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TRIT > SEC Filings for TRIT > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for TRI-TECH HOLDING, INC.

Form 10-Q for TRI-TECH HOLDING, INC.


15-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The actual results could differ materially from those described herein.

Company Overview

Tri-Tech Holding Inc. (the "Company" or "we") is a leading provider of integrated solutions, products and technologies to water resource management and environmental protection industries. The Company has successfullyimplemented projects throughout the world, including China, India, the Middle East and North America..

The Company aims to provide tailored solutions to complex environmental challenges faced by both public and private sectors in China and beyond. Its clientele consists of a combination of government agencies, municipalities, and industrial entities.

The Company's principal executive offices are located at the 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The telephone number at this address is +86 (10) 5732-3666. Its ordinary shares are traded on the NASDAQ Capital Market under the symbol "TRIT." The Company's website, www.tri-tech.cn, provides a variety of information including current, quarterly and annual reports.

Principal Products, Services and Their Markets

The Company operates in three segments: (i) Water, Wastewater Treatment and Municipal Infrastructure ("WWTM"), (ii) Water Resource Management System and Engineering Services ("WRME"), and (iii) Industrial Pollution Control and Safety ("IPCS"). Through its subsidiaries, variable interest entities ("VIE") and joint venture partnership, the Company:

Provides proprietary and third-party products, integrated systems and other services forthe purposes of water resource monitoring, development, utilization and protection;

Designs water works and customized facilities for reclaiming and reusing water and sewage treatment for China's municipalities;

Designs systems that track natural waterway levels for flood and drought control, monitor groundwater quality, manage water resources and irrigation systems; and

Provides systems for volatile organic compound ("VOC") abatement, odor control, water and wastewater treatment, water recycling facilities design, project engineering, procurement and construction for petroleum refineries, petrochemical and power plants as well as safe and clean production technologies for oil and gas field exploration and pipelines.

Business Segments

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure ("WWTM")

WWTM focuses on municipal water supply and distribution, wastewater treatment and gray water recycling, through the procurement and construction of proprietary build-transfer-operation ("BTO") processing equipment and processing control systems. The Company also provides municipal facilities engineering and operation management services for related infrastructure construction projects.

Segment 2: Water Resource Management System and Engineering Service ("WRME")

WRME involves projects relating to water resource management, flood control and forecasting, irrigation systems, and similar ventures through system integration of proprietary and third-party hardware and software products. For government agencies, the Company designs systems that track natural waterway levels for drought control, monitor groundwater quality, and generally manage water resources and irrigation systems.

Segment 3: Industrial Pollution Control and Safety ("IPCS")

Equipped with a variety of technologies and products, such as zero liquid discharge ("ZLD"),multi-effect evaporation, multi-flash evaporation, as well as emissions control, IPCS focuses on industrial water, wastewater treatment and seawater desalination for industrial production and pollution control in the petroleum and power industries. Projects in this segment include traditional Engineering Procurement Construction ("EPC") of equipment and modules, and the operation and maintenance of industrial wastewater treatment plants. For petroleum refineries, petrochemical factories and power plants, the Company provides systematic solutions for volatile organic compound abatement, odor control, water and wastewater treatment, and water recycling. The Company also provides safe and clean production technologies for oil and gas field exploration and pipeline transportation.

Critical Accounting Policies

Estimates and Assumptions

The preparation of financial statements requires management to make numerous estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have financial impacts on recognition and disclosure of assets, liabilities, equity, revenues and expenses. However, we believe that these estimates used in preparing our financial statements are based on our best professional judgment, and are reasonable and prudent.

The most complex and subjective estimates and assumptions that present the greatest amount of uncertainty relate to the recognition of revenue under the percentage of completion method recording, business combination, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income tax. We evaluate all of these estimates and judgments on an on-going basis.Below are the most critical estimates and assumptions we make in preparing the consolidated financial statements.

Revenue Recognition

Our revenues consist primarily of three categories: (i) System Integration, (ii) Hardware Product Sales, and (iii) Software Product Sales. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered, or services rendered, and collectability ensured.

For system integration, sales contracts are structured with fixed price. The contract periods range from two months to approximately three years in length. We recognize revenue of these contracts following the percentage-of-completion method, measured by different stages in accordance with ASC 605-35, "Construction-Type and Production-Type Contracts." Only if the actual implementation status meets the established stages of completion will we recognize the relevant portion of the revenue. There are four major stages for the system integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance.

For hardware product sales, we recognize revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, "Revenue Recognition." We are not obligated for any repurchase or return of the goods.

