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 August 11, 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 LOGO]
Contact:
John G. Nesbett
IMS
212-668-0813
DESWELL INDUSTRIES, INC. ANNOUNCES FIRST QUARTER RESULTS
- 8.0% Increase in First Quarter Net Income -
- Company Also Announces First Quarter Dividend of $0.17 Per Share -
HONG KONG (August 11, 2006) - Deswell Industries, Inc. (Nasdaq: DSWL) today
announced its financial results for the fiscal first quarter ended June 30,
2006.
Deswell reported net sales for the first quarter ended June 30, 2006 of $31.7
million, compared to $30.1 million for the first quarter 2005, an increase of
5.4%. Operating income totaled $3.8 million, compared to $4.0 million for the
same quarter in 2005, a decrease of 5.2%. The decrease was mainly attributed to
a stock-based compensation cost of $0.8 million during the quarter. Net income
for the quarter increased 8.0% to $3.4 million from $3.2 million in the year-ago
quarter. Basic and diluted net income per share for the quarter increased to
$0.23 and $0.23, respectively (based on 14,924,000 and 14,955,000 weighted
average shares outstanding, respectively), compared to $0.21 and $0.21,
respectively (based on 14,865,000 and 14,929,000 weighted average shares
outstanding, respectively), for the comparable period in 2005.
The Company's balance sheet remains strong, with cash and cash equivalents for
the quarter totaling $21.9 million, compared to $25.4 million on March 31, 2006.
Working capital totaled $59.0 million as of June 30, 2006, up from $55.1 million
as of March 31, 2006. The Company has no long-term or short-term borrowings.
Mr. Richard Lau, chief executive officer, commented, "We are very pleased with
the recorded 5.4% revenue growth in the first quarter, which was primarily
driven by the 25.4% growth in our plastic division offsetting the 7.6% decrease
in sales in our electronics and metallic segment as compared with the year-ago
quarter. Some of that decrease was due to the shortage of certain electronic
materials that delayed production and shipments in the quarter. The increase in
revenue in the plastic division is primarily attributable to the increase in
orders from one of our telecommunication customer and new customers."
Mr. Lau continued, "During the quarter we invested approximately $2.5 million in
new equipment and an updated automated coating capability. We estimate it will
be fully installed and operational by end of September 2006. Moreover,
management is confident about growth prospects in the coming two quarters as
orders from some new customers develop."
Annual General Meeting
----------------------
The Company will hold its 2006 Annual General Meeting at 9:30 a.m. on September
18, 2006 at the Wynn Las Vegas Resort, 3131 Las Vegas Blvd South, Las Vegas,
Nevada 89109, U.S.A.
First-Quarter Dividends
-----------------------
The Company also announced that on August 7, 2006 its board of directors
declared a dividend of $0.17 per share for the fiscal first quarter 2006. The
dividend will be payable on September 6, 2006 to shareholders of record as of
August 23, 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.
