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 29, 2007
DESWELL INDUSTRIES, INC.
(Registrant's name in English)
17B Edificio Comercial Rodrigues
599 Avenida Da Praia Grande,
Macao, China
(Address of principal executive offices)
DESWELL
Contact:
John G. Nesbett
Institutional Marketing Services (IMS)
203.972.9200
jnesbett@institutionalms.com
DESWELL INDUSTRIES ANNOUNCES
FOURTH QUARTER AND YEAR-END RESULTS
- Net Sales Increase 16% For The Quarter -
- Company also Announces Fourth Quarter Dividend of $0.17 Per Share -
MACAO (June 29, 2007) - Deswell Industries, Inc. (Nasdaq: DSWL) today announced
it financial results for the fourth quarter and year ended March 31, 2007.
Net sales for the year ended March 31, 2007 were $136.8 million, an increase of
18.7% compared to sales of $115.3 million for the year ended March 31, 2006.
Operating income increased 43.4% to $13.7 million, compared to $9.6 million for
the year ended March 31, 2006, and net income increased 38.6% to $12.2 million,
compared to $8.8 million in the previous year. Basic net income per share and
diluted net income per share increased to $0.81 and $0.81, respectively (based
on 14,948,000 and 15,040,000 weighted average shares outstanding, respectively),
compared to $0.59 and $0.59, respectively (based on 14,908,000 and 14,936,000
weighted average shares outstanding, respectively), for the year ended March 31,
2006.
Deswell reported that net sales for the fourth quarter ended March 31, 2007 were
$30.4 million, compared to $26.2 million for the same quarter of 2006, an
increase of 16.0%. Revenues at Deswell's electronic assembly division increased
37.0% in the fourth quarter while revenues at the company's plastics division
decreased 9.1% compared to the corresponding period in the previous year.
Total gross margin decreased to 17.1% in the fourth quarter ended March 31, 2007
from 19.2% in the fourth quarter last year. Gross profit in the plastic segment
increased to 29.4% of net sales for the quarter compared to 24.4% of net sales
for the year-ago quarter. The improved gross margin in the plastic segment was
mainly a combined effect of a change in customer and product mix to higher end
orders and a provision for obsolete stock of $645,000 that had been made in the
quarter last year but not in the quarter ended March 31, 2007. Gross profit in
the electronic and metallic segment decreased to 10.4% of net sales for the
quarter ended March 31, 2007 compared to 14.8% of net sales for the year-ago
quarter. The decrease was mainly attributed to a 3.7% increase in material cost
as a percentage of sales due to a write-off of obsolete stock of $296,000 as
well as a stock provision of $193,000 in the quarter. Furthermore, there was an
approximately 3.8% appreciation in Chinese renminbi currency as compared with
year-ago quarter and labor cost in the electronics division rose to 5.1% of net
sales versus 3.3% of net sales for the quarter a year ago.
Operating income totaled $1.8 million, compared to $0.2 million for the same
quarter of 2006. Net income for the quarter increased to $1.6 million compared
to $0.5 million for the year-ago quarter. Basic net income per share and diluted
net income per share for the quarter increased to $0.10 and $0.10, respectively
(based on 15,023,000 and 15,159,000 weighted average shares outstanding,
respectively), compared to $0.03 and $0.03, respectively (based on 14,924,000
and 14,924,000 weighted average shares outstanding, respectively), for the
quarter ended March 31, 2006.
Other operating income for the quarter increased $1,810,000 to $1,069,000
compared to other expenses of $741,000 for the quarter ended March 31, 2006.
