What changed in this filing

/stocks — the workspaceLOADING

Item 3. Legal Proceedings

2021-02-22 compared with 2020-02-12 · 86 added, 1697 removed, 349 unchanged (84% of the section changed)

7 unchanged sentences

See “Risk Factors – Risks Related to Our International Operations” in Part I, Item 1A of this Annual Report for a more detailed summary of the intellectual property technology risks associated with our international business operations.

In August 2018, the Company received a letter from the EPA concerning potential violations under the Clean Air Act Amendments of 1990, which do not involve any actual discharge of materials into the environment, arising as a result of an inspection at KFAB.

In February 2019, we fully resolved this matter with the EPA and paid approximately $0.2 million.

The settlement amount was accrued at December 31, 2018.

Mine Safety Disclosures.

5 unchanged sentences

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.

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.

banking facility permits us to pay dividends up to $25.0 million per fiscal year to our stockholders so long as we have not defaulted at the time of such dividend and no default would result from declaring and paying such dividend.

The payment of dividends is within the discretion of our Board of Directors, and will depend upon, among other things, our earnings, financial condition, capital requirements, and general business conditions.

15 unchanged sentences

Issuer Purchases of Equity Securities

During the fourth quarter of 2019, the Company did not repurchase any shares of its Common Stock.

During November 2015, the Company’s board of directors authorized a share repurchase plan to repurchase up to an aggregate of $100 million of the Company’s outstanding common stock.

This repurchase plan expired December 31, 2019, and was not renewed.

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

Selected Financial Data.

4 unchanged sentences

Statement of Income Data

Gain (loss) on disposal of fixed assets

Total operating expenses

Income from operations

11 unchanged sentences

Capital expenditures

In addition, during the periods presented we made the following acquisitions considered significant to our operations.

In 2015 we acquired Pericom and in 2019 we acquired GFAB.

In addition, in the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC by the Company.

We anticipate closing the LSC acquisition in the second half of 2020.

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

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

14 unchanged sentences

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 12, 2020 , and such discussion and analysis is hereby incorporated into this Form 10-K by this reference .

Summary for the Twelve Months Ended December 31, 2020

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

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

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

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

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

Achieved $187.2 million cash flow from operations.

We had $75.8 million of capital expenditures, or 6.2% of revenue.

Net cash flow was a positive $61.0 million.

Summary of the Twelve Months Ended December 31, 2019

7 unchanged sentences

Net cash flow was a positive $17.7 million, which includes the net pay down of $117.3 million of long-term debt.

Summary of the Twelve Months Ended December 31, 2018

Revenue grew to a record $1.2 billion, an increase of 15.2% over the $1.05 billion in 2017;

Gross profit was a record $435.3 million, a 22.0% increase, compared to the $356.8 million in 2017;

Gross margin improved 210 basis points to 35.9% from 33.8% in 2017;

Operating income increased to a record $154.5, or 12.7% of revenue, compared to 7.5%, in 2017;

Net income was a record $104.0 million, or $2.04 per diluted share, compared to a net loss of ($1.8) million, or ($0.04) per share, in 2017;

Achieved $185.6 million cash flow from operations.

We had $87.5 million of capital expenditures, or 7.2% of revenue.

Net cash flow was a positive $36.6 million, which includes the net pay down of $56.8 million of long-term debt.

Business Outlook and Factors Relevant to Our Results of Operations

We continue to pursue our previously announced goals of achieving revenue of $2.5 billion and gross margin of 40%, representing gross profit of $1.0 billion, all by 2025.

In spite of the negative impact COVID-19 had on our fiscal year 2020 results, we continue to pursue our previously announced goals of achieving revenue of $2.5 billion and gross margin of 40%, representing gross profit of $1.0 billion, all by 2025.

Acquisitions will continue to be a key part of our growth strategy to reach our 2025 revenue goal.

2 unchanged sentences

We believe the long-term outlook for our business remains generally favorable despite the uncertainties in the global economy as we continue to execute on the strategy that has proven successful for us over the years.

In April 2019, the Company announced the completion of the acquisition of GFAB.

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC by the Company.

At the effective date of the transaction, each share of LSC will be converted into the right to receive TWD $42.50 per share in cash, or approximately US $1.42 per share based on December 31, 2019 exchange rates.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

The acquisition received LSC shareholder approval on October 25, 2019, and we anticipate completing the acquisition in the second half of 2020, subject to customary closing conditions and regulatory approvals.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement.

In November 2020, the Company completed the acquisition of LSC and in April 2019, we completed the acquisition of GFAB .

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

20 unchanged sentences

Selling, general and administrative

sales commissions, as well as outside legal, investor relations, accounting, consulting and other operating expenses.

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.

2 unchanged sentences

Research and development expenses are primarily associated with our wafer facilities in China and the U.K.

and our manufacturing facilities in Taiwan and China, as well as with our engineers in the U.S.

and our manufacturing facilities in Taiwan and China, as well as with our engineers in the China, U.K., U.S.

All research and development expenses are expensed as incurred.

43 unchanged sentences

Amortization of acquisition-related intangible assets

Impairment of fixed assets

Restructuring

Gain on disposal of fixed assets

Loss (gain) on disposal of fixed assets

Other operating income

4 unchanged sentences

Income tax provision

Net sales increased for the twelve months ended December 31, 2019, compared to the same period last year due to growth in our automotive and industrial markets combined with growth in our frequency control products.

Net sales decreased for the twelve months ended December 31, 2020, compared to the same period last year due to the negative effect of COVID-19 on the global economy and our business.

This decrease in net sales was partially offset by $ 16 .9 million of net sales from LSC.

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

3 unchanged sentences

Cost of Goods Sold

Cost of goods sold increased approximately $4.6 million for the twelve months ended December 31, 2019 compared to the same period last year, primarily as a result of our increased sales.

Cost of goods sold increased approximately $14.8 million for the twelve months ended December 31, 2020 compared to the same period last year, primarily as a result of operations at GFAB for four quarters of 2020 compared to three quarters of 2019 and the one month of operations at LSC during 2020.

As a percent of sales, cost of goods sold was 64.9% for the twelve months ended December 31, 2020, compared to 62.7% for the same period last year.

Average unit cost increased 7.4% for the twelve months ended December 31, 2019, compared to the same period last year, due to the sale of higher margin products and increased production facility utilization.

For the twelve months ended December 31, 2019, gross profit increased approximately 7.0% when compared to the same period last year.

Average unit cost increased 1.5% for the twelve months ended December 31, 2020, compared to the same period last year, due to lower capacity utilization for the year, driven by COVID-19 pandemic related manufacturing plant closures and the associated slowdown in customer demand in early 2020.

For the twelve months ended December 31, 2020, gross profit decreased approximately 7.4% when compared to the same period last year.

Gross profit margin for the twelve month periods ended December 31, 2020 and 2019, was 35.1% and 37.3%, respectively.

Operating expenses

Operating expenses for the twelve months ended December 31, 2019 decreased approximately $15.6 million, or 5.6%, compared to the same period last year.

A significant contributing factor to this decrease was a $24.3 million one-time gain we realized upon selling land.

The land was acquired in past years in anticipation of building a new corporate headquarters building.

The Company determined its current headquarters was adequate and disposed of the land in the fourth quarter of 2019.

Operating expenses for the twelve months ended December 31, 2020 increased approximately $31.6 million, or 11.9%, compared to the same period last year.

A significant contributing factor to the increase in 2020 compared to 2019 was a $24.3 million one-time gain we realized in 2019 upon selling land.

The land was acquired in past years in anticipation of building a new corporate headquarters building in Texas.

Selling, general and administrative expenses (“SG&A”) increased approximately $3.7 million.

The increase in SG&A was driven by increases in salaries and benefits, consulting and legal fees, partially offset by decreases in other SG&A expense categories.

Research and development expenses (“R&D”) increased approximately $2.2 million, tracking with the increase in sales.

The increase in SG&A was driven by increases in wages and benefits and freight and duty charges, partially offset by reductions in travel and entertainment expenses.

Research and development expenses (“R&D”) increased approximately $5.8 million primarily due to increases in wages and benefits and depreciation, associated with new product and new process development activities.

Amortization of acquisition-related intangibles decreased approximately $1.8 million reflecting the overall reduction in the balance of intangible assets subject to amortization.

SG&A, as a percentage of sales, was 14.5% for both twelve-month periods ended December 31, 2019 and 2018.

R&D, as a percentage of sales, was 7.1% for both twelve-month periods ended December 31, 2019 and 2018.

SG&A, as a percentage of sales, was 15.1% and 14.5% for the twelve-month periods ended December 31, 2020 and 2019, respectively.

R&D, as a percentage of sales, was 7.7% and 7.1% for the twelve-month periods ended December 31, 2020 and 2019, respectively.

Other (expense)/income

Interest income increased $0.2 million for the twelve months ended December 31, 2019, due to a higher amount of invested funds.

Interest expense decreased $2.0 million or 20.3% for the twelve months ended December 31, 2019, due to lower levels of debt partially offset by higher interest rates on the floating rate portions or our debt.

Foreign currency losses were relatively flat during the twelve months ended December 31, 2019.

Interest income decreased $1.1 million for the twelve months ended December 31, 2020, due to a lower amount of invested funds.

Interest expense increased $3.8 million or 47.8% for the twelve months ended December 31, 2020.

The increase in interest expense for the twelve months ended December 31, 2020 was due to higher levels of debt resulting from the draws on our U.S.

credit facility to finance the closing of the LSC acquisition.

The increase in interest expense due to higher levels of debt was partially offset by lower interest rates.

Foreign currency losses increased $6.1 million during the twelve months ended December 31, 2020.

Income tax provision

We recognized income tax expense of approximately $21.1 million for the twelve months ended December 31, 2020, and income tax expense of approximately $44.1 million for the twelve months ended December 31, 2019, resulting in effective income tax rates of 17.5 % and 22.3%, respectively.

The decrease in the effective tax rate for 2019 compared to 2018 is primarily attributable to increased net favorable U.S.

permanent book-tax differences resulting from enactment of the Tax Cuts and Jobs Act in December 2017.Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European and Asian subsidiaries.

