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| TRT > SEC Filings for TRT > Form 10-K on 2-Oct-2009 | All Recent SEC Filings |
2-Oct-2009
Annual Report
The following discussion and analysis should be read in conjunction with our disclaimer on "Forward-Looking Statements," "Item 1. Business," "Item 1A. Risk Factors," "Item 6. Selected Financial Data" and Consolidated Financial Statements, the notes to those statements and other financial information contained elsewhere in this Annual Report on Form 10-K.
Overview
Trio-Tech International has historically operated in three distinct segments:
distribution, manufacturing, testing. In June 2007, Trio-Tech International
Pte., Ltd. established a subsidiary Trio-Tech (Chongqing) Co., Ltd. ("TTCQ") in
Chongqing, China to develop certain real estate projects as more fully described
elsewhere in this Form 10-K. As our investment in the real estate business in
Chongqing, China meets the definition and exceeded more than 10% of our combined
assets of all operating segments in fiscal 2009, we reported our investment in
China as a separate Real Estate Segment, to be in compliance with and in
accordance to the Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information.
We provide third-party semiconductor testing and burn-in services primarily through our laboratories in Southeast Asia. At or from our facilities in California and Southeast Asia, we also design, manufacture and market equipment and systems to be used in the testing and production of semiconductors, and distribute semiconductor processing and testing equipment manufactured by other vendors.
Geographically, we operate in the U.S., Singapore, Malaysia, Thailand and China. Our major operation activities are conducted in our Singapore and Malaysia operations. Our customers are mainly concentrated in Southeast Asia and they are either semiconductor chip manufacturers or testing facilities that purchase our testing equipment.
In the third quarter of fiscal 2008, one of our major customers ceased their advanced burn-in testing service contract with us due to one of their product lines reaching the end of its life cycle earlier than expected. The net sales in the testing segment decreased by $8,414 to $9,758 for the year ended June 30, 2009 as the result of the loss of revenue from this major customer. Management took immediate action to reduce expenses in an effort to match future cash flows and is in the process of developing new customer relationships in China and Malaysia and exploring new business opportunities to offset the lost testing revenue from this contract.
Recently, there has been widespread concern over the instability of the financial markets and their influence on the global economy. We believe that, as a result of the credit market crisis and other macro-economic challenges currently affecting the global economy, the orders from our customers in our testing operations in China were seriously reduced. During the year ended June 30, 2009, there was minimal business activity in our Shanghai testing operation, and there were also no secured orders or backlogs for subsequent periods. Therefore, we expect very little future cash flows from the assets in the Shanghai operation. The Company recorded an impairment loss of $299 on these assets based on its examination of future undiscounted cash flows in the second quarter of fiscal 2009. In addition, business in the Suzhou operation also began to slow down in the fourth quarter of fiscal 2008 and suffered losses in fiscal 2009. The operation is currently only providing line support, maintenance and training services for one customer. Based on our estimated future undiscounted cash flows, an impairment loss of $226 was recorded for some of the testing equipment during the second quarter of fiscal 2009. During the third quarter of fiscal 2009, we also recorded an impairment loss of $98 for some testing equipment in our Malaysia operation, which was beyond repairable conditions.
In the second quarter of fiscal year 2009, we recorded lease termination expenses of $164 related to the future minimum rent of two idle plants in the Singapore operation. The non-cancelable lease term for these two plants expires in March 2011 and April 2011. Because neither of these plants have any economic benefit to the Company, management does not currently have further plans for these units, and the ability for the Company to sublease these units does not seem likely, according to SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company accrued the entire future minimum rent up to the end of the lease period in the second quarter of fiscal 2009. This provision for future rental expense increased our cost of goods sold by $164 in the second quarter of fiscal year 2009.
In fiscal year 2008, TTCQ invested RMB 15,000, equivalent to approximately $2,196 based on the exchange rate on June 30, 2009 published by the Monetary Authority of Singapore, to jointly develop a piece of property with 24.91 acres with JiaSheng Property Development Co., Ltd. (JiaSheng) located in Chongqing City, China, which is intended for sale after the completion of development. In fiscal year 2008, the investment of RMB 5,000, or approximately $732, was returned to the Company. The Company also recorded a profit of RMB 750, approximately $103, in investment income in fiscal year 2008. In accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock, management recorded the transaction using the cost method of accounting.
In fiscal year 2008, TTCQ purchased office space of 827.2 square meters located in Chongqing, China from MaoYe Property Ltd. at the purchase price of RMB 5,554, equivalent to approximately $813 based on the exchange rate as of June 30, 2009 published by the Monetary Authority of Singapore. The Company rented this property out to a third party on July 13, 2008. The term of the rental agreement was five years with a monthly rental income of RMB 39, or approximately $6 for the first three years, with an increase of 8% in the fourth year and another 8% in the fifth year. During the year ended June 30, 2009, this property generated a rental income of $54.
On October 23, 2008, TTCQ entered into a Memorandum Agreement with JiaSheng to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters located in Chongqing, China. The total purchase price was RMB 7,042, equivalent to approximately $1,031 based on the exchange rate as of June 30, 2009 published by the Monetary Authority of Singapore System. In October 2008, the Company made a cash down payment of 10% in the amount of RMB 704, or $103. In November 2008, the Company paid an additional RMB 2,908 in cash, or $426, from internally generated funds of the Company. The remaining balance was offset by the investment return the Company earned related to the No. B48 property. The Company and JiaSheng agreed to offset the investment return from the No. B48 property in the BeiPei district of Chongqing City against the purchase price of this commercial and residential property. In addition, the Company charged JiaSheng RMB 130, or $19, as penalties for the delay in the payment of investment principal and investment income. The penalty was also used to also offset the purchase price of the commercial and residential property. As of June 30, 2009, the Company paid cash in the amount of $529, and offset amounts of $290 as the return of investment principal, $192 as investment income and $19 as the penalties charged for this new commercial and residential property, totaling $1,031.
On October 23, 2008, the Company entered into a lease agreement with JiaSheng for the six units purchased from JiaSheng pursuant to the Memorandum Agreement. The lease provides for a two year term with an annual rental income of RMB 1,392, or approximately $204 based on the exchange rate as of June 30, 2009 published by the Monetary Authority of Singapore. The lease started on November 1, 2008 and generated a rental income of $137 in fiscal year 2009. The depreciation expenses of the investment property in Chongqing, China were $75 and the depreciation expenses of our office and office furniture in Chongqing, China were $15 in fiscal year 2009.
In April 2009, Trio-Tech International Pte., Ltd. Singapore set up a new entity, SHI International Pte., Ltd. ("SHI"), in which Trio-Tech International Pte., Ltd. holds 55% of the ownership interest. On April 7, 2009, SHI entered into a Share Purchase Agreement, pursuant to which SHI agreed to acquire from Erni Susanto Susi, Dwi Kartikarini and PT SAS International shares of PT SAS Heavy Industry ("SASHI") for an aggregate cash purchase price of $110. In August 2009, relevant Indonesian government authorities approved the transfer of shares in the Share Purchase agreement. The shares of SASHI acquired by SHI pursuant to the Share Purchase Agreement represent approximately 95% of the outstanding shares of SASHI.
In the context of a challenging economic environment, in order to achieve our
goal of attaining a lower breakeven point, we undertook several cost reduction
measures. Since the first quarter of fiscal 2009 ending September 30, 2008, we
reduced our headcount by approximately 48 employees. Also, on February 27, 2008,
our Chief Executive Office, Chief Financial Officer and directors voluntarily
decreased their base salary to 50% of the base salary agreed to in July
2007. From the second quarter of 2009 ending December 31, 2008, we implemented
four-day work weeks for all the employees in the Singapore operation, which
reduced our employee compensation by approximately 20%. These cost cutting
actions reduced our general and administrative expenses in the year ended June
30, 2009.
We plan to continue to expand our market share in the semiconductor industry. In
2009, the Malaysian subsidiary acquired the leased property in Malaysia in an
effort to assure the prospects of long term support for our customers in
Malaysia. Our Suzhou operation is in the process of transforming from a
production based operation to an engineering service based operation.
Fiscal 2009 Highlights
· Total revenue decreased by $20,370, or 50.4%, from $40,417 for fiscal 2008 to $20,047 for fiscal 2009.
· Manufacturing segment revenue decreased by $12,149, or 55.9%, to $9,582, compared to $21,732 for fiscal 2008 to $9,582.
· Testing segment revenue decreased by $8,414, or 46.3%, to $9,758, compared to $18,172 for fiscal 2008.
· Distribution segment revenue decreased by $117, or 28.5%, to $294, compared to $411 for fiscal 2008.
