Trio-Tech International - 10-Q quarterly report FY

 

(Exact name of Registrant as specified in its Charter)

Registrant’s Telephone Number, Including Area Code: 818-787-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o       Accelerated Filer o       Non-Accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock outstanding as of May 07, 2007 is 3,227,992

The discussions of Trio-Tech International’s (the “Company”) business and activities set forth in this Form 10-Q and in other past and future reports and announcements by the Company may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and assumptions regarding future activities and results of operations of the Company. In light of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following factors, among others, could cause actual results to differ materially from those reflected in any forward-looking statements made by or on behalf of the Company: market acceptance of Company products and services; changing business conditions or technologies and volatility in the semiconductor industry, which could affect demand for the Company’s products and services; the impact of competition; problems with technology; product development schedules; delivery schedules; changes in military or commercial testing specifications which could affect the market for the Company’s products and services; difficulties in profitably integrating acquired businesses, if any, into the Company; risks associated with conducting business internationally and especially in Southeast Asia, including currency fluctuations and devaluation, currency restrictions, local laws and restrictions and possible social, political and economic instability; and other economic, financial and regulatory factors beyond the Company’s control. See the discussions elsewhere in this Form 10-Q, including under the heading “Certain Risks That May Affect Our Future Results,” for more information. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.

We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

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 five testing facilities, one in the United States and four in Southeast 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 with facilities in Singapore, Malaysia and Thailand. In the second quarter of fiscal 2007, our China operations in Suzhou started its testing operation. We believe that the burn-in testing business in Suzhou will enhance our future growth opportunities and develop our China market share in testing services. 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 our utilization of our testing capacity, and can adversely affect profit margin 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.

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 focuses on marketing used and refurbished equipment, which some of our customers are more willing to purchase, as 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 ongoing 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 the Company’s own manufactured equipment in addition to distributing complementary products from other manufacturers that are used by the Company’s customers and other semiconductor and electronics manufacturers. One of the strategic business units also serves as a distributor of electronic components to customers. We continued to focus our marketing efforts on Asia, as we believe that Asian markets are growing faster than other markets due to rapid expansion in the China market. We also believe that due to our strategic position in the heart of Asia, we are in a good position to service customers in all of Southeast Asia.

On March 8, 2007, we hired Burnham Hill Partners, a division of Pali Capital, Inc in the United States. to act as (i) our exclusive financial advisor in connection with one or more potential strategic transactions currently being explored by the Company, which may include an acquisition, joint venture, partnership, strategic alliance, merger and/or sale involving the Company and (ii) our placement agent or underwriter in connection with the raising of debt or equity capital. We believe that the agreement that we made with Burnham Hill Partners is not a material definitive agreement. One of our directors, Jason Adelman, is a partner of Burnham Hill Partners. Burnham Hill Partners proposed a fee arrangement that was consistent with industry standards for transactions of that nature, and an agreement which would expire 12 months from the date into which it was entered. The agreement was approved by the Board of Directors of the Company in good faith by a vote sufficient without counting the vote of Mr. Adelman and, in the judgment of the Board of Directors, was just and reasonable at the time the agreement was so approved .

Overall, total sales for the nine months and three months ended March 31, 2007 were $37,556 and $13,613, respectively, an increase of $17,957 and $7,144, respectively, when compared to the same periods last fiscal year. As a percentage, total net sales increased by 91.6% and 110.4% for the nine months and three months ended March 31, 2007, respectively, when compared to total net sales for the same periods last fiscal year.

Total net sales into and within China and the Southeast Asia regions and other countries (except sales into and within the United States) increased by $14,790 to $32,404 and by $6,301 to $12,312 for the nine months and three months ended March 31, 2007, respectively, compared to the same periods last fiscal year. This overall increase was primarily due to an increase in sales from the manufacturing segment and testing segment. Total net sales into and within the United States were $5,152 and $1,301 for the nine months and three months ended March 31, 2007, respectively, an increase of $3,167 and $843, respectively, when compared to the same periods last fiscal year.

The following table sets forth our revenue components for the nine and three months ended March 31, 2007 and 2006, respectively.

The increase in net sales can be discussed within three segments as follows:

Net sales in the manufacturing segment as a percentage of total net sales were 54.86% and 50.86% for the nine months and three months ended March 31, 2007, respectively, an increase of 18.36% and 9.36% of total net sales when compared to the same periods last fiscal year. The absolute amount of net sales were $20,602 and $6,923 for the nine months and three months ended March 31, 2007, an increase of $13,451 and $4,238, respectively, when compared to the same periods last fiscal year. The increase in revenue generated by the manufacturing segment was due to a continuing increase in demand from the personal computer market in Asia, which in turn led to a greater demand for our products. We believe that the demand for our burn-in systems increased concurrently with the demand for more microprocessor chips in Southeast Asia. The increase primarily resulted from an increase in demand from one of our major customers, which was a result of that customer’s growing share in the market for microprocessor chips.