The decrease in the effective tax rate for 2020 compared to 2019 is primarily attributable to decrease in non-U.S.

withholding taxes.

Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European and Asian subsidiaries.

Any future distributions of foreign earnings will not be subject to additional U.S.

7 unchanged sentences

For 2020 and 2019 our working capital was $514.2 million and $524.6 million, respectively.

In 2019, our working capital increased due to increases in cash and accounts receivable, reflecting our increased sales.

In 2020, our working capital decreased due to increases in short-term debt and other current liabilities assumed as a result of the LSC acquisition.

We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations for at least the next 12 months.

2 unchanged sentences

These investments are highly liquid with maturity dates greater than three months at the date of purchase.

The decrease from $7.5 million in 2018, to $4.8 million in 2019 reflects the use of these investments to reduce our debt levels.

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.

1 unchanged sentence

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $307.1 million.

At December 31, 2019, borrowings were $13.3 million and letters of credit were $1.4 million under the Asia credit facilities.

At December 31, 2020, borrowings were $140.6 million and letters of credit were $0.5 million under our Asia credit facilities.

Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted, repayable on demand, terminable by the lender at any time and contain no restrictive covenants.

These credit facilities bear interest at LIBOR or similar indices plus a specified margin.

Interest payments are due quarterly on outstanding amounts under the credit lines.

Interest payments are due monthly on outstanding amounts under the credit lines.

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.

Credit Facility matures October 26, 2021.

The remaining portion of the term loan included in the U.S.

Credit Facility is repayable in part through quarterly installments that increase over time from $6.3 million per quarter in the first three quarters of 2019 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.

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).

The obligations of the Company and the other borrowers under the U.S.

Credit Facility are secured by substantially all of the assets of the Company, including controlling interests in its first-tier subsidiaries, and by specified assets of certain of its subsidiaries.

In addition to our U.S.

Credit Facility, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $23.5 million on a long-term basis from local Taiwan banks in order to make an investment.

The first loan of $4.3 million matures in 2033, while the second loan of $19.2 million matures in 2024.

See Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

On May 29, 2020, the Company, Diodes Holding B.V.

(the “Foreign Borrower” and, collectively with the Company, the “Borrowers”), and certain subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) that amends and restates that certain Amended and Restated Credit Agreement dated as of October 26, 2016 (as amended, modified and/or supplemented from time to time prior to May 29, 2020, the “Existing Credit Agreement”).

On December 31, 2020, Diodes Holding B.V.

merged into Diodes Holdings UK Limited, which following the merger became the Foreign Borrower under the Credit Agreement, and in connection with the merger, the parties to the Second Amended and Restated Credit Agreement entered into a Consent and Amendment No.

2 to Second Amended and Restated Credit Agreement (“Consent and Amendment No.

the Second Amended and Restated Credit Agreement as amended by Consent and Amendment No.

2 is referred to as the “Credit Agreement”).

Certain capitalized terms used in this description of the Credit Agreement have the meanings given to them in the Credit Agreement, the current form of which is set forth in Exhibit A to Consent and Amendment No.

2, which is attached as an exhibit to this report.

The Company analyzed the amendment and restatement of the Existing Credit Agreement pursuant to the guidance in ASC No.

470-50, Debt—Modifications and Extinguishments.

The Company determined that certain lenders had changes in cash flows which were substantially different as a result of the amendment and

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

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

The Revolver and the Term Loan mature on May 29, 2023 (the “Maturity Date”).

Both the term loan portion and the revolving portion of the Credit Agreement bear an interest rate at LIBOR or similar other indices plus a specified margin.

The Company used a portion of the proceeds available under the Revolver and the Term Loan (i) to finance the Company’s acquisition of Lite-On Semiconductor Corporation, which is described more fully elsewhere in this report, (ii) to refinance certain existing indebtedness of the Borrowers and their subsidiaries under the Existing Credit Agreement and (iii) for working capital, capital expenditures, and other lawful corporate purposes, including, without limitation, financing permitted acquisitions.

The Credit Agreement contains certain financial and non-financial covenants, including, but not limited to, a maximum Consolidated Leverage Ratio, a minimum Consolidated Fixed Charge Coverage Ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases).

These covenants are generally similar to the corresponding covenants in the Existing Credit Agreement, except that certain amounts permitted as exceptions to negative covenants restricting liens, indebtedness, investments, dispositions and restricted payments have been revised, and additional exceptions to certain negative covenants have been added, including increased capacity for certain intercompany Indebtedness and Investment (including existing Lite-On Indebtedness), and the right to enter into certain securitization transactions and receivables facilities, subject to limitations set forth in the Credit Agreement.

Furthermore, under the Credit Agreement, restricted payments, including dividends and share repurchases, are permitted in certain circumstances, including while the pro forma Consolidated Leverage Ratio is, both before and after giving effect to any such restricted payment, at least 0.25 to 1.00 less than the maximum permitted under the Credit Agreement.

Capital expenditures and investments

8 unchanged sentences

As of December 31, 2020, we have invested $193.7 million in this joint venture, primarily for infrastructure, buildings and equipment related capital expenditures.

Restricted cash is pledged as collateral when we enter into agreements with banks for certain banking facilities.

As of December 31, 2019, restricted cash of $1.1 million was pledged as collateral for issuance of bank acceptance notes and letters of credit.

The Company’s restricted cash primarily consisted of the cash required to be on deposit under contractual agreements with banks to support outstanding loan and import/export guarantees.

As of December 31, 2020, restricted cash of $52.5 million was pledged as collateral for issuance of bank loans, bank acceptance notes and letters of credit.

Our foreign operations expose us to unique intellectual property technology risks compared to a company with fewer or no international operations.

7 unchanged sentences

Net cash provided by operating activities

Net cash used by investing activities

Net cash used by financing activities

Net cash used in investing activities

Net cash used in financing activities

Effect of exchange rates on cash and cash equivalents,

including restricted cash

Net increase (decrease) in cash and cash equivalents, including restricted cash

Net increase in cash and cash equivalents, including restricted cash

Operating Activities

Net cash provided by operating activities for 2019 was approximately $229.8 million, due primarily to $154.1 million of net income, $109.6 million in depreciation and amortization of intangible assets, $20.5 million from non-cash share-based compensation, and a $9.9 million increase in deferred income taxes.

These increases were partially offset by a gain of $24.4 million related to the disposal of property, plant and equipment and a net decrease in operating capital assets and liabilities of $40.3 million.

Net cash provided by operating activities for 2020 was approximately $187.2 million, due primarily to $99.2 million of net income, $108.0 million in depreciation and amortization of intangible assets and $25.3 million from non-cash share-based compensation.

These increases were partially offset by a decrease in deferred taxes of $14.5 million, and a net decrease in operating capital assets and liabilities of $31.4 million.

Investing Activities

Net cash used by investing activities for 2019 was approximately $100.4 million, due primarily to $98.5 million used for purchases of property, plant and equipment and $33.0 used for acquisitions.

These uses of cash for investing was partially offset by proceeds from the sale of property, plant and equipment of $29.4 million.

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

Financing Activities

Net cash used in financing activities for 2019 was approximately $112.4 million, due primarily to the net repayment of long-term debt of $117.3 million, payment of taxes on net share settlement of $4.4 million related to vesting of Diodes stock awards and the payment of dividends to noncontrolling interest of $3.8 million,.

These uses of cash were partially offset by the receipt of $11.9 million from the exercise of stock options.

Net cash used in financing activities for 2020 was approximately $54.3 million, due $296.8 million related to the Diodes shares reacquired in connection with the LSC acquisition and the payment of taxes on net share settlement of $8.3 million.

These outflows of cash were partially offset by an inflow form a net increase in borrowing of $249.1 million to close the LSC acquisition.

Debt instruments

3 unchanged sentences

Our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin.

In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $23.5 million on a long-term basis from local Taiwan banks in order to make an investment.

The first loan of $4.3 million matures in 2033, while the second loan of $19.2 million matures in 2024.

At December 31, 2020, $140.6 million was outstanding under these lines of credit.

In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), has long-term debt of $30.0 million on a long-term basis from local Taiwan banks.

The ERIS debt matures in various periods from 2021 through 2033.

See “Liquidity and Capital Resources” above and Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

7 unchanged sentences

Finance leases

Defined benefit obligations

Defined benefit contribution obligations

Purchase obligations

1 unchanged sentence

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

The Revolver and Term Loan mature in October 2021.

The Revolver and Term Loan mature in May 2023.

Tax liabilities are not included in the above contractual obligations as we cannot make reasonable estimates of the amount and period in which those tax liabilities would be paid.

See “Accounting for income taxes” below and Note 12 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

In addition to these purchase commitments, we have equity investment obligations for our Chengdu facilities of $25 million for 2020, and capital investment obligations of $25 million for 2020 and $16 million for 2021.

In addition to these purchase commitments, we have been party to an agreement in which we were obligated to make equity investments and capital investments in our Chengdu facilities.

That agreement is expired, but we anticipate renewing it later in 2021.

Critical Accounting Policies and Estimates

47 unchanged sentences

If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

Business Combinations

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

Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

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

Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed.

The Company makes estimates and assumptions about conditions of the assets, other costs not captured in the base costs, and consideration for entrepreneurial profit, depreciation, functional obsolescence, and economic obsolescence allocated to the various property, plant and equipment categories considering the perspective of marketplace participants.

While management believes those expectations and assumptions are reasonable, they are inherently uncertain.

Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions, which could result in subsequent impairments.

Recently Issued Accounting Pronouncements

47 unchanged sentences

As of December 31, 2020, our outstanding principal debt included $282.3 million outstanding under our revolving senior credit facility and term loan, $140.6 million outstanding under foreign long term liabilities and $0.5 million used for import and export guarantees and bank acceptance notes.

Based on our debt balances at December, 31, 2019, 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

$1.2 million, net of the amounts realized from our interest rate swaps.

Based on our debt balances at December, 31, 2020, an increase or decrease in interest rates by 1.0% for the year on our credit facilities would increase or decrease our annual interest rate expense by less than $1.7 million, net of the amounts realized from our interest rate swaps.

