Business Context and Reporting Period
Company: Deswell Industries, Inc. (Nasdaq: DSWL)
Filing Type: Form 6-K (Current Report)
Reporting Period: Fiscal Third Quarter and Nine Months ended December 31, 2008
Announcement Date: March 3, 2009
Deswell manufactures injection-molded plastic parts, electronic products, and metallic components for OEMs and contract manufacturers, primarily operating factories in the People's Republic of China. The company operates two main segments: Plastic and Electronic & Metallic.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Net Sales | $37.1 million | $35.4 million | $104.4 million | $112.3 million |
| Gross Margin | 17.3% | 22.4% | 15.2% | 19.0% |
| Operating Income | $0.9 million | $3.0 million | $0.5 million | $8.0 million |
| Net Income | $1.0 million | $3.0 million | $0.6 million | $7.8 million |
| Diluted EPS | $0.06 | $0.19 | $0.04 | $0.51 |
| Cash & Equivalents | $15.3 million (Dec 31, 2008) vs $22.7 million (Mar 31, 2008) | |||
| Working Capital | ||||
| Debt | No short-term or long-term borrowings |
Material Changes vs. Prior Period
- Revenue Mix: Q3 sales increased 4.8% year-over-year, driven by a 46.2% surge in the Plastic segment ($6.6M increase) which offset a 22.9% decline in the Electronic & Metallic segment ($4.9M decrease). For the nine months, total sales fell 7% due to a 33% drop in the Electronic & Metallic segment outweighing a 32.8% rise in Plastics.
- Margin Compression: Overall gross margin declined significantly. The Plastic segment margin dropped from 29.3% to 25.1% due to a 14% rise in resin prices, increased material usage, and Renminbi appreciation. The Electronic & Metallic margin collapsed from 17.7% to 7.3% due to lower demand and a $1.6 million provision for excess inventory.
- Profitability: Net income for Q3 fell 66% to $1.0 million. The Electronic & Metallic segment reported an operating loss of $0.9 million in Q3, compared to an operating income of $1.2 million in the prior year.
- Cost Reduction: Management reduced headcount from 5,200 to 4,000 employees in Q3 to minimize expenses.
Guidance, Outlook, and Risks
- Outlook: CEO Franki Tse stated that the global economic crisis will inevitably affect 2009 performance, with sales expected to slow. The company plans to focus on maximizing margins, strengthening core businesses, and pursuing new projects.
- Dividend: The Board declared a quarterly dividend of $0.04 per share, payable March 25, 2009.
- Capital Expenditures: The company has a capital commitment of $1.5 million for a new LCD product assembly line.
- Risks: Key risks include dependence on a few major customers, competition forcing price reductions, rising resin prices, currency fluctuations (Renminbi/HKD vs. USD), and potential labor shortages.
Investor Verification Checklist
- Inventory Provisions: Verify the sustainability of the $1.6 million (Q3) and $1.8 million (9-month) provisions for excess/obsolete inventory in the Electronic & Metallic segment.
- Customer Concentration: Assess the risk associated with the Plastic segment's reliance on a single major customer for electronic entertainment products, which drove the recent sales growth.
- Currency Impact: Monitor the impact of Renminbi appreciation on gross margins, which offset labor cost savings in both segments.
- Cash Burn: Review the $7.4 million decrease in cash over nine months, driven by $7.0 million in capital expenditures and $3.2 million in dividends, against the backdrop of declining operating cash flow.