Deswell Industries, Inc. — FY2019 Form 20-F
Reporting period: Fiscal year ended March 31, 2019. The request identifies 2018 Q4, but this filing is an annual report and does not provide a standalone fiscal fourth-quarter income statement. Financial amounts below are U.S. dollars unless noted.
Business context
Deswell manufactures injection-molded plastic parts and assembles electronic products and subassemblies for OEMs and contract manufacturers. Manufacturing is conducted in Dongguan, China. In FY2019, electronics represented 56.8% of sales and plastics 43.2%; the former metallic-parts business was discontinued in 2015.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $66.581 million | $60.667 million | Up 9.7% |
| Gross profit / margin | $10.270 million / 15.4% | $9.714 million / 16.0% | Profit up; margin down 0.6 percentage points |
| Operating income / margin | $0.533 million / 0.8% | $1.802 million / 3.0% | Down 70.4% |
| Net income | $4.273 million | $6.190 million | Down 31.0% |
| Basic and diluted EPS | $0.27 | $0.39 | Down $0.12 |
| Cash from operations | $2.166 million | $5.699 million | Down 62.0% |
FY2019 net income included $3.884 million of net non-operating income, compared with $4.395 million in FY2018. This included investment income and gains, bank interest, and rental income; operating income was substantially lower than net income.
At March 31, 2019, cash and cash equivalents were $14.371 million, time deposits maturing over three months were $0.371 million, and marketable securities were $24.446 million. Working capital was $54.412 million; total debt was zero. Total assets were $100.169 million and shareholders’ equity was $83.964 million. Capital expenditures were $0.878 million. Contractual obligations and commitments totaled $6.686 million, primarily $6.394 million in purchase obligations; $0.235 million was in capital commitments.
Material changes and management commentary
- Sales growth reflected higher electronics orders, particularly professional audio products and home entertainment equipment. Plastic sales rose only modestly as printer and tooling orders partly offset weaker telephone and office-equipment orders.
- Gross margin declined as lower plastic selling prices and higher electronic raw-material and labor costs pressured margins. SG&A rose $0.653 million, while other income of $0.894 million in FY2018 became other expense of $0.278 million in FY2019, including a $0.403 million doubtful-receivables provision.
- Operating cash flow fell partly as accounts payable decreased $2.343 million. Inventory rose $0.353 million, and accounts receivable increased $0.225 million on the cash-flow statement.
- The company paid $1.589 million in dividends in FY2019, equivalent to $0.10 per share. A further $0.07-per-share dividend was declared in June 2019 and paid in July. Future dividends are not assured.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects working capital and capital spending to be funded mainly from cash on hand and internally generated funds; it says it may seek financing if appropriate.
- Three customers each accounted for more than 10% of FY2019 sales and together represented 35.1%. Sales are based on purchase orders, not long-term customer contracts.
- U.S.–China trade tariffs pose a specific risk because production is concentrated in China. The company was studying production relocation to Southeast Asia and, in June 2019, began procedures to incorporate a wholly foreign-owned enterprise in Vietnam; the plan remained in progress and its success was uncertain.
- Other stated risks include Chinese labor-cost and RMB movements, resin and electronic-component availability and pricing, intense competition, customer credit exposure, and dependence on China’s regulatory and business environment. The company reported no currency hedges or open forward contracts at March 31, 2019.
- Management believed the company was a passive foreign investment company (PFIC) for FY2019 and said it might remain one, potentially creating adverse U.S. tax consequences for U.S. investors.
- The auditor issued an unqualified opinion on the consolidated 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 notes that the auditor was not subject to PCAOB inspection in China at the time.
Investor verification priorities
- Confirm the period under review: this is FY2019, not a standalone 2018 Q4 filing.
- Assess the sustainability and composition of earnings, especially non-operating income relative to operating income, and review marketable-securities valuation and exposure.
- Track customer concentration, receivables and the increase in the doubtful-account allowance.
- Evaluate whether tariffs, Vietnam relocation plans, labor costs, currency changes, and input-price pressures affect orders and margins.
- Confirm current PFIC status and applicable U.S. tax treatment with qualified tax advisers.
- Review dividend capacity and the restrictions on transferring funds from PRC subsidiaries, including statutory reserve and withholding-tax requirements.