We also sell software products. These software product sales do not include any additional services such as maintenance or technical support. We recognize revenue under ASC 985-605, "Software Revenue Recognition" according to the acceptance of delivery revenue recognition method. At the end of each reporting period, we recognize the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.

If unapproved change orders or claims occur in the future, in accounting for contracts, we follow paragraphs 30 and 31 of ASC 605-35-25, "Construction-Type and Production-Type Contracts." We recognize revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. To date, we have not experienced any unapproved change orders in our ordinary business operation.

We present all sales revenue net of VAT. Our products sold in China are generally subject to Chinese VAT of 17% of the sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT payable may be offset by VAT paid by us on purchased raw materials and other materials included in the cost of projects or producing the finished product.

We record revenue in excess of billings as "unbilled revenue". For revenues accounted for under this account, we expect the amounts to be collected within one year. For those with collection periods in excess of one year, we classify them under "long-term unbilled revenue" on the consolidated balance sheets.

The Company obtained several contracts with a billing cycle of over three years in the past two years. The discounted revenues from those contracts are recorded and the discount rate is the 3-year nominal interest rate of 5.4%, set by the People's Bank of China, China's central bank. For the contract where a discount rate is specified, such specified rate is applied. These projects are funded by local governments with central government project appropriations, so the Company does not ascribe any collection risk on such projects.

Accounts Receivable

Given the characteristics of the clientele, we are confident that our accounts receivable are of good quality even though our accounts receivable days are relatively long compared with companies in other industries. Our finance team is constantly monitoring the accounts receivable quality and the process and assumptions used in bad debt provision. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs.

We recognize accounts receivable initially at fair value less an allowance for doubtful accounts. We make an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible. We maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time periods. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customer's historical payment history and current credit-worthiness and current economic trends. The amount of the provision, if any, is recognized in the consolidated statement of operations within "general and administrative expenses."

While the collection period for some of the long-term contracts, such as the build-and-transfer projects, can be as long as two years, given that our clients are primarily government agencies supported by provincial budgets and large state-owned enterprises with sufficient liquidity, we believe the collectability of accounts receivable is secure, long-term or short-term.

Impairment of Assets and Intangible Assets

We monitor the carrying value of our long-lived assets for potential impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. To the extent the estimated undiscounted future cash inflows attributable to the asset, less estimated undiscounted future cash outflows, are less than the carrying amount, we recognize an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment indicator is noted in the prior or current periods.

We evaluate the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Estimating future cash flows require significant judgment, and projections may vary from the cash flows eventually realized which could impact our ability to accurately assess whether an asset has been impaired.

For goodwill, we assess for impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. We use the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. We discount the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is the most reasonable because it provides a fair value estimate based upon the operating segments' expected long-term performance considering the economic and market conditions that generally affect our business.

Taxation

Pursuant to the new EIT Law and supplementary regulations, only high-tech companies that have been re-certified as such under the new criteria are granted the preferential enterprise income tax rate of 15%. TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011, after which the EIT rate became 15% as TTB continues to qualify as a high-tech company.

For revenues generated from those parts of our software solutions which are recognized by and registered with government authorities and meet government authorities' requirements to be treated as software products, we are entitled to receive a refund of 14% on the total VAT paid at a rate of 17%. Revenues from software products other than the above are subject to full VAT at 17%. In addition, we are currently exempted from sales tax for revenues generated from development and transfer of tailor-made software solutions for clients. Further, revenues from consulting services are subject to a 5% sales tax. Qualified to issue VAT invoices, we need to maintain a certain amount of revenue that is taxable by VAT. As such, we may have to refuse some of the tax exemption benefits in our tailor-made software development business and pay VAT for those parts of the revenue in order to maintain minimum VAT revenue thresholds. This practice may cease to apply if more of the software products become recognized and registered as software products in the PRC.

PRC Value-Added Tax

Our products sold in China are generally subject to a Chinese VAT at a rate of 17%. Proprietary software sales are subject to business tax of 5%. The VAT may be offset by VAT we pay on raw materials and other materials included in the cost of producing our finished product. Accrued VAT payables from Yanyu, Tranhold and BSST are subject to urban maintenance and construction tax and additional education fees, which are accounted for as 0.5% of the total sales value.

PRC Business Tax

Part of revenues from services provided by TTB, Yanyu, Tranhold and BSST are mostly subject to a Chinese business tax of 5% and surtax of 0.5%. One of the projects in Tianjin is subject to a 3% business tax. We pay business tax on gross revenues generated from our shipping agency services minus the costs of services, which are paid on behalf of our customers. The Business tax was terminated in some provinces or categories of China from September,2012, some the Company's revenues per subjected to Business Tax will subject to a 6% VAT.

