Metal products manufactured by the Company include metallic molds and accessory parts used in audio equipment, telephones, copying machines, pay telephones, multimedia stations, automatic teller machines, vending machines, etc.
As part of its manufacturing operations, the Company consults with its customers in the design of plastic parts and the design and production of the molds used to manufacture plastic parts, which are made by Deswell at its customers’ expense, and provides advice and assistance in the design and manufacturing of printed circuit boards. The Company believes that its ability to manufacture high-end plastic and metal parts of the quality required by OEMs and contract manufacturers which furnish products and services internationally, Deswell’s expertise in designing and manufacturing molds for its customers and the Company’s low production costs distinguish Deswell from most other manufacturers of plastic products and provide it with a competitive advantage. However, this advantage has been difficult to maintain as a result of increased competition and increased production overheads during the last three fiscal years.
Management believes that the injection molding and metal molds and parts manufacturing industries have each benefited in recent years from a trend among major users of injection molded and metal products to outsource an increasing portion of the parts requirements and to select a small number of suppliers or a sole supplier to provide those products. The Company is not aware of any empirical data defining the manufacturing industry in China, however, management believes that injection molding and metal manufacturing firms which are much smaller than the Company make up the largest segment of the industry in China. The Company’s experience indicates that such smaller firms are often unable to react quickly and responsively to the diverse demands of many customers and are not capable of furnishing the level of quality that high-end plastic and metal products require. Management believes that this inability on the part of these smaller manufacturers has created opportunities for the Company to increase sales by catering to the outsourcing requirements of OEMs and contract manufacturers that manufacture such high-end products.
Similarly, as a result of the recognition by OEMs in the electronics industry of the rising costs of operating a manufacturing site and the need to add more sophisticated and expensive manufacturing processes and equipment, OEMs have turned increasingly to outside contract manufacturers. By doing so, OEMs are able to focus on research, product conception, design and development, marketing and distribution, and to rely on the production expertise of contract manufacturers. Other benefits to OEMs of using contract manufacturing include: access to manufacturers in regions with low labor and overhead costs, reduced time to market, reduced capital investment, improved inventory management, improved purchasing power and improved product quality. In addition, the use of contract manufacturers has helped OEMs manage production in view of increasingly shorter product life cycles.
Operations
Operations
Plastic Injection Molding
Plastic injection molding manufacturing accounted for 43.5%57.6%, 40.9%50.9% and 55.7%43.7% of the Company’s total sales during the years ended March 31, 2007, 20082010, 2011 and 2009,2012, respectively. At March 31, 2009,2012, the Company conducted its plastic manufacturing operations in approximately 1,070,000 square feet of factory space in its factory located in Dongguan, Guangzhou, China. The factory space of approximately 113,000 square feet located in Shekou, Shenzhen, China, which Deswell formerly used for contract manufacturing, was being used for clerical and offices operations at March 31, 2009 and Deswell currently intends to sell its land lease on this property.
The Company’s plastic injection molding process consists of three phases: (1) mold design and production; (2) plastic injection; and (3) finishing.
Mold design and production
The plastic injection-molding process begins when a customer provides the Company with specifications for a product or part, which specifications are often created in consultation with the Company’s technical staff. Next the Company designs and produces the mold, using great care in the design process and in the selection of materials to produce the mold in an effort to create a high quality appearance of the completed product by reducing or eliminating potential flaws such as the sinkage of materials and irregularities in the knit line of joints.
The mold-making process ranges from 30 to 110 days, depending on the size and complexity of the mold. Mold making requires specialized machines and is capital intensive. At March 31, 2009,2012, the Company used 30 EDMs (electrical discharge machines), 32 CNC (computer numerical control) milling machines and 83 NC (numerical control) milling machines in the mold-making process. Deswell is continually adding equipment to expand its mold making and injection molding capabilities.
During the year ended March 31, 2007, the Company acquired machines and equipment costing approximately $2.2 million, including 83 sets of injection molding machines with clamping force of 86 tons to 1,300 tons; replacing 69 sets of old injection machines, two sets of old EDMs and three sets of old NC milling machines.
During the year ended March 31, 2008, the Company acquired machines and equipment costing approximately $1.6 million, including 22 sets of injection molding machines with clamping force of 86 tons to 250 tons; replacing 20 sets of old injection machines.
During the year ended March 31, 2009, the Company acquired machines and equipment costing approximately $1.7 million, including 53 sets of injection molding machines with clamping force of 90 tons to 1,600 tons; replacing 25 sets of old injection machines.
Molds produced by the Company generally weigh from 110 to 17,600 pounds and generally cost between $2,000 and $200,000.
The customer generally bears the cost of producing the molds and, as is customary in the industry, the customer owns them. However, the Company maintains and stores the molds at its factory for use in production and it is Deswell’s policy generally not to make molds for customers unless the customer undertakes to store its molds at the Company’s factory and uses Deswell to manufacture the related parts. In that way, the Company seeks to use its mold-making expertise to create dependence on it for the customer’s parts requirements. Beginning in 2005, however, through its then newly created Export Tooling Department, Deswell’s began producing molds for export to customers and thus does not use those molds to manufacture related parts.
During the year ended March 31, 2009,2012, the Company made on average about 50 to 60 different molds every month.an aggregate of approximately 200 molds. Management believes that the Company’s skills and expertise in mold-making, coupled with having its facilities and operations in China, allow the Company to produce molds at costs substantially less than molds of comparable quality made in Japan, Korea and Taiwan.
Plastic Injection
During the mold-making process, suitable plastic resin for the particular product is selected and purchased. See “Raw Materials, Component Parts and Suppliers,” below.” The completed mold is mounted onto injection machines, which are classified according to the clamping force (the pressure per square inch required to hold a mold in place during the injection molding process). At March 31, 2009,2012, the Company had approximately 430360 injection molding machines, ranging from 2230 to 1,6002,000 tons of clamping force, with most machines in the range of from 55 to 380 tons. Each of the Company’s machines is capable of servicing a variety of applications and product
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configurations and the Company has machines, which permit the Company to fabricate plastic parts as small as a button and as large as a 3 ft. x 2 ft. case for a copy machine.
Using separate shifts, injection molding is generallycan be conducted 24 hours a day, five to seven days per week, other than during normal down time for maintenance and changing of product molds. Molding of products requiring extra concerns for appearance, such as cases for calculators, personal organizers and telephones are conducted in an isolated and dust free section of the factory. In a continuous effort to assure quality, the Company’s quality control personnel inspect the products produced from each machine generally at hourly intervals during production. When defects are discovered, the Company’s maintenance personnel inspect the mold and the machine to determine which is responsible. If the mold is the cause of the defect, it will be immediately removed from the machine and serviced or repaired by one of a team of technicians employed to maintain molds. The mold will then be remounted on the machine and production will continue. If the machine is the source of the defect, the Company’s technicians and engineers service the machine immediately. Through this continuous vigilance to molds and machines, the Company has experienced what it believes to be a relatively low scrap rate and has been able to maintain a high level of productivity of its injection molding machines.
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In the year ended March 31, 2010, the Company did not acquire any new plastic injection molding machines.
During the year ended March 31, 2011, the Company acquired one new plastic injection molding machine for approximately $100,000 and disposed of 19 old injection molding machines.
During the year ended March 31, 2012 the Company disposed of 40 old plastic injection molding machines and did not add any new ones.
Finishing
After injection molding, products are finished. Finishing consists of smoothing and polishing, imprinting letters, numbers and signs through silk screening process, pad printing or epoxy ultra violet cutting, and treating the product with an anti-fog coating for a lasting and attractive appearance. Most of these functions are conducted by hand.
Electronic Products and Assemblies
In an aggregate of approximately 223,000 square feet of factory space at March 31, 20092012 located at facilities in Dongguan, China, the Company manufactures and assembles electronic products and electronic assemblies for OEMs. Finished products include consumer and sophisticated studio-quality audio equipment, IPBX and commercial telephone units, network education platforms, IP switches, routers etc. Assemblies consist of PCBs with passive (e.g., resistors, capacitors, transformers, switches and wire) and active (e.g., semiconductors and memory chips) components mounted on them. During the years ended March 31, 2007, 20082010, 2011 and 2009,2012, manufacturing of electronic products accounted for approximately 54.8%42.4%, 56.7%49.1% and 43.4%54.5%, respectively, of the Company’s total sales.
In assembling printed circuit boards the Company purchases printed circuit boards, surface mounted components and chips and uses PTH, BGAautomatic insertion and SMTpin-through-hole interconnection technologies to assemble various components onto the PCBs. Before delivery, completed PCBs are checked by in-circuit-testers and outgoing quality assurance inspections are performed.
PTH is a method of assembling printed circuit boards in which component leads are inserted and soldered into plated holes in the board. While this technology is several decades old and is labor intensive, it still has a significant market, particularly for consumer product applications.
BGA is a method of mounting an integrated circuit or other component to a PCB. Rather than using pins that consume a large area of the PCB, the component is attached to the circuit board with small balls of solder at each contact. This method allows for greater component density and is used in more complex PCBs.
SMT is the automatic process of printed circuit board assembly in which components are mounted directly to the surface of the board, rather than being inserted into holes. With this process, solder is accurately stenciled in paste form on pads located on the printed circuit board and the components are then placed onto the solder paste and fused to the melting point of the paste to establish a strong solder joint between components and the printed circuit board. The SMT process allows miniaturization of PCBs, cost savings and shorten lead paths between components (which results in faster signal speed and improved reliability). Additionally, it allows components to be placed on both sides of the printed circuit board, a major factor for the purpose of miniaturization.
Manufacturing operations include PCB assembly, wiring and testing. The process is completed by assembling the PCBs into a plastic or metal housing that comprises the finished product. Quality assurance is then conducted in accordance with the customers’ requirements before the shipment.
Metal Parts Manufacturing
In an aggregate of approximately 111,000 square feet of factory space at March 31, 20092012 located at facilities in Dongguan, China in the same complex and next to the Company’s electronic products assembly facilities, Deswell’s metal forming division manufactures metallic molds and accessory parts for use in audio
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equipment, routers, payphones, multimedia stations and ATMs. The Company’s metal molds and metal parts (products) manufacturing accounted for approximately 1.9%, 2.4% and 0.9%1.7% of Deswell’s total sales during the yearsyear ended March 31, 2007, 200831,2012, and 2009, respectively.less than one percent of the Company’s total sales for each of the fiscal years 2011 and 2012.
Quality Control
The Company maintains strict quality control procedures for its products. At hourly intervals, the Company’s quality control personnel monitor machines and molds to assure that plastic parts are free from defects.
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For electronic operations, the Company’s quality control personnel check all incoming components. Moreover, during the production stage, the Company’s quality control personnel check all work in process at several points in the production process. Finally, after the final assembly and before shipment, the Company conducts quality assurance inspections in accordance with the customers’ Acceptable Quality Level, or AQL, requirements.
Plastic, electronic and metal products manufactured and assembled at the Company’s facilities have a low level of product defects, and aggregate returns represented less than 3% of total net sales during each of the years ended March 31, 2007, 20082010, 2011 and 20092012.
In 1995, the Company earned ISO 9001 certifications for both its plastic and electronic products manufacturing operations. In April 2000, the Company also received ISO 9002 for its metal manufacturing operation. The “ISO” or International Organization for Standardization is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. ISO 9000, which is the first quality system standard to gain worldwide recognition, requires a company to gather, analyze, document and monitor and to make improvements where needed. ISO 9001 is the ISO level appropriate for manufacturers like the Company. The Company’s receipt of ISO 9001 certification demonstrates that the Company’s manufacturing operations meet the established world standards.
In August 2004, the Company’s plastic injection manufacturing plant in Dongguan also obtained ISO 14001 certification, which evidences that the Company’s environmental management standards or EMS meet established international standards. ISO 14000 is a series of international standards on environmental management, ISO 14001 is the most well knownwell-known of these standards and is often seen as the corner stone standard of the ISO 14000 series. In January 2006, the Company’s electronic and metallic manufacturing plant also obtained ISO 14001 certification.
The Company was working toward having its plastic injection manufacturing plant to obtain QS 9000 Certification but before completing that process elected to seek ISO/TS 16949 Certification. ISO/TS 16949 is an ISO Technical Specification. This specification aligns existing American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive quality systems standards within the global automotive industry. Together with ISO 9001:2000, ISO/TS 16949 specifies the quality system requirements for the design/development, production, installation and servicing of automotive related products. ISO/TS 16949 has been accepted as an equivalent to QS-9000, VDA6.1, AVSQ, and EAQF. ISO/TS 16949 does not replace QS-9000; but is optional and eliminates the need for multiple certifications. Deswell obtained ISO/TS 16949 Certification in July 2006.
Raw Materials, Component Parts and Suppliers
Plastic Resins.