See “Risk Factors,” – “ We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses, which could adversely affect our business, operating results and financial condition” in Part I, Item 1A of this Annual Report for additional information.

15 unchanged sentences

Not Applicable.

Controls and Procedures.

Disclosure Controls and Procedures

Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial Officer, Brett R.

Whitmire, with the participation of our management, carried out an evaluation as of December 31, 2019, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended).

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer believe that, as of the end of the period covered by this report, our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report is:

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

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

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.

The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures.

These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Management's Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting.

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

Our internal control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

GAAP, and that receipts and expenditures of ours are being made only in accordance with authorizations of our management and directors;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including our Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

This evaluation included review of the documentation of controls, testing of operating effectiveness of controls and a conclusion on this evaluation.

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Moss Adams LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

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

Other Information.

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, 2019, for our annual stockholders’ meeting for 2020 (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.

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.

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.

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.

Principal Accounting Fees and Services.

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

Exhibits, Financial Statement Schedules.

Financial Statements and Schedules

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, 2019, and 2018

Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

(2) Schedules:

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.

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

Financial Statements of Unconsolidated Subsidiaries and Affiliates

Not Applicable.

Form 10-K Summary.

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, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As disclosed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

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

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current year audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee of the Company’s board of directors and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue – Ship and Debit Reserve

As described in Note 1, the Company records reserves related to estimated customer incentives, such as “ship and debit”, which arise when the Company, from time to time based on market conditions, issue credits to certain distributors upon their shipments to their end customers.

The ship and debit reserve comprehends both claims in process and anticipated claims arising from the eventual sale of distribution inventory that is subject to claim activity.

The Company performs a look-back analysis of revenues and credits issued to distributors.

Using their look-back analysis, the Company adjusts their assumptions and estimated reserves each quarter.

The resulting ship and debit reserve is recorded as a reduction to net sales with a corresponding reduction to accounts receivable, and approximated $40.0 million as of December 31, 2019.

We identified the ship and debit reserve as a critical audit matter.

Estimating the reserve involves the application of models using assumptions including historical customer ship and debit credit rates and credit lag times on such revenues.

These assumptions could be affected by current and future economic and market conditions.

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

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

Testing select distributor balances.

Vouching revenues and ship and debit credits to supporting documents.

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

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

/s/ Moss Adams LLP

Los Angeles, California

February 11, 2020

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

Current assets:

Cash and cash equivalents

Short-term investments

Accounts receivable, net of allowances of $ 4,866 and $ 4,102 at

December 31, 2019 and 2018, respectively

Prepaid expenses and other current assets

Total current assets

Property, plant and equipment, net

Deferred income tax

Intangible assets, net

Other long-term assets

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 17)

Stockholders' equity

Preferred stock - par value $ 1.00 per share;

1,000,000 shares authorized;

shares issued or outstanding

Common stock - par value $ 0.66 2/3 per share;

70,000,000 shares authorized;

51,206,969 and

50,221,035 , issued and outstanding at December 31, 2019 and 2018, respectively

Additional paid-in capital

Retained earnings

Treasury stock, at cost, 1,457,206 shares held at December 31, 2019 and 2018

Accumulated other comprehensive loss

Total stockholders' equity

Noncontrolling interest

Total liabilities and stockholders' equity

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

Twelve Months Ended December 31,

Cost of goods sold

Operating expenses

Selling, general and administrative

Research and development

Amortization of acquisition-related intangible assets

Impairment of fixed assets

Restructuring

Gain on disposal of fixed assets

Other operating expense (income)

Total operating expenses

Income from operations

Other income (expense)

Interest income

Interest expense

Foreign currency loss, net

Total other expense

Income before income taxes and noncontrolling interest

Income tax provision

net income attributable to noncontrolling interest

Net income (loss) attributable to common stockholders

Earnings (loss) per share attributable to common stockholders

Number of shares used in computation

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

Twelve Months Ended December 31,

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

Unrealized (loss) gain on interest rate swap, net of tax

Unrealized foreign currency gain (loss), net of tax

Comprehensive income

Comprehensive income attributable to noncontrolling interest

Total comprehensive income attributable to common stockholders

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

Treasury stock

other comprehensive

Incorporated Stockholders'

Noncontrolling

(Amounts in thousands)

Balance, December 31, 2016

Total comprehensive income

Noncontrolling interests

Dividends to noncontrolling interest

Adoption of new accounting standard, ASU 2016-09

Common stock issued for share-based plans

Stock buyback

Share-based compensation

Tax related to net share settlement

Balance, December 31, 2017

Total comprehensive income

Contributions from noncontrolling interests

Dividends to noncontrolling interest

Common stock issued for share-based plans

Share-based compensation

Tax related to net share settlement

Balance, December 31, 2018

Total comprehensive income

Contributions from noncontrolling interests

Dividends to noncontrolling interest

Common stock issued for share-based plans

Share-based compensation

Tax related to net share settlement

Balance, December 31, 2019

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Twelve Months Ended December 31,

Operating Activities

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

net of effects of acquisitions:

Amortization of intangibles

Amortization of debt issuance costs

Share-based compensation

Gain on disposal of property, plant and equipment

Deferred income taxes

Changes in operating assets:

Accounts receivable

Prepaid expenses and other current assets

Changes in operating liabilities:

Accounts payable

Accrued liabilities

Other liabilities

Income taxes payable (refundable)

Net cash and cash equivalents provided by operating activities

Investing Activities

Acquisitions, net of cash acquired

Purchases of short-term investments

Sales of short-term investments

Purchases of property, plant and equipment

Proceeds from sales of property, plant and equipment

Receipt of subsidies and grants

Net cash and cash equivalents used in investing activities

Financing Activities

Advances 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

Proceeds from long-term debt

Debt issuance costs

Repayments of long-term debt

Repayments of finance lease obligations

Purchase of treasury stock

Capital contribution from noncontrolling interest

Dividend distribution to noncontrolling interest

Net cash and cash equivalents used in financing activities

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

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

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

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

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

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

Twelve Months Ended December 31,

Supplemental Cash Flow Information

Cash paid during the year for:

Non-cash activities:

(Increase) decrease property, plant and equipment purchased on accounts payable

Decrease (increase) in dividend accrued for noncontrolling interest

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

Twelve Months Ended December 31,

Current Assets:

Cash and cash equivalents

Restricted cash (included in other current assets)

Total cash, cash equivalents and restricted cash

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

DIODES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands except per share data)

Note 1 – Summary of Operations and Significant Accounting Policies

Nature of operations

Diodes Incorporated, together with its subsidiaries (collectively, the “Company,” “we” or “our”) (Nasdaq:

DIOD), is a leading global manufacturer and supplier of high-quality, application-specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets.

We serve the consumer electronics, computing, communications, industrial, and automotive markets.

Our products include diodes, rectifiers, transistors, MOSFETs, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors, power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers.

We also have timing, connectivity, switching, and signal integrity solutions for high-speed signals.

Our corporate headquarters and Americas’ sales offices are located in Plano, Texas and Milpitas, California.

Design, marketing, and engineering centers are located in Plano;

Taipei, Taoyuan City and Zhubei City, Taiwan;

Oldham, England;

and Neuhaus, Germany.

Our wafer fabrication facilities are located in Oldham and Shanghai, China and Greenock, Scotland.

We have assembly and test facilities located in Shanghai, Jinan and Chengdu, China, as well as in Hong Kong, Neuhaus and Taipei.

Additional engineering, research and development, sales, warehouse, and logistics offices are located in Taipei;

Shenzhen and Yangzhou, China;

Seongnam-si, South Korea;

Munich, Germany;

and Tokyo, Japan, with support offices throughout the world.

Significant Accounting Policies

Principles of consolidation – The consolidated financial statements include the accounts of Diodes Incorporated, its wholly-owned subsidiaries and its controlled majority-owned subsidiaries.

We account for equity investments in companies over which we have the ability to exercise significant influence, but do not hold a controlling interest, under the equity method, and we record our proportionate share of income or losses in Interest and other, net in the consolidated statements of income.

All significant intercompany balances and transactions have been eliminated.

Use of estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires that management make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed.

Actual results may differ from these estimates in amounts that may be material to the consolidated financial statements and accompanying notes.

Revenue recognition – Effective January 1, 2018, we adopted the comprehensive new revenue recognition standard ASC 606.

The details of the significant changes to our accounting policies resulting from the adoption of the new standard are set out below.

We adopted the standard using a modified retrospective method.

There was no change in our revenue reported for the twelve months ended December 30, 2017.

The adoption of this standard did not have a material impact on our condensed consolidated financial position, reported revenue, results of operations or cash flows as of and for the twelve months ended December 31, 2018.

ASC 606 defines a performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and under ASC 606 is the unit of account.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

Generally speaking, our performance obligations represent a promise to transfer various semiconductor products, and have the same pattern of revenue recognition.

Our performance obligations are satisfied at either a point in time, or over time as work progresses.

The vast majority of our revenue from products and services is accounted for at a point in time.

Substantially all of our revenue in direct and Distributor sales is recognized at a point in time.

Further, the payment terms on our sales are based on negotiations with our customers.

Our customers can order different types of semiconductors in a single contract (purchase order), and each line on a purchase order represents a separate performance obligation.

Depending on the terms of an arrangement, we may also be responsible for shipping and handling activities.

In accordance with ASC 606-10-25-18B, we have elected to account for shipping and handling as activities to fulfill our promise to transfer the good(s).

As such, shipping and handling activities do not represent a separate performance obligation, and are accrued as a fulfillment cost.

Further, although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended.

Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations;

therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

We record allowances/reserves for a number of items.

The following items are the largest dollar items for which we record allowances/reserves, with ship and debit making up the vast majority:

(i) ship and debit, which arise when we issue credit to certain distributors upon their shipments to their end customers;

(ii) stock rotation, which are contractual obligations that permit certain distributors, up to four times a year, to return a portion of their inventory based on historical shipments to them in exchange for an equal and offsetting order;

and (iii) price protection, which arise when market conditions cause average selling prices to decrease and we issue credit to certain distributors on their inventory.

