The Company provides for the estimated costs that may be incurred under its warranty program at the time the sale is recorded. The Company provides warranty for products manufactured in the term of one year. The Company estimates the warranty costs based on the historical rates of warranty returns. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.
| | March 31, | | | June 30, | |
| | 2008 | | | 2007 | |
| | (Unaudited) | | | | |
| | | | | | |
Beginning | | $ | 211 | | | $ | 142 | |
Additional accruals | | | - | | | | 74 | |
Warranty expenses incurred | | | (12 | ) | | | (3 | ) |
Reverse | | | (64 | ) | | | (2 | ) |
Ending | | $ | 135 | | | $ | 211 | |
| | | | | | |
| | (Unaudited) | | | June 30, 2008 | |
| | | | | | |
Beginning | | $ | 113 | | | $ | 211 | |
Additions charged to cost and expenses | | | 1 | | | | - | |
Reversal | | | (23 | ) | | | (80 | ) |
Actual usage | | | (7 | ) | | | (18 | ) |
Ending | | $ | 84 | | | $ | 113 | |
In April 2007, Trio-Tech International Pte., Ltd in Singapore entered a new loan agreement with a local bank in Singapore. The term loan facility was SGD5,500, or approximately U.S. $3,837 with a fixed interest rate of 3% plus the Market Reference Rate based on the inter-bank offered rate. The loan has a term of three years from the date of draw down. On August 1, 2007, the Company began to draw down the money on this loan. The loan is due with 35 monthly principal payments of SGD153 (U.S. $107) with a final principal payment due on August 1, 2010 of SGD145 (U.S. $101). The payment schedule of this loan for the next three years is presented in the following table:
As of March 31, 2008 | | Calendar Year 2008 | | | Calendar Year 2009 | | | Calendar Year 2010 | | | Thereafter | | | Total | | | Fair Value | |
Loan: | | | | | | | | | | | | | | | | | | |
Denominated in Singapore dollars; interest is at the bank's prime rate (2.51% at March 31, 2008) plus 3.0% per annum | | $ | 999 | | | $ | 1,332 | | | $ | 962 | | | $ | - | | | $ | 3,293 | | | $ | 3,293 | |
10. | ADOPTION OF FIN8. ADOPTION OF FASB INTERPRETATION NO. 48 |
The Company adopted the provisions of FIN 48 on July 1, 2007 and has had no material adjustments to its liabilities for unrecognized income tax benefits since its adoption. The Company has not included any uncertain tax positions as defined by FIN 48 in its currently filed federal or state income tax returns. As of June 30, 2007, and the adoption date, the Company had $267 of income tax liability related to the allocation of corporate management expenses to its Singapore operations. The Company has not recognized any income tax benefit for this position during the current quarter in accordance with the provisions of FIN 48.
11.
| 9. INVESTMENT IN CHONGQING CHINA |
The following table presents our investment in China during the nine months ended March 31, 2008. The exchange rate is based on the exchange rate on March 31, 2008 published by the Federal Reserve System.
| Investment Date | | Investment Amount | | | Investment Amount | |
| | | (RMB) | | | (U.S. Dollars) | |
Investment in property with Jiasheng | 8/28/07 | | | 10,000 | | | | 1,426 | |
Investment in property with Jiasheng | 12/17/07 | | | 5,000 | | | | 713 | |
Purchase an investment property | 1/04/08 | | | 5,554 | | | | 792 | |
Total investment in China | | | RMB20,554 | | | $ | 2,931 | |
In June 2007, Trio-Tech International Pte., Ltd. established a subsidiary in Chongqing, China. This newly established subsidiary, Trio-Tech (Chongqing) Co., Ltd., has a registered capital of RMB20,000RMB 20,000 (Chinese yuan), or equivalent to approximately U.S. $2,600, and is wholly owned by Trio-Tech International Pte., Ltd. In June 2007, Trio-Tech International Pte., Ltd. infused $2,600 to Trio-Tech (Chongqing) Co., Ltd. to fulfill its capital injection obligation. The source of the funds was from the proceeds from the disposition of disposing short-term deposits by Trio-Tech International Pte., Ltd.
On August 27, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with JiashengJiaSheng Property Development Co., Ltd. (Jiasheng(JiaSheng hereafter) to jointly develop a piece of property with 24.91 acres owned by JiashengJiaSheng located in Chongqing City, China, which is intended for sale after the completion of development. Pursuant to the signed agreement, the capital to be invested by Trio-Tech (Chongqing) Co., Ltd. was RMB10,000,RMB 10,000, equivalent to approximately U.S. $1,426$1,473 based on the exchange rate on March 31,September 30, 2008 published by the Federal Reserve System. On August 28, 2007, Trio-Tech (Chongqing) Co., Ltd. transferred the required amount from its bank account into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng.JiaSheng. The investment was accounted under the cost method as the Company accounted for less than 20% equity of this joint venture.method.
On October 22, 2007, the parties received approval from the Chinese District Zoning Regulation Bureau to increase the square meters of the buildings specified in the original Memorandum Agreement dated August 27, 2007 by 9,885 square meters. As a result, the construction costs of the proposed building project also increased. On November 15, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Supplement Agreement to the Memorandum Agreement dated August 27, 2007 with Jiasheng.JiaSheng. The purpose of this Supplement Agreement was to document another agreement reached by both parties regarding the additional capital infusion to be committed by the respective parties in order to finance the increase in construction costs. The Supplement Agreement does not modify the terms and obligations of both parties specified in the original Memorandum Agreement. Under the terms of the Supplement Agreement, the Company agreed to invest an additional RMB9,000,RMB 9,000, or approximately U.S. $1,284$1,326 based on the exchange rate as of March 31,September 30, 2008 published by the Federal Reserve Statistical Release. By infusing the additional capital of RMB9,000, the Company increased its equity ratio from 16% to 24% of the total capital infused by both parties. However, the profit sharing percentage remains at 20% as specified in the original Memorandum Agreement because management of the Company believes that the return on the total investment is still reasonable.System. On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list of additional costs incurred for this project, which were RMB4,000RMB 4,000 less than the estimated costscost of RMB9,000.RMB 9,000. Accordingly, the Company only transferred RMB5,000,RMB 5,000, approximately U.S. $713,$737, from its bank account into the special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng.JiaSheng. After that extra infusion, the equity ratio owned by the Company in that joint venture was 20%.
In the fourth quarter of 2008, the investment of RMB 5,000, approximately U.S. $737 based on the exchange rate as of September 30, 2008 published by the Federal Reserve System was returned to the Company, which reduced the investment in this project to $1,473. After that return of investment, the equity ratio owned by the Company in that joint venture was 15%. The Company also recorded a profit of RMB 750, approximately $103 based on the exchange rate as of September 30, 2008 published by the Federal Reserve System, in investment income in the fourth quarter of 2008.
In accordance with APB 18, the Equity Method of Accounting for Investments in Common Stock, management believes that the cost method of accounting is appropriate.
On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd. to purchase an office space of 827.2 square meters on the 35th floor of a 40 story high office building located in Chongqing, China. The total cash purchase price was RMB5,554RMB 5,554 (Chinese yuan), equivalent to approximately U.S. $792$818 based on the exchange rate as of March 31,September 30, 2008 published by the Federal Reserve System. Under the terms of the agreement, the Company paid the purchase price in full on January 4, 2008.
In accordance The Company rented this property to a third party on July 13, 2008. The term of the rent agreement is five years with APB 18, a monthly rental income of RMB 39, or approximately $5 for the Equity Methodfirst three years, with an increase of Accounting for Investments in Common Stock, with the 20% equity interest8% in the joint venture project, the Company considered several factors including primary beneficiary, decision making powerfourth year and representation on the Board of Directors. As Jiasheng is responsible for the daily business operations and development of that project and the Company dose not have decision making power and has played a passive investor role since the inception of this joint venture, management believes that the cost method of accounting is appropriate. There was no operating activity in Trio-Tech (Chongqing) Co., Ltd.another 8% in the nine months ended March 31, 2008, and there was no income generated from the entity during this period.
Infifth year. It the first quarter of fiscal 2009, this property generated a rental income of $15.
The following table presents the Company’s investment in China in fiscal 2008. The exchange rate is based on the exchange rate on September 30, 2008 published by the Company initiated a plan to sellFederal Reserve System.
