| Quarter ended | Six months ended | |||
| September 30, | September 30, | |||
| 1999 | 1998 | 1999 | 1998 | |
| (Unaudited) | (Unaudited) | |||
| Net sales | $16,110 | $15,795 | $28,191 | $31,242 |
| Cost of sales | 9,383 | 9,359 | 16,872 | 18,130 |
| Gross profit | 6,727 | 6,436 | 11,319 | 13,112 |
| Selling, general and administrative expenses | 3,277 | 2,493 | 5,944 | 5,530 |
| Operating income | 3,450 | 3,943 | 5,375 | 7,582 |
| Interest expense | - | -153 | - | (204) |
| Other income, net | 310 | 389 | 645 | 765 |
| Income before income taxes | 3,760 | 4,179 | 6,020 | 8,143 |
| Income taxes | 172 | 101 | 359 | 202 |
| Income before minority interests | 3,588 | 4,078 | 5,661 | 7,941 |
| Minority interests | 252 | 748 | 212 | 1,449 |
| Net income | $3,336 | $3,330 | $5,449 | $6,492 |
| Basic earnings per share (note 3) | $0.61 | $0.61 | $1.00 | $1.18 |
| Weighted average number of shares outstanding (in thousands) |
5,476 | 5,479 | 5,476 | 5,479 |
| Diluted earnings per share (note 3) | $0.61 | $0.60 | $0.99 | $1.18 |
| Diluted weighted average number of shares outstanding (in thousands) |
5,481 | 5,511 | 5,477 | 5,523 |
| September 30, | March 31, | ||
| 1999 | 1999 | ||
| ASSETS | (Unaudited) | ||
| Current assets : | |||
| Cash and cash equivalents | $25,662 | $27,556 | |
| Restricted cash | 2,334 | 2,376 | |
| Accounts receivable, net | 11,318 | 7,796 | |
| Trading investment | - | 134 | |
| Inventories | 7,306 | 5,902 | |
| Prepaid expenses and other current assets | 2,404 | 4,116 | |
| Income taxes receivable | 217 | 397 | |
| Total current assets | 49,241 | 48,277 | |
| Property, plant and equipment - net | 16,781 | 15,639 | |
| Goodwill | 566 | 357 | |
| Long term investment | 499 | - | |
| Total assets | $67,087 | $64,273 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
|||
| Current liabilities | |||
| Accounts payable | $3,994 | $2,873 | |
| Customer deposits and accrued expenses | 4,159 | 4,138 | |
| Income taxes payable | 262 | 200 | |
| Total current liabilities | 8,415 | 7,211 | |
| Minority interests | 8,709 | 8,280 | |
| Deferred income tax | 15 | 15 | |
| Shareholders' equity | |||
| Common stock | |||
| - authorized 20,000,000 shares; issued and outstanding |
|||
| 5,347,931 shares at September 30, 1999 and | |||
| 5,476,131 shares at March 31, 1999 | 53 | 55 | |
| Additional paid-in capital | 24,100 | 25,355 | |
| Retained earnings | 25,795 | 23,357 | |
| Total shareholders' equity | 49,948 | 48,767 | |
| Total liabilities and shareholders' equity | $67,087 | $64,273 |
| Six months ended | |||
| September 30, | |||
| 1999 | 1998 | ||
| Cash flows from operating activities : | |||
| Net income | $5,449 | $6,492 | |
| Adjustments to reconcile net income to net cash | |||
| provided by operating activities : | |||
| Depreciation and amortization | 2,297 | 2,024 | |
| Loss on disposal of property, plant and equipment | 3 | 8 | |
| Minority interests | 237 | 1,449 | |
| Changes in current assets and liabilities : | |||
| Accounts receivable | (3,522) | 2,654 | |
| Investment in trading securities | 134 | - | |
| Inventories | (1,404) | (200) | |
| Prepaid expenses and other current asse | 1,712 | (332) | |
| Income taxes receivable | 180 | (148) | |
| Accounts payable | 1,121 | (623) | |
| Customer deposits and accrued expenses | 21 | 522 | |
| Income taxes payable | 62 | 128 | |
| Net cash provided by operating activities | 6,290 | 11,974 | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (3,427) | (2,314) | |
| Proceeds from disposal of property, plant and equipment | - | 17 | |
| Acquisition, excluding cash acquired | (32) | - | |
| Increase in long term investment | (499) | - | |
| Purchase of property, plant and equipment | 42 | 829 | |
| Net cash used in investing activities | (3,916) | (1,468) | |
| Cash flows from financing activities | |||
| Common stock repurchased & cancelled | (1,256) | - | |
| Dividends paid | (3,012) | (4,110) | |
| Increase in short-term borrowings | - | 264 | |
| Net cash used in financing activities | (4,268) | (3,846) | |
| Net (decrease)/increase in cash and cash equivalents | (1,894) | 6,660 | |
| Cash and cash equivalents, at beginning of period | 27,556 | 21,902 | |
| Cash and cash equivalents, at end of period | 25,662 | 28,562 | |
| Six months ended | ||
| September 30, | ||
| 1999 | 1998 | |
| Supplementary disclosures of cashflow information : | ||
| Cash paid during the period for : | ||
| Interest | - | 204 |
| Income taxes | 116 | 219 |
| Acquisition of subsidiary, excluding cash acquired: | ||
| Goodwill | 224 | - |
| Minority Interests | (192) | - |
| Cash paid, net of cash acquired | 32 | - |
DESWELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1999 and March 31, 1999, the results of operations for the quarters and six months ended September 30, 1999 and September 30, 1998, and the cash flows for the six months ended September 30, 1999 and September 30, 1998. The notes to the Consolidated Financial Statements which are contained in the Form 20-F Annual Report filed on July 6, 1999 under the Securities Exchange Act of 1934 should be read in conjunction with these Consolidated Financial Statements.
2. Inventories
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 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 quarters and six months ended September 30, 1999 and 1998 were both from the Company's continuing operations.
DESWELL INDUSTRIES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL 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, 1999 Compared to Quarter Ended September 30, 1998
The Company's net sales for the quarter ended September 30, 1999 were $16,110,000, an increase of $315,000 or 2.0% as compared to corresponding period in 1998. The slight increase in sales was mainly related to an increase in sales of injection-molded plastic products of $3,148,000 offset by a decrease in sales of electronic products and metallic products of $2,833,000. This represented increase of 39.4% and decrease of 36.3% 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 substantial increase in orders from existing strong customer base together with the new orders from new customers. The decrease in sales of electronic and metallic products in the quarter was mainly attributed to the decrease in demand from its customers, especially the PCB assembly customers, coupled with the reduction in selling prices in both OEM and sub-contracted sales as compared with last year.
The gross profit for the quarter ended September 30, 1999 was $6,727,000, representing a gross profit margin of 41.8%. This compares with the overall gross profit and gross profit margin of $6,436,000 or 40.7% for the quarter ended September 30, 1998.
Selling, general and administrative expenses for the quarter ended September 30, 1999 were $3,277,000, amounting to 20.3% of total net sales, as compared to $2,493,000 or 15.8% of total net sales for the quarter ended September 30, 1998. The increase in selling, general and administrative expenses of $784,000 over the corresponding period was mainly attributed to the increase in depreciation expenses on the capital expenditure incurred after the move in to the new electronic & metallic factories last year and the director bonus provision this quarter.
As a result, operating income was $3,450,000 for the quarter ended September 30, 1999, a decrease of $493,000 or 12.5% as compared with the corresponding quarter in the prior year.
During the quarter ended September 30, 1999, the Company acquired an additional 10.9% equity interest in the metallic subsidiary. As a result, minority interests represent 49% minority interest in both the electronics and metallic subsidiaries. The decrease in minority interests to $252,000 for the quarter ended September 30, 1999 from $748,000 for the quarter ended September 30, 1998 reflects the fact that the electronic and metallic business generated less profits in the current period as compared to the corresponding period in 1998.
As a result of the above factors, net income was $3,336,000 for the quarter ended September 30, 1999, an increase of $6,000 or 0.2%, as compared to the quarter ended September 30, 1998 and net income as a percentage of net sales slightly decreased to 20.7% from 21.1%.
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30, 1998
The Company's net sales for the six months ended September 30, 1999 were $28,191,000, a decrease of $3,051,000 or 9.8% as compared to corresponding period in 1998. The decrease in sales was mainly related to decreased sales of electronic and metallic products of $4,985,000 offset by an increase in sales of injection-molded plastic products of $1,934,000. This represented a decrease of 35.4% and increase of 11.3% 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 increase in orders from its existing strong customer base together with the new orders from new customers. The decrease in sales of electronic and metallic products in the quarter was mainly attributed to the decrease in demand from its customers, especially the PCB assembly customers, coupled with the reduction in selling prices in both OEM and sub-contracted sales as compared with last year.
The gross profit for the six months ended September 30, 1999 was $11,319,000, representing a gross profit margin of 40.2%. This compares with the overall gross profit and gross profit margin of $13,112,000 or 42.0% for the six months ended September 30, 1998.
Selling, general and administrative expenses for the six months ended September 30, 1999 were $5,944,000, amounting to 21.1% of total net sales, as compared to $5,530,000 or 17.7% of total net sales for the six months ended September 30, 1998. The increase in selling, general and administrative expenses of $414,000 over the corresponding period was mainly attributed to the increase in depreciation expenses on the capital expenditure incurred after the move in to the new electronic & metallic factories last year and the director bonus provision this year.
As a result, operating income was $5,375,000 for the six months ended September 30, 1999, a decrease of $2,207,000 or 29.1% as compared with the corresponding period in the prior year.
During the six months ended September 30, 1999, the Company acquired an additional 17.9% equity interest in the metallic subsidiary. As a result, minority interests represent 49% minority interest in both the electronics and metallic subsidiaries. The decrease in minority interest to $212,000 for the six months ended September 30, 1999 from $1,449,000 for the six months ended September 30, 1998 reflects the fact that the electronic and metallic business generated less profits in the current period as compared to the corresponding period in 1998.
As a result of the above factors, net income was $5,449,000 for the six months ended September 30, 1999, a decrease of $1,043,000 or 16.1%, as compared to the six months ended September 30, 1998 and net income as a percentage of net sales decreased slightly to 19.3% from 20.8%.
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 September 30, 1999, the Company had a working capital surplus of $40,826,000. This compares with a working capital surplus of $41,066,000 at March 31, 1999. The decrease in working capital was mainly attributed to the dividend distribution of $3,012,000 and the buyback of common shares of $1,256,000 off setting net cash generated from its operating activities.
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 from cash generated from operations. The Company has no outstanding short-term borrowings and no long-term debt as of September 30, 1999.
As of September 30, 1999, the Company had in place general banking facilities with three financial institutions aggregating approximately $11,499,000. 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 September 30, 1999, the Company had ( i ) unused credit facilities of $11,499,000 ( ii ) cash and cash equivalents of $25,662,000 and ( iii ) restricted cash of $2,334,000, 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.
(U.S. dollars in thousands except per share data)
September 30, March 31, 1999 1999 Inventories by
major categories : Raw materials $ 3,680 $ 3,241 Work in progress 1,974 1,595 Finished goods 1,652 1,066 $ 7,306 $ 5,902
CONDITION AND RESULTS OF OPERATIONS