Ron and all:
Just returned, looked at quarterly financials and read through the posts. Added value from all. Now like it or not my thoughts, comments and critizisms.
Overall good quarter with all going on. Revenue and earnings growth look good. To what extent Mita had on the earnings and balance sheet in the prior quarter as compared to next quarter not clear.
This company has a balance that can withstand a strong downturn, managed in anticipation and recognition of normal business cycles. But the balance sheet and cash flow have taken a few hits this quarter.
Three areas of concern. Receivables, inventory and prepaid expenses. I appreciate peter's comments and have heard Mr. Lau's. But a company generally manages its balance sheet to the reporting period. Most companies decrease receivables and inventory, while lagging payables to help free cash flow. Deswell did the opposite in all catagories, giving their customers and suppliers the upper hand. This could be tactical or just the result of pressure to grow revenues at the expense of cash flow.
The comment concerning the reduction of recievables just after the quarter closed may or may not be valid, but cannot be independantly verified. To be more pessimistic, Mr. Lau stated he would not ship if a customer was not current. But if customers are demanding and getting longer payment terms, this would explain the increase.
The prepaid expenses are a mystery to me. Why would a company with such a string balance sheet be required to prepay.
Inventory should not grow incrementally above revenues, unless customers are cancelling or delaying orders (Mita?). And there is no way to determine potential obsolesence. Hopefully the auditors have acknowledged this by not requiring a write-down.
Operating cash flow was $2M, with much of the working capital generated from income hung up on the balance sheet. Then with $4M in dividends, we ended with a net reduction in the cash balance. Still a big buffer, but all of these issues IMO should be watched in the next reporting period.
Now if we can get the currency and DNA issues behind us....
jmt |
