Deswell Industries, Inc. — FY2014 Form 20-F
Business context and reporting period. This is an annual report for the fiscal year ended March 31, 2014, not a standalone Q4 filing. Deswell manufactures plastic components and electronic products and assemblies in Dongguan, China; it reports in U.S. dollars under U.S. GAAP. Its unaudited fiscal Q4 ended March 31, 2014. The auditor issued an unqualified opinion on the annual financial statements and internal controls.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $40.932 million | $54.074 million |
| Gross profit / margin | $3.144 million / 7.7% | $6.810 million / 12.6% |
| Operating loss / margin | $7.245 million / (17.7%) | $3.719 million / (6.9%) |
| Net loss / diluted loss per share | $7.490 million / $0.46 | $1.991 million / $0.12 |
| Net cash from (used in) operations | $(1.878) million | $8.410 million |
| Capital expenditures | $0.853 million | $0.951 million |
| Cash and cash equivalents at year-end | $23.278 million | $32.030 million |
| Working capital at year-end | $50.868 million | $58.298 million |
| Total assets / shareholders’ equity | $100.636 million / $89.610 million | $112.565 million / $101.576 million |
| Total debt | None reported | None reported |
At March 31, 2014, current assets were $61.894 million and current liabilities were $11.026 million. In addition to cash, the company held $11.258 million in time deposits maturing after three months, $5.303 million in trading securities and $1.643 million in available-for-sale securities. It had no committed credit facilities or restricted cash. Operating, investing and financing cash flows were $(1.878) million, $(2.341) million and $(4.533) million, respectively.
Fiscal Q4 unaudited results: sales of $7.944 million, gross profit of $0.199 million, operating loss of $2.986 million and net loss of $3.121 million. Management notes quarterly data may not sum to audited annual totals due to reclassifications.
Material changes versus the prior year
- Sales fell 24.3%, with decreases of $7.387 million in plastics and $5.755 million in electronic and metallic operations. No metallic-parts sales were recorded in FY2014.
- Gross margin contracted to 7.7% from 12.6%. The plastics segment’s margin declined to 11.7% from 14.1%; the electronic and metallic segment’s margin fell to 4.1% from 11.1%.
- The net loss widened to $7.490 million from $1.991 million. Lower sales and margins, and lower non-operating income ($0.379 million versus $2.056 million), contributed to the deterioration.
- Operating cash flow swung from $8.410 million provided to $1.878 million used. Cash and cash equivalents decreased by $8.752 million.
- The company recorded $0.490 million of property and equipment impairment and a $0.392 million goodwill impairment, eliminating the remaining goodwill balance.
- Dividends paid declined to $3.615 million from $5.357 million; reported dividends per share were $0.22 versus $0.30. The $4 million share-repurchase program ended by March 31, 2014; FY2014 repurchases totaled 561,409 shares for $1.411 million.
Outlook, commentary, risks and contingencies
Management cited weak customer orders amid sluggish economic conditions in the United States and Europe. It provided no quantified FY2015 revenue, earnings or margin guidance. Management expected working-capital needs and capital additions to be funded mainly from cash on hand and internally generated funds, while retaining the option to seek financing. The board’s stated intention to continue quarterly dividends is not assured and depends on earnings, cash needs and other conditions.
- Three customers accounted for 43.2% of FY2014 sales; sales are purchase-order based, with no long-term customer contracts. VTech, Lenbrook and Loud Technologies represented 15.8%, 15.7% and 11.7% of sales, respectively.
- Labor-cost increases, RMB appreciation, resin and electronic-component prices, competitive pricing and customer order volatility may further pressure margins. The company did not hedge currency exposure and had no open forward contracts at year-end.
- Cash and deposits are held across banks in Hong Kong, Macao and China; management warned that deposit-protection limits may not cover all balances. The filing also notes that PRC restrictions and statutory reserves can constrain upstream dividends; $77.255 million of paid-in capital and statutory reserves was restricted from transfer in the form of dividends, loans or advances.
- The company believed it was a passive foreign investment company (PFIC) for FY2014 and could remain one. U.S. holders may face adverse tax consequences.
- Other disclosed exposures include PRC regulatory, tax, legal and currency risks; limited product-liability coverage and no business-interruption insurance; and customer credit, inventory, supply, power, shipping and environmental risks. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the steep sales and margin declines continued after March 31, 2014, particularly in the two main operating segments.
- Customer concentration, order trends and receivable exposure; VTech accounted for 23.0% of year-end accounts receivable.
- Cash-flow sustainability and the composition, location, accessibility and protection of cash, time deposits and securities.
- The basis and impact of the property, equipment and goodwill impairments, and whether further impairments or inventory write-downs are likely.
- Current dividend policy and PRC subsidiaries’ capacity to remit funds, given statutory restrictions and withholding-tax considerations.
- The company’s PFIC status and applicable U.S. tax reporting implications; the filing cautions that status is determined annually.