| Investment Date | | Investment Amount | | | Investment Amount | |
| | (RMB) | | | (US Dollars) | |
Investment in property with JiaSheng | 08/28/07 | | | 10,000 | | | | 1,473 | |
Investment in property with JiaSheng | 12/17/07 | | | 5,000 | | | | 737 | |
Purchase on investment property | 01/04/08 | | | 5,554 | | | | 818 | |
Return on investment in property with JiaSheng | 06/26/08 | | | (5,000 | ) | | | (737 | ) |
Total investment in China | | | RMB 15,554 | | | $ | 2,291 | |
| The Company operates principally in three industry segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products) and the distribution of various products from other manufacturers in Singapore and Southeast Asia. The following net sales were based on customer location rather than subsidiary location. |
| The allocation of the cost of equipment, the current year investment in new equipment and depreciation expense have been made on the basis of the primary purpose for which the equipment was acquired. |
| All inter-segment sales were sales from the manufacturing segment to the testing and distribution segments. Total inter-segment sales were $11 and $59 for the three months ended September 30, 2008 and 2007, respectively. Corporate assets mainly consisted of cash and prepaid expenses. Corporate expenses mainly consisted of salaries, insurance, professional expenses and directors' fees. |
| The following segment information is unaudited: |
Business Segment Information: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Quarter | | | | | Operating | | | | | | Depr. | | | | |
| Ended | | Net | | | (Loss) | | | Total | | | and | | | Capital | |
| Sept. 30, | | Sales | | | Income | | | Assets | | | Amort. | | | Expenditures | |
Manufacturing | 2008 | | $ | 3,046 | | | $ | (444 | ) | | $ | 1,987 | | | $ | 60 | | | $ | 84 | |
| 2007 | | | 6,396 | | | | 326 | | | | 3,949 | | | | 40 | | | | 33 | |
| | | | | | | | | | | | | | | | | | | | | |
Testing Services | 2008 | | | 3,098 | | | | (222 | ) | | | 29,593 | | | | 485 | | | | 575 | |
| 2007 | | | 5,543 | | | | 1,018 | | | | 33,147 | | | | 748 | | | | 510 | |
| | | | | | | | | | | | | | | | | | | | | |
Distribution | 2008 | | | 86 | | | | 31 | | | | 44 | | | | 1 | | | | - | |
| 2007 | | | 111 | | | | (22 | ) | | | 798 | | | | 17 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Corporate and | 2008 | | | - | | | | (52 | ) | | | 50 | | | | - | | | | - | |
Unallocated | 2007 | | | - | | | | (68 | ) | | | 531 | | | | - | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | |
Total Company | 2008 | | $ | 6,230 | | | $ | (687 | ) | | $ | 31,674 | | | $ | 546 | | | $ | 659 | |
| 2007 | | $ | 12,050 | | | $ | 1,254 | | | $ | 38,425 | | | $ | 805 | | | $ | 545 | |
Geographic Area Information: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Elimin- | | | | |
| Quarter | | | | | | | | | | | | | | | | | | | | ations | | | | |
| Ended | | United | | | | | | Other | | | | | | | | | | | | and | | | Total | |
| Sept. 30, | | States | | | China | | | Countries | | | Singapore | | | Thailand | | | Malaysia | | | Other | | | Company | |
Net Sales to | 2008 | | $ | 2,332 | | | $ | 290 | | | $ | 379 | | | $ | 1,301 | | | $ | 129 | | | $ | 1,810 | | | $ | (11 | ) | | $ | 6,230 | |
Customers | 2007 | | | 1,460 | | | | 219 | | | | 388 | | | | 5,572 | | | | 514 | | | | 3,956 | | | | (59 | ) | | | 12,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating | 2008 | | | (242 | ) | | | (29 | ) | | | (41 | ) | | | (130 | ) | | | (13 | ) | | | (179 | ) | | | (53 | ) | | | (687 | ) |
Income (loss) | 2007 | | | 123 | | | | 26 | | | | 41 | | | | 592 | | | | 62 | | | | 478 | | | | (68 | ) | | | 1,254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-lived | 2008 | | | 6 | | | | 842 | | | | - | | | | 1,540 | | | | 666 | | | | 5,004 | | | | (40 | ) | | | 8,018 | |
Assets | 2007 | | | 7 | | | | 845 | | | | - | | | | 2,618 | | | | 831 | | | | 3,060 | | | | (40 | ) | | | 7,321 | |
11. MINORITY INTEREST
Minority interest represents the property located inminority stockholders’ proportionate share of 45% of the equity of Trio-Tech Malaysia and ceased the depreciation of that property in accordance with SFAS No. 144,.
Accounting for the Impairment or Disposal of Long-Lived Assets.12. SUBSEQUENT EVENTS The book value of this asset was $224 at March 31, 2008. In late December 2007, the Company
On October 23, 2008, Trio-Tech Chongqing Co., Ltd. entered into a definite saleMemorandum Agreement with JiaSheng Property Development Co., Ltd. (“JiaSheng”) to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters, at JiaSheng Jingyun Huafu Project located at No. 17 Puyun Avenue in Chongqing, China.
The total cash purchase agreement with a buyer with a selling price of RM700 (Malaysia ringgit), equivalent to be paid by the Company under the Memorandum Agreement is RMB 7,043 (Chinese yuan) or approximately U.S. $219, and received a deposit of RM70, equivalent to approximately U.S. $22,$1,030 (U.S. dollars) based on the exchange rate as of March 31,October 23, 2008 published by the Federal Reserve Statistical Release. It is anticipated thatUnder the sale will be consummatedterms of the Memorandum Agreement, the Company made a down payment of 10% in cash in the fourthamount of RMB 704 or U.S. $103 based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release in October 2008 and the balance of 90% was paid on November 4, 2008, using internally generated funds of the Company.
Additionally, on October 23, 2008, the Company entered into a lease agreement with JiaSheng for the six units purchased from JiaSheng pursuant to the Memorandum Agreement. The lease provides for a two year term with an annual rental income of RMB 1,392 (Chinese yuan) or approximately $204 (U.S. dollars). The lease commenced November 1, 2008.
13. LOAN COVENANT VIOLATION
As the Company suffered a loss in the first quarter of fiscal 2008. Accordingly,2009, the Singapore operations did not fulfill one of their loan covenants which requires the Company believes thatto maintain the assets held for sale should be presented as partdebt to EBITDA ratio of current assets. In accordance with SFAS No 144,no more than 2.5 times at all times during the asset held for sale was recorded at the lower of fair value less cost to sell of $219. Impairment loss of $5 was recorded for the nine months ended March 31, 2008.
The Company applies the provisions of Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”) to property, plant and equipment, and other intangible assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual dispositionterms of the asset. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
In the nine months ended March 31, 2008,loan. As a result the Company recorded an impairment losshas reclassified the related long term portion of $457, or $0.14 per diluted share, based on its examinationthe bank loan of future undiscounted cash flows. An impairment loss$1,215 to the current portion of $16 was recordedthe liabilities. The management has communicated to the bank and requested a waiver of this particular loan covenant. As of the filing date of this 10Q report, the bank is still in the second quarterprocess of fiscal year 2008, which consisted of a loss of $11 related toreviewing the disposal of certain fixed assets in our Suzhou operation in China and $5 related to the asset held for sale in Malaysia. In the third quarter of fiscal 2008, the Company recorded an impairment loss of $441. Of this amount, an impairment loss of $221 was for certain advanced burn-in testing equipment located in Singapore as a result of the termination of a testing service contract with one of our major customers. An impairment loss of $75 was for the burn-in board testing service in our Shanghai operation in China due to the change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. An impairment loss of $57 was for building renovations for certain testing projects due to a decrease in the customer’s order in our Shanghai operation in China. The remaining impairment loss of $88 was for certain machinery and equipment in our Singapore operation due to a decrease in our backlog and projected future sales.Company’s request.
The Company operates principally in three industry segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products) and the distribution of various products from other manufacturers in Singapore and Southeast Asia. The following net sales were based on customer location rather than subsidiary location.
The allocation of the cost of equipment, the current year investment in new equipment and depreciation expenses have been made based on the primary purpose for which the equipment was acquired.
All inter-segment sales were sales from the manufacturing segment to the testing and distribution segments. Total inter-segment sales were $108 and $122 for the nine months ended March 31, 2008 and 2007, respectively. Corporate assets mainly consisted of cash and prepaid expenses. Corporate expenses mainly consisted of salaries, insurance, professional expenses and directors’ fees.
The following segment information is unaudited:
Business Segment Information: | | | | | | | | | | | | | |
| Quarter | | | | | Operating | | | | | | Depr. | | | | |
| Ended | | Net | | | Income | | | Total | | | and | | | Capital | |
| March 31, | | Sales | | | (loss) | | | Assets | | | Amort. | | | Expenditures | |
Manufacturing | 2008 | | $ | 4,367 | | | $ | (884 | ) | | $ | 3,747 | | | $ | 67 | | | $ | 43 | |
| 2007 | | $ | 6,923 | | | $ | 350 | | | $ | 3,511 | | | $ | 53 | | | $ | 98 | |
| | | | | | | | | | | | | | | | | | | | | |
Testing services | 2008 | | | 3,973 | | | | (553 | ) | | | 31,814 | | | | 662 | | | | 966 | |
| 2007 | | | 6,348 | | | | 1,077 | | | | 27,978 | | | | 826 | | | | 313 | |
| | | | | | | | | | | | | | | | | | | | | |
Distribution | 2008 | | | 115 | | | | (69 | ) | | | 424 | | | | 5 | | | | 5 | |
| 2007 | | | 342 | | | | (91 | ) | | | 556 | | | | 4 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Corporate and | 2008 | | | - | | | | 192 | | | | 97 | | | | - | | | | - | |
unallocated | 2007 | | | - | | | | 8 | | | | 208 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Total Company | 2008 | | $ | 8,455 | | | $ | (1,314 | ) | | $ | 36,082 | | | $ | 734 | | | $ | 1,014 | |
| 2007 | | $ | 13,613 | | | $ | 1,344 | | | $ | 32,253 | | | $ | 883 | | | $ | 411 | |
Business Segment Information: | | | | | | | | | | | | | |
| Nine | | | | | | | | | | | | | | | |
| Months | | | | | Operating | | | | | | Depr. | | | | |
| Ended | | Net | | | Income | | | Total | | | and | | | Capital | |
| March 31, | | Sales | | | (loss) | | | Assets | | | Amort. | | | Expenditures | |
Manufacturing | 2008 | | $ | 17,848 | | | $ | (92 | ) | | $ | 3,747 | | | $ | 174 | | | $ | 258 | |
| 2007 | | $ | 20,602 | | | $ | 1,041 | | | $ | 3,511 | | | $ | 147 | | | $ | 246 | |
| | | | | | | | | | | | | | | | | | | | | |
Testing services | 2008 | | | 15,186 | | | | 1,110 | | | | 31,814 | | | | 2,074 | | | | 2,233 | |
| 2007 | | | 15,519 | | | | 2,421 | | | | 27,978 | | | | 1,848 | | | | 2,214 | |
| | | | | | | | | | | | | | | | | | | | | |
Distribution | 2008 | | | 342 | | | | (152 | ) | | | 424 | | | | 14 | | | | 14 | |
| 2007 | | | 1,435 | | | | (101 | ) | | | 556 | | | | 12 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | |
Corporate and unallocated | 2008 | | | - | | | | (343 | ) | | | 97 | | | | - | | | | 2 | |
| 2007 | | | - | | | | 53 | | | | 208 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Total Company | 2008 | | $ | 33,376 | | | $ | 523 | | | $ | 36,082 | | | $ | 2,262 | | | $ | 2,507 | |
| 2007 | | $ | 37,556 | | | $ | 3,414 | | | $ | 32,253 | | | $ | 2,007 | | | $ | 2,461 | |
Geographic Area Information: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Elimin- | | | | |
| Quarter | | | | | | | | | | | | | | | | | | | | ations | | | | |
| Ended | | United | | | | | | Other | | | | | | | | | | | | and | | | Total | |
| March 31, | | States | | | China | | | Countries | | | Singapore | | | Thailand | | | Malaysia | | | Other | | | Company | |
Net sales to | 2008 | | $ | 1,052 | | | $ | 467 | | | $ | 551 | | | $ | 2,312 | | | $ | 471 | | | $ | 3,618 | | | $ | (16 | ) | | $ | 8,455 | |
customers | 2007 | | $ | 1,301 | | | $ | 1,102 | | | $ | 293 | | | $ | 8,493 | | | $ | 617 | | | $ | 1,868 | | | $ | (61 | ) | | $ | 13,613 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating | 2008 | | | (183 | ) | | | (83 | ) | | | (96 | ) | | | (413 | ) | | | (84 | ) | | | (647 | ) | | | 192 | | | | (1,314 | ) |
income (loss) | 2007 | | | 104 | | | | 112 | | | | 14 | | | | 854 | | | | 63 | | | | 189 | | | | 8 | | | | 1,344 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-lived | 2008 | | | 5 | | | | 995 | | | | - | | | | 1,850 | | | | 774 | | | | 4,272 | | | | (40 | ) | | | 7,856 | |
assets | 2007 | | | 10 | | | | 848 | | | | - | | | | 3,695 | | | | 877 | | | | 2,748 | | | | (40 | ) | | | 8,138 | |
Geographic Area Information: | | | | | | | | | | | | | | | | | | | | | | |
| Nine | | | | | | | | | | | | | | | | | | | | Elimin- | | | | |
| Months | | | | | | | | | | | | | | | | | | | | ations | | | | |
| Ended | | United | | | | | | Other | | | | | | | | | | | | and | | | Total | |
| March 31, | | States | | | China | | | Countries | | | Singapore | | | Thailand | | | Malaysia | | | Other | | | Company | |
Net sales to | 2008 | | $ | 4,096 | | | $ | 1,239 | | | $ | 1,468 | | | $ | 15,024 | | | $ | 1,544 | | | $ | 10,113 | | | $ | (108 | ) | | $ | 33,376 | |
customers | 2007 | | $ | 5,152 | | | $ | 4,493 | | | $ | 518 | | | $ | 21,030 | | | $ | 1,763 | | | $ | 4,722 | | | $ | (122 | ) | | $ | 37,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating | 2008 | | | 42 | | | | (12 | ) | | | (18 | ) | | | 758 | | | | 23 | | | | 73 | | | | (343 | ) | | | 523 | |
income (loss) | 2007 | | | 351 | | | | 413 | | | | 24 | | | | 1,966 | | | | 165 | | | | 442 | | | | 53 | | | | 3,414 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-lived | 2008 | | | 5 | | | | 995 | | | | - | | | | 1,850 | | | | 774 | | | | 4,272 | | | | (40 | ) | | | 7,856 | |
assets | 2007 | | | 10 | | | | 848 | | | | - | | | | 3,695 | | | | 877 | | | | 2,748 | | | | (40 | ) | | | 8,138 | |
TRIO-TECH INTERNATIONAL AND SUBSIDIARIES
IITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONSCONDITION AND RESULTS OF OPERATIONS (IN (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”factors” and “Management’s Discussiondiscussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operations”operations” in the most recent Annual Report on Form 10-K.