The primary raw materials used by the Company in the manufacture of its plastic parts are various plastic resins, primarily ABS (acrylonitrile-butadiene-styrene). The following tablechart shows Deswell’s average cost of ABS as a percentage of the total cost of plastic products sold and as a percentage of total cost of goods sold during its last three fiscal years.
| | | | | | | | | | | | |
| | Year ended March 31, 2009 |
| | 2007 | | 2008 | | 2009 |
Average cost of ABS as a percentage of the total cost of: | | | | | | |
Plastic products sold | | | 52 | % | | | 46 | % | | | 45 | % |
Goods sold | | | 20 | % | | | 17 | % | | | 25 | % |
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Because plastic resins are commodity products, the Company selects its suppliers primarily based on price. The Company has no long-term supply agreements for plastic resins. The Company currently obtains majorityselects its suppliers based on price, lead time, the brand name or those that are appointed by its customers. Most of its plastic resins are obtained from suppliers in the United States, Malaysia, Singapore, Taiwan, Japan and Hong Kong and the remaining from suppliers in Mainland China andChina. Deswell normally maintains a two to three month inventory supply.
The Company used in excess of 22,100,0004,965,000 pounds of plastic resins during the year ended March 31, 2009.2012. Management believes that the Company’s large volume purchases of plastic resin have generally resulted in lower
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unit raw material costs and generally has enabled the Company to obtain adequate shipments of raw materials. While the Company is not generally bound by fixed price contracts with its customers, the Company has found that increases in resin prices can be difficult to pass on to its customers and, as a consequence, a significant increase in resin prices could have, and in the past has had, a material adverse effect on the Company’s operations.
The primary plastic resins used by the Company are produced from petrochemical intermediates derived from products of the natural gas and crude oil refining processes. Natural gas and crude oil markets have in the past experienced substantially cyclical price fluctuations as well as other market disturbances including shortages of supply and crises in the oil producing regions of the world. The capacity, supply and demand for plastic resins and the petrochemical intermediates from which they are produced are also subject to cyclical and other market factors. Consequently, plastic resin prices may fluctuate as a result of natural gas and crude oil prices and the capacity, supply and demand for resin and petrochemical intermediates from which they are produced. Over the past several years, oil prices have experienced significant volatility and remain extremely uncertain. Sustained increases in oil prices could result in higher costs for plastic resins.
Although the plastics industry has from time to time experienced shortages of plastic resins, the Company has not experienced to date any such shortages. Management believes that there are adequate sources available to meet the Company’s raw material needs.
Component Parts and Supplies for Electrical Products Manufacturing
The Company purchases a wide variety of component parts from numerous suppliers and is not dependent upon any single supplier for any essential component. The Company purchases from suppliers in China, Hong Kong, Taiwan, Singapore, the United StatesKingdom and elsewhere.the United States. At various times there have been shortages of parts in the electronics industry, and certain components, including PCBsintegrated circuits, diodes, transistors and other semiconductors, have been subject to limited allocations.allocations by their suppliers, particularly if they are complex and/or customized for a particular use. Although shortages of parts and allocations have not had a material adverse effect on the Company’s results of operations, there can be no assurance that any future shortages or allocations would not have such an effect.
For a discussion of various risks we face associated with obtaining needed components used in our manufacture of electronic products, please see “Shortages of components and materials used in our production of electronics products may delay or reduce our sales and increase our costs” and “We face inventory risks from by providing turnkey manufacturing of electronic products” beginning on page 11 of the Risk Factor section of this Report.
Raw Metal
The primary materials used by the Company in metal molds and parts manufacturing are various metals, but purchases of raw metal were immaterial to the Company’s total operations during the years ended March 31, 2007, 20082010, 2011 and 2009.2012. Typically, the Company buys metals from a variety of suppliers in Hong Kong and China and has no long-term contracts with metal suppliers.
Transportation
Transportation of components and finished products to customers in Shenzhen and to and from Hong Kong and Shenzhen and Dongguan is by truck. Generally, the Company sells its products F.O.B. China or F.O.B. Hong Kong. To date, the Company has not been materially affected by any transportation problems and has found that the transition of Hong Kong to Chinese control in July 1997 has not had an adverse impact on the Company’s ability to transport goods to and from Hong Kong and China.
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Customers and Marketing
The Company’s customers are OEMs and contract manufacturers. The Company sells its products in the United States, Asia (China and Hong Kong and Thailand)Kong) and Europe (United Kingdom, Holland Norway and Germany)Norway). Net sales to customers by geographic area are determined by reference to shipping destinations as directed by the Company’s customers. For example, if the products are delivered to the customer in Hong Kong, the sales are recorded as generated in Hong Kong; if the customer directs the Company to ship its products to Europe, the sales are recorded as sold to Europe. See Note 1516 of Notes to Consolidated Financial Statements for the dollar amounts of export sales by geographic area for each of the years ended March 31, 2007, 20082010, 2011 and 2009.2012. Net sales as a percentage of total sales to customers by geographic area consisted of the following for the years ended March 31, 2007, 20082010, 2011 and 2009:
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2012:
| | | | Year ended March 31,
| |
---|
Geographical Area
| | | | 2010
| | 2011
| | 2012
|
---|
United States | | | | | 44.3 | % | | | 41.7 | % | | | 40.7 | % |
China | | | | | 52.5 | | | | 42.7 | | | | 34.0 | |
United Kingdom | | | | | 1.6 | | | | 9.0 | | | | 11.7 | |
Europe | | | | | 0.4 | | | | 2.5 | | | | 3.5 | |
Hong Kong | | | | | 0.7 | | | | 0.7 | | | | 0.4 | |
Others | | | | | 0.5 | | | | 3.4 | | | | 9.7 | |
Total | | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
We believe that our reported sales by geographic area do not necessarily reflect the final destinations of our products or the actual nationalities of our customers. For example, we have reported product sales in China amounting to 34.0% of our total net sales for the year ended March 31, 2012 because China is where our customers directed us to deliver the products. However, we believe that these sales were to offshore customers using local China shipping destinations, which in turn, transshipped our products offshore.
| | | | | | | | | | | | |
| | Year ended March 31, |
Geographic Areas | | 2007 | | 2008 | | 2009 |
China | | | 39.2 | % | | | 37.0 | % | | | 52.8 | % |
United States | | | 42.4 | | | | 46.8 | | | | 32.0 | |
Europe | | | 11.2 | | | | 10.7 | | | | 12.4 | |
Others | | | 3.8 | | | | 3.8 | | | | 1.5 | |
Hong Kong | | | 3.4 | | | | 1.7 | | | | 1.3 | |
| | | | | | | | | | | | |
Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | |
The Company markets its products and services to existing customers through direct contact with the Company’s management and direct sales personnel. The Company’s sales personnel attend trade shows, exhibitions and the Company advertises in trade publications such asModern Plastics International andInjection Molding.conventions. Collecting information from trade-show,trade-shows, as well as websites, Deswell’s marketing staffs contacts existing and potential customers directly by telephone, mail, fax, e-mail via the Internet and in person, stressing Deswell’s capability as a complete solution provider for plastic injection mold design, tooling and molding as well as an electronics manufacturing services, or EMS, provider of advanced technology manufacturing processes and flexible logistic services.
Major Customers
The table below sets forth each of the Company’s customers which accounted for 10% or more of net sales during the year ended March 31, 2009, the category of products purchased and the percentage of total Deswell net sales from such customers during the years ended March 31, 2007, 2008 and 2009.
| | | | | | | | | | | | | | | | |
| | | | | | Year ended March 31, |
Customer | | Product | | 2007 | | 2008 | | 2009 |
N&J Company Limited | | Plastic Component | | | * | % | | | 11.8 | % | | | 28.6 | % |
Digidesign, Inc. | | Professional audio equipment | | | 13.3 | | | | 17.0 | | | | 12.7 | |
The Company’s success will depend to a significant extent on the success achieved by its customers in developing and marketing their products, some of which may be new. Many of the industry segments served by the Company’s customers are subject to technological change, which can result in short product life cycles. The Company could be materially adversely affected if advances in technology or other factors reduce the marketability of essential products of its customers or if new products being developed by its customers do not attain desired levels of acceptance. If the Company was to lose any customers who account for a material portion of total net sales, or if any of these customers were to decrease substantially their purchases from the Company, the Company’s revenues, earnings and financial position would be materially and adversely affected. The Company’s dependence on these customers is expected to continue in the foreseeable future.
The Company’s sales transactions with all of its customers are based on purchase orders received by the Company from time to time. Except for these purchase orders, the Company has no written agreements with its customers. Sales of plastic parts, electronic products and metallic products are primarily made on credit terms, with payment in United States dollars or Hong Kong dollars expected within 30 to 90 days of shipment. In certain cases, primarily new customers of electronic products, sales are supported by letters of credit and are payable in United States dollars. To date, the Company has not experienced any significant difficulty in collecting accounts receivable on credit sales. Management communicates regularly with credit sale customers and closely monitors the status of payment and in this way believes it has kept the default rate low. Additionally, plastic parts deliveries are made in several installments over a lengthy period of time, which permits the Company to withhold delivery in the event of any delinquency in payment for past shipments. While the Company has not experienced any material difficulty in being paid by its major customers, there can be no assurance that the Company’s favorable collection experience will continuecontinue.
Customers
The Company’s success depends to a significant extent on the success achieved by its customers in every case or at all.developing and marketing their products, some of which may be new. Many of the industry segments served by the Company’s customers are subject to technological change, which can result in short product life cycles. The Company could be materially adversely affected if advances in technology or other factors reduce the marketability of essential products of its customers or if new products being developed by its customers do not attain desired levels of acceptance.
Historically, before fiscal 2011, a substantial percentage of Deswell’s sales were to a small number of major customer were unable to paycustomers that each accounted for more than 10% of its net sales. During the years ended March 31, 2010, the Company’s major customers together accounted for 42.0% of its total net sales. In the year ended March 31,
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2011 and 2012, however, Deswell’s sales to 10% or greater customers were limited to sales to VTech Telecommunications Limited, which accounted for 14.6% and 12.6% of net sales, respectively.
The Company’s sales are based on purchase orders and there are no long-term contracts with any of Deswell’s customers. The percentage of sales to the Company’s customers has fluctuated in the past and may fluctuate in future. Substantial decreases in sales to, or the loss of major customers, have adversely impacted Deswell’s sales and financial performance. For example, N&J Company Ltd. and Digidesign, Inc., the Company’s two largest customers in fiscal 2010, accounting for 19.2% and 12.7% of total sales during that year, both reduced the volumes of their orders during the years ended March 31, 2011 and 2012 to less than 10% of the Company’s total sales. These reductions in sales to major customers were principal contributing factors to the decreases in total sales by the Company over the last three fiscal years and, coupled with a 2.0% year-over-year decrease in sales to VTech, the operating and net losses suffered by Deswell during the year ended March 31, 2012.
Present or future customers could cease to use Deswell as the source of the injection-molded plastic parts and components it manufactures for electronic manufacturing services of electrical products and subassemblies or services.for metallic molds and accessories or significantly change, reduce or delay the amount of products and services ordered. The Company’s sales will continue to decline and its financial results will suffer further if orders from its largest customer, VTech, or orders from other substantial customers, cease or are significantly reduced unless Deswell can increase sales from other existing customers or add sales from new customers.
Competition
We compete with a number of different companies in producing of injection-molded plastic parts and components, electrical products and subassemblies and metallic molds and accessories. For example, we compete
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with major global EMS providers, other smaller EMS companies that have a regional or product-specific focus, and original design manufacturers with respect to some of the services that we provide. We also compete with our current and prospective customers, who can manufacture internally and who evaluate our capabilities in light of their own capabilities and cost structures. Our market segments are extremely competitive, many of our competitors have achieved substantial market share and many have lower cost structures and greater manufacturing, financial or other resources than we do. We face particular competition from Asian-based competitors, including Taiwanese EMS providers who compete in our end markets.
The Company believes that competition for plastic injection molding, contract electronic manufacturing and metal molds and parts manufacturing businesses are based on price, quality, service and the ability to deliver products in a timely and reliable basis.
Patents, Licenses and Trademarks
The Company has no patents, trademarks, licenses, franchises, concessions or royalty agreements that are material to its business.
Seasonality
For information concerning the seasonality of the Company’s business, see “Seasonality” included under ItemITEM 5 “Operating and Financial Review and Prospects.”
Property, Plants and Equipment
Macao
The Company leases Units 17B and 17E, Edificio Comercial Rodrigues, 599 Avenida da Praia Grande, Macao from an unaffiliated party, each being for a term of two years to July 2010.2014. The premises are used as trading, administrative and accounting officeoffices for the Company’s plastic injection business and electronic & metallic business, respectively. The monthly rent is approximately $2,190.$2,530.