On a segment basis, other operating income attributable to the plastic segment
was $1,147,000, an increase of $1,898,000 as compared with other expenses of
$751,000 for the quarter in last year. The increase was mainly attributed to an
exchange transaction adjustment of $1,166,000 of a subsidiary having a
non-United States dollar functional currency reclassified from the exchange
reserve in this quarter and a doubtful account receivable provision of $970,000
in the quarter ended March 31, 2006 relating to a telecommunication customer's
financial issues due to a failed European product launch but nil in this
quarter. This offset the increase in loss on disposal of fixed assets of $19,000
which is mainly related to the closure of one of our subsidiaries in the quarter
ended March 31, 2007, and the tax refunded on reinvestment of certain retained
earnings in one of our PRC subsidiaries of $173,000 in the quarter last year.
The Company's balance sheet remains strong, with cash and cash equivalents on
March 31, 2007 totaling $24.5 million, compared to $25.4 million on March 31,
2006. Working capital totaled $58.7 million as of March 31, 2007, versus $55.1
million as of March 31, 2006. The Company has no long-term or short-term
borrowings.
Mr. Franki Tse, chief executive officer, commented, "Overall sales growth for
the year was strong driven largely by the sales increase at our electronic
assembly division as a result of our expanding business with some of the top
professional and high end consumer audio companies. There continues to be strong
momentum in this business as our established reputation for manufacturing
quality audio equipment such as professional mixing boards and amplifiers
expands. The decline in plastics revenue in the fourth quarter was largely due
to the timing of new product introductions and we are confident that revenue in
the plastics division will improve over the next few quarters evidenced by a
recent pick-up in mold making activity.
"Nonetheless, increases in the labor rate, tax and renminbi over the course of
the past year have impacted margins. We were able to slightly offset these
increases with the closing of our Shenzhen facility last quarter, and we have
redoubled our efforts to drive costs down to maximize profitability. Capacity
utilization is running at over 95% at our electronics division. In order to
leverage the available space at the plastic factory, we are adding some
electronics manufacturing lines at our plastics facility which also provides
additional synergy between the two divisions."
Mr. Tse concluded, "A key aspect of our long-term strategy is to continue to
enhance our capabilities to provide higher margin products to customers. For
example, at our plastics division we are in the process of installing a new,
state-of-the-art clean room that will have one of the highest quality standards
in the industry."
Fourth Quarter Dividends
------------------------
The Company also announced that on June 26, 2007 its board of directors declared
a dividend of $0.17 per share for the fourth quarter, bringing cash dividends
per share for the year ended March 31, 2007 to $0.68 per share. The dividend
will be payable on July 26, 2007 to shareholders of record as of July 5, 2007.
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.
- more -
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. dollars in thousands, except per share data)
Quarter ended Year ended
March 31, March 31,
--------- --------- --------- ---------
2007 2006 2007 2006
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Net sales $ 30,373 $ 26,183 $ 136,779 $ 115,276
Cost of sales 25,165 21,167 105,506 89,850
--------- --------- --------- ---------
Gross profit 5,208 5,016 31,273 25,426
Selling, general and administrative
Expenses 4,439 4,083 18,957 15,052
Other income/(expenses), net 1,069 (741) 1,376 (823)
--------- --------- --------- ---------
Operating income (note 4) 1,838 192 13,692 9,551
Interest expense -- (6) -- (6)
Non-operating income/(expenses), net 113 135 547 447
--------- --------- --------- ---------
Income before income taxes 1,951 321 14,239 9,992
Income taxes 393 (191) 1,239 (27)
--------- --------- --------- ---------
Income before minority interests 1,558 512 13,000 10,019
Minority interests (4) 59 833 1,240
--------- --------- --------- ---------
Net income $ 1,562 $ 453 $ 12,167 $ 8,779
Other comprehensive income
Foreign currency translation adjustment (1,166) 436 670 436
--------- --------- --------- ---------
Comprehensive income $ 396 $ 889 $ 12,837 $ 9,215
========= ========= ========= =========
Net income per share (note 3) Basic:
Net income per share $ 0.10 $ 0.03 $ 0.81 $ 0.59
========= ========= ========= =========
Weighted average common shares
outstanding (in thousands) 15,023 14,924 14,948 14,908
========= ========= ========= =========
Diluted:
Net income per share (note 3) $ 0.10 $ 0.03 $ 0.81 $ 0.59
========= ========= ========= =========
Weighted average common shares
outstanding (in thousands) 15,159 14,924 15,040 14,936
========= ========= ========= =========
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DESWELL INDUSTRIES, INC.