· Real Estate segment revenue increased by $310, or 301.0% to $413, compared to $103 for fiscal 2008.
· Loss from operations increased by $1,010 to $1,966 compared to $956 for fiscal 2008.
· Gross profit margins increased by 1.6% to 23.8% for fiscal 2009, compared to 22.2% for fiscal 2008.
· General and administrative expenses decreased by $2,385, or 30.4%, as compared to $7,844 for fiscal 2008.
· Selling expenses decreased by $278, or 43.1%, to $367 as compared to $645 for fiscal 2008.
· We recorded $623, or $0.19 per diluted share, in impairment loss due to primarily reducing sales volumes in China, Malaysia and Singapore operations.
· Total assets decreased by $6,812, or 19.6%, to $27,947 for fiscal 2009 as compared to $34,759 for fiscal 2008.
· Total liabilities decreased by $4,645, or 47.3%, to $5,165 for fiscal 2009 as compared to $9,810 for fiscal 2008.
· Working capital decreased by $6,601 to $9,302 for fiscal 2009 as compared to $15,903 for fiscal 2008.
· Shareholders' equity decreased by $2,277, or 10.3%, to $19,864 for fiscal 2009 as compared to $22,141 for 2008.
The highlights above are intended to identify some of our more significant events and transactions during our fiscal year 2009, and recent events that occurred after the fiscal year end. However, these highlights are not intended to be a full discussion of our results for the year. These highlights should be read in conjunction with the following discussion of "Results of Operations" and "Liquidity and Capital Resources" and with our consolidated financial statements and footnotes accompanying this Annual Report.
Related Party Transactions
On October 23, 2008, TTCQ entered into a Memorandum Agreement with JiaSheng to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters located in Chongqing, China. The total purchase price was RMB 7,042, equivalent to approximately $1,031 based on the exchange rate as of June 30, 2009 published by the Monetary Authority of Singapore System. In October 2008, the Company made a cash down payment of 10% in the amount of RMB 704, or $103. In November 2008, the Company paid an additional RMB 2,908 in cash, or $426, from internally generated funds of the Company. The remaining balance was offset by the investment return the Company earned related to the No. B48 property. The Company and JiaSheng agreed to offset the investment return from the No. B48 property in the BeiPei district of Chongqing City against the purchase price of this commercial and residential property. In addition, the Company charged JiaSheng RMB130, or $19, as penalties for the delay in the payment of investment principal and investment income. The penalty was also used to offset the purchase price of the commercial and residential property. As of June 30, 2009, the Company paid cash in the amount of $290, and offset amounts of $290 as the return of investment principal, $192 as investment income and $19 as the penalties charged for this new commercial and residential property, totaling $1,031.
On October 23, 2008 the Company entered into a lease agreement with JiaSheng for the six units purchased from JiaSheng pursuant to the Memorandum Agreement. The lease provided for a two year term with an annual rental income of RMB 1,392, or approximately $204. The lease started on November 1, 2008.
Subsequent Events
In April 2009, Trio-Tech International Pte., Ltd. set up a new entity, SHI International Pte., Ltd. ("SHI"), in which Trio-Tech International Pte., Ltd. holds 55% of the ownership interest. On April 7, 2009, SHI entered into a Share Purchase Agreement, pursuant to which SHI has agreed to acquire from Erni Susanto Susi, Dwi Kartikarini and PT SAS International's shares of PT SAS Heavy Industry ("SASHI") for an aggregate cash purchase price of $10, and a goodwill of $100. In August 2009 relevant Indonesian government authorities approved the change of shareholders and hence PT SAS Indonesia is considered acquired 95% by SHI International Pte., Ltd. SASHI engages in business in the oil and gas industries by providing integrated engineering, manufacturing and fabrication services for customers in the oil and gas industries. These include products such as heat transfer equipment, pressure vessels, skid packages, onshore and offshore modules and structures, floating cranes and barges, and steel structures for industrial plants.
