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 March 13, 2006
DESWELL INDUSTRIES, INC.
(Registrant's name in English)
Unit 516 517, Hong Leong Industrial Complex,
No. 4 Wang Kwong Road, Kowloon Bay,
Kowloon, Hong Kong
(Address of principal executive offices)
Deswell Industries, Inc. Announces Third Quarter Results;
Company Also Announces Third Quarter Dividend of $0.14 Per Share
MACAU--(BUSINESS WIRE)--March 13, 2006--Deswell Industries, Inc. (Nasdaq:
DSWL) today announced it financial results for the third quarter and nine months
ended December 31, 2005.
Deswell reported that net sales for the third quarter ended December 31,
2005 were $30.0 million, compared to $36.2 million for the same quarter of 2004,
a decrease of 17.2%. Operating income totaled $2.7 million, compared to $4.8
million for the same quarter of 2004, a decrease of 44.4%. Net income for the
quarter decreased 43.4% to $2.4 million compared to $4.2 million for the
year-ago quarter. Basic earnings per share and diluted earnings per share for
the quarter decreased to $0.16 and $0.16, respectively (based on 14,924,000 and
14,924,000 weighted average shares outstanding, respectively), compared to $0.30
and $0.30, respectively (based on 14,074,000 and 14,114,000 weighted average
shares outstanding, respectively), for the quarter ended December 31, 2004.
Net sales for the nine months ended December 31, 2005 were $89.1 million, a
decrease of 8.1% compared to sales of $96.9 million for the corresponding period
in 2004. Operating income decreased 33.3% to $9.4 million, compared to $14.1
million for the nine months of fiscal 2005, and net income decreased 29.6% to
$8.3 million, compared to $11.8 million in the previous year. Basic earnings per
share and diluted earnings per share for the nine months decreased to $0.56 and
$0.56, respectively (based on 14,903,000 and 14,931,000 weighted average shares
outstanding, respectively), compared to $0.85 and $0.84, respectively (based on
13,861,000 and 14,109,000 weighted average shares outstanding, respectively),
for the nine months ended December 31, 2004.
The Company's balance sheet remains strong, with cash and cash equivalents
on December 31, 2005 totaling $24.6 million, compared to $28.1 million on March
31, 2005. Working capital totaled $57.4 million as of December 31, 2005, versus
$57.6 million as of March 31, 2005. The Company has no long-term or short-term
borrowings.
Mr. Richard Lau, chief executive officer, commented, "In our plastics
division, we saw a 26.5% decrease in sales due to a significant decrease in
orders from a telecommunications customer coupled with delayed new product
introductions across our customer base. We are very focused on expanding our
customer base, and hope to see some revenues in the September quarter as a
result of current business development. Our new facility is unquestionably one
of the best in the industry. While the sales cycle in our business is long, we
are seeing significant interest from quality potential customers touring our
factory. Gross margins in our plastics division decreased to 25% of sales from
34% of sales for the quarter. Labor rates increased 26% during the year, and we
continued to see very high resin prices. Resin typically accounts for
approximately 40% of our cost of sales at our plastics division."
Mr. Lau continued, 'Our electronics and metals division experienced a 7.9%
decrease in sales during the quarter. Some of that decrease was due to the
shortage of certain materials that delayed production and shipments in the
quarter. Even with the decrease in sales, we are confident that we will see
long-term growth in this segment of our business. We have established a very
strong brand over the past decade as a preeminent manufacturer in the audio
equipment industry. Furthermore, in 2005 we initiated a new division to help
companies distribute audio equipment in China. During the quarter we realized
over half a million in revenues from this initiative. Gross profits in the
electronic & metallic segment increased by $55,000 to $3,248,000, or 19.5% of
net sales, for the quarter compared to $3,193,000 or 17.6% of net sales, for the
same period last year. This was mainly due to improved pricing on materials and
tighter overhead control."
Mr. Lau concluded, "We were able to reduce our SG&A by 15% for the quarter.
