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TRT > SEC Filings for TRT > Form 10-Q on 19-Nov-2012All Recent SEC Filings

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Form 10-Q for TRIO TECH INTERNATIONAL


19-Nov-2012

Quarterly Report


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

Overview

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, 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, 2012.

Trio-Tech International ("TTI") 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.

The Company is a provider of environmental and reliability test equipment and services to the semiconductor industry. Our customers rely on us to verify that their semiconductor components meet or exceed the rigorous reliability standards demanded for aerospace, communications and other electronics products.

TTI generates more than 98% of its revenue from its three core business segments in the test and measurement industry, i.e. manufacturing of test equipment, testing services and distribution of test equipment. In 2007, we added a real estate revenue segment and in 2009, a fabrication segment when we ventured into providing fabrication service for oil and gas equipment industry. Our fabrication 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. In the first quarter of fiscal year 2013, management determined to terminate the lease of its fabrication yard in Batam, Indonesia and, pursuant to the terms of the lease, gave the landlord notice of termination. Management intends to outsource fabrication project to a service providers who have the facilities to undertake such fabrication projects.

Manufacturing

TTI develops and manufactures an extensive range of test equipment used in the "front end" and the "back end" manufacturing processes of semiconductors. Our equipment includes leak detectors, autoclaves, centrifuges, burn-in systems and boards, HAST testers, temperature controlled chucks, wet benches and more.

Testing

TTI provides comprehensive electrical, environmental, and burn-in testing services to semiconductor manufacturers in our testing laboratories in Southeast Asia and the United States. Our customers include both manufacturers and end-users of semiconductor and electronic components who look to us when they do not want to establish their own facilities. The independent tests are performed to industry and customer specific standards.

Distribution

In addition to our own products and services, TTI also provides an extensive range of complementary environmental and reliability test equipment from reputable manufacturers through our distribution operations. Such equipment includes temperature cycling and shock test chambers, reflow ovens, mechanical shock testers, drop testers and more.

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Real Estate

In 2007, TTI invested in real property in Chongqing, China, which generated investment income from real estate development projects and rental income from properties.

Fabrication

To mitigate concentration risks arising from industry concentration and customer concentration in our core businesses, TTI invested in a business that provides product and services to the oil and gas industry. This business operated from a yard facility in Indonesia and fabricated the steel structures, pipe spools, skid equipment packages and modules, heat transfer and process equipment. However, because the expected revenue and volume were not achieved, management decided to terminate the lease of the yard and outsource fabrication projects to a service provider who has the facilities to undertake such projects. Management intends to continue this segment of business and expects to achieve benefits to this segment through operating with lower fixed costs.

Subsequent Event

On October 2, 2012, management tendered the notice of termination of the lease rental of the fabrication yard in Batam, Indonesia. Based on the termination letter, the yard has to be vacated and handed over to the landlord by December 31, 2012.

First Quarter Fiscal 2013 Highlights

Manufacturing segment revenue increased by $2,494, or 89.1%, to $5,292 for the first quarter of fiscal 2013, compared to $2,798 for the same period in fiscal 2012.

Testing segment revenue increased by $618, or 18.8%, to $3,909 for the first quarter of fiscal 2013, compared to $3,291 for the same period in fiscal 2012.

Distribution segment revenue increased by $26, or 8.2%, to $344 for the first quarter of fiscal 2013, compared to $318 for the same period in fiscal 2012.

Real estate segment revenue decreased by $17, or 36.2%, to $30 for the first quarter of fiscal 2013, compared to $47 for the same period in fiscal 2012.

Fabrication Services segment revenue decreased by $2,173, or 92.7%, to $172 for the first quarter of fiscal 2013, compared to $2,345 for the same period in fiscal 2012.

The overall gross profit margins increased by 2.2% to 18.1% for the first quarter of fiscal 2013, from 15.9% for the same period in fiscal 2012.

Loss from operations decreased by $659, or 71.6% to $262 for the first quarter of fiscal 2013, compared to $921 for the same period in fiscal 2012.

General and administrative expenses decreased by $274 or 13.1% to $1,824 for the first quarter of fiscal 2013, from $2,098 for the same period in fiscal 2012.

Selling expenses decreased by $12 or 8.3% to $132 for the first quarter of fiscal 2013, from $144 for the same period in fiscal 2012.

Net loss for the first quarter of 2013 was $17 as compared to $804 for the same period in fiscal 2012.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the three months ended
September 30, 2012 and 2011, respectively.

