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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-09 · 91 added, 201 removed, 153 unchanged (66% of the section changed)

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We believe that our focus on application-specific standard products utilizing innovative, highly efficient packaging and cost-effective process technologies, coupled with our collaborative, customer-focused product development, provides us with a meaningful competitive advantage relative to other semiconductor companies.

Factors Relevant to Our Results of Operations for the Three Months Ended September 30, 2020

During the third quarter of 2020, net sales were $309.5 million, a decrease of 4.4% from the $323.7 million in the third quarter of 2019, and an increase of 7.2% from the $288.7 million in the second quarter of 2020;

Gross profit was $111.1 million, a decrease of 8.9% from the $122.0 million of gross profit in the third quarter of 2019, and an increase of 9.5% from the $101.5 million in the second quarter of 2020;

Gross profit margin was 35.9%, compared to gross profit margin of 37.7% in the third quarter of 2019, and 35.2% in the second quarter of 2020;

Net income was $27.2 million, or $0.51 per diluted share, compared to net income of $38.1 million, or $0.73 per diluted share, in the third quarter of 2019, and net income of $21.0 million, or $0.40 per diluted share in the second quarter of 2020;

Factors Relevant to Our Results of Operations for the Three Months Ended March 31, 2021

During the first quarter of 2021, net sales were $413.1 million, which included the first full quarter of revenue from the LSC acquisition, an increase of 47.2% from the $280.7 million of net sales in the first quarter of 2020, and an increase of 17.9% from the $350.4 million of net sales in the fourth quarter of 2020.

Gross profit was $138.6 million, an increase of 44.7% from the $95.8 million of gross profit in the first quarter of 2020, and an increase of 13.0% from the $122.7 million in the fourth quarter of 2020;

Gross profit margin was 33.6%, or 36.3% for Diodes’ only, compared to gross profit margin of 34.1% in the first quarter of 2020, and 35.0% in the fourth quarter of 2020;

Net income was $39.5 million, or $0.87 per diluted share, compared to net income of $20.2 million, or $0.38 per diluted share, in the first quarter of 2020, and net income of $29.7 million, or $0.59 per diluted share, in the fourth quarter of 2020;

Cash flow from operations was $68.2 million.

Net cash flow was a positive $85.2 million, which includes $17.8 million of capital expenditures and a $105.0 million draw-down under our amended and restated credit agreement , as a partial currency hedge, associated with the anticipated close of the LSC acquisition.

Net cash flow was a positive $10.6 million, which includes $17.2 million of capital expenditures and a net reduction in debt of $37.2 million.

Recent Developments

LSC Acquisition

In the third quarter of 2019 we entered into a Share Swap Agreement that provides for the acquisition of Lite-On Semiconductor Corporation (“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 $1.47 per share based on September 30, 2020 exchange rates.

The aggregate consideration payable by the Company, based on the September 30, 2020 exchange rate, is approximately $451.4 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 in October 2019, Taiwan regulatory approval in March 2020 and China regulatory approval in September 2020.

We anticipate completing the acquisition by the end of November 2020, subject to customary closing conditions.

On May 29, 2020, the Company entered into an amended and restated credit agreement that provides the borrowing capacity to fund the purchase of LSC.

The Company has drawn $305.0 million under the amended and restated credit agreement as a partial currency hedge associated with the purchase of LSC.

See “Liquidity and Capital Resources,” below for additional information related to the amended and restated credit agreement.

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.

COVID-19 continues to spread throughout the United States and other countries across the world, including the countries in which we operate.

The duration and severity of the effects of COVID-19 are currently unknown.

Developments have been occurring rapidly with respect to the spread of COVID-19 and its impact on human health and businesses.

New and changing government actions to address the COVID-19 pandemic have been occurring on a daily basis.

We have been closely monitoring the COVID-19 pandemic and its impacts and potential impacts on our business.

However, because developments with respect to the spread of COVID-19 and its impacts have been occurring so rapidly and because of the unprecedented nature of the pandemic, we are unable to predict the extent and duration of any possible adverse financial impact of COVID-19 on our business, financial condition and results of operations.

On November 30, 2020, the Company closed the acquisition of Lite-On Semiconductor Corporation (“LSC”), a Taiwan-based supplier of “green” power-related discrete analog semiconductor devices.

Since the close of the acquisition the Company has focused on the integration of LSC into its operations.