Nonetheless, while our business is still extremely profitable, we saw a decrease
in our earnings. We don't expect our performance to change significantly in the
next few quarters. Longer term, we remain very confident that our
state-of-the-art injection molding facility and leadership in audio
manufacturing, coupled with our healthy balance sheet, position us well for
long-term growth."
Third Quarter Dividends
The Company also announced that on March 9, 2006 its board of directors
declared a dividend of $0.14 per share for the third quarter. The dividend will
be payable on April 11, 2006 to shareholders of record as of March 31, 2006.
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 Digidesign Inc., Vtech Telecommunications Ltd.,
Epson Precision (H.K.) Ltd., Inter-Tel Incorporated, Line 6 Manufacturing and
Peavey Electronics Corporation.
To learn more about Deswell Industries, Inc., please visit the Company's
web site at www.deswell.com.
Forward-Looking Statements
Statements in this press release that are "forward-looking statements" are
based on current expectations and assumptions that are subject to risks and
uncertainties. For example, our statements regarding our expected growth in
sales from the electronic and metallic division in the coming year and our
efforts to reduce overhead costs in our plastic division are forward-looking
statements. Actual results could differ materially because of the following
factors, among others, which may cause revenues and income to fall short of
anticipated levels or our overhead expenses to increase: our dependence on a few
major customers; vigorous competition forcing product price reductions or
discounts; the timing and amount of significant orders from our relatively few
significant customers; continuing increases in resin prices that cannot be
passed on to customers; unexpected production delays; obsolete inventory or
product returns; losses resulting from fraudulent activity of our customers or
employees; labor shortages that increase labor and costs; changes in the mix of
product products we manufacture and sell; adverse currency fluctuations in the
renminbi and Hong Kong dollar when translated to US dollars; potential new
accounting pronouncements; and the effects of travel restrictions and
quarantines associated with major health problems, such as the Severe Acute
Respiratory Syndrome, on general economic activity.
For further information regarding risks and uncertainties associated with
the Company's business, please refer to the "Risk Factors" section of Company's
Annual Report on Form 20-F, copies of which may be obtained from the Website
maintained by the Securities and Exchange Commission at http://www.sec.gov.
All information in this release is made as of the date of this press
release. Deswell undertakes no duty to update any forward-looking statement to
conform the statement to actual results or changes in Deswell's expectations.
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
( U.S. dollars in thousands, except per share data )
Quarter ended Nine months ended
December 31, December 31,
----------------- -----------------
2005 2004 2005 2004
-------- ------- -------- -------
(Unaudited) (Unaudited)
Net sales $29,972 $36,185 $89,093 $96,897
Cost of sales 23,411 26,783 68,683 70,716
-------- -------- -------- --------
Gross profit 6,561 9,402 20,410 26,181
Selling, general and
administrative expenses 3,872 4,565 10,969 12,033
-------- -------- -------- --------
Operating income 2,689 4,837 9,441 14,148
Interest expense - (4) - (7)
Other income, net 111 30 230 92
-------- -------- -------- --------
Income before income taxes 2,800 4,863 9,671 14,233
Income taxes 90 179 164 488
-------- -------- -------- --------
Income before minority interests 2,710 4,684 9,507 13,745
Minority interests 330 477 1,181 1,915
-------- -------- -------- --------
Net income $ 2,380 $ 4,207 $ 8,326 $11,830
======== ======== ======== ========
Basic earnings per share $ 0.16 $ 0.30 $ 0.56 $ 0.85
======== ======== ======== ========
Weighted average number of shares
outstanding (in thousands) 14,924 14,074 14,903 13,861
======== ======== ======== ========
Diluted earnings per share $ 0.16 $ 0.30 $ 0.56 $ 0.84
