acquisitions.
ASU 2017-04, IntangiblesGoodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This standard
simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting units carrying value
exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is
effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company adopted this standard in the third quarter of 2017. Adoption of this standard had no impact on the
Companys financial statements.
Note 2 FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The
market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets
and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single
present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the
service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques
refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those
that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained
from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions
market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
These two types of inputs create a three-tier fair value hierarchy that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example,
interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from
or corroborated by observable market data by correlation or other means.
Level 3 Inputs - Significant unobservable inputs that reflect an entitys own assumptions that market participants would use in
pricing the assets or liabilities.
As of December 31, 2017, we had short-term investments. Trading securities held at December 31, 2017, were purchased on
the open market and unrealized gains and losses are included in other income (expense). The trading securities are valued under the
fair value hierarchy using Level 1 Inputs. Short-term investments of $4.6 million consist of investments such as time deposits, which
are highly liquid with maturity dates greater than three months at the date of purchase. See Note 17 for additional information related
to our interest rate swaps and foreign currency hedges. Generally, we can access these investments in a relatively short amount of
time but in doing so we generally forfeit a portion of earned and future interest income. The short-term investments are valued under
the fair value hierarchy using Level 2 Inputs.
- 62 -
Financial assets and liabilities carried at fair value as of December 31, 2017 are classified in the following table:
a
Description
Short-term investments
Interest rate swaps and collars
Fair Market
Value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Changes
in Fair Values
Included in
Current Period
Earnings
$
4,558
3,884
$
2,586
-
$
1,972
3,884
$
$
-
-
-
-
Financial assets and liabilities carried at fair value as of December 31, 2016 are classified in the following table:
a
Description
Short-term investments
Interest rate swap assets
Fair Market
Value
$
29,842
2,317
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
2,737
$
-
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Changes
in Fair Values
Included in
Current Period
Earnings
$
27,105
2,317
$
$
-
-
-
-
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are
not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment). We believe our long-term debt under our revolving credit facility approximates fair value and is
valued under the fair value hierarchy using Level 2 Inputs. Financial assets and financial liabilities measured at fair value on a non-
recurring basis were not significant at December 31, 2017 and 2016.
We also are responsible for a pension plan in the U.K. that holds investments carried at fair value. See Note 12 for additional
information related to these pension plan investments.
Note 3 INVENTORIES
Inventories, stated at the lower of cost or market value, at December 31 were:
Finished goods
Work-in-progress
Raw materials
Note 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 were:
Buildings and leasehold improvements
Machinery and equipment
Less: Accumulated depreciation and amortization
Construction in-progress
Land
2017
2016
$
$
81,194
52,578
82,734
216,506
$
$
2017
2016
$
$
203,054
774,138
977,192
(581,753)
395,439
22,446
41,284
459,169
$
$
66,930
45,408
81,145
193,483
192,290
685,249
877,539
(535,407)
342,132
24,049
35,807
401,988
Depreciation and amortization of property, plant and equipment was $76.9 million, $78.5 million and $71.5 million for the years
ended December 31, 2017, 2016 and 2015, respectively. We have capital lease obligations totaling approximately $1.0 million and
$1.1 million and December 31, 2017 and 2016, respectively, included in other current liabilities and other long-term liabilities on the
balance sheet.
- 63 -
Note 5 INTANGIBLE ASSETS
Intangible assets subject to amortization at December 31 were as follows:
Intangible Assets
Useful life
December 31, 2017
Gross Carrying
Amount
Accumulated
Amortization
Currency
Exchange
Net
Amortized intangible assets
nts
Software license
Developed product technology
Customer relationships
Other
Total amortized intangible assets
Intangible assets with indefinite lives
and development
Trademarks and trade names
Total Intangible assets with indefinite lives
Total intangible assets
5-15 years $
3 years
2-10 years
12 years
4 years
Indefinite
Indefinite
$
11,823
1,212
154,795
62,093
4,610
234,533
8,914
10,303
19,217
253,750
Intangible Assets
Useful life
December 31, 2016
Gross Carrying
Amount
Amortized intangible assets
Software license
Developed product technology
Customer relationships
Other
Total amortized intangible assets
Intangible assets with indefinite lives
and development
Trademarks and trade names
Total Intangible assets with indefinite lives
Total intangible assets
5-15 years $
3 years
2-10 years
12 years
4 years
Indefinite
Indefinite
$
11,823
1,212
153,009
62,093
4,610
232,747
10,700
10,303
21,003
253,750
$
$
$
$
(9,154)
(1,149)
(53,925)
(19,319)
(4,512)
(88,059)
-
-
-
(88,059)
Accumulated
Amortization
(8,431)
(1,149)
(41,416)
(13,915)
(4,336)
(69,247)
-
-
-
(69,247)
$
$
$
$
(242)
(63)
(6,219)
(1,650)
(75)
(8,249)
-
(997)
(997)
(9,246)
Currency
Exchange
(255)
(63)
(6,299)
(1,750)
(75)
(8,442)
-
(1,185)
(1,185)
(9,627)
$
$
$
$
2,427
-
94,651
41,124
23
138,225
8,914
9,306
18,220
156,445
Net
3,137
-
105,294
46,428
199
155,058
10,700
9,118
19,818
174,876
Amortization expense related to intangible assets subject to amortization was $18.8 million, $20.5 million and $8.6 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
Amortization of intangible assets is as follows:
2018
2019
2020
2021
2022
2023 and thereafter
Total
NOTE 6 GOODWILL
Changes in goodwill for the years ended December 31 were as follows:
Balance at December 31, 2015
Pericom measurement period adjustment
d
Foreign currency translation adjustment
Balance at December 31, 2016
Foreign currency translation adjustment
d
Balance at December 31, 2017
- 64 -
$
$
$
18,003
17,498
15,472
14,775
13,956
58,521
138,225
132,913
2,741
(6,242)
129,412
4,775
134,187
NOTE 7 BANK CREDIT AGREEMENTS AND OTHER SHORT-TERM AND LONG-TERM DEBT
Short-term debt
Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling
$80.5 million. Generally our foreign credit lines are unsecured, uncommitted and may be repayable on demand. These credit facilities
bear interest at LIBOR plus margin. Interest payments are due quarterly on outstanding amounts under the credit lines. The unused
and available credit under the various facilities as of December 31, 2017, was approximately $78.7 million, net of a $1.0 million
advance under the foreign credit line and $0.9 million credit used for import and export guarantee.
Long-term debt
We currently have a U.S. banking credit facility (the U.S. Credit Facility) under which we may draw up to $250 million on a
revolving basis, in addition to a $250 million term loan. The U.S. Credit Facility matures October 26, 2021. The term loan portion of
the U.S. Credit Facility is repayable in part through quarterly installments that increase over time from $3.1 million per quarter in
2016 to $9.4 million per quarter in the final year of the U.S. Credit Facility. We may, from time to time, request increases in the
aggregate commitments under the U.S. Credit Facility of up to $200 million, subject to the lenders electing to increase their
commitments or by means of the addition of new lenders, and subject to at least half of each increase in aggregate commitments being
in the form of term loans, with the remaining amount of each increase being an increase in the amount of the revolving portion of the
U.S. Credit Facility. The U.S. Credit Facility bears interest at LIBOR or similar indices plus a specified margin. The U.S. Credit
Facility contains certain financial and non-financial covenants, including, but not limited to, a maximum consolidated leverage ratio, a
minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness, investments, fundamental changes,
dispositions, and restricted payments (including dividends and share repurchases). At December 31, 2017, we owed $268.8 million
under the U.S. Credit Facility, $103.0 million of which was drawn under the revolving portion and $165.8 million of which was
outstanding under the term loan. The obligations of the Borrowers under the U.S. Credit Facility are secured by substantially all of the
assets of Diodes, including controlling interests in its first-tier subsidiaries, and by specified assets of certain of its subsidiaries.
Long-term debt balances as of December 31, consist of the following:
NNotes payable to Taiwan bank, original principal amount of TWD 132 million,
variable interest (approximately 1.7% as of December 31, 2017), matures July 6, 2021.
Term loan and revolver
Total long-term debt
Less: Current portion
Less: Unamortized debt issuance costs
gLong-term debt, net of current portion
$
$
268,812
270,083
(20,636)
(1,955)
247,492
$
2017
2016
1,271
$
1,466
The table below sets forth the annual contractual
t maturities of long-term debt at December 31, 2017:
t
2018
2019
2020
2021
Total long-term debt
$
$
- 65 -
428,375
429,841
(14,356)
(2,359)
413,126
20,636
26,892
33,147
189,408
270,083
NOTE 8 CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital lease agreements are summarized as follows:
For years ending December 31,
2018
2019
Less: Interest
Present value of minimum lease payments
Less: Current portion
gLong-term portion
$
$
658
410
1,068
(27)
1,041
(646)
395
At December 31, 2017, property under capital leases had a cost of $3.7 million, and the related accumulated depreciation was
$2.6 million. Depreciation of assets held under capital lease is included in depreciation expense.
NOTE 9 ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities and other current liabilities at December 31 were:
Accrued expenses
Compensation and payroll taxes
Equipment purchases
Accrued pricing adjustments
Accrued professional services
Other
Other long-term liabilities at December 31 were:
Accrued defined benefit plan
Unrecognized tax benefits
Deferred grant and subsidy
Income tax contingencies
Deferred compensation
Other
$
$
$
$
2017
2016
29,764
34,359
20,637
11,410
2,088
1,043
99,301
34,428
24,211
17,173
8,319
8,870
1,924
94,925
$
$
$
$
2017
33,947
23,720
6,377
3,817
2,645
1,056
71,562
30,515
15,340
18,259
8,163
6,433
2,663
81,373
2016
NOTE 10 STOCKHOLDERS EQUITY
We have never declared or paid cash dividends on our Common Stock. Our U.S. Credit Facility permits us to pay dividends up
to $3.0 million per fiscal year to its stockholders so long as we have not defaulted at the time of such dividend and no default would
result from declaring or paying such dividend. The payment of dividends is within the discretion of our Board of Directors. See Note 7
for additional information regarding our credit agreements.
ff
During November 2015 the Companys board of directors authorized a share repurchase plan to repurchase up to an aggregate
of $100 million of the Companys outstanding common stock, $0.66 2/3 par value per share. The share repurchase program is
expected to continue through the end of 2019 unless extended or shortened by the Board of Directors. During 2017 the Company
repurchased 300,000 of its common shares at a cost of $8.7 million and in 2016, the Company repurchased 691,196 of its common
shares at a cost of $18.0 million. All purchases were made through open market transactions and were recorded as treasury stock.
- 66 -
NOTE 11 INCOME TAXES
Tax Cuts and Jobs Act
The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%,
requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred,
provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and creates new taxes on certain foreign
sourced earnings. As of the completion of these financial statements and related disclosures, we have not completed our accounting
for the tax effects of the Tax Act; however, as described below, we have made a reasonable estimate of such effects and recorded a
provisional tax expense of $45.9 million, which is included as a component of income tax expense from continuing operations in the
fourth quarter of 2017. This provisional tax expense incorporates assumptions made based upon the Companys current interpretation
of the Tax Act, and may change as we receive additional clarification and implementation guidance and as the interpretation of the
Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects
of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be reported as a
component of income tax expense from continuing operations in the reporting period in which any such adjustments are determined.
The table below reflects the significant components of the provisional amount of tax expense recorded in the fourth quarter of
2017 and included as a component of income tax expense from continuing operations:
Component
Remeasurement of U.S. deferred tax assets and liabilities
Transition tax on foreign earnings
Foreign tax credits used to offset transition tax
Other adjustments
Total net tax expense related to the Tax Act
Provisional Amount
2,913
104,327
(58,975)
(2,357)
45,908
$
$
The Company expects to use net operating loss carryforwards and tax credits to completely offset any cash tax obligations
resulting from the transition tax. The other components shown above represent noncash adjustments to tax expense.
