Diodes Incorporated

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Diodes Incorporated

3050 East Hillcrest Drive
Westlake Village, California 91362
U.S.A.
Telephone: (805) 446-4800
Fax: (805) 446-4850
Web site: http://www.diodes.com

Public Company
Incorporated: 1959
Employees: 1,621
Sales: $214.7 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: DIOD
NAIC: 334413 Semiconductor Manufacturing

Diodes Incorporated manufactures discrete and analog semiconductors, offering a line of more than 4,000 products to manufacturers of electronic devices and electronic components. The company sells its products directly to 150 customers and serves more than 10,000 additional customers through distributors. Diodes' customers include Bose Corporation, Motorola, Inc., Samsung Electronics Co., and Logitech, Inc. Manufacturing, aside from a wafer fabrication facility located in suburban Kansas City, Missouri, is conducted overseas. Diodes operates two production plants in Shanghai, China, and maintains marketing and logistical facilities in Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong Kong. The company's discrete semiconductors, which provide electronic signal amplification and switching functions, are used in a wide variety of computer and consumer electronic devices, including flat-panel computer displays, notebook computers, digital cameras, MP3 players, television set-top boxes, and mobile telephone handsets. Diodes generates 67 percent of its revenue in Asia, 30 percent in North America, and less than 3 percent in Europe.

ORIGINS

In terms of stature, Diodes lived two different lives during its first half-century of existence. The company spent decades operating as a small, little-known firm before a change in strategy and in management propelled it toward national prominence, creating a profoundly more ambitious enterprise that bore little resemblance to the company that emerged as the 1960s began. Diodes was incorporated in 1959 as a regional, semiconductor-trading company. For the next 30 years, the company operated in relative obscurity, known only within the business community surrounding its headquarters in Westlake Village, California, in suburban Los Angeles. Annual revenues inched upward as the decades passed, but Diodes barely eclipsed the $10 million mark by the time the 1990s arrived, living off only a fraction of the business that would later support the company.

The transforming event in Diodes' history occurred in 1990. That year, Silitek Corporation, a Taiwanese manufacturer of semiconductor rectifiers and other electronic components, took a 46 percent stake in Diodes, gaining majority control over the small, West-lake Village firm. "That was the turnaround of the company," a Diodes executive recalled in a March 28, 1994 interview with the Los Angeles Business Journal. "They changed the management and the philosophy," the executive said, adding that Diodes had been managed "too casually" before the arrival of Taiwanese management. Silitek transferred control of Diodes to one of its Taiwanese subsidiaries, Lite-On Power Semiconductor Corporation, in 1991, and spearheaded fundamental changes in the way Diodes operated. With new management in place, Diodes began to record its first period of energetic financial growth, drawing new business from an expanded line of products, an emphasis on customer service, and increased inventory. Between 1991 and 1993, revenues nearly doubled, jumping from $14.7 million to $26.4 million. Profits recorded a more impressive leap, increasing from $265,000 to $1.5 million during the two-year period. Further financial gains would be realized from the sweeping restructuring program, but the greatest benefits were achieved from the company's increased activities on the manufacturing front. In 1990, Diodes manufactured only 10 percent of the products it sold, a percentage that would grow substantially as the company shed its anonymity in the semiconductor industry and became one of its rising stars in the early 21st century.

Manufacturing capacity was built up in 1996, centered in mainland China and focused on one specific area, a type of semiconductor that became synonymous with Diodes' activities from the 1990s forward. The company threw all it energies into manufacturing discrete semiconductors, a tiny electronic component that Investor's Business Daily, in its May 19, 2004 issue, referred to as the "chip equivalent of widgets." Discretes, unlike more complex semiconductors such as integrated circuits, performed a single function: regulating the flow of electric current in one direction. A slew of products relied on discretes to control power usage, including videocassette recorders, radios, lighting, toys—virtually any type of electronic device—and discretes, in turn, were produced in hundreds of different versions, varying according to voltage, current, power handling capability, and switching speed. For Diodes, choosing to focus on the production of discretes put the company in a commodity-like business, giving its management far different goals to pursue than those chased by the higher profile members of the semiconductor industry, integrated circuit makers. The integrated circuit market was characterized by rapid changes in technology, both in terms of production techniques and in the applications for the chips, which pit manufacturers in a race to put ever greater circuitry into ever smaller packages. Discrete manufacturers, in contrast, operated in a market largely devoid of rapid technological change. Success depended on the ability of a company to manufacture large numbers of inexpensive components while keeping overhead costs at a minimum.

COMPANY PERSPECTIVES

As Diodes continues to introduce higher margin, differentiated products, the company is also exploring opportunities to leverage its flexible manufacturing base and proven sales and marketing capabilities. In identifying that customer requirements should drive product development and the factory floor, the company provides superior customer and product service, as well as greater design flexibility and specialized configurations. In order to increase market share, Diodes is working to move these specialized products into high volume applications. The company is also exploring expanding its product offering into adjacent technologies, such as analog and mixed signal, to increase revenue and profitability.