Hong Kong
The Company sold its previously owned property of Unit 10-14, 19/F., Kwong Sang Hong Centre, 151-153 Hoi Bun Road, Kwun Tong, Hong Kong to an unaffiliated party for proceeds of $1,350,000 in March 2007.
Southern China.China
In October 2000, the Company acquired under sale and purchase agreement with third party an aggregate of approximately 112,900 square feet of manufacturing space at Block G, Wing Village Industrial Estate, Shekou, Shenzhen, China which was previously leased by the Company for the use of its plastic injection molding operations. Deswell paid approximately $1,461,000 to acquire this property. At March 31, 2009, the Company had closed this manufacturing facility and now holds it for sale. For information regarding Deswell’s pending sale of this property to a third party, see the discussion under Item 4 Information on the Company — “Important Events in Deswell’s Development that Have Occurred since April 1, 2008” and Item 10 Additional Information — “Material Contracts” at pages 17 and 45, respectively, of this Report.
In January 2000, the Company acquired under sale and purchasea land-lease agreement with the local government party an aggregate of approximately 1.3 million square feet of land to construct its own manufacturing plant and dormitory buildings in Houjie, Dongguan, China. As atUnder the land-lease agreement, the Company has the right to use the land for 50 years. On this land, Deswell has through March 31, 2009, there were built and operational 2012 constructed approximately
1,070,000 square feet of factory space,
91,000 square feet of amenity space,
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133,000 square feet of office building space, and
470,000 square feet of dormitory space.
Deswell now uses this facility for its plastic manufacturing operations.
The Company leases space at various locationsowns 12 apartment units located near its plastic manufacturing factories that are used for housing senior management. At March 31, 2012, the Company leased one dormitory for factory staff near its plastics manufacturing factories in Dongguan that it uses as dormitories for factory staff. Management estimates that the spaceDongguan. The dormitory is leased for dormitories approximated 2,400 square feet at March 31, 2009 in Dongguan. The facilities are leased for periodsa period of one year with expiration dates ranging from April 2010 to June 2010.expiring in October 2012. The aggregate monthly rental is approximately $650. During the period from July 2006 to March 2007, Deswell sold its previously owned dormitory apartments to unaffiliated parties for aggregate proceeds of $795,000.$400.
In July 2003, the Company completed the acquisitionacquired under a land-lease agreement with a third party for an aggregate of approximately 244,000 square feet of land and approximately 420,000 square feet of buildings, including six blocks of dormitory buildings, a canteen, a factory building, a car park and a guard room, at Chang An, Dongguan, China, which was previously named Kwan Hong Building. The land use period is for 50 years from February 1, 2003 to January 31,
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2053. The Company paid approximately $4,186,000 to acquire this property and uses the facilities for its electronic products manufacturing operations.
At March 31, 2009,2012, the Company leased approximately 69,400 square feet of manufacturing space in Kwanta Building, Chang An, Dongguan, China for its contract metal manufacturing operations. These premises are leased from a third party expireand the lease expires in May 2010.2013. The aggregate monthly rental is approximately $8,600.$9,600.
In addition, the Company leases approximately 4,000 square feet of space at various locations near its contract electronics and metal manufacturing factories in Dongguan, which are used as staff quarters. The facilities are leased from third parties for period of one year and expire from December 2009 to July 2010. The aggregate monthly rental is approximately $2,000.
Management believes that Deswell will be able to renew each of the leases described above as it expires for periods comparable to the current term or find alternative space as needed.
The Company believes that its existing offices and manufacturing space, and manufacturing space in close proximity to its existing facilities, which management believes will be available as needed for limited expansion, will be adequate for the operation of its business for at least the next two years.
ITEMITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.applicable to Deswell.
ITEM 5. | | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Except for statements of historical facts, this section contains forward-looking statements involving risks and uncertainties. You can identify these statements by forward looking words including “expect”, “anticipate”, “believe” “seek”, “estimate”. Forward looking statements are not guarantees of Deswell’s future performance or results and the Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the section of this Report entitled ItemITEM 3. Key Information — “Risk Factors”. This section should be read in conjunction with the Company’s Consolidated Financial Statements included under Item 18 of this Report.
Operating Results
The following discussion should also be read in conjunction with the consolidated financial statements and notes thereto included later infollowing ITEM 18 of this Report. The Company prepares its financial statements in accordance with U.S. GAAP.
General
The Company’s revenues are derived from the manufacture and sale of injection-molded plastic parts and components, electrical products and subassemblies and metallic molds and accessories. Jetcrown Macao and Jetcrown Dongguan (wholly owned subsidiaries) carry onHistorically, the plastics operations whereas Integrated carries out the electronics and metallic operations. The Company acquired a controlling interest in Integrated’s predecessor in October 1992 and has included the results of the predecessor in its consolidated financial statements from the date of acquisition. Through December 2002, the Company owned a 51% interest in Integrated. In January 2003, the Company increased its interest in Integrated to 71% by purchasing an additional 20% from its minority shareholders in exchange for the issuance to them of an aggregate of 251,880 common shares. In April 2005, the Company increased its interest in Integrated to 76% by purchasing an additional 5% from a minority shareholder in exchange for the issuance to it of 120,000 common shares. In August 2007, the Company further increased its interest in Integrated to 100% by purchasing the remaining 24% from the minority shareholder in exchange for the issuance to them of 632,080 common shares and a cash payment of $414,000.
The Company’s plastics operations arehave been the mainstay of its business and have historically accounted for the majority of its sales. That changed in fiscal 2012, when the Company’s sales decreased overall and in each business segment, but the percentage of sales decline in the plastic segment was more than that in the electronic & metallic segment, resulting in the Company’s electronic & metallic segment contributing more than half of Deswell’s total sales.
The Company carries out all of its manufacturing operations in Southern China, where it ishas been able to take advantage of the lower overhead costs and inexpensive labor rates as compared to Hong Kong. At the same time, the proximity of the Company’s factories in Southern China to Hong Kong permits the Company to manage easily its manufacturing operations from Macao, facilitates transportation of its products through Hong Kong and provides the Company’s plastic manufacturing operations with access to electricity from Hong Kong and to nearby water, both of whichwater. These, resources are needed in abundance to manufacture plastic parts and are often inadequate elsewhere in China.
PRC Income Taxes
Under PRC tax law in effect before January 1, 2008, we have beenwere afforded a number of tax concessions by, and tax refunds from, China’s tax authorities on a substantial portion of our operations in China by reinvesting
27
all or part of the profits attributable to our PRC manufacturing operations. We have enjoyed preferential tax concessions in the PRC as a high-tech enterprise and have benefited from favorable overall effective income tax rates of 8.70 % and 1.13% for the years ended March 31, 2007 and 2008, respectively. However, on March 16, 2007, the Chinese government enacted a new unified enterprise income tax law which became effective on January 1, 2008. Under the new income tax law most domestic enterprises and foreign invested enterprises, like Deswell, would be subject to a single PRC enterprise income tax rate and gradually transfer to the new tax rate of 25% within five years.years of the effective date. Following the implementation of the Enterprise Income Tax Law effective January 1, 2008, the State Council announced the transition rules for preferential tax policies (Guofa [2007] No.39) of January 2, 2008, for eligible enterprises previously subject to a 15% tax rate or 24% tax rate. As so announced, the new enterprise income tax rates for tax year 2010 was, and such rates for tax years 2011 and 2012 (and thereafter) are:
| | | | | | | | |
| | Rate under EIT for enterprises previously subject to tax rate of |
Tax Year (Calendar) | | 15 percent | | 24 percent |
2009 | | | 20 | % | | | 25 | % |
2010 | | | 22 | % | | | 25 | % |
2011 | | | 24 | % | | | 25 | % |
2012 | | | 25 | % | | | 25 | % |
| | | | Rate under EIT for enterprises previously subject to tax rate of
| |
---|
Tax Year (Calendar)
| | | | 15 percent
| | 24 percent
|
---|
2010 | | | | | 22 | % | | | 25 | % |
2011 | | | | | 24 | % | | | 25 | % |
2012 and thereafter | | | | | 25 | % | | | 25 | % |
Accordingly, with the enactment of new PRC Enterprise Tax effective January 1, 2008, the Company expects the benefits it previously enjoyed, such as receiving tax refunds as a result of its reinvestment of profits in certain of its subsidiaries in China and favorable concession rates, will no longer be available.
The Company is subject to the applicable transfer pricing rules in PRC in connection to the transactions between its subsidiaries located inside and outside PRC. In accordance to Guo Shui Fa [2009] No.2 “Implementation Regulations of Special Tax Adjustments (Provisional)”(“Guo Shui Fa [2009] No.2”), which took effect at the beginning of calendar year 2008 and set out the regulations in relation to transfer pricing, contemporaneous documentation, disclosure and compliance of intercompany transactions, the Company and external parties have prepared transfer pricing contemporaneous
31
documentations (the “Contemporaneous Documentations”) of its subsidiaries in PRC for the calendar year ended December 31, 2008, 2009 and 2010.
Business Segment Information
Deswell’s material operations are generally organized in twothree segments: plastic injection molding, orwhich we sometimes refer to as the plastic segment,“plastics segment”, and electronic products assembling and metallic parts manufacturing. The Company’s reportable segments are strategic business units that offer different products and services. See Note 16 of Notes to Consolidated Financial Statements. Results from the Company’s metallic parts manufacturing operations have not been material to the Company’s operations as a whole and have therefore been combined aswith the electronic and metallic segment for the table presentation and discussion below. The Company’s reportable segments are strategic business units that offer different productsbelow and services.elsewhere in this Report. As so combined, we refer to them as the “electronic & metallic segment.” The following table sets forth present selected consolidated financial information statedpresented as a percentagespercentage of net sales by segment for each of the three years in the period ended March 31, 2009.2012.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended March 31, 2007 | | Year ended March 31, 2008 | | Year ended March 31, 2009 |
| | Plastic | | | | | | | | | | Plastic | | | | | | | | | | Plastic | | | | |
| | Injection | | Electronic | | | | | | Injection | | Electronic & | | | | | | Injection | | Electronic & | | |
| | Molding | | & Metallic | | | | | | Molding | | Metallic | | | | | | Molding | | Metallic | | |
| | Segment | | Segment | | Total | | Segment | | Segment | | Total | | Segment | | Segment | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of sales | | | 68.1 | | | | 84.1 | | | | 77.1 | | | | 74.4 | | | | 86.6 | | | | 81.6 | | | | 82.4 | | | | 87.6 | | | | 84.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 31.9 | | | | 15.9 | | | | 22.9 | | | | 25.6 | | | | 13.4 | | | | 18.4 | | | | 17.6 | | | | 12.4 | | | | 15.3 | |
Selling, general and administrative expenses | | | 17.4 | | | | 11.2 | | | | 13.9 | | | | 18.4 | | | | 10.3 | | | | 13.6 | | | | 16.3 | | | | 12.6 | | | | 14.6 | |
Other income, net | | | 2.5 | | | | (0.1 | ) | | | 1.0 | | | | 4.0 | | | | (0.6 | ) | | | 1.3 | | | | 0.5 | | | | (0.8 | ) | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 17.0 | | | | 4.6 | | | | 10.0 | | | | 11.2 | | | | 2.5 | | | | 6.1 | | | | 1.8 | | | | (1.0 | ) | | | 0.6 | |
Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Non-operating income, net | | | 0.8 | | | | 0.1 | | | | 0.4 | | | | 0.8 | | | | 0.1 | | | | 0.4 | | | | 0.3 | | | | (0.1 | ) | | | 0.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes and minority interest | | | 17.8 | | | | 4.8 | | | | 10.4 | | | | 12.0 | | | | 2.6 | | | | 6.5 | | | | 2.1 | | | | (1.1 | ) | | | 0.7 | |
Income taxes | | | 1.8 | | | | 0.2 | | | | 0.9 | | | | 0.5 | | | | (0.2 | ) | | | 0.1 | | | | (0.1 | ) | | | (0.4 | ) | | | (0.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before minority interests | | | 15.9 | | | | 4.6 | | | | 9.5 | | | | 11.5 | | | | 2.8 | | | | 6.4 | | | | 2.2 | | | | (0.7 | ) | | | 0.9 | |
Minority interests | | | — | | | | 1.1 | | | | 0.6 | | | | — | | | | 0.3 | | | | 0.2 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 15.9 | % | | | 3.5 | % | | | 8.9 | % | | | 11.5 | % | | | 2.5 | % | | | 6.2 | % | | | 2.2 | % | | | (0.7 | )% | | | 0.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended March 31, 2010
| | Year ended March 31, 2011
| | Year ended March 31, 2012
| |
---|
| | | | Plastic Injection Molding Segment
| | Electronic & Metallic Segment
| | Total
| | Plastic Injection Molding Segment
| | Electronic & Metallic Segment
| | Total
| | Plastic Injection Molding Segment
| | Electronic & Metallic Segment
| | Total
|
---|
Net sales | | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of sales | | | | | 79.1 | | | | 91.9 | | | | 84.5 | | | | 86.4 | | | | 91.0 | | | | 88.6 | | | | 81.7 | | | | 88.3 | | | | 85.4 | |
Gross profit | | | | | 20.9 | | | | 8.1 | | | | 15.5 | | | | 13.6 | | | | 9.0 | | | | 11.4 | | | | 18.3 | | | | 11.7 | | | | 14.6 | |
Selling, general and administrative expenses | | | | | 22.5 | | | | 14.2 | | | | 19.0 | | | | 21.0 | | | | 12.0 | | | | 16.6 | | | | 26.8 | | | | 12.8 | | | | 18.9 | |
Other income (expenses), net | | | | | 9.0 | | | | 1.0 | | | | 5.6 | | | | (10.5 | ) | | | 0.1 | | | | (5.3 | ) | | | 1.9 | | | | 0.3 | | | | 1.0 | |
Operating income (loss) | | | | | 7.4 | | | | (5.1 | ) | | | 2.1 | | | | (17.9 | ) | | | (2.9 | ) | | | (10.5 | ) | | | (6.6 | ) | | | (0.8 | ) | | | (3.3 | ) |
Non-operating income, net | | | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | 2.3 | | | | 0.3 | | | | 1.3 | | | | 3.0 | | | | 0.9 | | | | 1.8 | |
Income (loss) before income taxes | | | | | 7.9 | | | | (4.5 | ) | | | 2.7 | | | | (15.6 | ) | | | (2.6 | ) | | | (9.2 | ) | | | (3.6 | ) | | | 0.1 | | | | (1.5 | ) |
Income taxes | | | | | 0.6 | | | | 1.1 | | | | 0.9 | | | | 0.7 | | | | 0.2 | | | | 0.5 | | | | 1.2 | | | | 0.4 | | | | 0.7 | |
Net income (loss) | | | | | 7.3 | % | | | (5.6 | )% | | | 1.8 | % | | | (16.3 | )% | | | (2.8 | )% | | | (9.7 | )% | | | (4.8 | )% | | | (0.3 | )% | | | (2.2 | )% |
Year ended March 31, 20092012 (Fiscal 2012) Compared to Year Ended March 31, 20082011 (Fiscal 2011)
Net Salessales -— The Company’s net sales for the year ended March 31, 20092012 were $131,738,000,$64,783,000, a decrease of $12,068,000$19,239,000, or 8.4%22.9%, as compared to the for year ended March 31, 2008. Sales to N&J Company Limited (“N&J”) and Digidesign Inc. (“Digidesign”), the Company’s two largest customers during the year ended March 31, 2009, represented approximately 41.3% of net sales for the year. See Item 4. Information on the Company — Major
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Customers, above.fiscal 2011. The decrease was related to a decreasedecreases in sales revenue at our electronic and metallic segment of $26,637,000 offsetting the increase in sales$14,433,000, or 33.7%, at our plastic segment, of $14,569,000. This represented a decrease of 31.3% and an increase of 24.8% respectively,$4,806,000, or 11.7%, from our electronic & metallic segment, as compared with the respective net sales from these segments in fiscal 2008.
