Deswell Industries, Inc. (Nasdaq: DSWL) today announced its financial results for the fiscal first quarter ended June 30, 2010.

Net sales for the first quarter ended June 30, 2010 were $20.5 million, a decrease of 9.9% compared to net sales of $22.7 million for the same quarter ended June 30, 2009. Net sales decreased by 13.2% to $10.8 million in the plastic segment and by 5.9% to $9.7 million in the Company’s electronic and metallic segment. The operating loss in the first quarter was $2.7 million, compared to an operating loss of $0.3 million for the same quarter of fiscal 2010.

Total gross margin decreased to 4.4% in the first quarter ended June 30, 2010 compared to 15.8% in the same quarter last year. Gross profit margin in the plastic segment decreased to 1.6% of net sales for the first quarter of fiscal 2011 compared to 20.8% of net sales for the same quarter of last fiscal year. The decreased gross margin in the plastic segment was mainly due to reduction of sales in higher profit margin items, as well as an increase in labor costs resulting from a raise in the minimum wage rate, increases in overtime allowance and headcount. The decreased gross margin was also driven by an increase in factory overhead as a percentage of sales during the quarter. Gross profit margin in the electronic and metallic segment decreased to 7.5% of net sales for the first quarter ended June 30, 2010, compared to 10.0% of net sales for the year-ago quarter. The decrease in gross margin in the electronic and metallic segment was mainly attributable to a decline in sales revenues resulting from long lead time in completing sales order due to material shortages and supply slippage, increased labor costs as a percentage of sales driven by increases in the minimum wage rate and a knock on effect from overtime payments and increases in headcount during the quarter.

The Company reported a net loss of $2.2 million for the first quarter ended June 30, 2010 compared to net loss of $0.3 million for the quarter ended June 30, 2009. Basic and diluted net loss per share was ($0.14), (based on 16,192,000 and 16,205,000 weighted average shares outstanding, respectively) compared to basic and diluted net loss per share of ($0.02), (based on 15,791,000 and 15,921,000 weighted average shares outstanding, respectively) for the same quarter ended June 30, 2009.

The Company's financial position remained strong at the end of the first quarter of fiscal year 2011, with $29.4 million in cash and cash equivalents at June 30, 2010, compared to $35.1 million at March 31, 2010. Working capital totaled $58.6 million as of June 30, 2010, versus $59.8 million as of March 31, 2010. Furthermore, the Company has no long-term or short-term borrowings at June 30, 2010.

Mr. Franki Tse, chief executive officer, commented, “During this quarter, our sales decreased due to the slower than hoped for pace of the economic recovery. It is our expectation that this will continue to impact our business in the coming few quarters. Our margins were also impacted by a serious labor shortage, low efficiency from new workers, a 20% increase in local minimum wages and material cost increases. Hence, we are very focused on driving costs down and are in the process of business process re-engineering and organizational re-structuring which will take place during the next two quarters. Given our loss for the quarter, we have not declared dividends to maintain cash reserves.

“We have started working with some new customers and will continue focusing on new business development. Our state-of-the-art capabilities, exemplary client base and very strong balance sheet with cash and no debt position us well to drive enhanced shareholder value over time.”

About Deswell

Deswell manufactures injection-molded plastic parts and components, electronic products and subassemblies, and metallic products for original equipment manufacturers (“OEMs”) and contract manufacturers at its factories in the People’s Republic of China. The Company produces a wide variety of plastic parts and components used in the manufacture of consumer and industrial products; printed circuit board assemblies using surface mount (“SMT”) and finished products such as telephones, telephone answering machines, sophisticated studio-quality audio equipment and computer peripherals. The Company’s customers include N&J Company, Digidesign Inc., Vtech Telecommunications Ltd.

To learn more about Deswell Industries, Inc., please visit the Company’s website at www.deswell.com.

Forward-Looking Statements

Statements in this press release that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. For example, our statements regarding our expected growth in sales from the electronic and metallic division in the coming year and our efforts to reduce overhead costs in our plastic division are forward-looking statements. Actual results could differ materially because of the following factors, among others, which may cause revenues and income to fall short of anticipated levels or our overhead expenses to increase: our dependence on a few major customers; vigorous competition forcing product price reductions or discounts; the timing and amount of significant orders from our relatively few significant customers; continuing increases in resin prices that cannot be passed on to customers; unexpected production delays; obsolete inventory or product returns; losses resulting from fraudulent activity of our customers or employees; labor shortages that increase labor and costs; changes in the mix of product products we manufacture and sell; adverse currency fluctuations in the renminbi and Hong Kong dollar when translated to US dollars; potential new accounting pronouncements; and the effects of travel restrictions and quarantines associated with major health problems, such as the Severe Acute Respiratory Syndrome, on general economic activity.

For further information regarding risks and uncertainties associated with the Company’s business, please refer to the “Risk Factors” section of Company’s Annual Report on Form 20-F, copies of which may be obtained from the Website maintained by the Securities and Exchange Commission at http://www.sec.gov.

All information in this release is made as of the date of this press release. Deswell undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Deswell’s expectations.
DESWELL INDUSTRIES, INC.    
CONSOLIDATED BALANCE SHEET
( U.S. dollars in thousands)
  June 30, March 31,
2010 2010
ASSETS (Unaudited) (Audited)
 
Current assets :
Cash and cash equivalents $ 29,436 $ 35,120
Marketable securities 7,431 5,673
Accounts receivable, net 18,480 14,399
Inventories 18,614 15,808
Prepaid expenses and other current assets   2,500   1,844
Total current assets 76,461 72,844
Property, plant and equipment - net 59,747 60,705
Deferred income tax assets - 70
Goodwill   392   392
Total assets $ 136,600 $ 134,011
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities
Accounts payable $ 11,155 $ 7,298
Accrued payroll and employee benefits 3,034 2,570
Customer deposits 1,229 883
Other accrued liabilities 2,178 1,905
Deferred income tax liabilities   268   340
Total current liabilities   17,864   12,996
 
Shareholders' equity
Common shares nil par value
- authorized 30,000,000 shares; issued and outstanding
16,191,810 shares at June 30, 2010 and
16,191,810 shares at March 31, 2010, respectively 50,803 50,803
Additional paid-in capital 7,719 7,719
Accumulated other comprehensive income 5,316 5,316
Retained earnings   54,898   57,177
Total shareholders' equity   118,736   121,015
Total liabilities and shareholders' equity $ 136,600 $ 134,011
DESWELL INDUSTRIES, INC.    
 
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
( U.S. dollars in thousands, except per share data )
Quarter ended
June 30,

2010

2009
(Unaudited)
Net sales $ 20,486 $ 22,738
Cost of sales   19,585     19,135  
Gross profit 901 3,603
Selling, general and administrative expenses 3,822 3,916
Other income, net   243     41  
Operating loss (2,678 ) (272 )
Interest expense - -
Non-operating income, net   397     55  
Loss before income taxes (2,281 ) (217 )
Income taxes   (2 )   36  
Net Loss $ (2,279 ) $ (253 )
 
 
Net loss per share
Basic:
Net loss per share $ (0.14 ) $ (0.02 )
Weighted average number of shares
outstanding (in thousands)   16,192     15,791  
 
Diluted:
Net loss per share $ (0.14 ) $ (0.02 )
Weighted average number of shares
outstanding (in thousands)   16,205     15,921  

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