Recently Issued Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's (consolidated) financial position and results of operations.

Revenues by Segment

In the three and nine months ended September 30, 2012, Segment 1 contributed 35.4% and 38.4%, respectively of the total revenues; Segment 2 contributed 36.7% and 35.3%, respectively; and Segment 3 contributed the remaining 27.9% and 26.3%, respectively.

                                                     Three Months Ended September 30, 2012
              Segment 1:          %         Segment 2:          %         Segment 3:          %            Total:            %
System
Integration   $ 6,263,243          97.4 %   $ 5,244,660          78.7 %   $ 4,873,996          96.4 %   $ 16,381,899          90.3 %
Hardware
Products      $   167,694           2.6 %   $ 1,415,778          21.3 %   $   181,440           3.6 %   $  1,764,912           9.7 %
Total
Revenues      $ 6,430,937          35.4 %   $ 6,660,438          36.7 %   $ 5,055,436          27.9 %   $ 18,146,811         100.0 %

The following table provides revenue percentage for each segment and category for the nine months ended September 30, 2012.

                                                       Nine Months Ended September 30, 2012
               Segment 1:          %          Segment 2:          %          Segment 3:          %            Total:            %
System
Integration   $ 23,024,644          99.3 %   $ 18,639,808          87.3 %   $ 14,991,879          94.5 %   $ 56,656,331          93.8 %
Hardware
Products      $    167,694           0.7 %   $  2,711,220          12.7 %   $    873,412           5.5 %   $  3,752,326           6.2 %
Total
Revenues      $ 23,192,338          38.4 %   $ 21,351,028          35.3 %   $ 15,865,291          26.3 %   $ 60,408,657         100.0 %

Backlog and Pipeline for 2012

Backlog represents the uncompleted projects we have in the current period. The following table provides backlog by segment as of September 30, 2012 and June 30, 2012, respectively. The percentage of change reflects both conversion of backlog to revenue and replacement of completed projects with new projects.

                            September 30, 2012                 June 30, 2012
                                        % of Total                       % of Total
                            $            Backlog             $            Backlog          % Change
                              38.8                             41.9
Segment 1:                 million             55.1 %       million             52.9 %           (7.4 )%
                               7.9                             12.2
Segment 2:                 million             11.2 %       million             15.4 %          (35.2 )%
                              23.7                             25.1
Segment 3:                 million             33.7 %       million             31.7 %           (5.6 )%
                              70.4                             79.2
Total                      million            100.0 %       million            100.0 %          (11.1 )%

Pipeline represents the values of projects we have been actively pursuing. The pipeline by the end of September 30, 2012 was $86.7 million in Segment 1, $5.2 million in Segment 2 and $47.1 million in Segment 3.

Secured projects move from pipeline into backlog and backlog to revenue based on percentage of completion, sometimes simultaneously.

The Company's backlog represents the amount of contract work remaining to be completed, that is, revenues from existing contracts and work in progress expected to be recognized in current period, based on the assumption that these projects will be completed on time according to the project schedules.

Operational Results Overview and Business Trends



The operational result overview and business trends are as follows, contract
amounts represent the total amount of signed contracts in certain quarters.



                                                  Operational Result
                             Three Months Ended    Three Months Ended    Three Months Ended
                               March 31, 2012        June 30, 2012       September 30, 2012
Segment 1 Contract Amount $           1,464,966 $           3,113,749 $            3,233,149
          Revenue         $           8,406,973 $           8,354,428 $            6,430,937
          Cash received   $           2,553,003 $          12,392,186 $            7,972,865
Segment 2 Contract Amount $          13,219,454 $          10,426,373 $            3,682,382
          Revenue         $           6,254,590 $           8,436,000 $            6,660,438
          Cash received   $           3,111,764 $           9,047,913 $            8,376,037
Segment 3 Contract Amount $           7,298,036 $           6,994,743 $            5,709,685
          Revenue         $           4,559,749 $           6,250,106 $            5,055,436
          Cash received   $           1,567,111 $           3,853,130 $            2,042,494

Strategies for Growth

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

Strengthened by our core compentence as an EPC contractor, we will continue seeking BTO and BOT opportunities with favorable payment terms and well-managed risk factors for municipal water/wastewater treatment and water supply, a tendency that has been revealing in the Chinese water market.

Segment 2: Water Resources Management Systems and Engineering Services

Under favorable governmental policies, we will focus on expanding market share in flash flood and river hydrologic monitoring in China and upgrading water resources management programs. Integrated with our technical competence on water informatization, water distribution management in irrigation is one of our future growth goals.