The Company believes that t he integration of LSC is progressing well as we have already begun to realize some of the benefits of manufacturing synergies from improved factory loading with both LSC and Diodes’ products.

Our global manufacturing footprint is serving as a key advantage at a time when the broader semiconductor industry is challenged by supply and capacity constraints.

We remain focused on the safety and well-being of our stakeholders and on the service to our customers.

We will continuously review and assess the rapidly-changing COVID-19 pandemic and its impacts on our customers, our suppliers and our business so that we can seek to address those impacts.

In the first quarter of 2020, following the extended Chinese New Year, we delayed the start of our manufacturing production in China and at the end of the first quarter of 2020 we temporarily closed our wafer fabrication facilities located in the United Kingdom.

Our operations in China and the United Kingdom have both resumed full production.

No assurances can be provided that we will not be required to close or reduce our manufacturing production in the future in response to the COVID-19 pandemic or other events beyond our control.

As of September 30, 2020, our cash, cash equivalents, and short-term investments were $590.7 million, and we had access to additional borrowing capacity of $150 million under the revolving portion our U.S.

Credit Facility, which we believe assures us adequate liquidity to manage the impacts of the COVID-19 pandemic on our business to cover cash needs for working capital and capital expenditures for at least the next 12 months.

Please see “Risk Factors - The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.” in Item 1A of this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.

Results of Operations for the Three Months Ended September 30, 2020 and 2019

We previously temporarily closed a manufacturing facility due to COVID-19 and no assurances can be provided that we will not be required to close or reduce our manufacturing production in the future in response to the COVID-19 pandemic or other events beyond our control.

As of March 31, 2021, our cash, cash equivalents, and short-term investments were $339.5 million, and we had access to additional borrowing capacity of $150.0 million under the revolving portion our Credit Agreement, which we believe assures us adequate liquidity to manage the impacts of the COVID-19 pandemic on our business and to cover cash needs for working capital, capital expenditures and acquisitions for at least the next 12 months.

See “Risk Factors - The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.” in Item 1A of this Quarterly Report on Form 10-Q for an additional discussion of risks and potential risks of the COVID-19 pandemic on our business, financial condition and results of operations.

Results of Operations for the Three Months Ended March 31, 2021 and 2020

The table below sets forth the condensed consolidated statement of operations line items as a percentage of net sales.

Percent of Net Sales

Three Months Ended September 30,

Three Months Ended March 31,

Cost of goods sold

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Net income attributable to common stockholders

The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Three Months Ended

September 30,

Increase/(Decrease)

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Foreign currency loss, net

Unrealized gain on investments

Income tax provision

Net sales decreased approximately $14.2 million for the three months ended September 30, 2020, compared to the same period last year.

This decrease in net sales reflects the global economic slowdown caused by the COVID-19 pandemic.

Despite the overall decrease in net sales, in the third quarter of 2020, the Company benefited from growth in the automotive, consumer and computing end markets and our serial-connectivity products.

Net sales for the third quarter of 2020 increased 7.2% when compared to the second quarter of 2020 .

The table below sets forth our revenue as a percentage of total revenue by end-user market for the three months ended September 30, 2020 and 2019:

Net sales increased approximately $132.4 million for the three months ended March 31, 2021, compared to the same period last year, setting a record both organically and on a consolidated basis.

This increase in net sales was driven by growth in Asia and Europe.

The Company also achieved growth in our computing end market, driven by increases in serial-connectivity products , and the automotive market due to strong organic growth in the automotive business.

The table below sets forth our revenue as a percentage of total revenue by end-user market for the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30,

Communications

Cost of goods sold decreased approximately $3.3 million for the three months ended September 30, 2020, compared to the same period last year due to the decreased net sales during the third quarter of 2020.

As a percent of sales, cost of goods sold was 64.1%

for the three months ended September 30, 2020, compared to 62.3% for the same period last year.

Average unit cost decreased approximately 2.4% for the three months ended September 30, 2020, compared to the same period last year.

For the three months en ded September 30, 2020, gross profit decreased approximately 9.0% when compared to the same period last year.

Gross profit margin for the three month periods ended September 30, 2020 and 2019 was 35.9% and 37.7%, respectively.

The decrease in gross profit margin reflects the 4.4% decrease in net sales.

Operating expenses for the three months ended September 30, 2020, were flat when compared to the three months ended September 30, 2019.