2011. The decrease in sales revenues was mainly attributed to a decrease in customer orders in response to the slow global economic recovery and potential economic recessions in the European countries.
Decrease in sales revenues at the plastic segment was mainly attributed to a reduction of orders totaling $5,052,000 in plastic sales for electronic entertainment products as well as $4,121,000 for telephone products, representing 35.0% and 28.5%, respectively, of the decrease in total sales in fiscal 2012, as compared to fiscal 2011.
The sales revenues decrease in the electronic & metallic segment primarily resulted from a decrease of $17,596,000 in orders for professional audio instrument products and $740,000 for telecom products from existing customers, offsetting an increase of $13,563,000 in orders for professional audio and home entertainment products from other existing customers.
Although remaining its largest customer in fiscal 2012, accounting for 12.6% of total net sales, the adverse effects on Deswell’s operating results from a 2.0% decline in orders during fiscal 2012 from VTech Telecommunications Limited, compared sales made to that customer in fiscal 2011, coupled with the Company’s inability to recapture sales made to pre-fiscal 2011 major customers or supplant them with significant sales to other customers, were principal factors contributing to the decrease in Deswell’s total revenues in fiscal 2012. These
32
dynamics also illustrate Deswell’s historical dependence on a few major customers. See the Risk Factor entitled “Historically we have been dependent on a few major customers that accounted for a substantial percentage of our sales. Starting from fiscal 2011, we have been limited to one major customer. Our sales will continue to decline and our financial results will suffer further if orders from our major customer or customer base are ceased, or substantially reduced, or if we cannot develop new customers or increase sales from our existing customers” in ITEM 3. KEY INFORMATION.
Gross profit - Gross profit for the year ended March 31, 2012 was $9,465,000, representing a gross profit margin of 14.6%. This compared with an overall gross profit and gross profit margin of $9,548,000 and11.4%, respectively, for the year ended March 31, 2011.
Gross profit in the plastic segment decreased by $642,000, to $5,189,000, or to 18.3% of net sales from that segment, for the year ended March 31, 2012, as compared to $5,831,000, or 13.6%, of comparable net sales for fiscal 2011. The increase in gross margin for the plastic segment was principally due to the combined effect of an increase in revenues of higher profit margin items, and savings in labor cost resulting from reduced headcount, when compared with fiscal 2011.
Gross profit in the electronic & metallic segment increased by $559,000, to $4,276,000, or 11.7% of net sales from that segment, for the year ended March 31, 2012, as compared to $3,717,000, or 9.0%, of comparable net sales for fiscal 2011. The increase in gross margin was mainly attributed to an increase in the selling price of products, offsetting higher labor costs as a result of increases in overtime allowances and factory overheads, as compared with fiscal 2011.
Selling, general and administrative expenses - SG&A expenses for the year ended March 31, 2012 were $12,273,000, or 18.9% of total net sales, as compared to $13,941,000, or 16.6% of total net sales for the year ended March 31, 2011. SG&A expenses decreased by $1,668,000, or 12.0%, in fiscal 2012, as compared to those expenses in fiscal 2011.
SG&A expenses in the plastic segment decreased by $1,399,000, to $7,581,000, compared to $8,980,000 for fiscal 2011. The decrease was primarily related to decreases of $350,000 in selling expense, $1,409,000 in staff costs and welfare expenses and $91,000 in compensation to the segment’s senior management, offsetting increases of $384,000 in stock-based compensation expenses as a result of 700,000 options granted to officers and employees and $324,000 in local government taxes and subsidies, as compared to fiscal 2011. Notwithstanding the fiscal 2012 decrease of SG&A expenses in absolute dollars, because of the segment’s year-over-year decline in sales, SG&A expenses as a percentage of sales from that segment increased to 26.8% in fiscal 2012, compared to 21.0% in fiscal 2011.
SG&A expenses in the electronic & metallic segment decreased by $269,000, to $4,692,000, or 12.9% of net sales from that segment, for the year ended March 31, 2012, compared to $4,961,000, or 12.1% of net sales in the same segment, for fiscal 2011. The savings in fiscal 2012 were primarily related to decreases of $82,000 in selling expense and $163,000 in staff costs and welfare expenses, offsetting increases of $165,000 in stock-based compensation expenses and $155,000 in local government taxes and subsidies, as compared with fiscal 2011.
Other income (expenses), net - Other income was $639,000 for the year ended March 31, 2012, as compared to other expenses of $4,435,000 in fiscal 2011.
On a segment basis, other income attributable to the plastic segment for the year ended March 31, 2012 was $528,000, as compared to other expenses of $4,498,000 for fiscal 2011. Other income was mainly due to an exchange gain of $309,000 and a gain of $132,000 from sales of scrap materials during the year ended March 31, 2012, as compared to an exchange loss of $263,000, provisions of $229,000 for doubtful receivables and $4,474,000 of charges for impairment of property, plant and equipment during fiscal 2011.
The Company did not impair, after its review and assessment of, the carrying amounts of its long-lived assets at March 31, 2012. See Notes 2 and 7 of Notes to Consolidated Financial Statements included later in this report.
Other income attributable to the electronic & metallic segment for the year ended March 31, 2012 was $111,000, as compared with other income of $63,000 for fiscal 2011. The increase in fiscal 2012 other income was principally because of reductions of $118,000 in the Company’s provision for doubtful receivables and a $72,000 gain from scrap materials sales, as compared with fiscal 2011.
Operating loss - Operating loss was $2,169,000 for the year ended March 31, 2012, which compares to an operating loss of $8,828,000 for fiscal 2011.
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On a segment basis, the operating loss of the plastic segment was $1,864,000, or negative 6.6% of net sales from that segment, in the year ended March 31, 2012, as compared to an operating loss of $7,647,000, or negative 17.9% of net sales in the same segment, in fiscal 2011. The decrease in operating loss in the plastic segment during fiscal 2012 primarily resulted because the Company did not incur charges for impairment of property, plant and equipment as well as from the improvement in gross margin caused by sales of higher margin products and the increase in other income, offsetting the increase in the SG&A expenses as a percentage of sales as described above.
The electronic & metallic segment reported an operating loss of $305,000, or negative 0.8% of net sales from that segment, in the year ended March 31, 2012, compared to an operating loss of $1,182,000, or a negative 2.9% of net sales from the same segment, in fiscal 2011. The decrease in operating loss was mainly because of the segment’s increase in gross margin, as described above.
Non-operating income - Non-operating income for the year ended March 31, 2012 increased by $94,000, to $1,190,000, as compared with $1,096,000 of non-operating income during fiscal 2011. This was mainly attributable to $509,000 of income from securities investments, $261,000 of interest income and $133,000 in other non-operating income, offsetting a decrease of $831,000 in realized gain from the sale of marketable securities, as compared with fiscal 2011. See Note 3 of Notes to Consolidated Financial Statements.
Income taxes - Income taxes for the year ended March 31, 2012 were comprised of income tax expense of $307,000 and a deferred tax provision of $175,000, as compared to the income tax expense of $596,000 and a deferred tax benefit of $214,000 in fiscal 2011.
On a segment basis, there was an income tax expense of $131,000 and a deferred tax provision of $207,000 in the plastic segment for the year ended March 31, 2012, as compared to an income tax expense of $420,000 and a deferred tax benefit of $127,000 for the prior fiscal year. The income tax of the electronic & metallic segment was comprised of an income tax expense of $170,000 and a deferred tax benefit of $26,000 for the year ended March 31, 2012, as compared to an income tax expense of $176,000 and a deferred tax benefit of $87,000 for fiscal 2011.
Net loss - The Company had a net loss of $1,461,000, or a negative 2.3% of net sales, for the year ended March 31, 2012, as compared to net loss of $8,114,000, or a negative 9.7% of net sales, for the year ended March 31, 2011. The improvement in fiscal 2012 primarily resulted because the Company did not incur charges for impairment of property, plant and equipment as it did in fiscal 2011 and because of other income of $639,000 reported in fiscal 2012 versus other expenses of $4,435,000 reported in fiscal 2011, as discussed above.
Net loss for the plastic segment for the year ended March 31, 2012 totaled $1,345,000, as compared to a net loss of $6,955,000 for fiscal 2011. Bottom line improvements in the plastic segment resulted primarily from the absence of impairment charges of property, plant and equipment and the exchange gain reported in other income during fiscal 2012, as compared to $4,474,000 of impairment charges of fixed assets in fiscal 2011, as described above.
Net loss for the electronic & metallic segment for the year ended March 31, 2012 was $116,000, compared to a net loss of $1,159,000 for the prior fiscal year. The decrease in the net loss of the electronic and metallic segment was mainly from the improvement in gross margin and increases in other income and non-operating income during fiscal 2012, as described above.
Year ended March 31, 2011 (Fiscal 2011) Compared to Year Ended March 31, 2010 (Fiscal 2010)
Net sales - The Company’s net sales for the year ended March 31, 2011 were $84,022,000, an increase of $2,408,000 or 3.0% as compared to fiscal 2010. The increase was related to an increase in sales revenue increaseof $6,644,000, or 19.2%, from our electronic & metallic segment, offsetting the decrease in sales revenue at our plastic segment of $4,236,000, or 9.0%, as compared with respective net sales from these segments in fiscal 2010.
