FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For March 4 2005
DESWELL INDUSTRIES, INC.
(Registrant's name in English)
Unit 516 517, Hong Leong Industrial Complex,
No. 4 Wang Kwong Road, Kowloon Bay,
Kowloon, Hong Kong
(Address of principal executive offices)
Deswell Industries, Inc. Announces Earnings of $0.45 Per Share for the Third
Quarter; Revenue Up 46% and Net Income Up 19%
HONG KONG--(BUSINESS WIRE)--Feb. 22, 2005--
Company Also Announces Three-for-Two Stock Split
And Third Quarter Dividend of $0.26 Per Share
Deswell Industries, Inc. (Nasdaq: DSWL) today announced results
for the third quarter and nine months ended December 31, 2004.
Net sales for the quarter were $36.2 million, an increase of 46%
compared to sales of $24.8 million in the third quarter ended December
31, 2003. Operating income increased 10% to $4.8 million, compared to
$4.4 million in the previous year. Net income for the quarter was $4.2
million, an increase of 19%, compared to $3.5 million in the previous
year. The basic earnings per share and diluted earnings per share
increased to $0.45 and $0.45, respectively (based on 9,382,000 and
9,409,000 weighted average shares outstanding, respectively), compared
to $0.39 and $0.37, respectively (based on 9,121,000 and 9,518,000
weighted average shares outstanding, respectively), in the quarter
ended December 31, 2003.
Net sales for the nine months ended December 31, 2004 were $96.9
million, an increase of 28% compared to sales of $75.9 million for the
corresponding period in 2003. Operating income increased 4% to $14.1
million, compared to $13.6 million in the previous year. Net income
was $11.8 million, compared to $12.0 million in the previous year. The
basic earnings per share and diluted earnings per share increased to
$1.28 and $1.26, respectively (based on 9,240,000 and 9,406,000
weighted average shares outstanding, respectively), compared to $1.32
and $1.29, respectively (based on 9,097,000 and 9,316,000 weighted
average shares outstanding, respectively), in the nine months ended
December 31, 2003.
The Company's cash and cash equivalents at December 31, 2004 were
$23.1 million, as compared to $30.2 million on March 31, 2004. The
decreased cash position was mainly attributed to the funding from cash
flow for the construction and acquisition of machinery for the
plastic-injection manufacturing plant in Dongguan and for the rapid
growth of the electronic and metallic segment. Working capital was
$57.2 million as of December 31, 2004, versus $52.9 million of March
31, 2004. The Company has short-term borrowings of $0.9 million and no
long-term borrowings as of December 31, 2004.
Mr. Richard Lau, chairman and chief executive officer, commented,
"The Company continued to see strong revenue growth for the quarter.
Both our electronics & metallic division and plastic-injection
division had strong performances, growing 56% and 37% respectively.
This growth was primarily due to our continued penetration of the
audio equipment market and the increase in plastic-injection orders
from existing and new customers. In 2004, resin prices were
significantly affected by the pricing fluctuation of crude oil. During
the quarter, there was an average 10% to 15% decrease in resin prices.
While oil prices moved up a bit in January of 2005, we expect raw
material pricing to stabilize in six to nine months time."
Mr. Lau continued, "We expect our business in the electronic &
metallic segment to continue to grow in the coming year. Furthermore,
our plastics business is beginning to demonstrate improved growth, and
we are looking forward to the completion of phase III expansion of our
Dongguan manufacturing plant in the third quarter of fiscal 2006. Upon
completion of this expansion, the fully-equipped factory space and
facility will enable us to better focus on the highend of the market.
The other new expansion is our export tooling division. The machinery
for this division will be fully installed by April 2005 and we
estimate the division will be matured and able to generate revenue in
September 2005."
Third Quarter Dividends
The Company also announced that on February 22, 2005 its board of
directors declared a dividend of $0.26 per share (or equivalent to
$0.173 per share giving effect to the three-for-two stock split
announced below) for the third quarter. The dividend will be payable
on March 29, 2005 to shareholders of record as of March 15, 2005.