Consolidated Balance Sheet
(U.S. dollars in thousands)
March 31, March 31,
2007 2006
--------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,549 $ 25,369
Restricted cash -- 649
Marketable securities 107 164
Accounts receivable, net 21,063 18,318
Inventories 29,495 21,845
Prepaid expenses and other current assets 4,999 5,035
Income taxes receivable 130 --
--------- ---------
Total current assets 80,343 71,380
Property, plant and equipment - net 60,157 58,286
Deferred income tax assets -- 294
Goodwill 710 710
--------- ---------
Total assets $ 141,210 $ 130,670
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,865 $ 10,886
Dividend payable -- 2,089
Customer deposits and accrued expenses 5,035 3,107
Deferred income tax 321 --
Income taxes payable 450 184
--------- ---------
Total current liabilities 21,671 16,266
--------- ---------
Minority interests 7,884 7,636
--------- ---------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued and outstanding
15,038,730 shares at March 31, 2007 and
14,923,730 at March 31, 2006 43,024 41,254
Additional paid-in capital 6,970 6,970
Accumulated other comprehensive income 1,106 436
Retained earnings 60,555 58,108
--------- ---------
Total shareholders' equity 111,655 106,768
--------- ---------
Total liabilities and shareholders' equity $ 141,210 $ 130,670
========= =========
- more -
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
( U.S. dollars in thousands )
Year ended
March 31,
---------
2007 2006
-------- --------
(Unaudited) (Audited)
Cash flows from operating activities:
Net income $ 12,167 $ 8,779
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,274 5,299
(Gain)/loss on sale of property, plant and equipment (643) 45
Unrealized holding loss on marketable securities 57 80
Stock-based compensation cost 631 --
Minority interests 833 1,215
Changes in current assets and liabilities:
Accounts receivable (2,745) 6,773
Inventories (7,650) (709)
Prepaid expenses and other current assets 36 (274)
Income taxes receivable (130) 20
Accounts payable 4,979 (5,563)
Customer deposits and accrued expenses 1,928 (2,908)
Deferred income tax 615 (294)
In income taxes payable 266 (141)
-------- --------
Net cash provided by operating activities 15,618 12,322
-------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (7,812) (6,940)
Proceeds from disposal of property, plant and equipment 3,232 50
-------- --------
Net cash used in investing activities (4,580) (6,890)
-------- --------
Cash flows from financing activities
Dividend paid (11,809) (9,400)
Dividends paid to minority shareholders of a subsidiary (582) (1,229)
Contribution from minority shareholders of subsidiaries -- (170)
Exercise of stock options 1,139 352
Decrease in restricted cash 649 391
-------- --------
Net cash used in financing activities (10,603) (7,967)
-------- --------
Net cash effect of translation adjustment (1,255) (169)
Net decrease in cash and cash equivalents (820) (2,704)
Cash and cash equivalents, at beginning of year 25,369 28,073
-------- --------
Cash and cash equivalents, at end of year 24,549 25,369
======== ========
Supplementary disclosures of cashflow information:
Interest -- 6
Income taxes paid, net 487 215
======== ========
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)
======== ========
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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, 2007 and March
31, 2006, the results of operations for the quarters and year ended
March 31, 2007 and March 31, 2006, and the cash flows for the year
ended March 31, 2007 and March 31, 2006. The notes to the Consolidated
Financial Statements contained in the Form 20-F Annual Report filed on
July 14, 2006 under the Securities Exchange Act of 1934 should be read
in conjunction with these Consolidated Financial Statements.