======== ======== ======== ========
Diluted weighted average number of
shares outstanding (in thousands) 14,924 14,114 14,931 14,109
======== ======== ======== ========
DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(U.S. dollars in thousands)
December 31, March 31,
2005 2005
------------ -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,610 $ 28,073
Restricted cash 646 1,040
Marketable securities 182 244
Accounts receivable, net 23,495 25,091
Inventories 23,096 21,136
Prepaid expenses and other current
assets 5,518 4,761
Income taxes receivable - 20
------------ -----------
Total current assets 77,547 80,365
Property, plant and equipment - net 57,831 56,133
Goodwill 710 478
------------ -----------
Total assets $ 136,088 $ 136,976
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,781 $ 16,449
Customer deposits and accrued expenses 5,998 6,015
Income taxes payable 327 325
------------ -----------
Total current liabilities 20,106 22,789
------------ -----------
Deferred income tax - -
------------ -----------
Minority interests 7,577 9,420
------------ -----------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued
and outstanding 14,923,730 shares at
December 31, 2005 and 14,778,730 at
March 31, 2005 41,254 39,068
Additional paid-in capital 6,970 6,970
Exchange Reserve 436 -
Retained earnings 59,745 58,729
------------ -----------
Total shareholders' equity 108,405 104,767
------------ -----------
Total liabilities and
shareholders' equity $ 136,088 $ 136,976
============ ===========
CONTACT: IMS
John G. Nesbett, 212-668-0813
jnesbett@institutionalms.com
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
( U.S. dollars in thousands )
Nine months ended
December 31,
------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 8,326 $ 11,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,004 3,667
Gain/(loss) on sale of property, plant and equipment 7 32
Foreign exchange gain (169) -
Minority interests 1,156 1,915
Deferred taxes - (15)
Changes in current assets and liabilities:
Accounts receivable 1,596 (13,435)
Marketable securities 62 -
Inventories (1,960) (5,307)
Prepaid expenses and other current assets (757) (1,341)
Income taxes receivable 20 127
Accounts payable (2,668) 7,307
Customer deposits and accrued expenses (17) 677
In income taxes payable 2 293
--------- ---------
Net cash provided by operating activities 9,602 5,750
--------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (5,106) (13,210)
Proceeds from disposal of property, plant and equipment 4 20
--------- ---------
Net cash used in investing activities (5,102) (13,190)
--------- ---------
Cash flows from financing activities
Common stock issued 352 7,210
Dividends paid to minority shareholders of a subsidiary (1,229) (457)
Contribution from minority shareholders of a subsidiary (170) (26)
Dividend paid (7,310) (6,675)
Increase in bank loan - 903
Increase in restricted cash 394 (649)
--------- ---------
Net cash (used in)/provided by financing activities (7,963) 306
--------- ---------
Net decrease in cash and cash equivalents (3,463) (7,134)
Cash and cash equivalents, at beginning of period 28,073 30,193
--------- ---------
Cash and cash equivalents, at end of period 24,610 23,059
========= =========
Supplementary disclosures of cashflow information:
Cash paid during the period for:
Interest - 7
Income taxes 142 83
========= =========
Supplementary disclosures of significant non-cash
transactions:
Issuance of common stock in connection of acquisition
of Additional 5% shareholdings of a subsidiary 1,834 -
Excess of acquisition cost over the fair value of
acquired net assets of additional 5% shareholdings of
a subsidiary (234) -
========= =========
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 December 31, 2005 and March 31, 2005, the
results of operations for the quarters and nine months ended December 31,
2005 and December 31, 2004, and the cash flows for the nine months ended
December 31, 2005 and December 31, 2004. The notes to the Consolidated
Financial Statements contained in the Form 20-F Annual Report filed on July
8, 2005 under the Securities Exchange Act of 1934 should be read in
conjunction with these Consolidated Financial Statements.