Three-for-two Stock Split
The Company also announced that its board of directors has
approved a three-for-two stock split in the Company's common stock,
payable on March 29, 2005 to shareholders of record on March 15, 2005.
The stock split will increase the number of total shares outstanding
from approximately 9.8 million shares to 14.7 million shares.
General U.S. Federal Income Tax Consequences of Stock Split
The following general description of the federal income tax
consequences of the stock split is based on the Internal Revenue Code
of 1986, as amended, the applicable Treasury Regulations promulgated
thereunder, judicial authority and current administrative rulings and
practices as in effect on the date of this press release, all of which
are subject to change (possibly with retroactive effect) and to
differing interpretations. This discussion is directed to U.S.
individual shareholders who hold their shares in the Company for
investment, is for general information only, and does not address all
the tax consequences that may be relevant to shareholders in light of
their particular tax circumstances or to shareholders who may be
subject to special tax treatment. We have not sought, and will not
seek, an opinion of counsel or a ruling from the Internal Revenue
Service ("IRS")regarding the federal income tax consequences of the
stock split. Consequently, our beliefs expressed below are not binding
upon the IRS or the courts, and there can be no assurance that the IRS
or the courts will accept the positions expressed herein. Furthermore,
no foreign, state or local tax consequences are discussed herein.
ACCORDINGLY, EACH SHAREHOLDER IS URGED TO CONSULT ITS, HIS OR HER OWN
TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE STOCK
SPLIT TO SUCH HOLDER.
Except in connection with receipt of cash in lieu of a fractional
share interest, the forward stock split should not result in any
recognition of gain, loss or taxable income. The aggregate tax basis
in the post-split common shares (including the new shares received in
the stock split) held by a shareholder should be equal to the
aggregate tax basis in the common shares held by the shareholder
immediately before the stock split, potentially reduced by the basis
allocable to any fractional share that the shareholder is treated as
having redeemed for cash. The holding period of the new common shares
should include the holding period of the old common shares.
Notwithstanding the foregoing, the receipt of cash in lieu of a
fractional share interest will result in tax liabilities, which should
not be material in amount in view of the value of the fractional share
interest. Each shareholder is urged to consult its, his or her own tax
advisor regarding the specific tax consequences to such shareholder of
the receipt of cash in lieu of a fractional share interest.
Backup Withholding. Cash payments made to our shareholders may,
under certain circumstances, be subject to U.S. backup withholding at
a rate of 28%. There is no withholding for shareholders who provide
the Company's transfer agent with their correct U.S. federal taxpayer
identification number and who certify that no loss of exemption from
backup withholding has occurred on IRS Form W-9 or its substitute.
Certain categories of persons (generally, corporations and non-U.S.
persons) are not subject to backup withholding. In order for a foreign
(i.e., non-U.S. person) to qualify as an exempt recipient, such person
must generally provide the Company's transfer agent with a completed
IRS Form W-8BEN or its substitute. Any amounts withheld under the
backup withholding rules are not an additional tax. Rather, any such
amounts will be allowed as a credit or refund against such
shareholder's U.S. federal income tax liability provided that the
shareholder furnishes to the IRS all required information.
About Deswell
Deswell manufactures injection-molded plastic parts and
components, electronic products and subassemblies, and metallic
products for original equipment manufacturers ("OEMs") and contract
manufacturers at its factories in the People's Republic of China. The
Company produces a wide variety of plastic parts and components used
in the manufacture of consumer and industrial products; printed
circuit board assemblies using surface mount ("SMT") and finished
products such as telephones, telephone answering machines,
sophisticated studio-quality audio equipment and computer peripherals.
The Company's customers include Digidesign Inc., Vtech
Telecommunications Ltd., Epson Precision (H.K.) Ltd., Inter-Tel
Incorporated, Kyocera Mita Industrial Co. (H.K.) Limited, Peavey
Electronics Corporation and Emerson.
To learn more about Deswell Industries, Inc., please visit the
Company's web site at www.deswell.com.