Ship and debit reserves are recorded as a reduction to net sales with a corresponding reduction to accounts receivable.

Stock rotation reserves and price protection reserves are recorded as a reduction to net sales with a corresponding increase in accrued liabilities.

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

Payment terms and conditions typically vary depending on negotiations with the customer.

Net sales are reduced in the period of sale for estimates of product returns and other allowances including distributor adjustments, which were approximately $ 163.9 million, $ 158.8 million and $ 158.1 million in 2019, 2018 and 2017, respectively.

Product warranty – We generally warrant our products for a period of one year from the date of sale.

Historically, warranty expense has not been material.

Cash, cash equivalents, and short-term investments – We consider all highly liquid investments with maturity of three months or less at the date of purchase to be cash equivalents.

We currently maintain substantially all of our day-to-day operating cash balances with major financial institutions.

We hold short-term investments consisting of time deposits, which are highly liquid with maturity dates greater than three months at the date of purchase.

Generally, we can access these investments in a relatively short amount of time but in doing so we generally forfeit a portion of interest income.

See Note 3 below for additional information regarding fair value of financial instruments.

Allowance for doubtful accounts – We evaluate the collectability of our accounts receivable based upon a combination of factors, including the current business environment and historical experience.

If we are aware of a customer’s inability to meet its financial obligations, we record an allowance to reduce the receivable to the amount we reasonably believe will be collected from the customer.

For all other customers, we record an allowance based upon the amount of time the receivables are past due.

If actual accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting effect on operating expense.

Accounts receivable are presented net of valuation allowance, which were approximately $ 4.9 million at December 31, 2019 and $ 4.1 million at December 31, 2018.

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 2019, 2018, or 2017.

Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test.

If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary.

When we perform the quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill.

If fair value exceeds carrying value, the goodwill is not considered impaired.

If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

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, 2019, we expect the remaining carrying value of assets to be recoverable.

During 2017, we recognized an impairment of long-lived assets related to the KFAB fixed assets.

See Note 19 below for additional information related to the KFAB shut down.

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 20 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, 2019 and 2018, respectively.

Research and development costs – Internally-developed research and development costs are expensed as incurred.

Acquired in-process research and development (“IPR&D”) is capitalized as an indefinite-lived intangible asset and evaluated periodically for impairment.

When the project is completed, an expected life is determined and the IPR&D is amortized as an expense over the expected life.

Shipping and handling costs – Shipping and handling costs for products shipped to customers, which are included in selling, general and administrative expenses, were approximately $ 13.9 million, $ 14.8 million and $ 15.2 million for the twelve months ended December 31, 2019, 2018 and 2017, respectively.

Concentration of credit risk – Financial instruments, which potentially subject us to concentrations of credit risk, include trade accounts receivable.

Credit risk is limited by the dispersion of our customers over various geographic areas, operating primarily in electronics manufacturing and distribution.

We perform a credit evaluation of new customers and monitor the accounts receivable aging of our existing customers.

Generally we require no collateral from our customers and historically credit losses have been insignificant.

We currently maintain substantially all of our day-to-day cash balances and short-term investments with major financial institutions.

Cash balances are usually in excess of Federal and/or foreign deposit insurance limits.

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

Share-based compensation – We use the Black-Scholes-Merton model to determine the fair value of stock options on the date of grant and recognize compensation expense for stock options on a straight-line basis.

Restricted stock grants are measured based on the fair market value of the underlying stock on the date of grant and compensation expense is recognized on a straight-line basis over the requisite four-year service period.

Performance stock units are measured based on the fair market value of the underlying stock on the date of grant and compensation expense is recognized over the three-year performance period, with adjustments made to the expense to recognize the probable payout percentage.

The amount of compensation expense recognized using the Black-Scholes-Merton model requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our stock option grants.

The fair value calculated by this model is a function of several factors, including the grant price, the expected future volatility, the expected term of the option and the risk-free interest rate of the option.

The expected term and expected future volatility of the options require judgment.

In addition, we

estimate the expected forfeiture rate and only recognize expense for those stock options expected to vest.

We estimate the forfeiture rate based on historical experience, and to the extent our actual forfeiture rate is different from our estimate, share-based compensation expense is adjusted accordingly.

Treasury stock – Under a program 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 of approximately $ 3.7 million for both twelve month periods ended December, 31, 2019 and 2018 and approximately $ 8.0 million for the twelve months ended December 31, 2017.

Defined benefit plan – We maintain plans covering certain of our employees in the U.K.

The overfunded or underfunded status of pension and postretirement benefit plans are recognized on the balance sheet.

Actuarial gains and losses, and prior service costs or credits, are recognized in other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit cost.

For financial reporting purposes, the net pension and supplemental retirement benefit obligations and the related periodic pension costs are calculated based upon, among other things, assumptions of the discount rate for plan obligations, estimated return on pension plan assets and mortality rates.

These obligations and related periodic costs are measured using actuarial techniques and assumptions.

The projected unit credit method is the actuarial cost method used to compute the pension liabilities and related expenses.

The expected long-term return on plan assets was determined based on historical and expected future returns of the various asset classes.

The plan’s investment policy includes a mandate to diversify assets and invest in a variety of asset classes to achieve its expected long-term return and is currently invested in a variety of funds representing most standard equity and debt security classes.

Trustees of the plan may make changes at any time.

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 $ 108.1 million, $ 101.8 million and $ 83.5 million at December 31, 2019, 2018 and 2017, respectively.

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

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

Recently Issued Accounting Pronouncements

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

Recently Adopted Standards

2016-02, Leases (Topic 842) (“ASU 2016-02”) – In February 2016, the FASB issued ASU 2016-02, which amends the accounting treatment for leases and requires, among other things, lessees to recognize a right-of-use (“ROU”) asset and lease liability for most lease arrangements.

The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective transition approach, under which financial results reported in periods prior to 2018 are unchanged.

We elected the following allowed practical expedients as permitted under the transition guidance within the new standard:

Not record leases with an initial term of 12 months or less on the balance sheet;

Not separate non-lease components of leases from the lease components;

Not reassess (1) the definition of a lease, (2) lease classification, and (3) initial direct costs for existing leases during transition.

Upon adoption of ASU 2016-02, the Company recorded ROU assets of $ 68.3 million, including land-use rights of $ 17.1 million previously recorded in other assets and $ 2.5 million previously recorded in property, plant and equipment and ROU liabilities of $ 50.4 million.

For additional information related to the Company’s leases, see Note 9.

The Company determines if an arrangement is a lease at inception.

ROU assets are included in Other assets in the Company’s condensed consolidated balance sheets.

Current lease liabilities are included in Accrued liabilities and other and long-term lease liabilities are included in Other long-term liabilities, in our condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

To determine the present value of the lease payments, we estimate our incremental borrowing rate based on information available at the lease commencement date.

The Company’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option.

Leases with a term of 12 months or less are not recorded on the balance sheet.

Our leases typically do not contain any residual value guarantees.

For real estate, we account for the lease and non-lease components as a single lease component.

2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") - In June 2018, the FASB issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees.

ASU 2018-07 was effective for the Company on January 1, 2019.

The adoption of this standard did not have a material effect on our condensed consolidated financial statements or disclosures.

2017-12 - Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) -In August 2017, the FASB issued ASU No.

2017-12 to better align hedge accounting with risk management strategies, and as a result, more hedging strategies will be eligible for hedge accounting.

Public business entities will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge’s effectiveness.

After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge.

An initial quantitative test to establish that the hedge relationship is highly effective is still required.

The amendments are effective for fiscal years beginning after December 15, 2018, and the Company adopted the new standard January 1, 2019.

The new standard had no impact on the Company’s financial statements.

On January 1, 2019, the Company adopted ASU No.

2018-16, “Derivatives and Hedging (Topic 815):

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”.

The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S.

benchmark interest rate for hedge accounting purposes under ASC 815, in addition to the currently permissible benchmark interest rates.

This ASU provides the Company the ability to utilize the OIS rate based on SOFR as the benchmark interest rate on certain hedges of interest rate risk.

The new standard had no impact on the Company’s financial statements.

Standards Effective in Future Years

The FASB has issued the following relevant standards, effective in future years, which are not expected to have a material impact on our consolidated condensed financial statements:

Standard Name

Standard Effective Date

Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

January 1, 2020

Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

January 1, 2020

In April 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01).

The amendments generally have the same effective dates as their related standards.

If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period;

early adoption is permitted.

The Company is evaluating the impact of the adoption of these standards.

Note 2 – Earnings per Share

Basic earnings per share is calculated by dividing net earnings attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

Diluted earnings per share is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.

Earnings per share are computed using the “treasury stock method.”

Twelve Months Ended December 31,

Earnings (numerator)

Net income (loss) attributable to common stockholders

Shares (denominator)

Weighted average common shares outstanding (basic)

Dilutive effect of stock options and stock awards outstanding

Adjusted weighted average common shares outstanding (diluted)

Earnings (loss) per share attributable to common

Stock options and stock awards excluded from EPS

calculation because their inclusion would be

anti-dilutive (In thousands)

Note 3 – Fair Value Measurements

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

We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.

The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs).

Valuation techniques should be consistently applied.

Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.

Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

These two types of inputs create a three-tier fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

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

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

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

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

As of December 31, 2019, we had short-term investments.

Trading securities held at December 31, 2019, were purchased on the open market and unrealized gains and losses are included in Other income (expense).

The trading securities are valued under the fair value hierarchy using Level 1 Inputs.

Short-term investments consist of investments such as time deposits, which are highly liquid with maturity dates greater than three months at the date of purchase.

Generally, we can access these short-term investments in a relatively short amount of time but in doing so we generally forfeit a portion of earned and future interest income.

Deferred compensation investments consist of the Company’s stock, mutual funds and cash.

See Note 13 for additional information related to our deferred compensation program and Note 18 for additional information related to our interest rate swaps and foreign currency hedges.