The decrease in sales from the plastic segment was mainly due to the increasea change in product and customer mix stemming from a reduction of $9,976,000 in orders from existing and new customers of $23,321,000 offsetting the decrease in orders from other existing customers of $8,751,000. The increase was principally due to a $20,671,000 increase infor plastic component sales ofcomponents used for electronic entertainment products. The increaseproducts from N&J Company Limited, the Company’s largest customer in ordersfiscal 2010, both in ourthe plastic segments and as a whole, accounting for 33.3% of plastic segment was largely from N&J, onesales and 19.2% of our major customers during both fiscal 2008 and 2009, which accounted for 28.6% of our total net sales during the year ended March 31, 2009, up2010. This reduction in the plastics segment, which reduced sales to N&J to less than 10% of total sales during fiscal 2011, was partially offset by an increase of $5,894,000 in sales to other customers of plastic components used for telephone and automotive products.
The increase in sales in the electronic & metallic segment was primarily attributable to an increase of $12,776,000 in orders for professional audio instrument products from 11.8%existing and new customers, offsetting a decrease of our$6,132,000 in orders for professional audio and telecommunication products from Digidesign, Inc. the
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Company’s largest customer in the electronic & metallic segment and second largest customer as a whole during fiscal 2010, accounting for 25.7% of sales in the electronic & metallic segment sales and 10.8% of total net sales during the year ended March 31, 2008.
2010. The revenue decreaseincrease in sales in the electronic and& metallic segment was mainly due toresulted from the decrease incombined effect of orders of electronicsfrom new customers and metallic productsincreased orders for new product models from existing customers of $35,175,000 and $2,075,000, respectively, offsetting the increasecustomers.
The adverse effect on our operating results from decreases in orders from existing and new customers for professional audio instrument products of $10,651,000. The increase in total orders for professional audio instrument products largely came from existing customers other than Digidesign. The overall decrease in orders of electronics and metallic products from existing customers was due to the combined factors of a decline in demand as a result of the global economic recession, persistent pressure of losing orders to competitors which provide lower-priced products, and a change in product mix from low-end to high-end products. We believe that these factors resulted in the reduction in orders from Digidesign, down to 12.7% of our total net sales the year ended March 31, 2009, from 17.0% of our total net sales during 2008, and the decline in orders from each of Line 6 Manufacturing (“Line 6”) and Inter-Tel Incorporated (“Inter-Tel”)fiscal 2011 to below 10% of our total net salestwo largest customers during the year ended March 31, 2009. Line 6 and Inter-Tel accounted for 14.3% and 10.2%, respectively, of our total net sales during the year ended March 31, 2008. These declines in net sales to Digidesign, Line 6 and Inter-Tel during the year ended March 31, 2009fiscal 2010 illustrates our historical dependence on a few major customers and that a substantial decreasesdecrease in sales from any of our larger customers adversely impacts our sales and financial performance. See the discussion under “We areRisk Factor entitled “Historically we have been dependent on a few major customers andthat accounted for a substantial percentage of our sales. Starting from fiscal 2011, we have no long-term contracts with them.been limited to one major customer. Our sales wouldwill continue to decline and our financial results will suffer further if orders from our major customer or customer base are ceased, or substantially decrease and we would suffer decreases in net incomereduced, or losses if we lose any ofcannot develop new customers or increase sales from our major customers, if they substantially reduce their orders or if they are unable to pay us. These risks have become particularly acuteexisting customers” in the current adverse economic environment” in Item 3 Key Information — Risk Factors, above.ITEM 3. KEY INFORMATION.
Gross Profitprofit -— Our gross Gross profit for the year ended March 31, 20092011 was $20,168,000,$9,548,000, representing a gross profit margin of 15.3%11.4%. This compared with the overall gross profit and gross profit margin of $26,433,000$12,656,000 or 18.4%, respectively,15.5% for the year ended March 31, 2008.2010.
Gross profit in the plastic segment decreased by $2,118,000$4,013,000, to $12,952,000,$5,831,000, or 17.6%13.6% of net sales in that segment for the year ended March 31, 2009,2011, as compared to $15,070,000,$9,844,000, or 25.6%20.9% of same segment net sales, for the year ended March 31, 2008.in fiscal 2010. The decrease in gross margin for the plastic segment was mainly dueprincipally associated with increased labor cost related to regulatory increases in the shiftminimum wage rates of product mix to lower margin products, as compared with the prior year. Thefactory workers and higher overtime allowances, offsetting a decrease in gross margin was also driven by higher material costs as a resultpercentage of a 10% rise in resin price and an approximate 9.05% appreciation of RMB, plus an increase in labor costs caused by a 17% rise in labor rates in spite of headcount reductions,net sales, when compared towith fiscal 2008.2010.
Gross profit in the electronic and& metallic segment decreased by $4,147,000 to $7,216,000,was $3,717,000, or 12.4%9.0% of net sales from that segment, for the year ended March 31, 20092011, as compared to $11,363,000,$2,813,000, or 13.4%8.1% of same segment net sales, for the year ended March 31, 2008.fiscal 2010. The decreaseincrease in gross margin was primarily attributablemainly attributed to relativelyan increase in sales volume of higher labor cost caused by a 28.4%margin items and decrease in factory overhead expenses, offsetting the increase in labor rates despite headcount reductions throughout the year together withcosts as a general decline in sales demandresult of regulatory increases in the year ended March 31, 2009,minimum wage rates of factory workers and increases in overtime allowances and average number of workers, as compared with last year.fiscal 2010.
Selling, general and administrative expenses —-SG&A expenses for the year ended March 31, 20092011 were $19,291,000, amounting to 14.6%$13,941,000, or 16.6% of total net sales, as compared to $19,601,000$15,505,000, or 13.6%19.0% of total net sales for the year ended March 31, 2009. There was a decrease2010. SG&A expenses decreased by $1,564,000, or 10.1%, in selling, general and administrativefiscal 2011, as compared to those expenses of $310,000 or 1.6% over the corresponding period.in fiscal 2010.
The SG&A expenses in the plastic segment decreased by $1,604,000, to $8,980,000, or 21.0% of net sales in that segment, for the year ended March 31, 2011, compared to $10,584,000, or 22.5% of same segment net sales, for fiscal 2010. The decrease was primarily related to decreases of $833,000 in staff housing and other costs associated with the headcount reduction in fiscal 2011, $352,000 in government license and registration fees, $87,000 in stock compensation expenses and $424,000 in depreciation, offsetting an increase of $246,000 in compensation to executives in this segment and $115,000 in selling expenses, as compared to fiscal 2010.
SG&A expenses in the electronic & metallic segment increased by $1,142,000$40,000, to $11,965,000,$4,961,000, or 16.3%12.1% of net sales for that segment, for the year ended March 31, 2011, compared to $4,921,000, or 14.2% of same segment net sales, for fiscal 2010. The increase was primarily related to increases of $79,000 in selling expense and $99,000 in staff costs, offsetting decreases of $64,000 in compensation to executives in this segment, $38,000 in stock compensation expenses and $104,000 in government license and registration fees, as compared with fiscal 2010.
Other expenses - Other expenses were $4,435,000 for the year ended March 31, 2011, as compared to other income of $4,594,000 in the prior fiscal year.
On a segment basis, other expenses attributable to the plastic segment for the year ended March 31, 2011 were $4,498,000, as compared to other income of $4,250,000 for fiscal 2010. Other expenses were mainly due to an exchange loss of $263,000, provisions of $229,000 for doubtful receivables and $4, 474,000 of charges for impairment of property, plant and equipment fixed assets during the year ended March 31, 2011, as compared to a net gain of $4,198,000, included in other income for fiscal 2010, realized from the sale of the former plastic injection manufacturing plant in Shekou, Shenzhen, China, offset by a provision for doubtful receivables of $71,000 and an exchange loss of $87,000 during fiscal 2010.
Other income attributable to the electronic & metallic segment for the year ended March 31, 2011 was $63,000, as compared with other income of $344,000 for fiscal 2010. The decrease in other income was principally
35
because of increases of $152,000 in exchange loss and $147,000 in provision for doubtful receivables, as compared with fiscal 2010.
Operating loss - Operating loss was $8,828,000 for the year ended March 31, 2011, which compares to operating income of $1,745,000 for fiscal 2010.
On a segment basis, the operating loss of the plastic segment was $7,647,000, or a negative 17.9% of net sales in that segment, in the year ended March 31, 2011, as compared to same segment operating income of $3,509,000, or 7.4% of net sales from that segment, in fiscal 2010. The decrease in operating income in the plastic segment primarily resulted from the decrease in gross margin caused by higher labor costs and decrease in other income as described above.
The electronic & metallic segment reported an operating loss of $1,182,000, or a negative 2.9% of net sales, from that segment in the year ended March 31, 2011, compared to an operating loss of $1,764,000, or a negative 5.1% of same segment net sales in fiscal 2010. The decrease in operating loss was because of the net effect of the increase in gross margin and the decrease in SG&A expenses as described above.
Non-operating income - Non-operating income for the year ended March 31, 2011 increased by $652,000, to $1,096,000, as compared with the prior fiscal year. This is mainly accounted for by an increase of $652,000 in the realized gain on the sale of marketable securities as compared with fiscal 2010.
Income taxes - Income tax for the year ended March 31, 2011 was comprised of income tax expense of $596,000 and a deferred tax benefit of $214,000, as compared to the income tax expense of $380,000 and a deferred tax provision of $310,000 in fiscal 2010.
On a segment basis, there was an income tax expense of $420,000 and a deferred tax benefit of $127,000 in the plastic segment for the year ended March 31, 2011, as compared to an income tax expense of $379,000, part of which was taxable on the gain on the sale, which closed during the Company’s second fiscal quarter ended September 30, 2010, of the Company’s former manufacturing plant in Shekou, Shenzhen, China, and a deferred tax benefit of $91,000 during fiscal 2010. The components of income tax of the electronic & metallic segment were comprised of an income tax expense of $176,000 and a deferred tax benefit of $87,000 for the year ended March 31, 2011, as compared to tax expense of $1,000 and a deferred tax provision of $401,000 in fiscal 2010.
Net loss - The Company had a net loss of $8,114,000, or a negative 9.7% of net sales, for the year ended March 31, 20092011, as compared to $10,823,000,net income of $1,499,000, or 18.4%1.8% of net sales, for the year ended March 31, 2008.2010. The increasefiscal 2011 net loss was primarily attributable to decreased sales to the Company’s largest customers in the SG&A expenses was primarily related to the increaseplastics and electronic & metallic segments during fiscal 2010, $4,474,000 in salaries and bonuses of $516,000 as a result of 17.3% increase in pay rates, and $132,000 in social insurance, and $100,000 in value-added taxes and property taxes , as compared with the year ended March 31, 2008.
The SG&A expenses in the electronic and metallic segment decreased by $1,452,000 to $7,326,000 or 12.6% of net sales, for the year ended March 31, 2009 compared to $8,778,000 or 10.3% of net sales for the prior
29
a year. The decrease was primarily due to the continued cost control measures resulting in a decrease of $612,000 in salaries and bonuses, $410,000 in social insurance and staff welfare expenses, $80,000 in travelling expenses and $52,000 in rental expenses as compared with the corresponding period in the prior year. There was also a decrease of $73,000 in selling expense as well as $65,000 in depreciation expense when compared to the year ended March 31, 2008.
Other operating income —Other operating expense was $132,000 for the year ended March 31, 2009, representing a decrease of $1,970,000 as compared with last year.
On a segment basis, other operating income attributable to our plastic segment for the year ended March 31, 2009 was $348,000, a decrease of $1,996,000 as compared with the prior year. The decrease was principally the result of a lower revaluation of monetary assets by $1,370,000 due to a less volatile exchange rate of United States Dollar to the RMB. The decrease in other operating income was also attributable to an additional provision for doubtful debt of $258,000, asset impairment for $176,000 and loss on disposalcharges of fixed assets of $134,000 during the year ended March 31, 2009.
Other operating expense attributable to our electronic and metallic segment for the year ended March 31, 2009 was $480,000, as compared to the other operating expense of $508,000decreases in fiscal 2008. The decrease was primarily the result of no impairment on the goodwill relating to the metallic division during fiscal 2009 as compared to $318,000 impairment loss recognized during fiscal 2008. During fiscal 2009, there was also a decrease in foreign exchange loss by $176,000, partially offsetting an increase of $437,000 in allowance for doubtful receivables, as compared to fiscal 2008.
Operating Income —Operating income was $745,000 for the year ended March 31, 2009, as compared with the operating income of $8,670,000 from the corresponding year in the prior year.
On a segment basis, operating income of the plastic division was $1,335,000, or 1.8% of net sales, in the year ended March 31, 2009, as compared to operating income of $6,593,000, or 11.2% of net sales, for the year ended March 31, 2008. Operating income in the plastic division decreased primarily from the decrease in gross margin as a result of higher material usage and cost, factory overhead, and the decrease in other operating income as described above.
