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 November 21, 2006
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)
Contact:
John G. Nesbett
IMS
203.972.9200
jnesbett@institutionalms.com
DESWELL INDUSTRIES, INC. ANNOUNCES SECOND QUARTER RESULTS
- 28.7% Increase in Net Income in Second Quarter -
- Company also Announces Second Quarter Dividend of $0.17 Per Share-
MACAO (November 20, 2006) - Deswell Industries, Inc. (Nasdaq: DSWL) today
announced its financial results for the fiscal second quarter and six months
ended September 30, 2006.
Deswell reported net sales for the second quarter ended September 30, 2006 of
$35.7 million, compared to $29.0 million for the same quarter of 2005, an
increase of 23.0%. Operating income totaled $4.0 million, compared to $2.8
million for the same quarter of 2005, an increase of 43.6%. Net income for the
quarter increased 28.7% to $3.6 million compared to $2.8 million for the
year-ago quarter.
Basic and diluted net income per share for the quarter increased to $0.24 and
$0.24, respectively (based on 14,938,000 and 15,005,000 weighted average shares
outstanding, respectively), compared to $0.19 and $0.19, respectively (based on
14,920,000 and 14,967,000 weighted average shares outstanding, respectively),
for the quarter ended September 30, 2005.
Net sales for the six months ended September 30, 2006 were $67.4 million, an
increase of 14.0%, compared to sales of $59.1 million for the corresponding
period in 2005. Operating income increased 14.8% to $7.8 million, compared to
$6.8 million in the first six months of fiscal 2006, and net income increased
17.7% to $7.0 million, compared to $5.9 million in the first six months of
fiscal 2006. Basic and diluted net income per share for the six months increased
to $0.47 and $0.47, respectively (based on 14,931,000 and 14,959,000 weighted
average shares outstanding, respectively), compared to $0.40 and $0.40,
respectively (based on 14,893,000 and 14,921,000 weighted average shares
outstanding, respectively), for the six months ended September 30, 2005.
The Company's balance sheet remains strong, with cash and cash equivalents on
September 30, 2006 totaling $15.2 million, compared to $25.4 million on March
31, 2006. Working capital totaled $56.9 million as of September 30, 2006, versus
$55.1 million as of March 31, 2006. The Company has no long-term or short-term
borrowings.
Mr. Richard Lau, chief executive officer, commented, "This quarter's revenue
growth was mainly driven by the 52.1% growth in our plastic division. We saw a
significant pick up in business from one of our telecommunications customers, as
well as an increase in business from some of our newer customers. We were
disappointed with the 4.6% growth in our electronic & metallic division due to
some customers delaying orders as well as a continued shortage of certain
electronic materials. However, we are pleased that our customers have indicated
to us that we will receive the delayed orders in the next three to six months."
Mr. Lau continued, "Given the strong performance at our plastic's division
during the quarter, we are filling capacity and very satisfied with the
performance of our new state-of-the-art facility. We are confident about growth
prospects in the coming two quarters as orders from new customers develop and as
we see the delayed customer orders at our electronics division."
Second-Quarter Dividends
The Company also announced that on November 17, 2006 its board of directors
declared a dividend of $0.17 per share for the second quarter. The dividend will
be payable on December 18, 2006 to shareholders of record as of November 30,
2006.
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, Line 6 Manufacturing and Peavey Electronics
Corporation.
To learn more about Deswell Industries, Inc., please visit the Company's web
site at www.deswell.com.
Forward-Looking Statements
Statements in this press release that are "forward-looking statements" are based
on current expectations and assumptions that are subject to risks and
uncertainties. For example, our statements regarding our expected growth in
sales from the electronic and metallic division in the coming year and our
efforts to reduce overhead costs in our plastic division are forward-looking
statements. Actual results could differ materially because of the following
factors, among others, which may cause revenues and income to fall short of
anticipated levels or our overhead expenses to increase: our dependence on a few
major customers; vigorous competition forcing product price reductions or
discounts; the timing and amount of significant orders from our relatively few
significant customers; continuing increases in resin prices that cannot be
passed on to customers; unexpected production delays; obsolete inventory or
product returns; losses resulting from fraudulent activity of our customers or
employees; labor shortages that increase labor and costs; changes in the mix of
product products we manufacture and sell; adverse currency fluctuations in the
renminbi and Hong Kong dollar when translated to US dollars; potential new
accounting pronouncements; and the effects of travel restrictions and
quarantines associated with major health problems, such as the Severe Acute
Respiratory Syndrome, on general economic activity.