The short-term investments and deferred compensation investments are valued under the fair value hierarchy using Level 1 and Level 2 Inputs.

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

Fair Market Value

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Total Changes in Fair Values Included in Current Period Earnings

Short-term investments

Interest rate swaps and collars

Deferred compensation investments

Financial assets and liabilities carried at fair value as of December 31, 2018 are classified in the following table:

Fair Market Value

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

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Total Changes in Fair Values Included in Current Period Earnings

Short-term investments

Interest rate swap assets

Deferred compensation investments

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, 2019 and 2018.

We also are responsible for a pension plan in the U.K.

that holds investments carried at fair value.

See Note 13 for additional information related to these pension plan investments.

Note 4 – Inventories

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

Finished goods

Work-in-progress

Raw materials

Note 5 – Property, Plant and Equipment

Property, plant and equipment at December 31 were:

Buildings and leasehold improvements

Machinery and equipment

Accumulated depreciation and amortization

Construction in-progress

Depreciation and amortization of property, plant and equipment was $ 91.5 million, $ 86.3 million and $ 76.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

At December 31, 2018, we had capital lease obligations totaling approximately $ 2.1 million, included in Other current liabilities and Other long-term liabilities on the balance sheet.

See Note 9 for information related to our lease liabilities as of December 31, 2019.

During the fourth quarter of 2019 the Company recorded a $ 24.3 million gain realized upon selling land.

The land was acquired in a previous period in anticipation of building a new corporate headquarters building.

Note 6 – Intangible Assets

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

December 31, 2019

Intangible Assets

Gross Carrying Amount

Accumulated Amortization

Currency Exchange

Amortized intangible assets

Developed product technology

Customer relationships

Software license and other

Total amortized intangible assets

Intangible assets with indefinite lives

In process research and development

Trademarks and trade names

Total Intangible assets with indefinite lives

Total intangible assets

December 31, 2018

Intangible Assets

Gross Carrying Amount

Accumulated Amortization

Currency Exchange

Amortized intangible assets

Developed product technology

Customer relationships

Software license and other

Total amortized intangible assets

Intangible assets with indefinite lives

In process research and development

Trademarks and trade names

Total Intangible assets with indefinite lives

Total intangible assets

Amortization expense related to intangible assets subject to amortization was $ 18.0 million, $ 18.4 million and $ 18.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

In process research and development is transferred to amortized intangible assets at the time the product becomes viable.

The schedule below sets future amortization expense of our currently owned intangible assets:

2025 and thereafter

Note 7 – Goodwill

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

Balance at December 31, 2017

Acquisitions:

ERIS acquisition of Yea Shin Technology Corporation

Foreign currency translation adjustment

Balance at December 31, 2018

Acquisitions:

Wafer fabrication in Greenock, Scotland

Canyon Investment

ERIS acquisition of Yea Shin Technology Corporation

Foreign currency translation adjustment

Balance at December 31, 2019

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

Short-term debt

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $ 126.6 million.

These credit facilities bear interest at LIBOR or similar indices plus a specified 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, 2019, was approximately $ 111.8 million, net of a $ 13.3 million advanced under our foreign credit lines and $ 1.4 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.

Credit Facility matures October 26, 2021 .

The remaining portion of the term loan included in the U.S.

Credit Facility is repayable in part through quarterly installments that increase over time from $ 6.3 million per quarter in the first three quarters of 2019 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.

Credit Facility bears interest at LIBOR or similar indices plus a specified margin.

At December 31, 2019, we owed $ 75.2 million under the U.S.

Credit Facility, all of which was outstanding under the term loan.

The obligations of the Company and the other borrowers under the U.S.

Credit Facility are secured by substantially all of the assets of the Company, including controlling interests in its first-tier subsidiaries, and by specified assets of certain of its subsidiaries.

I n addition to our credit lines, our 51 % owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $ 23.5 million on a long-term basis from local Taiwan banks in order to make an investment.

The first loan of $ 4.3 million matures in 2033 , while the second loan of $ 19.2 million matures in 2024 .

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

Notes payable

to Bank of Taiwan, original principal amount of TWD 140 million,

fixed interest rate of 1.3 %, matures June 28, 2033 .

Notes payable to Yuan Ta Bank, original principal amount of

TWD 113 million,

fixed interest rate of 1.7 %, matured on January 29, 2019 .

Notes payable to China Trust Bank, original principal of TWD 576 million, fixed interest rate of 1.7 %, matures May 27, 2024

Term loan and revolver

Total long-term debt

Current portion

Unamortized debt issuance costs

Long-term debt, net of current portion

The table below sets forth the annual contractual maturities of long-term debt at December 31, 2019:

2025 and thereafter

Total long-term debt

Note 9 – Leases

The Company leases certain assets used in its business, including land, buildings and equipment.

These leased assets are used for operational and administrative purposes.

The components of lease expense are set forth in the table below:

Twelve Months Ended

December 31, 2019

Operating lease expense

Finance lease expense:

Amortization of assets

Interest on lease liabilities

Short-term lease expense

Variable lease expense

Total lease expense

The table below sets forth supplemental balance sheet information related to leases:

December 31, 2019

Operating leases:

Operating lease ROU assets

Current operating lease liabilities

Noncurrent operating lease liabilities

Total operating lease liabilities

Finance leases:

Finance lease ROU assets

Accumulated amortization

Finance lease ROU assets, net

Current finance lease liabilities

Non-current finance lease liabilities

Total finance lease liabilities

Weighted average remaining lease term (in years):

Operating leases

Finance leases

Weighted average discount rate:

Operating leases

Finance leases

The table below sets forth supplemental cash flow and other information related to leases:

Twelve Months Ended

December 31, 2019

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

Operating cash outflows from operating leases

Operating cash outflows from finance leases

Financing cash outflow from finance leases

ROU assets obtained in exchange for lease liabilities incurred:

Operating leases

The table below sets forth information about lease liability maturities:

December 31, 2019

Operating Leases

Finance Leases

2026 and thereafter

Total lease payments

imputed interest

Total lease obligations

current obligations

Long-term lease obligations

Note 10 – 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

Operating lease

Finance lease

Accrued pricing adjustments

Accrued professional services

Other long-term liabilities at December 31 were:

Accrued defined benefit plan

Unrecognized tax benefits

Operating lease

Finance lease

Deferred grans and subsidy

Deferred compensation

Tax contingencies

Note 11 – Stockholders’ Equity

We have never declared or paid cash dividends on our Common Stock.

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 under the U.S.

Credit Facility at the time of such dividend and no default would result from declaring or paying such dividend.

The payment of dividends is within the discretion of our Board of Directors.

See Note 8 for additional information regarding our credit agreements.

During November 2015, the Company’s board of directors authorized a share repurchase plan to repurchase up to an aggregate of $ 100 million of the Company’s outstanding common stock.

This repurchase plan expired December 31, 2019, and was not renewed.

During 2017, the Company repurchased 300,000 shares of its common stock at a cost of $ 8.7 million.

All purchases were made through open market transactions and were recorded as treasury stock.

During 2018 and 2019, the Company did no t make any repurchases of its common stock.

Note 12 – Income Taxes

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

Income (loss) before income taxes

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

Current tax provision

Deferred tax provision (benefit)

Liability for unrecognized tax benefits

Total income tax provision

Effective Tax Rate Reconciliation

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

State income taxes, net of federal tax

Foreign income taxed at lower tax rates

tax impact of foreign operations

Foreign withholding taxes

Research and development

Liability for unrecognized tax benefits

Valuation allowance

Employee stock-based compensation

Tax Cuts and Jobs Act

Income tax provision

The sum of the amounts in the table may not equal to the effective tax rate due to rounding.

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.

The table below sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:

Balance at January 1,

Additions based on tax positions related to the

Additions for prior year tax positions

Reductions for prior year tax positions

Balance at December 31,

If the $ 35.7 million of unrecognized tax benefits as of December 31, 2019, is recognized, approximately $ 33.5 million would affect the effective tax rate.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax 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 2012 or tax year 2015.

We are no longer subject to China income tax examinations by tax authorities for tax years before 2009.

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 2014.

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, 2019, 2018 and 2017.

Deferred Taxes

The table below sets forth our deferred tax assets and liabilities as of December 31:

Deferred tax assets

Inventory cost

Accrued expenses and accounts receivable

Foreign tax credits

Research and development tax credits

Net operating loss carryforwards

Lease obligations

Accrued pension

Share based compensation and others

Valuation allowances

Total deferred tax assets, non-current

Deferred tax liabilities

Plant, equipment and intangible assets

Right of use assets

Outside basis differences and others

Total deferred tax liabilities, non-current

Net deferred tax assets

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 $ 1.2 million net deferred tax assets presented in the balance sheet as of December 31, 2019, is net of $ 5.2 million of unrecognized tax benefits.

The $ 6.4 million and $ 16.9 million net deferred tax asset presented above for December 31, 2019 and 2018, respectively, is prior to the net balance sheet presentation required by ASU 2013-11.

At December 31, 2019, we had federal and state tax credit and research credit carryforwards of approximately $ 14 million and $ 8 million, respectively, which are available to offset future income tax liabilities.

The federal tax credit carryforwards begin to expire in 2023 and the state tax credit carryforwards will begin to expire in 2020.

Consistent with prior years, we determined that it is more likely than not that our state research credit carryforwards will expire before they are utilized.

During 2019 we determined that it is more likely than not that our federal tax credit carryforwards will be utilized before expiration.

We released the previously recorded valuation allowances as a credit to income tax expense.

The valuation allowances recorded against the related deferred tax assets totaled $ 8 million and $ 19 million as of December 31, 2019 and 2018, respectively.

At December 31, 2019, we had state net operating loss (“NOL”) carryforwards of approximately $ 1 million, and foreign NOL carryforwards of $ 110 million which are available to offset future taxable income.

The state NOL carryforward will begin to expire in 2020.

We determined that it is more likely than not that the 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 $ 19 million and $ 7 million as of December 31, 2019 and 2018, respectively .

Supplemental Information

Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European and Asian subsidiaries.