Remeasurement of U.S. deferred tax assets and liabilities
We remeasured certain U.S. deferred tax assets and liabilities using the lower corporate income tax rate of 21%. However, we
are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these
deferred tax balances.
Transition tax on foreign earnings
The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S.
income taxes, and is net of indirect effects of unrecognized tax benefits. We have not yet completed our calculation of the total post-
1986 E&P for the majority of our foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held
in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously
deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax,
or any additional outside basis difference inherent in these entities. Our undistributed foreign earnings, including those subject to the
transition tax, continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European
subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not
subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the
one-time transition tax) is not practicable. We continue to evaluate the potential effects the Tax Act may have on our long term plans
for capital investment across the geographies in which we operate.
Foreign tax credits used to offset transition tax
The Company is able to claim foreign tax credits against the incremental U.S. tax due on its previously deferred foreign earnings.
However, we have not yet completed our calculation of the total amount of foreign taxes previously paid or accrued by the majority of
our foreign subsidiaries that may be creditable against the transition tax. We expect these tax credits to generally be available to offset
any cash tax liability resulting from the transition tax.
- 67 -
Other adjustments
We have not yet completed our analysis of the direct and indirect implications of the Tax Act on the Companys tax attributes,
such as tax credit carryforwards. Included in the provisional tax expense is the estimated effect of our change in judgment regarding
realizability of foreign tax credits and R&D credits.
(
)
Income (loss) before income taxes
U.S.
Foreign
Total
2017
2016
2015
$
$
(72,668)
135,259
62,591
$
$
(40,861)
65,896
25,035
$
$
$
$
2015
(21,091)
61,686
40,595
12
17,983
29
18,024
(2,739)
(1,063)
(228)
(4,030)
88
14,082
The components of the income tax provision (benefit) are as follows for the years ended December 31:
Current tax provision (benefit)
Federal
Foreign
State
Deferred tax provision (benefit)
Federal
Foreign
State
Liability for unrecognized tax benefits
Total income tax provision
Effective Tax Rate Reconciliation
2017
2016
-
31,820
7
31,827
30,186
(2,352)
(8)
27,826
2,672
62,325
$
$
-
28,993
13
29,006
(10,517)
(13,847)
101
(24,263)
1,815
6,558
$
$
Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2017, 2016, and 2015
is as follows:
2017
2016
2015
Amount
$
21,907
Federal tax
State income taxes, net of federal tax
provision
Foreign income taxed at lower tax rates
U.S. tax impact of foreign operations
Foreign withholding taxes
Research and development
Liability for unrecognized tax benefits
Valuation allowance
Provision-to-return adjustments
Employee stock-based compensation
U.S. Tax Cuts and Jobs Act
Other
Income tax provision
$
(15)
(23,515)
6,726
4,343
(2,643)
2,672
2,077
131
1,537
45,908
3,197
62,325
Percent
of pretax
earnings
Percent
of pretax
earnings
Amount
Percent
of pretax
earnings
Amount
35.0
$
8,762
35.0
$
14,214
-
(37.6)
10.7
6.9
(4.2)
4.3
3.3
0.2
2.5
73.4
5.1
99.6
$
(65)
(6,955)
324
4,834
(2,241)
1,815
(2,600)
(61)
-
-
2,745
6,558
(0.3)
(27.8)
1.3
19.3
(9.0)
7.3
(10.4)
(0.2)
-
-
11.0
26.2
$
(152)
(10,126)
2,046
2,268
(2,068)
88
3,580
994
-
-
3,238
14,082
35.0
(0.4)
(24.9)
5.0
5.6
(5.1)
0.2
8.8
2.4
-
-
8.1
34.7
- 68 -
Uncertain Tax Positions
In accordance with the provisions related to accounting for uncertainty in income taxes, we recognize the benefit of a tax
position if the position is more likely than not to prevail upon examination by the relevant tax authority. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1,
Additions based on tax positions related to the
current year
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at December 31,
$
$
2017
2016
2015
28,849
$
26,503
$
3,492
863
(2,623)
30,581
$
6,746
960
(5,360)
28,849
$
19,488
3,450
6,963
(3,398)
26,503
If the $30.6 million of unrecognized tax benefits as of December 31, 2017 is recognized, approximately $27.2 million would affect the
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax
effective tax rate.
positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlements of ongoing
audits or competent authority proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject
to U.S. federal income tax examinations by tax authorities for tax years before 2008, or for the 2010 and 2011 tax years. We are no
longer subject to China income tax examinations by tax authorities for tax years before 2007. With respect to state and local
jurisdictions and countries outside of the U.S., with limited exceptions, we are no longer subject to income tax audits for years before
2012. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties, if any,
have been provided for in our reserve for any adjustments that may result from future tax audits. We recognize accrued interest and
penalties, if any, related to unrecognized tax benefits in interest expense. We had an immaterial amount of accrued interest and
penalties at December 31, 2017, 2016 and 2015.
Deferred Taxes
The table below sets forth our deferred tax assets and liabilities as of December 31, 2017 and 2016:
2017
2016
Deferred tax assets
Inventory cost
Accrued expenses and accounts receivable
Foreign tax credits
Research and development tax credits
Net operating loss carryforwards
Accrued pension
Share based compensation and others
Valuation allowances
Total deferred tax assets, non-current
Deferred tax liabilities
Plant, equipment and intangible assets
Total deferred tax liabilities, non-current
NNet deferred tax assets
$
$
8,000
690
10,626
15,828
5,392
5,428
12,443
58,407
(22,560)
35,847
(17,278)
(17,278)
18,569
$
$
6,923
2,112
19,610
13,633
37,379
5,494
16,992
102,143
(32,082)
70,061
(28,639)
(28,639)
41,422
We prospectively adopted ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (ASU 2013-11) effective in the first quarter of 2014. ASU
No. 2013-11 provides that an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in
the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. The $15.4 million net deferred tax assets presented in the balance sheet as of December 31, 2017, is net of $3.2 million
of unrecognized tax benefits. The $27.8 million net deferred tax asset presented on the balance sheet as of December 31, 2016, is net
of $13.6 million of unrecognized tax benefits. The $41.4 million net deferred tax asset presented above is prior to the net balance
sheet presentation required by ASU 2013-11.
- 69 -
We adopted ASU No. 2016-09, CompensationStock Compensation (Topic 718) Improvements to Employee Share-Based
Payment Accounting, (ASU 2016-09) effective in the first quarter of 2017. The effect of the adoption related to the income tax
components of ASU 2016-09 was an increase of $4.8 million to retained earnings and to deferred income tax assets, to record the tax
benefit of the net operating loss carryforward resulting from excess tax deductions related to stock based compensation. ASU 2016-09
requires that the tax effects of differences between cumulative compensation expense recorded for financial statement purposes and
available income tax deductions be recorded to income tax expense. We recorded a $1.5 million increase to income tax expense as a
result of the application of ASU 2016-09 to stock based compensation vesting and exercise events that occurred during 2017.
At December 31, 2017, we had federal tax credit and research credit carryforwards of approximately $20 million and $7 million,
respectively, which are available to offset future income tax liabilities. The federal tax credit carryforwards begin to expire in 2021
and the state tax credit carryforwards will begin to expire in 2020. We determined that it is more likely than not that a portion of our
federal and state research credit carryforwards will expire before they are utilized. The valuation allowances recorded against the
related deferred tax assets totaled $13 million and $22.4 million as of December 31, 2017 and 2016, respectively.
At December 31, 2017, we had state net operating loss (NOL) carryforwards of approximately $3 million, and foreign NOL
carryforwards of $2 million which are available to offset future taxable income. The U.S. state NOL carryforwards will begin to
expire in 2018. We determined that it is more likely than not that the U.S. state NOL carryforwards will expire before they are fully
utilized and recorded a full valuation allowance on the related deferred tax assets. The foreign NOL carryforwards will begin to expire
in 2020. We determined that it is more likely than not that a portion of the foreign NOL carryforwards will expire before they are fully
utilized. The valuation allowances recorded against the related deferred tax assets totaled $5 million and $5.9 million as of December
31, 2017 and 2016, respectively.
Supplemental Information
Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to
earnings of European subsidiaries. As of December 31, 2017, we had undistributed earnings from non-U.S. operations of
approximately $770 million (including approximately $51 million of restricted earnings, which are not available for dividends).
Undistributed earnings of our China subsidiaries comprise $429 million of this total. Additional Chinese withholding taxes of
approximately $42 million would be required should the $429 million of such earnings be distributed out of China as dividends.
The impact of tax holidays decreased our tax expense by approximately $3.7 million, $7.3 million and $2.9 million for the years
ended December 31, 2017, 2016 and 2015, respectively. The benefit of the tax holidays on basic and diluted earnings per share was
$0.08, $0.15 and $0.06 for the twelve months ended December 31, 2017, 2016 and 2015, respectively.
NOTE 12 EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
In connection with the Zetex acquisition, we adopted a contributory defined benefit plan that covers certain employees in the
U.K. The defined benefit plan is closed to new entrants and frozen with respect to future benefit accruals. The retirement benefit is
based on the final average compensation and service of each eligible employee. We determined the fair value of the defined benefit
plan assets and utilize an annual measurement date of December 31. At subsequent measurement dates, defined benefit plan assets
will be determined based on fair value. Defined benefit plan assets consist of a diverse range of listed and unlisted securities including
corporate bonds and mutual funds and are denominated in the currency in which the benefits will be paid and that have terms to
maturity approximating the terms of the related pension liability. The net pension and supplemental retirement benefit obligations and
the related periodic costs are based on, among other things, assumptions of the discount rate, estimated return on plan assets and
mortality rates. These obligations and related periodic costs are measured using actuarial techniques and assumptions. The projected
unit credit method is the actuarial cost method used to compute the pension liabilities and related expenses. All unrecognized
actuarial gains and losses, prior service costs and accumulated other comprehensive income are eliminated and the balance sheet
liability is set equal to the funded status of the defined benefit plan at acquisition date.
- 70 -
The table below sets forth net periodic benefit costs of the plan for the years ended December 31, 2017 and 2016:
Components of net periodic benefit cost:
Service cost
Interest cost
Recognized actuarial loss
Expected return on plan assets
NNet periodic benefit cost
Defined Benefit Plan
2017
2016
$
$
258
4,228
1,325
(6,506)
(695)
$
$
The table below sets forth the benefit obligation, the fair value of plan assets, and the funded status as of December 31:
Change in benefit obligation:
Beginning balance
Service cost
Interest cost
Actuarial loss
Benefits paid
Currency changes
Benefit obligation at December 31
Change in plan assets:
Beginning balance - fair value
Employer contribution
Actual return on plan assets
Benefits paid
Currency changes
Fair value of plan assets at December 31
Underfunded status at December 31
Defined Benefit Plan
2017
2016
$
$
$
$
$
146,801
258
4,228
4,910
(4,313)
14,179
166,063
118,658
2,974
5,454
(4,313)
11,461
134,234
(31,829)
$
$
$
$
$
270
5,151
993
(6,210)
204
145,019
270
5,151
29,793
(6,816)
(26,616)
146,801
116,386
2,105
28,422
(6,816)
(21,439)
118,658
(28,143)
Based on an actuarial study performed as of December 31, 2017, the plan is underfunded by approximately $31.8 million and
the liability is reflected in our consolidated balance sheets as a noncurrent liability and the amount recognized in accumulated other
comprehensive loss was approximately $44.0 million.
We apply the 10% corridor approach to amortize unrecognized actuarial gains (losses). Under this approach, only actuarial
gains (losses) that exceed 10% of the greater of the projected benefit obligation or the market-related value of the plan assets are
amortized. For the twelve months ended December 31, 2017, the plans total recognized loss increased by approximately $4.8 million.