For further information regarding risks and uncertainties associated with the
Company's business, please refer to the "Risk Factors" section of Company's
Annual Report on Form 20-F, copies of which may be obtained from the Website
maintained by the Securities and Exchange Commission at http://www.sec.gov.
All information in this release is made as of the date of this press release.
Deswell undertakes no duty to update any forward-looking statement to conform
the statement to actual results or changes in Deswell's expectations.
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DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. dollars in thousands, except per share data)
Quarter ended Six months ended
September 30, September 30
-------------------------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Net sales $35,715 $29,046 $67,404 $59,121
Cost of sales 26,850 22,837 50,093 45,272
--------- --------- --------- ---------
Gross profit 8,865 6,209 17,311 13,849
Selling, general and administrative
expenses 4,892 3,443 9,558 7,097
--------- --------- --------- ---------
Operating income 3,973 2,766 7,753 6,752
Interest expense - - - -
Other income, net 143 479 330 119
--------- --------- --------- ---------
Income before income taxes 4,116 3,245 8,083 6,871
Income taxes 394 49 545 74
--------- --------- --------- ---------
Income before minority interests 3,722 3,196 7,538 6,797
Minority interests 125 401 538 851
--------- --------- --------- ---------
Net income $3,597 $2,795 $7,000 $5,946
Other comprehensive income
Foreign currency translation
adjustment - - 710 (404)
--------- --------- --------- ---------
Comprehensive income $3,597 $2,795 $6,290 $5,542
========= ========= ========= =========
Net income per share (note 3)
Basic:
Net income per share $0.24 $0.19 $0.47 $0.40
========= ========= ========= =========
Weighted average common shares
outstanding (in thousands) 14,938 14,920 14,931 14,893
========= ========= ========= =========
Diluted:
Net income per share (note 3) $0.24 $0.19 $0.47 $0.40
========= ========= ========= =========
Weighted average common shares
outstanding (in thousands) 15,005 14,967 14,959 14,921
========= ========= ========= =========
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DESWELL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(U.S. dollars in thousands)
September 30, March 31,
2006 2006
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,214 $ 25,369
Restricted cash - 649
Marketable securities 118 164
Accounts receivable, net 30,277 18,318
Inventories 31,277 21,845
Prepaid expenses and other current assets 5,458 5,035
Income taxes receivable 41 -
--------- ----------
Total current assets 82,385 71,380
Property, plant and equipment - net 61,403 58,286
Deferred income tax assets - 294
Goodwill 712 710
--------- ----------
Total assets $ 144,500 $ 130,670
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,446 $ 10,886
Dividend payable - 2,089
Customer deposits and accrued expenses 4,849 3,107
Income taxes payable 219 184
--------- ----------
Total current liabilities 25,514 16,266
--------- ----------
Minority interests 8,193 7,636
--------- ----------
Shareholders' equity
Common stock
- authorized 30,000,000 shares; issued and
outstanding 14,938,730 shares at September 30,
2006 and 14,923,730 at March 31, 2006 (note 4) 42,198 41,254
Additional paid-in capital 6,970 6,970
Accumulated other comprehensive income 1,146 436
Retained earnings 60,479 58,108
--------- ----------
Total shareholders' equity 110,793 106,768
--------- ----------
Total liabilities and shareholders' equity $ 144,500 $ 130,670
========= ==========
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DESWELL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(U.S. dollars in thousands)
Six months ended
September 30,
2006 2005
---- ----
Cash flows from operating activities:
Net income $ 7,000 $ 5,946
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,575 2,695
(Gain)/loss on sale of property, plant and equipment (148) 5
Unrealized holding loss on marketable securities 46 40
Stock-based compensation cost 820 -
Minority interests 557 826
Deferred income tax 294 -
Changes in current assets and liabilities:
Accounts receivable (11,959) 1,578
Inventories (9,432) (1,780)
Prepaid expenses and other current assets (423) (406)
Income taxes receivable (41) 20
Accounts payable 9,560 (1,342)
Customer deposits and accrued expenses 1,742 (149)
In income taxes payable 35 (27)
-------------- ------------
Net cash provided by operating activities 626 7,406
-------------- ------------