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DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. dollars in thousands, except per share data)
Quarter ended
June 30,
2006 2005
--------------------
Net sales $ 31,689 $ 30,075
Cost of sales 23,243 22,435
--------- ---------
Gross profit 8,446 7,640
Selling, general and administrative expenses 4,666 3,654
--------- ---------
Operating income 3,780 3,986
Interest expense - -
Other income, net 187 (360)
--------- ---------
Income before income taxes 3,967 3,626
Income taxes 151 25
--------- ---------
Income before minority interests 3,816 3,601
Minority interests 413 450
--------- ---------
Net income $ 3,403 $ 3,151
Other comprehensive income
Foreign currency translation adjustment 710 (404)
--------- ---------
Comprehensive income 4,113 2,747
========= =========
Net income per share (note 3) Basic:
Net income per share $ 0.23 $ 0.21
========= =========
Weighted average common shares
outstanding (in thousands) 14,924 14,865
========= =========
Diluted:
Net income per share (note 3) $ 0.23 $ 0.21
========= =========
Weighted average common shares
outstanding (in thousands) 14,955 14,929
========= =========
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DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(U.S. dollars in thousands)
June 30, March 31,
2006 2006
---------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,910 $ 25,369
Restricted cash - 649
Marketable securities 110 164
Accounts receivable, net 26,589 18,318
Inventories 25,532 21,845
Prepaid expenses and other current assets 5,288 5,035
---------- ----------
Total current assets 79,429 71,380
Property, plant and equipment - net 59,849 58,286
Deferred income tax assets 225 294
Goodwill 712 710
---------- ----------
Total assets $ 140,215 $ 130,670
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,675 $ 10,886
Dividend payable - 2,089
Customer deposits and accrued expenses 3,761 3,107
Income taxes payable 10 184
---------- ----------
Total current liabilities 20,446 16,266
---------- ----------
Minority interests 8,068 7,636
---------- ----------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued and outstanding
14,923,730 shares at June 30, 2006 and
14,923,730 at March 31, 2006 42,074 41,254
Additional paid-in capital 6,970 6,970
Accumulated other comprehensive income 1,146 436
Retained earnings 61,511 58,108
---------- ----------
Total shareholders' equity 111,701 106,768
---------- ----------
Total liabilities and shareholders' equity $ 140,215 $ 130,670
========== ==========
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DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
( U.S. dollars in thousands )
Quarter ended
June 30,
--------
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 3,403 $ 3,151
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,291 1,363
(Gain)/loss on sale of property, plant and equipment (111) 4
Unrealized holding loss on marketable securities 54 66
Stock based compensation cost 820 -
Minority interests 432 425
Deferred income tax 69 -
Changes in operating assets and liabilities:
Accounts receivable (8,271) 622
Inventories (3,687) 1,502
Prepaid expenses and other current assets (253) (311)
Income taxes receivable - (153)
Accounts payable 5,789 (2,600)
Customer deposits and accrued expenses 654 188
In income taxes payable (174) 78
--------- ---------
Net cash provided by operating activities 16 4,335
--------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (2,279) (2,033)
Proceeds from disposal of property, plant and
equipment 112 -
--------- ---------
Net cash used in investing activities (2,167) (2,033)
--------- ---------
Cash flows from financing activities
Dividend paid (2,089) -
Dividends paid to minority shareholders of a
subsidiary - (430)
Loan to minority shareholders of subsidiaries - (170)
Exercise of stock options - 141
Decrease in restricted cash 649 264
--------- ---------
Net cash used in financing activities (1,440) (195)
--------- ---------
Cash effect of exchange rate changes 132 218
Net (decrease)/increase in cash and cash equivalents (3,459) 2,325
Cash and cash equivalents, at beginning of period 25,369 28,073
--------- ---------
Cash and cash equivalents, at end of period 21,910 30,398
========= =========
Supplementary disclosures of cashflow information:
Cash paid during the period for:
Interest - -
Income taxes 256 100
========= =========
Supplementary disclosures of significant non-cash
transactions:
Issuance of common stock in connection of acquisition of
Additional 5% shareholdings in a subsidiary - 1,834
Excess of acquisition cost over the fair value of
acquired net assets of additional 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 June 30, 2006 and March 31, 2006, the
results of operations for the quarters ended June 30, 2006 and June 30,
2005, and the cash flows for the quarters ended June 30, 2006 and June 30,
2005. The notes to the Consolidated Financial Statements, which are
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
-----------
June 30, March 31,
2006 2006
--------- ---------
Inventories by major categories :
Raw materials $ 11,797 $ 8,782
Work in progress 8,014 6,932
Finished goods 5,721 6,131
--------- ---------
$ 25,532 $ 21,845
========= =========
3. Net Income 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 net income available
to common holders by the weighted average number of common shares
outstanding during the period. Diluted net income per share gives effect to
all dilutive potential common shares outstanding during the period. The
weighted average number of common shares outstanding is adjusted to include
the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued. In computing the
dilutive effect of potential common shares, the average stock price for the
period is used in determining the number of treasury shares assumed to be
purchased with the proceeds from exercise of options.