This press release may contain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements in this press release are based on current
expectations and are subject to change. Actual results may differ
materially from the forward--looking statements. Deswell does not
undertake to update any such forward-looking statements or to publicly
announce developments or events relating to the matters described
herein. Uncertainties and risks are described in Deswell's most
recently filed SEC documents, such as its most recent form 20-F.
tables follow
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
( U.S. dollars in thousands, except per share data )
Quarter ended Nine months ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
--------- -------- ------------------
(Unaudited) (Unaudited)
Net sales $36,185 $24,784 $96,897 $75,938
Cost of sales 26,783 16,383 70,716 51,146
-------- -------- -------- --------
Gross profit 9,402 8,401 26,181 24,792
Selling, general and
administrative expenses 4,565 3,998 12,033 11,232
-------- -------- -------- --------
Operating income 4,837 4,403 14,148 13,560
Interest expense (4) (1) (7) (16)
Other income, net 30 (306) 92 528
-------- -------- -------- --------
Income before income taxes 4,863 4,096 14,233 14,072
Income taxes 179 81 488 511
-------- -------- -------- --------
Income before minority
interests 4,684 4,015 13,745 13,561
Minority interests 477 480 1,915 1,551
-------- -------- -------- --------
Net income $4,207 $3,535 $11,830 $12,010
======== ======== ======== ========
Basic earnings per share (note
3) $0.45 $0.39 $1.28 $1.32
======== ======== ======== ========
Weighted average number of
shares outstanding (in
thousands)(note 3) 9,382 9,121 9,240 9,097
======== ======== ======== ========
Diluted earnings per share
(note 3) $0.45 $0.37 $1.26 $1.29
======== ======== ======== ========
Diluted weighted average number
of shares outstanding (in
thousands)(note 3) 9,409 9,518 9,406 9,316
======== ======== ======== ========
DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
( U.S. dollars in thousands)
December 31, March 31,
2004 2004
------------ ---------
ASSETS (Unaudited) (Audited)
Current assets :
Cash and cash equivalents $23,059 $30,193
Restricted cash 1,039 390
Accounts receivable 32,392 18,957
Inventories 21,481 16,174
Prepaid expenses and other current assets 4,293 2,952
Income taxes receivable - 127
--------- ---------
Total current assets 82,264 68,793
Property, plant and equipment - net 53,752 44,261
Other investments 2 2
Goodwill 478 478
--------- ---------
Total assets $136,496 $113,534
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $18,475 $11,168
Bank loan 903 -
Customer deposits and accrued expenses 5,296 4,619
Income taxes payable 423 130
--------- ---------
Total current liabilities 25,097 15,917
--------- ---------
Minority interests 9,304 7,872
--------- ---------
Deferred income tax - 15
--------- ---------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued and
outstanding 9,763,585 shares at December
31, 2004 and 9,149,085 shares at March
31, 2004 37,190 29,980
Additional paid-in capital 6,970 6,970
Retained earnings 57,935 52,780
--------- ---------
Total shareholders' equity 102,095 89,730
--------- ---------
Total liabilities and shareholders'
equity $136,496 $113,534
========= =========
DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
( U.S. dollars in thousands )
Nine months ended
December 31,
----------------------------
2004 2003
---- ----
Cash flows from operating activities :
Net income $11,830 $12,010
Adjustments to reconcile net income to net
cash
provided by operating activities :
Depreciation and amortization 3,667 3,308
Loss on disposal of property, plant and
equipment 32 406
Minority interests 1,915 1,001
Deferred taxes (15) -
Changes in operating assets and
liabilities :
Accounts receivable (13,435) (5,027)
Marketable securities - 4,821
Inventories (5,307) (1,713)
Prepaid expenses and other
current assets (1,341) (1,259)
Income taxes receivable 127 247
Accounts payable 7,307 3,106
Customer deposits and accrued
expenses 677 535
Income taxes payable 293 (3,043)
------------ ------------
Net cash provided by operating
activities 5,750 14,392
------------ ------------
Cash flows from investing activities
Purchase of property, plant and
equipment (13,210) (17,768)
Proceeds from disposal of property, plant
& equipment 20 264
Net cash used in investing
activities (13,190) (17,504)
------------ ------------
Cash flows from financing activities