Overview
Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. The Company also designs, manufactures and markets equipment and systems, and distributes semiconductor processing and testing equipment manufactured by others. The Company operates in three business segments: Testing Services, Manufacturing and Distribution.
We own and operate facilities that provide testing services for semiconductor devices and other electronic components to meet the requirements of military, aerospace, industrial and commercial applications. We currently operate sixfour testing facilities, one in the United States, three in Southeast Asia and two in China.Asia. The Company uses its own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. The Company conducts the majority of its testing operations in Southeast Asia and China with facilities in Singapore, Malaysia, Thailand and China. Our facilities require substantial investment to construct and are largely fixed-costs assets once in operation. Because we own most of the testing capacity, a significant portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or the utilization of our testing capacity, and can adversely affect profit margins as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which should improve profit margins.
In the third quarter of fiscal 2008, one of our major customers ceased their advanced burn-in testing service contract with us due to one of their product lines reaching the end of its life cycle earlier than expected. The net sales in the testing segment decreased by $2,445 to $3,098 for the three months ended September 30, 2008 as the result of the loss of revenue from this major customer. Management took immediate action to reduce expenses in an effort to match future cash flows and is in the process of developing new customer relationships in China and Malaysia and exploring new business opportunities to offset the lost testing revenue from this contract.
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, our manufacturing segment focused on marketing used and refurbished equipment, which some of our customers are more willing to purchase since it is less expensive than new equipment.
Due to the competitive environment in the manufacturing segment, we anticipate that we will continue to implement our cost reduction plan by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.
Our distribution segment operates primarily in Southeast Asia. This segment markets and supports distribution of our own manufactured equipment in addition to distributing complementary products supplied by other manufacturers that are used by our customers and other semiconductor and electronics manufacturers. We expanded the distribution business to include a strategic business unit mainly to serve as a distributor of electronic components to customers. It is the strategy of management to focus on the sales of our own manufactured products. We believe this will help us to reduce our exposure to multiple risks arising from being a mere distributor of manufactured products from others.
Recent EventsIn June 2007, Trio-Tech International Pte., Ltd. established a subsidiary in Chongqing, China. This subsidiary, Trio-Tech (Chongqing) Co., Ltd., has registered capital of RMB 20,000 (Chinese yuan), or approximately U.S. $2,600, and is wholly owned by Trio-Tech International Pte., Ltd. On August 27, 2007, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with JiaSheng Property Development Co., Ltd. (JiaSheng) to jointly develop a piece of property with 24.91 acres owned by JiaSheng located in Chongqing City, China, which is intended for sale after the completion of development. In fiscal 2008, the Company invested an aggregate of RMB 15,000, equivalent to approximately U.S. $2,210 based on the exchange rate on September 30, 2008 published by the Federal Reserve System on this project. In the fourth quarter of 2008, the investment of RMB 5,000, or approximately $737 was returned to the Company, which reduced the investment in this project to $1,473. The Company also recorded a profit of RMB 750, approximately $103 in investment income in the fourth quarter of 2008. In accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock, management believes that the cost method of accounting is appropriate.
Purchase of an office space in Chongqing
On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum Agreement with MaoYe Property Ltd., a Chinese company, to purchase an office space of 827.2 square meters on the 35th floor of a 40 story high office building located in Chongqing, China. The total cash purchase price was RMB5,554RMB 5,554 (Chinese yuan), equivalent to approximately U.S. $792$818 based on the exchange rate on March 31,as of September 30, 2008 published by the Federal Reserve System. The Company rented this property out to a third party on July 13, 2008. The term of the rent agreement is five years with a monthly rental income of RMB 39, or approximately $5 for the first three years, with an increase of 8% in the fourth year and another 8% in the fifth year. It the first quarter of fiscal 2009, this property generated a rental income of $15.
The investment income generated by Trio-Tech (Chongqing) Co., Ltd. in the first quarter of fiscal year 2009 was classified as investment income, which was included in other income in the Consolidated Statements of Operations and Comprehensive Income for the three months ended September 30, 2008. There was no investment income in the same period of fiscal 2008.
First Quarter Fiscal 2009 Highlights
● | Total revenue decreased 48.3% to $6,230 for the first quarter of fiscal 2009, compared with revenue of $12,050 for the first quarter of fiscal 2008. |
● | Manufacturing segment revenue decreased by $3,350, or 52.4%, to $3,046, compared to $6,396 for the first quarter of fiscal 2008. |
● | Testing segment revenue decreased by $2,445, or 44.1%, to $3,098, compared to $5,543 for the first quarter of fiscal 2008. |
● | Distribution segment revenue decreased by $25, or 22.5% to $86, compared to $111 for the first quarter of fiscal 2008. |
● | Loss from operations increased by $1,941, or 154.8%, to $687 compared with an income of $1,254 for the first quarter of fiscal 2008. |
● | Gross profit margins decreased by 4.3% to 20.9% from 25.2% for the first quarter of fiscal 2008. |
● | Selling expenses as a percentage of revenue increased by 1.0% from 1.0% of revenue for the first quarter of fiscal 2008 to 2.0% of revenue for the first quarter of fiscal 2009. |
● | General and administrative expenses as a percentage of revenue increased by 18.6% from 13.7% of revenue for the first quarter of fiscal 2008 to 32.3% or revenue for the first quarter of fiscal 2009. |
● | Net loss increased by $1,470, or 195.7% to $719, compared to a net income of $751 for the first quarter of fiscal 2008. |
● | Net cash flow provided by operating activities increased by $415, or 108.6% to $33, compared to a cash outflow of $382 for the first quarter of fiscal 2008. |
Subsequent Events
On October 23, 2008, Trio-Tech Chongqing Co., Ltd. entered into a Memorandum Agreement with JiaSheng Property Development Co., Ltd. (“JiaSheng”) to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters, at JiaSheng Jingyun Huafu Project located at No. 17 Puyun Avenue in Chongqing, China.
The total cash purchase price to be paid by the Company under the Memorandum Agreement is RMB 7,043 (Chinese yuan) or approximately $1,030 (U.S. dollars) based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release. Under the terms of the agreement,Memorandum Agreement, the Company made a down payment of 10% in cash in the amount of RMB 704 or U.S. $103 based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release in October 2008 and the balance of 90% was paid the purchase price in full on JanuaryNovember 4, 2008, using internally generated funds of the Company.
Declaration of dividend
On February 12,Additionally, on October 23, 2008, the Board of Directors of Registrant declaredCompany entered into a cash dividend of eleven cents (U.S. 11¢) per share payablelease agreement with JiaSheng for the six units purchased from JiaSheng pursuant to the shareholdersMemorandum Agreement. The lease provides for a two year term with an annual rental income of record on February 25, 2008.RMB 1,392 (Chinese yuan) or approximately $204 (U.S. dollars). The total number of shares issued and outstanding as of February 25, 2008 was 3,226,430 and the total cash dividends paid on March 25, 2008 were $354.
Termination of advanced burn-in testing service contract
In the third quarter of fiscal 2008, one of our major customers sent an official notice to the Company that, starting from April 1, 2008, their advanced burn-in testing service contract with us would cease. Management performed an impairment test on the related testing assets and recorded a write down of these assets to zero. We recorded an impairment loss of $221 on the advanced burn-in testing equipment, which will not be recoverable. In order to match our expenses with the future cash flows from the loss of this testing revenue, we laid off 65 employees in our Singapore operation in March and recorded $57 in unemployment benefits in the third quarter of 2008. We also reduced the salary of our chief executives by $93 per quarter effective April November 1, 2008. In Singapore, we sent a notice to the landlord to terminate our rental contracts for four plants before the lease expiration. The rental cost of these four plants was $25 per quarter. All these cost saving actions benefited the Company starting from April 1, 2008. The Company is in the early stages of developing new customer relationships in China and Malaysia to replace the lost testing revenues from this contract.