The variance between the actual and expected return to plan assets during 2017 decreased the total unrecognized net loss by
approximately $1.1 million. The total unrecognized net loss is more than 10% of the projected benefit obligation and 10% of the plan
assets. Therefore, the excess amount will be amortized over the average term to retirement of plan participants not yet in receipt of
pension, which as of December 31, 2017 the average term was approximately 13 years. The following weighted-average assumptions
were used to determine net periodic benefit costs for the twelve months ended December 31:
Discount rate
Expected long-term return on plan assets
2017
2.8%
5.4%
The following weighted-average assumption was used to determine the benefit obligations at December 31:
Discount rate
2017
2.6%
- 71 -
2016
2.8%
5.4%
2016
2.8%
The expected long-term return on plan assets was determined based on historical and expected future returns of the various asset
classes. The plans investment policy includes a mandate to diversify assets and invest in a variety of asset classes to achieve its
expected long-term return and is currently invested in a variety of funds representing most standard equity and debt security classes.
Trustees of the plan may make changes at any time. The table below sets forth the plan asset allocations of the assets in the plan and
expected long-term return by asset category:
Asset category
Growth assets
Hedging assets
Cash
Total
Expected long-term return
Asset allocation
7.7%
1.8%
0.5%
5.5%
64%
34%
2%
100%
Benefit plan payments are primarily made from funded benefit plan trusts and current assets. The table below sets forth the
expected future benefit payments, including future benefit accrual, as of December 31, 2017:
2018
2019
2020
2021
2022
2023-2026
$
3,845
3,998
4,376
4,871
5,267
24,455
We adopted a payment plan with the trustees of the defined benefit plan, in which we would make annual contributions each
year through 2030, of approximately GBP 2 million (approximately $2.8 million based on a GBP:USD exchange rate of 1.4). The
annual contributions were expected to meet the deficit disclosed in the plan as of April 5, 2013 by December 31, 2030. The trustees
are required to review the funding position every three years, and a further review was carried out as of April 5, 2016. The outcome of
the review, as agreed with the trustees during the first quarter of 2017, was that contributions would continue at the existing level until
December 31, 2029.
Our overall defined benefit plan investment strategy is to achieve a mix of investments for long-term growth and for near-term
benefit payments with a wide diversification of asset types and fund strategies. The target allocations for plan assets are 48% equity
securities, 40% corporate bonds and government securities, and 12% to absolute return funds. Equity securities primarily include
investments in large-cap and mid-cap companies primarily located in the U.K. Fixed income securities include corporate bonds of
companies from diversified industries, and U.K. government bonds. The absolute return fund is mainly invested in a mixture of
equities and bonds.
The plans trustees appoint fund managers to carry out all the day-to-day functions relating to the management of the fund and
its administration. The fund managers must invest their portion of the plans assets in accordance with their investment manager
agreement agreed by the trustees. The trustees are responsible for agreeing these investment manager agreements and for deciding on
the portion of the plans assets that will be invested with each fund manager. When making decisions, the trustees take advice from
experts including the plans actuary and also have the option to consult with the Company.
- 72 -
The following table summarizes the major categories of the plan assets:
Asset category
Cash and cash equivalents
Equity securities:
North America
Europe (excluding U.K.)
Japan
Pacific Basin (excluding Japan)
Emerging markets
Fixed income securities:
Others
Index linked securities:
Other types of investments:
Hedge funds
Development REITS
Insurance linked securities
Liability driven investments
Other
Total
Level 1
December 31, 2017
Level 2
$
2,182
$
4,915
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,182
$
$
2,787
16,082
5,713
2,703
1,372
4,448
3,682
5,731
203
1,291
27,355
6,004
4,117
45,450
199
132,052
$
Level 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
7,097
2,787
16,082
5,713
2,703
1,372
4,448
3,682
5,731
203
1,291
27,355
6,004
4,117
45,450
199
134,234
Fair value is taken to mean the bid value of securities, as supplied by the fund managers. All the plans securities are publically
traded and highly liquid. The plan does not hold any Level 3 securities. See Note 2 for additional information regarding fair value and
Levels 1, 2 and 3.
The investment manager agreements require the fund managers to invest in a diverse range of stocks and bonds across each
particular asset class. The stocks held by the plan in a particular asset class should therefore match closely the underlying stocks in the
relevant index. We believe that this leads to minimal concentration of risk within each asset class; although we recognize that some
asset classes are inherently more risky than others.
We also have pension plans in Asia for which the benefit obligation, fair value of the plan assets and the funded status amounts
are immaterial and therefore, not included in the amounts or assumptions above.
401(k) Retirement Plan
We maintain a 401(k) retirement plan (the Plan) for the benefit of qualified employees at our U.S. 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. We currently make a matching contribution of $1 for every $2 contributed by the
participant up to 6% (3% maximum matching) of the participants eligible payroll, which vests over an initial four years. In addition,
we may make a discretionary contribution to the entire qualified employee pool, in accordance with the Plan.
As stipulated by the regulations of China, we maintain a retirement plan pursuant to the local municipal government for the
employees in China. We are required to make contributions to the retirement plan at a rate between 10% and 22% of the employees
eligible payroll. Pursuant to the Taiwan Labor Standard Law and Factory Law, we maintain a retirement plan for the employees in
Taiwan, whereby we make contributions at a rate of 6% of the employees eligible payroll.
For the years ended December 31, 2017, 2016 and 2015, total amounts expensed under these plans were approximately $14.8
million, $13.9 million and $14.0 million, respectively.
Deferred Compensation Plan
We maintain a Non-Qualified Deferred Compensation Plan (the Deferred Compensation Plan) for executive officers, key
employees and members of the Board of Directors (the Board). The Deferred Compensation Plan allows eligible participants to
defer the receipt of eligible compensation, including equity awards, until designated future dates. We offset our obligations under the
Deferred Compensation Plan by investing in the actual underlying investments. These investments are classified as trading securities
- 73 -
and are carried at fair value. At December 31, 2017, these investments totaled approximately $8.8 million. All gains and losses in
these investments are materially offset by corresponding gains and losses in the deferred compensation plan liabilities.
NOTE 13 - SHARE-BASED COMPENSATION
The table below sets forth the line items where share-based compensation expense was recorded for the twelve months ended
December 31, 2017, 2016 and 2015:
Cost of goods sold
Selling, general and administrative expense
Research and development expense
Total share-based compensation expense
2017
2016
2015
$
$
645
15,130
2,834
18,609
$
$
775
10,567
2,687
14,029
$
$
716
16,228
2,026
18,970
The table below sets forth share-based compensation expense by type for the twelve months ended December 31, 2017, 2016
and 2015:
Stock options
Share grants
Total share-based compensation expense
2017
2016
2015
$
$
934
17,675
18,609
$
$
1,511
12,518
14,029
$
$
2,516
16,454
18,970
In 2016, we recorded a $2.7 million reversal decrease of previously recorded expense related to performance grants. In 2015, we
recorded $4.0 million in restricted stock expense related to Diodes restricted stock grants issued as replacement for unvested Pericom
employee awards outstanding at the date of the acquisition.
In May 2013, our stockholders approved our 2013 Equity Incentive Plan (2013 Plan). Since the approval of the 2013 Plan, all
stock options are granted under the 2013 Plan, and we will not grant any further stock options under our 2001 Plan. Stock options
under the 2013 Plan generally vest in equal annual installments over a four-year period and expire eight years after the grant date. The
number of shares originally authorized to be awarded under the 2013 Plan was 6 million shares. In May 2017, our stockholders
approved an amendment to the 2013 Plan, authorizing and additional 6 million shares to be awarded, bringing the total shares
authorized to be awarded under the 2013 Plan to 12 million shares.
Share-based compensation expense for stock options granted in previous years was calculated on the date of grant using the
Black-Scholes-Merton option-pricing model. No stock options were granted in any of the periods presented.
Total cash received from option exercises was approximately $13.6 million, $0.1 million and $10.2 million during 2017, 2016
and 2015, respectively.
At December 31, 2017, unrecognized compensation expense related to unvested options, net of estimated forfeitures, was
approximately $0.3 million. The weighted average period over which share-based compensation expense related to these options will
be recognized is less than 1 year.
- 74 -
The table below sets forth a summary of activity in our stock option plans:
Stock Options
Outstanding at December 31, 2014
Granted
Exercised
Forfeited or expired
ff
Outstanding at December 31, 2015
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2016
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Weighted
Average
Remaining
Contractual
Term
(years)
Weighted
Average
Exercise
Price ($)
Aggregate
Intrinsic
Value
Shares
2,736
-
(653)
(20)
2,063
-
(7)
(223)
1,833
-
(581)
(24)
1,228
1,186
21.26
-
15.63
22.91
23.03
-
18.48
22.75
23.08
-
23.42
26.87
22.85
22.67
3.1
3.1
$
$
7,298
7,266
The table below sets forth information about stock options outstanding at December 31, 2017:
Plan
2001 Plan
2013 Plan
Range of exercise prices
$
$
15.05-29.21
23.35-27.92
Number
outstanding
917
311
Weighted average
remaining
contractual life
(years)
Weighted average
exercise price
2.9
3.9
$
$
21.90
25.29
Share GrantsRestricted stock awards and restricted stock units generally vest in equal annual installments over a four-year
period. Since the approval of the 2013 Plan, all new grants are granted under the 2013 Plan, and we will not grant any further grants
under our 2001 Plan.
The table below sets forth a summary of our non-vested share grants in 2017, 2016 and 2015:
Restricted Stock Grants
Shares
NNonvested at December 31, 2014
Granted
Vested
Forfeited
NNonvested at December 31, 2015
Granted
Vested
Forfeited
NNonvested at December 31, 2016
Granted
Vested
Forfeited
NNonvested at December 31, 2017
1,535
1,557
(370)
(43)
2,679
880
(877)
(62)
2,620
746
(645)
(441)
2,280
- 75 -
Weighted
Average
Grant Date
Fair Value ($)
23.32
22.46
25.02
26.08
23.51
18.63
18.92
20.80
21.31
25.23
21.89
22.31
22.24
Aggregate
Intrinsic
Value
$
65,357
During 2017 the Company modified a performance-based award previously granted to our Chief Executive Officer. The effect
was to replace a performance-based grant covering 700,000 shares of the Companys common stock with a performance-based grant
covering 62,905 shares of the Companys common stock and a restricted stock grant covering 62,905 of the Companys common
stock. If certain performance criteria are met for the performance-based grant, Dr. Lu will receive 200% of that award or 125,810
shares. The incremental expense if Dr. Lu received 200% of the performance-based grant award is approximately $3.3 million. The
incremental expense of the restricted stock grant is approximately $1.7 million.
Included in the restricted stock grant for 2015 were 724,000 shares granted to Pericom employees. During 2016, the Company
paid $2.5 million in taxes related to the net share settlement on shares of stock that vested for Pericom employees.
.
The total unrecognized share-based compensation expense as of December 31, 2017 was approximately $32.4 million, relating
to restricted stock awards, which was expected to be recognized over a weighted average period of approximately 2.4 years.
Our Chief Executive Officer has a grant of 600,000 performance-based stock units that vest upon the Company reaching $1.0
billion in revenue. Based on the Company reaching approximately $1.1 billion in revenue in 2017, our Chief Executive Officers
grant of 600,000 performance-based stock units will be released to the Chief Executive Officer, upon filing of the Companys Annual
Report on Form 10-K, in February 2018. The expense related to the 600,000 performance-based units was all recognized in previous
periods.
