# DIODES INC /DEL/ (DIOD) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DIODES INC /DEL/'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/29002/000095017022001438/diod-20211231.htm
Accession: 0000950170-22-001438
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DIOD/
All MD&A years: /company/DIOD/mda/
Next year: /company/DIOD/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following section discusses management’s view of the financial condition, results of operations and cash flows of Diodes Incorporated and its subsidiaries (collectively, “the Company,” “our Company,” “we,” “our,” “ours,” or “us”) and should be read together with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form 10-K.

The following discussion contains forward-looking statements and information relating to our Company. 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,” “project,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in Part I, Item 1A.“Risk Factors,” as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act.

Changes from Prior Periodic Reports

In this Annual Report on Form 10-K, we have revised our disclosures to comply with SEC Release No. 33-10825, “Modernization of Regulation S-K Items 101, 103, and 105.” In addition, we have adopted the changes in the disclosure standards included in SEC Release No. 33-10890, “Management’s Discussion and Analysis, Selected Financial Data, Supplementary Financial Information.”

The SEC issued Release No. 33-10825, “Modernization of Regulation S-K Items 101, 103, and 105,” effective for annual periods beginning subsequent to November 2020. This release was adopted to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. Specifically, this release requires registrants to provide disclosures relating to their human capital resources and to restructure their risk factor disclosures. Additionally, the release increases the threshold for disclosure of environmental proceedings to which the government is a party.

The SEC issued Release No. 33-10890, “Management’s Discussion and Analysis, Selected Financial Data, Supplementary Financial Information” which became fully effective on August 9, 2021. This release was adopted to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, this release eliminated the requirement for selected financial data, only requiring quarterly disclosure when there are retrospective changes affecting comprehensive income, and amended the matters required to be presented under Management’s Discussion and Analysis (“MD&A”) to, among other things, eliminate the requirement of the contractual obligations table.

With our adoption of this release, we have eliminated from this Annual Report on Form 10-K the items discussed above which were included in our prior Annual Reports on Form 10-K but which are no longer required. For further information on our contractual obligations see "Contractual Obligations" below.

General

Diodes Incorporated, together with its subsidiaries (collectively, the “Company,” “we,” or “our”) (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. The Company serves the consumer electronics, computing, communications, industrial, and automotive markets.

The Company's products include discrete semiconductor products, analog products, mixed-signal products, standard logic products, multichip products, wafers, and frequency control products.

The Company's corporate headquarters and Americas’ sales offices are located in Plano, Texas, and Milpitas, California, respectively. Design, marketing, and engineering centers are located in Plano; Milpitas; Taipei, Taoyuan City, Zhubei City, Taiwan; Shanghai and Yangzhou, China; Oldham, England; and Neuhaus, Germany. The Company's wafer fabrication facilities are located in Oldham, England Greenock, Scotland; Shanghai and Wuxi, China; and Keelung and Hsinchu, Taiwan. The Company has assembly and test facilities located in Shanghai, Jinan, Chengdu, and Wuxi, China; Neuhaus, Germany; and Jhongli and Keelung, Taiwan. Additional

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engineering, sales, warehouse, and logistics offices are located in Taipei, Taiwan; Hong Kong; Oldham, England; Shanghai, Shenzhen, Wuhan, and Yangzhou, China; Seongnam-si, South Korea; and Munich and Frankfurt, Germany; with support offices throughout the world.

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The company’s manufacturing facilities have achieved certifications in the internationally recognized standards of ISO 9001:2015, ISO 14001:2015, and, for automotive products, IATF 16949:2016;

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Diodes Incorporated is also C-TPAT certified; and

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These Quality Awards reflect the superior quality-control techniques established at Diodes Incorporated and further enhance our credibility as a vendor-of-choice to OEMs increasingly concerned with quality and consistency.

Our market focus is on high-growth, end-user applications in the following areas:

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Industrial: embedded systems, precision controls, and Industrial IoT;

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Communications: smartphones, 5G networks, advanced protocols, and charging solutions;

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Consumer: IoT, wearables, home automation, and smart infrastructure;

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Computing: cloud computing including server, storage, and data center applications; and

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Automotive: connected driving, comfort/style/safety, and electrification/powertrain.