Common stock issued 7,210 1,627
Dividends paid to minority
shareholders of subsidiaries (457) -
Contribution from minority
shareholders of subsidiaries (26) -
Increase in bank loans 903 -
Dividends paid (6,675) (6,374)
(Increase)/decrease in restricted
cash (649) 1,976
------------ ------------
Net cash provided by/(used in)
financing activities 306 (2,771)
------------ ------------
Net increase in cash and cash
equivalents (7,134) (5,883)
cash and cash equivalents, at
beginning of period 30,193 34,400
------------ ------------
Cash and cash equivalents, at end of period 23,059 28,517
============ ============
Supplementary disclosures of cashflow information :
Cash paid during the period for :
Interest 7 16
Income taxes 83 3,309
============= ============
DESWELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands except per share data)
1. Management's Statement
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of Deswell
Industries, Inc. (the Company) at December 31, 2004 and March 31, 2004, the
results of operations for the quarters and nine months ended December 31, 2004
and December 31, 2003, and the cash flows for the nine months ended December 31,
2004 and December 31, 2003. The notes to the Consolidated Financial Statements
contained in the Form 20-F Annual Report filed on July 16, 2004 under the
Securities Exchange Act of 1934 should be read in conjunction with these
Consolidated Financial Statements.
2. Inventories
December 31, March 31,
2004 2004
---- ----
Inventories by major categories :
Raw materials $ 8,650 $ 7,832
Work in progress 8,437 4,467
Finished goods 4,394 3,875
------------- --------------
$ 21,481 $ 16,174
============= ==============
3. Earnings Per Share
The basic net income per share and diluted net income per share are
computed in accordance with the Statement of Financial Accounting Standards
No.128 "Earnings Per Share."
The basic net income per share is computed by dividing income available to
common holders by the weighted average number of common shares outstanding
during the period. Diluted net income per share gives effect to all potentially
dilutive common shares outstanding during the period. The weighted average
number of common shares outstanding is adjusted to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued. In computing the dilutive effect of
potential common shares, the average stock price for the period is used in
determining the number of treasury shares assumed to be purchased with the
proceeds from exercise of options.
The net income for the nine months ended December 31, 2004 and 2003 were
both from the Company's continuing operations.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
The Company's revenues are derived from the manufacture and sale of (i)
injection-molded plastic parts and components, (ii) electronic products and
subassemblies and (iii) metallic parts and components. The Company carries out
all of its manufacturing operations in southern China, where it is able to take
advantage of the lower overhead costs and less expensive labor rates as compared
with Hong Kong.
Quarter Ended December 31, 2004 Compared to Quarter Ended December 31, 2003
Net Sales - The Company's net sales for the quarter ended December 31, 2004
were $36,185,000, an increase of $11,401,000, or 46.0%, as compared to the
corresponding period in 2003. The increase in sales was mainly related to the
increase in sales of injection-molded plastic segment and electronic and
metallic segment of $4,866,000 and $6,535,000 respectively. This represented
increases of 36.9% and 56.4% respectively, as compared with the net sales from
these segments in the corresponding period in the prior year.
The revenue increase in the plastic segment was mainly a result of an
increase in orders from its existing and new customers of $4,543,000 and
$323,000 respectively during the quarter. The increase in net sales in the
electronic and metallic segment was mainly due to an increase in orders from
both its existing and new customers of $6,398,000 and $503,000 respectively,
offsetting the net decrease in orders from old customers of $366,000 during the
quarter. The net increase resulted from a change in the customer mix during the
period as compared with last year.
Gross Profit - The gross profit for the quarter ended December 31, 2004 was
$9,402,000, representing a gross profit margin of 26.0%. This compares with the
overall gross profit and gross profit margin of $8,401,000 or 33.9% for the
quarter ended December 31, 2003.