2. Doubtful Sales
--------------
The Company has made a provision for doubtful sales of approximately $1,006
for the quarter and six months ended September 2005 in connection with
certain transactions. These transactions, which consisted of orders
primarily from three customers for products of the metallic parts division
of the Company's electronic & metallic business segment that were shown as
shipped to and received by the customers but in fact had been
surreptitiously cancelled without shipment. The Company discovered these
matters in October 2005 when documentation reflecting the cancellation of
the orders was uncovered following the departure of the General Manager of
the Company's metallic parts division who, with the assistance of a
Production and Materials Control Supervisor in that division (who has since
resigned), had previously concealed such documentation. These matters have
been disclosed to the Audit Committee of the Board of Directors and to the
Company's independent registered public accountants. Based on the
recommendations of the Audit Committee, the Company has retained
independent forensic accountants to continue the investigation, reported
the matter to the local police for investigation and prosecution and
retained local counsel to consider and advise the Company concerning
appropriate legal proceedings against the former General Manager of the
Company's metallic parts division.
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
potentially dilutive 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 potentially dilutive 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 nine months ended December 31, 2005 and 2004 were
both from the Company's continuing operations.
4. Stock Split
-----------
On February 22, 2005, the Company announced that it was effecting a
three-for-two stock split of its outstanding shares to holders of record on
March 15, 2005 and payable on March 29, 2005.
The common stock, additional paid-in capital and earnings per shares are
presented with regard to the effects of stock split on March 15, 2005.
5. Inventories
-----------
December 31, March 31,
2005 2005
------------ ---------
Inventories by major categories :
Raw materials $ 9,668 $ 8,329
Work in progress 7,887 8,088
Finished goods 5,541 4,719
------------ ---------
$ 23,096 $ 21,136
============ =========
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 less expensive labor rates as compared
with Hong Kong.
Quarter Ended December 31, 2005 Compared to Quarter Ended December 31, 2004
---------------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended December 31, 2005 were
$29,972,000, a decrease of $6,213,000, or 17.2%, as compared to the
corresponding period in 2004. The decrease in sales was mainly related to the
decrease in sales at our injection-molded plastic segment and electronic and
metallic segment of $4,777,000 and $1,436,000 respectively. This represented
decreases of 26.5% and 7.9% respectively, as compared with the net sales from
these segments in the corresponding period in the prior year.
The revenue decrease at our plastic segment was mainly the result of a decrease
in telecommunication product orders from a major customer of $948,000 as we
chose not to take on significantly lower margin business; and the decrease in
orders from existing customers of $6,909,000 which was partly due to customers
delaying the progress of new model productions. These factors offset the
increase in orders from both new and existing customers of $1,644,000 and
$1,436,000, respectively.
The decrease in net sales in the electronic and metallic segment was mainly due
to the decrease in orders from OEM products from existing customers of
$2,668,000 and the decrease in orders of metallic products of $248,000. Orders
from new OEM customers totalled $906,000. Furthermore, the electronic and
metallic segment's audio equipment distribution business, established in January
of 2005, realized an increase in sales of $574,000 during the quarter. The
decrease in sales for OEM products from existing customers were partly due to
the shortage in certain material supplies that delayed some production and
shipments in the quarter, as well as some customers delaying the progress of new
model productions and our strategy of focusing on higher margin production.
Gross Profit - The gross profit for the quarter ended December 31, 2005 was
$6,561,000, representing a gross profit margin of 21.9%. This compares with the
overall gross profit and gross profit margin of $9,402,000 or 26.0% for the
quarter ended December 31, 2004.
Gross profit in the plastic segment decreased by $2,896,000 to $3,313,000 or
25.0% of net sales, for the quarter ended December 31, 2005 compared to
$6,209,000 or 34.4% of net sales, for the quarter ended December 31, 2004. This
was mainly attributed to an average 26% increase in labor rate and an average of
2% appreciation in Chinese renminbi currency where most of our direct overhead
is denominated, as compared with the quarter last year. The plastic resin cost
was still high and there was no material fluctuation as compared same quarter of
last year.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross profits in the electronic & metallic segment increased by $55,000 to
$3,248,000, or 19.5% of net sales, for the quarter ended December 31, 2005
compared to $3,193,000 or 17.6% of net sales, for the same period last year.
