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TRT > SEC Filings for TRT > Form 10-Q on 14-Nov-2011All Recent SEC Filings

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Form 10-Q for TRIO TECH INTERNATIONAL


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings "Risk factors" and "Management's discussion and analysis of financial condition and results of operations" in the our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Overview

Trio-Tech International was incorporated in 1958 under the laws of the State of California. As used herein, the term "Trio-Tech" or "Company" or "we" or "us" or "Registrant" includes Trio-Tech International and its subsidiaries unless the context otherwise indicates. Our mailing address and executive offices are located at 16139 Wyandotte Street, Van Nuys, California 91406, and our telephone number is (818) 787-7000.

We operate our business in five segments: manufacturing, testing services, distribution, real estate and fabrication services. Geographically, we operate in the U.S., Singapore, Malaysia, Thailand, China and Indonesia. Our major operation activities are conducted in our Singapore and Malaysia operations. Our customers for semi-conductor related activities are mainly concentrated in Southeast Asia and they are either semiconductor chip manufacturers or testing facilities that purchase our testing equipment. We operate six testing services facilities; one in the United States and five in Southeast Asia. We operate two manufacturing facilities: one is located in the United States and the other one is in Southeast Asia. Our distribution segment, the real estate segment and fabrication services operate primarily in Southeast Asia. Our major customers are concentrated in Southeast Asia and they are either semiconductor chip manufacturers or testing facilities that purchase testing equipment.

Manufacturing

Our manufacturing segment manufactures Artic Temperature Controlled Wafer Chucks, which are used for test, characterization and failure analysis of semiconductor wafers; Wet Process Stations, which wash and dry wafers at a series of 100 to 300 additional processing steps after the etching or deposition of integrated circuits; and other microelectronic substrates in what is commonly called the "front-end", or creation, of semiconductor circuits. Additionally, we also manufacture centrifuges, leak detectors, HAST (Highly Accelerated Stress Test) systems and "burn-in" systems that are used primarily in the "back-end" of the semiconductor manufacturing process to test finished semiconductor devices and electronic components.

In the United States, the manufacturing segment focused on marketing used and refurbished equipment, which some of our customers are more willing to purchase since refurbished equipment is less expensive than new equipment.

Due to the competitive environment in the manufacturing segment, we implement cost reduction plans by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.

Testing

We provide third-party semiconductor testing and burn-in services primarily through our laboratories in Southeast Asia.

Our testing operation in Shanghai, China suffered continued operating losses and the cash flow was minimal for fiscal 2007 through 2009. In January 2010, we discontinued the testing operation in Shanghai, China. In the fourth quarter of fiscal 2010, Trio-Tech International Pte. Ltd. registered a new 100% wholly owned subsidiary, Trio-Tech (Tianjin) Co. Ltd. ("TTTJ"), located in the Xiqing Economic Development Area (XEDA) International Industrial Park in Tianjin City, Peoples' Republic of China. TTTJ commenced operating activities in the third quarter of fiscal 2011.

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Distribution

Our distribution segment operates primarily in Southeast Asia. This segment markets and supports distribution of its own manufactured equipment in addition to distributing complementary products supplied by other manufacturers that are used by its customers and other semiconductor and electronics manufacturers. We believe this will help us to reduce our exposure to multiple risks arising from being a mere distributor of manufactured products from others.

Real Estate

Our real estate segment generates investment income from the investments made and rental revenue from real estate property purchased in Chongqing, China.

On November 1, 2010, Trio-Tech (Chongqing) Co. Ltd. ("TTCQ") entered into a Memorandum Agreement with JiaSheng to invest in their property development projects (Project B-48 Phase 2) located in Chongqing City. On the same date, TTCQ entered into another Memorandum Agreement with Jiang Huai Property Development Co. Ltd. ("Jiang Huai") to invest in their property development projects (Project - Yu Jin Jiang An) located in Chongqing City, China. The total investment of these two projects was RMB 7,000, or approximately $1,094 based on the exchange rate as of September 30, 2011 published by the Monetary Authority of Singapore, which was classified as a loan based on ASC Topic 310 Receivables.