Revenue Components

                          Three Months Ended
                            September 30,
                           2012         2011
Revenue:
Manufacturing              5,292        2,798
Testing Services           3,909        3,291
Distribution                 344          318
Real Estate                   30           47
Fabrication Services         172        2,345

Total                      9,747        8,799



Revenue Components

                          Three Months Ended
                            September 30,
                           2012         2011
Revenue:
Manufacturing               54.3 %       31.8 %
Testing Services            40.1         37.4
Distribution                 3.5          3.6
Real Estate                  0.3          0.5
Fabrication Services         1.8         26.7

Total                      100.0 %      100.0 %

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Revenue for the three months ended September 30, 2012 was $9,747, an increase of $948, when compared to the revenue for the same period of prior fiscal year. As a percentage, revenue increased by 10.8% for the three months ended September 30, 2012, when compared to total revenue for the same period of prior year.

Revenue into and within China, the Southeast Asia regions and other countries (except revenue into and within the United States) increased by $769, or 9.2%, to $9,161, for the three months ended September 30, 2012, as compared with $8,392 for the same period of last fiscal year.

The increase in revenue for the three months ended September 30, 2012 was primarily due to an increase in revenue in the manufacturing and distribution segments in our Singapore operation, and in the testing segment in our Malaysia and China operation but partially offset by a decrease in revenue in the testing segment in our Singapore operation, fabrication segment in the Indonesia operation, and the real estate segment in our China operation.

Revenue into and within the United States was $586 for the three months ended September 30, 2012, an increase of $179, or 44.0%, from $407 for the same period of the prior fiscal year. The increase in revenue into and with United States for the three months ended September 30, 2012 was mainly due to an increase in market demand for our products in the U.S. market as compared to the same period in fiscal 2012.

Revenue for the three months ended September 30, 2012 can be discussed within the five segments as follows:

Manufacturing Segment

Revenue in the manufacturing segment as a percentage of total revenue was 54.3% for the three months ended September 30, 2012, an increase of 22.5%, compared to 31.8% of total revenue for the same period of the last fiscal year. The absolute amount of revenue increased by $2,494 to $5,292 for the three months ended September 30, 2012 compared to $2,798 when compared to the same period of the last fiscal year.

The increase in revenue generated by the manufacturing segment for the three months ended September 30, 2012 was primarily due to an increase in orders from our major customer. The revenue in the manufacturing segment from this major customer accounted for 39.1% of our total revenue in the manufacturing segment for the three months ended September 30, 2012 as compared to 45.9% for the same period in the last fiscal year. The increase in revenue during this period from this customer was primarily due to an increase in their capital spending compared to the same period of last fiscal year.

The future revenue in our manufacturing segment will be significantly affected by the purchase and capital expenditure plans of this major customer if the customer base cannot be increased.

Testing Services Segment

Revenue in the testing segment as a percentage of total revenue was 40.1% for the three months ended September 30, 2012, an increase of 2.7% compared to 37.4% of total revenue for the same period of the last fiscal year. The absolute amount of revenue increased by $618 to $3,909 for the three months ended September 30, 2012, when compared to the same period of the last fiscal year.

The increase in revenue generated by the testing segment for the three months ended September 30, 2012 was primarily due to an increase in testing volume in our Malaysia and China operations, but partially offset by a decrease in testing volume in our Singapore operation. The increase in testing volume in our Malaysia and China operations were mainly due to an increase in orders by one of our major customers in our Malaysia and Tianjin operations and an increase in customer base in our Suzhou operation. 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 3.5% of total revenue for the three months ended September 30, 2012, a slight decrease of 0.1%, compared to 3.6% of total revenue for the same period of the last fiscal year. The absolute amount of revenue increased by $26 to $344 for the three months ended September 30, 2012, from $318 for the same period of the last fiscal year.

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Real Estate Segment

The real estate segment accounted for 0.3% of total net revenue for the three months ended September 30, 2012, a decrease of 0.2% when compared to the same period of the last fiscal year. The absolute amount of net revenue in the real estate segment decreased by $17 to $30 for the three months ended September 30, 2012 from $47 for the same period of the last fiscal year. The decrease was primarily due to a decrease in our investment income and rental income in the real estate segment for the three months ended September 30, 2012 as described below.

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

No investment income was recorded as revenue for the three months ended September 30, 2012 and 2011. Income of $65 for each of the three months ended September 30, 2012 and 2011 from certain of our property development investments was reclassified to loan receivables commencing in the third quarter of fiscal 2011 in accordance with ASC Topic 310-10-25 Receivables. Such income is included in "Other Income".

