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Diodes Incorporated Reports Fourth Quarter and Fiscal 2015 Financial Results

Achieves Continued Market Share Gains and Completes Acquisition of Pericom Semiconductor

PLANO, Texas — (BUSINESS WIRE) — February 16, 2016 — Diodes Incorporated (Nasdaq: DIOD), a leading global manufacturer and supplier of high-quality application specific standard products within the broad discrete, logic and analog semiconductor markets, today reported its financial results for the fourth quarter and fiscal year ended December 31, 2015.

Fourth Quarter Summary

Commenting on the results, Dr. Keh-Shew Lu, President and Chief Executive Officer, stated, “Diodes closed 2015 with increased market share, the achievement of our 25th consecutive year of profitability, as well as the successful completion of the Pericom Semiconductor acquisition. Pericom is well-aligned with our acquisition strategy and expands our analog footprint, while also adding a strong mixed-signal connectivity offering that will drive expanded product content in target applications. Over the past two months since closing the acquisition, we have been diligently working on the integration efforts to maximize sales, design, operations and administrative efficiencies for 2016. As expected, this transaction is accretive to our margins and non-GAAP earnings per share. Also during the quarter, we implemented the share buyback program approved by our board last quarter, repurchasing 466,010 shares and allowing us to return approximately $11 million to our shareholders.”

Dr. Lu further commented, “This past year was characterized by weaker demand across several key end markets and geographies. The softer environment impacted loading and utilization at our manufacturing facilities, but also provided unique opportunities in terms of market share gains at key customers. Gross margins were under pressure especially in the second half of the year. However, I believe we are well positioned for margin expansion in 2016 based on improvements in product mix and manufacturing performance as well as the benefit from previous cost reductions. Similar to past cycles, our flexible business model enabled us to respond quickly to the changing conditions in order to preserve revenue and gross profit.

“Looking forward to the coming year, we remain focused on integrating the Pericom acquisition to capitalize on the opportunities for margin expansion and cross-selling synergies for expanded content across targeted and emerging applications.”

Fourth Quarter 2015

Revenue for the fourth quarter 2015 was $214.4 million, which included approximately $14.6 million of revenue from Pericom, and compares to $208.9 million in the third quarter 2015 and $223.7 million in the fourth quarter 2014. Excluding the contribution from Pericom, revenue for the quarter was down 4.3 percent sequentially due primarily to softness in the computing market, weak domestic demand in China as well as normal seasonality.

GAAP gross profit for the fourth quarter 2015 was $53.9 million, or 25.1 percent of revenue, including $3.1 million inventory valuation adjustments related to the Pericom acquisition. Non-GAAP gross profit, excluding the $3.1 million inventory adjustment, was $56.9 million, or 26.5 percent of revenue. GAAP gross profit in the third quarter 2015 was $61.6 million, or 29.5 percent of revenue, and in the fourth quarter 2014 was $70.7 million, or 31.6 percent of revenue. The sequential decline in gross profit margin was due to lower capacity utilization, product mix and pricing.

Operating expenses for the fourth quarter 2015 were $52.8 million, or 24.6 percent of revenue, compared to $51.7 million, or 24.7 percent of revenue, in the third quarter 2015 and $48.6 million, or 21.7 percent of revenue, in the fourth quarter 2014.

Fourth quarter 2015 GAAP net income was $0.7 million, including $4.1 million of Pericom acquisition-related expense, or $0.01 per diluted share, compared to third quarter 2015 of $2.8 million, or $0.06 per diluted share, and fourth quarter 2014 of $16.7 million, or $0.34 per diluted share.

Fourth quarter 2015 non-GAAP net income was $6.7 million, or $0.14 per diluted share, which excluded, net of tax, $3.2 million of purchase price accounting costs, $2.4 million of non-cash, acquisition-related intangible asset amortization costs and $0.4 million of severance costs. This compares to non-GAAP net income of $6.3 million, or $0.13 per diluted share, in the third quarter 2015 and $18.3 million, or $0.38 per diluted share, in the fourth quarter 2014.

