ITEM 2.
M
ANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Overview
The following should be read in conjunction with the condensed
consolidated unaudited financial statements and notes in Item I
above and with the audited consolidated financial statements and
notes, and the information under the headings “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in
our Annual Report on Form 10-K for the fiscal year ended June 30,
2016.
Trio-Tech
International (“TTI”) was incorporated in 1958 under
the laws of the State of California. As used herein, the term
“Trio-Tech” or “Company” or
“we” or “us” or “Registrant”
includes Trio-Tech International and its subsidiaries unless the
context otherwise indicates. Our mailing address and executive
offices are located at 16139 Wyandotte Street, Van Nuys, California
91406, and our telephone number is (818) 787-7000.
The
Company is a provider of reliability test equipment and services to
the semiconductor industry. Our customers rely on us to verify that
their semiconductor components meet or exceed the rigorous
reliability standards demanded for aerospace, communications and
other electronics products.
TTI generated approximately 99.6% of its revenue from its three
core business segments in the test and measurement industry, i.e.
manufacturing of test equipment, testing services and distribution
of test equipment during the three months ended December 31, 2016.
To reduce our risks associated with sole industry focus and
customer concentration, the Company expanded its business into the
real estate investment and oil and gas equipment fabrication
businesses in 2007 and 2009, respectively. The Company’s
Indonesia operation and the Indonesia operation’s immediate
holding company, which comprised the fabrication services segment,
suffered continued operating losses since it commenced its
operations, and the cash flow was minimal in the past years. The
Company established a restructuring plan to close the fabrication
services operation, and in accordance with ASC Topic 205,
Presentation of Financial Statement Discontinued Operations
(“ASC Topic 205”), the Company presented the operation
results from fabrication services as a discontinued operation. The
Real Estate segment contributed only 0.4% to the total revenue and
has been insignificant since the property market in China has
slowed down due to control measures in China.
Manufacturing
TTI
develops and manufactures an extensive range of test equipment used
in the "front end" and the "back end" manufacturing processes of
semiconductors. Our equipment includes leak detectors, autoclaves,
centrifuges, burn-in systems and boards, HAST testers, temperature
controlled chucks, wet benches and more.
Testing
TTI
provides comprehensive electrical, environmental, and burn-in
testing services to semiconductor manufacturers in our testing
laboratories in Southeast Asia and the United States (U.S.). Our
customers include both manufacturers and end-users of semiconductor
and electronic components, who look to us when they do not want to
establish their own facilities. The independent tests are performed
to industry and customer specific standards.
Distribution
In addition to marketing our proprietary products, we distribute
complementary products made by manufacturers mainly from the U.S.,
Europe, Taiwan and Japan. The products include environmental
chambers, handlers, interface systems, vibration systems, shaker
systems, solderability testers and other semiconductor equipment.
Besides equipment, we also distribute a wide range of components
such as connectors, sockets, LCD display panels and touch-screen
panels. Furthermore, our range of products are mainly targeted for
industrial products rather than consumer products whereby the life
cycle of the industrial products can last from 3 years to 7
years.
Real Estate
Beginning in 2007, TTI has invested in real estate property in
Chongqing, China, which has generated investment income from the
rental revenue from real estate we purchased in Chongqing, China,
and investment returns from deemed loan receivables, which are
classified as other income. The rental income is generated from the
rental properties in MaoYe and FuLi in Chongqing, China. In the
second quarter of fiscal 2015, the investment in JiaSheng, which
was deemed as loans receivable, was transferred to down payment for
purchase of investment property in China.
Second Quarter Fiscal 2017 Highlights
●
Total
revenue increased by $750, or 9.0%, to $9,104 for the second
quarter of fiscal 2017, as compared to $8,354 for the same period
in fiscal 2016.
●
Manufacturing
segment revenue increased by $44, or 1.3%, to $3,320 for the second
quarter of fiscal 2017, as compared to $3,276 for the same period
in fiscal 2016.
●
Testing
segment revenue increased by $369, or 10.0%, to $4,070 for the
second quarter of fiscal 2017, as compared to $3,701 for the same
period in fiscal 2016.