NOTE 14 RELATED PARTY TRANSACTIONS
We conduct business with a related party company, Lite-On Semiconductor Corporation, and its subsidiaries and affiliates
(LSC), and Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, Nuvoton). LSC is our largest
stockholder, owning approximately 16% of our outstanding Common Stock as of December 31, 2017, and is a member of the Lite-On
Group of companies. We sold products to LSC totaling less than 1% of our net sales for the years ended December 31, 2017, 2016
and 2015, respectively. Raymond Soong, the Chairman of the Board of Directors, is the Chairman of LSC, and is the Chairman of
Lite-On Technology Corporation (LTC), a significant shareholder of LSC. C.H. Chen, our former President and Chief Executive
Officer and currently the Vice Chairman of the Board of Directors, is also Vice Chairman of LSC and a board member of LTC.
Dr. Keh-Shew Lu, our President and Chief Executive Officer and a member of our Board of Directors, is a board member of LTC, and
a board member of Nuvoton. L.P. Hsu, a former member of our Board of Directors serves as a consultant to LTC, and is a supervisor
of the board of Nuvoton. We consider our relationships with LSC, a member of the Lite-On Group of companies, and Nuvoton to be
mutually beneficial and we plan to continue our strategic alliance with LSC and Nuvoton. We purchase wafers from Nuvoton for use
in our production process.
We also conduct business with Keylink International (B.V.I.) Inc. and its subsidiaries and affiliates (Keylink). Keylink is our
5% partner in our Shanghai assembly and test facilities. We sell products to, and purchase inventory from, companies owned by
Keylink. We sold products to companies owned by Keylink, totaling approximately 1% of net sales for each of the years ended
December 31, 2017, 2016 and 2015. In addition, our subsidiaries in China lease their manufacturing facilities in Shanghai from, and
subcontract a portion of our manufacturing process (metal plating and environmental services) to, Keylink. We also pay a consulting
fee to Keylink. The aggregate amounts paid to Keylink for the years ended December 31, 2017, 2016 and 2015 were approximately
In addition, Chengdu Ya Guang Electronic Company Limited (Ya
$17.1 million, $16.1 million and $17.9 million, respectively.
Guang) is our 2% partner in one of our Chengdu assembly and test facilities and our 5% partner in our two Chengdu assembly and
test facilities; however, we have no material transactions with Ya Guang. We also purchase materials from Jiyuan Crystal
Photoelectric Frequency Technology Ltd. (JCP) an FCP manufacturing company in which we have made an equity investment and
account for using the equity method of accounting.
The Audit Committee of the Board reviews all related party transactions for potential conflict of interest situations on an
ongoing basis, all in accordance with such procedures as the Audit Committee may adopt from time to time.
- 76 -
The table below sets forth net sales and purchases from related parties for the twelve months ended December 31:
2017
2016
2015
LSC
Net sales
Purchases
Keylink
Net sales
Purchases
NNuvoton
Purchases
JCP
Purchases
$
$
$
$
$
$
1,406
24,313
8,856
3,827
11,407
1,105
$
$
$
$
$
$
$
$
$
$
$
852
21,936
9,125
5,054
10,386
826
The table below sets forth accounts receivable from and accounts payable to related parties at December 31:
2017
2016
LSC
Accounts receivable
Accounts payable
Keylink
Accounts receivable
Accounts payable
NNuvoton
Accounts payable
JCP
Accounts payable
$
$
$
$
$
$
342
3,308
4,089
5,016
1,121
317
$
$
$
$
$
$
588
22,378
9,749
6,272
12,598
N/A
301
4,333
5,394
4,295
950
263
- 77 -
NOTE 15 SEGMENT INFORMATION AND ENTERPRISE-WIDE DISCLOSURES
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 decision maker, or decision-making group, in deciding how to allocate resources and in assessing
performance. Our chief operating decision maker is our CEO. For financial reporting purposes, we operate in a single segment,
standard semiconductor products, through our various manufacturing and distribution facilities.
Our primary operations include the operations in Asia, North America and Europe. The table below sets forth net sales by
geographic areas based on the location of subsidiaries producing the net sales:
2017
Total sales
Inter-company sales
Net sales
Property, plant and equipment
Assets
2016
Total sales
Inter-company sales
Net sales
Property, plant and equipment
Assets
2015
Total sales
Inter-company sales
Net sales
Property, plant and equipment
Assets
Asia
North America
Europe
Consolidated
968,720
(128,924)
839,796
390,850
1,061,686
Asia
895,608
(137,959)
757,649
329,587
948,923
Asia
793,960
(118,415)
675,545
362,186
969,352
$
$
$
$
$
$
$
$
$
$
$
$
171,964
(71,608)
100,356
44,523
230,997
North America
109,442
(22,034)
87,408
57,145
400,472
North America
143,800
(60,882)
82,918
58,152
463,967
$
$
$
$
$
$
$
$
$
$
$
$
175,004
(60,952)
114,052
23,796
195,990
Europe
157,343
(60,238)
97,105
15,256
179,157
Europe
164,304
(73,863)
90,441
19,002
165,508
$
$
$
$
$
$
$
$
$
$
$
$
1,315,688
(261,484)
1,054,204
459,169
1,488,673
Consolidated
1,162,393
(220,231)
942,162
401,988
1,528,552
Consolidated
1,102,064
(253,160)
848,904
439,340
1,598,827
$
$
$
$
$
$
$
$
$
$
$
$
The accounting policies of the operating entities are the same as those described in the summary of significant accounting
policies.
- 78 -
The table below sets forth net sales by country. We report net sales based on shipped to customer locations as we believe this
best represents where our customers business activities occur. All others represents countries with less than 3% of total net sales
each.
2017
Net Sales
% of Total
Net Sales
China
U.S.
Korea
Germany
Singapore
Taiwan
All others
Total
China
U.S.
Korea
Germany
Singapore
Taiwan
All others
Total
China
U.S.
Korea
Germany
Singapore
Taiwan
All others
Total
2016
2015
$
$
$
$
$
$
593,098
86,276
65,849
74,303
58,570
67,399
108,709
1,054,204
Net Sales
% of Total
Net Sales
548,015
79,869
60,672
61,415
48,464
59,087
84,640
942,162
507,783
76,870
66,605
57,036
51,742
30,127
58,741
848,904
Net Sales
% of Total
Net Sales
56%
8%
6%
7%
6%
6%
11%
100%
58%
8%
6%
7%
5%
6%
10%
100%
60%
9%
8%
7%
6%
4%
6%
100%
Major customers One customer accounted for 10% or more of our net sales in 2017, but not 10% of our outstanding accounts
receivable at December 31, 2017. No customers accounted for 10% or more of our net sales in 2016 or 2015.
NOTE 16 COMMITMENTS AND CONTINGENCIES
Operating leases We lease offices, manufacturing plants, equipment, vehicles and warehouses under operating lease
agreements expiring through December 2024. Rental expense amounted to approximately $10.4 million, $10.5 million and $10.1
million for the years ended December 31, 2017, 2016 and 2015, respectively. We do not have purchase options related to the
operating lease agreements. The table below sets forth the approximate amount for future minimum lease payments under non-
cancelable operating leases at December 31, 2017:
2018
2019
2020
2021
2022
Thereafter
$
$
9,187
7,662
5,642
3,931
3,365
2,068
31,855
- 79 -
In addition, we have the following land right leases. None of the leases requires a rental payment.
ff
Location
Chengdu, China
Shanghai, China
Shandong, China
Shanghai, China
Yangzhou, China
Term (years)
50
50
50
50
50
Expiration Date
2061
2056
2058
2058
2065
Purchase commitments We have entered into non-cancelable purchase contracts for capital expenditures, primarily for
manufacturing equipment, for approximately $23.5 million at December 31, 2017. In addition to these purchase commitments, we
have equity investment obligations for our Chengdu facilities of $50 million, $25 million and $25 million for 2018, 2019 and 2020,
investment obligations of $62 million, $25 million and $29 million for 2018, 2019 and 2020, respectively.
respectively, and capital
a
Contingencies - From time to time, we are involved in various legal proceedings that arise in the normal course of business.
While we intend to defend any lawsuit vigorously, we presently believe that the ultimate outcome of any current pending legal
proceeding will not have any material adverse effect on our financial position, cash flows or operating results. However, litigation is
subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which
could impact on our business and operating results for the period in which the ruling occurs or future periods. Based on information
available, we evaluate the likelihood of potential outcomes. We record the appropriate liability when the amount is deemed probable
and reasonably estimable. In addition, we do not accrue for estimated legal fees and other directly related costs as they are
expensed as
incurred. The Company is not currently a party to any pending litigation that the Company considers material.
r
NOTE 17 DERIVATIVE FINANCIAL INSTRUMENTS
In accordance with ASC 815 we recognize derivative instruments on our balance sheet, and we measure them at fair value. The
accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to
designate the derivative as being in a hedging relationship, and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivative instruments that are designated, and qualify as hedges of the exposure to changes in the fair value
are considered fair value hedges. Derivative instruments that are designated, and qualify as hedges of the exposure to variability in
expected future cash flows are considered cash flow hedges. Derivative instruments may also be designated as hedges of the foreign
currency exposure of a net investment in a foreign operation. We currently only utilize cash flow hedges and do not use derivatives for
trading or speculative purposes.
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value
hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that
are intended to economically hedge certain risks, even though we elect not to apply hedge accounting under ASC 815. Changes in the
fair value of derivatives not designated in hedging relationships are recorded directly in the consolidated statements of income.
Specific information about the valuations of derivatives is described in Note 1 and classification of derivatives in the fair value
hierarchy is described in Note 2. Currently our interest rate swaps and interest rate collars are designated as hedges while our foreign
exchange contracts are not designated as hedges.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in
accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted
transaction affects earnings.
Certain of the Company's agreements with its derivative counterparties contain provisions where if certain merger activity, a
change of control, or a capital structure change occurs that materially changes the Company's creditworthiness in an adverse manner,
the Companys counterparty may have the right to terminate any derivative transactions under such agreement.
The company has agreements with each of its derivative counterparties that contain a provision where the Company could be
declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the
Company's default on the indebtedness.
Hedges of Foreign Currency Risk
We are exposed to fluctuations in various foreign currencies against our different functional currencies. We use foreign currency
forward agreements to manage this exposure. At December 31, 2017 we had outstanding foreign currency forward contracts that are
- 80 -
intended to preserve the economic value of foreign currency denominated monetary assets and liabilities; these instruments are not
designated for hedge accounting treatment in accordance with ASC 815. There is no fair value of our foreign exchange hedges,
therefore they are not recorded in our Consolidated Balance Sheets. As of December 31, 2017 and 2016 the total notional amounts of
these foreign exchange contracts was $87.6 million and zero, respectively.
The table below sets forth outstanding foreign currency forward contracts at December 31, 2017:
Notional Amount
2,494
$
10,514
10,612
31,834
1,594
30,594
Effective Date
December 2017
December 2017
December 2017
December 2017
December 2017
December 2017
Maturity Date
December 2017
December 2017
December 2017
December 2017
December 2017
December 2017
Index*
EUR/GPB
EUR/USD
GPB/USD
USD/CNY
USD/JPY
USD/TWD
Weighted Average
Strike Rate
1.2009
1.2009
1.3541
6.5343
112.35
29.406
Cash Flow Hedge
Designation
Non-designated
Non-designated
Non-designated
Non-designated
Non-designated
Non-designated
* EUR = Euro
GBP = British Pound Sterling
USD = United States Dollar
CNY = Chinese Yuan Renminbi
JPY = Japan Yen
TWD = Taiwan dollar
Hedges of Interest Rate Risk
The Companys objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to
interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps, including interest rate collars,
as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount.