Rental income for the three months ended September 30, 2012 was RMB 191 or approximately $30, based on the average exchange rate for the period of three months ended September 30, 2012, published by the Monetary Authority of Singapore, a decrease of $17 when compared to RMB 304 or approximately $47, for the same period in the last fiscal year. The decrease was primarily because one of the rental contracts reached maturity in January 2012, resulting in less rental income for the third quarter of fiscal 2012. A negotiation for the new rental contract is in process as at the date of this report.

"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 10.0% interest. Prior to the first quarter of fiscal 2012, the investment in this China affiliate was recorded on the equity basis. In the first quarter of fiscal 2012, 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 September 30, 2012 was $773, which approximates our pro rata 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 of its option to purchase 15% of the investment from this joint venture during September 2011 for RMB 500 or approximately $79.

Fabrication Services Segment

As a percentage of total revenue, the revenue generated by the fabrication services segment accounted for 1.8% of total revenue for the three months ended September 30, 2012, as compared to 26.7% of total revenue for the same period of last fiscal year. The absolute amount of revenue was $172 for the three months ended September 30, 2012, a decrease of $2,173, when compared to $2,345 for the same period of last fiscal year. The decrease in revenue for the three months ended September 30, 2012 generated by the segment was due to the completion of the two major projects which were being carried out in fiscal 2012 and the completion of smaller projects in the first quarter of fiscal 2013.

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, and 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.

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, changes in Chinese laws, regulations, or their interpretation.

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Comparison of the First Quarter Ended September 30, 2012 ("Q1 2013") and September 30, 2011 ("Q1 2012")

The following table sets forth certain consolidated statements of income data as a percentage of revenue for the first quarter of fiscal 2013 and 2012, respectively:

                               Three Months Ended
                                  September 30,
                               2012           2011
Revenue                          100.0  %      100.0 %
Cost of sales                     81.9          84.1
Gross Margin                      18.1  %       15.9 %
Operating expenses :
General and administrative        18.7  %       23.8 %
Selling                            1.4           1.6
Research and development           0.7           0.9
Gain on disposal of PP&E           0.0           0.1
Total operating expenses          20.8  %       26.4 %

Loss from Operations (2.7 )% (10.5 )%

Overall Gross Margin

Overall gross margin as a percentage of revenue increased by 2.2% to 18.1% for the three months ended September 30, 2012, from 15.9% in the same period of the last fiscal year, primarily due to an increase in the gross profit margin in the testing and distribution segments. That increase was partially offset by a decrease in gross profit margin in the manufacturing, real estate and fabrication segments.

Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 6.3% to 10.3% for the three months ended September 30, 2012, from 16.6% in the same period of the last fiscal year. The decrease of gross profit margin was primarily due to the change in product mix and the higher material cost. The increase in revenues in Singapore operation was primarily due to increase in orders from one major customer as discussed above. In absolute dollar amounts, gross profits in the manufacturing segment increased by $78 to $543 for the three months ended September 30, 2012 from $465 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the testing segment increased by 11.5% to 31.5% for the three months ended September 30, 2012, from 20.0% in the same period of the last fiscal year. The increase in gross profit margin was primarily due to an increase in testing volume in the first quarter fiscal 2013 as compared to the same period of the last fiscal year. The fixed costs are spread over the increased output, causing the increase gross profit margin.. In absolute dollar amounts, gross profit in the testing segment increased by $ 575 to $1,232 for the three months ended September 30, 2012 from $ 657 for the same period of the last fiscal year.

Gross profit margin as a percentage of revenue in the distribution segment increased by 5.7% to 19.5% for the three months ended September 30, 2012, from 13.8% for the same period of the last fiscal year. The increase was due to the change in product mix, as we sold more products with a higher profit margin in the distribution segment as compared to the same period of last fiscal year. In terms of absolute dollar amounts, gross profit in the distribution segment for the three months ended September 30, 2012 was $ 68, an increase of $ 24, as compared to $ 44 in the same period of the last fiscal year. The gross profit margin of the distribution segment is 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.

Gross profit margin as a percentage of revenue in the real estate segment was a negative 10.0% for the three months ended September 30, 2012, a decrease of 54.7% as compared to positive gross margin of 44.7% for the same period in the last fiscal year. In absolute dollar amounts, gross profit in the real estate segment for the three months ended September 30, 2012 was negative $3, as compared to gross profit of $21 in the same period of the last fiscal year. The decrease in gross profit margin was mainly due to a decrease in rental revenue in the first quarter of fiscal 2013 as one of the rental contracts reached maturity in January, 2012. In addition, the depreciation expenses increased in the first quarter of fiscal 2013 as compared to the same period of the last fiscal year, due to increase in the investment property. An amount of $673 was transferred from down payment, which was capitalized during April 2012 into investment property in China and in property, plant and equipment as the assets were put to use during the fiscal 2012.