As of December 31, 2019, we had undistributed earnings from non-U.S.

operations of approximately $ 913 million (including approximately $ 115 million of restricted earnings, which are not available for dividends).

Undistributed earnings of our China subsidiaries comprise $ 425 million of this total.

Additional Chinese withholding taxes of approximately $ 46 million would be required should the $ 425 million of such earnings be distributed out of China as dividends.

The impact of tax holidays decreased our tax expense by approximately $ 3.1 million, $ 1.6 million and $ 3.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The benefit of the tax holidays on basic and diluted earnings per share was $ 0.06 , $ 0.03 and $ 0.08 for the twelve months ended December 31, 2019, 2018 and 2017, respectively.

Note 13 – 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.

In October 2018, a U.K.

High Court ruling required pension plans, subject to guaranteed minimum pension rules to amend their pension plan formulas to equalize benefits for men and women to adjust for unequal results previously calculated.

High Court ruling went on to require pension plans to make back payments subject to plan rule limitations, with interest applied at one percentage point over the Bank of England base rate.

The guarantee equalization payment was allowed for by increasing the pension liability.

Our portion of the total equalization amount was approximately £ 0.5 million (or approximately $ 0.7 million based on GBP:

USD exchange rate of 1.33 ).

The table below sets forth net periodic benefit costs of the plan for the twelve months ended December 31:

Defined Benefit Plan

Components of net periodic benefit cost:

Interest cost

Recognized actuarial loss

Expected return on plan assets

Prior service cost

Net periodic benefit cost

The table below sets forth the benefit obligation, the fair value of plan assets, and the funded status as of December 31:

Defined Benefit Plan

Change in benefit obligation:

Beginning balance

Interest cost

Actuarial loss (gain)

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

Based on an actuarial study performed as of December 31, 2019, the plan is underfunded by approximately $ 26.1 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 $ 44.7 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, 2019, the plan’s total recognized loss increased by approximately $ 5.1 million.

The variance between the actual and expected return to plan assets during 2019 decreased the total unrecognized net loss by approximately $ 4.3 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, 2019, the average term was approximately 10.5 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

The following weighted-average assumption was used to determine the benefit obligations at December 31:

Discount rate

The expected long-term return on plan assets was determined based on historical and expected future returns of the various asset 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

Expected long-term

Asset allocation

Growth assets

Hedging assets

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, 2019 :

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 $ 2.7 million based on a GBP:USD exchange rate of 1.33 ).

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.

Following the pension plan funding valuation as at March 31, 2019 the trustees and the Company have been in discussions regarding a recovery plan would result in a plan to recover the deficit by January 1, 2029.

Moving the recovery plan from a 2030 deadline to a 2029 deadline could cause us to increase our contributions.

This plan has not been finalized.

The defined benefit plan’s investment strategy is to invest 65 % in growth strategy assets and 35 % in hedging strategy assets.

The growth strategy consists of a highly diversified set of assets, and the hedging component is designed to hedge a significant proportion of the plan’s interest and inflation rate risks.

The overall strategy is designed to return a long-term return of 2.6 % p.a.

above the liability benchmark which is broadly equal to changes in the plan’s liabilities.

The plan’s 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 plan’s 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 plan’s assets that will be invested with each fund manager.

When making decisions, the trustees take advice from experts including the plan’s actuary and also have the option to consult with the Company.

The following table summarizes the major categories of the plan assets:

December 31, 2019

Asset category

Cash and cash equivalents

Equity securities:

Overseas equities

Emerging markets

Fixed income securities:

Government bonds

Non-government bonds

Index-linked securities:

treasury securities

Other types of investments

Liability-driven investments

Fair value is taken to mean the bid value of securities, as supplied by the fund managers.

All the plan’s securities are publicly traded and highly liquid.

The plan does not hold any Level 3 securities.

See Note 3 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.

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 participant’s 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 employee’s 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 employee’s eligible payroll.

For the years ended December 31, 2019, 2018 and 2017, total amounts expensed under these plans were approximately $ 16.3 million, $ 17.0 million and $ 14.8 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 our Board of Directors.

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.

At December 31, 2019 these investments are classified as trading securities and are carried at fair value.

At December 31, 2019, these investments totaled approximately $ 12.9 million.

All gains and losses in these investments are materially offset by corresponding gains and losses in the deferred compensation plan liabilities.

Note 14 – 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:

Cost of goods sold

Selling, general and administrative expense

Research and development expense

Total share-based compensation expense

The table below sets forth share-based compensation expense by type for the twelve months ended December 31:

Stock options

Total share-based compensation expense

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 $ 11.9 million, $ 4.9 million and $ 13.6 million during 2019, 2018 and 2017, respectively.

At December 31, 2019, there was no unrecognized compensation expense related to unvested options.

The table below sets forth a summary of activity in our stock option plan:

Stock Options

Weighted Average

Exercise Price

Weighted Average

Contractual Term

Intrinsic Value

Outstanding at December 31, 2016

Forfeited or expired

Outstanding at December 31, 2017

Outstanding at December 31, 2018

Outstanding and Exercisable at December 31, 2019

The table below sets forth information about stock options outstanding at December 31, 2019:

Range of Exercise Prices

Number Exercisable

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Share Grants – Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.

All new grants are granted under the 2013 Plan, and there will be no additional share grants under the 2001 Plan.

Performance stock units (“PSUs”) are measured based on the fair market value of the underlying stock on the date of grant and compensation expense is recognized over the three-year performance period, with adjustments made to the expense to recognize the probable payout percentage.

PSUs will vest upon the Company achieving a cumulative 3 -year non-GAAP operating income target for the applicable periods.

The table below sets forth a summary of our non-vested share grants in 2019, 2018 and 2017:

Restricted and Performance Stock Grants

Weighted Average Grant Date Fair Value ($)

Aggregate Intrinsic Value

Nonvested at December 31, 2016

Nonvested at December 31, 2017

Nonvested at December 31, 2018

Nonvested at December 31, 2019

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 Company’s common stock with a performance-based grant covering 62,905 shares of the Company’s common stock and a restricted stock grant covering 62,905 of the Company’s 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.

During 2018, we modified previously granted stock option and stock awards for two corporate officers who retired.

The result of the modification was the acceleration of the vesting of 7,500 stock options and 79,720 stock awards for the corporate officers.

The incremental expense recorded for this modification was approximately $ 1.8 million, which was expensed in SG&A during 2018.

The total unrecognized share-based compensation expense as of December 31, 2019, was approximately $ 40.0 million, relating to share grants, which was expected to be recognized over a weighted average period of approximately 2.2 years.

The aggregate fair value amount of share grants that vested during 2019 was $ 20.7 million.

Note 15 – Related Party Transactions

We conduct business with a related party company, Lite-On Semiconductor Corporation;

(“LSC”), and its subsidiaries and affiliates, and Nuvoton Technology Corporation and its subsidiaries and affiliates (collectively, “Nuvoton”).

LSC is our largest stockholder, owning approximately 15.2 % of our outstanding Common Stock as of December 31, 2019, and is a member of the Lite-On Group of companies.

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC and its subsidiaries by the Company.

At the effective date of the transaction, each share of LSC will be converted into the right to receive TWD $ 42.50 per share in cash, or approximately US $ 1.42 per share based on December 31, 2019 exchange rates.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $ 437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement.

We sold products to LSC totaling less than 1 % of our net sales for the years ended December 31, 2019, 2018 and 2017, 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.

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.

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.

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, 2019, 2018 and 2017.

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, 2019, 2018 and 2017 were approximately $ 15.3 million, $ 16.6 million and $ 17.1 million, respectively.

In addition, Chengdu Ya Guang Electronic Company Limited (“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 facilities ;

however, we have no material transactions with Ya Guang, other than this joint venture.

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.

The table below sets forth net sales and purchases from related parties for the twelve months ended December 31:

LSC, its subsidiaries and affiliates

The table below sets forth accounts receivable from and accounts payable to related parties at December 31:

LSC, its subsidiaries and affiliates

Accounts receivable

Accounts payable

Accounts receivable

Accounts payable

The increase in Keylink accounts receivable and accounts payable is the result of a foreign government requirement that the business process change from a service model to a buy/sell business model.

Note 16 – Segment Information, Revenue and Enterprise-Wide Disclosures

Segment Reporting.

For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various manufacturing and distribution facilities.

We aggregate our products because the products are similar and have similar economic characteristics, use similar production processes and share the same customer type.

Our primary operations include operations in Asia, North America and Europe.

The accounting policies of the operating entities are the same as those described in the summary of significant accounting policies.

The tables below set forth net sales based on the location of the subsidiary producing the net sale:

North America

Inter-company sales

Property, plant and equipment

North America

Inter-company sales

Property, plant and equipment

North America

Inter-company sales

Property, plant and equipment

Disaggregation of Revenue .

We disaggregate revenue from contracts with customers into direct sales and distribution sales (“Distributors”) and by geographic area.

Direct sales customers consist of those customers using our product in their manufacturing process, and Distributors are those customers who resell our products to third parties.

We sell our products to customers in multiple areas of the world including Asia, Europe, and North America.

Across these regions, we sell products to end users in a variety of markets such as consumer electronics, computing, communications, industrial and automotive.

Further, most of our contracts are fixed-price arrangements, and are short term in nature, ranging from days to several months.

The tables below set forth the amount of net sales by type, direct sales or Distributor and the location of the customer based on the location to where the products were shipped for the twelve months ended December 31, 2019, 2018 and 2017:

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

United States

All others (1)

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

United States

All others (1)

Total Net Sales for the Twelve Months Ended December 31,

Percent of Net Sales

United States

All others (1)

(1) Represents countries with less than 3 % of the total net sales of each.

The tables below set forth a summary of the above data:

Distributor Sales

Major customers – During the twelve months ended December 31, 2019, 2018 and 2017, one customer, a broad-based global distributor that sells to thousands of different end users, accounted for approximately 10.0 % or $ 119.6 million, $ 120.0 million and $ 101.7 million, respectively, of our revenue.

No customer accounted for 10% or greater of our outstanding accounts receivable at December 31, 2019 or 2018.