During the second quarter of fiscal 2011, TTCQ entered into a joint venture agreement with JiaSheng to develop real estate projects in China. TTCQ invested RMB 10,000, or approximately $1,564 based on the exchange rate as of September 30, 2011 published by the Monetary Authority of Singapore, for a 10% interest in the newly formed joint venture, which was incorporated as a limited liability company, Chong Qing Jun Zhou Zhi Ye Co. Ltd. (the "joint venture"), in China. The agreement stipulates that TTCQ will nominate two of the five members of the Board of Directors of the joint venture and has the ability to assign two members of management to the joint venture. The agreement also stipulates that TTCQ will receive a fee of RMB 10,000, or approximately $1,564 based on the exchange rate as of September 30, 2011 published by the Monetary Authority of Singapore, for the services rendered in connection with obtaining priority to bid in certain real estate projects from the local government. Upon signing of the agreement, JiaSheng paid TTCQ RMB 5,000 in cash, or approximately $782 based on the exchange rate as of September 30, 2011 published by the Monetary Authority of Singapore. The remaining RMB 5,000, or approximately $782, will be paid over 72 months commencing in 36 months from the date of the agreement. TTCQ considered the RMB 5,000, or approximately $782, received in cash from JiaSheng, the controlling venturer in the joint venture, as a partial return of the Company's initial investment of RMB 10,000, or approximately $1,564. Therefore, the RMB 5,000, or approximately $782, received in cash was offset against the initial investment of RMB 10,000 resulting in a net investment of RMB 5,000. TTCQ considers the collectability of the remaining RMB 5,000, or approximately $782, to be uncertain due to the extended terms of the payment, and therefore has not recorded this amount as a receivable.

Fabrication Services

PT SHI Indonesia is an Indonesia-based enterprise providing fabrication of large and complex structures employed to process oil and gas and for temporary storage of the oil prior to transshipment, and related services for the offshore oil and gas industries. Our objective in acquiring this business was to diversify our business, reduce the risk associated with sole industry focus, and enhance our future growth opportunities. As the Company has only been in the fabrication business for less than two years, the existing customer base is still limited. The Company renewed the lease of the yard, which we believe will enable management to explore additional business and seek new customers with a longer business horizon so as to optimize capacity utilization, which will enable the operations to be profitable.

Indonesia is one of the largest oil and gas producers in Southeast Asia, as well as a major exporter of liquefied natural gas in Asia. Management is of the view that Indonesia will offer great potential for growth in demand for equipment and machinery for the oil and gas industries. We believe that the demand for oil and gas has been increasing steadily for the past few years, thereby generating an increase in investments in the oil and gas industries to discover and explore new production locations to meet such demand. We believe that this may lead to an increase in capital spending for oil and gas exploration and development, as well as capital spending on technology advances to improve the success rate in oil and gas discovery at lower costs. In addition, as offshore oil and gas exploration moves into more challenging deep waters and locations where infrastructure is lacking, larger and more complex equipment may be needed to support the production facility.

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First Quarter Fiscal 2012 Highlights

? Manufacturing segment revenue decreased by $6,176, or 68.8%, to $2,798 for the first quarter of fiscal 2012, compared to $8,974 for the same period in fiscal 2011.

? Testing segment revenue decreased by $183, or 5.3%, to $3,291 for the first quarter of fiscal 2012, compared to $3,474 for the same period in fiscal 2011.

? Distribution segment revenue increased by $89, or 38.9%, to $318 for the first quarter of fiscal 2012, compared to $229 for the same period in fiscal 2011.

? Real estate segment revenue decreased by $140, or 74.9%, to $47 for the first quarter of fiscal 2012, compared to $187 for the same period in fiscal 2011.

? Fabrication Services segment revenue increased by $2,180 to $2,345 for the first quarter of fiscal 2012, compared to $165 for the same period in fiscal 2011.

? The overall gross profit margins decreased by 5.2% to 15.9% for the first quarter of fiscal 2012, from 21.1% for the same period in fiscal 2011.

? General and administrative expenses increased by $268, or 14.6 %, to $2,098 for the first quarter of fiscal 2012, from $1,830 for the same period in fiscal 2011.