Gross profits in the plastic segment increased by $497,000 to $6,209,000 or
34.4% of net sales, for the quarter ended December 31, 2004 compared to
$5,712,000 or 43.3% of net sales, for the quarter ended December 31, 2003. This
decrease in gross margins was mainly attributed to the 60% -90% increase in
plastic resin costs since last year, most of which we could not pass on to our
customers.
Gross profits in the electronic & metallic segment increased by $504,000 to
$3,193,000, or 17.6% of net sales, for the quarter ended December 31, 2004
compared to $2,689,000 or 23.2% of net sales, for the same period last year.
This decrease in gross margins was mainly attributed to the general increase in
raw material pricing and labor cost, averaging 4% and 10% over the prior year
respectively. While we continued our long-term focus on attracting higher-margin
sales, pricing pressure resulted in generally lower selling prices during the
quarter.
Selling, General and Administrative Expenses - SG&A expenses for the
quarter ended December 31, 2004 were $4,565,000, amounting to 12.6% of total net
sales, as compared to $3,998,000 or 16.1% of total net sales for the quarter
ended December 31, 2003. There was an increase in selling, general and
administrative expenses of $567,000 over the corresponding period.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The SG&A expenses in the plastic segment increased by $468,000 or 17.6% to
$3,127,000 or 17.3% of net sales, for the quarter ended December 31, 2004
compared to $2,659,000 or 20.2% of net sales, for the corresponding period in
2003. The increase was primarily related to the increase in salary expenses of
$720,000 offsetting the decrease in depreciation expenses of $97,000 and the
tightened expenses control in administration expenses of $164,000 during the
quarter ended December 31, 2004.
The SG&A expenses in the electronic & metallic segment increased by $99,000
or 7.4% to $1,438,000 or 7.9% of net sales, for the quarter ended December 31,
2004 compared to $1,339,000 or 11.5% of net sales for corresponding period in
2003. The increase was primarily related to the increase in salary expenses of
$42,000 and other general administration expenses of $58,000 during the quarter
ended December 31, 2004.
Operating Income - Operating income was $4,837,000 for the quarter ended
December 31, 2004, an increase of $434,000, or 9.9% as compared with the
corresponding quarter in the prior year.
On a segment basis, the operating income of the plastics division increased
$29,000 to $3,082,000 or 17.1% of net sales, in quarter ended December 31, 2004
compared to $3,053,000 or 23.1% of net sales in corresponding period in 2003.
The increase in operating income was attributable to the increase in gross
profit offsetting the increase in SG&A expenses as described above.
The operating income of electronic & metallic segment increased $405,000 to
$1,755,000 or 9.7% of net sales, in the quarter ended December 31, 2004 compared
to $1,350,000 or 11.6% of net sales in the corresponding period in 2003. The
increase in operating income was attributable to the increase in gross profit
offsetting the increase in SG&A expenses as described above.
Other income - Other income was $30,000 for the quarter ended December 31,
2004, an increase of $336,000 as compared with the corresponding period in the
prior year.
On a segment basis, other income attributable to the plastic segment
increased to $67,000* in the quarter ended December 31, 2004, as compared with
other expenses of $330,000 for the corresponding quarter in the prior year. This
increase in other income was primarily attributable to the increase in exchange
gain of $7,000, the decrease in loss on disposal of fixed assets of $397,000 and
the decrease in loss on disposal of residual material of $9,000 offsetting the
decrease in interest income of $26,000 in the quarter ended December 31, 2004 as
compared with corresponding period in 2003.
Other income attributable to the electronic & metallic segment decreased
$61,000 to other expenses of $37,000 in the quarter ended December 31, 2004.
This decrease in other income was mainly due to the increase in exchange loss of
$10,000 and a provision for bad debt of $13,000 in the quarter ended December
31, 2004.