Cash flows from investing activities
Purchase of property, plant and equipment (5,330) (3,392)
Proceeds from disposal of property, plant and equipment 362 2
-------------- ------------
Net cash used in investing activities (4,968) (3,390)
-------------- ------------
Cash flows from financing activities
Dividend paid (6,718) (4,923)
Dividends paid to minority shareholders of a subsidiary - (430)
Contribution from minority shareholders of a subsidiary - (170)
Common stock issued 124 352
Decrease in restricted cash 649 239
-------------- ------------
Net cash used in financing activities (5,945) (4,932)
-------------- ------------
Cash effect of exchange rate changes 132 (169)
Net decrease in cash and cash equivalents (10,155) (1,085)
Cash and cash equivalents, at beginning of period 25,369 28,073
-------------- ------------
Cash and cash equivalents, at end of period 15,214 26,988
============== ============
Supplementary disclosures of cashflow information: Cash paid during the period
for:
Interest - -
Income taxes 256 80
============== ============
Supplementary disclosures of significant non-cash transactions:
Issuance of common stock in connection of acquisition of
Additional 5% shareholdings of a subsidiary - 1,834
Excess of acquisition cost over the fair value of acquired
net assets of additional 5% shareholdings of a subsidiary - (234)
============== ============
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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 September 30, 2006 and
March 31, 2006, the results of operations for the six months ended
September 30, 2006 and September 30, 2005, and the cash flows for the
six months ended September 30, 2006 and September 30, 2005. The notes
to the Consolidated Financial Statements, which are contained in the
Form 20-F Annual Report filed on July 14, 2006 under the Securities
Exchange Act of 1934 should be read in conjunction with these
Consolidated Financial Statements.
2. Inventories
-----------
September 30, March 31,
2006 2006
----------------- ---------------
Inventories by major categories :
Raw materials $ 14,727 $ 8,782
Work in progress 10,424 6,932
Finished goods 6,126 6,131
----------------- ---------------
$ 31,277 $ 21,845
================= ==============
3. Net Income 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 net 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 dilutive potential 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 dilutive potential 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 six months ended September 30, 2006 and 2005
were both from the Company's continuing operations.
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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 inexpensive labor rates as compared to
Hong Kong.
Quarter Ended September 30, 2006 Compared to Quarter Ended September 30, 2005
-----------------------------------------------------------------------------
Net Sales - The Company's net sales for the quarter ended September 30, 2006
were $35,715,000, an increase of $6,669,000 or 23.0% as compared to the
corresponding period in 2005. The increase was related to increase in sales in
the plastic segment and electronic and metallic segment of $5,852,000 and
$817,000, respectively. This represented an increase of 52.1% and 4.6%
respectively, as compared with the respective net sales from these segments in
the corresponding period in the prior year.
The revenue increase in our plastic segment was mainly due to the increase in
orders from a telecommunication customer of $3,875,000 and other existing
customers of $2,269,000; and increase in orders from new customers of $1,711,000
over the corresponding period in the prior year. This together offset the
decrease in orders from other existing customers of $2,004,000.
The revenue increase in our electronics and metallic segment was mainly due to
the increase in OEM product orders of $2,082,000 and $1,133,000 from existing
and new customers respectively; the increase in distribution sales of $180,000;
the increase in metallic products of $296,000 from existing customers and the
decrease in provision of metallic doubtful sales $889,000 made in the quarter of
prior last year. This together offset the revenue decrease in electronic orders
from customers of $3,594,000 and in metallic orders of $169,000 during the
quarter. The net increase resulted from a change in customer mix as compared
with last year. The increase in sales in the OEM products was mainly for the
sales of professional audio equipment products.
