Deswell Industries, Inc. — FY2017 Form 20-F
Business context and reporting period. This is an audited annual report for the fiscal year ended March 31, 2017, prepared under U.S. GAAP in U.S. dollars—not a standalone 2016 fourth-quarter filing. Deswell manufactures injection-molded plastic parts and electronic products and assemblies in China. Its metallic-parts business was closed and sold in fiscal 2015; its results are presented as discontinued operations.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $44.522 million | $44.568 million |
| Gross profit / margin | $7.449 million / 16.7% | $4.793 million / 10.8% |
| Operating loss | $2.103 million | $5.347 million |
| Net income (loss) | $1.376 million | $(4.934) million |
| Basic and diluted earnings (loss) per share | $0.09 | $(0.31) |
| Net cash from (used in) operating activities | $(1.082) million | $0.563 million |
| Working capital at year-end | $41.307 million | $39.890 million |
| Total assets / shareholders’ equity | $90.987 million / $76.201 million | $87.571 million / $76.808 million |
| Total debt | None | None |
At March 31, 2017, cash and cash equivalents were $8.078 million; time deposits were $5.422 million maturing within twelve months and $2.902 million maturing later. Marketable securities were $16.327 million. Current assets were $56.093 million and current liabilities $14.786 million. The company had no committed credit facilities or restricted cash.
Material changes and operating performance
- Revenue was nearly flat year over year: plastic-segment sales increased $3.419 million while electronic-segment sales decreased $3.465 million. Plastic and electronics represented 52.2% and 47.8% of sales, respectively.
- Gross margin improved to 16.7% from 10.8%. Segment margins rose to 21.4% in plastics from 17.1%, and to 11.6% in electronics from 5.7%. Management attributed the gains mainly to lower labor costs as a percentage of sales; electronics also benefited from lower raw-material costs.
- SG&A declined 2.9% to $8.856 million. Operating losses narrowed, but the company remained loss-making at the operating level.
- Net income included $3.688 million of net non-operating income, including a $1.999 million unrealized gain on trading securities, compared with a $1.860 million unrealized loss in FY2016. Thus, the return to profitability was materially affected by investment-market gains.
- Operating cash flow turned negative despite the reported profit. Receivables rose $4.322 million and inventories rose $2.509 million; management cited longer collection periods and higher materials and work-in-process levels. The allowance for doubtful accounts increased to $1.252 million from $0.881 million.
- Capital expenditures increased to $2.152 million from $0.591 million, including machinery and facility upgrades intended to improve production efficiency. Financing cash outflow was $2.556 million, primarily dividends, plus a $308,000 share repurchase. Dividends per share declined to $0.105 from $0.14.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expects working-capital needs and capital additions to be funded mainly from cash and internally generated funds, but may seek financing if appropriate and available. It expects semi-annual cash dividends, subject to future results, cash needs and other conditions; future dividends are not assured.
- Management cited rising Chinese labor and operating costs, competitive pricing, and resin and electronic-component cost or availability as risks to margins. RMB depreciation partly offset labor-cost pressure in FY2017; the company did not hedge currency exposure and had no open forward contracts at year-end.
- Three customers each represented over 10% of FY2017 sales and together accounted for 33.6%. Sales are based on purchase orders, with no long-term customer contracts. One customer represented 22.2% of year-end receivables.
- The company believes it was a passive foreign investment company (PFIC) for FY2017 and may remain one. U.S. investors could face adverse tax consequences; the company says it does not expect to monitor PFIC status in future years.
- PRC rules restrict transfers of subsidiary funds, including dividend distributions; statutory reserves and withholding taxes may further constrain funds available to the parent. Management reported $66.099 million of PRC subsidiary net assets restricted from transfer as of March 31, 2017.
- The company reported no material legal proceedings, no long-lived-asset impairment in FY2017, and no off-balance-sheet financing arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an opinion on internal-control effectiveness. The filing notes the China-based auditor was not subject to PCAOB inspection.
- The company repurchased 171,000 shares from its former CEO for $308,000, or $1.80 per share. The filing reports no publicly announced repurchase program for FY2017.
Important facts for investors to verify
- Whether improved segment margins can persist and whether the company can return to positive operating income.
- Whether collections and inventory levels normalize and operating cash flow recovers, given the FY2017 working-capital outflow and higher doubtful-account allowance.
- The composition, valuation and volatility of the $16.327 million marketable-securities portfolio, and how much earnings depend on investment gains rather than manufacturing operations.
- Customer concentration, receivable exposure, and the effect of purchase-order-based business on future sales visibility.
- Cash availability to the parent after PRC transfer restrictions, and the sustainability of dividends alongside capital and working-capital needs.
- The company’s PFIC status and related U.S. tax implications; investors should consult their own tax advisers.