Income Taxes - Income tax expenses for the quarter were $179,000, an
increase of $98,000 as compared with the corresponding quarter in the prior
year. On a segment basis, the income taxes of plastic segment increased $86,000
to $112,000 for the quarter ended December 31, 2004 whereas the income tax
expenses for the electronic & metallic segment increased $12,000 to $67,000 for
the quarter ended December 31, 2004, respectively. The increase in the plastic
segment was primarily due to a final tax charge of $47,000 for the taxable year
2003 of our Shekou manufacturing plant whereas the increase in the electronic &
metallic segment was due to an increase in net sales as described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Minority Interest - Minority interests represent a 29% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries and a 49% minority interest in
the subsidiary conducting marketing for Deswell's plastic and electronic
businesses. In January 2003, the Company acquired an additional 20% interest in
Integrated, increasing its ownership in that subsidiary from 51% to 71%. The
dollar amount of minority interest was decreased $3,000 to $477,000 for the
quarter ended December 31, 2004, from $480,000 for the corresponding quarter in
the prior year. Despite the decrease in minority interest in Deswell's
electronic & metallic segment, the dollar amount of minority interest increased
$92,000 to $471,000 for the quarter ended December 31, 2004, from $379,000 for
the corresponding quarter in the prior year, which reflects that the electronics
subsidiaries generated more net income in the quarter ended December 31, 2004,
compared with corresponding quarter in fiscal 2003. Whereas the dollar amount of
minority interest in the marketing subsidiary decreased $95,000 to $6,000 this
quarter, from $101,000 for corresponding quarter. This was mainly due to the end
of operations of this marketing subsidiary during the quarter ended December 31,
2004.
Net Income - Net income was $4,207,000 for the quarter ended December 31,
2004, an increase of $672,000 or 19.0%, as compared to net income of $3,535,000
for the quarter ended December 31, 2003, and net income as a percentage of net
sales decreased from 14.3% to 11.6% for the quarter ended December 31, 2004. The
increase in net income was mainly the result of the increase in operating income
and other income, offsetting the increase in income tax expenses as described
above.
Net income for the plastic segment increased by 16.8% to $3,031,000 for the
quarter ended December 31, 2004 compared to $2,596,000 for the corresponding
quarter in 2003. The increase in net income of the plastic segment was mainly
the result of the increase in operating income and other income, the decrease in
minority interest, offsetting the increase in income tax expenses as described
above.
Net income for the electronic & metallic segment increased by 25.2% to
$1,176,000 for the quarter ended December 31, 2004 compared to $939,000 for the
corresponding quarter in 2003. The increase in net income of the electronic &
metallic segment was mainly the result of the increase in operating profit
offsetting the decease in other income, the increase in income taxes and
minority interest, as described above.
Nine Months Ended December 31, 2004 Compared to Nine Months Ended December
31, 2003
Net Sales - The Company's net sales for the nine months ended December 31,
2004 were $96,897,000, an increase of $20,959,000 or 27.6% as compared to
corresponding period in 2003. The increase in sales was mainly related to the
increase in sales of plastic segment and electronics and metallic segment of
$5,471,000 and $15,488,000 respectively. This represented an increase of 13.4%
and 44.1% respectively, as compared with the respective net sales from these
segments in the corresponding period in the prior year.
The revenue increase in the plastics segment was mainly a result of
increase in orders from its existing and new customers of $5,070,000 and
$401,000 respectively as compared to the corresponding period last year. The
increase in net sales in the electronic and metallic segment was mainly due to
an increase in orders from both existing and new customers of $15,134,000 and
$1,195,000 respectively, offsetting the net decrease in orders from old
customers of $841,000 during the nine months ended December 31, 2004. The net
increase resulted from a change in the customer mix during the period as
compared with last year.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross Profit - The gross profit for the nine months ended December 31, 2004
was $26,181,000, representing a gross profit margin of 27.0%. This compares with
the overall gross profit and gross profit margin of $24,792,000 or 32.6% for the
nine months ended December 31, 2003.
Gross profit in the plastics segment decreased by $649,000 to $16,185,000
or 35.0% of net sales, for the nine months ended December 31, 2004 compared to
$16,834,000 or 41.2% of net sales, for the nine months ended December 31, 2003.