The following is a summary reconciliation of GAAP net income to non-GAAP net income and per share data, net of tax (in thousands, except per share data):

        Three Months Ended
December 31, 2015
GAAP net income $ 725
 
GAAP diluted earnings per share $ 0.01
 
Adjustments to reconcile net income to Non-GAAP net income:
 
M&A Activities
 
Pericom 4,112
 
Inventory adjustment 2,907
 
Transaction costs 216
 
Retention costs 86
 
Amortization of acquisition related intangible assets 903
 
Others 1,478
 
Amortization of acquisition related intangible assets 1,478
 
Severance   419
 
Non-GAAP net income $ 6,734
 
Non-GAAP diluted earnings per share $ 0.14

(See the reconciliation tables of net income to non-GAAP net income near the end of the release for further details.)

Included in the fourth quarter 2015 GAAP and non-GAAP net income was approximately $2.5 million, net of tax, of non-cash share-based compensation expense. Excluding share-based compensation expense, both GAAP and non-GAAP diluted EPS would have increased by an additional $0.05 per share for each of the fourth quarter 2015, the third quarter 2015 and the fourth quarter 2014.

EBITDA, which represents earnings before net interest expense, income tax, depreciation and amortization, for the fourth quarter 2015, was $24.4 million, compared to $29.7 million for the third quarter 2015 and $42.7 million for the fourth quarter 2014. For a reconciliation of GAAP net income to EBITDA (non-GAAP), see the table near the end of the release for further details.

For the fourth quarter 2015, net cash provided by operating activities was $21.4 million. Net cash flow was $29.7 million, which reflects the pay-down of $18.8 million of long-term debt. Free cash flow was ($16.9) million, which includes $38.2 million of capital expenditures.

Fiscal 2015

For 2015, revenue was $848.9 million, a decrease of 4.7 percent from the $890.7 million in 2014. Gross profit was $248.8 million, or 29.3 percent of revenue, compared to $277.3 million, or 31.1 percent of revenue, in the prior year.

GAAP net income was $29.8 million, or $0.60 per diluted share, compared to $63.7 million, or $1.31 per diluted share, in 2014. Non-GAAP net income for 2015 was $42.3 million, or $0.86 per diluted share, which excluded, net of tax, $6.9 million of non-cash acquisition-related intangible asset amortization costs, $4.0 million of purchase price accounting adjustments and transaction costs, $1.3 million asset impairment charges and $0.4 million of severance costs, compared to non-GAAP net income of $70.1 million, or $1.44 per diluted share, in the prior year. The following is a summary reconciliation of GAAP net income to non-GAAP net income and per share data, net of tax (in thousands, except per share data):

        Twelve Months Ended
December 31, 2015
GAAP net income $ 29,772
 
GAAP diluted earnings per share $ 0.60
 
Adjustments to reconcile net income to Non-GAAP net income:
 
M&A Activities
 
Pericom 4,867
 
Inventory adjustment 2,907
 
Transaction costs 971
 
Retention costs 86
 
Amortization of acquisition related intangible assets 903
 
Others 6,037
 
Retention costs 70
 
Amortization of acquisition related intangible assets 5,967
 
Impairment loss on long-lived assets 1,250
 
Severance   419
 
Non-GAAP net income $ 42,345
 
Non-GAAP diluted earnings per share $ 0.86

(See the reconciliation tables of net income to net income near the end of the release for further details.)

Included in 2015 GAAP and non-GAAP net income was approximately $10.1 million, net of tax, of non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP diluted EPS would have increased by an additional $0.20 per diluted share. Included in 2014 GAAP and non-GAAP net income was approximately $9.2 million, net of tax, of non-cash share-based compensation expense. Excluding this expense, both 2014 GAAP and non-GAAP diluted EPS would have increased by an additional $0.19 per diluted share.

EBITDA, which represents earnings before net interest expense, income tax provision, depreciation and amortization, for 2015 was $129.5 million, compared to $163.7 million for 2014. For a reconciliation of GAAP net income to EBITDA (non-GAAP), see the table near the end of the release for further details.

