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| TRT > SEC Filings for TRT > Form 10-K on 9-Oct-2012 | All Recent SEC Filings |
9-Oct-2012
Annual Report
The following discussion and analysis should be read in conjunction with our disclaimer on "Forward-Looking Statements," "Item 1. Business," and Consolidated Financial Statements, the notes to those statements and other financial information contained elsewhere in this Annual Report on Form 10-K.
Trio-Tech International operates in five distinct segments: manufacturing, testing services, distribution, real estate and fabrication. In fiscal year 2012, revenue from our manufacturing, testing services, distribution, real estate and fabrication services segments represented 49.6%, 37.8%, 3.1%, 0.4% and 9.1% of our revenue, respectively, compared to 54.9%, 36.9%, 2.7%, 3.0% and 2.5%, respectively, in fiscal year 2011.
Semi-conductor testing and manufacturing of test equipments is our core business. 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.
We plan to continue expanding our market share in the semiconductor testing segment. In the third quarter of 2011, Trio-Tech (Tianjin) Co. Ltd. ("TTTJ"), located in the Xiqing Economic Development Area International Industrial Park in Tianjin City, People's Republic of China, commenced operating activities. It provides testing services for one of our major customers. During fiscal year 2012, TTTJ obtained the ISO/TS 16949: 2009 certification, which enables this operation to provide burn-in services to the automotive industry.
Our testing operation in Malaysia substantially completed its expansion in the fourth quarter of fiscal year 2012, which was commenced in the fourth quarter of fiscal 2010 with the objective to meet the increasing demands of one of our major customers.
Our Shanghai operation, as a component of the testing services segment, suffered continued operating losses from fiscal year 2007 to fiscal year 2010 and the cash flow was minimal for those years. In the fourth quarter of 2010, we established a restructuring plan to close the testing operation in Shanghai, China. Based on the restructuring plan and in accordance with ASC Topic 205-20, Presentation of Financial Statement of Discontinued Operations, we presented the operation results from Shanghai as a discontinued operation, from fiscal year 2011. In management's discussion and analysis of financial condition and results of operation below, the amounts used in comparison have been reclassified to exclude the amounts from discontinued operations, which have been discussed as a separate line item listed on the consolidated statements of operations and comprehensive income.
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.
Our real estate segment generates investment income from the investments made and rental revenue from real estate property purchased in Chongqing, China.
During the second quarter of fiscal 2011, the Company entered into a joint-venture agreement with JiaSheng to develop real estate projects in China. Prior to the first quarter of fiscal 2012, the Company had 10% ownership in this China affiliate, and this investment was recorded on the equity basis. Pursuant to the joint-venture agreement, the Company has the option of purchasing 15% of investment from its joint venture within a period of 24 months from the commencement of the joint venture. In the first quarter of fiscal 2012, due to the resignation of two directors representing Trio-Tech on the board of the joint venture, we concluded that we could no longer exert significant influence on the operating and financial activities of the joint venture. Therefore, we began accounting for this investment using cost method effective September 29, 2011. The carrying value of this investment at June 30, 2012 was $765, which approximates our pro rate share of the underlying value of the joint venture. Based on ASC Topic 323 - Investment - Other, Cost Method Investments, the existing cost, after evaluating for impairment, the carrying value of the investment has been considered to be the cost of investment. The Company disposed the option of purchasing 15% of the investment from its joint venture during September 2011 for RMB 500 or approximately $79.
In fiscal 2010, the TTCQ entered into a Memorandum Agreement with Chongqing Fu Li Real Estate Development Co. Ltd. ("Fu Li Real Estate"), to purchase two commercial properties totaling 311.99 square meters ("office space") located in Jiang Bei District Chongqing. The total purchase price committed and paid was RMB 4,025, or approximately $633 based on the exchange rate as of June 30, 2012. The construction has been completed and the property was handed over to TTCQ during April 2012 and the documentation of the change of title is in process. We rented this property to a third-party during the fourth quarter of fiscal 2012 and generated a rental income of RMB 21, or approximately $3, for the fiscal year 2012.
