Deswell Industries, Inc. — Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2020; this is an annual filing, not a quarterly report for “2019 Q4.” Financial statements are audited and prepared under U.S. GAAP. Amounts below are U.S. dollars unless stated otherwise.
Business context and financial results
Deswell manufactures injection-molded plastic parts and assembles electronic products at facilities in Dongguan, China. Fiscal 2020 sales were 61.2% electronic products and 38.8% plastic products.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $65.368m | $66.581m |
| Gross profit / margin | $11.864m / 18.1% | $10.270m / 15.4% |
| Operating income / margin | $1.413m / 2.2% | $0.533m / 0.8% |
| Non-operating income (expense), net | $(2.360)m | $3.884m |
| Net income (loss) | $(1.320)m | $4.273m |
| Basic and diluted EPS | $(0.08) | $0.27 |
| Cash from operating activities | $13.121m | $2.166m |
Gross margin improved as lower raw-material costs lifted margins in both segments. Operating income also rose, while the net loss was primarily driven by a $5.179m unrealized loss on marketable securities, compared with an unrealized gain of $0.891m in FY2019.
Liquidity, debt and cash flow
- At March 31, 2020, cash and cash equivalents were $22.514m; time deposits totaled $2.207m, including $1.424m maturing after twelve months; marketable securities were $19.441m.
- Working capital was $51.063m, down from $54.412m. Total assets were $95.379m and shareholders’ equity was $80.322m.
- The company reported no short- or long-term debt and no committed credit facilities. Operating cash flow increased substantially, supported in part by decreases in receivables and inventory; those reductions may not recur at the same level.
- Investing cash outflow was $2.656m and financing cash outflow was $2.322m, mainly reflecting dividends. Capital expenditures were $0.507m.
- Dividends paid in FY2020 totaled approximately $2.387m, or $0.15 per share. Future dividends are not assured.
Changes versus the prior comparable year
- Sales declined 1.8%. Plastic-segment revenue decreased by $3.425m, while electronic-segment revenue increased by $2.212m. Professional-audio signal-processor orders supported electronics growth; lower orders for mixing consoles and plastic products weighed on results.
- Gross profit rose $1.594m and operating income rose $0.880m. SG&A increased $0.567m to $10.026m.
- Net results swung from $4.273m income to a $1.320m loss as marketable-security valuation results reversed sharply.
- Operating cash flow rose from $2.166m to $13.121m. Accounts receivable fell $3.136m and inventory fell $4.026m during FY2020.
Outlook, risks and unusual items
- COVID-19: PRC plants were temporarily suspended for one to two weeks in February 2020 and had resumed normal operations by March 31. Management expected weaker customer demand and lower revenue and net income from April 2020; the full impact was not quantifiable. No COVID-related impairment, inventory charge or bad-debt provision was recorded for FY2020.
- Customer concentration: Three customers each exceeded 10% of sales and together accounted for 42.3%; the largest represented 18.7%. Sales are purchase-order based, with no long-term customer contracts.
- Operating risks: Competition and pricing pressure, China labor costs, resin and electronic-component availability, currency movements, customer credit, supply-chain disruption, trade tensions, and reliance on manufacturing in China could affect results. The company had no currency hedges at year-end.
- Investment and tax risks: Marketable securities are exposed to equity-price volatility. The company believes it was a PFIC for FY2020, potentially creating adverse U.S. tax consequences for U.S. investors.
- Other notable items: Deswell explored relocating some production to Southeast Asia, but its proposed Vietnam incorporation was suspended after questions about origin-certification eligibility. Management provided no quantified FY2021 earnings or revenue guidance.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal-control effectiveness. The filing also says the auditor was not subject to PCAOB inspection in China.
Important facts for investors to verify
- Whether post-year-end COVID-19 effects materially changed demand, production, collections or cash flows.
- The composition, valuation sensitivity and subsequent performance of the $19.441m marketable-securities portfolio.
- Whether customer concentration or major-customer orders changed after March 31, 2020.
- Whether operating cash flow remains strong after the FY2020 working-capital reductions.
- The company’s ongoing PFIC status, dividend capacity and any developments affecting audit inspection or U.S. listing risk.