For fiscal 2015, net cash provided by operating activities was $119.8 million. Net cash flow was ($24.6) million. Free cash flow was ($13.4) million, which includes $133.2 million of capital expenditures.

Balance Sheet

As of December 31, 2015, the Company had approximately $283 million in cash, cash equivalents and short-term investments, long-term debt totaled approximately $466 million, and working capital was approximately $571 million.

Share Repurchase

During the fourth quarter, Diodes returned approximately $11.0 million of cash to shareholders by repurchasing approximately 466,010 shares of common stock under its previously announced share repurchase program.

The results announced today are preliminary, as they are subject to the Company finalizing its closing procedures and customary quarterly review by the Company's independent registered public accounting firm. As such, these results are subject to revision until the Company files its Annual Report on Form 10-K for the fiscal year 2015.

Business Outlook

Dr. Lu concluded, “For the first quarter of 2016, we expect revenue to range between $214 million and $235 million, or flat to up 10 percent sequentially, including the first full quarter of revenue from Pericom. We expect non-GAAP gross margin to be 30.0 percent, plus or minus 2 percent. Non-GAAP operating expenses are expected to be approximately 25.5 percent of revenue, plus or minus 1 percent. We expect interest expense to be approximately $3.4 million and our income tax rate to be 28 percent, plus or minus 3 percent. Shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 49.5 million.” Note that purchase accounting adjustments related to Pericom and previous acquisitions of $7.3 million after tax are not included in these non-GAAP estimates.

Conference Call

Diodes will host a conference call on Tuesday, February 16, 2016 at 4:00 p.m. Central Time (5:00 p.m. Eastern Time) to discuss its fourth quarter and fiscal year financial results. Investors and analysts may join the conference call by dialing 1-855-232-8957 and providing the confirmation code 21434065. International callers may join the teleconference by dialing 1-315-625-6979 and enter the same confirmation code at the prompt. A telephone replay of the call will be made available approximately two hours after the call and will remain available until Tuesday, February 23, 2016 at midnight Central Time. The replay number is 1-855-859-2056 with a pass code of 21434065. International callers should dial 1-404-537-3406 and enter the same pass code at the prompt. Additionally, this conference call will be broadcast live over the Internet and can be accessed by all interested parties on the Investors section of Diodes' website at http://www.diodes.com. To listen to the live call, please go to the Investors section of Diodes’ website and click on the conference call link at least 15 minutes prior to the start of the call to register, download and install any necessary audio software. For those unable to participate during the live broadcast, a replay will be available shortly after the call on Diodes' website for approximately 60 days.

About Diodes Incorporated

Diodes Incorporated (Nasdaq: DIOD), a Standard and Poor's SmallCap 600 and Russell 3000 Index company, is a leading global manufacturer and supplier of high-quality application specific standard products within the broad discrete, logic, analog and mixed-signal semiconductor markets. Diodes serves the consumer electronics, computing, communications, industrial, and automotive markets. Diodes' products include diodes, rectifiers, transistors, MOSFETs, protection devices, function-specific arrays, single gate logic, amplifiers and comparators, Hall-effect and temperature sensors; power management devices, including LED drivers, AC-DC converters and controllers, DC-DC switching and linear voltage regulators, and voltage references along with special function devices, such as USB power switches, load switches, voltage supervisors, and motor controllers. Diodes’ corporate headquarters and Americas' sales office are located in Plano, Texas. Design, marketing, and engineering centers are located in Plano; Milpitas, California; Taipei, Taiwan; Taoyuan City, Taiwan, Zhubei City, Taiwan, Manchester, England; and Neuhaus, Germany. Diodes’ wafer fabrication facilities are located in Kansas City, Missouri and Manchester, with an additional facility located in Shanghai, China. Diodes has assembly and test facilities located in Shanghai, in Jinan, in Chengdu, and in Yangzhou, China, as well as in Hong Kong, Neuhaus and in Taipei. Additional engineering, sales, warehouse, and logistics offices are located in Taipei; Hong Kong; Manchester; Shanghai; Shenzhen, China; Seongnam-si, South Korea; and Munich, Germany, with support offices throughout the world.

