Deswell Industries, Inc. — Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2013, filed July 16, 2013. The request labels the period “2012 Q4,” but this filing is an annual report; it also presents unaudited quarterly data for the quarter ended March 31, 2013. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and financial results
Deswell manufactures injection-molded plastic parts, electronic products and assemblies, and metallic molds and parts. Its factories are in Dongguan, China. Annual figures below are in millions of U.S. dollars unless otherwise noted.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $54.074 | $64.783 | -16.5% |
| Gross profit / margin | $6.810 / 12.6% | $9.465 / 14.6% | Profit down 28.1%; margin down 2.0 percentage points |
| SG&A | $10.803 | $12.273 | -12.0% |
| Operating loss / margin | $(3.719) / -6.9% | $(2.169) / -3.3% | Loss widened |
| Net loss / loss per share | $(1.991) / $(0.12) | $(1.461) / $(0.09) | Loss widened |
| Cash from operations | $8.410 | $11.149 | Down $2.739 |
| Capital expenditures | $0.951 | $0.282 | Up $0.669 |
Net sales fell in both segments: plastics sales declined 5.7% and electronic and metallic sales declined 25.0%. The latter segment’s professional-audio orders fell substantially. Two customers each represented at least 10% of sales; together they contributed 24.1%, including VTech at 13.0% and Lenbrook at 11.1%.
FY2013 non-operating income was $2.056 million, including income from securities investments and realized and unrealized investment gains. These gains helped cushion operating losses; the company nevertheless reported a net loss. Gross margins weakened in both segments, which management attributed mainly to higher overtime labor costs and, in electronics, higher factory overhead.
Quarter ended March 31, 2013
The filing’s unaudited quarterly table reports sales of $9.517 million, gross profit of $0.331 million, operating loss of $2.668 million, and net loss of $1.999 million. Compared with the March 2012 quarter, sales fell from $12.198 million, gross profit from $1.409 million, operating loss widened from $1.652 million, and net loss widened from $0.713 million. The filing identifies the fiscal fourth quarter as typically the slowest, partly because factories close for two weeks for Chinese New Year.
Liquidity, balance sheet and capital allocation
| Metric at March 31 | 2013 | 2012 |
|---|---|---|
| Cash and cash equivalents | $32.030 million | $33.073 million |
| Time deposits maturing after three months | $8.684 million | $4.008 million |
| Working capital | $58.298 million | $60.933 million |
| Total assets | $112.565 million | $121.959 million |
| Shareholders’ equity | $101.576 million | $107.689 million |
| Total debt | None | None |
Operating cash flow remained positive but was supported in part by working-capital reductions: receivables decreased $3.971 million and inventory decreased $4.366 million, while accounts payable decreased $2.597 million. Investing activities used $4.289 million, including purchases of securities and time deposits; financing activities used $5.164 million, principally for $5.357 million of cash dividends and $1.102 million of share repurchases, partly offset by $1.295 million from option exercises. The company reported no committed credit facilities or restricted cash.
The board had authorized up to $4 million of buybacks over two years. In FY2013, Deswell repurchased 414,162 shares for $1.102 million, averaging $2.66 per share; approximately $2.898 million remained under the program at year-end. The company reported dividends of $0.30 per share for FY2013 and said it planned to continue quarterly dividends, subject to future earnings, cash needs, and other conditions.
Management outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expects working-capital needs and capital additions to be funded from cash and internally generated funds. Capital commitments at year-end were $0.407 million, mainly for machinery.
- Demand and customer concentration: Sales are based on purchase orders, not long-term customer contracts. Weak customer demand, loss of major customers, or further reductions in orders could materially affect results.
- Costs and competition: Rising PRC wages, overtime, RMB appreciation, resin prices, and competitive pricing may pressure margins. Guangdong minimum wages rose an average 19.1% effective May 1, 2013, after the fiscal year-end.
- Investment and impairment items: The company recorded a $0.197 million impairment charge in FY2013. Securities-related gains contributed to non-operating income. The filing reports $6.168 million of trading securities and $1.586 million of available-for-sale securities at year-end.
- Tax and shareholder risks: Management believed Deswell was a PFIC for FY2013, potentially exposing U.S. holders to adverse tax treatment. PRC restrictions, withholding taxes, and possible tax-residency or transfer-pricing assessments may affect cash repatriation and distributions.
- Geographic and operating risks: Manufacturing is concentrated in China; risks include currency controls, regulatory and political changes, labor-law constraints, power interruptions, and limited business-interruption and product-liability insurance. A substantial portion of cash is held in banks in Hong Kong, Macao, and China.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting; management also concluded controls were effective. The filing notes that the China-based auditor was not subject to PCAOB inspection at the time.
- Other disclosures: No material legal proceedings or off-balance-sheet financing arrangements were reported. The company stated that it was not using a committed credit facility.
Key facts investors should verify
- Whether order trends and segment performance stabilized after FY2013, especially the sharp decline in electronic and metallic sales and the weak March quarter.
- Whether reported operating cash flow is sustainable as receivables, inventory, and payables normalize, and how much cash is readily accessible across jurisdictions and financial institutions.
- Customer exposure and credit quality: VTech represented 27.8% of year-end receivables, and Primax represented 12.9%, despite neither being the only major sales customer.
- The composition, liquidity, valuation, and realized results of securities and time deposits, and the extent to which investment income supports reported earnings.
- Dividend affordability and the remaining buyback authorization in light of recurring net losses, falling equity, PRC distribution restrictions, and the absence of debt facilities.
- Deswell’s PFIC status for relevant tax years and any resulting U.S. holder reporting or tax consequences.