This was mainly attributed to the strengthening material sourcing strategy and
tightened overhead control during the quarter as compared with last year despite
an increase in labor rate of an average 22% as compared with prior year.
Selling, General and Administrative Expenses - SG&A expenses for the quarter
ended December 31, 2005 were $3,872,000, amounting to 12.9% of total net sales,
as compared to $4,565,000 or 12.6% of total net sales for the quarter ended
December 31, 2004. There was a decrease in selling, general and administrative
expenses of $693,000 over the corresponding period.
The SG&A expenses in the plastic segment decreased by $981,000 or 31.4% to
$2,146,000 or 16.2% of net sales, for the quarter ended December 31, 2005
compared to $3,127,000 or 17.3% of net sales, for the corresponding period in
2004. The decrease was primarily related to savings in administration expenses
of $421,000 as a result of the closure of one marketing subsidiary at the
beginning of 2005, coupled with a decrease in selling expenses of $22,000 as a
result of the decrease in sales activities during the quarter, the decrease in
depreciation expenses of $44,000 and the decrease in salaries expenses of
$545,000 offsetting the increase in other general expenses of $51,000.
The SG&A expenses in the electronic & metallic segment increased by $288,000 or
20.0% to $1,726,000 or 10.3% of net sales, for the quarter ended December 31,
2005 compared to $1,438,000 or 7.9% of net sales for corresponding period in
2004. The increase was primarily related to the increase in salary expenses and
selling expenses of $184,000 and $77,000 respectively as a result of an increase
in headcount for the expansion of our distribution and OEM business, as well as
a $17,000 increase in traveling expenses offset by a $11,000 decrease in
depreciation expenses during the quarter.
Operating Income - Operating income was $2,689,000 for the quarter ended
December 31, 2005, a decrease of $2,148,000, or 44.4% as compared with the
corresponding quarter in the prior year.
On a segment basis, the operating income of the plastic division decreased
$1,915,000 to $1,167,000 or 8.8% of net sales, in quarter ended December 31,
2005 compared to $3,082,000 or 17.1% of net sales in corresponding period in
2004. Operating income in the plastic division decreased due to a decrease in
gross profit slightly offset by the decrease in SG&A expenses as described
above.
The operating income of the electronic & metallic segment decreased $233,000 to
$1,522,000 or 9.1% of net sales, in the quarter ended December 31, 2005 compared
to $1,755,000 or 9.7% of net sales in the corresponding period in 2004.
Electronic & metallic operating income decreased due to the increase in SG&A
expenses slightly offset by the increase in gross profit as described above.
Other income - Other income was $111,000 for the quarter ended December 31,
2005, an increase of $81,000 as compared with the corresponding period in the
prior year.
On a segment basis, other income attributable to the plastic segment increased
$89,000 to $156,000 in the quarter ended December 31, 2005. This increase in
other income was mainly attributed to the increase in interest income of
$117,000 resulted from the increase in interest rates, offsetting the decrease
in exchange gain of $24,000 as compared with corresponding period in 2004.
Other income attributable to the electronic & metallic segment decreased $8,000
to other expenses of $45,000 in the quarter ended December 31, 2005. This
decrease in other income was mainly due to the increase in exchange loss of
$45,000 offsetting the increase in interest income of $31,000 and other scrap
sale income of $6,000 as compared with corresponding period in 2004.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes - Income tax expenses for the quarter were $90,000, a decrease of
$89,000 as compared with the corresponding quarter in the prior year. On a
segment basis, the income taxes of theplastic segment decreased $112,000 to $nil
for the quarter ended December 31, 2005. The decrease was a result of taxable
losses incurred in the manufacturing subsidiaries as a result of the decrease in
sales during the quarter and the tax concession received by a trading
subsidiary. The income tax expenses for the electronic & metallic segment
increased $23,000 to $90,000 for the quarter ended December 31, 2005.