On November 24, 2015, Diodes Incorporated acquired Pericom Semiconductor Corporation with headquarters in Milpitas, California, and with design centers and technical sales and support offices globally. Pericom enables serial connectivity with the industry's most complete solutions for the computing, communications, consumer and embedded market segments. Pericom's analog, digital and mixed-signal integrated circuits, along with its frequency control products are essential in the timing, switching, bridging and conditioning of high-speed signals required by today's ever-increasing speed and bandwidth demanding applications.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such statements include statements regarding our expectation that: Pericom is well-aligned with our acquisition strategy and expands our analog footprint, while also adding a strong mixed-signal connectivity offering that will drive expanded product content in target applications; over the past two months since closing the acquisition, we have been diligently working on the integration efforts to maximize sales, design, operations and administrative efficiencies for 2016; as expected, this transaction is accretive to our margins and non-GAAP earnings per share; however, I believe we are well positioned for margin expansion in 2016 based on improvements in product mix and manufacturing performance as well as the benefit from previous cost reductions; looking forward to the coming year, we remain focused on integrating the Pericom acquisition to capitalize on the opportunities for margin expansion and cross-selling synergies for expanded content across targeted and emerging applications; for the first quarter of 2016, we expect revenue to range between $214 million and $235 million, or flat to up 10 percent sequentially, including the first full quarter of revenue from Pericom; we expect non-GAAP gross margin to be 30.0 percent, plus or minus 2 percent; non-GAAP operating expenses are expected to be approximately 25.5 percent of revenue, plus or minus 1 percent; we expect interest expense to be approximately $3.4 million and our income tax rate to be 28 percent, plus or minus 3 percent. Shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 49.5 million; and note that purchase accounting adjustments related to Pericom and previous acquisitions of $7.3 million after tax are not included in these non-GAAP estimates. Potential risks and uncertainties include, but are not limited to, such factors as: the risk that such expectations may not be met; the risk that the expected benefits of acquisitions may not be realized; the risk that we may not be able to maintain our current growth strategy or continue to maintain our current performance, costs and loadings in our manufacturing facilities; risks of domestic and foreign operations, including excessive operation costs, labor shortages, higher tax rates and our joint venture prospects; the risk of unfavorable currency exchange rates; our future guidance may be incorrect; the global economic weakness may be more severe or last longer than we currently anticipated; breaches of our information technology systems; the possibility that no shares will be repurchased; the risk that the expected benefits of share repurchases will not be realized; and other information including the “Risk Factors,” detailed from time to time in Diodes’ filings with the United States Securities and Exchange Commission.

Recent news releases, annual reports and SEC filings are available at the Company's website: http://www.diodes.com. Written requests may be sent directly to the Company, or they may be e-mailed to: diodes-fin@diodes.com.

 
 
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 
    Three Months Ended     Twelve Months Ended
December 31, December 31,
  2015         2014     2015         2014  
NET SALES $ 214,382 $ 223,671 $ 848,904 $ 890,651
 
COST OF GOODS SOLD   160,531     153,009     600,067     613,372  
 
Gross profit 53,851 70,662 248,837 277,279
 
OPERATING EXPENSES
Selling, general and administrative 34,728 34,183 133,010 133,701
Research and development 15,004 12,571 55,648 52,136
Amortization of acquisition related intangible assets 2,967 1,954 8,597 7,914
Loss (gain) on fixed assets   57     (67 )   1,613     (983 )
Total operating expenses   52,756     48,641     198,868     192,768  
 
Income from operations 1,095 22,021 49,969 84,511
 
OTHER INCOME (EXPENSES)
Interest income 311 312 1,006 1,470
Interest expense (1,630 ) (843 ) (4,232 ) (4,332 )
Gain (loss) on securities carried at fair value 545 (410 ) 400 1,364
Other   693     2,113     1,319     2,979  
Total other expenses (81 ) 1,172 (1,507 ) 1,481
 