2. Inventories
-----------
March 31, March 31,
2007 2006
--------- ---------
Inventories by major categories :
Raw materials $ 13,267 $ 8,782
Work in progress 10,227 6,932
Finished goods 6,001 6,131
--------- ---------
$ 29,495 $ 21,845
========= =========
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 years ended March 31, 2007 and 2006 were both
from the Company's continuing operations.
4. Restatement of Operating Income
-------------------------------
Other operating income/(expenses) are reclassified in the consolidated
statement of income for the year ended March 31, 2007 for better
presentation. Comparative figures for the year ended March 31, 2006 are
restated accordingly. The restatement of operating income has no impact
on the net income on the consolidated statement of income for the years
ended March 31, 2007 and 2006.
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 and distribution sales of
audio equipments. 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 March 31, 2007 Compared to Quarter Ended March 31, 2006
---------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended March 31, 2007 were
$30,373,000, an increase of $4,190,000, or 16.0%, as compared to the
corresponding period in 2006. The increase in sales was mainly related to the
increase in sales at our electronic and metallic segment of $5,274,000 offset by
the decrease in sales at our plastic segment of $1,084,000. This represented an
increase of 37.0% and a decrease of 9.1% 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 the
decrease in orders from existing customers of $5,403,000 which was partly due to
customers delaying the progress of new model productions, offsetting the
increase in orders from both new and existing customers of $2,583,000 and
$1,736,000, respectively.
The increase in net sales in the electronic and metallic segment was mainly due
to the increase in orders from OEM products from existing customers of
$7,190,000, of which the increase in order of $4,869,000 and $1,356,000 were
related to professional audio equipments and telecommunication equipments
respectively. These increases, together with the increase in distribution sales
of $56,000, offset the decrease in orders of electronics and metallic products
from new and existing customers of $1,201,000 and $771,000 respectively.
Gross Profit - The gross profit for the quarter ended March 31, 2007 was
$5,208,000, representing a gross profit margin of 17.1%. This compares with the
overall gross profit and gross profit margin of $5,016,000 or 19.2% for the
quarter ended March 31, 2006.
Gross profit in the plastic segment increased by $280,000 to $3,186,000 or 29.4%
of net sales, for the quarter ended March 31, 2007 compared to $2,906,000 or
24.4% of net sales, for the quarter ended March 31, 2006. The improved gross
margin was mainly attributed to a change in customer mix and product mix in the
quarter ended March 31, 2007 when comparing with the year ago quarter. Moreover,
there was a stock provision of $645,000 or 5.4% of net sales made in the
corresponding quarter in last year, of which $588,000 was mainly relating to the
discontinuation of a telecommunication customer's European product launch.
Moreover, there was a 20% increase in labor cost and an average of 3.8%
appreciation in Chinese renminbi currency where most of our direct overhead is
denominated as compared with the quarter last year.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross profits in the electronic & metallic segment decreased by $88,000 to
$2,022,000, or 10.4% of net sales, for the quarter ended March 31, 2007 compared
to $2,110,000 or 14.8% of net sales, for the same period last year. The decrease
in gross margin was mainly attributed to an increased material cost of 3.7% as a
percentage of sales, which is due to a write-off of obsolete stock of $296,000
together with a stock provision of $193,000 in the quarter and the appreciation
in Chinese renminbi currency as discussed above. Approximately 18% of material
supplies were denominated in Chinese renminbi. Additionally, the labor rate also
increased by approximately 19% in the quarter as compared with prior year.
Selling, General and Administrative Expenses - SG&A expenses for the quarter
ended March 31, 2007 were $4,439,000, or 14.6% of total net sales, compared to
$4,083,000, or 15.6% of total net sales for the quarter ended March 31, 2006.
There was an increase in selling, general and administrative expenses of
$356,000 over the corresponding period.