Minority Interest - Minority interests represent a 24% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries. In April 2005, the Company
acquired an additional 5% interest in Integrated, increasing its ownership in
that subsidiary from 71% to 76%. In June 2005, the Company liquidated the
marketing subsidiary in which it previously held a 49% minority interest. As a
result of the decrease in minority interest in Deswell's electronic & metallic
segment and the marketing subsidiary, the dollar amount of minority interest
decreased to $330,000 for the quarter ended December 31, 2005, from $477,000 for
the corresponding quarter in the prior year. This represented a decrease in
minority interest of $141,000 in the electronics and metallic subsidiaries,
together with the decrease in minority interest from $6,000 in the quarter ended
December 31, 2004 to nil in the marketing subsidiary in the quarter ended
December 31, 2005.
Net Income - Net income was $2,380,000 for the quarter ended December 31, 2005,
a decrease of $1,827,000 or 43.4%, as compared to net income of $4,207,000 for
the quarter ended December 31, 2004, and net income as a percentage of net sales
decreased from 11.6% to 7.9% for the quarter ended December 31, 2005. The
decrease in net income was mainly the result of the decrease in operating income
offsetting the increase in other income, the decrease in minority interest and
income tax expense as described above.
Net income for the plastic segment decreased by 56.4% to $1,323,000 for the
quarter ended December 31, 2005 compared to $3,031,000 for the corresponding
quarter in 2004. The decrease in net income of the plastic segment was mainly
the result of the decrease in operating income offsetting the decrease in income
tax expenses and increase in other income as described above.
Net income for the electronic & metallic segment decreased by 10.1% to
$1,057,000 for the quarter ended December 31, 2005 compared to $1,176,000 for
the corresponding quarter in 2004. The decrease in net income of the electronic
& metallic segment was mainly the result of the decrease in operating income,
the decrease in other income and the increase in income tax expenses as
described above.
Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31,
------------------------------------------------------------------------------
2004
----
Net Sales - The Company's net sales for the nine months ended December 31, 2005
were $89,093,000, a decrease of $7,804,000 or 8.1% as compared to corresponding
period in 2004. The decrease in sales was mainly related to the decrease in
sales at our plastic segment of $9,961,000 or 21.5% offsetting the increase in
sales of electronics and metallic segment of $2,157,000 or 4.3%, as compared
with the corresponding period in the prior year.
The revenue decrease at our plastic segment was mainly a result of the decrease
in telecommunication product orders from a major customer of $6,529,000 as we
chose not to take on significantly lower margin business; and the decrease in
orders from existing customers of $7,702,000 which was partly due to a customer
delaying the progress of new model productions. These together offset the
increase in orders from both new and existing customers of $3,491,000 and
$779,000.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in net sales in the electronic and metallic segment was mainly due
to an increase in orders for electronic products from both existing and new
customers of $3,079,000 and $1,152,000, respectively, and an increase in sales
of $1,487,000 in the audio equipment distribution business in the nine months.
This business was newly established in January 2005. These factors together
offset the net decrease in orders from customers of electronic products and
metallic products of $1,469,000 and $2,092,000, respectively. The net increase
was the result of a change in business and customer mix during the period as
compared with last year. The increase in sales in the OEM products was mainly
for sales of professional audio equipment products.
Gross Profit - The gross profit for the nine months ended December 31, 2005 was
$20,410,000, representing a gross profit margin of 22.9%. This compares with the
overall gross profit and gross profit margin of $26,181,000 or 27.0% for the
nine months ended December 31, 2004.
Gross profit in the plastics segment decreased by $5,801,000 to $10,384,000 or
28.6% of net sales, for the nine months ended December 31, 2005 compared to
$16,185,000 or 35.0% of net sales, for the nine months ended December 31, 2004.