Meanwhile, management is exploring opportunities for business expansion. Besides the investment in Chongqing, we invested $1,956 in our Malaysian operation for testing machinery and equipment in the third quarter of fiscal 2008. We also plan to purchase a factory in Malaysia, where we’ve deposited $390, or 10% of the purchase price. The Company and the seller are still negotiating the final details of the agreement. We have no future obligations to the seller at this time. The testing revenue generated in our Malaysia operation increased by 37.26% to $1,275 in the third quarter of fiscal 2008. We believe that the demand for our testing services is still strong in Malaysia, and that further development in that operation will help to offset part of the decrease in revenue in other areas of business.
Third Quarter Fiscal 2008 Highlights
· | In the third quarter of fiscal year 2008, we recorded $441, or $0.14 per diluted share, in impairment loss due primarily to the phase-out of an advanced burn-in testing service provided by our facilities in Singapore and China. |
· | Total revenue decreased 37.89% to $8,455 for the third quarter of fiscal 2008, compared with revenue of $13,613 for the third quarter of fiscal 2007, as the result of the phase-out of the advanced burn-in testing service that we provided to one of our major customers. |
· | Testing segment revenue decreased by $2,375, or 37.41%, to $3,973 compared with $6,348 for the third quarter of fiscal 2007. |
· | Manufacturing segment revenue decreased by $2,556, or 36.92%, to $4,367 compared with $6,923 for the third quarter of fiscal 2007. |
· | Distribution segment revenue decreased by $227, or 66.37%, to $115 compared with $342 for the second quarter of fiscal 2007. |
· | Loss from operations increased by $2,658, or 197.77%, to $1,314 compared with an income of $1,344 for the third quarter of fiscal 2007. |
· | Gross profit margins decreased by 9.76% to 16.66% from 26.42% for the third quarter of fiscal 2007. |
· | Selling expenses increased by 0.32% from 1.92% of revenue for the third quarter of fiscal 2007. |
· | General and administrative expenses increased by 10.06% from 14.48% of revenue for the third quarter of fiscal 2007. |
The highlights above are intended to identify some of our more significant events and transactions during the quarter ended March 31, 2008. These highlights are not intended to be a full discussion of our operating results for this quarter. These highlights should be read in conjunction with the following discussion and with our unaudited consolidated financial statements and notes thereto accompanying this Quarterly Report.
Results of Operations and Business Outlook
The following table sets forth our revenue components for the nine and three months ended March 31,September 30, 2008 and 2007, respectively.
Revenue Components | | | | | | | | | | | | | | |
| Nine Months Ended March 31, | | Three Months Ended March 31, |
| 2008 | | | | 2007 | | | | 2008 | | | | 2007 | |
Net Sales: | | | | | | | | | | | | | | |
Manufacturing | 53.48 | % | | | 54.86 | % | | | 51.65 | % | | | 50.86 | % |
Testing | 45.50 | | | | 41.32 | | | | 46.99 | | | | 46.63 | |
Distribution | 1.02 | | | | 3.82 | | | | 1.36 | | | | 2.51 | |
Total | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| Three Months Ended September 30, | |
| 2008 | | | | 2007 | |
Net Sales: | | | | | | |
Manufacturing | 48.9 | % | | | 53.1 | % |
Testing | 49.7 | | | | 46.0 | |
Distribution | 1.4 | | | | 0.9 | |
Total | 100.0 | % | | | 100.0 | % |
Net sales for the nine and three months ended March 31,September 30, 2008 were $33,376 and $8,455, respectively,$6,230, a decrease of $4,180 and $5,158, respectively, when$5,820, or 48.3%, compared to the same sales periods of the prior year. As a percentage, total net sales decreased by 11.1% and 37.9% for the nine and three months ended March 31, 2008, respectively, when compared to total net sales$12,050 for the same periods of the priorquarter last fiscal year.
Net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United Sates)States) decreased by $3,124$6,692, or 63.2% to $29,280 and by $4,909 to $7,403$3,898 for the nine months and three months ended March 31,September 30, 2008, respectively, compared towith $10,590 for the same periodsperiod of the priorlast fiscal year. ThisThe decrease was primarily due to a drop in sales in the testing segment in our Singapore and China operations. Net sales into and within the United States were $4,096 and $1,052 for the nine and three months ended March 31, 2008, respectively, a decrease$2,332, an increase of $1,056 and $249, respectively, when$872, or 59.7% compared to the same periods of the prior year.quarter last fiscal year 2008, due to an increase in market demand for our refurbished equipment.
The decrease in net sales in the nine and three months ended March 31, 2008 can be discussed within three segments as follows:
Manufacturing Segment
Net sales in the manufacturing segment as a percentage of total net sales were 53.48% and 51.65% for the nine and three months ended March 31, 2008, respectively, a decrease of 1.38% and an increase of 0.79%decreased by 4.2% to 48.9% of total net sales respectively, whenfor the three months ended September 30, 2008, compared to 53.1% of total net sales in the same periodsfirst quarter of the prior year.fiscal 2008. The absolute amount of net sales was $17,848 and $4,367decreased by $3,350 for the nine and three months ended March 31,September 30, 2008, respectively, a decrease of $2,754 and $2,556, respectively, whenfrom $6,396 to $3,046, compared to the same periodsperiod of the prior year.fiscal 2008. The decrease in revenue generated by the manufacturing segment was due to the fact that fewer orders were placed by one of our major customers, which was the result of slowing inslower movement of that customer’s product line and equipment capacity. We believe that the loss of orders from our major customer will continue to have a negative impact on our revenue in the future if we are unable to compensate for the loss of this source of revenue.
The following table sets forth certain consolidated statements of income data as a percentage of net sales for the thirdfirst quarters of fiscal 20082009 and 2007,2008, respectively:
Gross profit margin as a percentage of revenue in the distribution segment was 37.4%improved by 5.3% for the thirdfirst quarter of fiscal 2009, from 26.1% in the first quarter of fiscal 2008 from 6.1% into 31.4%, compared to the thirdsame quarter oflast fiscal 2007.year. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the thirdfirst quarter of fiscal 20082009 compared to the same periodquarter of fiscal 2007.2008. In absolute amounts,terms of dollar amount, gross margin in the distribution segment in the first quarter of fiscal 2009 was $43, an increase$27, a decrease of $22 $2, or 6.9%, compared to $21$29 in the same period of fiscal 2007.
2008. Table. The gross margin of
Contentsthe 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.
Operating Expenses
Operating expenses for the thirdfirst quarters of fiscal2009 and 2008 and 2007 were as follow:follows:
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
General and administrative | | $ | 2,015 | | | $ | 1,645 | |
Selling | | $ | 123 | | | $ | 124 | |
Research and development | | $ | 10 | | | $ | 19 | |
Gain on disposal of PP&E | | $ | (159 | ) | | $ | - | |
Total | | $ | 1,989 | | | $ | 1,788 | |
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
General and administrative | | $ | 2,075 | | | $ | 1,971 | |
Selling | | | 189 | | | | 262 | |
Research and development | | | 7 | | | | 18 | |
Impairment loss | | | 441 | | | | 2 | |
Loss on disposal of property, plant and equipment | | | 11 | | | | - | |
Total | | $ | 2,723 | | | $ | 2,253 | |
During the third quarter of fiscal year 2008, we reclassified $84 of selling expenses into general and administrative expenses and cost of sales to reflect a better presentation of our operations. Accordingly, $84 of selling expense was reclassified to general and administrative expenses and cost of sales in the third quarter of fiscal 2007 for the purpose of comparison. General and administrative expenses increased by $104,$370, or 5.28%22.5%, from $1,645 to $2,015 for the three months ended September 30, 2008, compared to the same period of last fiscal 2007,year. The increase was primarily attributable to an increase of noncash stock option expenses of $238 in the first quarter of fiscal 2009 and a reversal of bonus provision of $154 in the first quarter of fiscal year 2008 as discussed in our annual report for the year-ended June 30, 2008. We did not have any bonus reversal in the first quarter of fiscal 2009. The increase was offset by a decrease in the officer and executive compensation in the first quarter of fiscal 2009. On February 27, 2008, in view of anticipated reductions in service revenue for fiscal 2008, our Chief Executive Officer, Chief Financial Officer and directors voluntarily decreased their base salary to 50% of the base salary agreed to in July 2007. As a result, our compensation for the officers and executives decreased by $99 in the first quarter of fiscal 2009.
Selling expenses decreased slightly by $1, or 0.8%, from $1,971 to $2,075 for the three months ended March 31, 2008. The increase was attributableSeptember 30, 2008, from $124 to an increase in payroll and related expenses in the Malaysia operation to handle a rise in sales volume and an increase of $57 in unemployment benefits in the Singapore operations. In order to lower our costs to match with production activity, we laid off 65 employees in our Singapore operation in March. In addition, share based compensation expenses, as a result of the stock options granted in the second quarter of fiscal 2008, increased by $32 when$123 compared to the same quarter of fiscal 2007.2008.
Selling expenses decreased by $73, or 27.86%, for the three months ended March 31, 2008, from $262 to $189 compared to the sameIn first quarter of fiscal 2007. This2009, research and development expenses were $10 compared to $19 for the first quarter of fiscal 2008. The decrease was mainlyprimarily due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment. In addition, we incurred some selling expenses in demo sets, which were given to customers free of charge for promotional purposes in the same quarter of last fiscal year.
Research and development expenses were $7 compared to $18 for the third quarter of fiscal 2007 due to a decrease in payroll expensesfull time employee headcount in the U.S. operation.
The impairment loss increased by $439Gain on disposal of property, plant and equipment was $159 for the three months ended March 31, 2008, from $2 to $441 compared to the same quarter of fiscal 2007. The impairment loss of $441 in the thirdfirst quarter of fiscal year 2008 consisted2009, which mainly resulted from the disposal of $221 from certain advanced burn-in testing equipmentidle fixed assets at a gain in the Singapore operation as a result of the termination of the advanced burn-in testing service contract with one of our major customers. An impairment of $75 related to the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in services, which in turn made certain of our existing burn-in facilities obsolete. An impairment of $57 related to the building renovations for certain testing projects due to a decrease in a customer’s order in our Shanghai operation in China. The remaining impairment of $88 related to certain testing machinery and equipment in our Singapore operation due to a decrease in our testing backlog and projected future sales.
The impairment lossoperation. We had no such gain for the three months ended March 31, 2007 consistedsame period of building renovations with a cost of $4 and related accumulated depreciation of $2. The carrying value of these assets was written down to zero as a result of relocating to a new office unit to accommodate the needs of the testing segment in the Suzhou operation in China.fiscal year 2008.
