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 23, 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. LOGO]
Contact:
John G. Nesbett
IMS
212-668-0813
DESWELL INDUSTRIES, INC. ANNOUNCES
FOURTH QUARTER AND YEAR-END RESULTS
- Company also Announces Fourth Quarter Dividend of $0.14 Per Share -
MACAO (June 23, 2006) - Deswell Industries, Inc. (Nasdaq: DSWL) today announced
it financial results for the fourth quarter and year ended March 31, 2006.
Deswell reported that net sales for the fourth quarter ended March 31, 2006 were
$26.2 million, compared to $28.7 million for the same quarter of 2005, a
decrease of 8.7%. Operating income totaled $0.9 million, compared to $3.6
million for the same quarter of 2005. Net income for the quarter decreased to
$0.5 million compared to $3.4 million for the year-ago quarter. Basic earnings
per share and diluted earnings per share for the quarter decreased to $0.03 and
$0.03, respectively (based on 14,924,000 and 14,924,000 weighted average shares
outstanding, respectively), compared to $0.23 and $0.23, respectively (based on
14,690,000 and 14,777,000 weighted average shares outstanding, respectively),
for the quarter ended March 31, 2005.
Net sales for the year ended March 31, 2006 were $115.3 million, a decrease of
8.2% compared to sales of $125.6 million for the year ended March 31, 2005.
Operating income decreased 41.6% to $10.4 million, compared to $17.8 million for
the year ended March 31, 2005, and net income decreased 42.2% to $8.8 million,
compared to $15.2 million in the previous year. Basic earnings per share and
diluted earnings per share decreased to $0.59 and $0.59, respectively (based on
14,908,000 and 14,936,000 weighted average shares outstanding, respectively),
compared to $1.04 and $1.02, respectively (based on 14,656,000 and 14,933,000
weighted average shares outstanding, respectively), for the year ended March 31,
2005.
Total gross margin decreased to 19.2% in the fourth quarter ended March 31, 2006
from 25.6% in the fourth quarter last year. Gross profit in the plastic segment
decreased to 24.4% of net sales for the quarter ended March 31, 2006 compared to
34.3% of net sales for the year-ago quarter. The decrease was mainly due to a
provision for obsolete stock of $645,000 made in the quarter ended March 31,
2006. Furthermore, plastic resin costs remain high. Gross profit in the
electronic and metallic segment decreased to 14.8% of net sales for the quarter
ended March 31, 2006 compared to 18.0% of net sales for the year-ago quarter.
The decrease was mainly due to an increased charge of $407,000, for value-added
taxation (VAT).
Other income for the quarter was a loss of $606,000 for the quarter ended March
31, 2006, an increase in expenses of $856,000 as compared to other income of
$250,000 for the quarter ended March 31, 2005.
On a segment basis, other expenses attributable to the plastic segment were
$623,000, an increase of $639,000 as compared with other income of $16,000 for
the quarter in last year. The increase was mainly attributed to a doubtful
account's 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. This offset the tax refunded on reinvestment of certain
retained earnings in one of our PRC subsidiaries of $173,000; the increase in
interest income of $68,000 resulted from the increase in interest rates and
other income of $95,000 as compared with the corresponding period in 2005.
The Company's balance sheet remains strong, with cash and cash equivalents on
March 31, 2006 totaling $25.4 million, compared to $28.1 million on March 31,
2005. Working capital totaled $55.1 million as of March 31, 2006, 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 10.5% decrease in sales in the quarter due to a $3.9 million decrease
in business from a printer customer which could not be offset by increasing
orders from some long standing as well as newer customers. Our electronics and
metals division experienced a 7.2% 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."
Mr. Lau continued, "The profitability of our business has also been impacted by
raw material prices and labor rate increases. The margin decrease was compounded
by the write-off of obsolete stock of $645,000 in the plastic segment and
$342,000 in the electronic & metallic segment, respectively during the year. A
total of $1.6 million in write-offs for stock and doubtful account receivables
in the fourth quarter, coupled with a $1 million write-off of doubtful sales in
relation to our metallic parts division in the quarter ended September 2005,
contributed significantly to the decrease in net income during the fiscal year."
Mr. Lau continued, "We are confident that we will see long-term growth in the
electronics 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
$300,000 in revenues from this initiative."