This was mainly attributed to the increased plastic resin costs which could not
be reflected in the selling price to customers, an average 21% increase in labor
rate and an average 2% appreciation in Chinese renminbi currency in the quarter
ended September 30, 2005 where most of our direct overhead is denominated, as
compared with last year.
Gross profit in the electronic & metallic segment increased by $30,000 to
$10,026,000 or 19.0% of net sales, for the nine months ended December 31, 2005
compared to $9,996,000 or 19.8% of net sales, for the same period last year.
This was mainly attributed to the combined effect of the strategy of offering
volume pricing for large orders obtained by the electronics division in view of
the keen competition in the market, the strengthened material sourcing strategy,
and tightened overhead control during the period as compared with last year
despite an increase in labor rate of an average 12% as compared with prior year.
Selling, General and Administrative Expenses - SG&A expenses for the nine months
ended December 31, 2005 were $10,969,000, amounting to 12.3% of total net sales,
as compared to $12,033,000 or 12.4% of total net sales for the nine months ended
December 31, 2004.
The SG&A expenses in the plastic segment decreased by $1,416,000 or 18.3% to
$6,303,000 or 17.3% of net sales, for the nine months ended December 31, 2005
compared to $7,719,000 or 16.7% of net sales, for the corresponding period in
2004. The decrease was primarily related to the savings in administration
expenses of $816,000 as a result of the closure of one marketing subsidiary at
the beginning of the year 2005; the decrease in salaries, selling and
depreciation expenses of $539,000, $13,000 and $79,000 respectively; and the
continuing efforts of tightening other general expenses of $14,000 offsetting
the increase in legal and professional expenses of $45,000.
The SG&A expenses in the electronic & metallic segment increased by $352,000 or
8.2% to $4,666,000 or 8.8% of net sales, for the nine months ended December 31,
2005 compared to $4,314,000 or 8.5% of net sales for corresponding period in
2004. The increase was primarily related to the increase in salaries expenses of
$154,000, selling & logistic expenses of $130,000, traveling expenses of
$39,000, financial expenses of $11,000 and other general expenses of $36,000 as
a result of the expansion in distribution and the increase in sales activities
during the period.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Income - Operating income was $9,441,000 for the nine months ended
December 31, 2005, a decrease of $4,707,000, or 33.3% as compared with the
corresponding period in the prior year.
On a segment basis, the operating income of the plastics segment decreased
$4,385,000 to $4,081,000 or 11.2% of net sales, in the nine months ended
December 31, 2005 compared to $8,466,000 or 18.3% of net sales in corresponding
period in 2004. The decrease in operating income was attributable to the
decrease in gross profit offsetting the decrease in SG&A expenses as described
above.
The operating income of electronics & metallic segment decreased $322,000 to
$5,360,000 or 10.2% of net sales, in the nine months ended December 31, 2005
compared to $5,682,000 or 11.2% of net sales in the corresponding period in
2004. The decrease in operating income was attributable to the increase in SG&A
expenses offsetting the increase in gross profit as described above.
Other income - Other income was $230,000 for the nine months ended December 31,
2005, an increase of $138,000 or 150.0% as compared with the corresponding
period in the prior year. On a segment basis, other income attributable to the
plastic segment increased $287,000 to $376,000 in the nine months ended December
31, 2005. The increase in other income was primarily attributable to the
increase in interest income of $212,000, the increase in exchange gain of
$52,000 and the decrease in loss on disposal of fixed assets of $17,000 in the
nine months ended December 31, 2005 as compared with corresponding period in
2004.
Other income attributable to the electronic & metallic segment decreased
$149,000, to other expenses of $146,000 in the nine months ended December 31,
2005. This decrease in other income was mainly due to the increase in exchange
loss of $86,000, an unrealized loss on revaluation of marketable securities of
$60,000, increase in provision for doubtful debt of $8,000 and decrease in
dividend income from investment securities of $6,000 offsetting the increase in
interest income of $42,000 in the nine months ended December 31, 2005.