●
Distribution
segment revenue increased by $316, or 23.3%, to $1,675 for the
second quarter of fiscal 2017, as compared to $1,359 for the same
period in fiscal 2016.
●
Real
estate segment revenue increased by $21, or 116.7%, to $39 for the
second quarter of fiscal 2017, as compared to $18 for the same
period in fiscal 2016.
●
Gross
profit margin in absolute dollars increased by $179, or 8.5%, to
$2,294 for the second quarter of fiscal 2017, as compared to $2,115
for the same period in fiscal 2016.
●
The
overall gross profit margin decreased by 0.1% to 25.2% for the
second quarter of fiscal 2017, from 25.3% for the same period in
fiscal 2016.
●
Income
from operations for the second quarter of fiscal 2017 was $278, a
decrease of $50 or 15.2%, as compared to $328 for the same period
in fiscal 2016.
●
General
and administrative expenses increased by $177, or 11.1%, to $1,776
for the second quarter of fiscal year 2017, from $1,599 for the
same period in fiscal year 2016.
●
Selling
expenses increased by $39, or 27.7%, to $180 for the second quarter
of fiscal year 2017, from $141 for the same period in fiscal year
2016.
●
Other
income increased by $185 to $203 in the second quarter of fiscal
year 2017 compared to $18 in the same period in fiscal year
2016.
●
Tax
expense for the second quarter of fiscal year 2017 was $67, a
decrease of $19, as compared to $86 in the same period in fiscal
year 2016.
●
During
the second quarter of fiscal year 2017, income from continuing
operations before non-controlling interest, net of tax was $366, an
increase of $157, as compared to $209 for the same period in fiscal
year 2016.
●
Net
income attributable to non-controlling interest for the second
quarter of fiscal year 2017 was $52, as compared to $25 in the same
period in fiscal year 2016.
●
Working
capital increased by $41, or 0.6%, to $6,520 as of December 31,
2016, compared to $6,479 as of June 30, 2016.
●
Earnings
per share for the three months ended December 31, 2016 was $0.09,
an increase of $0.04, as compared to $0.05 for the same period in
fiscal year 2016.
●
Total
assets decreased by $1,523 or 4.7% to $30,696 as of December 31,
2016, compared to $32,219 as of June 30, 2016,
●
Total
liabilities decreased by $739 or 6.5% to $10,609 as of December 31,
2016, compared to $11,348 as of June 30, 2016.
Results of Operations and Business Outlook
The following table sets forth our revenue components for the three
and six months ended December 31, 2016 and 2015,
respectively.
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|
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|
|
|
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|
|
|
|
|
|
|
|
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|
Manufacturing
|
36.5
%
|
39.2
%
|
38.7
%
|
39.4
%
|
|
Testing
Services
|
44.7
|
44.3
|
45.5
|
46.0
|
|
Distribution
|
18.4
|
16.3
|
15.4
|
14.3
|
|
Real
Estate
|
0.4
|
0.2
|
0.4
|
0.3
|
|
|
|
|
|
|
|
Total
|
100.0
%
|
100.0
%
|
100.0
%
|
100.0
%
|
Revenue for the three months and six months ended December 31, 2016
was $9,104 and $18,075, respectively, an increase of $750 and
$1,791, respectively, when compared to the revenue for the same
periods of the prior fiscal year. As a percentage, revenue
increased by 9.0% and 11.0% for the three and six months ended
December 31, 2016, respectively, when compared to total revenue for
the same periods of the prior year.
For the three months ended December 31, 2016, the $750 increase in
overall revenue was primarily due to
●
an
increase in the manufacturing segment in the Singapore and Suzhou,
China, operations,
●
an
increase in the testing segment in the Singapore, Malaysia and
Bangkok, Thailand operations,
●
an
increase in the distribution segment in the Singapore, Malaysia and
Suzhou, China, operations and
●
an
increase in the real estate segment in China.
These increases were partially offset by the
●
decrease
in revenue in the manufacturing segment in the U.S. operations
and
●
decrease
in the testing segment in China operations.
For the six months ended December 31, 2016, the $1,791 increase in
overall revenue was primarily due to
●
an
increase in the manufacturing segment in Singapore
operations,
●
an
increase in the testing segment in the Singapore, Malaysia and
Bangkok, Thailand operations,
●
an
increase in the distribution segment in the Singapore and Suzhou,
China operations and
●
an
increase in the real estate segment in China.