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the twelve months ended December 31 2021. This discussion should be read in conjunction with Item 8, the consolidated financial statements and the notes to consolidated financial statements. This discussion and analysis does not address certain items in respect of fiscal 2019 in reliance on amendments to disclosure requirements adopted by the SEC in 2019. A discussion and analysis of fiscal 2019 may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021, and such discussion and analysis is hereby incorporated into this Form 10-K by this reference .

Summary for the Twelve Months Ended December 31, 2021

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Net sales were $1.81 billion, an increase of 46.9% from the $1.23 billion in 2020;

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Gross profit was $670.4 million, a 55.5% increase, compared to the $431.1 million in 2020;

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Gross margin improved 200 basis points to 37.1% from 35.1% in 2020;

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Operating income increased 105.4% to $276.0 million, or 15.3% of net sales, compared to $134.3 million, or 10.9% of net sales, in 2020;

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Net income was $228.8 million, or $5.00 per diluted share, compared to $98.1 million, or $1.88 per diluted share, in 2020; and

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We achieved $338.5 million cash flow from operations. We had cash capital expenditures of $141.2 million, or 7.8% of net sales. Net cash flow was a positive $46.3 million.

Summary for the Twelve Months Ended December 31, 2020

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Net sales were $1.23 billion, a decrease of 1.6% from the $1.25 billion in 2019;

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

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

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

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

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We achieved $187.2 million cash flow from operations. We had $75.8 million of cash capital expenditures, or 6.2% of revenue. Net cash flow was a positive $61.0 million.

Business Outlook and Factors Relevant to Our Results of Operations

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Our record financial performance in 2021 represents a significant step toward our 2025 business targets of $1.0 billion of gross profit, based upon net sales of $2.5 billion and gross margin of 40%. Acquisitions will continue to be part of our growth strategy to reach our 2025 revenue and gross profit goal. We have a solid pipeline of designs and expanded customer relationships across all regions and product lines. The success of our business depends on, among other factors, the strength of the global economy and the stability of the financial markets, our customers’ demand for our products, the ability of our customers to meet their payment obligations, customers not canceling or deferring existing orders, and the strength of consumers’ demand for items containing our products in the end-markets we serve. We believe the long-term outlook for our business remains generally favorable despite the uncertainties in the global economy as we continue to execute on the strategy that has proven successful for us over the years. See “Risk Factors – The success of our business depends on the strength of the global economy and the stability of the financial markets, and any weaknesses in these areas may have a material adverse effect on our net sales, operating results and financial condition.” in Part I, Item 1A of this Annual Report for additional information.

Description of Sales and Expenses

Net sales

The principal factors that have affected or could affect our net sales from period to period are:

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The condition of the economy in general and of the semiconductor industry in particular;

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Political tension, including the implementation of tariffs, among and between the countries in which we do business;

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Our customers’ adjustments in their order levels;

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Changes in our pricing policies or the pricing policies of our competitors or suppliers;

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The addition or termination of key supplier relationships;

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The rate of introduction and acceptance by our customers of new products;

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Our ability to compete effectively with our current and future competitors;

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Our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances;

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Changes in foreign currency exchange rates;

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A major disruption of our information technology infrastructure;

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Unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes;

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Any other disruptions, such as change in the political or governmental policies, labor shortages, unplanned maintenance or other manufacturing problems; and

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Other risks, uncertainties, and assumptions identified in item 1A, "Risk Factors," of this Annual Report on Form 10-K and risks, uncertainties, and assumptions reflected in other documents we file with the SEC.

Cost of goods sold

Cost of goods sold includes manufacturing costs for our semiconductors and our wafers. These costs include raw materials used in our manufacturing processes as well as labor costs and overhead expenses. Cost of goods sold is also impacted by yield improvements, capacity utilization and manufacturing efficiencies. In addition, cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient.

Selling, general and administrative

Selling, general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, sales and marketing, information technology, engineering, human resources, procurement, planning and finance, and sales commissions, as well as outside legal, investor relations, accounting, consulting and other operating expenses. Also included in selling, general and administrative expenses are acquisition costs from business combinations.

Research and development

Research and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for new product development and technology qualification. Research and development expenses are executed on a global basis and primarily associated with where the engineering talent is located, as well as the location of manufacturing sites participating in any required technology or process development. All research and development expenses are expensed as incurred.