The net income for the quarters ended June 30, 2006 and 2005 were both from
the Company's continuing operations.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
---------------------
General
-------
The Company's revenues are derived from the manufacture and sale of (i)
injection-molded plastic parts and components, (ii) electronic products and
subassemblies and (iii) metallic parts and components. The Company carries out
all of its manufacturing operations in southern China, where it is able to take
advantage of the lower overhead costs and inexpensive labor rates as compared to
Hong Kong.
Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005
-------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended June 30, 2006 were
$31,689,000, an increase of $1,614,000 or 5.4% as compared to the corresponding
period in 2005. The increase was related to the increase in sale of
injection-molded plastic products of $3,002,000 offsetting the decrease in sales
of electronic and metallic segment of $1,388,000. This represented an increase
of 25.4% and a decrease of 7.6% respectively, as compared with the net sales in
the corresponding period in the prior year.
The increase in net sales in our plastic segment was mainly due to an increase
in orders from a telecommunication customer of $4,249,000 and other existing
customers of $1,874,000; and increase in orders from new customers of $1,160,000
over the corresponding period in the prior year. This together offset the
decrease in orders from other existing customers of $4,281,000, which was partly
due to customers delaying the progress of new model productions. The revenue
decrease in our electronics and metallic segment was mainly a result of decrease
in electronic orders from customers of $5,496,000 and in metallic orders of
$802,000, and the decrease in distribution business of $458,000; this together
offset the increase in professional audio equipment product orders of $3,057,000
and $2,311,000 from both existing and new customers respectively.
Gross Profit - The gross profit for the quarter ended June 30, 2006 was
$8,446,000, representing a gross profit margin of 26.7%. This compares with the
overall gross profit and gross profit margin of $7,640,000 or 25.4% for the
quarter ended June 30, 2005.
Gross profit in the plastic segment increased by $787,000 to $4,696,000 or 31.7%
of net sales, for the quarter ended June 30, 2006 compared to $3,909,000 or
33.0% of net sales, for the quarter ended June 30, 2005. This was mainly
attributed to an average 25% increase in labor rate and an average of 2%
appreciation in Chinese renmimbi currency where most of our direct overhead is
denominated, as compared with the quarter last year, despite we continued tight
control on factory overheads.
Gross profit in the electronic & metallic segment increased by $19,000 to
$3,750,000 or 22.2% of net sales, for the quarter ended June 30, 2006 compared
to $3,731,000 or 20.4% 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
an increase in labor rate of an average 23% as compared with prior year period.
Selling, general and administrative expenses - SG&A expenses for the quarter
ended June 30, 2006 were $4,666,000, amounting to 14.7% of total net sales, as
compared to $3,654,000 or 12.1% of total net sales for the quarter ended June
30, 2005. There was an increase in selling, general and administrative expenses
of $1,012,000 over the corresponding period.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
SG&A expenses in the plastic segment increased by $734,000 or 35.7% to
$2,790,000 or 18.8% of net sales, for the quarter ended June 30, 2006 compared
to $2,056,000 or 17.4% of net sales, for the corresponding period in 2005. The
increase was primarily related to a stock based compensation cost of $820,000
and an increase in selling expenses of $13,000 during the quarter ended June 30,
2006 offset savings in other overheads. The SG&A expenses in the electronic &
metallic segment increased by $278,000 or 17.4% to $1,876,000 or 11.1% of net
sales, for the quarter ended June 30, 2006 compared to $1,598,000 or 8.8% of net
sales for corresponding period in 2005. The increase was primarily related to
the increase in salary expenses of $196,000 as a result of expanding our
marketing, technical and quality assurance force and increase in selling
logistic expenses of $140,000 during the quarter ended June 30, 2006. This
together offset savings in other overheads.
Operating income - Operating income was $3,780,000 for the quarter ended June
30, 2006, a decrease of $206,000 or 5.2% as compared with the corresponding
quarter in the prior year.