The operating loss of the electronic & metallic segment was $589,000, or 1.0% of net sales, in the year ended March 31, 2009, compared to operating income of $2,077,000, or 2.4% of net sales, in fiscal 2008. Electronic & metallic operating income decreased due to the decrease in sales revenue and gross margin as well as a relative increase in SG&A expenses as a percentage of sales as described above.
Non-operating income— Non-operating income for the year ended March 31, 2009 decreased by $353,000 to $168,000, as compared with fiscal 2008. This is mainly attributable to the decrease in interest income of $38,000 and an unrealized gain on the revaluation of marketable securities of $25,000 in the electronic and metallic segment, as well as the decrease in interest income of $243,000 in the plastic division during fiscal 2009.
Income Taxes —Income taxes for the year ended March 31, 2009 were comprised of income tax expenses of $234,000 and a deferred tax asset of $516,000, as compared with the income tax expenses of $654,000 and a deferred tax asset of $550,000 fiscal 2008.
Minority Interest —There was no minority interest for the year ended March 31, 2009. In August 2007, the Company acquired the remaining 24% minority interest in Integrated International Limited, the holding company holding the capital stock of Deswell’s electronic and metallic subsidiaries, thereby increasing Deswell’s interest in that company from 76% to 100%. As a result, the dollar amount of minority interest decreased to zero for the year ended in March 31, 2009 from $228,000 for fiscal 2008.
Net Income —The Company reported net income of $1,195,000 for the year ended March 31, 2009, a decrease of $7,664,000, as compared to a net income of $8,859,000 for the year ended March 31, 2008. Net income for the year ended March 31, 2009 represented 0.9% of net sales, compared to 6.2% of net sales for the net income the prior year. The decrease in net income was mainly the result of the decrease in sales revenue, gross profit margin, and other operating income as described above.
Net incomeloss for the plastic segment for the year ended March 31, 20092011 totaled $1,620,000,$6,955,000, as compared to net income of $6,735,000$3,446,000 for the prior year.fiscal 2010. The decreasenet loss in net income of the plastic segment was primarilymainly the result of lowerdecreased sales to the Company’s largest customer in the plastics segment during fiscal 2010, $4,474,000 in impairment charges of fixed assets and decreases in gross profit margin and the decrease in other operating income as described above.
Net loss for the electronic and& metallic segment for the year ended March 31, 20092011 was $425,000,$1,159,000, compared to a net incomeloss of $2,124,000$1,947,000 for the prior fiscal year. The decrease in net income of the electronic and metallic
30
segment was principally the result of the decrease in sales revenue, lower gross profit margin, and relatively higher SG&A expenses as a percentage of sales as described above.
Year ended March 31, 2008 Compared to Year Ended March 31, 2007
Net Sales— The Company’s net sales for the year ended March 31, 2008 were $143,806,000, an increase of $7,027,000 or 5.1% as compared to the year ended March 31, 2007. Sales to Digidesign, Line 6, N&J and Inter-Tel, the Company’s four largest customers during the year ended March 31, 2008, represented approximately 53.3% of net sales for the year.
The increase in sales was mainly related to the increase in sales at our electronics and metallic segment of $7,634,000 offsetting the decrease in sales at our plastic segment of $607,000. This represented an increase of 9.9% and a decrease of 1.0% respectively, as compared with the net sales from the segments in the prior year.
Revenue from our plastics segment during fiscal 2008 amounted to $58,858,000, including $28,000 of intersegment revenue, as compared to revenue in this segment during fiscal 2007 of $59,587,000, including $150,000 of intersegment revenue. The revenue decrease at our plastic segment was mainly due to the decrease in orders from existing customers of $12,984,000 of which $4,655,000 was related to plastic component sales of printer products and $5,402,000 was related to telecommunication products, offsetting the increase in orders from other existing and new customers of $11,397,000 and $981,000 respectively. Of the increase, $8,811,000 was related to plastic component sales of electronic entertainment products.
Revenue from our electronic and metallic segment during fiscal 2008 amounted to $88,916,000, including $3,940,000 of intersegment sales of electronic products as compared to revenue in this segment during fiscal 2007 of $80,311,000, including $2,969,000 of intersegment sales of electronic products. The revenue increase at our electronic and metallic segment was mainly due to an increase in OEM orders of electronic and metallic products from existing and new customers of $12,958,000 and $2,887,000 respectively, and an increase in distribution sales of $682,000 during the year, offsetting the decrease in orders from existing customers of $8,452,000 in electronic sales and $442,000 in metallic sales respectively. Of the increases, $9,037,000 and $5,403,000 were related to orders of professional audio equipment and telecommunication equipment, respectively.
Gross Profit— The gross profit for the year ended March 31, 2008 was $26,433,000, representing a gross profit margin of 18.4%. This compares with the overall gross profit and gross profit margin of $31,273,000 or 22.9% for the year ended March 31, 2007.
Gross profit in the plastics segment decreased by $3,867,000 to $15,070,000 or 25.6% of net sales, for the year ended March 31, 2008 compared to $18,937,000 or 31.9% of net sales, for the year ended March 31, 2007. The decrease in gross margin was mainly attributed to the combined effect of a change in customer and product mix and the increase in resin cost during the year and the increase in labor cost and overhead cost of 2.4% and 4.0% of net sales, respectively, as compared with prior year, as a result of the RMB appreciation and implementation of a new China Labor Ordinance commencing January 1, 2008.
Gross profits in the electronic & metallic segment decreased by $973,000 to $11,363,000, or 13.4% of net sales, for the year ended March 31, 2008 compared to $12,336,000 or 15.9% of net sales, for the 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; the increase in labor cost of 1.4% of net sales, the increase in value added tax cost as a result of the change in value added tax policy by the government of China for different categories of export products in the first quarter of fiscal 2008 and an average of 8.7% appreciation in RMB currency in the year where most of our direct overhead and increased local material souring are denominated, as compared with last year.
Selling, General and Administrative Expenses— SG&A expenses for the year ended March 31, 2008 were $19,601,000, amounting to 13.6% of total net sales, as compared to $18,957,000 or 13.9% of total net sales for the year ended March 31, 2007.
The SG&A expenses in the plastic segment increased by $506,000 or 4.9% to $10,823,000 or 18.4% of net sales, for the year ended March 31, 2008 compared to $10,317,000 or 17.4% of net sales, for the prior year. The increase was primarily related to an increase in staff and welfare cost of $712,000, audit and professional expenses of $170,000, depreciation expenses of $161,000 and selling expenses of 153,000 and estate duty and usage tax of $168,000. Together these offset the decrease in director remuneration of $526,000 and decrease in stock based compensation cost of $509,000 as compared with last year.
The SG&A expenses in the electronic & metallic segment increased by $138,000 or 1.6% to $8,778,000 or 10.3% of net sales, for the year ended March 31, 2008 compared to $8,640,000 or 11.2% of net sales for the prior
31
year. The increase was primarily related to the increase in management and staff salary and welfare expenses of $305,000 and staff commission expenses of $92,000 offsetting the decrease in selling logistic expenses of $289,000 as compared with last year.
Other operating income— Other operating income was $1,838,000 for the year ended March 31, 2008, an increase of $462,000 as compared with the other operating income of $1,376,000 for the year ended March 31, 2007.
On a segment basis, other operating income attributable to the plastic segment increased $861,000 to $2,346,000 in the year ended March 31, 2008, as compared to other expenses of $1,485,000 for the year ended March 31, 2007. The increase was mainly attributed to an increase in exchange translation gain of $1,193,000 relating to a subsidiary having RMB functional currency, and a decrease in allowance for doubtful receivables of $168,000, offsetting decrease in gain on disposal of fixed assets of $560,000 as compared with the prior year.
Other operating expenses attributable to the electronic & metallic segment increased $400,000, to operating expenses of $508,000 in the year ended March 31, 2008, as compared to other operating expenses of $108,000 for the year ended March 31, 2007. This increase in other operating expenses was primarily attributable to an impairment in goodwill relating to a metallic subsidiary of $317,000 as described in Note 7 of Notes to the Consolidated Financial Statements, the increase in exchange loss of $231,000 and the decrease in gain on disposal of fixed assets of $126,000 offsetting the decrease in allowance for doubtful receivables of $204,000 during the year ended March 31, 2008.
Operating Income— Operating income was $8,670,000 for the year ended March 31, 2008, a decrease of $5,022,000, or 36.7% as compared with the prior year.
On a segment basis, the operating income of the plastics segment decreased $3,512,000 to $6,593,000 or 11.2% of net sales in the year ended March 31, 2008 compared to $10,105,000 or 17.0% of net sales in the prior year. The decrease in operating income in this segment was attributable to the decrease in gross profit and the increase in SG&A offsetting the increase in other operating income as described above.
The operating income of the electronics & metallic segment decreased $1,511,000 to $2,077,000 or 2.4% of net sales, in the year ended March 31, 2008 compared to $3,588,000 or 4.6% of net sales in the prior year. The decrease in operating income in this segment was attributable to the decrease in gross profit, coupled with the increase in SG&A expenses and other operating expenses as described above.
Non-operating income— Non-operating income for the year decreased by $26,000 to $521,000 for the year ended March 31, 2008 as compared with last year. This is mainly attributed to the decrease in interest income of $20,000 and rental income of $70,000 offsetting the decrease in impairment loss on marketable securities of $67,000 as compared with prior year.
Income Taxes— Income tax for the year ended March 31, 2008 is comprised of income tax expenses of $654,000 and a deferred tax asset of $550,000, compared with income tax expenses of $624,000 and a deferred tax provision of $615,000 in the prior year.
On a segment basis, the income tax of the plastic segment is comprised of income tax expenses of $637,000 and a deferred tax asset of $321,000 for the year ended March 31, 2008, as compared with income tax expenses of $472,000 and a deferred tax provision of $615,000 in the prior year. The decrease in income tax expense was mainly attributed to the additional tax provision made during the corresponding year ended March 31, 2007 as a result of an additional tax assessment in connection with the amounts of assessable profits and the date of commencement of the first profitable year for our Dongguan plastic subsidiary. As a result, we made a tax provision of approximately $154,000, $92,000 and $166,000 for taxable calendar years 2004, 2005 and 2006 respectively, at an applicable tax rate of 24% with a 50% tax exemption for the calendar years 2004 to 2006. The tax assessment and payment for calendar years 2004, 2005 and 2006 were settled during the year ended March 31, 2008. For taxable calendar year 2007, we initially provided an applicable national tax rate of 24% and 3% local tax rate but we have recently been approved as an “Export-oriented Enterprises” by the local tax authority and enjoyed a lower tax rate of 12%. Hence, an over-provision of income tax was made in the last quarter. The income tax expenses for the electronic & metallic segment is comprised of income tax expenses of $18,000 and a deferred tax asset of $230,000 as compared with income tax expenses of $152,000 in the prior year.
Minority Interest— There was no minority interest as of March 31, 2008, whereas the minority interest for the five months ended August 31, 2007 and year ended March 31, 2008 represented a 24% minority interest in Integrated International Limited, the holding company holding the capital stock of Deswell’s electronic and metallic subsidiaries. In August 2007, the Company acquired an additional 24% interest in Integrated, increasing its
32
ownership in that subsidiary from 76% to 100%. As a result of the decrease in Minority interest in Deswell’s electronic & metallic segment during the year, the dollar amount of minority interest decreased by $605,000 from $833,000 for the year ended March 31, 2007.
Net Income— Net income was $8,859,000 for the year ended March 31, 2008, a decrease of $3,308,000 or 27.2 %, as compared to net income of $12,167,000 for the year March 31, 2007. Net income as a percentage of net sales decreased from 8.9% to 6.2 % for the year ended March 31, 2008. The decrease in net income was mainly the result of the decrease in operating income offsetting the decrease in income tax expenses and decrease in minority interest, as described above.
Net income for the plastic segment decreased by $2,732,000 or 28.9 % to $6,735,000 for the year ended March 31, 2008 compared to $9,467,000 for the prior year 2007. The decrease in net income of the plastic segment was mainly the result of the decrease in operating income offsetting the decrease in income tax expenses, as described above.
Net income for the electronic & metallic segment decreased by $577,000 or 21.4% to $2,124,000 for the year ended March 31, 2008 compared to $2,701,000 for the prior year 2007. The decrease in net income of the electronic & metallic segment was mainly from the result ofincrease in sales revenues despite decreased sales to the decreaseCompany’s largest customer during fiscal 2010, improvement in operating income offsettinggross margin and the decrease in incomedeferred tax expenses and in minority interest,benefit resulting from fiscal 2011, as described above.