In August 2009 TTM, a 55% owned subsidiary of Trio-Tech International Pte., Ltd. (which in turn is a wholly-owned subsidiary of the Registrant), acquired the building for a value of RM 12,450, or approximately $3,534, for its testing operations. Prior to this purchase this property was under lease rental by the Company. On August 24, 2008, TTM obtained a long-term loan of RM 9,625, or approximately $2,733, offered by a financial institution in Malaysia. This non-revolving long-term loan has a term of fifteen years from the first draw down. The financial institution offered an interest rate at the financial institution's prime rate plus 1.5% per annum or a fixed rate of 7.12% per annum in the first five years and the financial institution's prime rate plus 1.5% per annum thereafter. The Company decided to opt for bank's prime rate plus 1.5% per annum, and the loan was disbursed on August 10, 2009. The funds were utilized to acquire a property in which the Malaysian operations are currently functioning in Petaling Jaya, Kuala Lumpur, Malaysia. The completion of acquisition of the property took place in August 2009.
General Financial Information
During the fiscal year ended June 30, 2009, total assets decreased by $6,812 from $34,759 to $27,947. The decrease was primarily in cash and cash equivalents, trade accounts receivables, inventory, other receivables, plant and equipment, but was partially offset by an increase in investment in China and other assets.
Cash and cash equivalents and short-term deposits and restricted term deposits at June 30, 2009 totaled $11,468, a decrease of $2,878, or 20.1%, as compared to a total of $14,346 as of June 30, 2008. The decrease in cash and short-term deposits was mainly due to capital expenditure of $1,358 and repayment of bank loans and capital lease of $1,671 during fiscal year 2009.
Accounts receivables at June 30, 2009 were $3,981, representing a decrease of $1,721, or 30.2%, compared to $5,702 at June 30, 2008. The decrease was attributable mainly to a decrease in sales due to the loss of a major customer in fiscal 2008, as discussed previously. Total sales from all of the segments in fiscal 2009 were $20,047, a decrease of $20,370, or 50.4%, compared to total sales of $40,417 in fiscal 2008. The turnover of accounts receivables was 88 days for fiscal 2009, an increase of 29 days, compared to 59 days for fiscal 2008. We believe that the increase in such rate was due to the impact of the difficult global economic condition. If customers are not successful in generating sufficient revenue or are precluded from securing financing, they may delay payment of accounts receivable that are owed to us. We have taken actions to improve the rate of turnover of our accounts receivables, such as providing electronic payment method to our customers and sending periodic customer account statements.
Other receivables at June 30, 2009 were $279, a decrease of $517 from $796 as at June 30, 2008. Such decrease was mainly due to a decrease in goods and services tax (GST) claimable by Singapore operations in fiscal year 2009 as a result of reduced purchases because of a drop in revenue, as discussed elsewhere in this report.
Inventory at June 30, 2009 was $1,184, a decrease of $1,265, or 51.7%, compared to $2,449 at June 30, 2008. The decrease in inventory was mainly from a decrease in work-in-progress inventories in Singapore operations as a result of a slowdown in the manufacturing segment. The turnover of inventory was 43 days for fiscal 2009, reflecting an increase of 17 days compared with a turnover rate of 26 days for fiscal 2008. The slower rate was due to a decrease in sales as a result of fewer orders being placed by one of our major customers, because of the slower movement of that customer's product line and equipment capacity.
Property, plant and equipment at June 30, 2009 were $6,607, a decrease of $1,529, or 18.8%, compared to $8,136 at June 30, 2008 due to the impairment of certain fixed assets in the China operations amounting to $525 and in the Malaysia operations amounting to $98 in fiscal 2009 and depreciation of the Company's fixed assets in the ordinary course of business. Capital expenditures were $1,358 in fiscal 2009, compared with $3,453 ($3,357 in cash, and $96 in capital lease) for fiscal 2008. The decrease in capital expenditures was mainly due to a decrease in our investment activity during the difficult economic climate.
Depreciation and amortization was $2,135 for fiscal 2009, compared with $2,715 for fiscal 2008. The decrease in depreciation expenses was mainly due to the impairment of certain fixed assets in the Singapore and China operations in fiscal year 2009 as a result of the termination of a testing service contract with one of our major customers and a change in customer demand for certain burn-in testing services, thus reducing our depreciation related to those assets.
Other assets at June 30, 2009 increased by $513 to $1,326, compared to $813 at June 30, 2008. The increase in other assets was primarily due to the down payment for fixed assets in the Malaysia operations for the purchase of the building, as discussed earlier. This purchase was completed in August 2009.
Total liabilities at June 30, 2009 were $5,165, a decrease of $4,645, or 47.4%, compared to $9,810 at June 30, 2008. The decrease in liabilities was mainly due to the decrease in trade payables, accrued expenses and note payables.