Operating expenses as a percentage of net sales was 23.7% and 22.7% for the three months ended September 30, 2020 and 2019, respectively.

Selling, general and administrative expenses (“SG&A”) decreased approximately $1.5 million and research and development expenses (“R&D”) increased approximately $1.8 million, each as compared to the same period last year.

Amortization of acquisition related intangibles decreased $0.5 million, compared to the same period last year.

SG&A, as a percentage of net sales, was 14.4% and 14.2% for the three months ended September 30, 2020 and 2019, respectively.

R&D, as a percentage of net sales, was 7.9% and 7.0% for the three months ended September 30, 2020 and 2019, respectively.

Interest income decreased 49.3% for the three months ended September 30, 2020, compared to the same period last year, due to a reduction in short-term investments.

Interest expense increased 86.6% for the three months ended September 30, 2020, compared to the same period last year.

The increase in interest expense for the three months ended September 30, 2020 was due to the increased debt under our amended and restated credit agreement, as a partial currency hedge, associated with the anticipated close of the LSC acquisition, leading to higher levels of borrowing, partially offset by lower interest rates on the floating rate portion.

We recognized an income tax expense of approximately $5.9 million and $10.6 million for the three months ended September 30, 2020 and 2019, respectively.

The decrease in income taxes for 2020 compared to 2019 was primarily attributable to a decrease in pretax book income, a decrease in non-U.S.

withholding taxes and a net increase in favorable U.S.

permanent differences.

Results of Operations for the Nine Months Ended September 30, 2020 and 2019

The table below sets forth the condensed consolidated statement of operations line items as a percentage of net sales.

Percent of Net Sales

Nine Months Ended September 30,

Cost of goods sold

Total operating expense

Income from operations

Total other expense

Income before income taxes and noncontrolling interest

Income tax provision

Net income attributable to common stockholders

The following table and discussion explains in greater detail our consolidated operating results and financial condition for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Nine Months Ended

September 30,

Increase/(Decrease)

Cost of goods sold

Total operating expense

Interest income

Interest expense

Foreign currency loss, net

Income tax provision

Net sales decreased approximately $69.1 million for the nine months ended September 30, 2020, compared to the same period last year.

This decrease in net sales reflects the global economic slowdown caused by the COVID-19 pandemic.

The decrease also reflects the Company delaying reopening its manufacturing facilities in China after the Chinese New Year period that was extended due to the COVID-19 pandemic.

Also as a result of the COVID-19 pandemic, late in March 2020, the Company temporarily shut down its manufacturing facilities in the United Kingdom.

Our operations in China and the United Kingdom have both resumed full production.

The table below sets forth our revenue as a percentage of total revenue by end-user market for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

Communications

Cost of goods sold decreased approximately $21.1 million for the nine months ended September 30, 2020, compared to the same period last year, due, in part, to the decreased net sales during the first nine months of 2020.

As a percent of sales, cost of goods sold was 64.9% for the nine months ended September 30, 2020, compared to 62.4% for the same period last year.

Average unit cost increased approximately 3.6% for the nine months ended September 30, 2020, compared to the same period last year, in part due to the shutdown of our manufacturing facilities due to the extended Chinese New Year period.

For the nine months ended September 30, 2020, gross profit decreased approximately 13.5% when compared to the same period last year.

Gross profit margin for the nine month periods ended September 30, 2020 and 2019 was 35.1% and 37.6%, respectively.

The decrease in gross profit margin reflects the 7.3% decrease in net sales and an increase in unit costs driven by lower manufacturing capacity utilization.

Operating expenses for the nine months ended September 30, 2020, decreased approximately $3.2 million, or 1.5%, compared to the nine months ended September 30, 2019.

Operating expenses as a percentage of net sales was 24.3% and 22.9% for the nine months ended September 30, 2020 and 2019, respectively.

SG&A decreased approximately $4.9 million and R&D increased approximately $2.9 million, each as compared to the same period last year.

Cost of goods sold increased approximately $89.6 million for the three months ended March 31, 2021, compared to the same period last year, due to the increased net sales during the first quarter of 2021.

As a percent of sales, cost of goods sold was 66.4% for the three months ended March 31, 2021, compared to 65.9% for the same period last year.

Average unit cost increased approximately 1.9% for the three months ended March 31, 2021, compared to the same period last year.

For the three months ended March 31, 2021, gross profit increased approximately 44.7% when compared to the same period last year.

Gross profit margin for the three month periods ended March 31, 2021 and 2020 was 33.6% and 34.1%, respectively.

Operating expenses for the three months ended March 31, 2021, increased $21.3 million when compared to the three months ended March 31, 2020.

Operating expenses as a percentage of net sales was 22.1% and 24.9% for the three months ended March 31, 2021 and 2020, respectively.

Selling, general and administrative expenses (“SG&A”) increased approximately $16.5 million, due to higher selling costs and wages and salaries.

Research and development expenses (“R&D”) increased approximately $4.0 million due to higher wages and benefits as compared to the same period last year.

Amortization of acquisition related intangibles decreased $0.2 million, compared to the same period last year.

SG&A, as a percentage of net sales, was 15.1% and 14.2% for the nine months ended September 30, 2020 and 2019, respectively.

R&D, as a percentage of net sales, was 7.9% and 7.0% for the nine months ended September 30, 2020 and 2019, respectively.

Interest income decreased 67.5% for the nine months ended September 30, 2020, compared to the same period last year, due to $0.7 million of interest income received in the nine months ended September 30, 2019 related to the settlement of a cross-currency s wap and reduction in short-term investments.

Interest expense increased 24.0% for the nine months ended September 30, 2020, compared to the same period last year.

The increase in interest expense for the nine months ended September 30, 2020 was due to hig her levels of debt as the draws on our amended and restated credit facility in anticipation of closing the LSC acquisition.

We recognized an income tax expense of approximately $15.1 million and $32.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in income taxes for 2020 compared to 2019 was primarily attributable to a decrease in pretax book income, a decrease in non-U.S.

withholding taxes and a net increase in favorable U.S.

permanent differences.

SG&A, as a percentage of net sales, was 14.2% and 15.0% for the three months ended March 31, 2021 and 2020, respectively.

R&D, as a percentage of net sales, was 6.7% and 8.4% for the three months ended March 31, 2021 and 2020, respectively.

Interest income increased 181.3% for the three months ended March 31, 2021, compared to the same period last year, due to increased revenue related to cross currency swaps.

Interest expense increased 130.0% for the three months ended March 31, 2021, compared to the same period last year.

The increase in interest expense for the three months ended March 31, 2021 was due to the increased debt related to the LSC acquisition and an increase in interest rates on the floating rate portion of our debt.

Unrealized gain on investments increased from 2020 due to investment income from an investment the Company acquired in the LSC acquisition.

We recognized an income tax expense of approximately $9.4 million and $4.6 million for the three months ended March 31, 2021 and 2020, respectively.

The increase in income taxes for 2021 compared to 2020 was primarily attributable to an increase in pretax book income.

Financial Condition

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Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $205.5 million.

At September 30, 2020, outstanding borrowings were $70.7 million and outstanding letters of credit were $0.4 million under the 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 monthly on outstanding amounts under the credit lines.

At March 31, 2021, outstanding borrowings were $67.6 million and outstanding letters of credit were $0.5 million under the Asia credit facilities.

In connection with our Asia credit facilities, $54.8 million of cash deposits have been restricted in support of a corresponding loan amount.

During April 2021 $50.0 million of the restricted cash was released from all contractual restrictions, as the applicable loans were repaid in full.

Long-term debt

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 “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”).

Certain capitalized terms used in this description of the Credit Agreement have the meanings given to them in the Credit Agreement.

The Credit Agreement rebalances the Company’s 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 submit, a $10,000,000 letter of credit sublimit, and a $40,000,000 alternative currency sublimit.

The Company analyzed the amendment to 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 to 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 three-month period ended June 30, 2020.

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

The Company plans to use a portion of the proceeds available under the Revolver and the Term Loan (i) to finance the Company’s previously announced acquisition of Lite-On Semiconductor Corporation, (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 ex isting 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 div idends 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 un der the Credit Agreement.

The Company maintains a long-term credit facility (“Credit Agreement”) consisting of a term loan with a current balance of $ 218.0 million and a $ 150.0 million r evolving senior credit facility.

The Credit Agreement matures in May 2023.

In addition to the liquidity provided by the Credit Agreement, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), borrowed $13.3 million through a short term loan and $30.0 million on a long-term basis from local Taiwan banks.

The ERIS debt matures in periods from 2021 through 2033.

The details of our borrowings outstanding as of September 30, 2020 are set forth in the table below:

September 30,

Current Amount

Interest Rate

Short-term debt

Libor + Margin

Various during

Long-term debt

Notes payable to Bank of Taiwan

Variable, 1.3% base

Notes payable to Bank of China Trust Company

Taibor 3 month rate + 0.5%

Notes payable to Bank of China Trust Company

Taibor 3 month rate + 0.5%

Notes payable to E Sun Bank

1-M deposit rate plus 0.08%

Notes payable to E Sun Bank

1-M deposit rate plus 0.08%

Notes payable to E Sun Bank

1-M deposit rate plus 0.08%

Term loan and revolver

Libor plus margin

Total long-term debt

Current portion of long-term debt

Unamortized debt costs

Total long-term debt, net of current portion

Historically, our primary liquidity requirements have been to meet our inventory and capital expenditure needs and to fund on-going operations.

In the second quarter of 2020, as described above, we increased our borrowing capacity and our outstanding borrowings due to the anticipated close of the LSC acquisition later this year.

As of September 30, 2020, we had a $305 million draw-down under our amended and restated credit agreement, as a partial currency hedge, associated with the anticipated close of the LSC acquisition.

At September 30, 2020 and December 31, 2019, our working capital was $893.2 million and $524.6 million, respectively.

We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to cover cash needs for working capital and capital expenditures and acquisitions for at least the next 12 months.

Capital expenditures (including accrued capital expenditures) for the nine months ended September 30, 2020 and 2019 were $47.5 million and $77.4 million, respectively.

For the first nine months of 2020 capital expenditures were approximately 5.4% of our net sales, which is in line with our capital spending target range of 5% to 9% of net sales.

At March 31, 2021 and December 31, 2020, our working capital was $617.5 million and $514.2 million, respectively.

We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to cover cash needs for working capital, capital expenditures and acquisitions for at least the next 12 months.

Capital expenditures (including accrued capital expenditures) for the three months ended March 31, 2021 and 2020 were $25.1 million and $12.6 million, respectively.

For the first three months of 2021 capital expenditures were approximately 11.5% of our net sales.

While capital expenditures for the three months ended March 31, 2021, is greater than our capital spending target range of 5% to 9% of net sales, we expect our capital expenditure for the twelve months ending December 31, 2021 to be in our target range.

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

As of September 30, 2020, our foreign subsidiaries held approximately $526.0 million of cash, cash equivalents and investments of which approximately $7.6 million would be subject to a potential non-U.S.

As of March 31, 2021, our foreign subsidiaries held approximately $222.6 million of cash, cash equivalents and investments of which approximately $17.8 million would be subject to a potential non-U.S.

withholding tax if distributed outside the country in which the cash is currently held.

All of this $7.6 million is held in Korea and Taiwan.

As of September 30, 2020, we had short-term investments totaling $3.0 million.

All of this $17.8 million is held in Germany, China, Korea and Taiwan.

As of March 31, 2021, we had short-term investments totaling $8.4 million.

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

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Additional sources of liquidity are cash and cash equivalents, short-term investments and our credit facilities.

Our cash and cash equivalents increased from $258.4 million at December 31, 2019 to $587.6 million at September 30, 2020, reflecting the funds that will be used to consummate the purchase of LSC.

Our cash, cash equivalents and restricted cash increased from $326.7 million at December 31, 2020 to $339.5 million at March 31, 2021.

The table below sets forth a summary of the condensed consolidated statements of cash flows:

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash flows provided by operating activities

Net cash and cash equivalents (used in) provided by investing activities

Net cash and cash equivalents provided by (used in) financing activities

Net cash and cash equivalents used in investing activities

Net cash and cash equivalents used in financing activities

Effect of exchange rate changes on cash and cash equivalents

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Operating Activities

Net cash flows provided by operating activities for the nine months ended September 30, 2020 was $126.4 million.

Net cash flows provided by operating activities for the nine months ended September 30, 2020 resulted from net income of $69.2 million, depreciation and amortization of intangible assets of $80.4 million, and share-based compensation of $18.7 million, partially offset by a decrease in deferred taxes of $10.2 million, a decrease in inventories of $20.5 million and a decrease in noncash working capital accounts, excluding inventory, of $20.3 million.

Net cash flows provided by operating activities for the nine months ended September 30, 2019 was $177.7 million.

Net cash flows provided by operating activities for the nine months ended September 30, 2019 resulted from net income of $106.6 million, depreciation and amortization of $81.3 million, share-based compensation of $15.4 million and a decrease in noncash working capital accounts of $25.3 million.

Net cash flows provided by operating activities for the three months ended March 31, 2021 was $68.2 million.

Net cash flows provided by operating activities for the three months ended March 31, 2021 resulted from net income of $40.6 million, depreciation and amortization of intangible assets of $30.5 million, share-based compensation of $6.1 million and an increase in deferred taxes of $1.0 million.

The increases were partially offset by a decrease in noncash working capital accounts of $6.7 million.

Net cash flows provided by operating activities for the three months ended March 31, 2020 was $53.7 million.

Net cash flows provided by operating activities for the three months ended March 31, 2020 resulted from net income of $20.4 million, depreciation and amortization of intangible assets of $27.0 million, share-based compensation of $4.7 million and an increase in noncash working capital accounts of $0.8 million.

Investing Activities

Net cash and cash equivalents used in investing activities was $51.8 million for the nine months ended September 30, 2020.

Net cash and cash equivalents used in investing activities for the nine months ended September 30, 2020 was primarily due to the purchase of property, plant and equipment of $48.5 million and the additional investment by the Company’s subsidiary ERIS in Yea-Shin of $6.1 million, bring ERIS’ ownership of Yea-Shin to approximately 99.5%.

These outflows of cash were partially offset by net proceeds from the maturity of short-term investments of $1.9 million for the nine months ended September 30, 2020.

Net cash and cash equivalents used in investing activities was $110.2 million for the nine months ended September 30, 2019.

Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $76.1 and the acquisition of GFAB for $33.2.

Net cash and cash equivalents used in investing activities was $10.4 million for the three months ended March 31, 2021.

Net cash and cash equivalents used in investing activities for the three months ended March 31, 2021 was primarily due to the purchase of property, plant and equipment of $17.2 million, partially offset by net proceeds from the maturity of short-term investments of $2.1 million and other investing cash inflows of $9.1 million for the three months ended March 31, 2021.

Net cash and cash equivalents used in investing activities was $17.6 million for the three months ended March 31, 2020.

Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $14.2 million and the additional investment by the Company’s subsidiary ERIS in Yea-Shin Technology Co., Ltd.

(“Yea-Shin”) of $6.1 million, bringing ERIS’ ownership of Yea-Shin to approximately 99.5%.

These outflows of cash were partially offset by net proceeds from the maturity of short-term investments of $1.9 million for the three months ended March 31, 2020.

Financing Activities

Net cash and cash equivalents provided by financing activities was $294.7 million for the nine months ended September 30, 2020.

Net cash provided by financing activities in the nine months ended September 30, 2020 consisted primarily of $305.7 million, net advances on our debt facilities, including $305.0 million in anticipation of closing the LSC acquisition later this year, partially offset by taxes paid on net share settlements of $8.2 million.

Net cash and cash equivalents used in financing activities was $87.0 million for the nine months ended September 30, 2019.

Net cash used in financing activities in the nine months ended September 30, 2019 consisted primarily of $94.7 million net repayments of long-term debt, taxes paid on net share settlements of $4.4 million and dividend distributions to noncontrolling interests of $2.6 million.

These uses of cash were partially offset by inflows of $7.2 million related to stock option exercises and $6.9 million of net increases in lines of credit and short-term debt.

Net cash and cash equivalents used in financing activities was $45.4 million for the three months ended March 31, 2021.

Net cash used in financing activities in the three months ended March 31, 2021 consisted primarily of $37.2 million of net reductions in our debt and taxes paid on net share settlements of $9.3 million.

Net cash and cash equivalents used in financing activities was $21.4 million for the three months ended March 31, 2020.

Net cash used in financing activities in the three months ended March 31, 2020 consisted primarily of $16.6 million of net repayments of long-term debt and taxes paid on net share settlement of $4.5 million.

Use of Derivative Instruments and Hedging

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The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage 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 amo unt.

To accomplish this objective, the Company primarily uses interest rate swaps, including interest rate collars, as part of its interest rate risk management strategy.

Hedges of Foreign Currency Risk

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Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 12, 2020.

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.

Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q in Note 1 – Summary of Operations and Significant Accounting Policies.

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Recently Issued Accounting Pronouncements

See Note 1 - Summary of Operations and Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements, for detailed information regarding the status of recently issued accounting pronouncements.