The SG&A expenses in the plastic segment increased by $182,000, or 8.2%, to
$2,401,000, or 22.1% of net sales, for the quarter ended March 31, 2007 compared
to $2,219,000 or 18.6% of net sales for the corresponding period in 2006. The
increase was primarily related to the increase in staff cost and welfare
expenses of $226,000 and depreciation expenses of $98,000, offsetting the
savings in other general & administrative expenses of $149,000 upon the closure
of one of our PRC subsidiaries during the quarter.
The SG&A expenses in the electronic & metallic segment increased by $174,000, or
9.3%, to $2,038,000, or 10.4% of net sales, for the quarter ended March 31, 2007
compared to $1,864,000, or 13.1% of net sales for the corresponding period in
2006. The increase was primarily related to the increase in staff cost and
welfare expenses of $165,000, and selling expenses of $29,000 as a result of
increase in headcount for the expansion of our OEM business offsetting the
decrease in depreciation expenses of $13,000.
Other operating income - Other operating income was $1,069,000 for the quarter
ended March 31, 2007, an increase of $1,810,000 as compared to other expenses of
$741,000 for the quarter ended March 31, 2006.
On a segment basis, other operating income attributable to the plastic segment
was $1,147,000, an increase of $1,898,000 as compared with other operating
expenses of $751,000 for the quarter in last year. The increase was mainly
attributed to an exchange transaction adjustment of $1,166,000 of a subsidiary
having a non-United States dollar functional currency reclassified from the
exchange reserve in this quarter and a doubtful account receivable provision of
$970,000 in the quarter ended March 31, 2006 relating to a telecommunication
customer's financial issues due to a failed European product launch but nil in
this quarter. This offset the increase in loss on disposal of fixed assets of
$19,000 which is mainly related to the closure of one of our subsidiaries in the
quarter ended March 31, 2007, and the tax refunded on reinvestment of certain
retained earnings in one of our PRC subsidiaries of $173,000 in the last year
quarter.
Other operating income attributable to the electronic & metallic segment
decreased $88,000 to other operating expense of $78,000 in the quarter ended
March 31, 2007 as compared with other operating income of $10,000 for the
year-ago quarter. This decrease was mainly due to a bad debt write-off of
$142,000 during the quarter ended March 31, 2006 but $nil for this quarter, and
gain on disposal of fixed assets of $147,000 offsetting an increase in exchange
loss of $76,000, and an allowance for doubtful receivable of $174,000 in the
quarter ended March 31, 2007.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Income - Operating income was $1,838,000 for the quarter ended March
31, 2007, an increase of $1,646,000 as compared with the corresponding quarter
in the prior year.
On a segment basis, the operating income of the plastic division increased
$1,996,000 to $1,932,000, or 17.8% of net sales in the quarter ended March 31,
2007 compared to operating loss of $64,000 in corresponding period in 2006.
Operating income in the plastic division increased due to the increase in gross
profit and other operating income offsetting the increase in SG&A expenses as
described above.
The operating income of the electronic & metallic segment decreased $350,000 to
an operating loss of $94,000, in the quarter ended March 31, 2007 compared to
$256,000, or 1.8% of net sales in the corresponding period in 2006. Electronic &
metallic operating income decreased due to the decrease in gross profit coupled
with the increase in SG&A expenses and other operating expenses as described
above.
Non-operating income - Non-operating income for the quarter decreased by $22,000
to $113,000 for the quarter ended March 31, 2007 as compared with the year-ago
quarter. This is mainly attributed to the increase in impairment loss on
marketable securities of $26,000 offsetting the increase in interest income of
$8,000 during the quarter.
Income Taxes - Income tax for the quarter comprised of income tax expenses of
$393,000, as compared with income tax credit of $191,000 in the corresponding
quarter in the prior year.