? Research and development expenses increased by $46, or 158.6%, to $75 for the first quarter of fiscal 2012, compared to $29 for the same period in fiscal 2011.

? Loss from operations increased by $1,674, or 222.3%, to $921 for the first quarter of fiscal 2012, compared to an income of $753 for the same period in fiscal 2011.

? Net loss attributed to Trio-Tech International common shareholders increased by $1,295 to $804 for the first quarter of 2012 as compared to an income of $491 for the same period in fiscal 2011.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the three months ended
September 30, 2011 and 2010, respectively.

Revenue Components
                       Three Months Ended        Three Months Ended
                         September 30,             September 30,
                       2011         2010          2011         2010
Revenue:                %            %
Manufacturing           31.8%       68.8%     $   2,798     $  8,974
Testing Services        37.4%       26.7%         3,291        3,474
Distribution             3.6%        1.8%           318          229
Real Estate              0.5%        1.4%            47          187
Fabrication Services    26.7%        1.3%         2,345          165

Total                  100.0%      100.0%     $   8,799     $ 13,029

Revenue for the three months ended September 30, 2011 were $8,799, a decrease of $4,230, or 32.5%, compared to $13,029 for the same quarter of last fiscal year.

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Revenue into and within China and the Southeast Asia regions and other countries (except sales into and within the United States) decreased by $4,323, or 34.0%, to $8,392 for the three months ended September 30, 2011, as compared with $12,715 for the same period of last fiscal year. The decrease was primarily due to a decrease in revenue in the manufacturing segment in our Singapore operation and in the testing services segment in our Malaysia operation, but partially offset by an increase in revenue in the distribution segment in our Singapore operation and the fabrication services segment in our Indonesia operation. Revenue into and within the United States was $407 for the three months ended September 30, 2011, an increase of $93 from $314 for the same period of the last fiscal year, due to an increase in revenue in the testing services segment in our U.S operation in the third quarter of fiscal 2012 as compared to the same period of last fiscal year.

Revenue components can be discussed within the five segments as follows:

Manufacturing Segment

Revenue in the manufacturing segment as a percentage of total revenue was 31.8% for the three months ended September 30, 2011, a decrease of 37.0% compared to 68.8% of total revenue for the same period of the last fiscal year. In terms of dollar amount, the revenue decreased by $6,176 to $2,798 for the three months ended September 30, 2011, compared to $8,974 for the same period of the last fiscal year.

The decrease in the revenue generated by the manufacturing segment in the first quarter of fiscal 2012 was primarily due to a decrease in capital spending from one of our major customers during the first quarter of fiscal 2012 which are used by the major customers for the testing and production of their semiconductors compared to the same period of last fiscal year. The revenue in the manufacturing segment from this major customer accounted for 45.9% and 86.9% of our total revenue in the manufacturing segment for the three months ended September 30, 2011 and 2010, respectively. The future revenue in our manufacturing segment will be dependent on the purchase and capital expenditure plans of this major customer, if the customer base cannot be increased.

Testing Services Segment

Revenue in the testing services segment as a percentage of total revenue was 37.4% for the three months ended September 30, 2011, an increase of 10.7%, compared to 26.7% of total revenue for the same period of the last fiscal year. In terms of dollar amount, the revenue in the testing segment decreased by $183 to $3,291 for the three months ended September 30, 2011, compared to $3,474 for the same period of the last fiscal year.

The decrease in revenue generated by the testing services segment was primarily due to a decrease in testing volume in the Malaysia and Thailand operations, which was mainly caused by our major customers in Malaysia and Thailand reducing their orders due to the prevailing global market slowdown. Demand for testing services varies from country to country depending on changes taking place in the market and our customers' forecasts. As it is difficult to accurately forecast fluctuations in the market, management believes it is necessary to maintain testing facilities in close proximity to our customers in order to make it convenient for them to send us their newly manufactured parts for testing and to enable us to maintain a share of the market.

Distribution Segment

Revenue in the distribution segment accounted for 3.6% of total revenue for the three months ended September 30, 2011, an increase of 1.8% compared to 1.8% of total revenue for the same period of the last fiscal year. In terms of dollar amount, the revenue increased by $89 to $318 for the three months ended September 30, 2011, compared to $229 for the same period of the last fiscal year.