This was mainly attributed to the 60% - 90% increase in plastic resin costs
since last year, most of which we could not pass on to our customers.
Gross profit in the electronic & metallic segment increased by $2,038,000
to $9,996,000 or 19.8% of net sales, for the nine months ended December 31, 2004
compared to $7,958,000 or 22.7% of net sales, for the same period last year.
This decrease was mainly attributed to the general increase in raw material
pricing and labor cost of an average 4% and 10% over the prior year. While we
continue our long-term focus on attracting higher margin sales, pricing pressure
resulted in generally lower selling prices during the quarter.
Selling, General and Administrative Expenses - SG&A expenses for the nine
months ended December 31, 2004 were $12,033,000, amounting to 12.4% of total net
sales, as compared to $11,232,000 or 14.8% of total net sales for the nine
months ended December 31, 2003. There was an increase in selling, general and
administrative expenses of $801,000 or 7.1% over the corresponding period.
The SG&A expenses in the plastic segment increased by $182,000 or 2.4% to
$7,719,000 or 16.7% of net sales, for the nine months ended December 31, 2004
compared to $7,537,000 or 18.5% of net sales, for the corresponding period in
2003. The increase was primarily related to the increase in salary expenses of
$560,000 offsetting the decrease in depreciation expenses of $16,000 and the
tightened expenses control in administration expenses of $288,000 and selling
expenses of $82,000 during the nine months ended December 31, 2004.
The SG&A expenses in the electronic & metallic segment increased by
$619,000 or 16.8% to $4,314,000 or 8.5% of net sales, for the nine months ended
December 31, 2004 compared to $3,695,000 or 10.5% of net sales for corresponding
period in 2003. The increase was primarily related to the increase in salary
expenses of $422,000, increase in other general expenses of $217,000, and
increase in selling expenses of $117,000 offsetting the decrease in depreciation
expenses of $139,000 during the nine months ended December 31, 2004. The
expenses were increased due to the increase in sales activities in the
electronic & metallic segment.
Operating Income - Operating income was $14,148,000 for the nine months
ended December 31, 2004, an increase of $588,000, or 4.3% as compared with the
corresponding period in the prior year.
On a segment basis, the operating income of the plastics segment decreased
$831,000 to $8,466,000 or 18.3% of net sales, in the nine months ended December
31, 2004 compared to $9,297,000 or 22.8% of net sales in corresponding period in
2003. The decrease in operating income was attributable to the decrease in gross
profit coupled with the increase in SG&A expenses as described above.
The operating income of electronics & metallic segment increased $1,419,000
to $5,682,000 or 11.2% of net sales, in the nine months ended December 31, 2004
compared to $4,263000 or 12.1% of net sales in the corresponding period in 2003.
The increase in operating income was attributable to the increase in gross
profit offsetting the increase in SG&A expenses as described above.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Other income - Other income was $92,000 for the nine months ended December
31, 2004, a decrease of $436,000 or 82.6% as compared with the corresponding
period in the prior year. On a segment basis, other income attributable to the
plastic segment decreased $237,000 to $89,000 in the nine months ended December
31, 2004. This decrease in other income was primarily attributable to the
realized gain on disposal of investment securities of $533,000 in the nine
months ended December 31, 2003 but none in 2004 and the decease in interest
income of $123,000 offsetting the increase in exchange gain of $51,000 and the
decrease in loss on disposal of fixed assets of $377,000 in the nine months
ended December 31, 2004 as compared with corresponding period in 2003.
Other income attributable to the electronic & metallic segment decreased
$199,000, to $3,000 in the nine months ended December 31, 2004. This decrease in
other income was mainly due to the increase in exchange loss of $67,000, the
decrease in other income of $119,000 and a provision for bad debt of $13,000 in
the nine months ended December 31, 2004.