On a segment basis, the income tax of the plastic segment comprised of income
tax expenses of $187,000 and a deferred income tax of 321,000 for the quarter
ended March 31, 2007, this compared with income tax expenses of $73,000 and
deferred income tax assets of $265,000 for the quarter ended March 31, 2006. The
increase was mainly attributed to the increase in income tax and deferred tax
provision in the quarter. The income tax expenses for the electronic & metallic
segment decreased from $1,000 to a credit of $115,000 for the quarter ended
March 31, 2007. This was mainly due to a recognition of tax refund of $124,000
in the quarter.
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. The
decrease in dollar amount of minority interest to a credit of $4,000 for the
quarter ended March 31, 2007, from $59,000 for the corresponding quarter in the
prior year, represented a decrease in operating income in the electronics and
metallic subsidiaries in the quarter ended March 31, 2007.
Net Income - Net income was $1,562,000 for the quarter ended March 31, 2007, an
increase of $1,109,000 or 244.8%, as compared to net income of $453,000 for the
quarter ended March 31, 2006, and net income as a percentage of net sales
increased from 1.7% to 5.1% for the quarter ended March 31, 2007. The increase
in net income was mainly the result of the increase in other operating income
and the decrease in minority interest offsetting the income in income tax
expenses as described above.
Net income for the plastic segment increased by $1,302,000 to $1,558,000 for the
quarter ended March 31, 2007 compared to $256,000 for the corresponding quarter
in 2006. The increase in net income of the plastic segment was mainly the result
of the increase in operating income offsetting the increase in income tax
expenses as described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net income for the electronic & metallic segment decreased by $193,000 to $4,000
for the quarter ended March 31, 2007 compared to $197,000 for the corresponding
quarter in 2006. The decrease in net income of the electronic & metallic segment
was mainly the result of the decrease in operating income offsetting the
decrease in income tax expenses and minority interest as described above.
Year Ended March 31, 2007 Compared to Year Ended March 31, 2006
---------------------------------------------------------------
Net Sales - The Company's net sales for the year ended March 31, 2007 were
$136,779,000, an increase of $21,503,000 or 18.7% as compared to year ended
March 31, 2006. The increase in sales was mainly related to the increase in
sales at our plastic segment and electronics and metallic segment of $11,161,000
and $10,342,000 respectively. This represented increases of 23.1% and 15.4%
respectively, as compared with the net sales from the segments in the prior
year.
The revenue increase in our plastic segment was mainly a result of the increase
in orders from a telecommunication customer of $7,991,000 and other existing
customers of $3,988,000; and increase in orders from new customers of $9,125,000
over the corresponding period in the prior year. The increase in new orders was
mainly for sales of electronic game and entertainment products. These together
offset the decrease in orders from existing customers of $9,943,000. The net
increase resulted from a change in customer mix as compared with last year.
The revenue increase in our electronic and metallic segment was mainly due to an
increase in orders for electronic products from both existing and new customers
of $11,262,000 and $2,185,000, respectively, offsetting the decrease in orders
from existing customers of $2,462,000 in electronic sales and $638,000 in
metallic sales and $5,000 in distribution sales respectively. The net increase
was the result of a change in business and customer mix during the year 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 year ended March 31, 2007 was
$31,273,000, representing a gross profit margin of 22.9%. This compares with the
overall gross profit and gross profit margin of $25,426,000 or 22.1% for the
year ended March 31, 2006.
Gross profit in the plastics segment increased by $5,647,000 to $18,937,000 or
31.9% of net sales, for the year ended March 31, 2007 compared to $13,290,000 or
27.5% of net sales, for the year ended March 31, 2006. The improved gross margin
was mainly attributed to a change in customer and product mix where lower margin
assembly sales decreased by approximately 36% and higher margin orders increased
during the year as compared with prior year; and our continued tight control of
factory overhead despite the 40.5% increase in labor cost as a result of the
approximately $1,005,000 in severance paid upon the closure of one of our PRC
subsidiaries during the year ended March 31, 2007 and an average 14% increase in
labor rate as compared with last year.
Gross profits in the electronic & metallic segment increased by $200,000 to
$12,336,000, or 15.9% of net sales, for the year ended March 31, 2007 compared
to $12,136,000 or 18.1% of net sales, for the last year. This was mainly
attributed to the change in customer and product mix and the increased material
pricing pressure on some of our electronic materials; an approximately 32%
increase in labor rate and an average of 3.8% appreciation in Chinese renminbi
currency during fiscal year 2007 where most of our direct overheads and
increased local material sourcing are denominated, as compared with last year.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, General and Administrative Expenses - SG&A expenses for the year ended
March 31, 2007 were $18,957,000, amounting to 13.9% of total net sales, as
compared to $15,052,000 or 13.1% of total net sales for the year ended March 31,
2006.
The SG&A expenses in the plastic segment increased by $1,795,000 or 21.1% to
$10,317,000 or 17.4% of net sales, for the year ended March 31, 2007 compared to
$8,522,000 or 17.7% of net sales, for the prior year. The increase was primarily
related to a stock based compensation cost of $820,000, the increase in director
remuneration of $402,000 and approximately $388,000 in severance paid upon the
closure of one of our PRC subsidiaries during the year, coupled with an increase
in selling expenses of $140,000 and depreciation expense of $162,000 as a result
of the increase in sales activities and machinery investment during the year
ended March 31, 2007 as compared with last year.
The SG&A expenses in the electronic & metallic segment increased by $2,110,000
or 32.3% to $8,640,000 or 11.2% of net sales, for the year ended March 31, 2007
compared to $6,530,000 or 9.7% of net sales for the prior year. The increase was
primarily related to the increase in salary expenses and staff welfare expenses
of $1,265,000 and $61,000; as a result of both increase in staff rate and
headcounts in various departments. Moreover, there were an increase in selling
logistic expenses of $438,000 and increase in other general expense of $338,000
during the year, as a result of the increase in sales activities as compared
with last year.
Other operating income - Other operating income was $1,376,000 for the year
ended March 31, 2007, an increase of $2,199,000 as compared with the other
operating expenses of $823,000 for the year ended March 31, 2006.
On a segment basis, other operating income attributable to the plastic segment
increased $2,139,000 to $1,484,000 in the year ended March 31, 2007, as compared
to other expenses of $655,000 for the year ended March 31, 2006. The increase
was mainly attributed to an exchange transaction adjustment of $1,166,000 of a
subsidiary having a non-United States dollar functional currency and a decrease
in doubtful account receivable provision of $766,000 of which $970,000 was
related to a telecommunication customer's financial issues due to a failed
European product launch in the year ended March 31, 2006; This together with the
gain on disposal of fixed assets of $560,000 which is mainly resulted from the
disposal of owned quarter premises upon closure of one of our PRC subsidiaries;
offset the $173,000 tax refund received on our reinvestment of certain retained
earnings in one of our PRC subsidiaries and the increase in other exchange loss
of $163,000 as compared with the prior year.
Other operating income attributable to the electronic & metallic segment
increased $60,000, to operating expenses of $108,000 in the year ended March 31,
2007, as compared to other expenses of $168,000 for the year ended March 31,
2006. This increase was primarily due to the increase in gain on disposal of
fixed assets of $128,000 and the decrease in bad debt write-off of $169,000
offsetting the increase in allowance for doubtful receivables of $206,000 during
the year ended March 31, 2007.
Operating Income - Operating income was $13,692,000 for the year ended March 31,
2007, an increase of $4,141,000, or 43.3% as compared with the prior year.
On a segment basis, the operating income of the plastics segment increased
$5,991,000 to $10,104,000 or 17.0% of net sales, in the year ended March 31,
2007 compared to $4,113,000 or 8.5% of net sales in the prior year. The increase
in operating income was attributable to the increase in gross profit and other
operating income offsetting the increase in SG&A expenses as described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The operating income of electronics & metallic segment decreased $1,850,000 to
$3,588,000 or 4.6% of net sales, in the year ended March 31, 2007 compared to
$5,438,000 or 8.1% of net sales in the prior year. The decrease in operating
income was attributable to the increase in SG&A expenses offsetting the increase
in gross profit and decrease in other operating expenses as described above.
