Deswell Industries, Inc. — FY2012 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2012, audited under U.S. GAAP and presented in U.S. dollars. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited quarterly results. Amounts below are in U.S. dollars unless noted.
Business context
Deswell manufactures injection-molded plastic components, electronic products and assemblies, and metal molds and parts at facilities in Dongguan, China. Revenue is generated through customer purchase orders; the company has no long-term customer contracts. Electronics and metallic products contributed 54.5% of FY2012 sales, plastics 43.7%, and metal products approximately 1.7%.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $64.783 million | $84.022 million |
| Gross profit / margin | $9.465 million / 14.6% | $9.548 million / 11.4% |
| Operating income (loss) / margin | $(2.169) million / (3.3)% | $(8.828) million / (10.5)% |
| Net income (loss) | $(1.461) million | $(8.114) million |
| Net loss per share | $(0.09) | $(0.50) |
| Cash provided by (used in) operations | $11.149 million | $(3.194) million |
| Capital expenditures | $0.282 million | $1.034 million |
At March 31, 2012, working capital was $60.933 million, total assets $121.959 million, and shareholders’ equity $107.689 million. Cash and cash equivalents were $33.073 million; time deposits maturing beyond three months were $4.008 million, and available-for-sale securities were $7.630 million. The company reported no debt, no restricted cash, and no committed credit facilities. Operating cash generation included reductions in accounts receivable and inventory as sales and orders declined.
The FY2012 dividend was $0.12 per share; cash dividends paid during the year totaled approximately $2.430 million. A board-approved share repurchase program authorizes purchases of up to $4 million over two years, but none had been made by March 31, 2012.
Quarterly performance and changes versus comparable periods
For the fiscal fourth quarter ended March 31, 2012, net sales were $12.198 million, gross profit $1.409 million, operating loss $1.652 million, and net loss $0.713 million. In the comparable fiscal fourth quarter ended March 31, 2011, sales were $15.978 million, gross profit $2.440 million, operating loss $0.405 million, and net loss $0.653 million. Thus, fourth-quarter sales fell about 23.7% year over year and the operating loss widened.
For FY2012 overall, sales declined 22.9% from FY2011. Plastic-segment sales fell 33.7% and electronic and metallic segment sales fell 11.7%. Despite lower sales, consolidated gross margin improved by 3.2 percentage points, mainly because of a more favorable product mix and labor savings in plastics, and improved pricing and product mix in electronics. SG&A declined 12.0% in dollars but rose as a share of sales to 18.9%.
The net loss narrowed substantially from FY2011, principally because FY2012 had no repeat of the prior-year $4.474 million non-cash impairment charge and because other income was $0.639 million versus other expenses of $4.435 million. FY2012 included a $0.746 million unrealized loss on available-for-sale securities in other comprehensive loss; management described the bond valuation decline as temporary and did not record an impairment charge.
Outlook, commentary and risks
- Management expects working-capital needs and capital additions to be funded principally from cash on hand and internally generated funds. It may seek debt or equity financing if appropriate, but provided no quantified revenue or earnings guidance.
- Management said it currently plans to continue quarterly dividends, while emphasizing future payments are not assured and depend on earnings, cash needs, and other factors.
- Customer concentration remains material: VTech was the only customer representing at least 10% of FY2012 sales, at 12.6%. Management attributed declines partly to weaker orders from previous major customers and a 2.0% year-over-year decline in VTech orders. Orders are not covered by long-term contracts.
- Risks include weak demand and competitive pricing, rising Chinese wages and RMB appreciation, resin and electronic-component costs and availability, customer credit and order volatility, and dependence on manufacturing operations in China. The RMB appreciated approximately 3.7% against the U.S. dollar during FY2012; about 49% of costs and expenses were RMB-denominated. The company did not hedge currency risk.
- Cash is concentrated in banks in Hong Kong, Macao, and mainland China, where deposit protection may be limited. Management also cited restrictions on transferring PRC subsidiary funds, PRC tax and transfer-pricing uncertainty, and exposure to possible future asset impairments.
- The company invested $8.376 million in two Hong Kong-listed corporate bonds with contractual maturities beyond five years; their March 31, 2012 fair value was $7.630 million. Management stated it intended and was able to hold them until fair-value recovery.
- The new independent auditor, BDO China Shu Lun Pan, issued an unqualified opinion on the FY2012 financial statements and internal controls. BDO Limited resigned in March 2012; the filing reports no disagreements or reportable events with the former auditor.
Most important facts for investors to verify
- Whether customer orders and sales stabilize, particularly from VTech, and whether the company can replace reduced business from former major customers.
- Whether improved gross margins can persist despite lower volume, labor inflation, RMB appreciation, and materials-cost pressure.
- The quality and liquidity of the long-dated corporate bond investments, including the basis for management’s conclusion that the unrealized loss is temporary.
- Cash availability by jurisdiction and the practical ability to upstream PRC subsidiary funds for dividends and other corporate needs.
- Dividend sustainability, progress under the $4 million repurchase authorization, and any subsequent share repurchases.
- The annual-report financial statements and disclosures for subsequent developments; this summary covers FY2012 and should not be treated as a current-period update.