DESWELL INDUSTRIES, INC.
| CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | ||
| (U.S. dollars in thousands, except per share data) | ||
| Quarter ended | ||
| June 30, | ||
| 1998 | 1997 | |
| Net sales | $15,447 | $14,584 |
| Cost of sales | 8,771 | 8,325 |
| Gross profit | 6,676 | 6,259 |
| Selling, general and administrative expenses | 3,037 | 3,001 |
| Operating income | 3,639 | 3,258 |
| Interest expense | -51 | -1 |
| Other income, net | 376 | 157 |
| Income before income taxes | 3,964 | 3,414 |
| Income taxes | 101 | 151 |
| Income before minority interests | 3,863 | 3,263 |
| Minority interests | 701 | 584 |
| Net income | $3,162 | $2,679 |
| ======== | ======== | |
| Basic earnings per share (note 3) | $0.58 | $0.56 |
| ======== | ======== | |
| Weighted average number of shares | 5,479 | 4,281 |
| outstanding (in thousands) | ======== | ======== |
| Diluted earnings per share (note 3) | $0.56 | $0.51 |
| Diluted weighted average number of shares | 5,623 | 5,295 |
| outstanding (in thousands) | ======== | ======== |
| CONSOLIDATED BALANCE SHEET | ||
| (U.S. dollars in thousands) | ||
| June 30, | March 31, | |
| 1998 | 1998 | |
| (Unaudited) | ||
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $19,871 | $21,902 |
| Restricted cash | 2,841 | 2,927 |
| Accounts receivable, net | 11,672 | 10,079 |
| Inventories | 8,354 | 6,415 |
| Prepaid expenses and other current assets | 2,454 | 1,640 |
| Income taxes receivable | 226 | 218 |
| Total current assets | 45,418 | 43,181 |
| Property, plant and equipment - net | 15,269 | 15,582 |
| Goodwill | 375 | 381 |
| Total assets | $61,062 | $59,144 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Current liabilities: | ||
| Accounts payable | $4,568 | $3,763 |
| Customer deposits and accrued expenses | 4,508 | 3,175 |
| Income taxes payable | 303 | 275 |
| Total current liabilities | 9,379 | 7,213 |
| Minority interests | 7,405 | 6,705 |
| Deferred income tax | 15 | 15 |
| Shareholders' equity | ||
| Common stock | ||
| - authorized 20,000,000 shares; issued and outstanding | ||
| 5,479,131 shares at June 30, 1998 | ||
| and at March 31, 1998 | 55 | 55 |
| Additional paid-in capital | 22,402 | 22,402 |
| Retained earnings | 21,806 | 22,754 |
| Total shareholders' equity | 44,263 | 45,211 |
| Total liabilities and shareholders' equity | $61,062 | $59,144 |
| CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) | ||
| ( U.S. dollars in thousands ) | ||
| Quarter ended | ||
| June 30, | ||
| 1998 | 1997 | |
| Cash flows from operating activities: | ||
| Net income | $3,162 | $2,679 |
| Adjustments to reconcile net income to net cash | ||
| provided by operating activities : | ||
| Depreciation and amortization | 968 | 778 |
| Loss on sale of property, plant and equipment | 2 | 1 |
| Minority interests | 700 | 394 |
| Changes in current assets and liabilities: | ||
| (Increase) / decrease in accounts receivable | -1,593 | 1,172 |
| (Increase) / decrease in inventories | -1,939 | 247 |
| Increase in prepaid expenses and other current assets | -814 | -1,419 |
| (Increase) / decrease in income taxes receivable | -8 | 68 |
| Increase / (decrease) in accounts payable | 805 | -610 |
| Increase / (decrease) in customer deposits and accrued expenses | 1,333 | -779 |
| Increase / (decrease) in income taxes payable | 28 | -118 |
| Net cash provided by operating activities | 2,644 | 2,413 |
| Cash flows from investing activities | ||
| Decrease in restricted cash | 86 | 20 |
| Proceeds from disposal of property, plant and equipment | - | 10 |
| Purchase of property, plant and equipment | -651 | -1,019 |
| Net cash used in investing activities | -565 | -989 |
| Cash flows from financing activities | ||
| Issue of common stock | - | 852 |
| Dividends paid | -4,110 | -1,950 |
| Increase in short-term borrowings | - | 367 |
| Net cash used in financing activities | -4,110 | -731 |
| Net (decrease) / increase in cash and cash equivalents | -2,031 | 693 |
| Cash and cash equivalents, at beginning of period | 21,902 | 12,003 |
| Cash and cash equivalents, at end of period | 19,871 | 12,696 |
| Supplementary disclosures of cashflow information: | ||
| Cash paid during the period for: | ||
| Interest | 51 | 1 |
| Income taxes | 80 | 201 |
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 June 30, 1998 and March 31, 1998, the results of operations for the quarters ended June 30, 1998 and June 30, 1997, and the cash flows for the quarters ended June 30, 1998 and June 30, 1997. The notes to the Consolidated Financial Statements, which are contained in the Form 20-F Annual Report filed on July 14, 1998 under the Securities Exchange Act of 1934 should be read in conjunction with these Consolidated Financial Statements.
2. Inventories
| June 30, | March 31, | |
| 1998 | 1998 | |
| Inventories by major categories : | $4,063 | $3,515 |
| Raw materials | 3,160 | 1,819 |
| Work in progress | 1,131 | 1,081 |
| Finished goods | $8,354 | $6,415 |
| ========== | ========= |
3. Earnings Per Share
The basic earnings per share and diluted earnings per share are computed in accordance with the Statement of Financial Accounting Standards No.128 "Earnings Per Share" effective for financial statements after December 15, 1997. The basic and diluted earnings per share for prior periods have been restated in accordance with the Statement of Financial Accounting Standards No. 128.
The basic earnings per share is computed on the income from continuing operations and net income respectively, available to common stockholders, divided by the weighted average number of common shares outstanding throughout the relevant periods.
The diluted earnings per share is computed on the income from continuing operations and net income respectively, available to common stockholders, divided by the weighted average number of common shares outstanding and the number of additional common shares that outstanding if the dilutive potential common shares had been issued throughout the relevant periods.
The net income for the quarters ended June 30, 1998 and 1997 were both from the Company's continuing operations.
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 June 30, 1998 Compared to Quarter Ended June 30, 1997
The Company's net sales for the quarter ended June 30, 1998 were $15,447,000, an increase of $863,000 or 5.9% as compared to the corresponding period in 1997. The increase in sales was mainly related to additional sales of injection-molded plastic and metallic products of $1,622,000 and $437,000 respectively net of the decrease in electronic sales of $1,196,000. This represented increases of 21.5% and 61.9% and a decrease of 18.9% respectively, as compared with the net sales in the corresponding period in the prior year.
The increase in net sales from the plastic operation was attributed to the continuing increase in orders from our existing and new customers. The increase in metallic sales was a result of the Company's efforts in strengthening its metallic operation during the fiscal year 1998 though it accounted for less than 10% of overall revenue. The decrease in sales of electronic products in this quarter was mainly due to the decrease in demand from its customers, especially the PCB assembly customers as a result of the increased keen competition in the Asian market.
The gross profit for the quarter ended June 30, 1998 was $6,676,000, representing a gross profit margin of 43.2%. This compares with the overall gross profit and gross profit margin of $6,259,000 or 42.9% for the quarter ended June 30, 1997.
Selling, general and administrative expenses for the quarter ended June 30, 1998 were $3,037,000, amounting to 19.7% of total net sales, as compared to $3,001,000 or 20.6% of total net sales for the quarter ended June 30, 1997. The increase of $36,000 in selling, general and administrative expenses, over the corresponding period, was largely due to the growth in the Company's overall operations.
As a result of the increase in net sales, operating income was $3,639,000 for the quarter ended June 30, 1998, an increase of $381,000 or 11.7% as compared with the corresponding quarter in the prior year.
Minority interests represent 49% and 66.9% minority interest in the electronics and metallic subsidiaries, respectively. The increase in minority interest to $701,000 for the quarter ended June 30, 1998 from $584,000 for the corresponding quarter in the prior year reflects the fact that the metallic business generated less loss in the current period as compared to the corresponding period in prior year. The metallic operation almost reached a breakeven situation in the first quarter ended June 30, 1998.
As a result of the above factors, net income was $3,162,000 for the quarter ended June 30, 1998, an increase of $483,000 or 18.0%, as compared to the quarter ended June 30, 1997 and net income as a percentage of net sales increased slightly to 20.5% from 18.4%.
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, although capital expenditure has been partly financed by long-term debt, including capital leases.
As of June 30, 1998, the Company had a working capital surplus of $36,039,000. This compares with a working capital surplus of $35,968,000 at March 31, 1998. The increase in working capital was mainly attributed to net cash generated from its operating activities netting off the cash dividend distributed of $4,110,000 in June 1998.
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 which are used to finance accounts receivable and are generally paid with cash generated from operations. The Company has no outstanding short-term borrowings and no long-term debt as of June 30, 1998.
As of June 30, 1998, the Company had in place general banking facilities with three financial institutions aggregating approximately $12,016,000. 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 June 30, 1998, the Company had ( i ) unused credit facilities of $12,016,000 ( ii ) cash and cash equivalents of $19,871,000 and ( iii ) restricted cash of $2,841,000. The restricted cash and leasehold land and buildings of $1,468,000 have 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.