DIODES INC /DEL/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as identified under the heading “Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995” herein. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by our management. The Private Securities Litigation Reform Act of 1995 (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. We undertake no obligation to publicly release the results of any revisions to our forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “Diodes,” the “Company,” “we,” “us” and “our” refer to Diodes Incorporated and its subsidiaries. Dollar amounts and share amounts are presented in thousands, except per share amounts, unless otherwise noted. This management’s discussion should be read in conjunction with the management’s discussion included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“Form 10-K”), previously filed with Securities and Exchange Commission (“SEC”) on February 22, 2021. Overview We are a leading global manufacturer and supplier of high-quality, application-specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets. For detailed information, see Note 1 – S ummary of Operations and Significant Accounting Policies, included in the condensed consolidated financial statements in Item 1 above. Our products are sold primarily throughout Asia, North America and Europe. 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 June 30, 2021 ● During the second quarter of 2021, net sales were $440.4 million, an increase of 52.5 % from the $288.7 million of net sales in the second quarter of 2020, and an increase of 6.6% from the $413.1 million of net sales in the first quarter of 2021. ● Gross profit was $159.8 million, an increase of 57.5% from the $101.5 million of gross profit in the second quarter of 2020, and an increase of 15.3% from the $138.6 million of gross profit in the first quarter of 2021; ● Gross profit margin was 36.3% compared to gross profit margin of 35.2% in the second quarter of 2020, and 33.6% in the first quarter of 2021; ● Net income was $55.4 million, or $1.22 per diluted share, compared to net income of $21.0 million, or $0.40 per diluted share, in the second quarter of 2020, and net income of $39.5 million, or $0.87 per diluted share, in the first quarter of 2021; and ● Cash flow from operations was $93.9 million. Net cash flow was a negative $36.2 million, which includes $27.9 million of capital expenditures and a net reduction in debt of $114.2 million. - 24 - Recent Developments LSC Acquisition 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. COVID-19 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. 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 June 30, 2021, our cash, cash equivalents, and short-term investments were $300.0 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 June 30, 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 June 30, 2021 2020 Net sales 100% 100% Cost of goods sold (64) (65) Gross profit 36 35 Total operating expense 21 24 Income from operations 15 11 Total other expense 1 (2) Income before income taxes and noncontrolling interest 16 9 Income tax provision (3) (2) Net income 13 7 Net income attributable to common stockholders 13 7 - 25 - The following table and discussion explains in greater detail our consolidated operating results and financial condition for the three months ended June 30, 2021, compared to the three months ended June 30, 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 June 30, 2021 2020 Increase/(Decrease) % Change Net sales $ 440,448 $ 288,669 $ 151,779 52.6 % Cost of goods sold 280,646 187,177 93,469 49.9 % Gross profit 159,802 101,492 58,310 57.5 % Total operating expense 94,445 70,623 23,822 33.7 % Interest income 818 168 650 386.9 % Interest expense (2,017 ) (2,653 ) (636 ) (24.0 %) Foreign currency (loss) gain, net (510 ) (3,600 ) (3,090 ) (85.8 %) Unrealized gain on investments 5,261 - 5,261 N/A Other income 1,837 1,274 563 (44.2 %) Income tax provision 12,120 4,670 7,450 159.5 % Net sales increased approximately $151.8 million, or 52.6%, for the three months ended June 30, 2021, compared to the same period last year. The 52.6% increase in net sales for the three months ended June 30, 2021 was driven by 27.5% organic growth attributable to the Company’s legacy business that existed prior to the LSC acquisition and 25.1% related to LSC. Revenue grew in all regions. The Company achieved records in global point-of-sale revenue, automotive and consumer end-user markets sales and sales of our Pericom branded products for high-end personal computers, servers and data center applications. For the three months ended June 30, 2021, weighted-average sales price increased 6.8% when compared to the same period last year. The table below sets forth our revenue as a percentage of total revenue by end-user market for the three months ended June 30, 2021 and 2020: Three Months Ended June 30, 2021 2020 Industrial 22% 22% Communications 17% 22% Consumer 19% 27% Computing 30% 19% Automotive 12% 10% With respect of total net sales by end-user markets, the LSC contribution to automotive, industrial, consumer and communication end-user markets was 7% or less for the three months ended June 30, 2021. With respect to the percentage of total net sales by the computing end-user market, the LSC contribution for the three months ended June 30, 2021 was approximately 47% of total computing net sales. The industrial end-user market grew as we experienced strong demand for our products for low-dropout regulators for power tools, eMeters and other industrial applications. In the communications end-user market the Company has continued to focus on mobile, smartphone, and especially 5G applications. In the consumer end-user market the Company experienced increasing growth momentum in the IoT space. The computing end-user market grew due to continued demand for notebooks, Chromebooks, high-end PCs, servers and datacenter applications. The automotive end-user market grew as we captured both increasing market share and content gains as the Company penetrated new and existing automotive customers and applications. With respect to the three months ended March 31, 2021, (a) net sales attributable to the Company’s legacy business that existed prior to the LSC acquisition increased 23.8% when compared to the first quarter of 2020, and (b) net sales from LSC contributed 23.4% to the increase in net sales in the first quarter of 2021 when compared to the first quarter of 2020. With respect to percentage of total net sales by end-user markets, the LSC contribution for the first quarter of 2021 to automotive, industrial, consumer and communication end-user markets was minimal, less than 7% contribution in each of these categories. With respect to percentage of total net sales by the computing end-user market, the LSC contribution for the first quarter of 2021 was approximately 45% of total computing net sales. - 26 - Cost of goods sold increased approximately $93.5 million for the three months ended June 30, 2021, compared to the same period last year, due to the increased net sales during the second quarter of 2021. As a percent of sales, cost of goods sold was 63.7% for the three months ended June 30, 2021, compared to 64.8% for the same period last year. Average unit cost increased approximately 5.0% for the three months ended June 30, 2021, compared to the same period last year due to cost increases from various subcontractors and foundries. For the three months ended June 30, 2021, gross profit increased approximately 57.5% when compared to the same period last year. Gross profit margin for the three month periods ended June 30, 2021 and 2020 was 36.3% and 35.2%, respectively. Operating expenses for the three months ended June 30, 2021, increased $23.8 million when compared to the three months ended June 30, 2020. Operating expenses as a percentage of net sales was 21.4% and 24.5% for the three months ended June 30, 2021 and 2020, respectively. Selling, general and administrative expenses (“SG&A”) increased approximately $14.9 million, due to increases in wages and benefits and selling expenses as compared to the same period last year. Research and development expenses (“R&D”) increased approximately $8.7 million due to increases in wages and benefits and operating expenses as compared to the same period last year. SG&A, as a percentage of net sales, was 13.7% and 15.7% for the three months ended June 30, 2021 and 2020, respectively. R&D, as a percentage of net sales, was 6.8% and 7.4% for the three months ended June 30, 2021 and 2020, respectively. Interest income increased 386.9% for the three months ended June 30, 2021, compared to the same period last year, due to increased revenue related to cross currency swaps. Interest expense decreased 24.0% for the three months ended June 30, 2021, compared to the same period last year. The decrease in interest expense for the three months ended June 30, 2021 was due to a decrease in the interest rate on our floating rate debt, partially offset by higher borrowing levels. Unrealized gain on investments increased from 2020 due to investment income from an investment the Company acquired in the LSC acquisition. We recognized income tax expense of approximately $12.1 million and $4.7 million for the three months ended June 30, 2021 and 2020, respectively. The increase in income taxes for 2021 compared to 2020 was primarily attributable to an increase in pretax book income. Results of Operations for the Six Months Ended June 30, 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 Six Months Ended June 30, 2021 2020 Net sales 100% 100% Cost of goods sold (65) (65) Gross profit 35 35 Total operating expense 22 25 Income from operations 13 10 Total other income (expense) 1 (1) Income before income taxes and noncontrolling interest 14 9 Income tax provision (3) (2) Net income 11 7 Net income attributable to common stockholders 11 7 - 27 - The following table and discussion explains in greater detail our consolidated operating results and financial condition for the six months ended June 30, 2021, compared to the six months ended June 30, 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. Six Months Ended June 30, 2021 2020 Increase/(Decrease) % Change Net sales $ 853,569 $ 569,386 $ 284,183 49.9 % Cost of goods sold 555,131 372,052 183,079 49.2 % Gross profit 298,438 197,334 101,104 51.2 % Total operating expense 185,691 140,613 45,078 32.1 % Interest income 1,586 441 1,145 259.6 % Interest expense (4,881 ) (3,898 ) 983 25.2 % Foreign currency (loss) gain, net (1,789 ) (3,525 ) (1,736 ) (49.2 %) Unrealized gain on investments 8,916 - 8,916 N/A Other income 4,154 1,275 2,879 225.8 % Income tax provision 21,554 9,226 12,328 133.6 % Net sales increased approximately $284.2 million for the six months ended June 30, 2021, compared to the same period last year, setting a record both organically and on a consolidated basis. The 49.9% increase in net sales for the three months ended June 30, 2021 was driven by 25.7% organic growth and 24.2% related to LSC. The Company achieved growth in global point-of-sale revenue, automotive and computing end-user markets combined with revenue growth for our Pericom branded products for high-end personal computers, servers and data center applications. For the six months ended June 30, 2021, weighted-average sales price increased 3.6% when compared to the same period last year. The table below sets forth our revenue as a percentage of total revenue by end-user market for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 Industrial 22% 24% Communications 17% 23% Consumer 19% 25% Computing 30% 18% Automotive 12% 11% With respect of total net sales by end-user markets, the LSC contribution to automotive, industrial, consumer and communication end-user markets was 7% or less for the six months ended June 30, 2021. With respect to the percentage of total net sales by the computing end-user market the LSC contribution for the six months ended June 30, 2021 was approximately 46% of total computing net sales. The industrial end-user market grew as we experienced strong demand for our products for low-dropout regulators for power tools, eMeters and other industrial applications. In the communications end-user market the Company has continued to focus on mobile, smartphone, and especially 5G applications. In the consumer end-user market the Company experienced increasing growth momentum in the IoT space. The computing end-user market grew due to continued demand for notebooks, Chromebooks, high-end PCs, servers and datacenter applications. The automotive end-user market grew as we captured both increasing market share and content gains as the Company penetrated new and existing automotive customers and applications. Cost of goods sold increased approximately $183.1 million for the six months ended June 30, 2021, compared to the same period last year, due to the increased net sales during 2021. As a percent of sales, cost of goods sold was 65.0% for the six months ended June 30, 2021, compared to 65.3% for the same period last year. Average unit cost increased approximately 3.8% for the six months ended June 30, 2021, compared to the same period last year due to cost increases from various subcontractors and foundries. For the six months ended June 30, 2021, gross profit increased approximately 51.2% when compared to the same period last year. Gross profit margin for the three month periods ended June 30, 2021 and 2020 was 35.0% and 34.7%, respectively. - 28 - Operating expenses for the six months ended June 30, 2021, increased $45.1 million when compared to the six months ended June 30, 2020. Operating expenses as a percentage of net sales was 21.8% and 24.7% for the six months ended June 30, 2021 and 2020, respectively. SG&A increased approximately $31.4 million, due to higher selling costs and wages and salaries. R&D increased approximately $12.6 million due to higher wages and benefits, higher selling expense and higher freight and duty costs, 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 13.9% and 15.4% for the six months ended June 30, 2021 and 2020, respectively. R&D, as a percentage of net sales, was 6.8% and 7.9% for the six months ended June 30, 2021 and 2020, respectively. Interest income increased 259.6% for the six months ended June 30, 2021, compared to the same period last year, due to increased revenue related to cross currency swaps. Interest expense increased 25.2% for the six months ended June 30, 2021, compared to the same period last year. The increase in interest expense for the six months ended June 30, 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 income tax expense of approximately $21.6 million and $9.2 million for the six months ended June 30, 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 Liquidity and Capital Resources Our primary sources of liquidity are cash and cash equivalents, funds from operations and, if necessary, borrowings under our credit facilities. Short-term debt Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling $173.1 million. At June 30, 2021, outstanding borrowings were $60.2 million and outstanding letters of credit were $1.1 million under the Asia credit facilities. Long-term debt The Company maintains a long-term credit facility (“Credit Agreement”) consisting of a term loan with a current balance of $ 114.7 million and a $ 150.0 million r evolving senior credit facility, of which nothing was drawn on June 30, 2021. 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 $17.2 million through a short term loan and $28.6 million on a long-term basis from local Taiwan banks. The ERIS debt matures in periods from 2021 through 2033. At June 30, 2021 and December 31, 2020, our working capital was $582.3 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 six months ended June 30, 2021 and 2020 were $53.7 million and $28.3 million, respectively. For the first six months of 2021 capital expenditures were approximately 6.3% of our net sales. Capital expenditures for the six months ended June 30, 2021, is in line with our capital spending target range of 5% to 9% of net sales. 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 June 30, 2021, our foreign subsidiaries held approximately $213.6 million of cash, cash equivalents and investments of which approximately $38.1 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 $38.1 million is held in Germany, China, Korea and Taiwan. As of June 30, 2021, we had short-term investments totaling $7.4 million. These investments are highly liquid with maturity dates greater than three months at the date of purchase. We generally can access these investments in a relatively short time frame but in doing so we generally forfeit all earned and future interest income. - 29 - Discussion of Cash Flow Our primary source of liquidity is cash flow from operations. Additional sources of liquidity are cash and cash equivalents, short-term investments and our credit facilities. Our cash and cash equivalents and restricted cash decreased from $320.5 million at December 31, 2020 to $294.9 million at June 30, 2021. This decrease is cash, cash equivalents and restricted cash reflects normal operations of the Company. The table below sets forth a summary of the condensed consolidated statements of cash flows: Six Months Ended June 30, 2021 2020 Net cash flows provided by operating activities $ 162,064 $ 86,734 Net cash and cash equivalents used in investing activities (36,674 ) (34,048 ) Net cash and cash equivalents used in financing activities (156,292 ) 241,784 Effect of exchange rate changes on cash and cash equivalents 5,291 644 Net increase in cash and cash equivalents, including restricted cash $ (25,611 ) $ 295,114 Operating Activities Net cash flows provided by operating activities for the six months ended June 30, 2021 was $162.1 million. Net cash flows provided by operating activities for the six months ended June 30, 2021 resulted from net income of $99.2 million, depreciation and amortization of intangible assets of $61.2 million, share-based compensation of $14.8 million and an increase in deferred taxes of $1.2 million. The increases were partially offset by a noncash gain on an investment of $9.1 million and a decrease in noncash working capital accounts of $5.5 million. Net cash flows provided by operating activities for the six months ended June 30, 2020 was $86.7 million. Net cash flows provided by operating activities for the six months ended June 30, 2020 resulted from net income of $41.8 million, depreciation and amortization of intangible assets of $53.9 million, share-based compensation of $12.4 million, partially offset by a decrease in inventories of $19.8 million and a decrease in noncash working capital accounts, excluding inventory, of $0.4 million. Investing Activities Net cash and cash equivalents used in investing activities was $36.7 million for the six months ended June 30, 2021. Net cash and cash equivalents used in investing activities for the six months ended June 30, 2021 was primarily due to the purchase of property, plant and equipment of $45.0 million and the net purchase of short-term investments of $1.1 million, partially offset by the proceeds from the sale of property, plant and equipment of $3.0 million and other investing cash inflows of $6.5 million for the six months ended June 30, 2021. Net cash and cash equivalents used in investing activities was $34.0 million for the six months ended June 30, 2020. Net cash and cash equivalents used in investing activities was primarily due to the purchase of property, plant and equipment of $30.7 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 $5.1 million for the six months ended June 30, 2020. Financing Activities Net cash and cash equivalents used in financing activities was $156.3 million for the six months ended June 30, 2021. Net cash used in financing activities in the six months ended June 30, 2021 consisted primarily of $151.5 million of net reductions in our debt and taxes paid on net share settlements of $10.0 million, partially offset by a capital contribution by a noncontrolling interest on $4.0 million. Net cash and cash equivalents provided by financing activities was $241.8 million for the six months ended June 30, 2020. Net cash provided by financing activities in the six months ended June 30, 2020 consisted primarily of $249.1 million, net advances on our debt facilities, including $200.0 million in anticipation of closing the LSC acquisition, partially offset by taxes paid on net share settlements of $5.4 million. Use of Derivative Instruments and Hedging We use interest rate swaps, foreign exchange forward contracts and cross currency swaps to provide a level of protection against interest rate risks and foreign exchange exposure. - 30 - Hedges of Interest Rate Risk 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 amount. 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 and 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 No. 815. The fair value of our foreign exchange hedges approximates zero. Off-Balance Sheet Arrangements We do not have any transactions, arrangements or other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, nor do we engage in leasing, swap agreements, or outsourcing of research and development services that could expose us to liability that is not reflected on the face of our financial statements. Contractual Obligations There have been no material changes in our Contractual Obligations 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. 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 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. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the condensed consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates. 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, if any. Available Information Our Internet address is http://www.diodes.com . Information included on, or accessible through, our website shall not be deemed to form a part of the Quarterly Report on Form 10-Q. We make available, free of charge through our Internet website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website also provides access to investor financial information, including SEC filings and press releases, as well as stock quotes and information on corporate governance compliance. Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995 Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934. We generally identify forward-looking statements by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of - 31 - such terms. 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. 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. 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 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. - 32 - Risk Factors RISKS RELATED TO OUR BUSINESS 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. Downturns in the highly cyclical semiconductor industry or changes in end-market demand could adversely affect our operating results and financial condition. The semiconductor business is highly competitive, and increased competition may harm our business, operating results and financial condition. 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. We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our products, which could adversely affect our growth and profit margins. Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales and may demand to audit our operations from time to time. A failure to qualify a product or a negative audit finding could adversely affect our net sales, operating results and financial condition. 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 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. We depend on third-party suppliers for timely deliveries of raw materials, manufacturing services, product and process development, parts and equipment, as well as finished products from other manufacturers, and our reputation with customers, operating results and financial condition could be adversely affected if we are unable to obtain adequate supplies in a timely manner. If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies we anticipate, which could adversely affect our ability to compete, our operating results and financial condition. Part of our growth strategy involves identifying and acquiring companies. We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any acquisitions, we may be unable to successfully integrate any acquired companies with our operations, which could adversely affect our business, operating results and financial condition. We are subject to litigation risks, including securities class action litigation and intellectual property litigation, which may be costly to defend and the outcome of which is uncertain and could adversely affect our business and financial condition. 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. We may fail to attract or retain the qualified technical, sales, marketing, finance and management/executive personnel required to operate our business successfully, which could adversely affect our business, operating results and financial condition. We may not be able to achieve future growth, and any such growth may place a strain on our management and on our systems and resources, which could adversely affect our business, operating results and financial condition. 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. - 33 - 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. Our hedging strategies may not be successful in mitigating our risks associated with interest rates or foreign exchange exposure or our counterparties might not perform as agreed. We may have a significant amount of debt with various financial institutions worldwide. Any indebtedness could adversely affect our business, operating results, financial condition and our ability to meet payment obligations under such debt. Restrictions in our credit facilities may limit our business and financial activities, including our ability to obtain additional capital in the future. Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could adversely affect our operating results and financial condition. We operate a global business through numerous foreign subsidiaries, and there is a risk that tax authorities will challenge our transfer pricing methodologies or legal entity structures, which could adversely affect our operating results and financial condition. The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate and the actual amount of expenses recorded in the consolidated financial statements could differ materially from the assumptions used. Changes in actuarial assumptions for our defined benefit plan could increase the volatility of the plan’s asset value, require us to increase cash contributions to the plan and have a negative impact on our cash flows, operating results and financial condition. Certain of our customers and suppliers require us to comply with their codes of conduct, which may include certain restrictions that may substantially increase our cost of doing business as well as have an adverse effect on our operating efficiencies, operating results and financial condition. Compliance with government regulations and customer demands regarding the use of “conflict minerals” may result in increased costs and may have a negative impact on our business, operating results and financial condition. There are risks associated with previous and future acquisitions. We may ultimately not be successful in overcoming these risks or any other problems encountered in connection with acquisitions. If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our Common Stock. RISKS RELATED TO OUR INTERNATIONAL OPERATIONS Our international operations subject us to risks that could adversely affect our operations. We have significant operations and assets in China, the U.K., Germany, Hong Kong and Taiwan and, as a result, will be subject to risks inherent in doing business in those jurisdictions, which may adversely affect our financial performance and operating results. 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 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. Economic regulation in China could materially and adversely affect our business, operating results and prospects. We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act, the U.K.’s Bribery Act 2010, China’s anti-corruption campaign and similar worldwide anti-bribery laws. We are subject to foreign currency risk as a result of our international operations. - 34 - China is experiencing rapid social, political and economic change, which has increased labor costs and other related costs that could make doing business in China less advantageous than in prior years. Increased labor costs in China could adversely affect our business, operating results and financial condition. We may not continue to receive preferential tax treatment in Asia, thereby increasing our income tax expense and reducing our net income. The distribution of any earnings of certain foreign subsidiaries may be subject to foreign income taxes, thus reducing our net income. We could be adversely affected by the compromise or theft of our technology, know-how, data or intellectual property or a requirement that we yield rights in technology, know-how, data stored in foreign jurisdictions or intellectual property that we use in such foreign jurisdictions. RISKS RELATED TO OUR COMMON STOCK Variations in our quarterly operating results may cause our stock price to be volatile. We may enter into future acquisitions and take certain actions in connection with such acquisitions that could adversely affect the price of our Common Stock. Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters. We were formed in 1959, and our early corporate records are incomplete. As a result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete. Non-cash tender offers, debt equity swaps or equity exchanges to consummate our business activities are likely to have the effect of diluting the ownership interest of existing stockholders, including qualified stockholders who receive shares of our Common Stock in such business activities. Anti-takeover effects of certain provisions of Delaware law and our Certificate of Incorporation and Bylaws, may hinder a take-over attempt. Section 203 of Delaware General Corporation Law may deter a take-over attempt. Certificate of Incorporation and Bylaw Provisions may deter a take-over attempt. GENERAL 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. 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. 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. 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. - 35 - Item 3. 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 fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.