On a segment basis, the operating income of plastic segment increased $53,000 to
$1,906,000 or 12.9% of net sales, in quarter ended June 30, 2006 compared to
$1,853,000 or 15.7% of net sales in corresponding period in 2005. The increase
in operating income was attributable to the increase in gross profit offsetting
the increase in SG&A expenses as described above.
The operating income of electronic & metallic segment decreased $259,000 to
$1,874,000 or 11.1% of net sales, in the quarter ended June 30, 2006 compared to
$2,133,000 or 11.7% of net sales in the corresponding period in 2005. 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 increased by $547,000 from other expenses of
$360,000 in the quarter ended June 30, 2005. On a segment basis, other income
attributable to the plastic segment increased $411,000 to $252,000 in the
quarter ended June 30, 2006. The increase in other income was primarily
attributable to the increase in exchange gain of $244,000 and gain on disposal
of fixed assets of $115,000 in the quarter ended June 30, 2006. Other expenses
attributable to the electronic & metallic segment decreased $136,000, to $65,000
in the quarter ended June 30, 2006. This decrease in other expenses was mainly
attributable to the decrease in exchange loss of $106,000 and the increase in
interest expenses of $26,000 offsetting the net increase in doubtful debt
provision and bad debt write off of $24,000 as compared with the quarter in
prior year.
Income Taxes - Income taxes expenses for the quarter was $151,000, an increase
of $126,000 as compared with the corresponding quarter in the prior year. On a
segment basis, the income taxes of plastic segment increased $212,000 to $69,000
in the quarter ended June 30, 2006 whereas the income tax expenses for the
electronic & metallic segment decreased $86,000 to $82,000 for the quarter ended
June 30, 2006, respectively. The increase in the plastic segment was primarily
due to a income tax provision of $69,000 versus a tax refund $173,000 approved
on our reinvestment of retained earnings in our Dongguan manufacturing plant in
the prior year quarter. The decrease in the electronic & metallic segment was
due to decrease in operating income as described above.
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 $413,000 for the quarter ended June 30, 2006, from $450,000 for the
corresponding quarter in the prior year. This represented a decrease in minority
interest of $37,000 in the electronics and metallic subsidiaries in the quarter
ended June 30, 2006.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Income - Net income was $3,403,000 for the quarter ended June 30, 2006, an
increase of $252,000 or 8.0%, as compared to net income of $3,151,000 for the
quarter ended June 30, 2005, and net income as a percentage of net sales was
increased from 10.5% to 10.7% for the quarter ended June 30, 2006. The increase
in net income was mainly the result of the increase in other income offsetting
the decrease in operating income and the increase in income tax as described
above.
Net income for the plastic segment increased by 13.7% to $2,089,000 for the
quarter ended June 30, 2006 compared to $1,837,000 for the corresponding quarter
in 2005. The increase in net income of the plastic segment was mainly the result
of the increase in operating income and other income offsetting the increase in
income tax as described above.
Net income for the electronic & metallic segment was $1,314,000 for the quarter
ended June 30, 2006 and for the corresponding quarter in 2005. There was nil
change and was mainly the result of the decrease in operating profit offsetting
the increase in other income and the decrease in income tax, 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 June 30, 2006, the Company had a working capital surplus of $58,983,000
and cash and cash equivalent of $21,910,000. This compares with a working
capital surplus of $55,114,000 and cash and cash equivalent of $25,369,000 at
March 31, 2006. The decrease in cash and cash equivalent of $3,459,000 was
mainly attributed to the capital investment of $2,279,000, dividend paid of
$2,089,000, offset the net cash generated from its operating activities of
$16,000 during the quarter, the decrease in restricted cash of $649,000 and
proceeds from disposal of property, plant and equipment of $112,000, during the
quarter ended June 30, 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 long-term
debt or short-term borrowings at June 30, 2006.
As of June 30, 2006, the Company had nil 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/ Richard Lau
------------------------
Richard Lau
Chief Executive Officer
Date: August 11, 2006