Mr. Lau concluded, "We believe that our performance in the coming quarter will
recover as most of the provisions aforementioned are one-time charges. We remain
confident about our business performance in the coming year."
Fourth Quarter Dividends
------------------------
The Company also announced that on June 21, 2006 its board of directors declared
a dividend of $0.14 per share for the fourth quarter, bringing cash dividends
per share for the year ended March 31, 2006 to $0.60 per share. The dividend
will be payable on July 20, 2006 to shareholders of record as of June 30, 2006.
Appointment of Chief Financial Officer
--------------------------------------
Deswell also announced that the Company has appointed Ms Pang Yuk Ping, Eliza as
the Chief Financial Officer effective from April 1, 2006. Ms Pang has been the
Financial Controller of the Company since 1995.
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 Year ended
March 31, March 31,
----------------- -------------------
2006 2005 2006 2005
-------- ------- --------- --------
(Unaudited) (Unaudited)
Net sales $26,183 $28,693 $115,276 $125,590
Cost of sales 21,167 21,356 89,850 92,072
-------- ------- --------- --------
Gross profit 5,016 7,337 25,426 33,518
Selling, general and administrative expenses 4,083 3,726 15,052 15,759
-------- ------- --------- --------
Operating income 933 3,611 10,374 17,759
Interest expense (6) (5) (6) (12)
Other income (expenses), net (606) 250 (376) 342
-------- ------- --------- --------
Income before income taxes 321 3,856 9,992 18,089
Income taxes (expenses) benefits 191 (88) 27 (576)
-------- ------- --------- --------
Income before minority interests 512 3,768 10,019 17,513
Minority interests 59 415 1,240 2,330
-------- ------- --------- --------
Net income $ 453 $ 3,353 $ 8,779 $ 15,183
======== ======= ========= ========
Basic earnings per share (note 3) $ 0.03 $ 0.23 $ 0.59 $ 1.04
======== ======= ========= ========
Weighted average number of shares 14,924 14,690 14,908 14,656
======== ======= ========= ========
outstanding (in thousands) (note 3)
Diluted earnings per share (note 3) $ 0.03 $ 0.23 $ 0.59 $ 1.02
======== ======= ========= ========
Diluted weighted average number of shares 14,924 14,777 14,936 14,933
======== ======= ========= ========
outstanding (in thousands) (note 3)
DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(U.S. dollars in thousands)
March 31, March 31,
2006 2005
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,369 $ 28,073
Restricted cash 649 1,040
Marketable securities 164 244
Accounts receivable, less allowance of doubtful
Accounts of $970 and $0 at March 31, 2006 and 2005
respectively 18,318 25,091
Inventories 21,845 21,136
Prepaid expenses and other current assets 5,035 4,761
Income taxes receivable - 20
----------- -----------
Total current assets 71,380 80,365
Property, plant and equipment - net 58,286 56,133
Goodwill 710 478
Deferred income tax assets 294 -
----------- -----------
Total assets $ 130,670 $ 136,976
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,886 $ 16,449
Customer deposits and accrued expenses 5,196 6,015
Income taxes payable 184 325
----------- -----------
Total current liabilities 16,266 22,789
----------- -----------
Deferred income tax - -
----------- -----------
Minority interests 7,636 9,420
----------- -----------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued and outstanding
14,923,730 shares at March 31, 2006 and
14,778,730 at March 31, 2005 (note 4) 41,254 39,068
Additional paid-in capital 6,970 6,970
Exchange Reserve 436 -
Retained earnings 58,108 58,729
----------- -----------
Total shareholders' equity 106,768 104,767
----------- -----------
Total liabilities and shareholders' equity $ 130,670 $ 136,976
=========== ===========
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. dollars in thousands)
Year ended
March 31,
-----------------------------
2006 2005
----------- -----------
(Unaudited) (Audited)
Cash flows from operating activities:
Net income $ 8,779 $ 15,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,299 4,970
Loss on sale of property, plant and equipment 45 125
Foreign exchange gain (169) -
Realized gain on disposal of other investments - (295)
Unrealized loss on revaluation of marketable securities 80 53
Minority interests 1,215 2,330
Deferred taxes (294) (15)
Changes in current assets and liabilities:
Accounts receivable 6,773 (6,134)
Inventories (709) (4,962)
Prepaid expenses and other current assets (274) (1,809)
Income taxes receivable 20 107
Accounts payable (5,563) 5,281
Customer deposits and accrued expenses (819) 1,396
In income taxes payable (141) 195
----------- -----------
Net cash provided by operating activities 14,242 16,425
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (6,940) (17,003)
Proceeds from disposal of property, plant and equipment 50 36
----------- -----------
Net cash used in investing activities
(6,890) (16,967)
----------- -----------
Cash flows from financing activities
Dividend paid (9,400) (9,234)
Dividends paid to minority shareholders of a subsidiary (1,229) (756)
Exercise of stock options 352 9,092
Increase in bank loan - 903
Odd shares redemption - (4)
(Increase)/decrease in restricted cash 391 (650)
Loan to minority shareholders of subsidiaries (170) (26)
----------- -----------
Net cash used in financing activities (10,056) (1,578)
----------- -----------
Net decrease in cash and cash equivalents (2,704) (2,120)
Cash and cash equivalents, at beginning of year 28,073 30,193
----------- -----------
Cash and cash equivalents, at end of year 25,369 28,073
=========== ===========
Supplementary disclosures of cashflow information:
Cash paid during the year for:
Interest 6 12
Income taxes 215 289
=========== ===========
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 March 31, 2006 and March 31, 2005, the
results of operations for the quarters and year ended March 31, 2006 and
March 31, 2005, and the cash flows for the year ended March 31, 2006 and
March 31, 2005. 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 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 years ended March 31, 2006 and 2005 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
-----------
March 31, March 31,
2006 2005
----------- -----------
Inventories by major categories :
Raw materials $ 8,782 $ 8,329
Work in progress 6,932 8,088
Finished goods 6,131 4,719
----------- -----------
$ 21,845 $ 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 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, 2006 Compared to Quarter Ended March 31, 2005
---------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended March 31, 2006 were
$26,183,000, a decrease of $2,510,000, or 8.7%, as compared to the corresponding
period in 2005. The decrease in sales was mainly related to the decrease in
sales at our injection-molded plastic segment and electronic and metallic
segment of $1,405,000 and $1,105,000 respectively. This represented decreases of
10.5% and 7.2% 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
significant decrease in orders from a printer customer of $3,861,000 and from
other existing customers of $1,221,000 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 $721,000 and $2,956,000,
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
$2,691,000 and the decrease in orders of metallic products of $1,536,000.
Increased orders from new and existing OEM customers totalled $1,828,000 and
$959,000, respectively. Furthermore, the electronic and metallic segment's audio
equipment distribution business, established in January of 2005, realized an
increase in sales of $335,000 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 March 31, 2006 was
$5,016,000, representing a gross profit margin of 19.2%. This compares with the
overall gross profit and gross profit margin of $7,337,000 or 25.6% for the
quarter ended March 31, 2005.
Gross profit in the plastic segment decreased by $1,661,000 to $2,906,000 or
24.4% of net sales, for the quarter ended March 31, 2006 compared to $4,567,000
or 34.3% of net sales, for the quarter ended March 31, 2005. This was mainly
attributed to a stock provision of $645,000 or 5.4% of net sales made in the
quarter and 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 with the same
quarter of last year. Of the obsolete stock provision, $588,000 was mainly
related to the discontinuation of a telecommunication customer's European
product launch.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross profits in the electronic & metallic segment decreased by $660,000 to
$2,110,000, or 14.8% of net sales, for the quarter ended March 31, 2006 compared
to $2,770,000 or 18.0% of net sales, for the same period last year. This was
mainly attributed to an increased charge of $407,000, or 2.9% of net sales for
the quarter, for value-added taxation. Additionally, labor rates increased an
average of 20% as compared with prior year.
Selling, General and Administrative Expenses - SG&A expenses for the quarter
ended March 31, 2006 were $4,083,000, or 15.6% of total net sales, compared to
$3,726,000, or 13.0% of total net sales for the quarter ended March 31, 2005.
There was an increase in selling, general and administrative expenses of
$357,000 over the corresponding period.