As Diodes pressed forward in its new role as a manufacturer of discretes, the company succeeded in meeting the criteria of success in its market. Its financial growth, after decades of anemia, reflected an enterprise at last hitting its stride. By 1995, sales reached $61 million, a total drawn from the company's marketing office in Westlake Village and an engineering, manufacturing, purchasing, and sales facility in Taipei, Taiwan, the base of its subsidiary, Diodes Incorporated Taiwan Company, Ltd. In 1996, the company announced an agreement with newly created subsidiary Lite-On, FabTech, Inc. to secure a supply of silicon wafers, the building blocks of semiconductors. The agreement was notable not only because it strengthened Diodes' ability to manufacture discretes but also because the affiliation with FabTech led to a second turning point in the company's development. Making the foray into manufacturing lifted the company's fortunes during the 1990s and gave it a recognizable face in the semiconductor industry, but its greatest financial growth occurred after management leveraged the manufacturing foundation established during the 1990s to pursue a more ambitious growth strategy in the first years of the 21st century. By relying nearly exclusively on the sales of discretes, Diodes increased its revenue to $79 million by the end of the 1990s, a total from which it gleaned $5.5 million in profit. During the ensuing years, a change in strategy produced a far more impressive revenue-to-profit ratio, making the Westlake Village enterprise one of the most lauded companies in the nation.

A NEW STRATEGY FOR THE 21ST CENTURY

As Diodes entered the 21st century, it suffered along with the rest of the semiconductor industry from a severe downturn in the technology sector. To its credit, the company made a bold move toward repositioning itself in the market during the industry-wide crisis, taking its first step as the decade began. In December 2000, the company acquired FabTech, obtaining a foundry in Lee's Summit, Missouri, that made five-inch silicon wafers. FabTech, which operated under its own name as a Diodes subsidiary, specialized in making a type of diode called "Schottky," which provided higher system efficiency. The acquisition reflected a new mindset at Diodes' headquarters, one espoused by the company's new president and chief executive officer, C. H. Chen. Chen joined Diodes in March 2000 after spending 21 years at Texas Instruments, where he rose to the post of vice-president of the company's Taiwan operations. With Chen at the helm, Diodes began pursuing a new growth strategy aimed at manufacturing higher profit-margin products, seeking to produce proprietary products for the computer and consumer electronic equipment market. The ongoing proliferation of consumer electronic devices offered enticing opportunities for growth, and Diodes sought to address the needs of the market with multi-functional products to improve the operating efficiency of cellular telephones, iPods, personal digital assistants (PDAs), digital cameras, notebook computers, and the like.

Diodes remained committed to discrete semiconductors as it approached its 50th anniversary, but the years were most notable for the company's foray into adjacent markets. The company began producing analog and mixed-signal products, offerings, coupled with an expanding market for discretes, that fueled rapid financial growth. Engineers at the company's FabTech subsidiary, in one instance of Diodes' push into more complex products, developed a line of transistors that combined diodes and transistors into a smaller space, making them ideal for battery-powered devices such as PDAs. The introduction of new products lifted annual revenues by 8 percent, joining a product portfolio of more than 4,000 different devices, and enabled the company to eclipse the $100 million-in-sales mark for the first time in 2002. From there, revenue shot upward, making Diodes' progress national news in the business press. Between 2002 and 2005, the company's sales total swelled from $115 million to $214 million, but the greatest gains were achieved in earnings. During the same period, net income skyrocketed from $5.8 million to $33.3 million.

NEW LEADERSHIP FOR THE FUTURE

Diodes' impressive financial growth drew accolades from industry observers, thrusting a company that for decades had labored in obscurity into the limelight. In 2004, Business 2.0 included Diodes on its list of the 100 fastest-growing technology companies in the nation. Forbes recognized Diodes as one of the "200 Best Small Companies" in 2004, an honor it bestowed on the company in 2005 as well. Diodes jumped from the 100th position to the 26th position on Forbes' list in 2005, an achievement hailed by the company's new chief executive officer and president, Keh-Shew Lu. "To be ranked 26th in Forbes' list of the 200 Best Small Companies, and as the only company in the semiconductor industry, is a great honor," Lu said in an October 24, 2005 interview with Wireless News. "The dramatic jump from 100th last year confirms that our strategy to differentiate ourselves with innovative technology, customized product focus, and excellent customer service continues to be successful."

KEY DATES

1959:: Diodes is incorporated.
1990:: Silitek Corporation, based in Taiwan, acquires a 46 percent interest in Diodes.
1991:: Silitek transfers control of Diodes to one of its subsidiaries, Lite-On Power Semiconductor Corp.
1996:: Manufacturing operations are established in mainland China.
2000:: Diodes acquires FabTech, a wafer fabrication facility in suburban Kansas City, Missouri.
2005:: Keh-Shew Lu is appointed president and chief executive officer.

Lu's commitment to the strategy developed by his predecessor promised to deliver robust financial growth in the years ahead. Lu was appointed president and chief executive officer in mid-2005, joining the company after a 27-year career at Texas Instruments. During his stay at Texas Instruments—the former employer of Chen, Diodes' senior vice-president of operations, and the company's vice-president of Asian sales—Lu served as president of Asian operations and managed Texas Instruments' global memory business. The post he held before joining Diodes' board of directors in 2001 was as senior vice-president and general manager of Texas Instruments' analog, mixed-signal and logic products, experience that would serve him well in his efforts to lead Diodes into new markets. "I am very excited about what we can accomplish in the future as we continue to move into adjacent technologies that will build on these strengths and enable us to offer higher margin products," he said in a June 1, 2005 interview with the Ventura County Star. In the coming years, the evidence of Lu's success would be on display in Diodes' bottom line, as the company expanded its role in the semiconductor industry.

PRINCIPAL SUBSIDIARIES

Diodes Taiwan Company, Limited; Shanghai KaiHong Electronics Company, Limited (China); FabTech Incorporated; Diodes-Hong Kong Limited (Hong Kong); Shanghai KaiHong Technology Company, Limited (China).