Income Taxes - Income taxes expenses for the nine months ended December 1,
2004 were $488,000, a decrease of $23,000 or 4.5% as compared with the
corresponding period in the prior year. On a segment basis, the income taxes of
plastic segment decreased $162,000 to $112,000 for the nine months ended
December 31, 2004 whereas the income tax expenses for the electronic & metallic
segment increased $139,000 to $376,000 for the nine months ended December 31,
2004, respectively. The decrease in the plastic segment was primarily due to the
tax holiday enjoyed in our Dongguan manufacturing plant whereas the increase in
the electronic & metallic segment was due to increase in net sales as described
above.
Minority Interest - Minority interests represent a 29% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries and a 49% minority interest in
the subsidiary conducting marketing for Deswell's plastic and electronic
businesses. In January 2003, the Company acquired an additional 20% interest in
Integrated, increasing its ownership in that subsidiary from 51% to 71%. Despite
the decrease in minority interest in Deswell's electronic & metallic segment,
the dollar amount of minority interest increased to $1,915,000 for the nine
months ended December 31, 2004, from $1,551,000 for the corresponding period in
the prior year, which reflects that both the electronics and metallic
subsidiaries and the marketing subsidiary generated more net income in the nine
months ended December 31, 2004, compared with corresponding period in fiscal
2003.
Net Income - Net income was $11,830,000 for the nine months ended December
31, 2004, a decrease of $180,000 or 1.5%, as compared to net income of
$12,010,000 for the nine months ended December 31, 2003, and net income as a
percentage of net sales was decreased from 15.8% to 12.2% for the nine months
ended December 31, 2004. The decrease in net income was mainly the result of the
decrease in other income and the increase in minority interest offsetting the
increase in operating income as described above.
Net income for the plastic segment decreased by 10.5% to $8,051,000 for the
nine months ended December 31, 2004 compared to $8,997,000 for the corresponding
quarter in 2003. The decrease in net income of the plastic segment was mainly
the result of the decrease in operating profits and the decrease in other income
offsetting the decrease in income tax as described above.
Net income for the electronic & metallic segment increased by 25.4% to
$3,779,000 for the nine months ended December 31, 2004 compared to $3,013,000
for the corresponding quarter in 2003. The increase in net income of the
electronic & metallic segment was mainly the result of the increase in operating
profit offsetting the decease in other income, the increase in income taxes and
minority interest as described above. - more - DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Traditionally, the Company has relied primarily upon internally generated
funds and short-term borrowings (including trade finance facilities) to finance
its operations and expansion.
As of December 31, 2004, the Company had a working capital surplus of
$57,167,000 and cash and cash equivalents of $23,059,000. This compares with a
working capital surplus of $52,876,000 and cash and cash equivalents of
$30,193,000 at March 31, 2004. The decrease in cash and cash equivalents was
mainly attributed to the capital investment of $13,210,000, dividend
distribution of $6,675,000 and the increase in restricted cash of $649,000
offsetting the exercise of stock options by directors and officers of $7,210,000
and the cash generated from operating activities of $5,750,000 during the nine
months ended December 31, 2004.
The Company has generated sufficient funds from its operating activities to
finance its operations and there is little need for external financing other
than short-term borrowings that are used to finance accounts receivable and are
generally paid with cash generated from operations. The Company has short-term
borrowings of $903,000 and no long-term borrowings at December 31, 2004.
As of December 31, 2004, the Company had in place general banking
facilities with three financial institutions aggregating approximately
$6,788,000. Such facilities, which are subject to annual review, include
overdrafts, letters of credit, import facilities, trust receipt financing,
inward bills financing as well as fixed loans. As of December 31, 2004, the
Company had ( i ) unused credit facilities of $5,884,000 ( ii ) cash and cash
equivalents of $23,059,000 and ( iii ) restricted cash of $1,039,000, which has
been pledged as collateral for those credit facilities.
The Company expects that working capital requirements and capital additions
will be funded through a combination of internally generated funds and existing
facilities.
CONTACT: The Investor Relations Group
John G. Nesbett/Jordan Silverstein
212-825-3210
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
For and on behalf of
Deswell Industries, Inc.
By: /s/ Richard Lau
_________________________
Richard Lau
Chief Executive Officer
Date: March 5, 2005
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