Non-operating income - Non-operating income for the year increased by $100,000
to $547,000 for the year ended March 31, 2007 as compared with last year. This
is mainly attributed to the decrease in impairment loss on marketable securities
of $20,000, the increase in interest income of $55,000 and rental income of
$23,000 in the year as compared with prior year.
Income Taxes - Income tax for the year ended March 31, 2007 comprised of income
tax expenses of $624,000, realization of deferred income tax assets of $294,000
and a deferred tax provision of $321,000, compared with income tax expenses of
267,000 and a deferred income tax credit of $294,000 in the prior year.
On a segment basis, the income tax of the plastic segment comprised of income
tax expenses of $472,000, realization of deferred income tax of $294,000 and a
deferred tax provision of $321,000 for the year ended March 31, 2007, as
compared with income tax expenses of $8,000 and deferred income tax credit of
$294,000 in the prior year. The increase was mainly related to the realization
of deferred income tax assets of $294,000; an under-provision of $253,000 for
taxable year 2004 and 2005 and a current year provision of $197,000 as a result
of the reassessment of the first taxable year from 2004 to 2002 by the PRC Tax
Bureau for a plastic manufacturing subsidiary during the year and a deferred
income tax provided of $321,000. The income tax expenses for the electronic &
metallic segment decreased $107,000 to $152,000 for the year ended March 31,
2007. This was mainly due to recognition of tax refundable of $124,000 for the
year ended March 31, 2007.
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. The decrease in
the dollar amount of minority interest to $833,000 for the year ended March 31,
2007, from $1,240,000 for the prior year, represented the decrease in operating
income in the electronics and metallic subsidiaries during the year.
Net Income - Net income was $12,167,000 for the year ended March 31, 2007, an
increase of $3,388,000 or 38.6%, as compared to net income of $8,779,000 for the
year March 31, 2006. Net income as a percentage of net sales increased from 7.6%
to 8.9% for the year ended March 31, 2007. The increase in net income was mainly
the result of the increase in operating income and the decrease in minority
interest offsetting the increase in income tax expenses, as described above.
Net income for the plastic segment increased by $4,660,000 or 96.9% to
$9,467,000 for the year ended March 31, 2007 compared to $4,807,000 for the
prior year 2006. The increase in net income of the plastic segment was mainly
the result of the increase in operating income offsetting the increase in income
tax expenses, as described above.
Net income for the electronic & metallic segment decreased by $1,271,000 or
32.0% to $2,701,000 for the year ended March 31, 2007 compared to $3,972,000 for
the prior year 2006. The decrease in net income of the electronic & metallic
segment was mainly the result of the decrease in operating income offsetting the
increase in other income, the decrease in income tax expenses and in minority
interest, as described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 March 31, 2007, the Company had a working capital surplus of $58,672,000
and cash and cash equivalents of $24,549,000. This compares with a working
capital surplus of $55,114,000 and cash and cash equivalents of $25,369,000 at
March 31, 2006. The decrease in cash and cash equivalents was mainly attributed
to the capital investment of $7,812,000, dividend distribution of $11,809,000
and dividend distribution to minority shareholders of subsidiaries of $582,000
offsetting the increase in net cash provided by operating activities of
$15,618,000, the exercise of stock options by directors and officers of
$1,139,000 and the decrease in restricted cash of $649,000 during the year ended
March 31, 2007.
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 March 31, 2007.
As of March 31, 2007, the Company had no general banking facilities. The Company
expects that working capital requirements and capital additions will be funded
through internally generated funds.
- 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/ Franki Tse
---------------------------
Franki Tse
Chief Executive Officer
Date: June 27, 2006