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Amortization of acquisition-related intangible assets

Amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer relationships.

Impairment of fixed assets

Impairment of fixed assets consists of the impairment amount recognized as a result of the fair value of an asset being below its recorded value.

Restructuring

Restructuring are one-time charges that must be paid by the Company due to reorganizing or restructuring a part of the business.

Interest income / expense

Interest income consists of interest earned on our cash and investment balances. Interest expense consists of interest payable on our outstanding credit facilities and other debt instruments.

Gain (loss) on securities carried at fair value

We may hold investments in the form of common stock or some other similar equivalent and have elected fair value accounting treatment.

Foreign currency (loss) gain, net

This income account is used to show the amount gained or lost as a result of foreign currency transactions.

Income tax provision

Our global presence requires us to pay income taxes in a number of jurisdictions. See Note 12 of “Notes to Consolidated Financial Statements” for additional information.

Net income attributable to noncontrolling interest

This represents the minority investors’ share of our subsidiaries’ earnings.

Net income attributable to common stockholders

Net income attributable to common stockholders is net income less net income attributable to noncontrolling interest.

Results of Operations

The following table sets forth, for the periods indicated, the percentage that certain items in the statements of income bear to net sales:

[[GREPCENT_TABLE]]
[["","Percent of Net Sales"],["","Twelve Months Ended December 31,"],["","","2021","","","","2020"],["Net sales","","100.0","%","","","100.0","%"],["Cost of goods sold","","(62.9",")","","","(64.9",")"],["Gross profit","","37.1","","","","35.1"],["Operating expenses","","(21.8",")","","","(24.1",")"],["Income from operations","","15.3","","","","10.9"],["Interest income","","0.2","","","","0.1"],["Interest expense","","(0.4",")","","","(1.0",")"],["Foreign currency (loss) gain, net","","(0.1",")","","","(0.8",")"],["Unrealized gain on investments","","1.6","","","","0.2"],["Other income (expenses)","","1.0","","","","0.5"],["Income before income taxes and noncontrolling interest","","17.5","","","9,8"],["Income tax provision","","4.4","","","","1.7"],["Net income","","13.1","","","","8.1"],["Net (income) loss attributable to noncontrolling interest","","(0.4",")","","","0.1"],["Net income attributable to common stockholders","","12.7","","","","8.0"]]
[[/GREPCENT_TABLE]]

The following discussion explains in greater detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K (in thousands).

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[[GREPCENT_TABLE]]
[["","Twelve Months Ended"],["","December 31,"],["","2021","","","2020","","","Increase/ (Decrease)","","","% Change"],["Net sales","$","1,805,162","","","$","1,229,215","","","$","575,947","","","","46.9","%"],["Cost of goods sold","","1,134,802","","","","798,094","","","","336,708","","","","42.2","%"],["Gross profit","","670,360","","","","431,121","","","","239,239","","","","55.5","%"],["Operating expenses"],["Selling, general and administrative","","257,710","","","","185,067","","","","72,643","","","","39.3","%"],["Research and development","","119,200","","","","94,288","","","","24,912","","","","26.4","%"],["Amortization of acquisition-related intangible assets","","16,216","","","","16,261","","","","(45",")","","","(0.3","%)"],["Loss (gain) on disposal of fixed assets","","246","","","","106","","","","140","","","","132.1","%"],["Other operating income","","1,003","","","","1,067","","","","64","","","","6.0","%"],["Other income (expense)"],["Interest income","","3,139","","","","1,066","","","","2,073","","","","194.5","%"],["Interest expense","","(7,491",")","","","(11,662",")","","","(4,171",")","","","(35.8","%)"],["Foreign currency loss","","(2,107",")","","","(9,814",")","","","(7,707",")","","","(78.5","%)"],["Unrealized gain on investments","","28,018","","","","2,083","","","","25,935","","","","1245.1","%"],["Other income","","17,551","","","","4,336","","","","13,215","","","","304.8","%"],["Income tax provision","","78,807","","","","21,112","","","","57,695","","","","273.3","%"]]
[[/GREPCENT_TABLE]]