The increase in revenue for the three months ended September 30, 2011 as compared to the prior year was mainly due to an increase of orders for self-designed and manufactured equipment, which are customized for the unique needs of our existing customers. We believe that our competitive advantage in self-designed and manufactured equipment, which addresses the unique needs of our customers, will continue to generate demand for our products.

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Real Estate Segment

The real estate segment accounted for 0.5% of total revenue for the three months ended September 30, 2011, a decrease of 0.9%, compared to 1.4% of total revenue for the same period of last fiscal year. In terms of dollar amount, the revenue in the real estate segment decreased by $140 to $47 for the three months ended September 30, 2011, compared to $187 for the same period of the last fiscal year.

The two main revenue components for the real estate segment were investment income and rental income.

We invested in the property development with JiaSheng beginning in fiscal 2008 and progressively received a return of our entire investment principal by the end of the second quarter of fiscal 2011. As such, there has been no investment income recorded since the third quarter of fiscal 2011.

Rental income for the first quarter of 2012 was RMB 304, or approximately $47, based on the average exchange rate for the three months ended September 30, 2011, published by the Monetary Authority of Singapore, as compared to RMB 644, or approximately $95, for the same period of last fiscal year.

''Investment in unconsolidated joint venture'' as shown in the balance sheet consists of the cost of an investment in a joint venture, in which we have a 10.89% interest. Prior to the first quarter of fiscal 2012, the 10.89% ownership in this China affiliate was recorded on the equity basis. In the first quarter of 2012, we concluded that we could no longer exert significant influence the operating and financial activities of the joint venture. Therefore, we began accounting for this investment using the cost method effective September 29, 2011. The carrying value of this investment at September 29, 2011 was $760,000, which approximates our pro rata share of the underlying value of the joint venture. Based on ASC Topic 323 - Investments - Other, Cost Method Investments, the existing cost, after evaluating for impairment, has been considered the carrying value of the investment to be the cost of investment.

Fabrication Services Segment

Revenue in the fabrication services segment accounted for 26.7% of total revenue for the three months ended September 30, 2011, an increase of 25.4% compared to 1.3% for the same period of the last fiscal year. In terms of dollar amount, the revenue was $2,345 for the three months ended September 30, 2011, an increase of $2,180 as compared to $165 for the same period of the last fiscal year.

The increase in revenue for the three months ended September 30, 2011 as compared to the same period of last fiscal year was primarily due to acceptance of two projects for mobile offshore production units and living quarters for customers involved in offshore oil exploration in Southeast Asia in the first quarter of fiscal 2012. Revenue from these two projects is recognized based on the percentage of completion. As at the quarter ended September 30, 2011, the percentage of completion of these two projects was 94.90% for one and 87.13% for the other. It is expected that both projects will be completed during the second quarter of fiscal 2012.

Uncertainties and Remedies

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology, specific requirements from the customer, decline in demand for certain types of burn-in devices or equipment, decline in demand for testing services and fabrication services and other similar factors. One factor that influences uncertainty is the highly competitive nature of the semiconductor industry. Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers' requirements due to short lead time and last minute order confirmation. This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame. However, the Company has taken certain actions and formulated certain plans to deal with and to help mitigate these unpredictable factors. For example, in order to meet manufacturing customers' demands upon short notice, the Company maintains higher inventories, but continues to work closely with its customers to avoid stock piling. We have also been improving customer service from staff by keeping our staff up to date on the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. Finally, the Company is exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods of higher technology chips.

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There are several influencing factors which create uncertainties when forecasting performance of our real estate segment, such as obtaining the rights by the joint venture to develop the real estate projects in China, inflation in China, currency fluctuations and devaluation, and changes in Chinese laws, regulations, or their interpretation.

Rapid change in the technology for fabrication services influences our ability to forecast performance of our fabrication services segment.

Comparison of the First Quarters Ended September 30, 2011 ("Q1 2012") and September 30, 2010 ("Q1 2011")

The following table sets forth certain consolidated statements of income data as a percentage of revenue for the first quarters of fiscal 2012 and 2011, respectively:

                                                                Three Months Ended September 30,
                                                                 2011                      2010
Revenue                                                               100.0 %                   100.0 %
Cost of sales                                                          84.1                      78.9
Gross Margin                                                           15.9 %                    21.1 %
Operating expenses:
General and administrative                                             23.8 %                    14.0 %
Selling                                                                 1.6                       1.0
Research and development                                                0.9                       0.2
Loss on disposal of Property, plant and equipment                       0.1                       0.1
Total operating expenses                                               26.4 %                    15.3 %
(Loss) / Income from Operations                                       (10.5 )%                    5.8 %

Gross Margin

Overall gross margin as a percentage of revenue decreased by 5.2% to 15.9% for the three months ended September 30, 2011, from 21.1% for the same period of the last fiscal year. This was primarily due to a decrease in the gross profit margin in the testing services, distribution and real estate segments, though partially offset by an increase in gross profit margin in the manufacturing and fabrication services segments.

Gross profit margin as a percentage of revenue in the manufacturing segment increased by 2.7% to 16.6% for the three months ended September 30, 2011, as compared to 13.9% for the same period of the last fiscal year. The increase was primarily due to a decrease in the cost of direct labor as we reduced our headcount in the manufacturing segment during the first quarter of 2012. In terms of dollar amount, the gross profits in the manufacturing segment decreased by $778 to $465 for the three months ended September 30, 2011 from $1,243 for the same period of the last fiscal year primarily due to a decrease in revenue, as previously discussed.

Gross profit margin as a percentage of revenue in the testing segment decreased by 19.3% to 20.0% for the three months ended September 30, 2011, as compared to 39.3% for the same period of the last fiscal year. The decrease was primarily due to a decrease in testing volume in the Malaysia and Thailand operations, as discussed earlier. Significant portions of our cost of goods sold are fixed in the testing segment. Thus, as the demand of services and factory utilization decreases, the fixed costs are spread over the decreased output, which results in a decreased gross profit margin. In terms of dollar amount, the gross profit in the testing segment decreased by $707 to $657 for the three months ended September 30, 2011 from $1,364 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the distribution segment decreased by 9.3% to 13.8% for the three months ended September 30, 2011, as compared to 23.1% for the same period of the last fiscal year. The gross profit margin of the distribution segment was not only affected by the market price of our products, but also our product mix, which changes frequently as a result of changes in market demand. In the first quarter fiscal 2012, we sold more products with a lower profit margin as compared to the same period of last fiscal year. In terms of dollar amount, gross profit in the distribution segment for the three months ended September 30, 2011 was $44, a decrease of $9 from $53 for the same period of the last fiscal year, primarily due to a decrease in revenue and lower gross margin.

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Gross profit margin as a percentage of revenue in the real estate segment was 44.7% for the three months ended September 30, 2011, representing a decrease of 28.6% from 73.3% for the same period in the last fiscal year. In terms of dollar amount, gross profit in the real estate segment for the three months ended September 30, 2011 was $21, a decrease of $116 from $137 in the same period of the last fiscal year. The decrease in the gross profit margin as a percentage of revenue in the real estate segment was because the investment in property development reached maturity by the end of the second quarter of fiscal 2011. Accordingly, there has been no investment income since the third quarter of fiscal year 2011, which had a lower direct cost. Rental income was $47 and $187 for the three months ended September 30, 2011 and September 30, 2010, respectively.

Gross profit margin as a percentage of revenue in the fabrication services segment was 9.1% for the three months ended September 30, 2011, an improvement of 39.4% as compared to a negative margin of 30.3% for the same period of the last fiscal year. In terms of dollar amount, gross profit in the fabrication services segment for the three months ended September 30, 2011 was $213, an improvement of $263, from negative $50 in the same period of the last fiscal year, which was primarily due to an increase in revenue of $2,180 to $2,345 for the three months ended September 30, 2011, as compared to $165 for the same period of last fiscal year. The cost of sales in this segment mainly consisted of rental expenses, depreciation expenses, cost of direct labor and consumables. Since the lease was extended for three more years towards the end of the first quarter of fiscal 2011, the depreciation of the leasehold improvement was spread across a longer period based on the renewed lease. Hence the depreciation . . .

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