Our fabrication services segment, SHI International Pte. Ltd ("SHI"), provides fabrication of large and complex offshore structures employed to process oil and gas and for temporary storage of the oil prior to shipment, and related services for the offshore oil and gas industries. This segment suffered continued operating losses since it commenced operation in fiscal year 2009. The scale of this operation is not adequate to cover its fixed costs which mainly consist of yard rental cost and direct labor cost. Subsequent to the year end, management determined to terminate the lease of the its fabrication and, pursuant to the terms of the lease, gave the landlord the notice of termination. Going forward, management intends to outsource fabrication project to a service providers who have the facilities to undertake such projects. In the fourth quarter of fiscal year 2012, management performed an assessment of the carrying value of this operation's fixed assets. As we expect very little future cash flow from the assets in this segment, the Company recorded an impairment loss of $216 on these assets based on its examination of future undiscounted cash flows.
Subsequent Event
In October 2012, PT SHI Indonesia a 100% owned subsidiary of SHI International Pte. Ltd. in which Trio-Tech International Pte. Ltd. holds a 55% equity interest, has communicated the notice of termination of the lease of the fabrication yard in Batam Indonesia. Going forward, fabrication projects contracted by SHI International Pte. Ltd. will be subcontracted to service providers who have the facility to undertake such projects.
Fiscal 2012 Highlights (in Thousands)
· Total revenue decreased by $1,324, or 3.7 %, to $34,211 in fiscal 2012 compared to $35,535 in fiscal 2011.
· Manufacturing segment revenue decreased by $2,537, or 13%, to $16,955 in fiscal 2012 compared to $19,492 in fiscal 2011.
· Testing services segment revenue decreased by $204, or 1.6%, to $12,922 in fiscal 2012 compared to $13,126 in fiscal 2011.
· Distribution segment revenue increased by $120, or 12.6%, to $1,075 in fiscal 2012 compared to $955 in fiscal 2011.
· Real estate segment revenue decreased by $914, or 86.1%, to $148 in fiscal 2012 compared to $1,062 in fiscal 2011.
· Fabrication services segment revenue increased by $2,211, or 245.7%, to $3,111 in fiscal 2012 compared to $900 in fiscal 2011.
· Gross profit margins decreased by 10.0% to 13.4% in fiscal 2012 compared to 23.4% in fiscal 2011.
· General and administrative expenses decreased by $482, or 5.9%, to $7,737 in fiscal 2012 compared to $8,219 in fiscal 2011.
· Impairment loss increased by $144 to $216 in fiscal 2012 compared to $72 in fiscal 2011.
· Research and Development expenses increased by $45, or 18%, to $295 in fiscal 2012 from $250 in fiscal 2011.
· Stock option expense decreased by $426 to $204 in fiscal 2012 as compared to $630 in fiscal 2011.
· Loss from operations increased by $ 3,714 to $4,300 in fiscal 2012 compared to $586 in fiscal 2011.
· Losses from continuing operations before income tax increased by $4,298, to $4,425 in fiscal 2012 compared to $127 in fiscal 2011.
· Total assets increased by $1,694 or 4.7%, to $38,050 as of June 30, 2012 compared to $36,356 as of June 30, 2011.
· Working capital decreased by $2,060, or 28.4%, to $ 5,196 as of June 30, 2012 compared to $7,256 as of June 30, 2011.
The highlights above are intended to identify some of our most significant events and transactions during our fiscal year 2012. 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 discussion in this Item 7 and with our consolidated financial statements and footnotes accompanying this Annual Report.
General Financial Information
During the fiscal year ended June 30, 2012, total assets increased by $ 1,694 from $36,356 in fiscal 2011 to $38,050 in fiscal 2012. The increase was primarily due to an increase in short term deposits, trade accounts receivables, other receivables, prepaid expenses and investment property which was partially offset by a decrease in cash and cash equivalents, inventory, property, plant and equipment, restricted term deposits and other assets.
Cash and cash equivalents at June 30, 2012 were $1,572, a decrease of $1,539, or 49.5%, compared to a total of $3,111 as of June 30, 2011. The decrease in cash was primarily due to capital expenditure in cash of $1,603 during fiscal year 2012 primarily for the purchase of machinery and equipment for the testing services segment in the Tianjin and Malaysia operation.
Trade accounts receivables at June 30, 2012 were $11,311, representing an increase of $4,499, or 66.0 %, compared to $6,812 at June 30, 2011. The increase was attributable to an increase in sales in Singapore operations mainly in the fourth quarter of fiscal 2012 as a result of an increase in sale of equipment and systems used in the testing of semiconductors from one of our major customers. Total sales from all of the segments in fiscal 2012 were $34,211, a decrease of $1,324, or 3.7%, compared to total sales of $35,535 in fiscal 2011. The turnover of accounts receivables was 95 days for fiscal 2012, a decrease of 2 days compared to 97 days for fiscal 2011.