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Gross profit margin as a percentage of revenue in the fabrication services segment deteriorated to a negative 43.6% for the three months ended September 30, 2012, compared to 9.1% for the same period of the last fiscal year. In terms of dollar amounts, gross profit in the fabrication services segment for the three months ended September 30, 2012 was negative $75, as compared to a $213 in the same period of the last fiscal year. The revenue generated from the orders could not cover the entire fixed cost of the operation, resulting in a negative gross margin due to underutilization of the plant capacity. The cost of sales in this segment mainly consisted of rental expenses, depreciation expenses and cost of direct labor.

Operating Expenses

Operating expenses for the first quarter of fiscal 2013 and 2012 were as
follows:

                                      Three Months Ended
                                         September 30,
(Unaudited)                            2012          2011
General and administrative          $    1,824      $ 2,098
Selling                                    132          144
Research and development                    73           75
(Gain) / loss on disposal of PP&E           (3 )          4
 Total                              $    2,026      $ 2,321

General and administrative expenses decreased by $274, or 13.1%, from $2,098 to $1,824 for the three months ended September 30, 2012 compared to the same quarter of last fiscal year. The decrease in general and administrative expenses was mainly attributable to the decrease in payroll expenses in the Singapore operation which was mainly caused by the reduction in headcount and the turnover in staff. In addition, depreciation expenses increased in Malaysia operation during the first quarter of fiscal 2013 as compared to the same period of last fiscal year, but partially offset by an increase of approximately $30, in provision for doubtful debts in the real estate segment, due to the rent receivable which has exceeded the number of days stipulated in the accounts receivable collectoin and valuation policy.

Selling expenses decreased by $12, or 8.3%, for the three months ended September 30, 2012, from $144 to $132 compared to the same quarter of the last fiscal year. The decrease was mainly due to a decrease in commission expenses, as the commissionable revenue decreased in the Singapore operation.

Research and development expenses decreased slightly by $2, or 2.7%, for the three months ended September 30, 2012, from $75 to $73 compared to the same quarter of last fiscal year,

Loss from Operations

Loss from operations was $262 for the three months ended September 30, 2012 as compared $921 for the three months ended September 30, 2011, mainly due to the increase in gross margins and a decrease in operating expenses as previously discussed.

Interest Expense

Interest expense for the first quarter of fiscal 2013 and 2012 was as follows:

Three Months Ended September 30,
(Unaudited) 2012 2011 Interest expenses $ 85 $ 61

Interest expense increased by $24 to $85 from $61 for the three months ended September 30, 2012, primarily due to the utilization of the bank credit facilities by the Singapore operation for its working capital. We are trying to keep our debt at a minimum in order to save financing costs. As of September 30, 2012, the Company had an unused line of credit of $3,766.

Other Income

Other income for the first quarter of fiscal 2013 and 2012 was as follows:

Three Months Ended
September 30,
(Unaudited) 2012 2011
Other income $ 182 $ 44

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Other income was $182, an increase of $138, for the three months ended September 30, 2012 as compared to $44 in the same period of the last fiscal year, primarily attributable to foreign currency exchange gains and interest income from the loan receivable in the real estate segment.

Income Tax Benefit / (Expenses)

Income tax benefit for the three months ended September 30, 2012 was $124, as compared to income tax expenses of $37 for the same period of the last fiscal year. The increase in income tax benefit was mainly due to tax refunded for the Singapore and Malaysia operations, for the three months ended September 30, 2012 as compared to the same period in the previous fiscal year.

Loss from Discontinued Operations

Loss from discontinued operations was nil for the three months ended September 30, 2012 as compared to a loss of $1 for the same period in the last fiscal year.

Non-controlling Interest

As of September 30, 2012, we held a 55% interest in Trio-Tech (Malaysia) Sdn. Bhd., Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI International Pte. Ltd., Singapore and PTSHI Indonesia and a 76% interest in Prestal Enterprise Sdn. Bhd. The non-controlling interest for the three months ended September 30, 2012 in the net loss of subsidiaries was $24, a decrease of $159 as compared $183 for the same period of the previous fiscal year. The increase in the non-controlling interest in the net loss of subsidiaries was attributable to the increase in net . . .

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