Net Sales

Our net sales increased approximately $575.9 million, or 46.9%, for the twelve months ended December 31, 2021, compared to the prior year, due primarily to our content expansion initiatives, improvements in product mix, overall strong demand for our products (especially in comparison to the negative effect of Covid-19 in 2020), and record revenue in the automotive, industrial, communication and consumer end-user markets. The 46.9% increase in net sales for the twelve months ended December 31, 2021 was driven, by a 25.5% organic growth attributable to the Company’s legacy business that existed prior to the LSC acquisition and 21.4% is related to the positive net sales increase from the acquisition of LSC. Contributing to the Company's growth in net sales has been the success of our focused expansion initiative in the automotive market where revenue grew over 59% when compared to year 2020, generating an 8-year CAGR of 30%. Additionally, our Pericom product line continued to set new revenue records, achieving 5 consecutive quarters of growth. The Company has experienced growth in higher-margin end markets which, when combined with increased manufacturing loading at LSC facilities, has enabled the Company to increase its net sales and margins, even in the midst of the current supply-constrained environment. For the twelve months ended December 31, 2021, weighted-average sales price of the Company's products increased 9.5% when compared to the prior year. This represents the improved product mix across the portfolio, as well as price increases to offset supply chain cost increasing.

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

[[GREPCENT_TABLE]]
[["Twelve Months Ended December 31,"],["End-Markets *","","2021","","2020","","2019"],["Industrial","","23%","","23%","","28%"],["Communications","","16%","","21%","","23%"],["Consumer","","19%","","25%","","23%"],["Computing","","30%","","20%","","16%"],["Automotive","","12%","","11%","","10%"],["* Amounts in the table may not total 100% due to rounding"]]
[[/GREPCENT_TABLE]]

Cost of Goods Sold

Cost of goods sold increased approximately $336.7 million for the twelve months ended December 31, 2021 compared to the same period last year, primarily as a result of the 46.9% increase in net revenue. As a percent of sales, cost of goods sold was 62.9% for the twelve months ended December 31, 2021, compared to 64.9% for the same period last year. Average unit cost increased 6.0% for the twelve months ended December 31, 2021, compared to the same period last year, due to cost increases from various subcontractors and foundries, as well as the cost for a more premium mix of products that were sold in 2021. For the twelve months ended December 31, 2021, gross profit increased approximately 55.5% when compared to the prior year. Gross profit margin for the twelve month periods ended December 31, 2021 and 2020, was 37.1% and 35.1%, respectively.

Operating expenses

Operating expenses for the twelve months ended December 31, 2021 increased approximately $97.6 million, or 32.9%, compared to the same period last year. Selling, general and administrative expenses (“SG&A”) increased approximately $72.6 million. The increase in SG&A was driven by increases in wages and benefits, selling expenses and freight and duty charges. Research and

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development expenses (“R&D”) increased approximately $24.9 million primarily due to increases in wages and benefits, outside consulting and depreciation, associated with new product and new process development activities. One driver of the operating expense was a was a full year of LSC related operating expenses in 2021 versus one month in 2020. Amortization of acquisition-related intangibles decreased approximately 0.3% reflecting the overall reduction in the balance of intangible assets subject to amortization. SG&A, as a percentage of sales, was 14.3% and 15.1% for the twelve-month periods ended December 31, 2021 and 2020, respectively. R&D, as a percentage of sales, was 6.6% and 7.7% for the twelve-month periods ended December 31, 2021 and 2020, respectively.

Other (expense)/income

Interest income increased $2.1 million for the twelve months ended December 31, 2021, due to income received from cross currency swaps. The decrease in interest expense is due to a decrease in the interest rate on our floating rate debt and lower borrowing levels. Foreign currency losses decreased $7.7 million during the twelve months ended December 31, 2021 due to the effectiveness of the Company's hedging program. Unrealized gain on investments increased from 2020 due to investment income from investments the Company acquired in the LSC acquisition.

Income tax provision

We recognized income tax expense of approximately $78.8 million for the twelve months ended December 31, 2021, and income tax expense of approximately $21.1 million for the twelve months ended December 31, 2020, resulting in effective income tax rates of 25.0 % and 17.5%, respectively. The increase in the effective tax rate for 2021 compared to 2020 is primarily attributable to an increase in overall pre-tax book income and the impact of changes to the outside basis difference in foreign subsidiaries where the Company does not assert permanent reinvestment. Our undistributed foreign earnings continue to be indefinitely reinvested in foreign operations, with limited exceptions related to earnings of European and Asian subsidiaries. Any future distributions of foreign earnings will not be subject to additional U.S. income tax but may be subject to foreign withholding taxes. The Company has recorded outside basis differences in the limited instances where they do not assert permanent reinvestment. As of December 31, 2021, our foreign subsidiaries held approximately $231.4 million of cash, cash equivalents and investments of which approximately $36.8 million would be subject to foreign withholding tax if distributed outside the country in which the related earnings were generated.

Financial Condition

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, short-term investments, funds from operations and, if necessary, borrowings under our credit facilities.

Liquidity requirements

Our primary liquidity requirements have been to meet our capital expenditure needs and to fund ongoing operations. For 2021 and 2020 our working capital was $716.6 million and $514.2 million, respectively. In 2021, our working capital increased primarily due to increases in cash and cash equivalents, accounts receivable, and inventories, reflecting the increase in net sales in 2021 compared to 2020. Also contributing was a decrease in the outstanding debt under our lines of credit. We expect cash generated by our operations together with existing cash, cash equivalents, short-term investments and available credit facilities to be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations for at least the next 12 months.

Short-term investments

As of December 31, 2021, we had short-term investments of approximately $6.5 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 amount of time but in doing so we generally forfeit a portion of interest income.

Short-term debt

Our Asia subsidiaries maintain credit facilities with several financial institutions through our foreign entities worldwide totaling approximately $122.5 million at December 31, 2021. Other than two Taiwanese credit facilities that are collateralized by assets, our foreign credit lines are unsecured, uncommitted and contain no restrictive covenants. These credit facilities bear interest at LIBOR or similar indices plus a specified margin. Interest payments are due monthly on outstanding amounts under the credit lines. The unused and available credit under the various facilities as of December 31, 2021, was approximately $103.4 million, net of $18.1 million advanced under our foreign credit lines, attributable to our 51% owned subsidiary, Eris Technology Company ("ERIS"), and $1.0 million credit used for import and export guarantee.

Long-term debt

The Company maintains a long-term credit facility (“Credit Agreement”) consisting of a term loan with a current balance of $155.1 million and a $200.0 million revolving senior credit facility. Nothing was drawn on the $200.0 million revolving senior credit facility as of December 31, 2021. The revolving senior credit facility and term loan mature on May 29, 2024. Both the term loan portion and the revolving portion of the Credit Agreement bear an interest rate at LIBOR or similar other indices plus a specified margin. The

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Credit Agreement contains certain financial and non-financial covenants, including, but not limited to, a maximum Consolidated Leverage Ratio, a minimum Consolidated Fixed Charge Coverage Ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases). Furthermore, under the Credit Agreement, restricted payments, including dividends and share repurchases, are permitted in certain circumstances, including while the pro forma Consolidated Leverage Ratio is, both before and after giving effect to any such restricted payment, at least 0.25 to 1.00 less than the maximum permitted under the Credit Agreement. In addition to the credit facilities described above, ERIS has long-term debt of $29.8 million from local Taiwan banks. The ERIS debt matures in various periods through 2033.

On January 22, 2021, Diodes Hong Kong Limited, a company incorporated under the laws of Hong Kong and a subsidiary of the Company, entered into a Facility Agreement (the “Facility Agreement”) with The Hongkong and Shanghai Banking Corporation Limited and the other parties identified therein pursuant to which Diodes Hong Kong Limited obtained from the lenders a US Dollar revolving loan facility in an aggregate amount equal to $100.0 million. Diodes Hong Kong Limited used a portion of the proceeds from such revolving loan facility (i) to refinance certain existing indebtedness and (ii) to finance working capital requirements and its general corporate purposes.

Capital expenditures and investments

In 2021 and 2020, our total cash capital expenditures were approximately $141.2 million and $75.8 million, respectively, which includes approximately $29.4 million and $15.4 million of capital expenditures related to the investment agreement with the Management Committee of the Chengdu Hi-Tech Industrial Development Zone (the “CDHT”) for 2021 and 2021, respectively. Our capital expenditures for these periods were primarily related to manufacturing expansion in our facilities in China and, to a lesser extent, our office buildings. Cash capital expenditures in 2021 were approximately 7.8% of our net sales.

We were party to an investment agreement with the Management Committee of the CDHT. Under this agreement, we formed a joint venture with a Chinese partner, Chengdu Ya Guang Electronic Company Limited (“Ya Guang”), to establish a semiconductor assembly and test facility in Chengdu, China. We currently own approximately 98% of the joint venture entity. The CDHT granted the joint venture a 50 year land lease and provides corporate and employee tax incentives, tax refunds, subsidies and other financial support. The above agreement has expired and we are currently negotiating with CDHT for a new agreement, which we believe will be a long-term, multi-year project that will provide us additional capacity and support. As of December 31, 2021, we have invested $222.9 million in this joint venture, primarily for infrastructure, buildings and equipment related capital expenditures.

The Company’s restricted cash primarily consisted of the cash required to be on deposit under contractual agreements with banks to support outstanding loan and import/export guarantees. As of December 31, 2021, restricted cash of $3.2 million was pledged as collateral for issuance of bank loans, bank acceptance notes and letters of credit.

Our foreign operations expose us to unique intellectual property technology and other risks compared to a company with fewer or no international operations. For example, we are exposed to potential cyber security breaches that may target our employees or infrastructure outside the United States. These risks may result in material and adverse impacts on our financial condition and results of operations. See “Risk Factors – Risks Related to Our International Operations” in Part I, Item 1A of this Annual Report for a more detailed summary of the intellectual property technology risks and other associated with our international business operations.

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Discussion of Cash Flows

Cash and cash equivalents, including restricted cash, increased approximately $46.3 million to $366.8 million in 2021 from $320.5 million in 2020. The table below sets forth summary information from our statements of cash flows:

[[GREPCENT_TABLE]]
[["","Twelve Months Ended December 31,"],["","2021","","","2020","","","Change"],["Net cash provided by operating activities","$","338,543","","","$","187,220","","","$","151,323"],["Net cash used by investing activities","","(144,229",")","","","(106,772",")","","","(37,457",")"],["Net cash used by financing activities","","(158,441",")","","","(54,302",")","","","(104,139",")"],["Effect of exchange rates on cash and cash equivalents, including restricted cash","","10,416","","","","34,876","","","","(24,460",")"],["Net increase in cash and cash equivalents, including restricted cash","$","46,289","","","$","61,022","","","$","(14,733",")"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities for 2021 was approximately $338.5 million, due primarily to $236.3 million of net income, $122.4 million in depreciation expense and amortization of intangible assets expense, $33.2 million from non-cash share-based compensation expense and a change in deferred taxes of $21.5 million. These increases were partially offset by a non-cash gain on investments of $37.9 million and a net decrease in operating capital assets and liabilities of $39.2 million.

Investing Activities

Net cash used in investing activities for 2021 was approximately $144.2 million, due primarily to the purchase of property, plant and equipment of $141.2 million.

Financing Activities

Net cash used in financing activities for 2021 was approximately $158.4 million, due primarily to the net reduction in our outstanding indebtedness of $152.6 million, taxes on net share settlement of $14.8 million and dividends paid in respect of noncontrolling interests of $2.2 million. These outflows of cash were partially offset by inflows from capital contributions in respect of noncontrolling interests of $7.8 million and the net proceeds from the issuance of Common Stock of $4.3 million.

Debt instruments

The U.S. credit facility contains certain financial and non-financial covenants, including, but not limited to, a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and restrictions on liens, indebtedness, investments, fundamental changes, dispositions, and restricted payments (including dividends and share repurchases).

As of December 31, 2021, our Asia subsidiaries had unused and available credit lines of up to an aggregate of approximately $122.5 million, with several financial institutions. Our foreign credit lines are unsecured and uncommitted, except for two Taiwanese credit facilities that are collateralized by assets. Our foreign credit lines bear interest at LIBOR or similar indices plus a specified margin. At December 31, 2021, $18.1 million was outstanding under these lines of credit. In addition to our credit lines, our 51% owned subsidiary, ERIS Technology Corporation (“ERIS”), had long-term debt of $29.8 million, at December 31, 2021, on a long-term basis from local Taiwan banks. The outstanding ERIS debt matures in various periods from 2022 through 2033. See “Liquidity and Capital Resources” above and Note 8 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

On January 22, 2021, Diodes Hong Kong Limited ,a company incorporated under the laws of Hong Kong and a subsidiary of the Company, entered into a Facility Agreement (the “Facility Agreement”) with The Hongkong and Shanghai Banking Corporation Limited and the other parties identified therein pursuant to which Diodes Hong Kong Limited obtained a US Dollar revolving loan facility in an aggregate amount equal to $100.0 million. Diodes Hong Kong Limited used a portion of the proceeds (i) to refinance certain existing indebtedness and (ii) to finance working capital requirements and its general corporate purposes. In addition, on January 22, 2021, Diodes Hong Kong Limited entered into a Hong Kong Debenture (the “Debenture”) with The Hongkong and Shanghai Banking Corporation Limited, as Security Agent (the “Security Agent”). Pursuant to the Debenture, Diodes Hong Kong Limited granted to the Security Agent, on behalf of itself and the other secured parties, a security interest over certain assets of Diodes Hong Kong Limited. The security interest is continuing security for the payment, discharge and performance of all of the secured liabilities, which includes Diodes Hong Kong Limited’s payment obligations under the Facility Agreement. The Facility Agreement is governed by the laws of Hong Kong.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market or credit risk

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support, nor do we engage in leasing, hedging or research and development services, that could expose us to liability that is not reflected on the face of our financial statements.

Contractual Obligations

Our estimated future obligations consist of debt, interest on long-term debt, leases, defined benefit obligation and purchase obligations. See Note 8 “Bank Credit Agreements and Other Short-term and Long-term Debt, Note 9 - "Leases", Note 13 - "Employee Benefit Plans" and Note 17 - "Commitments and Contingencies” of the notes to consolidated financial statements" included elsewhere in this Annual Report for additional information.

We cannot make reasonable estimates of the amount and period in which our tax liabilities will be paid. See “Accounting for income taxes” below and Note 12 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted principles in the United States of America (“U.S. GAAP”) requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, which are based upon historical experiences, market trends and financial forecasts and projections, and upon various assumptions that management believes to be reasonable under the circumstances at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.

We believe the following critical accounting estimates affect the significant estimates and judgments we use in the preparation of our consolidated financial statements, and may involve a higher degree of judgment and complexity than others.

Revenue recognition

In relation to our revenue recognition, we record estimated allowances/reserves for the following items;

•
Ship and debit reserves, which arise when we, from time to time based on market conditions, issue credit to certain distributors upon their shipments to their end customers;

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

•
Price protection reserves, which arise when market conditions cause average selling prices to decrease and we issue credit to certain distributors on their inventory;

•
Accounts receivable reserves related to our customer's ability to pay; and

•
Product returns, distributor price adjustments and other allowances.

Our reserve estimates are based upon historical data as well as projections of sales, distributor inventories, price adjustments, average selling prices and market conditions. Actual returns and adjustments could be significantly different from our estimates and provisions, resulting in an adjustment to net sales.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined principally by the first-in, first-out method. On an ongoing basis, we evaluate our inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to our manufacturing facilities. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis. If future demand or market conditions are different than our current estimates, an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.

Accounting for income taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. A valuation allowance is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. This analysis requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.

The benefit of a tax position is recognized only if it is more likely than not that the tax position would be sustained based on its technical merits in a tax examination, using the presumption the tax authority has full knowledge of all relevant facts regarding the position. The amount of benefit recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on ultimate settlement with the tax authority. For tax positions not meeting the more likely than not test, no tax benefit is recorded.

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Goodwill and other indefinite lived intangible assets

Goodwill and other indefinite lived assets are tested for impairment on an annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. We have one operating segment. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare fair value to carrying value, which includes goodwill. If fair value of exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.

Business Combinations

Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed. The Company makes estimates and assumptions about conditions of the assets, other costs not captured in the base costs, and consideration for entrepreneurial profit, depreciation, functional obsolescence, and economic obsolescence allocated to the various property, plant and equipment categories considering the perspective of marketplace participants.

Recently Issued Accounting Pronouncements

See Note 1 of “Notes to Consolidated Financial Statements” of this Annual Report for additional information regarding the status of recently issued accounting pronouncements.