Deswell Industries, Inc. — FY2015 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2015. This is an annual filing, not a standalone Q4 report; the filing also provides unaudited quarterly figures for the quarter ended March 31, 2015. Financial amounts below are U.S. dollars; annual figures are in millions unless otherwise noted.
Business context
Deswell manufactures injection-molded plastic components and electronic products and assemblies at facilities in Dongguan, China. In the fourth quarter of fiscal 2015, it closed and sold the assets of its metallic-parts business, reporting that unit as discontinued operations. Plastic products represented 51.9% and electronic products 48.1% of continuing-operation sales.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Continuing-operation net sales | $38.076 | $40.932 |
| Gross profit / margin | $4.224 / 11.1% | $3.637 / 8.9% |
| Operating loss | $(4.806) | $(6.834) |
| Net loss | $(2.808) | $(7.490) |
| Net loss per share | $(0.17) | $(0.46) |
| Cash used in operating activities | $(2.370) | $(1.878) |
| Cash and cash equivalents at year-end | $14.325 | $23.278 |
| Working capital | $45.864 | $50.868 |
| Total debt | $0 | $0 |
- FY2015 revenue declined 7.0%: plastic sales rose $0.434 million, while electronic sales fell $3.290 million, mainly on lower orders for home entertainment and professional audio products.
- Gross margin improved as plastic-segment margins strengthened to 16.9% from 11.7%; electronic-segment margins weakened to 4.9% from 6.4%. SG&A declined 11.1% to $9.123 million.
- Non-operating income increased to $2.553 million from $0.379 million, primarily reflecting a $1.819 million year-over-year increase in unrealized gains on marketable securities. The improved net result therefore included a significant investment-valuation contribution.
- Year-end current assets were $58.240 million and current liabilities $12.376 million. The balance sheet also included $9.911 million of time deposits maturing over three months, $1.601 million of deposits maturing over twelve months, $9.803 million of marketable securities and $1.676 million of available-for-sale securities.
- Operating cash use increased despite the smaller net loss; accounts receivable rose $1.724 million, which management attributed mainly to longer collection days. Investing cash use was $3.612 million, including $0.890 million of capital expenditure and purchases of marketable securities. Financing cash use was $2.971 million, all for dividends.
- FY2015 dividends paid totaled $2.970 million, or $0.185 per share. Management said it currently planned to continue quarterly dividends, subject to future earnings, cash needs and other risks.
Q4 and material changes
The filing’s unaudited quarterly table reports, for the quarter ended March 31, 2015, sales of $8.126 million, gross profit of $0.934 million, operating loss of $0.743 million and net income of $0.013 million. The filing cautions that quarterly totals may not equal audited figures because the metallic segment was presented as discontinued operations.
Compared with FY2014, annual sales continued to contract, but the operating and net losses narrowed. The plastic business improved through lower labor costs following headcount reductions and lower depreciation; electronic gross profit declined with lower turnover and higher labor allowances. The metallic-parts unit’s exit is a significant change in the business and reporting presentation.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management expects working-capital needs and capital additions to be funded from cash on hand and internally generated funds; it had no committed credit facilities.
- Management identified customer concentration as a key risk: two customers together accounted for 30.2% of FY2015 sales, and sales are based on purchase orders without long-term customer contracts.
- Operating risks include rising PRC labor costs, RMB appreciation, resin and electronic-component costs, competitive pricing, customer order volatility and inventory obsolescence. A Guangdong minimum-wage increase averaging 15.3% took effect May 1, 2015.
- All manufacturing is in China. The filing highlights PRC regulatory, tax, currency-transfer, political and legal risks, as well as restrictions on distributing subsidiary earnings and a potential 10% withholding tax on PRC-source dividends.
- The company believed it was a PFIC for FY2015, potentially exposing U.S. investors to adverse tax treatment. It stated it did not expect to monitor PFIC status in future years.
- Unusual or nonrecurring items included the metallic-parts closure, prior-year goodwill impairment of $0.392 million, and FY2015 investment gains that materially supported the reduction in net loss. No long-lived-asset impairment was recorded in FY2015.
- Management and the auditor concluded internal control over financial reporting was effective as of March 31, 2015; the financial-statement audit opinion was unqualified. The filing notes that the China-based auditor was not then subject to PCAOB inspection.
Investor verification priorities
- Confirm the Q4 figures and their treatment of discontinued operations against the audited statements and notes.
- Assess whether the improvement in losses is sustainable without unrealized investment gains, and review the composition, valuation and liquidity of securities and deposits.
- Track receivables, collection days, customer concentration and subsequent orders, particularly from the two major customers.
- Evaluate whether higher wages, currency movements and component or resin costs can be passed through without further customer losses or margin pressure.
- Review the metallic business disposal, remaining liabilities and any ongoing environmental or operating obligations.
- Verify cash availability for dividends, including PRC subsidiary distribution restrictions, and monitor the company’s PFIC status and related U.S. tax implications.