Segment 3: Industrial Pollution Control and Safety

Supported with our R&D and manufacturing center in Baoding, we will develop our core technical competences in thermal evaporation and membrane technologies, such as mechanical vapor compression (MVC) and multi-effect distillation (MED), for the application in industrial wastewater zero liquid discharge (ZLD) and seawater desalination. Our VOC treatment services are strengthening our auxiliary value in this segment.

R&D and Manufacturing Facility

This facility is an essential part of our Company strategy to facilitate the business transition and sustainable development, in which we will centralize the production of common parts for each segment while developing core technologies in thermal evaporators and membrane for practical utilization.

Funding for Continuous Growth

We are actively working with local Chinese banks for possible financial support. In August 2012, we secured a credit line of $6.3 million fromChina Merchants Bank, $2.4 million of which was used in quarter three to fund our payments to suppliers. The remaining $3.9 million is to be used for project guarantees. The credit lines are to increase our financial flexibility and to optimize the efficiency of our capital structure.

In addition to the lines of credit, we worked with Nanjing Bank and issued a corporate bond of $7.89 million in September 2012, adding a new avenue to fuel our growth.

Principal Suppliers

As independent as we are at selecting general suppliers, we are planning to further develop strategic partnerships with suppliers who provide the Company with key components that contribute to a large portion of our costs.

Customers and Marketing/Distribution Methods

Our top five customers collectively represented approximately 45.9% and 72.7% of our total revenue for the three months ended September 30, 2012 and 2011, respectively. Although we are dependent on our large clients to a certain degree, unlike other commercial businesses, collectability of accounts receivables is relatively secure because our client base consists primarily of government agencies or large state-owned enterprises.

Government Regulation and Approval

In August 2012, the Company, through one of its subsidiaries, received approvals from the Reserve Bank of India to establish project offices in Buxar, Begusarai and Hajipur in Bihar, India.

Employees

As of September 30, 2012, we had 474 total employees of whom 202 (42.6%) were in technical support and project management, 109 (23.0%) were in sales, 13 (2.7%) were in research and development, 47 (10.0%) were in finance, and the remaining
103 (21.7%) were in general and administrative functions.

According to the Company's financial performance and economic downturn situations, the management is very closely examining and evaluating the manpower vs. workload, and exploring possible measures to cut the expenses, including streamlining the workforce if necessary.

Results of Operations

Overview for the Three and Nine Months Ended September 30, 2012 and 2011

Our operating revenues are primarily derived from system design and integration, hardware product design and manufacturing and sales. Our second quarter results reflected stable growth.

Highlights of our financial results during the three months ended September 30, 2012 include:

Total revenues decreased to $18,146,811 in the third quarter of 2012, a decrease of 24.4%, from $23,988,988 in the same period of 2011. This decrease is primarily attributable to the progress of Ordos and India projects. The Ordos project had approached the end, while the India projects were slow to receive Indian regulatory approvals and had less progress than expected.

Total cost of revenues decreased by $4,428,708 from $17,910,439 in the third quarter of 2011 to $13,481,731 in the third quarter of 2012. This decrease is due to the decrease of related revenue.

Total operating expenses were $4,946,707 for the third quarter of 2012, an increase of 68.0%, compared with the amount in the same period of 2011. Having a big amount of pipeline, we expanded the headcount of sales and administration in quarter three, actively pursuing new projects. This expansion caused the increase of operating expenses.

Operating loss was $281,627 in the third quarter of 2012, compared with operating income of $3,134,666 in the third quarter of 2011, representing 1.6% and 13.1% of total revenues in the third quarter of 2012 and 2011, respectively. The decrease was due to the decreased revenue and increased expenses mentioned above.

Net loss attributable to TRIT was $677,022 for the third quarter of 2012.

The following are the operating results for the three months ended September 30, 2012 and 2011:

                               Three Months                     Three Months
                              Ended September      % of        Ended September      % of                         Change
                               30, 2012 ($)        Sales        30, 2011 ($)        Sales       Change ($)        (%)
Revenue                            18,146,811       100.0 %         23,988,988       100.0 %     (5,842,177 )      (24.4 )%
Cost of Revenues                   13,481,731        74.3 %         17,910,439        74.7 %     (4,428,708 )      (24.7 )%
Selling and Marketing
Expenses                            1,031,607         5.7 %            519,451         2.2 %        512,156         98.6 %
General and Administrative
Expenses                            3,908,026        21.5 %          2,393,836        10.0 %      1,514,190         63.3 %
. . .
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