Income before income taxes and noncontrolling interest 1,014 23,193 48,462 85,992
 
INCOME TAX PROVISION   272     5,988     16,451     20,359  
 
NET INCOME 742 17,205 32,011 65,633
 
Less: NET INCOME attributable to noncontrolling interest   (17 )   (540 )   (2,239 )   (1,955 )
 
NET INCOME attributable to common stockholders $ 725   $ 16,665   $ 29,772   $ 63,678  
 
EARNINGS PER SHARE attributable to common stockholders
Basic $ 0.02   $ 0.35   $ 0.62   $ 1.35  
Diluted $ 0.01   $ 0.34   $ 0.60   $ 1.31  
 
Number of shares used in computation
Basic   48,495     47,587     48,210     47,184  
Diluted   49,518     48,739     49,500     48,594  

Note: Throughout this release, we refer to “net income attributable to common stockholders” as “net income.”

 
 
DIODES INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME

(in thousands, except per share data)

(unaudited)

 

For the three months ended December 31, 2015:

 
        Operating     Income Tax    
COGS Expenses Provision Net Income
 
Per-GAAP $ 725
 
Earnings per share (Per-GAAP)
Diluted $ 0.01
 
Adjustments to reconcile net income to Non-GAAP net income:
 
M&A Activities
 
Pericom 4,112
 
Inventory adjustment 3,060 (153 )
 
Transaction costs 332 (116 )
 
Retention costs 132 (46 )
 
Amortization of acquisition related intangible assets 1,101 (198 )
 
Others 1,478
 
Amortization of acquisition related intangible assets 1,866 (388 )
 
Severance 645 (226 ) 419
 
Non-GAAP $ 6,734
 
Diluted shares used in computing earnings per share   49,518
 
Non-GAAP earnings per share
Diluted $ 0.14

Note: Included in GAAP and non-GAAP net income was approximately $2.5 million, net of tax, non-cash share-based compensation expense. Excluding share based compensation expense, both GAAP and non-GAAP adjusted diluted earnings per share would have improved by $0.05 per share.

 
 
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME – Cont.

(in thousands, except per share data)

(unaudited)

 

For the three months ended December 31, 2014:

 
    Operating     Income Tax    
Expenses Provision Net Income
 
Per-GAAP $ 16,665
 
Earnings per share (Per-GAAP)
Diluted $ 0.34
 
Adjustments to reconcile net income to Non-GAAP net income:
 
Retention costs 125 (19 ) 106
 
Amortization of acquisition related intangible assets 1,954 (392 ) 1,562
 
Non-GAAP $ 18,333
 
Diluted shares used in computing earnings per share   48,739
 
Non-GAAP earnings per share
Diluted $ 0.38

Note: Included in GAAP and non-GAAP net income was approximately $2.4 million, net of tax, non-cash share-based compensation expense. Excluding share based compensation expense, both GAAP and non-GAAP diluted earnings per share would have improved by $0.05 per share.

 
 
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME – Cont.

(in thousands, except per share data)

(unaudited)

 

For the twelve months ended December 31, 2015:

 
        Operating     Income Tax    
COGS Expenses Provision Net Income
 
Per-GAAP $ 29,772
 
Earnings per share (Per-GAAP)
Diluted $ 0.60
 
Adjustments to reconcile net income to Non-GAAP net income:
 
M&A Activities
 
Pericom 4,867
 
Inventory adjustment 3,060 (153 )
 
Transaction costs 1,493 (522 )
 
Retention costs 132 (46 )
 
Amortization of acquisition related intangible assets 1,101 (198 )
 
Others 6,037
 
Retention costs 83 (13 )
 
Amortization of acquisition related intangible assets 7,496 (1,529 )
 
Impairment loss on long-lived assets 1,470 (220 ) 1,250
 
Severance 645 (226 ) 419
 
Non-GAAP $ 42,345
 
Diluted shares used in computing earnings per share   49,500
 
Non-GAAP earnings per share
Diluted $ 0.86

Note: Included in GAAP and non-GAAP net income was approximately $10.1 million, net of tax, non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP diluted earnings per share would have improved by $0.20 per share.