(Loss) Income from Operations
Loss from operations increased by $2,658$1,941, or 154.8%, from an income from operations of $1,344$1,254 for the three months ended March 31,September 30, 2007 to a loss of $1,314$687 for the three months ended March 31,September 30, 2008, mainly due to athe decrease in sales in the manufacturing and testing segmentsrevenue and an increase in operating expenses, as previously discussed.
Interest Expense
Interest expense for the third quarters of fiscal 2008 and 2007 were as follow:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Interest expense | | $ | 93 | | | $ | 53 | |
Interest expenses increasedExpense
Interest expense for the first quarters of 2009 and 2008 was as follows:
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Interest expense | | $ | (58 | ) | | $ | (85 | ) |
Interest expense decreased by $40$27 for the three months ended March 31,September 30, 2008 from $53$85 to $93,$58, primarily due to a new termdecrease in the loan facilitypayable and capital lease obligation. We are trying to keep our debt at minimum in order to save financing costs. Our credit rating provides us with ready and adequate access to funds in global markets. As of $3,837 entered into duringSeptember 30, 2008, the first quarterCompany has an unused line of fiscal 2008 to support the expansion plans and potential business opportunitiescredit of the Singapore and China operations.$15,657.
Other (Expenses) Income
Other (expenses) income for the thirdfirst quarters of fiscal2009 and 2008 and 2007 were as follow:follows:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Other (expenses) income | | $ | (33 | ) | | $ | 45 | |
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Other (expenses) income | | $ | 215 | | | $ | (50 | ) |
Other expensesincome increased by $78$265 to $33$215 for the three months ended March 31,September 30, 2008 from an incomeexpense of $45$50 in the same quarter of last fiscal 2007,year, primarily due to an increase in therental income and currency transaction loss and an increase in provision for the value added tax in our China operation, but offset by an increase in investment income generated from short-term deposits and rental income.transaction gain. Currency transaction lossgain increased by $148$275 for the three months ended March 31,September 30, 2008, from $27a transaction loss of $118 to $175,a transaction gain of $157, compared to the same quarter of fiscal 2007.2008. This was attributable to the weakeningstrengthening of the U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars. The provision for the value added tax was $25, which was the result of a change in the local tax policy in our Suzhou operation in China. Investment income was $57 for the three months ended March 31, 2008 and was $18 higher than the interest income generated in the same quarter of fiscal 2007 due to an increase in short-term deposits by placing the idle cash into income generating investments.dollars. Rental income, which consisted mainly of space in the Malaysia operation and investment property in Chongqing operation rented to outside vendors, increased by $12$27 to $41$64 for the three months ended March 31,September 30, 2008 from $29compared to $37 in the same period of fiscal 2007.2008.
Income Tax
The net incomeIncome tax benefitprovision for the three months ended March 31,September 30, 2008 was $46, an increase$98, a decrease of $285$74 compared to the income tax provision of $239 for the three months ended March 31, 2007. Our Singapore operations suffered a loss of $938 for the three months ended March 31, 2008, a decrease of $2,452 compared to a profit of $1,514$172 for the same period of 2007. This loss resultedquarter last fiscal year. The decrease in an income tax benefit of $133provision was mainly due to a lower tax provision for the thirddecreased income generated from the Singapore operations in the first quarter of fiscal 2008. In addition, we reversed a deferred tax liability of $119 in the Singapore operation in the third quarter of fiscal 2008 due to a decrease in the book value of fixed assets as a result of provision from impairment loss. However, the income tax benefit was offset by a provision for deferred tax liability of $206 as a result of the timing differences related to the recording of depreciation expenses for book and tax purposes in the Malaysia operation.2009.
We assessed our income tax liability of $364$382 as of March 31,September 30, 2008 in accordance with FIN 48,FIN48, which wasis related to the allocation of corporate management expenses to our Singapore operation in terms of Singapore tax law. We did not see any potential benefits arising from this tax position. Accordingly, no impact of this tax position was recognized in the statement of operations for this quarter of fiscal 2008.2009. We did not include any potential income tax position in federal and state income tax returns currently filed.
Minority Interest
As of March 31,September 30, 2008, we held a 55% interest in Trio-Tech Malaysia. In the thirdfirst quarter of fiscal 2008,2009, minority interest in the net income of subsidiaries was $17, an increase$91, a decrease of $1,$105, or 53.6%, compared to a minority interest in the net income of $16$196 for the same quarter of fiscal 2007.2008. The increasedecrease in the minority interest was attributabledue to an improvementthe decrease in the net income generated from the Malaysia testing operation due to strongera decrease in revenue as the result of lesser market demands from our customers there.customers.
Net (loss) IncomeIncome/Loss
Net loss was $1,411$719 in the thirdfirst quarter of fiscal 2008, representing a decrease2009, an increase of $2,492,$1,470 from a net income of $1,081 during$751 for the same period of fiscal 2007.three months ended September 30, 2008. The decrease in net incomeloss was mainly due to a decrease in revenue and an increase in operating expenses, interest expensewhich was offset by an increase in other income and a decrease in otherinterest expenses and income tax provision, as previously discussed.
EarningsEarnings/Loss per Share
The basicBasic and diluted loss per share for the three months ended March 31,September 30, 2008 increased by $0.78$0.45 to $0.44$0.22, from an earningearnings of $0.34$0.23 per basic and diluted per share and the diluted loss per share increased by $0.77 to $0.44 from an earning of $0.33 per diluted share as compared toin the same quarter of the prior fiscal year.
Segment Information
The revenue, gross margin and income from each segment for the thirdfirst quarter of fiscal 20082009 and the thirdfirst quarter of fiscal 2007,2008, respectively, are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.
Manufacturing Segment
The revenue, gross margin and income from operations for the manufacturing segment for the thirdfirst quarters of fiscal2009 and 2008 and 2007 were as follows:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 4,367 | | | $ | 6,923 | |
Gross margin | | | 4.4 | % | | | 17.7 | % |
(Loss) Income from operations | | $ | (884 | ) | | $ | 350 | |
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 3,046 | | | $ | 6,396 | |
Gross margin | | | 14.4 | % | | | 14.9 | % |
Income (Loss) from operations | | $ | (444 | ) | | $ | 326 | |
Loss from the manufacturing segment was $884, an increase of $1,234increased by $770 to $444 for the three months ended March 31,September 30, 2008 from an income of $350$326 in the same quarter last fiscal year primarily due to the loss of fiscal 2007.orders from one of our major customers. The increase in operating loss was attributable to a decrease in gross profit of $1,034$512 and an increase in operating expenses of $200.$258. Operating expenses for the manufacturing segment were $1,075$882 and $875$624 for the three monthsmonth ended March 31, September 30, 2008 and 2007, respectively. The increase in operating expenses was mainly attributable to the impairment lossincrease in headcount in the manufacturing segment of $88 related to certain machinery and equipment in our Singapore operation, dueas we transferred employees from the distribution segment to the manufacturing segment. It is the strategy of management to focus on the sales of our own manufactured products. We believe this will help us to reduce our exposure to multiple risks arising from being a decrease in our backlog and projected future sales.mere distributor of manufactured products from others.
Testing Segment
The revenue, gross margin and income from operations for the testing segment for the thirdfirst quarters of fiscal2009 and 2008 and 2007 were as follows:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 3,973 | | | $ | 6,348 | |
Gross margin | | | 29.6 | % | | | 37.0 | % |
(Loss) Income from operations | | $ | (553 | ) | | $ | 1,077 | |
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 3,098 | | | $ | 5,543 | |
Gross margin | | | 27.0 | % | | | 37.2 | % |
Income from operations | | $ | (222 | ) | | $ | 1,018 | |
Loss from operations in the testing segment in the thirdfirst quarter of fiscal 20082009 was $553, $222, an increase of $1,630, $1,240, or 121.8%, compared to an income of $1,077$1,018 in the same period of fiscal 2007.2008 primarily due to the loss of one of our major customer as their product lines reaching the end of its life cycle earlier than expected. The increase in operating loss from operations was attributable to a decrease of $1,226 in gross profit of $1,176 due to a drop in testing volume coupled with reducing unit sales price as a result of changes in the Singapore testing operationcustomers’ demands, and an increase of $14 in operating expenses of $454. One of our significant customer’s product lines reached the end of its product cycle earlier than expected, causing sales orders to drop significantly in the third quarter of fiscal 2008.expenses. Operating expenses were $1,728$1,059 and $1,274$1,045 for the three months ended March 31,September 30, 2008 and 2007, respectively. The increase in operating expenses was mainly due to an impairment lossa reversal of $353 that we recognized$111 in bonus provision for the thirdfirst quarter of fiscal 2008. Of this amount, an impairment loss of $221 was for certain advanced burn-in testing equipment as a result of the termination of the advanced burn-in testing service contract with one of our major customers. An impairment loss of $75 was for the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. An impairment loss of $57 was for the building renovations for certain testing projects due to a decrease2008, there being no such reversal in the customer’s order in our Shanghai operation in China. The other contributing factor for the increase in operation expenses was an increase in payroll and related expenses in the testing segment in the Malaysia operation in order to handle the rise in sales volume there.first quarter of fiscal 2009.
Distribution Segment
The revenue, gross margin and loss from operations for the distribution segment for the thirdfirst quarters of fiscal2009 and 2008 and 2007 were as follows:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 115 | | | $ | 342 | |
Gross margin | | | 37.4 | % | | | 6.1 | % |
Loss from operations | | $ | (69 | ) | | $ | (91 | ) |
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 86 | | | $ | 111 | |
Gross margin | | | 31.4 | % | | | 26.1 | % |
Income (Loss) from operations | | $ | 31 | | | $ | (22 | ) |
Income from operations in the distribution segment increased by $53 to $31 for the three months ended September 30, 2008, from an operating loss of $22 in the first quarter of fiscal 2008. The increase in operating income was mainly due to a decrease of operating expenses of $55, but offset by a decrease in gross profit of $2 as the result of a decrease in revenue. Operating expenses were negative $4 and $51 for the three months ended September 30, 2008 and 2007, respectively. The decrease in operating expenses was mainly due to a decrease in commission expenses incurred in the first quarter of fiscal 2009 as the result of a decrease in commissionable sales and also a gain of $24 in the selling of property, plant and equipment.
LossCorporate
The income (loss) from operations infor corporate for the distribution segmentfirst quarters of 2009 and 2008 were as follow:
| | Three Months Ended September 30, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Income (Loss) from operations | | $ | (52 | ) | | $ | (68 | ) |
Corporate operating loss decreased by $22$16 to $69$52 for the three months ended March 31,September 30, 2008, compared to $91from $68 in the same period oflast fiscal 2007.year. The decrease in operating loss wasis mainly due to an increase in gross margin of $22, as previously discussed. Operating expenses remainedcorporate management fee and a decrease in officers and executive compensation. In March 2008, we increased the same at $112 for the three months ended March 31, 2008 and 2007.
Corporate
The income from operations for corporate for the third quarters of fiscal 2008 and 2007 were as follow:
| | Three Months Ended March 31, | |
(In Thousands, unaudited) | | 2007 | | | 2006 | |
Income from operations | | $ | 192 | | | $ | 8 | |
Corporate operating income increased by $184 to $192 for the three months ended March 31, 2008, compared to $8 in the same period of fiscal 2007. The improvement in corporate income was mainly attributable to an increase inmanagement fee which is based on the percentage of revenue imposed on all the subsidiaries in the third quarter of fiscal 2008 due to a decrease in the revenue from our subsidiaries. The revenue percentage charged on subsidiaries is a reimbursement to the corporate office to cover its operating expenses. Management reviews this percentage periodically to make sure the amount charged is sufficient to cover its corporate expenses. This improvement was primarily offset by an increase of $32 in stock option compensation expenses.
Comparison of the Nine Months Ended March 31, 2008 and 2007
The following table sets forth certain consolidated statements of (loss) income data as a percentage of net sales for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
| | 2008 | | | 2007 | |
Net Sales | | | 100 | % | | | 100.0 | % |
Cost of sales | | | 77.1 | % | | | 74.9 | % |
Gross Margin | | | 22.9 | % | | | 25.1 | % |
| | | | | | | | |
Operating Expenses | | | | | | | | |
General and administrative | | | 18.4 | % | | | 13.6 | % |
Selling | | | 1.4 | % | | | 1.8 | % |
Research and development | | | 0.1 | % | | | 0.1 | % |
Impairment loss | | | 1.3 | % | | | 0.5 | % |
Loss on disposal of property, plant and equipment | | | 0.1 | % | | | 0.0 | % |
Total operating expenses | | | 21.3 | % | | | 16.0 | % |
| | | | | | | | |
Income from Operations | | | 1.6 | % | | | 9.1 | % |
Overall Gross Margin
Overall gross margin as a percentage of revenue decreased by 2.2% to 22.9% for the nine months ended March 31, 2008, from 25.1% for the same period of fiscal 2007. The decrease in the overall gross margin was due primarily to the decrease in the gross margin in the manufacturing and testing segments. However, this was offset by an increase in gross margin in the distribution segment. In terms of dollar value, the overall gross margin decreased by $1,775, or 18.8%, for the nine months ended March 31, 2008, from $9,421 to $7,646 compared to the same period of fiscal 2007, as a result of a decrease in revenue and an increase in cost of goods sold.
Gross profit margin as a percentage of revenue in the manufacturing segment decreased by 2.9% for the nine months ended March 31, 2008 compared to the same period of fiscal 2007, from 16.2% to 13.3%. In absolute amounts, gross profitamount, there was $2,374, a decrease of $969, or 29.0%, for the nine months ended March 31, 2008, from $3,343 in the same period of fiscal 2007. The decrease in gross margin was due to a decrease in average selling prices of burn-in boards and burn-in systems as a result of strong competition in the market place.
Gross profit margin in the testing segment decreased by 3.7% for the nine months ended March 31, 2008 compared to the same period of the prior year, from 37.8% to 34.1%. In absolute amount, gross profits in the testing segment were $5,171, a decrease of $693, or 11.8%, for the nine months ended March 31, 2008, from $5,864 in the same period of fiscal 2007. The decrease in the gross margin was attributable to a considerable decrease in sales volume due to the fact that one of our significant customer’s product lines reached the end of its life cycle in the third quarter of fiscal 2008, as previously discussed. Significant portions of our operating costs are fixed in the testing segment; thus as product demands decrease and factory utilization decreases, the fixed costs are spread over the decreased output, which in turn decreases profit margin.
Gross profit margin as a percentage of revenue in the distribution segment improved by 14.6%, from 14.9% for the nine months ended March 31, 2007 to 29.5% in the same period this fiscal year. The improvement in the gross profit as a percentage of sales was due to an increase in average sales prices compared to related expenses in the nine months of fiscal 2008 compared to the same period of fiscal 2007. In absolute amount, gross profits decreased by $113, or 52.8%, to $101 for the nine months ended March 31, 2008 from $214 for the nine months ended March 31, 2007, due to a drop in sales volume as previously discussed.
Operating Expenses
The following table presents the operating expenses for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
General and administrative | | $ | 6,144 | | | $ | 5,121 | |
Selling | | | 466 | | | | 660 | |
Research and development | | | 45 | | | | 52 | |
Impairment loss | | | 457 | | | | 174 | |
Loss on disposal of property, plant and equipment | | | 11 | | | | -- | |
Total | | $ | 7,123 | | | $ | 6,007 | |
During the nine months ended March 31, 2008, we reclassified payroll expenses of $301 from selling expenses to general and administrative expenses and cost of sales to reflect a better presentation of our operations. Accordingly, $222 of selling expenses was reclassified to general and administrative expenses and cost of sales in the nine months ended March 31, 2007 for the purpose of comparison. General and administrative expenses increased by $1,023, or 20.0%, from $5,121 to $6,144 for the nine months ended March 31, 2008, compared to the same period of fiscal 2007. The increase was primarily attributable to a hike in payroll and related expenses in the Malaysia operation in order to handle the rise in sales volume there, an increase of $57 in unemployment benefits$143 in the third quarter of 2008 resulting fromfees we imposed on all the layoff of 65 employees in our Singapore operation in order to lower our costs to match with production activity, and an increase of $386 was related to stock option compensation expenses for the 100,000 options granted on December 4, 2007.
Selling expenses decreased by $194, or 29.4 %, for the nine months ended March 31, 2008, from $660 to $466, compared to the same period of fiscal year 2007. This was mainly due to a decrease in commission expenses as a result of fewer commissionable sales in the distribution segment, and a reversal of $92 in overprovided commission expenses in the manufacturing segment and distribution segment. Part of our commission payable was based on the estimated profit margin of sales when the sales were recorded, and it was reduced when the actual profit margin decreased as the result of an increase in unexpected service expenses following the sales. In addition, in the nine months ended March 31, 2007 there were expenses incurred for free demo sets which were given to customers for promotional purposes, while there were no such expenses in the same period of fiscal 2008.
Research and development costs decreased by $7 from $52 in the nine months ended March 31, 2007 to $45 in same period of 2008 due primarily to a decrease in payroll expenses in the U.S. operation.
The impairment loss increased by $283 for the nine months ended March 31, 2008, from $174 to $457, compared to the same period of fiscal 2007. Of this loss, $11 was related to the disposal of certain fixed asset in our Suzhou operation in China in the second quarter of fiscal 2007. $5 was related to the asset held for sale in Malaysia. $221 was related to certain advanced burn-in testing equipment as a result of the termination of the advance burn-in testing service contract with one of our major customers. $75 was related to the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. Additionally, $57 of the impairment loss was related to the building renovations for certain testing projects due to a decrease in a customer’s order in our Shanghai operation in China, and the remaining impairment loss of $88 was related to certain machinery and equipment in our Singapore operation due to a decrease in backlog and projected future sales.
The impairment loss in the nine months ended March 31, 2007 consisted of $423 in machinery and equipment net of accumulated depreciation of $251, as well as $4 in building renovations and related accumulated depreciation of $2. Due to the decrease in demand for the slower speed microprocessor chips, those of our existing burn-in facility assets in the Singapore operation used for testing such chips became obsolete, and the carrying amount was written down to zero in the second quarter of fiscal 2007. The building renovation was impaired as we moved to a new office unit in order to accommodate the needs of the testing operation in the Suzhou operation in China. Since there will be no future cash flows from those assets, the carrying value of these assets was written down to zero, and the impairment cost was recorded.
Income from Operations
Income from operations decreased by $2,891 to $523 for the nine months ended March 31, 2008, from $3,414 for the same period of fiscal year 2007. The decrease in income from operations was due to a decrease in gross margin of $1,775 and an increase in operating expense of $1,116.
Interest Expense
The following table presents the interest expenses for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Interest expense | | $ | 257 | | | $ | 119 | |
Interest expenses increased by $138 during the nine months ended March 31, 2008, from $119 to $257 compared to the same period of fiscal 2007, primarily due to a new term loan facility of $3,837 entered into during the first quarter of fiscal 2008 to support the expansion plans and potential business opportunities of the Singapore and China operations. The other contributing factor was an interest loss of $80 in the nine months ended March 31, 2008 due to an interest swap agreement on one of our loans that we entered into during the first quarter of fiscal 2008.
Other Income
The following table presents the other income for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Other (expenses) income | | $ | (224 | ) | | $ | 155 | |
Other expenses increased by $379 to $224 for the nine months ended March 31, 2008, from an income of $155 in the same period of the prior year, primarily due to an increase in the currency transaction loss and an increase in provision for the value added tax in our China operation, but offset by an increase in investment income generated from short-term deposits and rental income. Currency transaction loss increased by $500 for the nine months ended March 31, 2008, from $5 to $505, compared to the same period fiscal 2007. This was attributable to the weakening of the U.S. dollar against foreign currency with regard to transactions denominated in U.S. dollars. The provision for the value added tax was $121, which was the result of a change in the local tax policy in our Suzhou operation in China. Investment income was $199 for the nine months ended March 31, 2008 and was $108 higher than the investment income generated in the same period of the prior year due to an increase in the placement of short-term deposits by placing idle cash into income generating investments. Rental income, which consisted mainly of space in the Malaysia operation rented to outside vendors, increased by $34 to $117 for the nine months ended March 31, 2008 from $83 in the same period of fiscal 2007.
Income Tax
Income tax provision for the nine months ended March 31, 2008 was $268, a decrease of $449 compared to an income tax provision of $717 for the same period of fiscal 2007. The decrease in income tax provision was mainly due to a lower tax provision for the decreased income generated from the Singapore operations during the nine months ended March 31, 2008 and a reversal of deferred tax liability of $119 in the Singapore operations. This benefit was offset by a provision for deferred tax liability of $206 as the result of the timing differences related to the recording of depreciation expenses for book and tax purposes in the Malaysia operation.
Minority Interest
As of March 31, 2008, we held a 55% interest in Trio-Tech Malaysia. The minority interest for the nine months ended March 31, 2008 in the net income of subsidiaries was $269, an increase of $172 compared to a minority interest in the net income of $97 for the same period of the prior year. The increase in the minority interest was attributable to the improvement in the net income generated from the Malaysia testing operation due to stronger market demands from our customers there.
Net (Loss) Income
Net loss for the nine months ended March 31, 2008 was $495, an increase of $3,131, compared to a net income of $2,636 in the same period of fiscal 2007. The decrease in net income was mainly due to a decrease in revenue, an increase in operating expenses, interest expense and a decrease in other income, as previously discussed.
Earnings per Share
Basic and diluted loss per share for the nine months ended March 31, 2008 increased by $0.97 to $0.15 from basic and diluted earnings of $0.82 per share in the same period of the prior year.
Segment Information
The revenue, gross margin and income from each segment for the nine months ended March 31, 2008 and 2007 are presented below. As the segment revenue and gross margin for each segment have been discussed in the previous section, only the comparison of income from operations is discussed below.
Manufacturing Segment
The following table presents the revenue, gross margin and (loss) income from operations for the manufacturing segment for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 17,848 | | | $ | 20,602 | |
Gross margin | | | 13.3 | % | | | 16.2 | % |
(Loss) Income from operations | | $ | (92 | ) | | $ | 1,041 | |
Loss from operations in the manufacturing segment increased by $1,133 to $92 for the nine months ended March 31, 2008 from an income of $1,041 in the same period of fiscal 2007. The decrease in operating profit was attributable to a decrease of $969 in gross profit, and an increase of $164 in operating expenses. Operating expenses for the manufacturing segment were $2,466 and $2,302 for the nine months ended March 31, 2008 and 2007, respectively. The increase in operating expenses was mainly attributable to the impairment loss of $88 related to certain machinery and equipment in our Singapore operation due to a decrease in our backlog and projected future sales. However, this was offset by a reversal of $43 in bonus provision for fiscal year 2007 as a result of a change in estimate in the first quarter of fiscal 2008, as discussed in Note 1.
Testing Segment
The following table presents the revenue, gross margin and income from operations for the testing segment for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 15,186 | | | $ | 15,519 | |
Gross margin | | | 34.1 | % | | | 37.8 | % |
Income from operations | | $ | 1,110 | | | $ | 2,421 | |
Income from the testing segment decreased by $1,311, or 54.2%, to $1,110 for the nine months ended March 31, 2008 from $2,421 in the same period fiscal 2007. The decrease in operating income was attributable to a decrease in gross profits of $693 and an increase in operating expenses of $618. Operating expenses were $4,061 and $3,443 for the nine months ended March 31, 2008 and 2007, respectively. The increase in operating expenses was mainly due to an increase in impairment loss of $353. Of this amount, an impairment loss of $221 was for certain advanced burn-in testing equipment as a result of the termination of the advanced testing service contract with one of our major customers. An impairment loss of $75 was for the burn-in board testing system in our Shanghai operation in China due to change in demand for certain burn-in testing services, which in turn made certain of our existing burn-in facilities obsolete. An impairment loss of $57 was for building renovations for certain testing projects due to a decrease in the customer’s order in our Shanghai operation in China. The other contributing factor was the hike in payroll and related expenses in the testing segment in the Malaysia operation in order to handle the rise in sales volume there. This was offset by a reversal of $111 in bonus provision for fiscal 2007 as a result of a change in estimate, as discussed in Note 1, in the first quarter of fiscal 2008.
Distribution Segment
The following table presents the revenue, gross margin and loss from operations for the distribution segment for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
Revenue | | $ | 342 | | | $ | 1,435 | |
Gross margin | | | 29.5 | % | | | 14.9 | % |
Loss from operations | | $ | (152 | ) | | $ | (101 | ) |
Loss from the distribution segment increased by $51 to $152 for the nine months ended March 31, 2008 from an operating loss of $101 in the same period of fiscal 2007. The operating loss was attributable to a decrease in gross profit of $113, but offset by a decrease in operating expenses of $62. This decrease in operating expenses was mainly due to lower commission expenses due to a drop in commissionable sales. Operating expenses were $252 and $314 for the nine months ended March 31, 2008 and 2007, respectively.
Corporate
The following table presents the (loss) income from operations for Corporate for the nine months ended March 31, 2008 and 2007, respectively:
| | Nine Months Ended March 31, | |
(In Thousands, unaudited) | | 2008 | | | 2007 | |
(Loss) Income from operations | | $ | (343 | ) | | $ | 53 | |
Corporate operating loss increased by $396 for the nine months ended March 31, 2008, from an operating income of $53 in the same period of fiscal 2007 to an operating loss of $343 this fiscal year. The increase in operating loss from corporate was mainly due to an increase of $214 in the remuneration for executive officers and an increase of $386 in stock option compensation expenses for the options we granted on December 4, 2007,2009 as compared to the same period of fiscal 2007.2008.
In July 2007, we decided to terminate the potential cash incentive awardsOn February 27, 2008, in view of anticipated reductions in service revenue for the chief executivesfiscal 2008, our Chief Executive Officer, Chief Financial Officer and increasedirectors voluntarily decreased their base salary starting fromto 50% of the fiscal year 2008.base salary agreed to in July 2007. As a result, our compensation for the Company suffered a lossofficers and executives decreased by $99 in the thirdfirst quarter of fiscal 2008, we reduced2009. However, such decrease in corporate expenses was offset by a $238 stock options expense in the salaryfirst quarter of our chief executives by $93 per quarter, effective April 1, 2008.fiscal 2009, there being no such expense in the same period of the last fiscal year.
During the ninethree months ended March 31,September 30, 2008, total assets increased $3,294, or 10.0%,decreased $3,085 from $32,788$34,759 at June 30, 20072008 to $36,082$31,674 at March 31, 3008.September 30, 2008. The majority of the increasedecrease was in othercash, accounts receivables inventory, prepaid expenses, investment and other assets, but offset by a decrease in cash, other intangible assets and accounts receivable.inventory.
At March 31, 2008,the end of the first quarter of fiscal 2009, total cash and short-term deposits were $14,300, $13,026, reflecting a decrease of $650$1,320 from the sum of those two balances at June 30, 2007.fiscal year-end 2008. The decrease in cash was mainlyprimarily due to a decrease in net cash provided by operating activities asloss of $719, a resultrepayment of a decrease in net income, an investment in Chongqing, China of $2,931bank loans and capital expenditurelease of $2,507 during the nine months ended March 31, 2008. This decrease was offset by$551 and capital an increaseexpenditures of $659 in proceeds from long-term loans. In the first quarter of fiscal 2008, we obtained a new term loan of $3,837 (based on the exchange rate of March 31, 2008)2009 to support our long-term investment and potential business expansion opportunities. acquire machinery equipment as discussed below.
At March 31,September 30, 2008, the accounts receivablesreceivable balance decreased by $327$869 from the balance at June 30, 20072008 due primarily to a decrease in sales in the thirdfirst quarter of fiscal 2008.2009. Therate of turnover of accounts receivables turnover was 5978 days forat the thirdend of the first quarter of fiscal 20082009 compared with 7866 days forat fiscal year-end 2008. The increase in such rate was due to a high employee turnover in our Singapore operation’s accounts receivable staff during the first quarter of fiscal 2009. We have taken actions to improve the rate of turnover of our accounts receivables, such as providing electronic payment method to our customers and sending periodical customer account statements.
Inventories at September 30, 2008 was $1,879, a decrease of $570, or 23.3%, compared to $2,449 at June 30, 2008, The decrease in inventory was mainly from the work in progress inventory items Our manufacturing segment built up additional inventory in the fourth quarter of fiscal 2007. The decrease in the accounts receivable turnover rate was primarily due to improvements in collections at the Singapore operation.
Other receivables at March 31, 2008 increased by $437 from that balance at June 30, 2007, due mainly to for an increase of $130 in expected product advanced payments to our vendors by the Singapore operation.shipment
Inventory at March 31, 2008 was $2,144, reflecting an increase of $198, or 10.2%, compared to June 30, 2007. The increase in inventory was mainly from an increase in raw materials. Most of the increased inventory was bought in the first two quartersquarter of fiscal year 2008, which2009. After the shipment was for the expected product shipmentscompleted in the third and fourthfirst quarter that we forecasted.of fiscal 2009, work in progress inventory decreased. The turnover of inventory was reduced by $329 as40 days at the end of the first quarter of fiscal 2009 compared to the inventory of $2,473 as of December 31, 2007with 21 days at fiscal year-end 2008. The slower rate was due to a decrease in projected sales. The turnoversales as a result of inventory was 22 days forfewer orders being placed by one of our major customers, because of the third quarterslower movement of fiscal 2008 compared with 23 days for the fourth quarterthat customer’s product line and equipment capacity.
Prepaid expenses and other current assets at March 31,September 30, 2008 were $222,$195, an increase of $100$57 from thatthe balance at June 30, 2007,2008, primarily due primarily to increased prepayments to suppliers and an increase in prepaid insurance for the calendar year 2008 in the Singapore operations.
Asset held for sale of $219 at March 31, 2008 was comprised of the market value of the property located in Malaysia, which is subjectGoods and Services Tax related to material purchases according to the terms under a definitive sales agreement dated December 31, 2007, less the cost to sell, in accordance with SFAS No. 144.related Singapore tax regulations.
On August 27, 2007 and November 15, 2007, In the first quarter of fiscal year 2008, Trio-Tech (Chongqing)Chongqing Co., Ltd. entered into a Memorandum Agreement and a Supplement Agreement, respectively, with JiashengJiaSheng Property Development Co., Ltd. to jointly develop a piece of property with 24.91 acres owned by JiashengJiaSheng located in Chongqing, China. Pursuant to the signed agreement, an investment of $1,426$1,473, based on the exchange rate on September 30, 2008 published by the Federal Reserve System, was transferred in the first quarter of fiscal 2008 into a special bank account jointly monitored by both Trio-Tech (Chongqing) Co., Ltd. and Jiasheng.JiaSheng
On December 17, 2007, Trio-Tech (Chongqing) Co., Ltd. received a list. Pursuant to the Supplement Agreement, an investment of additional costs incurred for this project. Accordingly,RMB 5,000, approximately U.S. $737 based on the Company onlyexchange rate on September 30, 2008 published by the Federal Reserve System. was transferred RMB5,000, approximately $713, from its bank account into the special bank account jointly monitoredon December 17, 2007. In the fourth quarter of fiscal 2008, the investment of RMB 5,000, approximately U.S. $737 based on the exchange rate on September 30, 2008 published by both Trio-Tech (Chongqing) Co.the Federal Reserve System, Ltd. and Jiasheng
was returned to the Company, which reduced the investment in this project to $1,473. On January 4, 2008, Trio-Tech (Chongqing) Co., Ltd. entered into a Memorandum of Agreement with MaoYe Property Ltd. to purchase an office space of 827.2 square meters on the 35th floor of a 40 story high office building located in Chongqing, China. The total cash purchase price was RMB5,554RMB 5,554 (Chinese yuan)Yuan), equivalent to approximately U.S. $792$818 based on the exchange rate as of March 31,September 30, 2008 published by the Federal Reserve System. Under the termsThe Company rented this property out to a third party on July 13, 2008. The term of the lease agreement is five years (starting from July 13, 2008) with a monthly rental income of RMB 39 (approximately $5) for the Company paidfirst three years, with an increase of 8% in the purchase pricefourth year and another 8% in full on January 4, 2008.the fifth year. As of March 31,June 30, 2008 the total of all the Company’s investments in Chongqing, China was $2,931.$2,267. The rental income generated from this investment property in first quarter of fiscal 2009 was $15. There was no such investment income in the first quarter of fiscal year 2008.
Property, plant and equipment increaseddecreased by $255$198, from $7,458$8,136 at June 30, 20072008 to $7,713$7,938 at March 31, 2008.September 30, 2008, due to the depreciation of the Company’s fixed assets in the ordinary course of business. Capital expenditures were $2,507 in the first nine months of fiscal 2008, compared with $2,409$659 for the first nine monthsquarter of fiscal 2007.2009, compared with $545 for the first quarter of fiscal 2008. The increase in capital expendituresexpenditure was mainly from our operationdue to purchases of machinery and equipment in Malaysiathe first quarter of fiscal 2009 by the Singapore operations in order to meet customers’ requirements.product specifications from our customers.
Depreciation and amortization was $2,262$518 for the nine months ended March 31, 2008,first quarter of fiscal 2009, compared with $2,007$778 for the same periodfirst quarter of fiscal 2007.2008. The increasedecrease in depreciation expenses was mainly due mainly to an increasethe write-off of certain fixed assets in property, plantthe Singapore and equipment acquired after June 30, 2007.China operations in the third and fourth quarters of fiscal year 2008, as a result of the termination of a testing service contract with one of our major customers and . change in customers’ demand for certain burn-in testing services.
Other assets were $645$735 at March 31,September 30, 2008, an increasea decrease of $200$78 from thatthe balance at June 30, 2007.2008. The increasedecrease in other assets was primarily due to a decrease of $110$4 in the deposit for rental and utilities and a decrease of $74 in the down payment on certainof fixed assets in the Singapore operation, and a decrease of $50 for the down payment for certain fixed assets, rent and utilities in the China operation, but was offset by an increase of $360 in down payment for the Malaysia operation.
Liquidity Comparison
Net cash provided by operating activities decreasedincreased by $1,451$415 to $1,421$33 for the ninethree months ended March 31,September 30, 2008 from $2,872a net cash outflow of $382 in the same period of last fiscal 2007.year. The decreaseincrease in net cash provided by operating activities was primarily due to a decreasethe collection of $3,131 in net income from $2,636accounts receivable and usage of inventory during this first quarter of fiscal 2009 compared to a lossan increase of $495 during the nine months ended March 31, 2008 as compared toaccounts receivable and inventory build up for the same period ofin the prior year. This decrease was offset by an increasea net loss of $1,017$719 and decrease in net impact from non-cash items and an increaseaccounts payable of $663 from change in balance sheet items. In$1,565 during the nine months ended March 31, 2008, the non-cash impairment expenses increased by $283, primarily due to the terminationfirst quarter of the advance burn-in testing service contract, depreciation and amortization increased by $255 due to an increase in fixed assets and stock option compensation expenses increased by $386 for the 100,000 options granted on December 4, 2007.
Net cash used in investing activities increaseddecreased by $3,875$1,871 to $5,832$1,068 for the ninethree months ended March 31,September 30, 2008 from $1,957$2,939 for the same period of fiscal 2007. The proceeds from maturing short-term deposits of $25,537 were not adequate to cover2008. In the higher investment in short-term deposits of $25,946 in the nine months ended March 31, 2008, thereby incurring a negative investing cash flow. As we anticipated that funds would be required in the nextfirst quarter of fiscal 2008, for working capital purposes, we invested in short-term depositsRMB 10,000, equivalent to generate investment income. We invested $2,931approximately U.S. $1,331 based on the average exchange rate for the three month ended September 30, 2007, in Chongqing, China in the nine months ended March 31, 2008 to jointly develop a piece of property with 24.91 acres with JiashengJiaSheng Property Development Co., Ltd and Ltd. We purchase an office space of 827.2 square meters in Chongqingdid. The capital expenditure also increased by $98, as previously discussed. not make a similar
Net cash provided by financing activities investment in the nine months ended March 31, 2008first quarter of fiscal 2009. In the first quarter of 2009, there was $2,201, representing an increase of $2,801 compared to$493 in the net cash usedinvestment in financing activitiesshort term deposits and an increase of $600 during$161 in the same period of fiscal 2007. The increase was mainly due to proceeds from the long-term bank loanssale of $3,837 entered into during the nine months ended March 31, 2008 as compared to bank loans of $6property, plant and equipment. We did not sale any property, plant and equipment in the same period of fiscal 2007. However, this was2008.These decreases in the net cash used in investing activities were offset by a decreasean increase in capital expenditure of $294 from net borrowing on lines$114 in the first quarter of creditfiscal 2009 compared with the same period of fiscal 2008. The increase in capital expenditure was primarily for the purchase of machinery and equipment in the Singapore operations in order to meet customers’ demands.
Net cash used in financing activities in the first quarter of fiscal 2009 was $548, representing an increase of $607$3,950 compared to net cash inflow of $3,402 during the first quarter of fiscal 2008. The increase was due mainly to an increase of $134 in prepaymentthe repayment of bank loans and capital leases.leases, a decrease of $209 in the net borrowings on line of credit and a decrease of $3,610 from the proceeds from long-term bank loans compared with the same period of last fiscal year. We are trying to keep our debt at minimum in order to save financing costs. Our credit rating provides us with ready and adequate access to funds in global markets. As of September 30, 2008, the Company has an unused line of credit of $15,657. In the first quarter of fiscal 2008, we increased our borrowing from bank loans to meet our daily operation needs and to support future potential expansion opportunities at that time.
We believe we have the necessary financial resources to meet our projected cash requirements for at least the next twelve months.
As the Company suffered a loss in the first quarter of fiscal 2009, the Singapore operations did not fulfill one of the loan covenants conditions, which requires the company to maintain the debt to EBITDA ratio of no more than 2.5 times at all times during the terms of the loan. As a result, the Company has reclassified the related long term portion of the bank loan of $1,215 to the current portion of the liabilities. The management has communicated to the bank and requested a waiver of this particular covenant. As of the filing date of this 10Q report, the bank is still in the process of reviewing the Company’s request.
Corporate Guarantee Arrangement
The Company provides a corporate guarantee of approximately $1,813$1,745 to one of its subsidiaries in Southeast Asia to secure line-of-credit and term loans from a bank to finance the operations of such subsidiary. With the strong financial position of the subsidiary company, the Company believes this corporate guarantee arrangement will have no material impact on its liquidity or capital resources.resources.
On October 23, 2008, Trio-Tech Chongqing Co., Ltd. entered into a Memorandum Agreement with JiaSheng Property Development Co., Ltd. (“JiaSheng”) to purchase four units of commercial property and two units of residential property, totaling 1,391.70 square meters, at JiaSheng Jingyun Huafu Project located at No. 17 Puyun Avenue in Chongqing, China. The total cash purchase price to be paid by the Company under the Memorandum Agreement is RMB 7,043 (Chinese yuan) or approximately $1,030 (U.S. dollars) based on the exchange rate as of October 23, 2008 published by the Federal Reserve Statistical Release. Under the terms of the Memorandum Agreement, the Company made a down payment of 10% in cash in the amount of RMB 704 or U.S. $103 in October 2008 and the balance of 90% was paid on November 4, 2008, using internally generated funds of the Company.
Critical Accounting Estimates and& Policies
There have been no significant changes in the critical accounting polices disclosed in “Management’s Discussiondiscussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operations”operations” included in the most recent Annual Report on Form 10-K.
We prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
An evaluation was carried out by the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31,September 30, 2008, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at a reasonable level.
Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.
During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control overall financial reporting.
TRIO-TECH INTERNATIONAL
The Company is involved in a legal proceeding with four of its former employees in connection with the termination of four employment contracts in the third quarter of fiscal year 2008 in the Singapore operation. The Company refuted the claims and proposed to dismiss the case. PART II. OTHER INFORMATIONThe Company is reviewing the employees’ allegations, but believes they are without merit and intend to vigorously defend itself in the lawsuit. As of March 31, 2008, no amounts have been recorded in the consolidated financial statements for this matter as management believes an unfavorable outcome is not probable.
Not applicable | Risk Factors |
Not applicableItem 1A. Risk Factors
| Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
Malaysian and Singapore regulations prohibit the payment of dividends if the Company does not have sufficient retained earnings and tax credit. In addition, the payment of dividends can only be made after making deductions for income tax pursuant to the regulations. Furthermore, the cash movements from the Company’s 55% owned Malaysian subsidiary to overseas are restricted and must be authorized by the Central Bank of Malaysia. California law also prohibits the payment of dividends if the Company does not have sufficient retained earnings or cannot meet certain asset to liability ratios.
| Defaults uponItem 3. Defaults Upon Senior Securities |
Not applicable
| Item 4. Submission of Matters to a Vote of Security Holders |
Not applicable
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
10.1 | Sales and purchase agreement on office and commercial units at Jiang Bei No. 21 Road,in Chongqing |
| |
10.2 | Tenant lease of U.S.agreement for the office |
| and commercial units in Chongqing |
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer of Registrant |
31.2 | |
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer of Registrant |
32 | |
32 | Section 1350 Certification. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TRIO-TECH INTERNATIONAL | |
| | | |
| By: | /s/ Victor H.M. Ting | |
| | VICTOR H.M. TING | |
| | Chief Financial Officer | |
| | (Principal Financial Officer) | |
| | Dated: May 15, 2008 | |
TRIO-TECH INTERNATIONAL
By: /s/ Victor H.M. Ting
VICTOR H.M. TING
Vice President and Chief Financial Officer
(Principal Financial Officer)
Dated: November 14, 2008