Income Taxes - Income taxes expenses for the nine months ended December 31, 2005
were $164,000, a decrease of $324,000 or 66.4% as compared with the
corresponding period in the prior year. On a segment basis, the income taxes of
plastic segment decreased $206,000 from $112,000 for the nine months ended
December 31, 2005 whereas the income tax expenses for the electronic & metallic
segment decreased $118,000 to $258,000 for the nine months ended December 31,
2005, respectively. The decrease in the plastic segment was primarily due to a
tax refund of $173,000 on reinvestment of some of the retained earnings in one
of our manufacturing subsidiaries offsetting a tax provision of $78,000 during
the nine months ended December 31, 2005. Moreover, one of our manufacturing
subsidiaries realized a tax holidays in 2005 and our trading subsidiary is also
realized a tax concession. The decrease in income tax expenses in the electronic
& metallic segment was primarily due to the write off of doubtful sales of the
metal division of $1,006,000 in the quarter ended September 30, 2005 and our
trading subsidiary enjoyed a tax concession.
Minority Interest - Minority interests represent a 24% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries. In April 2005, the Company
acquired an additional 5% interest in Integrated, increasing its ownership in
that subsidiary from 71% to 76%. In June 2005, the Company liquidated the
marketing subsidiary in which it held a 49% minority interest. As a result of
the decrease in minority interest in Deswell's electronic & metallic segment and
the marketing subsidiary, the dollar amount of minority interest decreased to
$1,181,000 for the nine months ended December 31, 2005, from $1,915,000 for the
corresponding period in the prior year. This represented a decrease in minority
interest of $343,000 in the electronics and metallic subsidiaries, and a
decrease in the minority interest in the companies marketing subsidiary from
$391,000 to nil.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Income - Net income was $8,326,000 for the nine months ended December 31,
2005, a decrease of $3,504,000 or 29.6%, as compared to net income of
$11,830,000 for the nine months ended December 31, 2004. Net income as a
percentage of net sales decreased from 12.2% to 9.3% for the nine months ended
December 31, 2005. The decrease in net income was mainly the result of the
decrease in operating income offsetting the increase in other income and the
decrease in income tax expenses and minority interest, as described above.
Net income for the plastic segment decreased by $3,500 or 43.5% to $4,551,000
for the nine months ended December 31, 2005 compared to $8,051,000 for the
corresponding period in 2004. The decrease in net income of the plastic segment
was mainly the result of the decrease in operating profits offsetting the
increase in other income and the decrease in income tax and minority interest as
described above.
Net income for the electronic & metallic segment decreased by $4,000 or 0.1% to
$3,775,000 for the nine months ended December 31, 2005 compared to $3,779,000
for the corresponding period in 2004. The decrease in net income of the
electronic & metallic segment was mainly the result of the decrease in operating
profit and other income offsetting the decrease in income tax expenses and
minority interest, as described above.
Liquidity and Capital Resources
-------------------------------
Traditionally, 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 December 31, 2005, the Company had a working capital surplus of
$57,441,000 and cash and cash equivalents of $24,610,000. This compares with a
working capital surplus of $57,576,000 and cash and cash equivalents of
$28,073,000 at March 31, 2005. The decrease in cash and cash equivalents was
mainly attributed to the capital investment of $5,106,000, dividend distribution
of $7,310,000 and dividend distribution to minority shareholders of subsidiaries
of $1,229,000 offsetting the increase in net cash provided by operating
activities of $9,602,000, the exercise of stock options by directors and
officers of $352,000 and the decrease in restricted cash of $394,000 during the
nine months ended December 31, 2005.
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
short-term borrowings and long-term borrowings at December 31, 2005.
As of December 31, 2005, the Company had in place general banking facilities
with a financial institution aggregating approximately $1,285,000. 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 December 31, 2005, the Company had ( i ) unused
credit facilities of $1,285,000 ( ii ) cash and cash equivalents of $24,610,000
and ( iii ) restricted cash of $646,000, which has 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.
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: March 13, 2006