 
 
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME – Cont.

(in thousands, except per share data)

(unaudited)

 

For the twelve months ended December 31, 2014:

 
    Operating     Income Tax    
Expenses Provision Net Income
 
Per-GAAP $ 63,678  
 
Earnings per share (Per-GAAP)
Diluted $ 1.31  
 
Adjustments to reconcile net income to Non-GAAP net income:
 
Retention costs 1,286 (193 ) 1,093
 
Gain on sale of assets (1,176 ) 200 (976 )
 
Amortization of acquisition related intangible assets 7,914 (1,627 ) 6,287
 
Non-GAAP $ 70,082  
 
Diluted shares used in computing earnings per share   48,594  
 
Non-GAAP earnings per share
Diluted $ 1.44  

Note: Included in GAAP and non-GAAP net income was approximately $9.2 million, net of tax, non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP diluted earnings per share would have improved by $0.19 per share.

GAAP to NON-GAAP ADJUSTMENTS

This measure consists of accounting principles generally accepted in the United States (“GAAP”) net income attributable to common stockholders (“net income”), which is then adjusted solely for the purpose of adjusting for retention costs, amortization of acquisition related intangible assets, gain on sale of assets, inventory adjustments and valuations, acquisition costs, restructuring and tax payments related to tax audit, as discussed below. Excluding retention costs, gain on sale of assets, inventory adjustments and valuations, acquisition costs, restructuring and tax payments related to tax audit provides investors with a better depiction of the Company’s operating results and provides a more informed baseline for modeling future earnings expectations. Excluding the amortization of acquisition related intangible assets allows for comparison of the Company’s current and historic operating performance. The Company excludes the above listed items to evaluate the Company’s operating performance, to develop budgets, to determine incentive compensation awards and to manage cash expenditures. Presentation of the above non-GAAP measures allows investors to review the Company’s results of operations from the same viewpoint as the Company’s management and Board of Directors. The Company has historically provided similar non-GAAP financial measures to provide investors an enhanced understanding of its operations, facilitate investors’ analyses and comparisons of its current and past results of operations and provide insight into the prospects of its future performance. The Company also believes the non-GAAP measures are useful to investors because they provide additional information that research analysts use to evaluate semiconductor companies. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results and may differ from measures used by other companies. For example, we do not adjust for any amounts attributable to noncontrolling interest except for one-time non-cash items outside the course of ordinary business, such as impairment of goodwill. The Company recommends a review of net income on both a GAAP basis and non-GAAP basis be performed to get a comprehensive view of the Company’s results. The Company provides a reconciliation of GAAP net income to non-GAAP adjusted net income.

Detail of non-GAAP adjustments:

Impairment of long-lived assets – The Company excluded costs accrued for impairment of long-lived assets related to assets that will no longer be used in our production process as we transition from six inch to eight inch production capability in our China wafer plant.

Inventory adjustments or valuations – The Company excluded cost incurred for inventory valuations. The Company adjusted the inventory acquired from the Pericom acquisition to account for the reasonable profit allowance for the selling effort on finished goods inventory and the reasonable profit allowance for the completing and selling effort on the work–in-progress inventory. This non-cash adjustment to inventory is not recurring in nature, however it could be recurring to the extent there are additional acquisitions. The Company believes the exclusion of the Pericom inventory adjustment and valuation provides investors with a more accurate reflection of costs likely to be incurred in the absence of an unusual event such as an acquisition and facilitates comparisons with the results of other periods that may not reflect such costs.

Severance costs – The Company excluded severance costs incurred during the fourth quarter of 2015. These one-time costs will reduce the Company’s cost structure in order to enhance operating effectiveness and improve profitability. These charges are excluded from management’s assessment of the Company’s operating performance. The Company believes the exclusion of the severance charges provides investors an enhanced view of the cost structure of the Company’s operations and facilitates comparisons with the results of other periods that may not reflect such charges or may reflect different levels of such charges.

Acquisition costs – The Company excluded costs associated with acquiring Pericom, which consisted of advisory, legal and other professional and consulting fees. These costs were expensed in the third and fourth quarters of 2015 when the costs were incurred and services were received, and in which the corresponding tax adjustments were made for the non-deductible portions of these expenses. The Company believes the exclusion of the acquisition related costs provides investors with a more accurate reflection of costs likely to be incurred in the absence of an unusual event such as an acquisition and facilitates comparisons with the results of other periods that may not reflect such costs.

Retention costs – The Company excluded employee retention costs accrued within operating expenses associated with acquisitions. Although these retention costs will be recurring every quarter until the final retention payment has been made, they are not part of the employees’ normal annual salaries and therefore are being excluded. The Company believes the exclusion of retention costs related to the acquisitions provides investors with a more accurate reflection of costs likely to be incurred in the absence of an unusual event such as an acquisition and facilitates comparisons with the results of other periods that may not reflect such costs.

Amortization of acquisition related intangible assets – The Company excluded the amortization of its acquisition related intangible assets including developed technologies and customer relationships. The fair value of the acquisition related intangible assets, which was recognized through acquisition accounting, is amortized using straight-line methods which approximate the proportion of future cash flows estimated to be generated each period over the estimated useful lives of the applicable assets. The Company believes the exclusion of the amortization expense of acquisition related assets is appropriate as a significant portion of the purchase price for its acquisitions was allocated to the intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both the Company’s newly acquired and long-held businesses. In addition, the Company excluded the amortization expense as there is significant variability and unpredictability among companies with respect to this expense.

Gain on sale of assets –During the second quarter of 2015, the Company sold a building located in Taiwan and this gain was excluded from management’s assessment of the Company’s core operating performance. The Company believes the exclusion of the gain on sale of assets provides investors an enhanced view of a gain the Company may incur from time to time and facilitates comparisons with results of other periods that may not reflect such gains.

Tax expense related to tax audit – The Company excluded additional tax expense in regard to a tax audit of the China tax authorities. The China government audited the Company’s High and New Technology Enterprise (“HNTE”) status for the years 2009 through 2015 and determined there was an underpayment for the tax year 2014. The Company has been approved for the HNTE status for 2014 through 2017. Given that 2014 is an isolated occurrence, the additional tax and any penalties and interest associated with the audit are being excluded. The Company believes the exclusion of tax expense related to this tax audit provides investors with a more accurate indication of tax expense likely to be incurred on an ongoing basis and facilitates comparisons with the results of other periods that may not reflect such audit determinations.

NON-GAAP EARNINGS PER SHARE

This non-GAAP financial measure is the portion of the Company’s GAAP net income assigned to each share of stock, excluding retention costs, amortization of acquisition related intangible assets, inventory valuations, acquisition costs and tax payments related to tax audit, as discussed above. Excluding retention costs, inventory valuations, acquisition costs and tax payments related to tax audit provides investors with a better depiction of the Company’s operating results and provides a more informed baseline for modeling future earnings expectations. Excluding the amortization of acquisition related intangible assets allows for comparison of the Company’s current and historic operating performance, as described in further detail above. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results and may differ from measures used by other companies. For example, we do not adjust for any amounts attributable to noncontrolling interest except for one-time non-cash items outside the course of ordinary business, such as impairment of goodwill. The Company recommends a review of diluted earnings per share on both a GAAP basis and non-GAAP basis be performed to obtain a comprehensive view of the Company’s results. Information on how these share calculations are made is included in the reconciliation tables provided.

CASH FLOW ITEMS

Free cash flow (FCF) (Non-GAAP)

FCF for the fourth quarter of 2015 is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from cash flow from operations. For the fourth quarter of 2015, FCF was ($16.9) million ($21.4 million less $38.2 million). FCF represents the cash and cash equivalents that we are able to generate after taking into account cash outlays required to maintain or expand property, plant and equipment. FCF is important because it allows us to pursue opportunities to develop new products, make acquisitions and reduce debt.