Accounts payable decreased by $1,561 from $2,586 at June 30, 2008 to $1,025 at June 30, 2009. The decrease in accounts payable was due to the decrease in material purchases during the year in the Singapore operations as a result of a decrease in backlogs.
Accrued expenses decreased by $1,267 from $3,036 at June 30, 2008 to $1,769 at June 30, 2009. The decrease in accrued expenses was mainly due to a decrease in accrued payroll expenses and provision for bonuses, as the result of a decrease in headcount in the Singapore operations and a reduction of performance bonuses, which were based on group performance. In addition, provision for sales tax, warranty cost and commission also decreased due to a decrease in revenue in fiscal 2009 as compared to fiscal 2008.
As of June 30, 2009, the outstanding loans payable were $1,503, with interest rates ranging from 2.70% to 7.15% per annum. These loans mature in August 2010. The loans are collateralized by restricted term deposits and by Corporate Guarantee.
Critical Accounting Estimates & Policies
The discussion and analysis of the Company's financial condition presented in this section are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. During the preparation of the consolidated financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to sales, returns, pricing concessions, bad debts, inventories, investments, fixed assets, intangible assets, income taxes and other contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under current conditions. Actual results may differ from these estimates under different assumptions or conditions.
In response to the SEC's Release No. 33-8040, Cautionary Advice Regarding Disclosure about Critical Accounting Policy, we have identified the most critical accounting policies upon which our financial status depends. We determined that those critical accounting policies are related to the inventory valuation, allowance for doubtful accounts, revenue recognition, and income tax. These accounting policies are discussed in the relevant sections in this management's discussion and analysis, including the Recently Issued Accounting Pronouncements discussed below.
Accounts Receivable and Allowance for Doubtful Accounts
During the normal course of business, the Company extends unsecured credit to its customers. Typically, credit terms require payment to be made between 30 to 60 days from the date of the sale. We do not require collateral from our customers. The Company maintains its cash accounts at credit worthy financial institutions.
The Company regularly evaluates and monitors the creditworthiness of each customer on a case-by-case basis. The Company includes any account balances that are determined to be uncollectible, along with a general reserve, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to management, the Company believed that its allowance for doubtful accounts was adequate as of June 30, 2009.
Inventory Valuation
Inventories consisting principally of raw materials, works in progress, and finished goods are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market value. The semiconductor industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. Provisions for estimated excess and obsolete inventory are based on our regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. Inventories are written down for not saleable, excess or obsolete raw materials, works-in-process and finished goods by charging such write-downs to cost of sales. In addition to write-downs based on newly introduced parts, statistics and judgments are used for assessing provisions of the remaining inventory based on salability and obsolescence.
Revenue Recognition
Revenue derived from testing services is recognized when testing services are rendered. Revenues generated from sales of products in the manufacturing and distribution segments are recognized when persuasive evidence of an arrangement exists, delivery of the products has occurred, customer acceptance has been obtained (which means the significant risks and rewards of ownership have been transferred to the customer), the price is fixed or determinable and collectability is reasonably assured. Certain products sold (in the manufacturing segment) require installation and training to be performed. Revenue generated by property is recognized as per the rental agreement and for the period the premises remains occupied.
Revenue from product sales is also recorded in accordance with the provisions of Emerging Issues Task Force (EITF) Statement 00-21 Revenue Arrangements with Multiple Deliverables and Staff Accounting Bulletin (SAB) 104 Revenue Recognition in Financial Statements, which generally require revenue earned on product sales involving multiple-elements to be allocated to each element based on the relative fair values of those elements. Accordingly, the Company allocates revenue to each element in a multiple-element arrangement based on the element's respective fair value, with the fair value determined by the price charged when that element is sold and specifically defined in a quotation or contract. The Company allocates a portion of the invoice value to products sold and the remaining portion of invoice value to installation work in proportion to the fair value of products sold and installation work to be performed. Training elements are valued based on hourly rates, which the Company charges for these services when sold apart from product sales. The fair value determination of products sold and the installation and training work is also based on our specific historical experience of the relative fair values of the elements if there is no easily observable market price to be considered. In fiscal 2009 and 2008, the installation revenues generated in connection with product sales were immaterial and included in the product sales revenue line on the consolidated statements of income. The Company estimates an allowance for sales returns based on historical experience with product returns.
Impairment
The Company applies the provisions of Statement of Financial Accounting Standard . . .
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