Business context and reporting period
Deswell Industries, Inc. filed an annual report on Form 20-F for the fiscal year ended March 31, 2022, prepared under U.S. GAAP. Although the request identifies “2021 Q4,” this filing covers the full fiscal year; it does not provide a standalone fourth-quarter income statement. Deswell is a BVI holding company whose manufacturing subsidiaries operate primarily in Dongguan, China. It manufactures injection-molded plastic parts and assembles electronic products and subassemblies.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $86.0 million | $64.9 million |
| Gross profit / margin | $14.0 million / 16.2% | $13.2 million / 20.3% |
| Operating income / margin | $2.8 million / 3.2% | $3.3 million / 5.0% |
| Net income | $8.2 million | $8.2 million |
| Net income per diluted share | $0.51 | $0.51 |
| Cash from operating activities | $(0.2) million | $3.3 million |
| Cash and cash equivalents at year-end | $13.5 million | $20.2 million |
At March 31, 2022, total assets were $115.4 million and total liabilities were $24.6 million. Current assets of $87.8 million exceeded current liabilities of $24.0 million, for working capital of $63.8 million and a current ratio of approximately 3.7. The company reported no short- or long-term bank debt and no committed credit facilities. In addition to cash and cash equivalents, it held $6.2 million of time deposits and $24.5 million of marketable securities.
Material changes versus the prior year
- Sales rose 32.5%, led by a $17.6 million increase in electronic products and a $3.5 million increase in plastic products. Electronics represented 72.8% of sales, up from 69.4%.
- Gross margin fell 4.1 percentage points. Plastic-segment gross margin declined to 15.2% from 23.6%; electronics margin declined to 16.6% from 18.8%.
- Operating income fell about 15% despite higher sales. Net income was essentially unchanged, supported by non-operating income of $5.3 million, including $1.9 million in realized and unrealized marketable-securities gains and $2.2 million of net rental income.
- Operating cash flow turned negative as accounts receivable increased $3.3 million and inventories increased $7.6 million. Cash and cash equivalents declined $6.8 million during the year.
- Dividends paid totaled $3.2 million, or $0.20 per share, compared with $2.9 million, or $0.18 per share, in FY2021.
Outlook, risks and unusual items
Management stated that cash and anticipated operating cash flows should be sufficient for current and anticipated general corporate needs for at least 12 months. It expects semiannual dividends based on results, but gave no assurance of future payments. No quantified revenue or earnings guidance was provided.
Management said facilities were operating normally and that COVID-19 had not significantly affected FY2022 results; however, Omicron-related disruption affected supplies of some production components. Other principal risks include customer concentration (two customers accounted for 31.7% of FY2022 sales), component and resin costs and availability, rising labor costs, foreign-exchange movements, and dependence on manufacturing in China. The company also disclosed uncertainty around PRC regulatory developments and the HFCAA: its auditor was identified as subject to the PCAOB inspection restriction, creating potential U.S. trading and delisting risk. Deswell believed it was a PFIC for FY2022, which could have adverse U.S. tax consequences for U.S. investors.
The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an opinion on internal-control effectiveness. The auditor identified the allowance for credit losses as a critical audit matter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether subsequent filings show improvement in operating cash flow, inventory levels and gross margins.
- The sustainability and composition of earnings, particularly gains on marketable securities and rental income versus manufacturing operations.
- Customer concentration, order trends, and the ability to recover higher component, resin and labor costs through pricing.
- Cash availability across subsidiaries, restrictions on PRC subsidiary distributions, and the company’s ability to sustain dividends.
- Developments in PCAOB auditor inspections and HFCAA trading restrictions, as well as the company’s PFIC status for each tax year.