CONSOLIDATED RECONCILIATION OF NET INCOME TO EBITDA

EBITDA represents earnings before net interest expense, income tax provision, depreciation and amortization. Management believes EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties, such as financial institutions in extending credit, in evaluating companies in our industry and provides further clarity on our profitability. In addition, management uses EBITDA, along with other GAAP and non-GAAP measures, in evaluating our operating performance compared to that of other companies in our industry. The calculation of EBITDA generally eliminates the effects of financing, operating in different income tax jurisdictions, and accounting effects of capital spending, including the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization expense. EBITDA is not a recognized measurement under GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, income from operations and net income, each as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures used by other companies. For example, our EBITDA takes into account all net interest expense, income tax provision, depreciation and amortization without taking into account any attributable to noncontrolling interest. Furthermore, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as tax and debt service payments.

The following table provides a reconciliation of net income to EBITDA (in thousands, unaudited):

    Three Months Ended     Twelve Months Ended
December 31, December 31,
2015     2014 2015     2014
 
Net income (per-GAAP) $ 725 $ 16,665 $ 29,772 $ 63,678
Plus:
Interest expense, net 1,319 531 3,226 2,862
Income tax provision 272 5,988 16,451 20,359
Depreciation and amortization   22,131   19,517   80,100   76,771
EBITDA (Non-GAAP) $ 24,447 $ 42,701 $ 129,549 $ 163,670
 
 
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

 
    December 31,     December 31,
  2015     2014  
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 218,435 $ 243,000
Short-term investments 64,685 11,726
Accounts receivable, net 218,496 188,248
Inventories 202,832 182,026
Prepaid expenses and other   46,103     50,510  
Total current assets   750,551     675,510  
 
PROPERTY, PLANT AND EQUIPMENT, net 439,340 309,931
 
DEFERRED INCOME TAXES, non-current 44,761 43,845
 
OTHER ASSETS
Goodwill 144,923 81,229
Intangible assets, net 196,409 45,028
Other   36,696     23,614  
Total assets $ 1,612,680   $ 1,179,157  
 
 
December 31, December 31,
  2015     2014  
(unaudited)
CURRENT LIABILITIES
Lines of credit $ - $ 1,064
Accounts payable 86,463 79,390
Accrued liabilities 77,801 60,149
Income tax payable 5,117 8,381
Current portion of long-term debt   10,282     287  
Total current liabilities   179,663     149,271  
 
LONG-TERM DEBT, net of current portion 455,941 140,787
DEFERRED TAX LIABILITIES - non current 31,658 -
OTHER LONG-TERM LIABILITIES   90,153     78,932  
Total liabilities   757,415     368,990  
 
COMMITMENTS AND CONTINGENCIES
 
EQUITY
Diodes Incorporated stockholders' equity
Preferred stock - par value $1.00 per share; 1,000,000 shares authorized; no shares issued or outstanding — —

Common stock - par value $0.66 2/3 per share; 70,000,000 shares authorized;

48,148,077 and 47,591,092 issued and outstanding at December 31, 2015 and December 31, 2014, respectively

32,404 31,729
Additional paid-in capital 350,855 314,942
Retained earnings 519,778 490,006
Treasury stock (11,009 ) —
Accumulated other comprehensive loss   (84,416 )   (68,402 )
Total Diodes Incorporated stockholders' equity 807,612 768,275
Noncontrolling interest   47,653     41,892  
Total equity   855,265     810,167  
Total liabilities and equity $ 1,612,680   $ 1,179,157  


Contact:

Company Contact:
Diodes Incorporated
Laura Mehrl
Director of Investor Relations
P: 972-987-3959
E: Email Contact
or
Investor Relations Contact:
Shelton Group
Leanne Sievers
EVP, Investor Relations
P: 949-224-3874
E: Email Contact