The SG&A expenses in the plastic segment increased by $48,000, or 2.2%, to
$2,219,000, or 18.6% of net sales, for the quarter ended March 31, 2006 compared
to $2,171,000 or 16.3% of net sales for the corresponding period in 2005. The
increase was primarily related to the increase in employee benefits of $115,000
during the quarter.
The SG&A expenses in the electronic & metallic segment increased by $309,000, or
19.9%, to $1,864,000, or 13.1% of net sales, for the quarter ended March 31,
2006 compared to $1,555,000, or 10.1% of net sales for corresponding period in
2005. The increase was primarily related to the increase in staff cost,
administration and selling expenses of $122,000, $94,000 and $55,000
respectively as a result of an increase in headcount for the expansion of our
distribution and OEM business, as well as a $25,000 increase in depreciation
expenses.
Operating Income - Operating income was $933,000 for the quarter ended March 31,
2006, a decrease of $2,678,000, or 74.2% as compared with the corresponding
quarter in the prior year.
On a segment basis, the operating income of the plastic division decreased
$1,709,000 to $687,000, or 5.8% of net sales in the quarter ended March 31, 2006
compared to $2,396,000 or 18.0% of net sales in corresponding period in 2005.
Operating income in the plastic division decreased due to the decrease in gross
profit coupled with the increase in SG&A expenses as described above.
The operating income of the electronic & metallic segment decreased $969,000 to
$246,000, or 1.7% of net sales, in the quarter ended March 31, 2006 compared to
$1,215,000, or 7.9% of net sales in the corresponding period in 2005. Electronic
& metallic operating income decreased due to the decrease in gross profit
coupled with the increase in SG&A expenses as described above.
Other income - Other expenses was $606,000 for the quarter ended March 31, 2006,
an increase in expenses of $856,000 as compared to other income of $250,000 for
the quarter ended March 31, 2005.
On a segment basis, other expenses attributable to the plastic segment were
$623,000, an increase of $639,000 as compared with other income of $16,000 for
the quarter in last year. The increase was mainly attributed to a doubtful debt
provision of $970,000 in the quarter ended March 31, 2006 relating to a
telecommunication customer having financial issues as a result of its failed
product launch in the European market. This offset the tax refunded on
reinvestment of certain retained earnings in one of our PRC subsidiaries of
$173,000; the increase in interest income of $68,000 resulted from the increase
in interest rates and other income of $95,000 as compared with corresponding
period in 2005.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other income attributable to the electronic & metallic segment decreased
$217,000 to $17,000 in the quarter ended March 31, 2006. This decrease in other
income was mainly due to an increase in bad debt write off of $127,000 during
the quarter ended March 31, 2006 and a realized gain on disposal of investment
of $295,000 in the quarter ended March 31, 2005 ($nil for the quarter ended
March 31, 2006). These factors offset the increase in exchange gain and other
income of $86,000 and $104,000 in the quarter ended March 31, 2006.
Income Taxes - Income tax for the quarter comprised of income tax expenses of
$74,000 and deferred income tax assets of $265,000, as compared with income tax
expenses of $88,000 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 $73,000 and deferred income tax assets of $265,000 for the
quarter ended March 31, 2006, this compared with income tax expenses of $90,000
in the corresponding quarter in 2005. The increase was a result of the
recognition of deferred income tax assets of $265,000 arising from the taxable
losses incurred in a plastic manufacturing subsidiary. The income tax expenses
for the electronic & metallic segment increased $3,000 to $1,000 for the quarter
ended March 31, 2006.
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 $59,000 for the quarter ended March 31, 2006, from $415,000 for the
corresponding quarter in the prior year. This represented a decrease in minority
interest of $357,000 in the electronics and metallic subsidiaries, together with
the decrease in minority interest from $1,000 in the quarter ended March 31,
2005 to $nil in the marketing subsidiary in the quarter ended March 31, 2006.
Net Income - Net income was $453,000 for the quarter ended March 31, 2006, a
decrease of $2,900,000 or 86.5%, as compared to net income of $3,353,000 for the
quarter ended March 31, 2005, and net income as a percentage of net sales
decreased from 11.7% to 1.7% for the quarter ended March 31, 2006. The decrease
in net income was mainly the result of the decrease in operating income, the
decrease in other income offsetting the decrease in minority interest and income
tax expense as described above.
Net income for the plastic segment decreased by 89.0% to $256,000 for the
quarter ended March 31, 2006 compared to $2,323,000 for the corresponding
quarter in 2005. The decrease in net income of the plastic segment was mainly
the result of the decrease in operating income and the increase in other
expenses offsetting the decrease in income tax expenses as described above.
Net income for the electronic & metallic segment decreased by 80.9% to $197,000
for the quarter ended March 31, 2006 compared to $1,030,000 for the
corresponding quarter in 2005. 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 offsetting the decrease in minority interest as
described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Year Ended March 31, 2006 Compared to Year Ended March 31, 2005
---------------------------------------------------------------
Net Sales - The Company's net sales for the year ended March 31, 2006 were
$115,276,000, a decrease of $10,314,000 or 8.2% as compared to year ended March
31, 2005. The decrease in sales was mainly related to the decrease in sales at
our plastic segment of $11,366,000 or 19.1% offsetting the increase in sales of
electronics and metallic segment of $1,052,000 or 1.6%, as compared with the
prior year.
The revenue decrease at our plastic segment was mainly the combined result of
the decrease in telecommunication product orders from a major customer of
$5,796,000 as we chose not to take on significantly lower margin business; the
decrease in orders from another major customer of $6,378,000 as a result of the
customer delaying the progress of new model production; the decrease in orders
from another telecommunication customer of $4,846,000 as a result of the
discontinuation of its European product launch in order to make revisions to the
product design and the decrease in orders from other existing customers of
$1,873,000. These together offset the increase in orders from both new and
existing customers of $3,066,000 and $4,461,000.
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 $3,352,000 and $3,392,000, respectively, and an increase in sales
of $1,822,000 in the audio equipment distribution business in the year. 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 $3,507,000 and $4,007,000, 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, 2006 was
$25,426,000, representing a gross profit margin of 22.1%. This compares with the
overall gross profit and gross profit margin of $33,518,000 or 26.7% for the
year ended March 31, 2005.
Gross profit in the plastics segment decreased by $7,462,000 to $13,290,000 or
27.5% of net sales, for the year ended March 31, 2006 compared to $20,752,000 or
34.8% of net sales, for the year ended March 31, 2005. This was mainly
attributed to the increased plastic resin costs which could not be reflected in
the selling price to customers, an average 27% 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 decreased by $630,000 to
$12,136,000 or 18.1% of net sales, for the year ended March 31, 2006 compared to
$12,766,000 or 19.4% of net sales, for the prior 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 an
increase in labor rate of an average 14% as compared with prior year.
Selling, General and Administrative Expenses - SG&A expenses for the year ended
March 31, 2006 were $15,052,000, amounting to 13.1% of total net sales, as
compared to $15,759,000 or 12.5% of total net sales for the year ended March 31,
2005.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The SG&A expenses in the plastic segment decreased by $1,368,000 or 13.8% to
$8,522,000 or 17.7% of net sales, for the year ended March 31, 2006 compared to
$9,890,000 or 15.0% of net sales, for the prior year. 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 $478,000, $15,000 and
$117,000 respectively; and the continuing efforts of tightening other general
expenses of $58,000. These together offset the increase in employee benefits of
$115,000.
The SG&A expenses in the electronic & metallic segment increased by $661,000 or
11.3% to $6,530,000 or 9.7% of net sales, for the year ended March 31, 2006
compared to $5,869,000 or 8.9% of net sales for the prior year. The increase was
primarily related to the increase in salaries & welfare expenses of $269,000,
selling & logistic expenses of $185,000, traveling expenses of $54,000, rental
expenses of $50,000, financial expenses of $24,000 and other general expenses of
$79,000 as a result of the expansion in distribution and the increase in sales
activities during the year.
Operating Income - Operating income was $10,374,000 for the year ended March 31,
2006, a decrease of $7,385,000, or 41.6% as compared with the prior year.
On a segment basis, the operating income of the plastics segment decreased
$6,094,000 to $4,768,000 or 9.9% of net sales, in the year ended March 31, 2006
compared to $10,862,000 or 16.5% of net sales in the prior year. 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 $1,291,000 to
$5,606,000 or 8.4% of net sales, in the year ended March 31, 2006 compared to
$6,897,000 or 10.5% of net sales in the prior year. The decrease in operating
income was attributable to the decrease in gross profit and the increase in SG&A
expenses as described above.