Available Information

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Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and in other reports we file with the SEC from time to time, that could cause actual results to differ materially from those anticipated by our management.

The PSLRA provides

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

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

All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the PSLRA.

All forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to, in addition to the other matters described in this Quarterly Report on Form 10-Q, a variety of significant risks and uncertainties.

The following discussion highlights some of these risks and uncertainties.

The following discussion highlights

some of these risks and uncertainties.

Further, from time to time, information provided by us or statements made by our employees may contain forward-looking information.

There can be no assurance that actual results or business conditions will not differ materially from those set forth or suggested in such forward-looking statements as a result of various factors, including those discussed below.

For more detailed discussion of these factors, see the “Risk Factors” discussion in Item 1A of our most recent Annual Report on Form 10-K as filed with the SEC and in Part II, Item 1A of this report The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

For more detailed discussion of these factors, see the “Risk Factors” discussion in Item 1A of our most recent Annual Report on Form 10-K as filed with the SEC and in Part II, Item 1A of this Quarterly Report The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

RISKS RELATED TO OUR BUSINESS

The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.

The ultimate impact of the COVID-19 pandemic outbreak cannot be estimated at this time, but it may have a material adverse effect on our business, financial condition and results of operations.

During times of difficult market conditions, our fixed costs combined with lower net sales and lower profit margins may have a negative impact on our business, operating results and financial condition.

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The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition.

One of our external suppliers is also a related party.

The loss of this supplier could harm our business, operating results and financial condition.

Delays in initiation of production at facilities due to implementing new production techniques or resolving problems associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies, operating results and financial condition.

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A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition.

Our customer orders are subject to cancellation or modification usually with no penalty.

High volumes of order cancellation or reduction in quantities ordered could adversely affect our net sales, operating results and financial condition.

Production at our manufacturing facilities could be disrupted for a variety of reasons, including natural disasters and other extraordinary events, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers’ demands and could adversely affect our operating results and financial condition.

New technologies could result in the development of new products by our competitors and a decrease in demand for our products, and we may not be able to develop new products to satisfy changes in demand, which would adversely affect our net sales, market share, operating results and financial condition.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense, reduction in our intellectual property rights and a negative impact on our business, operating results and financial condition.

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We are subject to many environmental laws and regulations that could result in significant expenses and could adversely affect our business, operating results and financial condition.

We may incur additional costs and face emerging risks associated environmental, social and governance (“ESG”) factors impacting our operations.

Our products, or products we purchase from third parties for resale, may be found to be defective and, as a result, warranty claims and product liability claims may be asserted against us and we may not have recourse against our suppliers, which may harm our business, reputation with our customers, operating results and financial condition.

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Obsolete inventories as a result of changes in demand for our products and change in life cycles of our products could adversely affect our business, operating results and financial condition.

If our direct sales customers do not design our products into their applications, our net sales may be adversely affected.

If our direct sales customers or our distributors’ customers do not design our products into their applications, our net sales may be adversely affected.

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.

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We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of ou r Common Stock.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S.

or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

System security risks, data protection breaches, cyber-attacks and other related cybersecurity issues could disrupt our internal operations, and any such disruption could reduce our expected net sales, increase our expenses, damage our reputation and adversely affect our stock price.

RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

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Significant uncertainties related to changes in governmental policies and participation in international trading partnerships or economic unions currently exist, and, depending upon how such uncertainties are resolved, the changes could have a material adverse effect on us.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with or displace our products and components, resulting in an adverse impact on our Chinese business.

The U.K.’s exit from the European Union (“E.U.”) will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

Tariffs or other restrictions imposed by the United States Trade Representative may affect our operations in the U.S., may disrupt our activities in the U.S., may have an adverse impact on our profitability and results of operations and may encourage the independent development in China of products and electronic components that will compete with ours or displace our products and components, resulting in an adverse impact on our Chinese business.

The U.K.’s exit from the European Union will continue to have uncertain effects and could adversely impact our business, results of operations and financial condition.

A slowdown in the Chinese economy could limit the growth in demand for electronic devices containing our products, which would have a material adverse effect on our business, operating results and prospects.

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Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt.

GENERAL RISK FACTORS

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows, operating results and financial condition.

Terrorist attacks, or threats or occurrences of other terrorist activities, whether in the U.S.

or internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our operating results and financial condition.

Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 12, 2020.

There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.

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-Q

Item 2. Management’s Discussion and Analysis