The table below sets forth information related to the number of and the notional amount of our interest rate related derivative
instruments at December 31 2017 and December 31, 2016:
Interest rate swaps and collars
Number of Instruments
2016
2017
6
14
Notional Amount
2017
2016
$
220,000
$
150,000
The table below sets forth the fair value of the Companys interest rate related derivative financial instruments as well as their
classification on the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016:
Other Current Assets
2016
2017
Fair Value
Other Assets
Other Liabilities
2017
2016
2017
2016
Interest rate swaps and collars
$
486
$
-
$
3,398
$
3,052
$
-
$
735
The tables below sets forth the effect of the Companys derivative financial instruments on the Consolidated Statements of
Income for the years ended December 31, 2017 and 2016:
Derivatives Designated as Hedging
Instruments
Amount of Gain or
(Loss) Recognized in
OCI on Derivative
2016
2017
Location of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income
Interest rate swaps and collars
$
1,567
$
2,317
Interest expense
Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Net Income
2017
2016
$
577
$
112
We estimate that $0.5 million of net derivative gains included in AOCI as of December 31, 2017 will be reclassified into
earnings within the following 12 months. No gains or losses were reclassified from AOCI into earnings as a result of forecasted
transactions that failed to occur during fiscal year 2017.
- 81 -
Derivatives Not Designated as Hedging Instruments
Amount of Gain or (Loss)
Recognized in Net Income
2017
2016
Location of Gain or (Loss)
Reclassified from Accumulated
OCI into Income
Foreign currency forward contracts
$
1,491
$
-
Foreign currency (loss) gain, net
There was no effect from derivative financial instruments on the Companys Consolidated Statements of Operations for the
twelve months ended December 31, 2015.
At December 31, 2017 and 2016, the fair value of derivatives in a net asset position, which includes accrued interest but
excludes any adjustments for nonperformance risk, related to these agreements was $3.9 million and $2.3 million, respectively. As of
December 31, 2017 and 2016, the Company had not posted any collateral related to these agreements.
NOTE 18 RESTRUCTURING COSTS
In February 2017, the Company announced its plan to transfer its wafer fabrication operation at KFAB to other Company-
owned wafer fabrication plants and external foundries. The Company ceased production operations at KFAB late in third quarter 2017
and vacated and returned the premises in November 2017. Employees were provided retention and standard severance
packages. During 2017 the Company received $6.5 million of insurance proceeds as a result of the fires sustained at the KFAB
facility during 2016 of which $4.5 million is recorded in Cost of Goods Sold and $2.0 million is recorded in Other Income. There are
outstanding insurance claims. Also during 2017, the Company recorded $1.9 million of asset impairment related to the shut-down of
KFAB.
KFAB
The table below sets forth the restructuring costs, recorded in restructuring expense in the Condensed Consolidated Statements
of Operations, incurred during the twelve months ended December 31, 2017:
Early termination of supply contract
Asset retirement obligation
Retention cost
Cost of equipment relocation, shutdown cost and other
Total
The table below sets forth the costs accrued related to the KFAB restructuring:
$
$
1,985
1,403
3,158
3,591
10,137
Beginning balance, January 1, 2017
Costs accrued
Restructuring costs paid
Balance at December 31, 2017
Early Contract
Termination
Retention
Costs
Equipment
Relocation,
Shutdown
Cost and
Other
$
$
-
1,985
(1,985)
-
$
$
-
3,158
(2,499)
659
$
$
-
3,591
(2,946)
645
$
$
Total
-
8,734
(7,430)
1,304
The Company will pay out the remaining accrued costs during the first quarter of 2018.
Based on continued negotiations with the landlord, we recorded an additional $1.4 million of asset retirement obligations
related the KFAB restructuring. This asset retirement obligation is for the estimated amounts to be paid to contractors to remediate the
KFAB facility upon vacating the property. The table below sets forth the asset retirement obligation related to the KFAB
restructuring:
Asset retirement obligation, January 1, 2017
Accrual of additional asset retirement obligation
Amount paid
Asset retirement obligation, December 31, 2017
$
$
486
1,403
(1,500)
389
In connection with the asset retirement obligation, the Company recorded amortization expense of the offsetting asset of $1.4
million for the twelve months ended December 31, 2017.
- 82 -
NOTE 19 BUSINESS COMBINATION
Pericom Semiconductor Corporation
On November 24, 2015, we completed our acquisition of Pericom Semiconductor Corporation (Pericom) pursuant to the
Agreement and Plan of Merger dated as of September 2, 2015 (the Merger Agreement), as amended on November 6, 2015, by
Amendment No. 1 (the Merger Agreement Amendment). Under the Merger Agreement and the Merger Agreement Amendment
and in accordance with the General Corporation Law of the State of California (1) PSI Merger Sub, Inc., a California corporation and
wholly-owned subsidiary of the Company, was merged with and into Pericom, with Pericom continuing as the surviving corporation
and a wholly-owned subsidiary of the Company, and (2) each outstanding share of common stock, without par value, of Pericom
(other than shares owned by Pericom or certain of its affiliates or shares held by Pericom shareholders who have perfected their
appraisal rights in accordance with applicable California law) was automatically converted into the right to receive $17.75 in cash per
share, without interest. The aggregate consideration was approximately $403.2 million including the value of Pericom equity awards
paid out or converted to Diodes equity awards pursuant to the Merger Agreement and Merger Agreement Amendment.
The table below sets forth the estimated purchase price and related costs for Pericom:
Cash consideration for shares outstanding
Cash consideration for vested stock awards, including taxes of $88
Value of Diodes stock to be issued in exchange for unvested Pericom employee stock awards.
Total purchase price
$
$
391,123
7,371
4,680
403,174
The results of operations of Pericom are included in our consolidated financial statements from November 24, 2015. The
consolidated revenue and earnings of Pericom included in our consolidated financial statements for the twelve months ended
December 31, 2015 was approximately $14.6 million and $(1.0) million, respectively, which include acquisition accounting
adjustments. The purpose of the acquisition was to further our strategy of expanding market and growth opportunities through
selected strategic acquisitions.
The table below sets for the unaudited pro forma consolidated results of operations for the twelve month ended December 31,
2015 as if the acquisition of Pericom had occurred at January 1, 2014:
NNet revenues
NNet income attributable to common stockholders
Earnings per shareBasic
Earnings per shareDiluted
Twelve Months Ended
December 31, 2015
960,019
40,180
0.82
0.80
$
$
$
$
The unaudited pro forma consolidated results of operations do not purport to be indicative of the results that would have been
obtained if the above acquisition had actually occurred as of the dates indicated or of those results that may be obtained in the future.
The unaudited proforma consolidated results for December 31, 2015, exclude $10.0 million of acquisition related costs and $8.0
million of costs from Diodes restricted stock grants and change-in-control agreements for Pericom employees, and include additional
amortization and depreciation of $12.0 million, additional interest expense of $11.0 million and additional income tax expense of $1.0
million. These unaudited pro forma consolidated results of operations were derived, in part, from the historical consolidated financial
statements of Pericom and other available information and assumptions believed to be reasonable under the circumstances. Pericom
will be conformed to Diodes reporting calendar.
- 83 -
NOTE 20 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
2017
Net sales
Gross profit
Net income (loss) attributable to common shareholders
Earnings (loss) per share attributable to common shareholders
Basic
Diluted
2016
Net sales
Gross profit
(Loss) net income attributable to common shareholders
(Loss) earnings per share attributable to common shareholders
Basic
Diluted
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
236,303
73,911
1,217
0.03
0.02
$
$
$
264,224
90,139
13,179
0.27
0.26
$
$
$
285,247
96,347
14,450
0.29
0.29
$
$
$
268,430
96,379
(30,651)
(0.62)
(0.62)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
222,738
64,220
(1,733)
(0.04)
(0.04)
$
$
$
236,645
74,817
5,752
0.12
0.12
$
$
$
250,694
80,623
10,648
0.22
0.21
$
$
$
232,085
67,263
1,268
0.07
0.07
$
$
$
$
$
$
Note: The sum of the quarterly earnings per share may not equal the full year amount, as the computations of the weighted average
number of common shares outstanding for each quarter and for the full year are performed independently.
- 84 -
Number
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
INDEX TO EXHIBITS
Certificate of Incorporation, as amended
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
X
Amended By-laws of the Company, amended as
of January 6, 2016
8-K
January 11, 2016
Form of Certificate for Common Stock, par
value $0.66-2/3 per share
Stock Award Agreement, dated as of
September 22, 2009, between the Company and
Keh-Shew Lu
Confirmation Agreement, dated April 1, 2013,
between the Company and Keh-Shew Lu
Employment Agreement dated as of July 21,
2015, between the Company and Keh-Shew Lu
Stock Unit Agreement, dated as of July 21,
2015, between the Company and Keh-Shew Lu
Amendment No. 1 to Employment Agreement,
dated as of February 22, 2017, between the
Company and Keh-Shew Lu.
3.1
4.1
S-3
August 25, 2005
10-Q May 9, 2014
10.6
8-K
April 3, 2013
8-K
July 27, 2015
8-K
July 27, 2015
99.1
99.1
99.3
8-K
February 27, 2017
99.1
Employment agreement dated as of August 29,
2005, between the Company and Mark King
8-K
September 2,
2005
10.2
Form of Indemnification Agreement between
the Company and its directors and executive
officers
Diodes Incorporated 2001 Omnibus Equity
Incentive Plan, as amended and restated
December 22, 2008
Diodes Incorporated Second Amended and
Restated Deferred Compensation Plan effective
January 1, 2009
First Amendment to the Diodes Incorporated
Second Amended and Restated Deferred
Compensation Plan, effective June 1, 2013
Diodes Incorporated 2013 Equity Incentive Plan
as amended and restated on May 3, 2017
Form of Incentive Stock Option Agreement for
the Diodes Incorporated 2013 Equity Incentive
Plan
8-K
September 2, 2005
10.5
10-K February 26, 2009
10.87
10-K February 27, 2017
10.9
10-K February 27, 2017
10.10
S-8
August 17, 2017
99.1
S-8
June 13, 2013
99.2
10.13*
Form of Stock Unit Agreement for the Diodes
Incorporated 2013 Equity Incentive Plan
S-8
June 13, 2013
99.4
10.13.1*
Form of Restricted Stock Unit Agreement
8-K
February 27, 2017
99.2
10.13.2*
Form of Performance Stock Unit Agreement
8-K
February 27, 2017
99.3
10.14*
Form of Nonstatutory Stock Option Agreement
for the Diodes Incorporated 2013 Equity
10-K
February 27, 2014
10.80
- 85 -
Number
10.15*
10.16*
10.17*
10.18*
10.19*
10.20
10.21
10.22
10.23
10.23.1
10.24
10.25
10.25.1
Description
Incentive Plan, as amended (Domestic Version)
Form of Nonstatutory Stock Option Agreement
for the Diodes Incorporated 2013 Equity
Incentive Plan (International Version)
Form of Unit Stock Agreement for the Diodes
Incorporated 2013 Equity Incentive Plan, as
amended (Domestic Version)
Form of Unit Stock Agreement for the Diodes
Incorporated 2013 Equity Incentive Plan
(International Version)
Form of Stock Unit Agreement (Substitute for
Pericom Semiconductor Corporation Domestic
Existing RSUs and Options)
Form of Stock Unit Agreement (Substitute for
Pericom Semiconductor Corporation
International Existing RSUs and Options)
Joint Venture Agreement dated as of March 18,
1996, between the Company and J.H. Xing
Sale and Leasing Agreement dated as of March
30, 2002, between Shanghai Kaihong Electronic
Ltd. and Shanghai Ding Hong Electronics
Company, Ltd.
Lease Agreement dated as of March 30, 2002,
between Shanghai Kaihong Electronic
Company, Ltd. and Shanghai Ding Hong
Electronic Equipment, Ltd.
Lease Agreement, dated as of September 30,
2003, between Shanghai Kaihong Electronic
Co., Ltd. and Shanghai Ding Hong Electronic
Equipment, LTD.