Gross Profit - The gross profit for the quarter ended September 30, 2006 was
$8,865,000, representing a gross profit margin of 24.8%. This compares with the
overall gross profit and gross profit margin of $6,209,000 or 21.4% for the
quarter ended September 30, 2005.
Gross profit in the plastic segment increased by $2,916,000 to $6,078,000 or
35.6% of net sales, for the quarter ended September 30, 2006 compared to
$3,162,000 or 28.1% of net sales, for the quarter ended September 30, 2005. This
was mainly attributed to the change in customer and product mix where lower
margin assembly sales decreased by approximately 23% in the quarter as compared
with last year; and our continued tight control of factory overhead; despite an
average of 2% appreciation in Chinese renminbi currency where most of our direct
overhead is denominated, during the quarter as compared with last year.
Gross profit in the electronic & metallic segment decreased by $260,000 to
$2,787,000 or 15.0% of net sales, for the quarter ended September 30, 2006
compared to $3,047,000 or 17.1% of net sales, for the same period last year.
This was mainly attributed to the change in customer and product mix and the
increased material pricing pressure on some of our electronic materials; an
approximately 11% increase in labor cost as compared with last year
corresponding quarter; and an average of 2% appreciation in Chinese renminbi
currency where most of our direct overheads and increased local material
sourcing are denominated, as compared with last year.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses - SG&A expenses for the quarter
ended September 30, 2006 were $4,892,000, amounting to 13.7% of total net sales,
as compared to $3,443,000 or 11.9% of total net sales for the quarter ended
September 30, 2005. There was an increase in selling, general and administrative
expenses of $1,449,000 over the corresponding period.
The SG&A expenses in the plastic segment increased by $456,000 or 21.7% to
$2,557,000 or 15.0% of net sales, for the quarter ended September 30, 2006
compared to $2,101,000 or 18.7% of net sales, for the corresponding period in
2005. The increase was primarily related to the increase in director
remuneration of $350,000 and an increase in selling expenses of $82,000 as a
result of the increase in sales activities during the quarter.
The SG&A expenses in the electronic & metallic segment increased by $993,000 or
74.0% to $2,335,000 or 12.5% of net sales, for the quarter ended September 30,
2006 compared to $1,342,000 or 7.5% of net sales for corresponding quarter in
2005. The increase was primarily related to the increase in salary expenses of
$681,000; which included a one-time payment to staff of $216,000 for their past
services to the company and the increase in management and staff cost of
$268,000 and $197,000 as a result of both increase in staff rate and headcounts
in various departments. Moreover, there were increases in selling logistic
expenses of $84,000 for electronic & metallic sales and $81,000 for distribution
sales respectively; increase in social welfare expenses of $37,000 and increase
in other general expenses of $150,000 for OEM and distribution operations during
the quarter; as a result of the increase in sales activities as compared with
prior year.
Operating income - Operating income was $3,973,000 for the quarter ended
September 30, 2006, an increase of $1,207,000 or 43.6% as compared with the
corresponding quarter in the prior year.
On a segment basis, the operating income of the plastic division increased
$2,460,000 to $3,521,000 or 20.6% of net sales, in quarter ended September 30,
2006 compared to $1,061,000 or 9.4% of net sales for the corresponding quarter
in 2005. 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 decreased $1,253,000 to
$452,000 or 2.4% of net sales, in the quarter ended September 30, 2006 compared
to $1,705,000 or 9.6% of net sales for the corresponding quarter in 2005. The
decrease in operating income was attributable to the decrease in gross profit
coupled with the increase in SG&A expenses as described above.
Other income - Other income decreased by $336,000 to $143,000 for the quarter
ended September 30, 2006. On a segment basis, other income attributable to the
plastic segment decreased $273,000 to $106,000 in the quarter ended September
30, 2006. The decrease was primarily attributable to the increase in exchange
loss of $366,000 offsetting the increase in interest income of $29,000, the gain
on disposal of fixed assets of $41,000 and a write back of bad debt provision of
$20,000 in the quarter as compared with corresponding period in 2005.
Other income attributable to the electronic & metallic segment decreased $63,000
to $37,000 in the quarter ended September 30, 2006. This decrease was mainly due
to the increase in exchange loss of $56,000 and the decrease in unrealized gain
in investment securities revaluation of $17,000 offsetting the increase in
interest income of $13,000 in the quarter as compared with the corresponding
period in 2005.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes - Income taxes expenses for the quarter was $394,000, an increase
of $345,000 as compared with the corresponding quarter in the prior year. On a
segment basis, the income taxes of plastic segment increased $395,000 to
$444,000 for the quarter ended September 30, 2006 whereas the income tax
expenses for the electronic & metallic segment decreased $50,000 from $nil for
the quarter ended September 30, 2005, respectively. The increase in the plastic
division was mainly related to our Jetcrown Dongguan subsidiary's completion of
its two years tax exemption for the calendar years ended December 31, 2004 and
2005.
Minority Interest - Minority interests represent a 24% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries. In April 2005, the Company
acquired an additional 5% interest in Integrated, increasing its ownership in
that subsidiary from 71% to 76%. In June 2005, the Company liquidated the
marketing subsidiary in which it previously held a 49% minority interest. As a
result of the decrease in minority interest in Deswell's electronic & metallic
segment and the marketing subsidiary, the dollar amount of minority interest
decreased to $125,000 for the quarter ended September 30, 2006, from $401,000
for the corresponding quarter in the prior year. This represented a decrease in
minority interest of $276,000 in the electronics and metallic subsidiaries in
the quarter ended September 30, 2006.
Net Income - Net income was $3,597,000 for the quarter ended September 30, 2006,
an increase of $802,000 or 28.7%, as compared to net income of $2,795,000 for
the quarter ended September 30, 2005, and net income as a percentage of net
sales increased from 9.6% to 10.1% for the quarter ended September 30, 2006. The
increase in net income was mainly the result of the increase in operating income
and the decrease in minority interest offsetting the decrease in other income
and the increase in income tax expenses as described above.
Net income for the plastic segment increased by 128.8% to $3,183,000 for the
quarter ended September 30, 2006 compared to $1,391,000 for the corresponding
quarter in 2005. The increase in net income of the plastic segment was mainly
the result of the increase in operating profits offsetting the decrease in other
income and the increase in income tax expenses as described above.
Net income for the electronic & metallic segment decreased by 70.5% to $414,000
for the quarter ended September 30, 2006 compared to $1,404,000 for the
corresponding quarter in 2005. The decrease in net income of the electronic &
metallic segment was mainly the result of the decrease in operating profit and
other income, offsetting the decrease in income taxes and minority interest, as
described above.
Six Months Ended September 30, 2006 Compared to Six Months Ended September 30,
------------------------------------------------------------------------------
2005
----
Net Sales - The Company's net sales for the six months ended September 30, 2006
were $67,404,000, an increase of $8,283,000 or 14.0% as compared to
corresponding period in 2005. The increase in sales was mainly related to the
increase in sales of plastic segment of $8,854,000 offsetting the decrease in
sales of electronics and metallic segment of $571,000. This represented an
increase of 38.4% and a decrease of 1.6% respectively, as compared with the
respective net sales from these segments in the corresponding period in the
prior year.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The revenue increase in our plastic segment was mainly a result of the increase
in orders from a telecommunication customer of $8,127,000 and other existing
customers of $3,671,000; and increase in orders from new customers of $2,871,000
over the corresponding period in the prior year. These together offset the
decrease in orders from other existing customers of $5,816,000.
The revenue decrease in our electronic and metallic segment was mainly due to
the decrease in orders from existing customers of $9,012,000 in electronic
orders, $460,000 in metallic orders and $278,000 in distribution sales
respectively. These together offset the increase in electronic and metallic
orders of $5,734,000 from existing customers and $3,445,000 from new customers
respectively. The net decrease was resulted from a change in customer mix as
compared with last year. Both decrease and increase in sales in the OEM products
was mainly for sales of professional audio equipment products.
Gross Profit - The gross profit for the six months ended September 30, 2006 was
$17,311,000, representing a gross profit margin of 25.7%. This compared with the
overall gross profit and gross profit margin of $13,849,000 or 23.4% for the six
months ended September 30, 2005.
Gross profit in the plastic segment increased by $3,703,000 to $10,774,000 or
33.7% of net sales, for the six months ended September 30, 2006 compared to
$7,071,000 or 30.6% of net sales, for the six months ended September 30, 2005.
This was mainly attributed to the change in customer and product mix where lower
margin assembly sales decreased by approximately 38% during the period as
compared with prior year; and our continued tight control on factory overhead;
despite an average of 2% appreciation in Chinese renminbi currency in the six
months ended September 30, 2006 where most of our direct overhead are
denominated, as compared with last year.
Gross profit in the electronic & metallic segment decreased by $241,000 to
$6,537,000 or 18.4% of net sales, for the six months ended September 30, 2006
compared to $6,778,000 or 18.8% of net sales, for the same period last year.
This was mainly attributed to the change in customer and product mix, the
increased material pricing pressure on some of our electronic materials, an
approximately 5% increase in labor cost and an average of 2% appreciation in
Chinese renminbi currency in the six months ended September 30, 2006 where most
of our direct overhead are denominated, as compared with last year.
Selling, general and administrative expenses - SG&A expenses for the six months
ended September 30, 2006 were $9,558,000, amounting to 14.2% of total net sales,
as compared to $7,097,000 or 12.0% of total net sales for the six months ended
September 30, 2005. There was an increase in selling, general and administrative
expenses of $2,461,000 or 34.7% over the corresponding period.
The SG&A expenses in the plastic segment increased by $1,190,000 or 28.6% to
$5,347,000 or 16.7% of net sales, for the six months ended September 30, 2006
compared to $4,157,000 or 18.0% of net sales, for the corresponding period in
2005. The increase was primarily related to a stock based compensation cost of
$820,000, the increase in director remuneration of $313,000, salary expenses of
$85,000 and selling expenses of $95,000 as a result of increase in sales
activities; these together offset the savings in other general expenses of
$139,000 during the six months ended September 30, 2006 as compared with prior
year.
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DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The SG&A expenses in the electronic & metallic segment increased by $1,271,000
or 43.2% to $4,211,000 or 11.9% of net sales, for the six months ended September
30, 2006 compared to $2,940,000 or 8.2% of net sales for corresponding period in
2005. The increase was primarily related to the increase salary expenses of
$779,000; which included a one time payment to staff of $216,000 for their past
services to the company, increase in management and staff cost of $239,000 and
$324,000 as a result of both increase in staff rate and headcounts in various
departments. Moreover, there were increases in selling logistic expenses of
$230,000 and $81,000 for electronic & metallic sales and distribution business
respectively; increase in social welfare expenses of $75,000; and increase in
other general expenses of $96,000 for OEM and distribution operations during the
six months ended September 30, 2006 as compared with prior year.
Operating income - Operating income was $7,753,000 for the six months ended
September 30, 2006, an increase of $1,001,000 or 14.8% as compared with the
corresponding period in the prior year.
On a segment basis, the operating income of plastic segment increased $2,513,000
to $5,427,000 or 17.0% of net sales, in the six months ended September 30, 2006
compared to $2,914,000 or 12.6% of net sales in corresponding period in 2005.
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 decreased $1,512,000 to
$2,326,000 or 6.6% of net sales, in the six months ended September 30, 2006
compared to $3,838,000 or 10.6% of net sales in the corresponding period in
2005. The decrease in operating income was attributable to the decrease in gross
profit coupled with the increase in SG&A expenses as described above.
Other income - Other income was $330,000 for the six months ended September 30,
2006, an increase of $211,000 as compared with the corresponding period in the
prior year. On a segment basis, other income attributable to the plastic segment
increased $138,000 to $358,000 in the six months ended September 30, 2006. The
increase in other income was primarily attributable to the increase in interest
income of $63,000 and increase in gain on disposal of fixed assets of $156,000
offsetting the increase in exchange loss of $123,000 in the six months ended
September 30, 2006 as compared with corresponding period in 2005.
Other income attributable to the electronic & metallic segment increased
$73,000, to other expenses of $28,000 in the six months ended September 30,
2006. This decrease in other income was mainly due to the increase in interest
income of $39,000 and the decrease in exchange loss of $50,000, offsetting the
increase in doubtful debt provision of $16,000 in the six months ended September
30, 2006.
Income Taxes - Income taxes expenses for the six months ended September 30, 2006
was $545,000, an increase of $471,000 as compared with the corresponding period
in the prior year. On a segment basis, the income taxes of plastic segment
increased $607,000 to $513,000 for the six months ended September 30, 2006. This
increase was mainly related to our Jetcrown Dongguan subsidiary as it had
completed the two years tax exemption for the calendar years ended December 31,
2004 and 2005. The income tax expenses for the electronic & metallic segment
decreased $136,000 to $32,000 for the six months ended September 30, 2006.
- more -
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Minority Interest - Minority interests represent a 24% minority interest in
Integrated International Limited, the holding company holding the capital stock
of Deswell's electronic and metallic subsidiaries. In April 2005, the Company
acquired an additional 5% interest in Integrated, increasing its ownership in
that subsidiary from 71% to 76%. In June 2005, the Company liquidated the
marketing subsidiary which was previously with a 49% minority interest. As a
result of the decrease in minority interest in Deswell's electronic & metallic
segment and the marketing subsidiary, the dollar amount of minority interest
decreased to $538,000 for the six months ended September 30, 2006, from $851,000
for the corresponding period in the prior year. This represented a decrease in
minority interest of $313,000 in the electronics and metallic subsidiaries in
the six months ended September 30, 2006.
Net Income - Net income was $7,000,000 for the six months ended September 30,
2006, an increase of $1,054,000 or 17.7%, as compared to net income of
$5,946,000 for the six months ended September 30, 2005, and net income as a
percentage of net sales was increased from 10.1% to 10.4% for the six months
ended September 30, 2006. The increase in net income was mainly the result of
the increase in operating income and other income, and the decrease in minority
interest offsetting the increase in income tax as described above.
Net income for the plastic segment increased by 63.3% to $5,272,000 for the six
months ended September 30, 2006 compared to $3,228,000 for the corresponding
period in 2005. The increase in net income of the plastic segment was mainly the
result of the increase in operating profit and other income offsetting the
increase in income tax as described above.
Net income for the electronic & metallic segment decreased to $1,728,000 for the
six months ended September 30, 2006 compared to $2,718,000 for the corresponding
period in 2005. The decrease in net income of the electronic & metallic segment
was mainly the result of the decrease in operating profit offsetting the
increase in other income, and the decrease in income tax and minority interest
as described above.
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 September 30, 2006, the Company had a working capital surplus of
$56,871,000 and cash and cash equivalent of $15,214,000. This compares with a
working capital surplus of $55,114,000 and cash and cash equivalent of
$25,369,000 at March 31, 2006. The decrease in cash and cash equivalent was
mainly attributed to the capital investment of $5,330,000, dividend distribution
of $6,718,000 offsetting the net cash generated from its operating activities of
$626,000, proceeds from disposal of property, plant and equipment of $362,000
and the decrease in restricted cash of $649,000 during the six months ended
September 30, 2006.
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 no
short-term borrowings and long-term borrowings at September 30, 2006.
As of September 30, 2006, the Company had nil general banking facilities. The
Company expects that working capital requirements and capital additions will be
funded through internally generated funds.
- end -
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: November 21, 2006