Note 17 – Commitments and Contingencies

Lease commitments – We lease offices, manufacturing plants, equipment, vehicles and warehouses under various lease agreements expiring through 2028.

For information related to our lease commitments see Note 9.

In addition, we have the following land right leases.

None of the leases requires a rental payment.

Expiration Date

Chengdu, China

Shanghai, China *

Shandong, China

Shanghai, China *

Yangzhou, China

* Separate leases by separate Diodes’ subsidiaries

Purchase commitments – We have entered into non-cancelable purchase contracts for capital expenditures, primarily for manufacturing equipment, for approximately $ 30.0 million at December 31, 2019.

In addition to these purchase commitments, we have equity investment obligations for our Chengdu facilities of $ 25 million for 2020, and capital investment obligations of $ 25 million and $ 16 million for 2020 and 2021, respectively.

As of December 31, 2019, we also had a commitment to purchase approximately $ 63.6 million of wafers to be used in our manufacturing process.

These wafer purchases will occur during 2020.

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.

Note 18 – 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 3.

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 Company’s 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, 2019 and 2018, we had outstanding foreign currency forward contracts that are 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, 2019 and 2018, the total notional amounts of these foreign exchange contracts was $ 106.0 million and $ 122.4 million, respectively.

The tables below set forth outstanding foreign currency forward contracts at December 31, 2019 and 2018:

Notional Amount

Effective Date

Maturity Date

Weighted Average Strike Rate

Cash Flow Hedge Designation

December 2019

February 2020

Non-designated

December 2019

February 2020

Non-designated

December 2019

February 2020

Non-designated

December 2019

February 2020

Non-designated

December 2019

February 2020

Non-designated

December 2019

February 2020

Non-designated

February 2020

Non-designated

December 2018

February 2019

Non-designated

December 2018

February 2019

Non-designated

December 2018

February 2019

Non-designated

December 2018

February 2019

Non-designated

December 2018

February 2019

Non-designated

December 2018

February 2019

Non-designated

December 2018

Non-designated

GBP = British Pound Sterling

USD = United States Dollar

CNY = Chinese Yuan Renminbi

JPY = Japan Yen

TWD = Taiwan dollar

Hedges of Interest Rate Risk

The Company’s 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 2019 and December 31, 2018:

Number of Instruments

Notional Amount

Interest rate swaps and collars

The table below sets forth the fair value of the Company’s interest rate related derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018:

Other Current Assets

Other Current Liabilities

Other Liabilities

Interest rate swaps and collars

The tables below sets forth the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the years ended December 31 2019, 2018 and 2017:

Amount of Gain or (Loss) Recognized in OCI on Derivative

Location of Gain or (Loss) Reclassified from Accumulated OCI into

Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion Excluded from Effectiveness Testing)

Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Derivative Instruments Designated as Hedging Instruments

Amount of Gain or (Loss) Reclassified from Accumulated OCI into Net Income

Interest rate swaps and collars

Interest expense

Cross currency swaps

Interest income

We estimate that $ 0.3 million of net derivative gains included in accumulated other comprehensive income (“AOCI”) as of December 31, 2019, 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 2019.

Amount of Gain or (Loss) Recognized in Net Income

Location of Gain or (Loss) Recognized in Net Income

Derivatives Not Designated As Hedging Instruments

Foreign currency forward contracts

Foreign currency loss, net

At December 31, 2019 and 2018, 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 $ 0.1 million and $ 4.7 million, respectively.

As of December 31, 2019 and 2018, the Company had no t posted any collateral related to these agreements.

Note 19 – 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 to the landlord in November 2017.

Employees were provided retention and standard severance packages.

During 2018 and 2017, the Company received $ 3.7 million and $ 6.5 million, respectively of insurance proceeds as a result of the fires sustained at the KFAB facility during 2016.

The $ 3.7 million received in 2018 and $ 2.0 million received in 2017 were recorded in Other Income.

The remaining $ 4.5 million received in 2017 was recorded in Cost of Goods Sold.

There are outstanding insurance claims.

Also during 2017, the Company recorded $ 1.9 million of asset impairment related to the shut-down of 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, 2018 and 2017:

Twelve Months Ended December 31,

Early supply contract termination

Cost of equipment relocation, shutdown cost and other

Asset retirement obligation

Retention costs

The table below sets forth the costs accrued related to the KFAB restructuring:

Early Contract

Retention Costs

Cost and Other

Beginning balance, January 1, 2017

Costs accrued

Restructuring costs paid

Balance at December 31, 2017

Costs accrued

Restructuring costs paid

Balance at December 31, 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

Asset retirement obligation, December 31, 2017

Accrual of additional asset retirement obligation

Asset retirement obligation, December 31, 2018

In connection with the asset retirement obligation, as of December 31, 2018, the offsetting asset has been fully amortized.

Note 20 – Business Acquisitions

Wafer Fabrication Facility Acquisition

On April 1, 2019 , the Company completed the previously announced acquisition of GFAB.

The Company recorded the purchase of GFAB as a business acquisition.

The Company purchased GFAB in order to increase the Company’s wafer production capacity.

Total consideration paid by the Company was $ 33.2 million and was funded by advances under the revolving portion of our long-term credit facility.

The facility and assets were wholly acquired, and there is no remaining minority interest.

The goodwill will not be tax deductible.

The Company also incurred acquisition costs of approximately $ 0.6 million that were recognized in selling, general and administrative expense.

Due to a lack of data we are unable to provide historical financial pro forma data.

The table below sets forth the fair value of the assets and liabilities recorded in the GFAB acquisition and the corresponding line item in which the item is recorded in our condensed consolidated balance sheet.

Property, plant and equipment

Prepaid expenses and other

Deferred tax liabilities

LSC Acquisition

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of LSC and its subsidiaries by the Company.

At the effective date of the transaction, each share of LSC will be converted into the right to receive TWD $ 42.50 per share in cash, or approximately US $ 1.42 per share based on December 31, 2019 exchange rates.

The aggregate consideration to be paid by the Company, based on the December 31, 2019 exchange rate, is approximately $ 437 million.

This amount is subject to change, based on the Taiwan dollar to United States dollar exchange rate at closing.

We expect to fund the purchase price of the transaction primarily with proceeds from a new bank financing arrangement .

Eris Technology Acquisitions

In July 2018, our 51 % owned subsidiary, ERIS Technology Corporation (“Eris”), acquired from Yea Shin Technology Corporation ("Yea Shin") and its shareholders 51 % of Yea Shin’s outstanding shares for approximately $ 6.4 million in cash.

Yea Shin operates a wafer fabrication facility located in Tao Yuan county, Taiwan that was established in 1993.

The purpose of the acquisition is to expand the current wafer production capacity of Eris.

Eris also entered into a property purchase agreement with Yong Xiang Development Corporation (“Yong Xiang”) to purchase the plant and facility leased by it to Yea Shin.

The total purchase price of the property is approximately $ 25.5 million.

Eris completed the purchase of the facility in June 2019.

Eris has leased from Yong Xiang the plant and facility until the purchase has been completed.

The monthly lease payment is approximately $ 0.04 million for the first 8.5 months and approximately $ 0.03 million for the remaining period.

Note 21 – Selected Quarterly Financial Data (Unaudited)

Net income attributable to common shareholders

Earnings per share attributable to common shareholders

Net income (loss) attributable to common shareholders

Earnings (loss) per share attributable to common shareholders

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.

Note 22 – Subsequent Event

On February 5, 2020, the Company entered into an agreement to invest up to approximately $ 14.2 million to acquire up to 51 % of Savitech Corporation (“Savitech”).

Savitech is a fabless semiconductor design company and is located in Zhubei City, Taiwan.

The Company will make the investment in two tranches.

The first tranche of approximately $ 5.6 million will be made as soon as possible pending regulatory approval.

The first tranche will provide the Company with approximately 32 % ownership of Savitech.

The second tranche of approximately $ 8.6 million will be made in mid-year 2021 and will increase the Company’s ownership to 51 % of Savitech.

The second tranche of the investment will only be made if Savitech achieves previously agreed-to revenue levels .

INDEX TO EXHIBITS

Date of First Filing

Certificate of Incorporation, as amended

February 20, 2018

Amended By-laws of the Company, amended as of January 6, 2016

January 11, 2016

Form of Certificate for Common Stock, par value $0.66-2/3 per share

August 25, 2005

Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

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

April 3, 2013

Employment Agreement dated as of July 21, 2015, between the Company and Keh-Shew Lu

July 27, 2015

Stock Unit Agreement, dated as of July 21, 2015, between the Company and Keh-Shew Lu

July 27, 2015

Amendment No.

1 to Employment Agreement dated as of February 22, 2017, between the Company and Keh-Shew Lu.

February 27, 2017

Employment agreement dated as of August 29, 2005, between the Company and Mark King

September 2, 2005

Separation letter between the Company and Mark King, dated January 11, 2018

Separation letter between the Company and Ed Tang, dated January 18, 2018

Form of Indemnification Agreement between the Company and its directors and executive officers

September 2, 2005

Diodes Incorporated 2001 Omnibus Equity Incentive Plan, as amended and restated December 22, 2008

February 26, 2009

Diodes Incorporated Second Amended and Restated Deferred Compensation Plan effective January 1, 2009

February 27, 2017

First Amendment to the Diodes Incorporated Second Amended and Restated Deferred Compensation Plan effective June 1, 2013

February 27, 2017

Diodes Incorporated 2013 Equity Incentive Plan, as amended and restated on May 3, 2017

August 17, 2017

Form of Incentive Stock Option Agreement for the Diodes Incorporated 2013 Equity Incentive Plan

June 13, 2013

Form of Stock Unit Agreement for the Diodes Incorporated 2013 Equity Incentive Plan

June 13, 2013

Date of First Filing

Form of Restricted Stock Unit Agreement

February 27, 2017

Form of Performance Stock Unit Agreement

February 27, 2017

Form of Nonstatutory Stock Option Agreement for the Diodes Incorporated 2013 Equity Incentive Plan, as amended (Domestic Version)

February 27, 2014

Form of Nonstatutory Stock Option Agreement for the Diodes Incorporated 2013 Equity Incentive Plan (International Version)

February 27, 2014

Form of Unit Stock Agreement for the Diodes Incorporated 2013 Equity Incentive Plan, as amended (Domestic Version)

February 27, 2014

Form of Stock Unit Agreement for the Diodes Incorporated 2013 Equity Incentive Plan (International Version)

February 27, 2014

Form of Stock Unit Agreement (Substitute for Pericom Semiconductor Corporation Domestic Existing RSUs and Options)

June 30, 2016

Form of Stock Unit Agreement (Substitute for Pericom Semiconductor Corporation International Existing RSUs and Options)

June 30, 2016

Joint Venture Agreement dated as of March 18, 1996, between the Company and J.H.