Net sales in the testing segment as a percentage of total net sales were 41.32% and 46.63% for the nine months and three months ended March 31, 2007, respectively, a drop of 13.33% and 6.72%, respectively, of total net sales when compared to the same period last fiscal year. However, absolute amount of net sales in the testing segment increased by $4,808 to $15,519 and by $2,897 to $6,348 for the nine months and three months ended March 31, 2007, respectively, compared to the same periods of fiscal 2006. The testing segment continued to show improvement in revenue compared to the same periods last fiscal year due to an increase in the demand for testing services in Southeast Asia, which resulted from the strong economic growth and robust development in the electronics manufacturing industries in China. The increase in revenue generated by the testing segment was the result of an overall improvement in performance by the majority of our testing operations in Southeast Asia. Furthermore, our China operation in Suzhou started its testing operation in the second quarter of fiscal 2007, which contributed to this improvement in revenue. Demand for testing services varies from time to time depending on changes taking place in the market and our customers’ forecasts. We anticipate that our customers will continue to request our services to perform “burn-in” on chips to be used in wireless handsets, automotive applications and wired communications, which chips are currently in high demand in their respective markets.

Net sales in the distribution segment accounted for 3.82% and 2.51% of total net sales for the nine months and three months ended March 31, 2007, respectively, a decrease of 5.04% and 2.64% compared to the same periods in fiscal 2006. The absolute amount of net sales slightly increased by $9 to $342 for the three months ended March 31, 2007. However, the net sales decreased by $302 to $1,435 for the nine months ended March 31, 2007, compared to the same period in fiscal 2006. The decrease in revenue in the nine months ended March 31, 2007 was mainly attributable to fewer bookings from customers resulting from what we believe is a saturation of equipment and electronic components in the current market. Product volume for the distribution segment depends on sales activities such as bookings, queries on products and backlog. Equipment and electronic component sales are very competitive, as the products are readily available in the market.

There are several influencing factors which create uncertainties when forecasting performance, such as the ever-changing nature of technology, specific requirements from the customer, decline in demand for certain types of burn-in devices or equipment, and other similar factors. One of these factors is the highly competitive nature of the semiconductor industry. Another is that some customers are unable to provide a forecast of the products required in the upcoming weeks; hence it is difficult to plan for the resources needed to meet these customers’ requirements due to short lead time and last minute order

confirmation. This will normally result in a lower margin for these products, as it is more expensive to purchase materials in a short time frame. However, the Company has taken action in an effort to protect itself and has formulated plans for dealing with these unpredictable factors. For example, in order to meet customers’ demands upon short notice, the Company maintains higher inventories, but continues to work closely with its customers to avoid stock piling. We continue to cut costs by upgrading some of our existing facilities to cater to the changing requirements of customers and maintaining a lean headcount, while still keeping quality high so as to sell new products at a competitive price. We have also been improving customer service by our staff by keeping our staff up-to-date on the newest technology and stressing the importance of understanding and meeting the stringent requirements of our customers. Finally, the Company is exploring new markets and products, looking for new customers, and upgrading and improving burn-in technology while at the same time searching for improved testing methods of higher technology chips.

The following table sets forth certain consolidated statements of income data as a percentage of net sales for the third quarters ended March 31, 2007 and 2006, respectively:

Overall gross margin decreased slightly by 0.9% for the three months ended March 31, 2007, from 27.4% in the third quarter of fiscal year 2006. The lower margin was primarily because sales from the manufacturing segment as a percentage of total sales was higher than the decrease in sales from the testing segment as a percentage of total sales in the third quarter of fiscal 2007, and the gross margin in the manufacturing segment was lower than the gross margin in the testing segment. In terms of dollar value, the overall gross margin increased by $1,842 for the three months ended March 31, 2007 from $1,772 to $3,614 compared to the same quarter last fiscal year, as a result of better sales performances by the manufacturing and testing segments.

Gross profit margin in the manufacturing segment decreased from 26.2% for the three months ended March 31, 2006, to 17.9% in the same quarter in fiscal 2007. The decrease in the gross margin was due to an increase in sales of low margins burn-in systems pass-through products in the third quarter of 2007 compared with the same quarter of fiscal 2006. Neither the increase in the absolute dollar amount of sales of burn-in boards and burn-in systems nor the increase in the quantity of burn-in systems sold in the third quarter were sufficient to maintain or increase the gross margin in the manufacturing segment due to the decrease in sales prices for the burn-in boards and burn-in systems as a result of strong competition in the market place. However, the Company currently intends to continue manufacturing low-margin burn-in systems and boards in order to maintain market share of these products with its current customers. In absolute amounts, gross profits from the manufacturing segment increased by $539 to $1,243 for the three months ended March 31, 2007, from $704 in the same quarter last year. The increase was mainly attributable to an increase in revenue from $2,685 for the third quarter of fiscal 2006 to $6,923 in the same quarter of fiscal 2007, as previously discussed.

Gross profit margin in the testing segment increased from 30.5% in the third quarter of fiscal year 2006 to 37.0% in the same quarter in fiscal 2007, primarily due to higher sales volume with lower overhead cost, especially in the China operation. Significant portions of our operating costs are fixed in the testing segment, thus as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which improves profit margin. However, this was offset by a drop in the average selling price of services in the Singapore testing operation. Our customers changed their demands and requirements for burn-in hours, which resulted in a lower average unit selling price for burn-in services. However, we expect

that the effect of such trend may be offset in the future by the increase in burn-in services demanded for the faster microprocessor chips. Gross profits in the testing segment were $2,351 and $1,054 for the three months ended March 31, 2007 and 2006, respectively.

Gross profit margin in the distribution segment increased by 1.3% to 5.7% in the third quarter of fiscal 2007 from 4.4% compared to the same quarter of fiscal 2006. Sales in the third quarter of fiscal 2007 were mainly from back-end products, such as chambers and ovens, which have a slightly higher margin. Gross profits were $20 and $14 for the three months ended March 31, 2007 and 2006, respectively.

The following table presents the operating expenses for the third quarters ended March 31, 2007 and 2006, respectively:

General and administrative expenses increased by $643 (or 51.0%) to $1,904 for the three months ended March 31, 2007, from $1,261 in the same quarter last fiscal year. The increase was attributable to a hike in payroll and related expenses due to a rise in headcount in the Singapore operation, and an increase in general and administrative expenses in the China operation in Suzhou, which commenced its testing operations in the second quarter of fiscal 2007.

Selling expenses increased by $93 (or 36.8%) to $346 for the three months ended March 31, 2007, from $253 in the same quarter last fiscal year, mainly due to expenses incurred for demo sets which were given to customers free for promotional purposes in the third quarter of fiscal 2007. Salaries for sales people and related expenses also increased due to a rise in headcount in the Singapore manufacturing segment.

Research and development costs decreased by $2 for the three months ended March 31, 2007 from $20 in the same quarter last fiscal year.

The impairment loss increased to $2 for the three months ended March 31, 2007 from $0 in the same period last fiscal year. The Company reviews the carrying amount of assets held for use and those to be disposed of whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment loss for the three months ended March 31, 2007 consisted 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 China operation in Suzhou.

Loss on disposal of property, plant and equipment was $22 for the three months ended March 31, 2006. Such loss primarily resulted from the disposal of certain obsolete fixed assets at a loss. The Company had no similar loss for the quarter ended March 31, 2007.

Income from operations increased by $1,128 to $1,344 for the three months ended March 31, 2007 from $216 for the three months ended March 31, 2006. Such increase was mainly due to an increase in net sales in the manufacturing segment and testing segment as a result of increased market demand for our products and services in the technology sector.

The following table presents the interest expenses for the third quarters ended March 31, 2007 and 2006, respectively:

Interest expense increased by $16 (or 43.2%) for the three months ended March 31, 2007 from $37 to $53 compared to the same quarter last year. The increase in interest expense was primarily due to higher usage of credit line facilities in the Singapore operation to maintain its working capital in daily operations compared to the same quarter last fiscal year.

The following table presents the other income for the third quarters ended March 31, 2007 and 2006, respectively:

Other income decreased by $39 (or 46.4%) for the three months ended March 31, 2007 from $84 to $45 compared to the same quarter last fiscal year. The decrease in other income was primarily due to a drop in interest income generated from short-term deposits and an increase in currency transaction loss. Interest income was $38 for the three months ended March 31, 2007 and was $31 lower than the interest income generated in the same quarter last fiscal year due to higher deposits made with the funds from the sale of the Ireland property in last fiscal year. Currency transaction loss increased by $13 for the three months ended March 31, 2007, from $14 to $27, compared to the same quarter last fiscal year. This was attributable to the weakening of the U.S. dollar against foreign currency in U.S. denominated transactions.

Income tax provision for the three months ended March 31, 2007 was $239, an increase of $133 (or 125.5%) compared to the income tax provision of $106 for the same time period last fiscal year. The increase for the third quarter 2007 was related to a higher tax provision for the increased income generated from the Singapore operations.

As of March 31, 2007, we held a 55% interest in Trio-Tech Malaysia. The minority interest for the three months ended March 31, 2007 in the net income of subsidiaries was $16, an increase of $33 compared to a minority interest net loss of $17 for the same quarter of fiscal 2006. The increase in the minority interest was attributable to the improvement in the net income generated from the Malaysia testing operation and an increase in translation gain as the result of an increase in the exchange rate between U.S. dollars and Singapore dollars.

Income from continuing operations before minority interest increased by $940 as the result of an increase in income from operations, offset by an increase in interest expenses, a decrease in other income and an increase in tax provision, as previously discussed. Net income for the three months ended March 31, 2007 was $1,081, an increase of $907 compared to $174 in the same quarter of fiscal 2006. The increase in net income was primarily due to an increase in sales from the manufacturing and testing segments as a result of stronger demands for our products, as previously discussed.

Basic and diluted earnings per share from continuing operations for the three months ended March 31, 2007 increased by $0.29 to $0.34, and by $0.28 to $0.33 from $0.05 for the three months ended March 31, 2006. There was no income or loss from discontinued operations for the third quarter of fiscal 2007.

The revenue, gross margin and income from each segment for the third quarters of fiscal 2007 and 2006, 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.

The following table presents the revenue, gross margin and income from operations for the manufacturing segment for the third quarters ended March 31, 2007 and 2006, respectively: