FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For June 17, 2004
DESWELL INDUSTRIES, INC.
(Registrant's name in English)
17B, Edificio Comercial Rodrigues
599 Avenida da Praia Grande, Macau
(Address of principal executive offices)
Deswell Industries, Inc. Announces Fourth Quarter and Year-End Results
MACAU--(BUSINESS WIRE)--June 17, 2004--Deswell Industries, Inc.
(Nasdaq: DSWL)
-- Deswell also Announces Fourth Quarter Dividend of $0.24 per
Share
-- Company Revises Previously Reported "Other Income" for the
Third Quarter
Deswell Industries, Inc. (Nasdaq: DSWL) today announced its
financial results for the fourth quarter and year ended March 31,
2004.
Net sales for the fourth fiscal quarter ended March 31, 2004
increased 7.8% to $21.3 million from $19.7 million in the fourth
fiscal quarter ended March 31, 2003. Operating income for the fourth
quarter ended March 31, 2004 increased 1.7% to $2.81 million for the
most recent quarter, compared to $2.77 million for same period last
year. Net income for the fourth quarter of fiscal 2004 was $2.7
million, compared to a net loss of $0.9 million, which was primarily a
result of a $3.5 million tax provision in fiscal 2003. Basic earnings
per share and diluted earnings per share for the quarter increased to
$0.30 and $0.29, respectively (based on 9,148,000 and 9,485,000
weighted average shares outstanding, respectively).
Net sales for the year ended March 31, 2004 were $97.2 million, an
increase of 6.9% compared to net sales of $90.9 million for the year
ended March 31, 2003. Operating income increased 12.6% to $16.4
million for the year ended March 31, 2004, compared to $14.5 million
for fiscal 2003. Net income was $14.7 million, an increase of 43.7%
compared to net income of $10.2 million. Basic earnings per share and
diluted earnings per share increased to $1.62 and $1.56, respectively
(based on 9,109,000 and 9,440,000 weighted average shares
outstanding), compared to $1.18 and $1.16, respectively (based on
8,672,000 and 8,852,000 weighted average shares outstanding), for the
year ended March 31, 2003.
Total gross margin decreased to 29.6% in the fourth quarter from
31.7% in the fourth quarter last year. Gross profit in the plastic
segment decreased to 34.3% of net sales compared to 40% last year.
This was mainly attributable to an average 20% increase in resin cost
coupled with an increase in production of lower margin plastic
injection products. The decrease in margins at the plastics division
was partially offset by increased gross margins at Deswell's
electronic & metallic segment. Gross profit in the electronic &
metallic segment increased to 23.4% of net sales for the quarter ended
March 31, 2004 compared to 19.8% of net sales last year. This was
mainly attributable to focusing the assembly business on higher margin
customers and stringent cost controls.
The Company continues to maintain a strong financial position. The
Company's cash and cash equivalents on March 31, 2004 were $30.2
million, as compared to $34.4 million on March 31, 2003. Working
capital was $52.9 million as of March 31, 2004, versus $58.2 million
as of March 31, 2003. The Company has no long-term or short-term
borrowings.
Mr. Richard Lau, chairman and chief executive officer, commented,
"We are pleased to have reported growth in both our plastics and
electronic & metallic divisions during the fourth quarter of 5.5% and
11% respectively. Over the past two and a half years, we have invested
approximately $25 million in plant construction and infrastructure
development to increase our plastics capacity in Dongguan. In August
2004, we will be fully operational with an aggregate of 600,000
additional square-feet of capacity. Over the next two years, we plan
on investing $15 million to build an additional 500,000 square-feet of
office and manufacturing space and $15 million in new machinery,
equipment and upgraded software. The upgraded and expanded capacity
provides us with a significant competitive advantage particularly in
large-size molding, automobile tooling and advanced injection molding.
At our electronic & metallic division, we are particularly pleased
with its improved performance. Looking ahead, we are optimistic about
near-term growth opportunities at our electronics & metallic division,
and also believe that the expanded capacity and improved technology at
our plastics division position it for long-term growth."
Fourth-Quarter Dividends
Deswell also announced that on June 11, 2004, its board of
directors declared a cash dividend of $0.24 per share, bringing cash
dividends per share for the year ended March 31, 2004 to $0.96. The
dividend will be payable on July 16, 2004 to shareholders of record as
of June 25, 2004.
Revision to Previously Reported Third Quarter
The Company also announced that it incorrectly reported "other
expenses" for the third quarter ended December 30, 2003. Other
expenses for the third quarter ended December 30, 2003 were $306,000,
not $17,000 as previously reported (see attached table). This increase
in other expenses for the third quarter reduces the net income for the
three months ended December 31, 2003 from $3,824,000 to $3,535,000,
and the basic and diluted earnings per share from $0.42 and $0.40,
respectively to $0.39 and $0.37, respectively. The other expenses
incurred during the third quarter ended December 31, 2003 were mainly
attributed to the loss on disposal of the Hong Kong office premises in
December 2003 as a result of the Company's move to Macau. Net income,
basic and diluted earnings per share for the nine months ended
December 31, 2003 were correctly reported as $12,010,000, or $1.32 and
$1.29 per share primary and diluted.
About Deswell
Deswell manufactures injection-molded plastic parts and
components, electronic products and subassemblies, and metallic
products for original equipment manufacturers ("OEMs") and contract
manufacturers at its factories in the People's Republic of China. The
Company produces a wide variety of plastic parts and components used
in the manufacture of consumer and industrial products; printed
circuit board assemblies using surface mount ("SMT") and finished
products such as telephones, telephone answering machines,
sophisticated studio-quality audio equipment and computer peripherals.
The Company's customers include Kyocera Mita Industrial Co. (H.K.)
Limited, Epson Precision (H.K.) Ltd., Inter-Tel Incorporated, Vtech
Telecommunications Ltd., Peavey Electronics Corporation and Emerson.
To learn more about Deswell Industries, Inc., please visit the
Company's web site at www.deswell.com.
CONSOLIDATED STATEMENT OF INCOME
(U.S. dollars in thousands, except per share data)
Quarter ended Year ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Audited)
Net sales $ 21,257 $ 19,725 $ 97,195 $ 90,905
Cost of sales 14,959 13,479 66,105 61,006
----------- --------- --------- ----------
Gross profit 6,298 6,246 31,090 29,899
Selling, general and
administrative
expenses 3,486 3,481 14,718 15,354
----------- --------- --------- ----------
Operating income 2,812 2,765 16,372 14,545
Interest expense - - (16) (6)
Other income, net 382 (217) 910 818
----------- --------- --------- ----------
Income before income
taxes 3,194 2,548 17,266 15,357
Income taxes (note 5) 78 3,747 589 3,826
----------- --------- --------- ----------
Income before
minority interests 3,116 (1,199) 16,677 11,531
Minority interests 406 (292) 1,957 1,288
----------- --------- --------- ----------
Net income $ 2,710 $ (907) $ 14,720 $ 10,243
=========== ========= ========= ==========
Basic earnings per
share $ 0.30 $ (0.10) $ 1.62 $ 1.18
=========== ========== ========= ==========
Weighted average
number of shares
outstanding (in
thousands) 9,148 8,969 9,109 8,672
=========== ========= ========= ==========
Diluted earnings per
share $ 0.29 $ (0.10) $ 1.56 $ 1.16
=========== ========= ========= ==========
Diluted weighted
average number of
shares outstanding
(in thousands) 9,485 9,164 9,440 8,852
=========== ========= ======== ==========
DESWELL INDUSTRIES, INC.
REVISED THIRD QUARTER CONSOLIDATED STATEMENT
OF INCOME (UNAUDITED)
(U.S. dollars in thousands, except per share data)
Quarter ended Nine months ended
December 31, December 31,
--------------------- --------------------
2003 2002 2003 2002
--------------------- --------------------
(Revised)
Net sales $ 24,784 $ 25,272 $ 75,938 $ 71,180
Cost of sales 16,383 16,799 51,146 47,527
---------- ---------- --------- ----------
Gross profit 8,401 8,473 24,792 23,653
Selling, general and
administrative expenses 3,998 3,890 11,232 11,873
---------- ---------- --------- ----------
Operating income 4,403 4,583 13,560 11,780
Interest expense (1) - (16) (6)
Other income, net* (306)* 206 528 1,035
---------- ---------- --------- ----------
Income before income taxes 4,096 4,789 14,072 12,809
Income taxes 81 366 511 79
---------- ---------- --------- ----------
Income before minority
interests 4,015 4,423 13,561 12,730
Minority interests 480 636 1,551 1,580
---------- ---------- --------- ----------
Net income* $ 3,535* $ 3,787 $ 12,010 $ 11,150
========== ========== ========= ==========
Basic earnings per share* $ 0.39* $ 0.43 $ 1.32 $ 1.30
========== ========== ========= ==========
Weighted average number of
shares outstanding
(in thousands) 9,121 8,726 9,097 8,574
========== ========== ========= ==========
Diluted earnings
per share* $ 0.37* $ 0.43 $ 1.29 $ 1.28
========== ========== ========= ==========
Diluted weighted average
number of shares
outstanding (in thousands) 9,518 8,850 9,316 8,706
========== ========== ========= ==========
* revised
DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
( U.S. dollars in thousands)
March 31, March 31,
2004 2003
-------------- ------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 30,193 $ 34,400
Restricted cash 390 2,366
Marketable securities - 4,821
Accounts receivable, net 18,957 16,727
Inventories 16,174 14,784
Prepaid expenses and other current assets 2,952 2,648
Income taxes receivable 127 323
----------- -----------
Total current assets 68,793 76,069
Property, plant and equipment - net 44,261 29,623
Investment in associates 2 2
Goodwill 478 478
----------- -----------
Total assets $ 113,534 $ 106,172
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,168 $ 9,643
Customer deposits and accrued expenses 4,619 4,257
Income taxes payable 130 3,946
------------ -----------
Total current liabilities 15,917 17,846
------------ -----------
Minority interests 7,872 6,465
------------ -----------
Deferred income tax 15 15
------------ -----------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued
and outstanding 9,149,085 shares at
March 31, 2004 and 9,030,835 shares at
March 31, 2003 29,980 28,247
Additional paid-in capital 6,970 6,970
Retained earnings 52,780 46,629
------------ -----------
Total shareholders' equity 89,730 81,846
------------ -----------
Total liabilities and
shareholders' equity $ 113,534 $ 106,172
============ ===========
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
( U.S. dollars in thousands )
Year ended Year ended
March 31, March 31,
---------------------------
2004 2003
---------------------------
(Unaudited) (Audited)
----------- ---------
Cash flows from operating activities:
Net income $14,720 $10,243
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 4,402 4,492
Loss on disposal of property, plant and equipment 392 6
Minority interests 1,901 1,288
Changes in current assets and liabilities:
Accounts receivable (2,230) 161
Marketable securities 4,821 (3,706)
Inventories (1,390) (1,559)
Prepaid expenses and other current assets (304) 773
Income taxes receivable 196 105
Accounts payable 1,525 2,060
Customer deposits and accrued expenses 362 (2,063)
Income taxes payable (3,816) 3,781
---------------------------
Net cash provided by operating activities 20,579 15,781
---------------------------
Cash flows from investing activities
Purchase of property, plant and equipment (19,862) (9,731)
Proceeds from disposal of property, plant and 430 127
Equipment
Acquisition of investment in an associate - (2)
---------------------------
Net cash used in investing activities (19,432) (9,606)
---------------------------
Cash flows from financing activities
Dividends paid (8,569) (6,687)
Dividends paid to minority shareholders of
subsidiaries (582) (851)
Issue of Common Stock 1,733 4,217
Odd share redemption upon stock split - (1)
Decrease in bank loans - (482)
Decrease in restricted cash 1,976 495
Contribution from minority shareholders of
subsidiaries 88 -
---------------------------
Net cash used in financing activities (5,354) (3,309)
---------------------------
Net increase/(decrease) in cash and cash equivalents (4,207) 2,866
Cash and cash equivalents, at beginning of year 34,400 31,534
---------------------------
Cash and cash equivalents, at end of year 30,193 34,400
===========================
Supplementary disclosures of cash flow information:
Cash paid/(refund) during the year for:
Interest $ 16 $ 6
Income taxes 4,210 (60)
===========================
Supplementary disclosures of significant non-cash
transactions:
Issuance of common stock in connection with
acquisition of additional 20% shareholdings
of a subsidiary $ - $ 4,423
===========================
DESWELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands except per share data)
1. Management's Statement
----------------------
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring
in nature) necessary to present fairly the financial position of Deswell
Industries, Inc. (the Company) at March 31, 2004 and March 31, 2003, the
results of operations for the quarters and year ended March 31, 2004 and
March 31, 2003, and the cash flows for the year ended March 31, 2004 and
March 31, 2003. The notes to the Consolidated Financial Statements that are
contained in the Form 20-F Annual Report filed on September 15, 2003 under
the Securities Exchange Act of 1934 should be read in conjunction with
these Consolidated Financial Statements.
2. Inventories
-----------
March 31, March 31,
2004 2003
Inventories by major categories :
Raw materials $ 7,816 $ 7,432
Work in progress 4,465 4,454
Finished goods 3,893 2,898
------- -------
$16,174 $14,784
======= =======
3. Earnings Per Share
------------------
The basic net income per share and diluted net income per share are
computed in accordance with the Statement of Financial Accounting Standards
No.128 "Earnings Per Share".
The basic net income per share is computed by dividing income available to
common holders by the weighted average number of common shares outstanding
during the period. Diluted net income per share gives effect to all
dilutive potential common shares outstanding during the period. The
weighted average number of common shares outstanding is adjusted to include
the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued. In computing the
dilutive effect of potential common shares, the average stock price for the
period is used in determining the number of treasury shares assumed to be
purchased with the proceeds from exercise of options.
The net income for the quarters and years ended March 31, 2004 and 2003
were both from the Company's continuing operations.
4. Stock Split
-----------
On June 17, 2002, the Company announced that it is effecting a
three-for-two stock split of its outstanding shares to holders of record on
July 8, 2002 and payable on July 22, 2002. In conjunction with this stock
split and proportionate to it, the Memorandum of Association will be
amended effective on July 8, 2002 to increase authorized capital to
30,000,000 common shares. This amendment will also result in the par value
of its shares converting to no par value per share.
The common stock and additional paid-in capital are presented with regard
to the effects of stock split on July 22, 2002 and change in par value on
July 8, 2002.
5. Income taxes
------------
During 2003, the Company was engaged in discussions with the Hong Kong
Inland Revenue Department, or IRD, regarding whether Deswell should be
assessed taxes on profits derived from activities of certain of its
subsidiaries during the six fiscal years ended March 31, 2002, which the
Company believed were conducted outside of Hong Kong and were not subject
to a profits tax under the Hong Kong Revenue Ordinance. While, based on
consultations with Hong Kong tax experts, Deswell believes that its tax
position for these years was sound and supportable, management nevertheless
concluded that it would be in the Company's best interest to reach an
immediate resolution of the tax issue with the IRD in order to avoid the
expenditure of substantial time, effort and expense involved in proceedings
that could extend years. The resolution also limits the assessment of
taxes, interest and/or penalties that would be incurred if the Company did
not prevail or sought to settle the dispute later. Accordingly, in June
2003 the Company made a proposal to settle the entire tax dispute and in
July 2003, the IRD accepted the proposal. As a result, a provision of
$3,532,000 was charged to the Company's consolidated income statements for
the three months and year ended March 31, 2003 and was paid during the year
ended March 31, 3004.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
---------------------
General
-------
The Company's revenues are derived from the manufacture and sale of (i)
injection-molded plastic parts and components, (ii) electronic products and
subassemblies and (iii) metallic parts and components. The Company carries out
all of its manufacturing operations in southern China, where it is able to take
advantage of the lower overhead costs and inexpensive labor rates as compared to
Hong Kong.
Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003
---------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended March 31, 2004
were $21,257,000, an increase of $1,532,000 or 7.8% as compared to the
corresponding period in 2003. This net increase was due to the increase in sales
within the plastic segment of $637,000 and the increase in sales within the
electronic & metallic segment of $895,000. This represented an increase of 5.5%
and 11.0% respectively, as compared with net sales from these segments in the
corresponding period in the prior year. The increase in net sales in both
segments was mainly due to an increase in orders from their existing customers
as well as new customers.
Gross Profit - The gross profit for the quarter ended March 31, 2004 was
$6,298,000, representing a gross profit margin of 29.6%. This compares with the
overall gross profit and gross profit margin of $6,246,000 or 31.7% for the
quarter ended March 31, 2003.
Gross profit in the plastic segment decreased by $450,000 to $4,184,000 or
34.3% of net sales, for the quarter ended March 31, 2004 compared to $4,634,000
or 40% of net sales, for fiscal 2003. This was mainly attributed to an average
20% increase in resin cost and the increase in net sales of relatively lower
margin plastic injection assembly over the fiscal year 2004, thereby offsetting
the increase in net sales for the period.
Gross profit in the electronic & metallic segment increased by $502,000 to
$2,114,000 or 23.4% of net sales, for the quarter ended March 31, 2004 compared
to $1,612,000 or 19.8% of net sales, for the same period last year This was
mainly attributed to focusing on higher margin sales, the reduction of factory
overhead, and the increase in net sales over the corresponding prior period.
Selling, general and administrative expenses - SG&A expenses for the
quarter ended March 31, 2004 were $3,486,000, amounting to 16.4% of total net
sales, as compared to $3,481,000 or 17.6% of total net sales for the quarter
ended March 31, 2003. There was a slight increase in selling, general and
administrative expenses of $5,000 over the corresponding period.
Operating income - Operating income was $2,812,000 for the quarter ended
March 31, 2004, an increase of $47,000 or 1.7% as compared with the
corresponding quarter in the prior year.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes - During 2003, the Company was engaged in discussions with the
Hong Kong Inland Revenue Department, or IRD, regarding whether Deswell should be
assessed taxes on profits derived from activities of certain of its subsidiaries
during the six fiscal years ended March 31, 2002, which the Company believed
were conducted outside of Hong Kong and were not subject to a profits tax under
the Hong Kong Revenue Ordinance. While based on consultations with Hong Kong tax
experts, Deswell believed that its tax position for these years was sound and
supportable, management nevertheless concluded that it would be in the Company's
best interest to reach an immediate resolution of the tax issue with the IRD in
order to avoid the expenditure of substantial time, effort,and expense involved
in proceedings that could extend years. The resolution also limits the
assessment of taxes, interest and/or penalties that would be incurred if the
Company did not prevail or sought to settle the dispute later. Accordingly, in
June 2003 the Company made a proposal to settle the entire tax dispute and in
July 2003, the IRD accepted the proposal. As a result, a provision of $3,532,000
was charged to the Company's consolidated income statements for the three months
and year ended March 31, 2003 and the payment was made in the year ended March
31, 2004.
Income tax expense for the quarter was $78,000, as compared to $3,747,000
for the quarter ended March 31, 2003. The decrease was primarily the result of
the above resolution.
Minority Interest - Minority interests represent a 29% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries and a 49% minority interest in
the subsidiary conducting marketing for Deswell's plastic and electronic
businesses. In January 2003, the Company acquired an additional 20% interest in
Integrated, increasing its ownership in that subsidiary from 51% to 71%. Despite
the decrease in minority interest in Deswell's electronic & metallic segment,
the dollar amount of minority interest increased to $406,000 for the quarter
ended March 31, 2004, from a loss of $292,000 for the corresponding quarter in
the prior year, which reflects that both the electronics and metallic
subsidiaries and marketing subsidiary generated more net income in the quarter
ended March 31, 2004, compared with corresponding quarter in fiscal 2003.
Net Income - Net income was $2,710,000 for the quarter ended March 31,
2004, an increase of $3,617,000 or 398.8%, as compared to net loss of $907,000
for the quarter ended March 31, 2003, and net income as a percentage of net
sales was increased to 12.7% for the quarter ended March 31, 2004. The increase
in net income was mainly the result of the decrease in income taxes as described
above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Year Ended March 31, 2004 Compared to Year Ended March 31, 2003
---------------------------------------------------------------
Net Sales - The Company's net sales for the year ended March 31, 2004, were
$97,195,000, an increase of $6,290,000 or 6.9% as compared to year ended March
31, 2003. The increase in sales was mainly related to the increase in sales of
plastic segment of $3,139,000 and the increase in sales of electronic & metallic
segment of $3,151,000. This represented an increase of 6.3% and 7.7%,
respectively, as compared with the respective net sales from these segments in
the prior year.
The increase in net sales in both segments was mainly due to an increase in
orders from their existing customers, coupled with orders from new customers
during the year.
Gross Profit - The gross profit for the year ended March 31, 2004 was
$31,090,000, representing a gross profit margin of 32.0%. This compares with the
overall gross profit and gross profit margin of $29,899,000 or 32.9% for the
year ended March 31, 2003.
Gross profit in plastic segment decreased by $445,000, to $21,018,000 or
39.6% of net sales, for fiscal year ended March 31, 2004 compared to $21,463,000
or 43% of net sales for fiscal 2003. This was mainly attributed to an average of
20% increase in resin cost and the increase in net sales of relatively lower
margin plastic injection assembly over the fiscal year 2004, and therefore
offsetting the increase in net sales for the year.
Gross profit in the electronic & metallic segment increased by $1,636,000
to $10,072,000 or 22.8% of net sales, for fiscal year ended March 31, 2004
compared to $8,436,000 or 20.6% of net sales, for fiscal 2003. This was mainly
attributable to the result of focusing on higher margin sales, the reduction of
factory overhead, and the increase in net sales over the year.
Selling, general and administrative expenses - SG&A expenses for the year
ended March 31, 2004 were $14,718,000, amounting to 15.1% of total net sales, as
compared to $15,354,000 or 16.9% of total net sales for the year ended March 31,
2003.
SG&A expenses in the plastic segment increased by $247,000 or 2.6%, to
$9,804,000 or 18.5% of net sales, for the year ended March 31, 2004 compared to
$9,557,000 or 19.1% of net sales, for fiscal 2003. SG&A expenses in the
electronic & metallic segment decreased by $883,000 or 15.2%, to $4,914,000 or
11.1% of net sales, for the year ended March 31, 2004 compared to $5,797,000 or
14.1% of net sales for fiscal 2003. The decrease was mainly attributed to the
reduction in general and administrative expenses in the electronic & metallic
segment.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income - Operating income was $16,372,000 for the year ended
March 31, 2004, an increase of $1,827,000 or 12.6% as compared with the prior
year. On a segment basis, the operating income of plastic segment decreased
$692,000 to $11,214,000 or 21.1% of net sales, in fiscal 2004 compared to
$11,906,000 or 23.9% of net sales in fiscal 2003. The operating income of
electronic & metallic segment increased $2,519,000 to $5,158,000 or 11.7% of net
sales, in fiscal 2004 compared to $2,639,000 or 6.4% of net sales in fiscal
2003. The increase in operating income is attributable to the increase in gross
profit and the decrease in SG&A expenses described above.
Income Taxes - During 2003, the Company was engaged in discussions with the
Hong Kong Inland Revenue Department, or IRD, regarding whether Deswell should be
assessed taxes on profits derived from activities of certain of its subsidiaries
during the six fiscal years ended March 31, 2002, which the Company believed
were conducted outside of Hong Kong and were not subject to a profits tax under
the Hong Kong Revenue Ordinance. While, based on consultations with Hong Kong
tax experts, Deswell believes that its tax position for these years was sound
and supportable, management nevertheless concluded that it would be in the
Company's best interest to reach an immediate resolution of the tax issue with
the IRD in order to avoid the expenditure of substantial time, effort and
expense involved in proceedings that could extend years. The resolution also
limits the assessment of taxes, interest and/or penalties that would be incurred
if the Company did not prevail or sought to settle the dispute later.
Accordingly, in June 2003 the Company made a proposal to settle the entire tax
dispute and in July 2003, the IRD accepted the proposal. As a result, a
provision of $3,532,000 was charged to the Company's consolidated income
statements for the three months and year ended March 31, 2003. Of the tax
provision of $3,532,000, $2,085,000 was related to the plastic segment and
$1,447,000 was related to the electronics & metallic segment. The tax payment
was made in the year ended March 31, 2004.