Seasonality
The following table sets forth certain unaudited quarterly financial information sequentially for the twelvefour quarters in each of the three-yearthree years in the period ended March 31, 20092012 (in thousands):
| | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended March 31, |
| | 2007 | | 2008 | | 2009 |
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 |
Net sales | | $ | 31,689 | | | $ | 35,715 | | | $ | 39,002 | | | $ | 30,373 | | | $ | 38,452 | | | $ | 38,414 | | | $ | 35,416 | | | $ | 31,524 | | | $ | 35,039 | | | $ | 32,241 | | | $ | 37,101 | | | $ | 27,357 | |
Gross profit | | | 8,446 | | | | 8,865 | | | | 8,754 | | | | 5,208 | | | | 6,762 | | | | 6,698 | | | | 7,923 | | | | 5,050 | | | | 5,901 | | | | 3,524 | | | | 6,413 | | | | 4,330 | |
Operating income | | | 3,866 | | | | 3,973 | | | | 4,016 | | | | 1,837 | | | | 3,304 | | | | 1,681 | | | | 3,033 | | | | 652 | | | | 1,310 | | | | (1,663 | ) | | | 878 | | | | 220 | |
Net income | | | 3,403 | | | | 3,597 | | | | 3,605 | | | | 1,562 | | | | 3,111 | | | | 1,755 | | | | 2,955 | | | | 1,038 | | | | 1,293 | | | | (1,675 | ) | | | 987 | | | | 590 | |
| | | | Year ended March 31,
| |
---|
| | | | 2010
| | 2011
| | 2012
| |
---|
| | | | Q1
| | Q2
| | Q3
| | Q4
| | Q1
| | Q2
| | Q3
| | Q4
| | Q1
| | Q2
| | Q3
| | Q4
|
---|
Net sales | | | | $ | 22,738 | | | $ | 20,852 | | | $ | 21,358 | | | $ | 16,666 | | | $ | 20,486 | | | $ | 24,023 | | | $ | 23,534 | | | $ | 15,978 | | | $ | 18,324 | | | $ | 18,020 | | | $ | 16,241 | | | $ | 12,198 | |
Gross profit | | | | | 3,603 | | | | 2,907 | | | | 4,049 | | | | 2,097 | | | | 901 | | | | 2,894 | | | | 3,314 | | | | 2,440 | | | | 3,161 | | | | 2,528 | | | | 2,367 | | | | 1,409 | |
Operating income (loss) | | | | | (272 | ) | | | 2,938 | | | | 296 | | | | (1,218 | ) | | | (2,678 | ) | | | (1,714 | ) | | | (4,031 | ) | | | (405 | ) | | | 114 | | | | (225 | ) | | | (406 | ) | | | (1,652 | ) |
Net income (loss) | | | | | (253 | ) | | | 3,124 | | | | (437 | ) | | | (935 | ) | | | (2,279 | ) | | | (1,597 | ) | | | (3,585 | ) | | | (653 | ) | | | 75 | | | | (914 | ) | | | 91 | | | | (713 | ) |
36
The following table sets forth the same unaudited quarterly information presented in the above table but by quarterly comparisons by year in the three-year period ended March 31, 20092012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| | June 30, | | September 30 | | December 31 | | March 31 |
| | 2007 | | 2008 | | 2009 | | 2007 | | 2008 | | 2009 | | 2007 | | 2008 | | 2009 | | 2007 | | 2008 | | 2009 |
Net sales | | $ | 31,689 | | | $ | 38,452 | | | $ | 35,039 | | | $ | 35,715 | | | $ | 38,414 | | | $ | 32,238 | | | $ | 39,002 | | | $ | 35,416 | | | $ | 37,101 | | | $ | 30,373 | | | $ | 31,524 | | | $ | 27,357 | |
Gross profit | | | 8,446 | | | | 6,762 | | | | 5,901 | | | | 8,865 | | | | 6,698 | | | | 3,522 | | | | 8,754 | | | | 7,923 | | | | 6,413 | | | | 5,208 | | | | 5,050 | | | | 4,330 | |
Operating income (loss) | | | 3,866 | | | | 3,304 | | | | 1,310 | | | | 3,973 | | | | 1,681 | | | | (1,663 | ) | | | 4,016 | | | | 3,033 | | | | 878 | | | | 1,837 | | | | 652 | | | | 220 | |
Net income (loss) | | | 3,403 | | | | 3,111 | | | | 1,293 | | | | 3,597 | | | | 1,755 | | | | (1,675 | ) | | | 3,605 | | | | 2,955 | | | | 987 | | | | 1,562 | | | | 1,038 | | | | 590 | |
| | | | Three months ended
| |
---|
| | | | June 30,
| | September 30
| | December 31
| | March 31
| |
---|
| | | | 2010
| | 2011
| | 2012
| | 2010
| | 2011
| | 2012
| | 2010
| | 2011
| | 2012
| | 2010
| | 2011
| | 2012
|
---|
Net sales | | | | $ | 22,738 | | | $ | 20,486 | | | $ | 18,324 | | | $ | 20,852 | | | $ | 24,023 | | | $ | 18,020 | | | $ | 21,358 | | | $ | 23,534 | | | $ | 16,241 | | | $ | 16,666 | | | $ | 15,978 | | | $ | 12,198 | |
Gross profit | | | | | 3,603 | | | | 901 | | | | 3,161 | | | | 2,907 | | | | 2,894 | | | | 2,528 | | | | 4,049 | | | | 3,314 | | | | 2,367 | | | | 2,097 | | | | 2,440 | | | | 1,409 | |
Operating income (loss) | | | | | (272 | ) | | | (2,678 | ) | | | 114 | | | | 2,938 | | | | (1,714 | ) | | | (225 | ) | | | 296 | | | | (4,031 | ) | | | (406 | ) | | | (1,218 | ) | | | (405 | ) | | | (1,652 | ) |
Net income (loss) | | | | | (253 | ) | | | (2,279 | ) | | | 75 | | | | 3,124 | | | | (1,597 | ) | | | (914 | ) | | | (437 | ) | | | (3,585 | ) | | | 91 | | | | (935 | ) | | | (653 | ) | | | (713 | ) |
The first calendar quarter (the fourth fiscal quarter ending March 31 of our fiscal year) is typically the Company’s slowest sales period because, as is customary in China, the Company’s manufacturing facilities in China are closed for two weeks for the Chinese New Year holidays. TheThrough March 31, 2012, the Company doeshas not experience any other significant seasonal fluctuations.
Impact of Inflation
The Company believes that inflation has not had a material effect on its business. AlthoughHistorically, the Company has found it difficult to increase the prices of its products in order to keep pace with inflation, particularly in its plastics operations, the Company believes that the location of its manufacturing operations in Southern China has resulted in a lower cost base which still provides it with a competitive advantage. Accordingly, the Company is reliantfocused upon increasing its transaction volume in order to compensate for inflation in China, where virtually all of the effectsCompany’s assets and employees are located and inflation in China had little impact on Deswell. However, in addition to the appreciation of inflation.
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the RMB to the US dollar, inflation in China has recently affected the Company significantly.
The consumer price index (CPI), a major gauge of China’s inflation, rose 4.9 % in January 2011 from a year earlier as food prices increased 10.3% due to rising demand and a drought in key grain-growing regions. The CPI rose another 4.5% and food prices increased an additional 10.5% in January 2012 from levels in January 2011. There is no fixed minimum wage which is applicable to all of China; local governments in China adopt different minimum wage amounts based on the situation in their area. Effective May 1, 2010, China’s Guangdong Province, where Deswell’s manufacturing facilities are located, raised minimum wages by approximately 20% and effective March 1, 2011 again increased the minimum wage by another approximately 20%. The 2010 and 2011 increases in minimum wages directly impacted the Company’s cost of labor, increasing its overall operating expenses and adversely affecting its financial results for the years ended March 31, 2011 and 2012.
Exchange Rates
The Chinese government has recently announced a new plan to increase the average growth rate of China’s minimum wage levels to over 13% annually between 2011 and 2015. Continuing material increases in our cost of labor will continue to increase the Company’s operating costs and will adversely affect Deswell’s financial results unless it passes on such increases to customers by increasing the prices of products and services. The effect of increases in the prices of products and services would make the Company’s products more expensive in global markets, such as the United States and the European Union. This could result in the loss of customers, who may seek, and be able to obtain, products and services comparable to those Deswell offers in lower-cost regions of the world. If the Company sellsdoes not increase prices to pass on the effect of increases in labor costs, Deswell’s margins and financial results would suffer.
Because most of its productsthe Company’s labor costs are incurred in China and pays for most componentstherefore paid in either Hong KongRMB, the adverse effect on Deswell’s business and financial results from increasing labor costs is exacerbated by the appreciation in the exchange rate to the US dollar, as is discussed in “Exchange Rates” immediately below.
Exchange Rates
The Company’s sales are mainly in United States dollars or U.S. dollars. Labor cost and overhead expenses of the Company are paid primarily in Hong Kong dollars and RMB, respectively.
Since 1983, the exchange rate of theits expenses are mainly in United States dollars, Hong Kong dollars and Chinese RMB.
The Hong Kong dollar has been pegged to the U.S. dollar has been fixed byat approximately 7.80 and relatively stable. The midpoint exchange rates between the Hong Kong governmentdollars and the U.S. dollar were approximately 7.764, 7.789 and 7.764 at approximately HK$7.80 to US$1.00March 31, 2010, 2011 and accordingly2012, respectively, as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/. The Hong Kong Dollars hasgovernment may not to date, represented a currency exchange risk to U.S. dollars. This could change in the future if those in Hong Kong arguing for a floating currency system prevail in the ongoing debate over whether to continue to peg the Hong Kong dollar to the U.S. dollar. There can be no assurance that the Chinese government will continue to maintain the present currency exchange mechanism, inwhich fixes the Hong Kong dollar at approximately 7.80 to each United States dollar and ifhas not in the past presented a material currency exchange risk. Although announcements by Hong Kong’s central bank indicate its intention to maintain the currency exchange mechanismpeg between the Hong Kong dollar and the U.S. dollar, were changed, the Company’s results of operationsif Hong Kong does change and financial condition could be materially adversely affected.
Until July 21, 2005, exchange rate fluctuations between the RMB and the US dollar had not had a significant impact on the Company’s operating results. In 1994,follows China adoptedto a floating currency system wherebyor otherwise changes the official
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exchange rate is equalsystem of Hong Kong dollars to the market rate. U.S. dollars, our margins and financial results could be adversely affected.
Between 1994 and July 2005, the market and official RMB rates were unified and the value of the RMB was essentially pegged to the USU.S. dollar and was relatively stable. During its fiscal years ended March 31, 2004 and 2005, the average exchange rate was 8.28 Yuan per US$1.00. On July 21, 2005, the People’s Bank of China adjusted the exchange rate of RMB to the U.S. dollar by linking the RMB to a basket of currencies and simultaneously setting the exchange rate of RMB to U.S. dollars, from 1:8.27, to a narrow band of around 1:8.11, resulting in an approximately 2% appreciation in8.11. The following chart illustrates the valuefluctuations since the July 31, 2005 adjustment of the RMB against the U.S. dollar. The four main currencies in the basket to which the RMB was linked were the US dollar by showing the Euro,exchange ratio at the Japanese yenend of each of Deswell’s fiscal years from March 31, 2006 to March 31, 2012.
(1) | | RMB (yuan) to US dollar data presented in this chart are the midpoint rates on March 31 of the year indicated as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/. |
The appreciation and depreciation in the Korean won. Inexchange ratio of the months since July 2005, further appreciation againstRMB to the US dollar continued to occurincreases and by July 31, 2009, the RMB had risen to 6.8321decreases, respectively, our costs and expenses to the US dollar. As a consequence,extent paid in RMB. Approximately 51.0%, 47.0% and 49.0% of our total costs and expenses were in addition to increases in plastic resin and labor costs, in each ofRMB during the years ended March 31, 2007, 20082010, 2011 and 2009, Deswell’s operating costs increased from levels existing prior to2012, respectively.
The following table shows the exchange rate adjustment. Since the Company was not able to pass on to its customers most of these cost increases by price increases of its products, Deswell’s gross margins, operating income and net income were adversely affected.
If the trend of RMBpercentage appreciation to the US dollar continues or the Chinese government allows a further and significant RMB appreciation, Deswell’s operating costs would further increase and its financial results would be adversely affected by such increase. If Deswell determined to pass onto its customers through price increases the effect of increases in the Chinese RMB relative to the U.S. dollar, it would make the Company’s products more expensive in global markets, such as the United States and the European Union. This could result in the loss of customers, who may seek, and be able to obtain, products comparable to those Deswell offers in lower-cost regions of the world.
For additional information regarding the appreciation of the exchange rate of the RMB to the U.S.US dollar from July 21, 2005 toat the end of each of our fiscal years in the three-year period ended March 31, 2009, please see2012:
Exchange ratio of RMB to US$1.00 at March 31,(1)
| |
---|
2010
| | 2011
| | 2012
| |
---|
Ratio
| | | | % change(2)
| | Ratio
| | % change(2)
| | Ratio
| | % change(2)
|
---|
1:6.826 | | | | 0.14% | | 1:6.560 | | 3.90% | | 1:6.319 | | 3.68% |
(1) | | RMB to US dollar data presented in this table are the midpoint rates on March 31 of the year indicated as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/. |
(2) | | From ratio at previous March 31. |
In mid-2008, the chartChinese government halted allowing the RMB to appreciate against the dollar as it did during earlier periods since July 25, 2005 because of concerns that the stronger RMB was hurting Chinese exports at a time of global recession. Accordingly, as shown in the above table, there was virtually no change in the exchange ratio of the RMB to the US dollar during our year ended March 31, 2010. However, on page 11June 19, 2010 China’s central bank announced that it planned to introduce more flexibility in the management of this Report.its currency and since then the RMB again began to appreciate against the US dollar, increasing 3.9% at March 31, 2011 from the midpoint level at March 31, 2010, and increasing an additional approximately 3.7% at March 31, 2012 from the
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midpoint level at March 31, 2011, as reported by “Historical Exchange Rates” at http://www.oanda.com/currency/historical-rates/.
We did not hedge our currency risk during the years ended March 31, 2007, 20082010, 2011 and 20092012 and at March 31, 2009,2012, we had no open forward currency contracts. We continually review our hedging strategy and there can be no assurance that hedging techniques we may implement will be successful or will not result in charges to our results of operations.
Liquidity and Capital Resources
For the year ended March 31, 2009,2012, net cash generated fromprovided by operations totaled $11,669,000,$11,149,000, including a net incomeloss of $1,195,000 and$1,461,000, depreciation and amortization expenses of $7,264,000.$4,920,000. Accounts receivable increaseddecreased by $918,000,$4,886,000 as compared to balances at March 31, 2011, primarily as a result of lower sales revenues generated during the fiscal year. Inventories decreased by $3,402,000 over levels at March 31, 2008,2011, primarily as a resultbecause of relatively lower demand for raw materials purchase resulting from reduced sales orders during the increase in credit sales to our largest customer despite the increase in provision of doubtful accounts receivable of $275,000. Inventoriesfiscal year. Accounts payable decreased by $4,923,000$1,123,000 over levels at March 31, 2008, primarily resulting from the decrease in our inventory of electronic parts. Accounts payable decreased by $2,157,000 over levels at March 31, 2008,2011, primarily because of the decrease in materials purchases. For the year ended March 31, 2008,2011, net cash generated fromused in operations totaled $16,418,000,$3,194,000, including a net incomeloss of $8,859,000$8,114,000 and depreciation and amortization expenses of $6,940,000.$6,197,000.
Net cash used in investing activities amounted to $7,057,000 and $7,369,000$11,285,000 for the year ended March 31, 2009 and 2008, respectively.2012, while net cash provided by investing activities in fiscal 2011 amounted to $4,513,000. Capital expenditures during these periods totaled $7,402,000$282,000 and $7,288,000,$1,034,000, respectively. There were no acquisitions of marketable securities during either of these periods. Our capital
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expenditures were primarily related to the acquisition of property, plant and equipment for our two manufacturing plants in Dongguan, China. In fiscal 2012, we acquired marketable securities for $3,184,000 and received cash proceeds from sale of the marketable securities for $4,251,000 as well as made investments in available-for-sale securities for $8,376,000 and increases in fixed deposits over three months for $4,008,000.
These available-for-sale securities are investments in two corporate bonds recorded at fair value based upon quoted market prices. The annual interest income receivable from those two corporate bonds is approximately $750,000. The Company has the ability and intent to hold these corporate bonds until a recovery of fair value occurs. The company does not consider these investments to be impaired as of March 31, 2012 as the losses of $746,000 arising from the revaluation of available-for-sale securities are unrealized and temporary. See Note 4 of Notes to Consolidated Financial Statements.
In fiscal 2011, we acquired marketable securities for $8,049,000 and received proceeds of $13,509,000 from sale of the marketable securities.
Net cash used in financing activities for the years ended March 31, 20092012 and 20082011 were $3,789,000$2,426,000 and $8,537,000,$804,000, respectively. Net cash we used in financing activities during the year ended March 31, 20092012 was primarilymainly to fund dividend payments to shareholders.shareholders of $2,430,000 and from the exercise of stock options from employees of $4,000. Net cash we used in financing activities during the year ended March 31, 20082011 was primarily to fund the dividend payments to shareholders of $9,523,000, net of the proceeds of $986,000$810,000 and from the exercise of stock options from directors and employees.employees of $6,000.
As a consequence of the fixed exchange rate between the Hong Kong dollar and the U.S. dollar, interest rates on Hong Kong dollar borrowings are similar to U.S. interest rates. The Hong Kong Prime Rate was decreased from 5.25% to 5.0% during the year endedat March 31, 2009.2012 remained at 5.0%, the same rate it was at March 31, 2011 and at March 31, 2010.
At March 31, 2009,2012, the Company had cash and cash equivalents of $23,134,000.$33,073,000. At that date, Deswell had no committed credit facilities and no restricted cash. Deswell expects that working capital requirements and capital additions will continue to be funded through cash on hand and internally generated funds. However, Deswell may choose to seek to obtain additional debt or equity financing if it believes it to be appropriate and available on reasonable terms. The Company’s working capital requirements are expected to increase in line with the growth in the Company’s business.
At March 31, 2009,2012, the Company had capital commitments fortotaling $1,000 to purchase of plantfurniture and machinery totaling $130,000fixtures, which are expected to be disbursed during the year ending March 31, 2010. Also, the Company had capital commitments for a new enterprise resource planning software system upgrade project at March 31, 2009 totaling $216,000 of which $82,000 are expected to be disbursed by March 31, 2010 and $134,000 by March 31, 2011, respectively.2013.
A summary of our contractual obligations and commercial commitments as of March 31, 20092012 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period (in thousands) |
| | | | | | | | | | Period from | | Period from | | Period |
| | | | | | Year ending | | April 1, 2010 | | April 1, 2012 | | after |
| | | | | | March 31, | | to March 31, | | to March 31, | | March 31, |
Contractual obligations | | Total | | 2010 | | 2012 | | 2014 | | 2014 |
Long-term bank borrowing | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Capital (finance) lease obligations | | | — | | | | — | | | | — | | | | — | | | | — | |
Operating lease payments | | | 154 | | | | 136 | | | | 18 | | | | — | | | | — | |
Capital expenditures | | | 346 | | | | 212 | | | | 134 | | | | — | | | | — | |
Purchase obligations | | | 5,854 | | | | 5,854 | | | | — | | | | — | | | | — | |
Other long-term liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
Total | | $ | 6,354 | | | $ | 6,202 | | | $ | 152 | | | $ | — | | | $ | — | |
| | |
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| | | | Payments due by period (in thousands)
| |
---|
Contractual obligations
| | | | Total
| | Year ending March 31, 2013
| | Period from April 1, 2013 to March 31, 2015
| | Period from April 1, 2015 to March 31, 2017
| | Period after March 31, 2017
|
---|
Long-term bank borrowing | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Capital (finance) lease obligations | | | | | — | | | | — | | | | — | | | | — | | | | — | |
Operating lease payments | | | | | 64 | | | | 64 | | | | — | | | | — | | | | — | |
Capital commitment | | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | |
Other purchase obligations | | | | | 3,774 | | | | 3,774 | | | | — | | | | — | | | | — | |
Other long-term liabilities reflected on | | | | | — | | | | — | | | | — | | | | — | | | | — | |
Company’s balance sheet under US GAAP | | | | | — | | | | — | | | | — | | | | — | | | | — | |
Total | | | | $ | 3,839 | | | $ | 3,839 | | | $ | — | | | $ | — | | | $ | — | |
Off Balance Sheet Arrangements
We do not use off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities.
Critical Accounting Policies and Recent Changes in Accounting Standards
For a discussion of critical accounting policies and recently issued and changes in accounting standards relevant to our financial performance and financial statements, see Note 2 of Notes to Consolidated Financial Statements included in Part III, ItemITEM 18, in this Report.
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ITEM 6. | | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The directors and executive officers of the Company at July 31, 2009June 30, 2012 are as follows:
| | | | | | |
| Name | |
| | | | Age | |
| | Position(s) with Company
|
---|
Richard Pui Hon Lau | | | 64 | 67 | | Chairman of the Board of Directors |
Franki Shing Fung Tse | | | 45 | 48 | | Chief Executive Officer |
Chin Pang Li | | | 63 | 66 | | Executive Director of Manufacturing and Administration for Plastic |
| | | | | | Operations and Member of the Board of Directors |
Hung-Hum Leung | | | 63 | 66 | | Non-Executive Director and Member of Audit Committee |
Allen Yau-Nam Cham | | | 62 | 65 | | Non-Executive Director and Chairman of Audit Committee |
Wing-Ki Hui | | | 63 | 66 | | Non-Executive Director and Member of Audit Committee |
Betty Ching Han LamHerman Wong Chi Wah | | | 47 | 34 | | Chief Financial Officer |
Richard PUI HONPui Hon Lau. Mr. Lau served as Chief Executive Officer and Chairman of the Board of Directors of the Company and its predecessors since their inception in 1987 until February 2007, at which time he retired as Chief Executive Officer. Mr. Lau remains as Chairman of the Board.
Franki SHING FUNG Tse.Shing Fung Tse. Mr. Tse joined Deswell in February 2007 at its Chief Executive Officer, bringing with him over 19 yearsyears’ experience in the tool-making, plastic injection and electronic service provider, or EPS, industry. From July 2005 until joining Deswell, he served as Vice President of Operations for Goodbaby Child Products Co. Ltd., a leading baby-products manufacturing company inlocated near Shanghai, China with approximately 15,000 workers.workers at the time of his departure. From May 2001 to June 2005 Mr. Tse served as Director of Marketing of Deswell’s plastic subsidiary, Jetcrown Industrial (Dongguan) Ltd. From 1988 to 2000, Mr. Tse was in charge of the China Sales Business Division of Qualidux Industrial Co., Ltd., a group of companies engaged in original design and original equipment plastics manufacturing. Mr. Tse received his MBA in Business Finance from the University of Lincoln, United Kingdom in 2002.
CHIN PANG Li.Chin Pang Li. Mr. Li has served the Company as a Member of the Board of Directors and in various executive capacities with the Company and its predecessors since their inception in 1987. He became Secretary of the Company in February 1995 and Chief Financial Officer in May 1995, a position which he held until March 31, 2006. As Executive Director of Manufacturing and Administration for Plastic Operations, Mr. Li is in charge of the
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manufacturing and administrative operations for the Company’s plastic products. Mr. Li received his Bachelor of Science degree from Chun Yan Institute College, Taiwan in 1967.
Hung-Hum Leung.Leung. Mr. Leung has been a non-executive director of the Company and member of the Audit Committee since December 1999. Mr. Leung has over 25 years of experience in the manufacture of electronic products. Mr. Leung was the founder of Sharp Brave Holdings Ltd. (since 2007 known as China Properties Investment Holdings Limited), a Hong Kong public company listed on the Hong Kong Stock Exchange, and from 1991 to 1995 served as the Chairman of Sharp Brave Holdings Ltd. Since 1995, Mr. Leung has been an independent consultant to the electronics industry. He received his Bachelor of Science degree in Physics from the National Taiwan University in 1971.
Allen Yau-Nam Cham. Mr. Cham has been a non-executive director of the Company and member of the Audit Committee since August 2003. Mr. Cham has been the Managing Director and shareholder of Kwong Fat Hong (Securities) Limited since 1995. He has over 20 years of experience in the securities industry. He is a Certified General Accountant in Canada. He obtained his Bachelor of Science degree from St. Mary’s University, Halifax, Canada, Bachelor of Engineering (Electrical) degree from Nova Scotia Technical College, Halifax, Canada and Master of Business Administration degree from University of British Columbia, Canada.
Wing-Ki Hui.Hui. Mr. Hui has been a non-executive director of the Company and member of the Audit Committee since October 2004. Since 1995 he has been the Operation Director of the Electronic Products Division of Tomorrow International Holdings Limited, a company listed on the Hong Kong Stock Exchange engaged in manufacturing of consumer electronics and printed circuit boards. Prior to serving in this capacity, Mr. Hui was Executive Director of Sharp Brave International Holdings Limited from 1991 to 1995 and Director of Sharp Brave Electronics Co., Ltd. from 1984 to 1995. Mr. Hui possesses over 20 years of experience in the electronic manufacturing industry, and is a graduate of South East Electronic College in Hong Kong.
Betty CHING HAN Lam. Ms. LamHerman Wong Chi Wah. Mr. Wong joined the Company as Chief Financial Officer effective on AugustApril 1, 2008. Ms Lam has over 20 years experience in accountancy profession in various industries. Before joining
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