Other income - Other expenses was $376,000 for the year ended March 31, 2006, an
increase of $718,000 as compared with the other income of $342,000 for the year
ended March 31, 2005.
On a segment basis, other expenses attributable to the plastic segment increased
$352,000 to $247,000 in the year ended March 31, 2006, as compared to other
income of $105,000 for the year ended March 31, 2005. The increase in other
expenses was primarily attributable to a doubtful debt provision of $970,000
relating to the discontinuation of a telecommunication customer's European
product launch in order to make revisions to the product design This offset the
$173,000 tax refund received on our reinvestment of certain retained earnings in
one of our PRC subsidiaries; the increase in interest income of $279,000, the
increase in exchange gain of $25,000 coupled with the decrease in loss on
disposal of fixed assets of $61,000 in the year ended March 31, 2006 as compared
with the prior year in 2005.
Other expenses attributable to the electronic & metallic segment increased
$366,000, to $129,000 in the year ended March 31, 2006, as compare to other
income of $237,000 for the year ended March 31, 2005. This increase in other
expenses was primarily due to the increase in bad debt write off of $135,000
during the year ended March 31, 2006 and a realized gain on disposal of
investment of $295,000 in the prior year but nil this year, an unrealized loss
on revaluation of marketable securities of $25,000 offsetting the increase in
interest income of $51,000 in the year ended March 31, 2006.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes - Income tax for the year ended March 31, 2006 comprised of income
tax expenses of $238,000 and deferred income tax assets of $265,000, compared
with income tax expenses of $576,000 in the prior year.
On a segment basis, the income tax of the plastic segment comprised of income
tax credit of $21,000 and deferred income tax assets of $265,000 for the year
ended March 31, 2006, as compared with income tax expenses of $202,000 in the
prior year. The increase was a result of the recognition of deferred income tax
assets of $265,000 arising from the taxable losses incurred in a plastic
manufacturing subsidiary during the year and the decrease in income tax expenses
of $209,000 in one of the manufacturing subsidiaries as a result of operating
losses incurred in this year. The income tax expenses for the electronic &
metallic segment decreased $115,000 to $259,000 for the year ended March 31,
2006. 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 and the decrease in operating income during the year ended March 31,
2006.
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
$1,240,000 for the year ended March 31, 2006, from $2,330,000 for the prior
year. This represented a decrease in minority interest of $700,000 in the
electronics and metallic subsidiaries, and a decrease in the minority interest
in the company's marketing subsidiary from $390,000 to nil.
Net Income - Net income was $8,779,000 for the year ended March 31, 2006, a
decrease of $6,404,000 or 42.2%, as compared to net income of $15,183,000 for
the year March 31, 2005. Net income as a percentage of net sales decreased from
12.1% to 7.6% for the year ended March 31, 2006. The decrease in net income was
mainly the result of the decrease in operating income and other income
offsetting the decrease in income tax expenses and minority interest, as
described above.
Net income for the plastic segment decreased by $5,567 or 53.7% to $4,807,000
for the year ended March 31, 2006 compared to $10,374,000 for the prior year
2005. The decrease in net income of the plastic segment was mainly the result of
the decrease in operating profits and other income, offsetting the decrease in
income tax expenses and minority interest, as described above.
Net income for the electronic & metallic segment decreased by $837,000 or 17.4%
to $3,972,000 for the year ended March 31, 2006 compared to $4,809,000 for the
prior year 2005. 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 March 31, 2006, the Company had a working capital surplus of $55,114,000
and cash and cash equivalents of $25,369,000. 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 $6,940,000, dividend distribution of $9,400,000 and
dividend distribution to minority shareholders of subsidiaries of $1,229,000
offsetting the increase in net cash provided by operating activities of
$14,242,000, the exercise of stock options by directors and officers of $352,000
and the decrease in restricted cash of $391,000 during the year ended March 31,
2006.
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, 2006.
As of March 31, 2006, 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 March 31, 2006, the Company had ( i ) unused credit
facilities of $1,285,000 ( ii ) cash and cash equivalents of $25,369,000 and (
iii ) restricted cash of $649,000, 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: June 23, 2006