Income tax expense was $589,000 for the year ended March 31, 2004, compared
to $3,826,000 for the prior year. The decrease was primarily the result of the
above resolution.
Minority Interest - Minority interests represent a 29% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries and a 49% minority interest in
the subsidiary conducting marketing for Deswell's plastic and electronic
businesses. In January 2003, the Company acquired an additional 20% interest in
Integrated, increasing its ownership in that subsidiary from 51% to 71%. Despite
the decrease in minority interest in Deswell's electronic & metallic segment,
the dollar amount of minority interest increased to $1,957,000 for the year
ended March 31, 2004, from $1,288,000 for the year ended March 31, 2003, which
reflects that both the electronics and metallic subsidiaries and marketing
subsidiary generated more net income in the fiscal 2004 as compared to fiscal
2003.
Net Income - Net income was $14,720,000 for the year ended March 31, 2004,
an increase of $4,477,000 or 43.7%, as compared to the year ended March 31,
2003, and net income as a percentage of net sales increased to 15.1% from 11.3%.
The increase in net income for fiscal 2004 was primarily the result of the tax
provision of $3.5 million made in fiscal 2003 as a result of the settlement in
July 2003 of the tax dispute with the IRD.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net income for the plastic segment increased by 7.6% to $10,996,000 for
fiscal 2004 compared to $10,223,000 for fiscal 2003. The increase in net income
of the plastic segment was mainly the result of the decrease in income taxes
offsetting the decrease in gross profit described above.
Net income for the electronic & metallic segment increased substantially to
$3,724,000 for fiscal 2004 compared to $20,000 for fiscal 2003. The increase in
net income of the electronic & metallic segment was mainly the result of the
decrease in income taxes, increase in gross profit, decrease in SG&A expenses
and the decrease in Deswell's minority interest in Integrated, as described
above.
Liquidity and Capital Resources
-------------------------------
During the past five years, the Company has relied primarily upon
internally generated funds and short-term borrowings (including trade finance
facilities) to finance its operations and expansion.
As of March 31, 2004, the Company had a working-capital surplus of
$52,876,000 and cash and cash equivalent of $30,193,000. This compares with a
working-capital surplus of $58,223,000 and cash and cash equivalent of
$34,400,000 at March 31, 2003. The decrease in cash and cash equivalent was
mainly attributed to net cash generated from its operating activities of
$20,579,000 and the exercise of stock options of $1,733,000, offset by the cash
dividend distributed of $8,569,000 and the capital investment of $19,862,000
during the year. The increase in capital investment was mainly related to the
construction and purchase of machinery for our new plastic-injection
manufacturing plant in Dongguan and for the acquisition of the electronic and
metal manufacturing factory in July 1003.
The Company has generated sufficient funds from its operating activities to
finance its operations and there is little need for external financing other
than short-term borrowings that are used to finance accounts receivable and are
generally paid with cash generated from operations. The Company has no long-term
debt or short-term borrowings at March 31, 2004.
As of March 31, 2004, the Company had in place general banking facilities
with three financial institutions aggregating approximately $10,118,000. Such
facilities, which are subject to annual review, include overdrafts, letters of
credit, import facilities, trust receipt financing, inward bills financing as
well as fixed loans. As of March 31, 2004, the Company had ( i ) unused credit
facilities of $10,118,000 ( ii ) cash and cash equivalents of $30,193,000 and
( iii ) restricted cash of $390,000, which has been pledged as collateral for
those credit facilities. The restricted cash of $390,000 and leasehold land and
buildings of $1,288,000 have been pledged as collateral for those credit
facilities.
The Company expects that working capital requirements and capital additions
will be funded through a combination of internally generated funds and existing
facilities.
CONTACT: The Investor Relations Group
John G. Nesbett
or Ryan Daniels
212-825-3210
- end -
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
For and on behalf of
Deswell Industries, Inc.
By: /s/ Richard Lau
------------------------
Richard Lau
Chief Executive Officer
Date: June 23, 2004