Other receivables at June 30, 2012 were $962, an increase of $653 from $309 at June 30, 2011. Such increase was mainly due to an increase in the goods and services tax ("GST") refund claimable from Singapore by the Singapore operations in fiscal year 2012 as a result of increased purchases to satisfy the expected orders from our customers. Singapore's GST is a broad-based consumption tax levied on import of goods, as well as nearly all supplies of goods and services. GST is refunded for business purchases and expenses. The backlog in our manufacturing segment was $4,321 at June 30, 2012, representing an increase of $2,242 from $2,079 at June 30, 2011. Singapore's GST is a broad-based consumption tax levied on import of goods, as well as nearly all supplies of goods and services, deferred revenue in the two projects of the fabrication segment in Indonesia and advance payments to suppliers in the Singapore operations.
Inventory in our manufacturing and distribution segments at June 30, 2012 was $2,324, a decrease of $106, or 4.4%, compared to $2,430 at June 30, 2011. The turnover of inventory was 56 days for fiscal 2012, reflecting a decrease of 5 days compared with a turnover rate of 61 days for fiscal 2011. The increase in the inventory turnover rate and the decrease in inventory balance at June 30, 2012 was due to higher usage of inventory to meet the increase in revenue in our manufacturing segment in the third and fourth quarter of fiscal 2012 as compared to the same period of last fiscal year.
Prepaid expenses at June 30, 2012 were $406, an increase of $58 from $348 at June 30, 2011. The increase was primarily due to increased prepayments to suppliers by our Tianjin operation and Malaysia operation during the normal course of business.
Loan receivables from investment in property development projects at June 30, 2012 were $1,101, an increase of $18 from $1,083 as at June 30, 2011. The increase in loan receivables from property development projects was primarily due to currency translation effect. The loan receivable from property development projects was RMB 5,000 and RMB 2,000, or approximately $787 and $314 based on the exchange rate published by the Monetary Authority of Singapore as of June 30, 2012, from JiaSheng and JiangHuai, respectively. The investment was classified as a loan based on ASC Topic 310-10-25 Receivables.
Investment properties in China at June 30, 2012 were $1,815, an increase of $577, from $1,238 as at June 30, 2011. The increase was due to a reclassification of balance from long-term deposits to investment account relating to a transfer of property from Fu Li Real Estate to our China subsidiary, Trio Tech Chongqing.
Property, plant and equipment at June 30, 2012 were $13,193, a decrease of $1,758, compared to $14,951 at June 30, 2011. The decrease was mainly due to depreciation charged during fiscal year 2012 during the normal course of business. In addition, there was an impairment loss of $216 arising from our fabrication segment, as discussed in this 10-K report. Depreciation for property, plant and equipment was $2,606 and $2,511 for fiscal years 2012 and 2011, respectively.
Other assets at June 30, 2012 were $776, a decrease of $636, compared to $1,412 as at June 30, 2011. The decrease was mainly due to a decrease in down-payment for fixed assets, which was partially offset by the increase in rental deposit in Singapore operations. An amount of $673 was transferred from down payment to investment property in China and in property, plant and equipment as the assets were put to use during fiscal year 2012.
Restricted cash at June 30, 2012 decreased by $117 to $3,445, compared to $3,562 at June 30, 2011. The decrease was mainly due to the currency translation effect.
Total liabilities at June 30, 2012 were $17,494, an increase of $6,115, compared to $11,379 at June 30, 2011.
The total of our lines of credit at June 30, 2012 was $3,605, representing an increase of $2,272, compared to $1,333 at June 30, 2011. We increased utilization of the lines of credit in fiscal year 2012 to finance the working capital needs of the Singapore, Indonesia and Tianjin operations. These lines of credit are collateralized by restricted deposits held in a financial institution in Singapore.
Accounts payable at June 30, 2012 was $4,834, an increase of $2,960, compared to $1,874 at June 30, 2011. The increase in accounts payable was due to an increase in material purchases during the fourth quarter of fiscal year 2012 in the Singapore operation as a result of a major order from one of the customers.
Accrued expenses at June 30, 2012 were $3,011, a decrease of $168, compared to $3,179 at June 30, 2011. The decrease in accrued expenses was mainly due to a decrease in provision for bonus as a result of the current year performance. There was no need for additional provision to be made and a decrease in payroll related accruals.
As of June 30, 2012, the outstanding bank loans payable was $4,139, with interest rates ranging from 4.55% to 5.10% per annum compared to the bank loans payable of $2,915 with interest rates of 4.55% per annum as of June 30, 2011. During the second quarter of fiscal 2012 we established a line of credit with a financial institution primarily for the working capital needs of our Singapore operation. These loans were collateralized by property, plant and equipment.
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, impairment of property, plant and equipment and investment property 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, we extend unsecured credit to our customers in all segments. Typically, credit terms require payment to be made between 30 to 90 days from the date of the sale. We generally do not require collateral from customers. We maintain our cash accounts at credit worthy financial institutions.
The Company's management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. 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, 2012.
Inventory Valuation
Inventories of our manufacturing and distribution segments 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 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.
Property, Plant and Equipment & Investment Property
Property, plant and equipment and investment property in China are stated at
cost, less accumulated depreciation and amortization. Depreciation is provided
for over the estimated useful lives of the assets using the straight-line
method. Amortization of leasehold improvements is provided for over the lease
terms or the estimated useful lives of the assets, whichever is shorter, using
the straight-line method.
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and improvements to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in the statement of operations.
Foreign Currency Translation and Transactions
The U.S. dollar is the functional currency of the U.S. parent company. The Singapore dollar, the national currency of Singapore, is the primary currency of the economic environment in which the operations in Singapore are conducted. We also operate in Malaysia, Thailand, China and Indonesia, of which the Malaysian ringgit, Thai baht, Chinese remimbi and Indonesian rupiah, respectively, are the national currencies. The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes.
The Company translates assets and liabilities of its subsidiaries outside the U.S. into U.S. dollars using the rate of exchange prevailing at the balance sheet date, and the statement of operations is measured using average rates in effect for the reporting period. Adjustments resulting from the translation of the subsidiaries' financial statements from foreign currencies into U.S. dollars are recorded in shareholders' equity as part of accumulated comprehensive loss - translation adjustments. Gains or losses resulting from transactions denominated in currencies other than functional currencies of the Company's subsidiaries are reflected in income for the reporting period.
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 from product sales is also recorded in accordance with the provisions of ASC Topic 605 (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 2012 and 2011, the installation revenues generated in connection with product sales were immaterial and were included in the product sales revenue line on the consolidated statements of operations.
Revenue derived from the fabrication services segment, which fabricates large and complex structures employed to process oil and gas and for temporary storage, is recognized from long-term, fixed-price contracts using the percentage-of-completion method of accounting: (1) Input measures - measured by multiplying the estimated total contract value by the ratio of actual contract costs incurred to date to the estimated total contract costs, and (2) Output measures - measured based on completion of contract of milestones. The Company makes significant estimates involving its usage of percentage-of-completion accounting to recognize contract revenues. The Company periodically reviews contracts in process for estimates-to-completion, and revises estimated gross profit accordingly. While the Company believes its estimated gross profit on contracts in process is reasonable, unforeseen events and changes in circumstances can take place in a subsequent accounting period that may cause the Company to revise its estimated gross profit on one or more of its contracts in process. Accordingly, the ultimate gross profit realized upon completion of such contracts can vary significantly from estimated amounts between accounting periods.
In the real estate segment: (1) revenue from property development is earned and recognized on the earlier of the dates when the underlying property is sold or upon the maturity of the agreement. If this amount is uncollectible, the agreement empowers the repossession of the property, and (2) rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the tenant assumes possession of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.
Joint Venture
The Company analyzes its investments in joint ventures to determine if the joint venture is a variable interest entity (a "VIE") and would require consolidation. The Company (a) evaluates the sufficiency of the total equity at risk, (b) reviews the voting rights and decision-making authority of the equity investment holders as a group, and whether there are any guaranteed returns, protection against losses, or capping of residual returns within the group and (c) establishes whether activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination. The Company would consolidate a venture that is determined to be a VIE if it was the primary beneficiary. Beginning January 1, 2010, a new accounting standard became effective and changed the method by which the primary beneficiary of a VIE is determined a primarily qualitative approach whereby the variable interest holder, if any, has the power to direct the VIE's most significant activities and is the primary beneficiary. To the extent that the joint venture does not qualify as VIE, the Company further assesses the existence of a controlling financial interest under a voting interest model to determine whether the venture should be consolidated.
Equity Method
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