April 1, 1996

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.

August 9, 2004

Supplementary to the Lease Agreement between Shanghai Kaihong Electronic Co.

Ltd., and Shanghai Ding Hong Electronic Co., Ltd.

August 9, 2004

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

August 9, 2004

Lease Agreement dated as of June 28, 2004, between Diodes Shanghai Co., Ltd.

and Shanghai Yuan Hao Electronic Co., Ltd.

August 9, 2004

Date of First Filing

Supplement to Lease Agreement dated January 1, 2007, for Disposal of Waste and Scraps, between Shanghai Kai Hong Technology Co., Ltd.

and Shanghai Yuan Hao Electronic Co., Ltd.

February 29, 2008

Supplementary Agreement dated December 31, 2007, between Shanghai Kai Hong Technology Co., Ltd.

and Shanghai Yuan Hao Electronic Co., Ltd.

February 29, 2008

Wafer Purchase Agreement dated January 10, 2006, between Anachip Corporation and Lite-On Semiconductor Corporation

January 12, 2006

Supplementary to the Lease Agreement dated September 5, 2004, between Shanghai Kaihong Electronic Co., Ltd.

and Shanghai Ding Hong Electronic Co., Ltd.

Supplementary to the Lease Agreement dated June 28, 2004, between Diodes Shanghai Company Limited and 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.

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.

February 29, 2008

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.

February 29, 2008

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.

August 11, 2008

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.

August 11, 2008

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.

November 7, 2008

Distributorship Agreement dated November 1, 2008, between Diodes Shanghai Co., Ltd.

(a/k/a Shanghai Kaihong Technology) and Shanghai Keylink Logistic Co., Ltd.

February 26, 2009

Date of First Filing

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.

February 26, 2009

Second Supplemental Agreement to the Factory Building Lease Agreement dated August 19, 2009, between Diodes Shanghai Co., Ltd.

(a/k/a Shanghai Kaihong Technology) and Shanghai Yuan Hao Electronic Co., Ltd.

November 6, 2009

Consulting Agreement dated January 1, 2009, between the Company 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.

March 1, 2010

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.

March 1, 2010

Construction Project Contract effective December 31, 2009, 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.

November 9, 2010

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

September 16, 2010

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

September 16, 2010

Joint Venture Agreement effective as of November 5, 2010, between Diodes Hong Kong Holding Company Limited and Chengdu Ya Guang Electronic Company Limited

November 12, 2010

Date of First Filing

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

November 12, 2010

Second Amendment to the DSH #2 Building Lease Agreement dated November 15, 2010, between Diodes Shanghai Co., Ltd.

(a/k/a Shanghai Kaihong Technology) and Shanghai Yuan Howe Electronics Company, Ltd.

February 28, 2011

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.

February 28, 2011

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.

November 9, 2011

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.

November 9, 2011

Third Supplemental Agreement to the Factory 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.

November 9, 2011

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.

August 9, 2011

Plating Process Agreement dated December 31, 2007, 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.

February 29, 2008

Construction Design Consulting Agreement dated April 1, 2011, between Diodes Technology (Chengdu) Company Limited and Lite-On Technology Corporation

August 9, 2012

Second Supplementary Agreement dated as of January 23, 2013, to the Investment Cooperation Agreement effective as of September 10, 2010, 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

February 27, 2013

Date of First Filing

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.

February 27, 2013

Supplement Agreement to Lease Agreement dated September 2013, between Shanghai Kaihong Electronic Co., Ltd and Shanghai Ding Hong Electronic Co., Ltd.

November 12, 2013

Amendment to Dinghong Building Lease Agreements between Shanghai Kaihong Electronic Co.

and Shanghai Dinghong Electronic Co., Ltd.

November 6, 2018

Termination Agreement to Dinghong Male Dorm Building Lease Agreement between Shanghai Kaihong Electronic Co.

and Shanghai Dinghong Electronic Co., Ltd.

November 6, 2018

Termination Agreement to Dinghong Female Dorm Building Lease Agreement between Shanghai Kaihong Electronic Technology Co.

Limited and Shanghai Dinghong Electronic Co.

November 6, 2018

Power Account Transfer Agreement between Shanghai Kaihong Technology Company Limited and Shanghai YuanHao Co.

November 6, 2018

Construction Design Consulting Assignment Agreement Supplemental Agreement, between Diodes Technology (Chengdu) Company Limited and Lite-On Technology Corporation

August 8, 2013

Procurement Agreement dated May 3, 2013, between Diodes Taiwan Inc.

and Lite-On Technology Corporation

August 8, 2013

Share Transfer Memorandum of Understanding dated June 18, 2013, among the Company, Chengdu Ya Guang Electronic Engineering Factory and Zetex Chengdu Electronics Limited

August 8, 2013

Plating Process Agreement dated February 8, 2013, between Zetex (Chengdu) Electronic Company Limited and Diodes Technology (Chengdu) Company Limited

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.

Date of First Filing

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.

March 2, 2015

Chemical Warehouse Lease Agreement dated November 1, 2014, between Shanghai Kaihong Electronic Co., Ltd.

and Shanghai Ding Hong Electronic Co., Ltd.

March 2, 2015

Chemical Warehouse Lease Agreement dated September 22, 2015, between Shanghai Kaihong Technology Co., Ltd.

and Shanghai Yuan Hao Electronic Co., Ltd.

November 6, 2015

Amendment to Yuanhao Building Lease Agreements between Shanghai Kaihong Technology Company Limited and Shanghai Yuanhao Electronic Co.

November 6, 2018

Fifth Supplemental Facility Lease Agreement dated February 1, 2015, between Shanghai Kaihong Technology Co., Ltd.

and Shanghai Yuan Hao Electronic Co., Ltd.

November 6, 2015

Property Lease Safety Agreement dated July 2016, between Zetex (Chengdu) Electronics Ltd.

and Chengdu Yaguang Electronic Co., Ltd.

August 9, 2016

Property Lease Agreement dated July 2016, between Zetex (Chengdu) Electronics Ltd.

and Chengdu Yaguang Electronic Co., Ltd.

August 9, 2016

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

December 13, 2016

Diodes Zetex Pension Scheme Recovery Plan dated February 22, 2017, between Trustees of the Diodes Zetex Pension Scheme and Diodes Zetex Limited

February 27, 2017

Diodes Zetex Pension Scheme Schedule of Contributions dated February 22, 2017, between Trustees of the Diodes Zetex Pension Scheme and Diodes Zetex Limited

February 27, 2017

Framework Agreement dated January 16, 2017, among Diodes Zetex Limited, Diodes Zetex Semiconductors Limited, the Company, HR Trustees Limited and Trustees

February 27, 2017

Guarantee dated March 26, 2012, among Diodes Zetex Semiconductors Limited, Diodes Zetex Limited, HR Trustees Limited and Trustees

August 9, 2012

Date of First Filing

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

August 9, 2012

Legal Charge dated March 26, 2012, among Zetex Semiconductors Limited, HR Trustees Limited and Trustees

August 9, 2012

Credit Agreement dated March 21, 2011, between Mega International Commercial Bank and Diodes Taiwan Inc.

August 9, 2011

Amended and Restated Credit Agreement dated October 26, 2016, among the Company, 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

November 1, 2016

Amendment No.

1 and Limited Waiver dated February 13, 2017, among the parties to the Amended and Restated Credit Agreement dated October 26, 2016 (Exhibit 10.87 above)

February 14, 2017

Amendment No.

2 dated August 24, 2017, among the parties to the Amended and Restated Credit Agreement dated October 26, 2016 (Exhibit 10.87 above)

February 20, 2018

Consent to Credit Agreement

November 6, 2018

Consent and Amendment No.

3 to Amended and Restated Credit Agreement dated December 27, 2018, among the parties to the Amended and Restated Credit Agreement dated October 26, 2016 (Exhibit 87 above)

February 21, 2019

Transition agreement between Diodes Incorporated and Richard White

March 6, 2019

Amended Transition Agreement between Diodes Incorporated and Richard White

April 1, 2019

Consent to Credit Agreement

August 5, 2019

Share Swap Agreement between Diodes Incorporated and Lite-On Semiconductor Corp.

dated as of August 8, 2019

August 9, 2019

Code of Ethics for Chief Executive Officer and Senior Financial Officers

Subsidiaries of the Registrant

Consent of Independent Registered Public Accounting Firm

Date of First Filing

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

Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Inline XBRL Taxonomy Extension Schema

Inline XBRL Taxonomy Extension Calculation Linkbase

Inline XBRL Taxonomy Extension Labels Linkbase

Inline XBRL Taxonomy Extension Definition Linkbase

Inline 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 Company’s 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.

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.

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.

DIODES INCORPORATED (Registrant)

/s/ Keh-Shew Lu

February 11, 2020

President and Chief Executive Officer

(Principal Executive Officer)

February 11, 2020

Chief Financial Officer

(Principal Financial and Accounting Officer)

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 Brett R.

Whitmire, Chief Financial Officer, 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 11, 2020.

/s/ Keh-Shew Lu

President and Chief Executive Officer

(Principal Executive Officer)

Chief Financial Officer

(Principal Financial Officer)

/s/ Raymond K.

/s/ Keh-Shew Lu

Chairman of the Board of Directors

/s/ Michael K.

/s/ Michael R.

/s/ Christina Wen-Chi Sung

CHRISTINA WEN-CHI SUNG

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings