Deswell Announces First Half 2019 Results

Deswell Industries, Inc. (Nasdaq:DSWL) today announced its unaudited financial results for the first six months of fiscal 2019, ended September 30, 2018.

Net sales for the six months ended September 30, 2018 were $34.8 million, an increase of 16.9% compared to net sales of $29.8 million for the six months ended September 30, 2017. Net sales decreased by 1% to $13.6 million in the plastic segment and increased by 32.4% to $21.2 million in the Companys electronic segment.

Total gross margin decreased to 13.8% of net sales during the six months ended September 30, 2018, as compared to 19.6% of net sales in the same period last year. Gross profit margin in the plastic segment decreased to 16.4% of net sales for the first half of fiscal 2019, compared to 24.3% of net sales for the corresponding period of last fiscal year. The decrease in gross profit and margin in the plastic segment was mainly due to increases in raw materials cost, offsetting a slight decrease in labor costs and subcontracting charges, as a percentage of sales. Gross profit margin in the electronic segment decreased to 12.1% of net sales for the first half of fiscal 2019, compared to 15.5% of net sales for the corresponding period of last fiscal year. The decrease in gross margin in the electronic segment was mainly attributable to an increase in raw materials costs, as a percentage of net sales. Operating income in the first half of fiscal 2019 was $0.2 million, compared to operating income of $1.6 million for the same period of fiscal 2018.

The Company reported net income of $2.8 million for the six months ended September 30, 2018, compared to net income of $3.7 million for the six months ended September 30, 2017. This was primarily due to a decrease in gross profit, as a percentage of sales, for the six months ended September 30, 2018. Deswell reported basic and diluted income per share of $0.17 for the first half of fiscal 2019 (based on 15,885,000 and 15,975,000 weighted average shares outstanding, respectively), compared to basic and diluted income per share of $0.23 (based on 15,885,000 weighted average shares outstanding), for the six months ended September 30, 2017.

The Company’s financial position remained strong, with $15.5 million in cash and cash equivalents and working capital totaled $53.4 million as of September 30, 2018. Furthermore, the Company has no long-term or short-term borrowings as of September 30, 2018.

Mr. Edward So, Chief Executive Officer, commented, We saw solid double-digit growth in our consolidated revenue driven by a 32% improvement in our electronic segment. This revenue increase was primarily attributable to increased orders from new and existing customers for professional audio equipment and home entertainment products. Gross margin in both our plastics and electronics business was lower during the period due to higher raw material costs. Throughout the first half of the fiscal year, the entire electronics industry faced shortages of semiconductors and other electronic components. While this impacted our margins, we were able to proactively manage the situation with our customers and effectively service their needs. Our balance sheet remains strong, and we continue to focus on expanding our business with both new and existing customers. On the other hand, in order to mitigate the uncertainties caused by the trade war between the US and China, we are studying the feasibility of reallocating part of the production to Southeast Asian countries.

First Half Dividend

The Company also announces that its board of directors today declared a cash dividend of $0.06 per share for the first half of the fiscal year ended September 30, 2018. The dividend will be payable on December 18, 2018 to shareholders of record as of November 27, 2018.

About Deswell

Deswell manufactures injection-molded plastic parts and components, electronic products and subassemblies, and metallic molds and accessory parts for original equipment manufacturers (OEMs) and contract manufacturers at its factories in the Peoples 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.

To learn more about Deswell Industries, Inc., please visit the Companys website 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 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 Companys business, please refer to the Risk Factors section of Companys 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 Deswells expectations.

DESWELL INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEET

(U.S. dollars in thousands)

September 30,March 31,

2018

2017

ASSETS(Unaudited)(Audited)
Current assets :
Cash and cash equivalents$15,482$15,192
Fixed deposits maturing over three months5002,190
Time deposits maturing over twelve months “ current portion2,9233,129
Marketable securities18,93717,282
Accounts receivable, net19,28815,912
Inventories12,97012,933
Prepaid expenses and other current assets1,9512,267
Total current assets72,05168,905
Property, plant and equipment – net30,61231,494
Total assets$102,663$100,399
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable$9,189$8,596
Accrued payroll and employee benefits5,5665,566
Customer deposits1,3701,707
Other accrued liabilities1,9151,873
Income taxes payable626603
Total current liabilities18,66618,345
Deferred income tax liabilities596775
Total liabilities19,26219,120
Shareholders’ equity
Common shares nil par value – authorized 30,000,000 shares;
15,885,239 shares issued and outstanding as of September 30, 2018 and
March 31, 201853,06353,063
Additional paid-in capital5,1845,184
Accumulated other comprehensive income5,3165,316
Retained earnings19,83817,716
Total shareholders’ equity83,40181,279
Total liabilities and shareholders’ equity$102,663$100,399

DESWELL INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(U.S. dollars in thousands, except per share data)

Six months ended
September 30,

2018

2017

Net sales$34,795$29,759
Cost of sales30,00523,938
Gross profit4,7905,821
Selling, general and administrative expenses4,7634,434
Other income (expense), net223198
Operating income (loss)2501,585
Non-operating income, net2,4822,130
Income before income taxes2,7323,715
Income taxes(25)46
Net income attributable to Deswell Industries, Inc.$2,757$3,669
Other comprehensive income (loss)$$
Comprehensive income (loss) attributable to Deswell Industries, Inc.$2,757$3,669
Net income per share attributable to
Deswell Industries, Inc.
Basic:
Net income per share$0.17$0.23
Weighted average common shares outstanding
shares (in thousands)15,88515,885
Diluted:
Net income per share$0.17$0.23
Weighted average number of shares
outstanding (in thousands)15,97515,885

DESWELL INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(U.S. dollars in thousands)

Six months endedSix months ended
September 30,September 30,

2018

2017

Cash flows from operating activities :
Net income$2,757$3,669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization1,0991,054
(Reversal of) provision for doubtful accounts58(84)
Allowances for obsolete inventories6985
(Gain) Loss on disposal of property, plant and equipment(1)17
Unrealized holding gain on marketable securities(1,109)(537)
Realized gain on disposal of marketable securities(396)(340)
Scrip dividend received(139)
Deferred tax(179)3
Changes in operating assets and liabilities :
Accounts receivable(3,434)(1,780)
Inventories(106)(2,608)
Prepaid expenses and other current assets316443
Accounts payable5931,843
Accrued payroll and employee benefits765
Customer deposits(337)(50)
Other accrued liabilities42(257)
Income taxes payable2354
Net cash provided by (used in) operating activities(605)2,138
Cash flows from investing activities
Purchase of property, plant and equipment(229)(577)
Proceeds from disposal of property, plant and equipment136
Purchase of marketable securities(5,004)(435)
Proceeds from disposal of marketable securities4,8541,928
Increase in fixed deposits maturing over three months1,6903,306
(Increase in) decrease in fixed deposits maturing over twelve months206(1,619)
Net cash provided by investing activities1,5302,609
Cash flows from financing activities
Dividend paid(635)(1,112)
Net cash used in financing activities(635)(1,112)
Cash effect of exchange rate changes
Net increase (decrease) in cash and cash equivalents2903,635
Cash and cash equivalents, at beginning of period15,1928,078
Cash and cash equivalents, at end of period15,48211,713
Supplementary disclosures of cashflow information:
Cash paid during the period for:
Interest
Income taxes8

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