Supplementary to the Lease agreement between
Shanghai Kaihong Electronic Co. Ltd., and
Shanghai Ding Hong Electronic Co., Ltd.
Amendment to The Sale and Lease Agreement,
dated as of September 30, 2004, between
Shanghai Ding Hong Electronic Equipment Ltd.
And Shanghai Kai Hong Electronic Company,
Limited
Lease Agreement dated as of June 28, 2004,
between Diodes Shanghai Co., Ltd. and
Shanghai Yuan Hao Electronic Co., Ltd.
Supplement to Lease Agreement, dated January
1, 2007, on Disposal of Waste and Scraps
between Shanghai Kai Hong Technology Co.,
Ltd. and Shanghai Yuan Hao Electronic Co.,
Ltd.
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
10-K
February 27, 2014
10.81
10-K
February 27, 2014
10.82
10-K
February 27, 2014
10.83
S-8
June 30, 2016
99.2
S-8
June 30, 2016
99.3
10-K
April 1, 1996
10.17
10-Q May 15, 2002
10.46
10-Q May 15, 2002
10.47
10-Q
August 9, 2004
10.52
10-Q
August 9, 2004
10.58
10-Q
August 9, 2004
10.56
10-Q
August 9, 2004
10.57
10-K
February 29, 2008
10.50
10.25.2
Supplementary Agreement dated December 31,
2007 between Shanghai Kai Hong Technology
Co., Ltd. and Shanghai Yuan Hao Electronic
10-K
February 29, 2008
10.53
- 86 -
Number
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
Co., Ltd.
10.26
10.27
10.28
10.29
10.30
10.31
10.31
10.33
10.34
10.35
10.36
10.37
Wafer Purchase Agreement, dated January 10,
2006, between Anachip Corporation and Lite-
On Semiconductor Corporation
Supplementary to the Lease Agreement dated on
September 5, 2004 with Shanghai Ding Hong
Electronic Co., Ltd.
Supplementary to the Lease Agreement dated on
June 28, 2004 with Shanghai Yuan Hao
Electronic Co., Ltd.
Agreement on Application, Construction and
Transfer of Power Facilities, dated as of March
15, 2006, between the Company and Shanghai
Yahong Electronic Co., Ltd.
A Supplement dated January 1, 2007 to the
Lease Agreement on Disposal of Waste and
Scraps between Shanghai Kaihong Electronic
Co., Ltd. and Shanghai Ding Hong Electronic
Co., Ltd.
Accommodation Building Fourth and Fifth
Floor Lease Agreement dated December 31,
2007 between Diodes Shanghai Co., Ltd. (a/k/a
Shanghai Kaihong Technology) and Shanghai
Ding Hong Electronic Co., Ltd.
Fourth Floor of the Accommodation Building
Lease Agreement dated January 1, 2008,
between Diodes Shanghai Co., Ltd. (a/k/a
Shanghai Kaihong Technology) and Shanghai
Ding Hong Electronic Co., Ltd.
Factory Building Lease Agreement dated March
1, 2008 between Diodes Shanghai Co., Ltd.
(a/k/a Shanghai Kaihong Technology) and
Shanghai Yuan Hao Electronic Co. Ltd.
Supplemental Agreement to the Factory
Building Lease Agreement dated as of August
11, 2008 between Diodes Shanghai Co., Ltd.
(a/k/a Shanghai Kaihong Technology) and
Shanghai Yuan Hao Electronic Co., Ltd.
Distributorship Agreement dated November 1,
2008 between Diodes Shanghai Co., Ltd. (a/k/a
Shanghai Kaihong Technology) and Shanghai
Keylink Logistic Co., Ltd.
Lease Facility Safety Management Agreement
dated December 31, 2008 between Diodes
Shanghai Co., Ltd. (a/k/a Shanghai Kaihong
Technology) and Shanghai Yuan Howe
Electronic Co., Ltd.
Second Supplemental Agreement to the Factory
Building Lease Agreement dated August 19,
2009 between Diodes Shanghai Co., Ltd. (a/k/a
8-K
January 12, 2006
2.1
10-Q May 10, 2006
10.14
10-Q May 10, 2006
10.15
10-Q May 10, 2006
10.16
10-K
February 29, 2008
10.51
10-K
February 29, 2008
10.54
10-Q
August 11, 2008
10.50
10-Q
August 11, 2008
10.6
10-Q
November 7, 2008
10.2
10-K
February 26, 2009
10.83
10-K
February 26, 2009
10.84
10-Q
November 6, 2009
10.1
- 87 -
Number
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
10.38
10.39
10.40
10.41
10.41.2
10.42
10.43
10.44
10.45
10.46
Shanghai Kaihong Technology) and Shanghai
Yuan Hao Electronic Co., Ltd.
Consulting Agreement dated January 1, 2009,
between Diodes Incorporated and Keylink
International (B.V.I.) Co., Ltd.
Power Facility Construction Agreement dated
October 29, 2009 between Diodes Shanghai Co.,
Ltd. (a/k/a Shanghai Kaihong Technology) and
Shanghai Yuan Hao Electronic Co., Ltd.
First Amendment to the DSH #2 Building Lease
Agreement dated December 31, 2009 between
Diodes Shanghai Co., Ltd. (a/k/a Shanghai
Kaihong Technology) and Shanghai Yuan Howe
Electronics Co., Ltd.
Construction Project Contract between Diodes
Shanghai Co., Ltd. (a/k/a Shanghai Kaihong
Technology) and Shanghai Yuan Howe
Electronic Co., Ltd.
Third Floor of the Accommodation Building
Lease Agreement, dated April 12, 2010, between
Diodes Shanghai Co., Ltd. (a/k/a Shanghai
Kaihong Technology) and Shanghai Ding Hong
Electronic Co., Ltd.
Second Floor of the Accommodation Building
Lease Agreement, dated September 1, 2010,
between Diodes Shanghai Co., Ltd. (a/k/a
Shanghai Kaihong Technology) and Shanghai
Ding Hong Electronic Company, Ltd.
Investment Cooperation Agreement effective as
of September 10, 2010, between Diodes Hong
Kong Holding Company Limited and the
Management Committee of the Chengdu Hi-
Tech Industrial Development Zone
Supplementary Agreement to the Investment
Cooperation Agreement effective as of
September 10, 2010, between Diodes Hong Kong
Holding Company Limited and the Management
Committee of the Chengdu Hi-Tech Industrial
Development Zone
Joint Venture Agreement effective as of
November 5, 2010 between Diodes Hong Kong
Holding Company Limited and Chengdu Ya
Guang Electronic Company Limited
Joint Venture Agreement Supplement
Concerning the Establishment of Diodes
Technology (Chengdu) Company Limited
effective as of November 5, 2010, between
Diodes Hong Kong Holding Company Limited
and Chengdu Ya Guang Electronic Company
Limited
10-Q May 8, 2009
10.1
10-K March 1, 2010
10.97
10-K March 1, 2010
10.98
10-Q May 7, 2010
10.2
10-Q May 7, 2010
10.3
10-Q November 9, 2010
10.1
8-K September 16, 2010
99.1
8-K September 16, 2010
99.2
8-K November 12, 2010
99.1
8-K November 12, 2010
99.2
10.47
Second Amendment to the DSH #2 Building
Lease Agreement, dated November 15, 2010,
between Diodes Shanghai Co., Ltd. (a/k/a
10-K February 28, 2011
10.112
- 88 -
Number
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
Shanghai Kaihong Technology) and Shanghai
Yuan Howe Electronics Company, Ltd.
Power Facility Expansion Construction Contract,
dated January 24, 2011, between Diodes
Shanghai Co., Ltd. (a/k/a Shanghai Kaihong
Technology) and Shanghai Yuan Howe
Electronics Company, Ltd.
First Floor of the Accommodation Building
Agreement, dated June 1, 2011, between Diodes
Shanghai Co., Ltd. (a/k/a Shanghai Kaihong
Technology) and Shanghai Ding Hong Electronic
Company, Ltd.
Third Floor of the Dormitory Building Lease
Agreement, dated July 1, 2011, between Diodes
Shanghai Co., Ltd. (a/k/a Shanghai Kaihong
Technology) and Shanghai Ding Hong Electronic
Company, Ltd.
Third Supplemental Agreement to the Factor
Building Lease Agreement, dated May 16, 2011,
between Diodes Shanghai Co., Ltd. (a/k/a
Shanghai Kaihong Technology) and Shanghai
Yuan Hao Electronic Company, Ltd.
Supplement Agreement to the Power Facility
Construction Application Agreement, dated
March 21, 2011, between Diodes Shanghai Co.,
Ltd. (a/k/a Shanghai Kaihong Technology) and
Shanghai Yuan Hao Electronic Company, Ltd.
Plating Process Agreement made and entered
into among Shanghai Kaihong Electronic Co.,
Ltd., Diodes Shanghai Co., Ltd. (a/k/a Shanghai
Kaihong Technology), Diodes Shanghai,
Shanghai Ding Hong Electronic Co., Ltd. and
Shanghai Micro-Surface Co., Ltd.
Construction Design Consulting Agreement
between Diodes Technology (Chengdu)
Company Limited and Lite-On Technology
Corporation
Second Supplementary Agreement, dated as of
January 23, 2013, to the Investment Cooperation
Agreement effective as of September 10, 2010,
by and among Diodes Hong Kong Holding
Company Limited, Diodes (Shanghai)
Investment Company Limited, Diodes
Technology (Chengdu) Company Limited, and
the Management Committee of the Chengdu Hi-
Tech Industrial Development Zone
DSH #2 Building Lease Agreement dated as of
January 28, 2013 between Diodes Shanghai Co.,
Ltd. (a/k/a Shanghai Kaihong Technology) and
Shanghai Yuan Howe Electronics Co., Ltd.
Supplement Agreement to Lease Agreement
dated September 2013 between Shanghai
Kaihong Electronic Co., Ltd and Shanghai Ding
10-K February 28, 2011
10.113
10-Q November 9, 2011
10.1
10-Q November 9, 2011
10.2
10-Q November 9, 2011
10.3
10-Q August 9, 2011
10.1
10-K February 29, 2008
10.52
10-Q August 9, 2012
10.1
10-K February 27, 2013
10.75
10-K February 27, 2013
10.76
10-Q November 12, 2013
10.6
- 89 -
Number
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
Hong Electronic Co., Ltd.
Construction Design Consulting Assignment
Agreement Supplemental Agreement between
Diodes Technology (Chengdu) Company
Limited and Lite-On Technology Corporation
Procurement Agreement, dated May 3, 2013,
between Diodes Taiwan Inc. and Lite-On
Technology Corporation
Share Transfer Memorandum of Understanding,
date June 18, 2013, among Diodes Incorporated,
Chengdu Ya Guang Electronic Engineering
Factory, and Zetex Chengdu Electronics Limited
Plating Process Agreement between Zetex
(Chengdu) Electronic Company Limited and
Diodes Technology (Chengdu) Company
Limited, dated February 8, 2013
Equity Transfer Agreement, dated April 2014,
between Chengdu Ya Guang Electronic
Engineering Factory and Diodes (Shanghai)
Investment Company Limited
Equity Transfer Agreement Amendment, dated
April 2014, between Chengdu Ya Guang
Electronic Engineering Factory and Diodes
(Shanghai) Investment Company Limited
Fourth Supplemental Agreement to the Factory
Building Lease Agreement, dated April 23, 2014,
between Shanghai Kaihong Technology Co., Ltd.
and Shanghai Yuan Hao Electronic Co., Ltd.
Plating Processing Agreement, dated
February 28, 2014, between Zetex (Chengdu)
Electronic Company Limited and Diodes
Technology (Chengdu) Company Limited
Amended Consulting Agreement dated as of
January 1, 2015 between Diodes Incorporated
and Keylink International (B.V.I) Co., Ltd.
Chemical Warehouse Lease Agreement, dated
November 1, 2014 between Shanghai Kaihong
Electronic Co., Ltd. and Shanghai Ding Hong
Electronic Co., Ltd.
Chemical Warehouse Lease Agreement between
Shanghai Kaihong Technology Co., Ltd. and
Shanghai Yuan Hao Electronic Co., Ltd.
Fifth Supplemental Facility Lease Agreement
between Shanghai Kaihong Technology Co., Ltd.
and Shanghai Yuan Hao Electronic Co., Ltd.
Property Lease Safety Agreement, dated July
2016, between Zetex (Chengdu) Electronics Ltd.
and Chengdu Yaguang Electronic Co., Ltd.
Property Lease Agreement, dated July 2016,
between Zetex (Chengdu) Electronics Ltd. and
Chengdu Yaguang Electronic Co., Ltd.
10-Q August 8, 2013
10.1
10-Q August 8, 2013
10.2
10-Q August 8, 2013
10.3
10-Q May 10, 2013
10.1
10-Q May 9, 2014
10.1
10-Q May 9, 2014
10.2
10-Q May 9, 2014
10.3
10-Q May 9, 2014
10.4
10-K March 2, 2015
10.78
10-K March 2, 2015
10.79
10-Q November 6, 2015
10.1
10-Q November 6, 2015
10.2
10-Q August 9, 2016
99.1
10-Q August 9, 2016
99.2
- 90 -
Number
10.72
10.73
10.74
10.75
10.76
10.77
10.78
10.79
10.80
10.80.1
10.80.2
Description
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
2016 Amendment to Joint Venture Agreement,
effective as of December 7, 2016, between
Diodes (Shanghai) Investment Company Limited
and Chengdu Ya Guang Electronic Company
Limited
Diodes Zetex Pension Scheme Recovery plan,
dated February 22, 2017, between Trustees of the
Diodes Zetex Pension Scheme and Diodes Zetex
Limited
Diodes Zetex Pension Scheme Schedule of
contributions, dated February 22, 2017, between
Trustees of the Diodes Zetex Pension Scheme
and Diodes Zetex Limited
Framework Agreement, dated January 16, 2017,
among Diodes Zetex Limited, Diodes Zetex
Semiconductors Limited, Diodes Incorporated,
HR Trustees Limited, and Trustees
Guarantee, dated March 26, 2012, among Diodes
Zetex Semiconductors Limited, Diodes Zetex
Limited, HR Trustees Limited, and Trustees
Diodes Zetex Pension Scheme Information
Protocol, dated April 10, 2012, among Diodes
Zetex Limited, Diodes Zetex Semiconductors
Limited, the Company, HR Trustees Limited and
Trustees
Legal Charge, dated March 26, 2012, among
Zetex Semiconductors Limited, HR Trustees
Limited, and Trustees
Credit Agreement, dated March 21, 2011,
between Mega International Commercial Bank
and Diodes Taiwan Inc.
Amended and Restated Credit Agreement, dated
October 26, 2016, by and among Diodes
Incorporated, Diodes International B.V., Diodes
Holding B.V., Diodes Investment Company,
Diodes FabTech Inc., Diodes Holdings UK
Limited, Diodes Zetex Limited, Pericom
Semiconductor Corporation, Bank of America,
N.A., as Administrative Agent, Swing Line
Lender and L/C Issuer, and the other Lenders
party thereto
Amendment No. 1 and Limited Waiver dated
February 13, 2017 by and among the parties to
the Amended and Restated Credit Agreement
dated October 26, 2016 (Exhibit 10.85 above).
Amendment No. 2 dated August 24, 2017 by and
among the parties to the Amended and Restated
Credit Agreement dated October 26, 2016
(Exhibit 10.85 above).
8-K December 13, 2016
99.1
10-K February 27, 2017
10.78
10-K February 27, 2017
10.79
10-K February 27, 2017
10.80
10-Q August 9, 2012
10.5
10-Q August 9, 2012
10.6
10-Q August 9, 2012
10.7
10-Q August 9, 2011
10.2
8-K November 1, 2016
10.1
8-K February 14, 2017
10.1
X
14**
Code of Ethics for Chief Executive Officer and
Senior Financial Officers
- 91 -
Number
21
Description
Subsidiaries of the Registrant
Form
Date of First Filing
Exhibit
Number
Filed
Herewith
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
23.1
31.1
31.2
32.1***
32.2***
Consent of Independent Registered Public
Accounting Firm
Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, adopted
pursuant to Section 302 of the Sarbanes- Oxley
Act of 2002
Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
Linkbase
101.LAB XBRL Taxonomy Extension Labels Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.PRE XBRL Taxonomy Extension Presentation
Linkbase
*
**
***
Constitute management contracts, or
compensatory plans or arrangements, which are
required to be filed pursuant to Item 601 of
Regulation S-K.
Provided in the Corporate Governance portion of
the Investor Relations section of the Companys
website at http://www.diodes.com
A certification furnished pursuant to Item 601 of
the Regulation S-K will not be deemed filed
for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the
Exchange Act), or otherwise subject to the
liability of that section. Such certification will
not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except to the
extent that the registrant specifically incorporates
it by reference.
- 92 -
PLEASE NOTE: It is inappropriate for investors to assume the accuracy of any covenants, representations or warranties that may be
contained in agreements or other documents filed as exhibits to this Annual Report on Form 10-K. In certain instances the disclosure
schedules to such agreements or documents contain information that modifies, qualifies and creates exceptions to the representations,
warranties and covenants. Moreover, some of the representations and warranties may not be complete or accurate as of a particular date
because they are subject to a contractual standard of materiality that is different from those generally applicable to stockholders or were
used for the purpose of allocating risk among the parties rather than establishing certain matters as facts. Accordingly, you should not
rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.
- 93 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DIODES INCORPORATED (Registrant)
By: /s/ Keh-Shew Lu
KEH-SHEW LU
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Richard D. White
RICHARD D. WHITE
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
February 19, 2018
February 19, 2018
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and
appoints Dr. Keh-Shew Lu, President and Chief Executive Officer, and Richard D. White, Chief Financial Officer and Secretary, his
true and lawful attorneys-in-fact and agents, with full power of substitution, to sign and execute on behalf of the undersigned any and
all amendments to this report, and to perform any acts necessary in order to file the same, with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and
agents, or their or his or her substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on February 19, 2018.
/s/ Keh-Shew Lu
KEH-SHEW LU
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Richard D. White
RICHARD D. WHITE
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ Raymond Soong
RAYMOND SOONG
Chairman of the Board of Directors
/s/ Michael R. Giordano
MICHAEL R. GIORDANO
Director
/s/ Keh-Shew Lu
KEH-SHEW LU
Director
/s/ Michael K.C. Tsai
MICHAEL K.C. TSAI
Director
/s/ C.H. Chen
C.H. CHEN
Director
/s/ Christina Wen-Chi Sung
CHRISTINA WEN-CHI SUNG
Director
/s/ John M. Stich
JOHN M. STICH
Director
- 94 -
SUBSIDIARIES OF THE REGISTRANT
Incorporated
Location
Subsidiary Name
BCD (Shanghai) Micro-Electronics Limited ....................................... China
BCD Semiconductor Limited (Hong Kong) ....................................... Hong Kong
BCD Semiconductor Manufacturing Limited ...................................... Cayman Islands
Diodes (Shanghai) Investment Company Limited ............................... China
Diodes FabTech Inc. ............................................................................ Delaware
Diodes Holding B.V............................................................................. Netherlands
Diodes Holdings UK Limited .............................................................. United Kingdom
Diodes Hong Kong Holding Company Limited .................................. Hong Kong
Diodes Hong Kong Limited ................................................................. Hong Kong
Diodes International B.V...................................................................... Netherlands
Diodes Kaihong Shanghai Limited ...................................................... China
Diodes Korea Inc.................................................................................. Korea
Diodes Taiwan S.a.r.l ........................................................................... Luxembourg
Diodes Taiwan S.a.r.l. Taiwan Branch ................................................ Taiwan
Diodes Technology (Chengdu) Company Limited .............................. China
Diodes Zetex GmbH............................................................................. Germany
Diodes Zetex Limited........................................................................... United Kingdom
Diodes Zetex Neuhaus GmbH.............................................................. Germany
Diodes Zetex Semiconductors Limited ................................................ United Kingdom
Eris Technology Co.............................................................................. Taiwan
Pericom Asia Limited........................................................................... Hong Kong
Pericom Global Limited ....................................................................... Cayman Islands
Pericom International Limited ............................................................. Cayman Islands
Pericom Semiconductor (HK) Limited ................................................ Hong Kong
Pericom Technology (Yangzhou) Corporation .................................... China
Pericom Technology Inc. ..................................................................... British Virgin Islands
Pericom Technology Inc. ..................................................................... Hong Kong
Pericom Technology Inc. ..................................................................... China
PSE Technology (Shandong) Corporation ........................................... China
PSE Technology Corporation............................................................... Taiwan
Shanghai Kaihong Electronic Co., Ltd................................................. China
Shanghai Kaihong Technology Company Limited .............................. China
Shanghai SIM-BCD Semiconductor Manufacturing Co. Ltd. ............. China
TF Semiconductor Solutions, Inc......................................................... Delaware
Zetex (Chengdu) Electronics Company Limited ................................. China
Holding Company (1)
or Subsidiary (2)
2
1
2
1
2
1
1
1
2
1
2
2
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
Exhibit 21
Percentage
Owned
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
98.02%
100%
100%
100%
100%
51%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
95%
95%
100%
58%
95%
Exhibit 23.1
Consent Of Independent Registered Public Accounting Firm
We consent to the incorporation by referff ence in the following Registration Statements of Diodes
Incorporated of our report dated February 19, 2018, related to the consolidated financial statements of
Diodes Incorporated and Subsidiaries (the Company) and the effectiveness of internal control over
financial reporting of the Company appearing in this Annual Report on Form 10-K for the year ended
December 31, 2017:
•
•
Registration Statements on Form S-8 (No. 333-106775, No. 333-124809 and No. 333-
189299) pertaining to the 2001 Omnibus Equity Incentive Plan of Diodes Incorporated;
Registration Statements on Form S-8 (No. 333-189298, No. 333-212327 and No. 333-
220019) pertaining to the Diodes Incorporated 2013 Equity Incentive Plan.
/s/ Moss Adams LLP
Los Angeles, California
February 19, 2018
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Keh-Shew Lu, certify that:
1. I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting;
and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report
financial information; and
ff
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
/s/ Keh-Shew Lu
Keh-Shew Lu
Chief Executive Officer
Date: February 19, 2018
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard D. White, certify that:
1.I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting;
and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report
financial information; and
ff
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
/s/ Richard D. White
Richard D. White
Chief Financial Officer
Date: February 19, 2018
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to his knowledge, the Annual Report on Form 10-K for the twelve-month period ended December 31, 2017 of Diodes
Incorporated (the Company) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, and that the information contained in such Annual Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of, and for, the periods presented in such report.
Exhibit 32.1
/s/ Keh-Shew Lu
Keh-Shew Lu
Chief Executive Officer
Date: February 19, 2018
A signed original of this written statement required by Section 906 has been provided to Diodes Incorporated and will be retained by
Diodes Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to his knowledge, the Annual Report on Form 10-K for the twelve-month period ended December 31, 2017 of Diodes
Incorporated (the Company) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, and that the information contained in such Annual Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of, and for, the periods presented in such report.
Exhibit 32.2
/s/ Richard D. White
Richard D. White
Chief Financial Officer
Date: February 19, 2018
A signed original of this written statement required by Section 906 has been provided to Diodes Incorporated and will be retained by
Diodes Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
Additional Information
CONSOLIDATED RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME
(unaudited)
(in thousands, except per share data)
2017
2016
2015
2014
2013
GAAP net (loss) income - common stockholders
GAAP (loss) earnings per share - common stockholders
Diluted
$
$
(1,805)
(0.04)
$
$
15,935
0.32
$
$
24,274
0.49
$
$
63,678
1.31
$
$
26,532
0.56
Adjustments to reconcile net income - common stockholders
to adjusted net income - common stockholders, net of tax:
Amortization of acquisition related intangible assets
15,201
16,595
6,870
6,287
6,374
Acquisition costs
Restructuring costs
Severance costs
Tax expense related to tax audit
Inventory adjustments and valuations
Retention costs
Impairment of goodwill
Gain on sale of assets
Loss of sale of assets
Shut-down related costs
-
182
6,589
-
-
-
229
-
-
16
1,769
-
-
-
-
-
-
-
971
-
419
-
-
-
-
-
-
2,907
2,907
952
156
1,093
2,568
-
-
-
-
-
710
1,127
-
5,447
4,661
-
2,712
(976)
-
-
-
-
-
-
-
-
-
-
-
-
-
Impairment of cost-basis investment
-
2,092
Impairment of long-lived assets
Employee award costs
Impact of Tax Cuts and Jobs Act
1,214
-
1,250
(282)
5,498
45,908
-
-
Adjusted net income - common stockholders (Non-GAAP)
$
69,121
$
38,381
$
42,345
$
70,082
$
50,131
Diluted shares used in computing earnings per share
50,340
49,789
49,500
48,594
47,658
Adjusted earnings per share - common stockholders (Non-GAAP)
Diluted
$
1.37
$
0.77
$
0.86
$
1.44
$
1.05
ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE
This consists of accounting principles generally accepted in the United States (“GAAP”) net income and earnings per share attributable to common
stockholders, which are then adjusted for the purpose of providing investors with a better depiction of the Company’s operating results and provide a
more informed baseline for modeling future earnings expectations. The Company makes adjustments for amortization of acquisition related intangible
assets, acquisition costs, restructuring costs, severance costs, tax expense related to tax audit, inventory adjustments and valuations, retention costs,
impairment of goodwill, gain on sale of assets, amortization of debt discount, impairment of long-lived assets, and employee award costs. The Company
excludes the above items to evaluate the Company’s operating performance, develop budgets, and manage cash expenditures. Presentation of the above
non-GAAP measures allows investors to review the Company’s results of operations from the same viewpoint as the Company’s management and
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operations, facilitate investors’ analyses and comparisons of its current and past results of operations and provide insight into its future performance. The
Company also believes the non-GAAP measures are useful to investors because they provide additional information that research analysts use to evaluate
semiconductor companies. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be
considered a substitute for, or superior to, GAAP results and may differ from measures used by other companies. The Company recommends a review
be performed on net income and earnings per share on both a GAAP and non-GAAP basis to obtain a comprehensive view of the Company’s results.
The Company provides a reconciliation of GAAP net income and GAAP earnings per share to non-GAAP adjusted net income and non-GAAP adjusted
earnings per share.
Detail of non-GAAP adjustments
Amortization of acquisition related intangible assets – The Company excluded this item, including amortization of developed technologies and
customer relationships. The fair value of the acquisition-related intangible assets, which was recognized through purchase accounting, is amortized using
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was allocated to the intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are
consistent over time for both the Company’s newly acquired and long-held businesses. In addition, the Company excluded this item because there is
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Additional Information – (Continued)
CONSOLIDATED RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME
(unaudited)
Acquisition costs – The Company excluded these costs associated with acquiring Pericom and BCD, which consisted of advisory, legal and other
professional and consulting fees. These costs were expensed when the costs were incurred and services were received, and which the corresponding
tax adjustments were made for the non-deductible portions of these expenses. The Company believes the exclusion of this item provides investors an
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such costs.
Restructuring costs – These restructuring activities related to our shut-down of KFAB, our UK development team and the closure of our New York
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of these items provide investors an enhanced view of the cost structure of the Company’s operations and facilitates comparisons with the results of other
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Severance costs – The Company excluded severance costs incurred during 2015. These one-time costs will reduce the Company’s cost structure in order
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performance. The Company believes the exclusion of the severance charges provides investors an enhanced view of the cost structure of the Company’s
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Tax expense related to tax audit – The China government audited the Company’s High and New Technology Enterprise (“HNTE”) status for the years
2009 through 2013 and determined there was an underpayment for the tax year 2013. The Company was approved for the HNTE status for 2012 through
2014. Given that 2013 is an isolated occurrence, the additional tax associated with the audit is excluded. The Company believes the exclusion of this
item provides investors an enhanced view of certain costs the Company may incur from time to time and facilitates comparisons with the results of other
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Inventory adjustments and valuations – In 2016, 2015 and 2013, the Company adjusted the inventory acquired in the Pericom and BCD acquisitions
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and selling effort on the work–in-progress inventory. This non-cash adjustment to inventory is not recurring in nature; however it could be recurring
to the extent there are additional acquisitions. The Company believes the exclusion of the Pericom and BCD inventory adjustments and valuations
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(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:76)(cid:86)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)(cid:3)
Retention costs – The Company excluded costs related to the employee retention plans in connection with the KFAB shutdown and the Pericom and
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not part of the employees’ normal annual salaries and therefore are being excluded. The Company believes the exclusion of retention costs related to the
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(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:76)(cid:86)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)(cid:3)
Impairment of goodwill – The Company recorded a non-cash goodwill impairment charge related to the Eris acquisition. This charge is excluded from
management’s assessment of the Company’s operating performance. The Company believes the exclusion of this item provides investors an enhanced
view of certain non-cash charges the Company may incur from time to time and facilitates comparisons with the results of other periods that may not
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portion of the impairment as it relates to net income.
Gain on sale of assets – During 2014, the Company sold a building located in Taiwan and this gain was excluded from management’s assessment of the
Company’s core operating performance. The Company believes the exclusion of the gain on sale of assets provides investors an enhanced view of a gain
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Loss on sale of assets – During 2017, the Company experienced a loss on the sale of assets related to the shutdown of KFAB. The Company believes
exclusion of this loss provides investors an enhanced view of the Company’s operations and facilitates comparisons with other periods in which such a
loss is not present.
Shut-down related costs – The Company has recorded shut-down related costs due to the shutdown and relocation of KFAB. These shut-down related
costs are excluded from management’s assessment of the Company’s operating performance. The Company believes the exclusion of the shut-down
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(cid:82)(cid:73)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)
Impairment of cost-basis investment – The Company adjusted for costs related to the non-cash impairment of equity investments that the company
made that are not related to the Company’s operations. The Company feels the exclusion of the expense related to the write-down of these investments
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(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:17)
Impairment of long-lived assets – During 2017, the Company recorded impairment charges related to the shutdown and relocation of KFAB. During
2015, the Company excluded costs accrued for impairment of long-lived assets related to assets that will no longer be used in our production process as
we transition from six inch to eight inch production capability in our China wafer plant. The Company believes the exclusion of these items provides
investors an enhanced view of a loss the Company may incur from time to time and facilitates comparisons with results of other periods that may not
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Employee award costs – The Company adjusted for costs related to the immediate vesting of Pericom equity awards upon closing of the Pericom
acquisition. The expense for these awards was recognized immediately after the acquisition and the Company believes adjusting for the one-time expense
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Impact of Tax Cuts and Job Act – The Company has recorded increased tax expense related to the Tax Cuts and Job Act (“TCJA”) law that was enacted
during December 2017. The TCJA expense has been excluded from management’s assessment of the Company’s current period operating performance
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CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
DR. KEH-SHEW LU
President & Chief Executive Officer
Employee since 2005
RICHARD D. WHITE
Chief Financial Officer & Secretary
Employee since 2006
HANS ROHRER
Senior Vice President,
Business Development
Employee since 2008
EMILY YANG
Vice President,
Worldwide Sales & Marketing
Employee since 2015
CLEMENTE “CLAY” BELTRAN
Vice President,
Corporate Supply Chain/Planning,
Outsourcing
Employee since 2011
JULIE HOLLAND
Vice President,
Corporate Operations
Employee since 2008
FRANCIS TANG
Vice President,
Worldwide Discrete Products
Employee since 2006
EVAN YU
Vice President,
Worldwide Analog Products
Employee since 2008
RAYMOND SOONG 2C, 3C, 4
Chairman of the Board,
Diodes Incorporated
Chairman of the Board,
Lite-On Technology Corporation
Chairman of the Board,
Lite-On Semiconductor Corporation
Director since 1993
C.H. CHEN 4C
Vice Chairman,
Diodes Incorporated
Vice Chairman,
Lite-On Semiconductor Corporation
Director since 2000
MICHAEL R. GIORDANO 1CF
Associate Director,
Senior Wealth Strategy Associate,
UBS Financial Services, Inc.
Director since 1990
CHRISTINA WEN-CHI SUNG 1, 2
Former, Chairman,
Taipei Financial Center Corporation
Director since 2017
DR. KEH-SHEW LU 4
President & Chief Executive Officer,
Diodes Incorporated
Former, Senior Vice President,
Texas Instruments, Inc.
Director since 2001
JOHN M. STICH 1, 3
Honorary Consul-General
of Japan in Dallas
Former, Chief Marketing Officer,
Texas Instruments, Inc. – Japan
Director since 2000
MICHAEL K.C. TSAI 2, 3
Chairman,
Zentel Electronics Corporation
Director since 2010
1 – Audit Committee Member
2 – Compensation Committee Member
3 – Governance and Stockholder Relations
Committee Member
4 – Risk Oversight Committee Member
C – Committee Chair
F – Financial Expert
SHAREHOLDER INFORMATION
Diodes Incorporated common stock is listed
on the Nasdaq Global Select Market
(Nasdaq-GS: DIOD).
Calendar Ended
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Closing Sales
Price of
Common Stock
High
Low
$ 35.09 $ 27.25
29.93
27.15
26.28
23.97
22.31
23.44
$ 26.96 $ 19.84
21.57
20.36
22.30
17.24
16.96
17.24
ANNUAL REPORT ON FORM 10-K
A copy of the Company Annual Report on
Form 10-K and other publicly filed reports,
as filed with the United States Securities
and Exchange Commission, are available at
www.diodes.com or www.sec.gov or upon
request of:
INVESTOR RELATIONS
Shelton Group
Contact: Leanne Sievers
19800 MacArthur Blvd., Suite 300
Irvine, California 92612
949-224-3874
LSievers@SheltonGroup.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Moss Adams LLP
10960 Wilshire Blvd., Suite 1100
Los Angeles, California 90024
TRANSFER AGENT & REGISTRAR
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
212-509-4000
GENERAL COUNSEL
Sheppard, Mullin, Richter & Hampton LLP
333 S. Hope Street, 42nd Floor
Los Angeles, California 90071
FINANCIAL INFORMATION ONLINE
World Wide Web users can access Company
information on the Diodes Incorporated
Investor page at www.investor.diodes.com.
DIODES INCORPORATED
Corporate Headquarters
America Sales
4949 Hedgcoxe Road
Mail Stop 200
Plano, Texas 75024
972.987.3900
ASIA SALES
Shanghai, China
Shenzhen, China
Tokyo, Japan
Seongnam-si, South Korea
Suwon, South Korea
Taipei, Taiwan
EUROPE SALES
Munich, Germany
MANUFACTURING FACILITIES
Chengdu, China (2)
Shanghai, China (4)
Neuhaus, Germany
Oldham, United Kingdom
Taipei, Taiwan
DIODES INCORPORATED
Registered to UL DQS
Certificate Registration No. 10002233
QM08
www.diodes.com
Nasdaq-GS: DIOD