These increases were partially offset by the
●
decrease
in revenue in the manufacturing segment in the U.S. operations
and
●
decrease
in the testing segment in China operations.
Revenue into and within China, the Southeast Asia regions and other
countries (except revenue into and within the U.S.) increased by
$968 (or 12.2%) to $8,906, and by $1,856 (or 12.0%) to $17,332 for
the three months and six months ended December 31, 2016,
respectively, as compared with $7,938 and $15,476, respectively,
for the same periods of last fiscal year.
Revenue into and within the U.S. was $198 and $743 for the three
months and six months ended December 31, 2016, respectively, a
decrease of $218 and $65, respectively, from $416 and $808 for the
same periods of last fiscal year, respectively.
Revenue for the three and six months ended December 31, 2016 is
discussed within the four segments as follows:
Manufacturing Segment
Revenue in the manufacturing segment as a percentage of total
revenue was 36.5% and 38.7% for the three and six months ended
December 31, 2016, respectively, a decrease of 2.7% and 0.7% of
total revenue, respectively, when compared to the same periods of
the last fiscal year. The absolute amount of revenue
increased by $44 to $3,320 from $3,276 and increased by $575 to
$6,991 from $6,416 for the three and six months ended December 31,
2016, respectively, compared to the same periods of the last fiscal
year.
Revenue in the manufacturing segment for the three and six month
periods ended December 31, 2016 increased primarily due to an
increase in the manufacturing revenue from customers in our
Singapore and Suzhou, China operations, which was partially offset
by a decrease in revenue in our U.S operations. The decrease in U.S
operations was caused by a delay in orders by a
customer.
The revenue in the manufacturing segment from a major customer
accounted for 55.7% and 38.3% of our total revenue in the
manufacturing segment for the three months ended December 31, 2016
and 2015, respectively, and 57.0% and 42.0% of our total revenue in
the manufacturing segment for the six months ended December 31,
2016 and 2015, respectively.
The future revenue in our manufacturing segment will be
significantly affected by the purchase and capital expenditure
plans of this major customer, if the customer base cannot be
increased.
Testing Services Segment
Revenue in the testing segment as a percentage of total revenue was
44.7% and 45.5% for the three and six months ended December 31,
2016, an increase of 0.4% and a decrease of 0.5%, respectively, of
total revenue when compared to the same periods of the last fiscal
year. The absolute amount of revenue increased by $369
to $4,070 from $3,701 and by $743 to $8,227 from $7,484 for the
three and six months ended December 31, 2016, respectively,
compared to the same periods of the last fiscal
year.
Revenue in the testing segment for the three and six-month period
ended December 31, 2016 increased primarily due to an increase in
testing volume as a result of an increase in orders from customers
in our Singapore, Malaysia and Bangkok, Thailand operations. The
increase was partially offset by a decrease in testing revenue in
our China operations due to a decrease in the average selling price
and a decrease in volume.
Demand for testing services varies from country to country
depending on changes taking place in the market and our
customers’ forecasts. As it is difficult to
accurately forecast fluctuations in the market, management believes
it is necessary to maintain testing facilities in close proximity
to our customers in order to make it convenient for them to send us
their newly manufactured parts for testing and to enable us to
maintain a share of the market.
Distribution Segment
Revenue in the distribution segment as a percentage of total
revenue was 18.4% and 15.4% for the three and six months ended
December 31, 2016, an increase of 2.1% and 1.1%, respectively,
when compared to the same periods of the prior fiscal
year. The absolute amount of revenue increased by $316
to $1,675 from $1,359, and increased by $445 to $2,779 from $2,334
for the three and six months ended December 31, 2016, respectively,
compared to the same periods of the last fiscal
year.
Revenue in the distribution segment for the three and six month
periods ended December 31, 2016 increased primarily due to an
increase in demand for products in the Singapore, Malaysia and
China operations.
Demand in the distribution segment varies depending on the demand
for our customers’ products and the changes taking place in
the market and our customers’ forecasts. Hence it
is difficult to accurately forecast fluctuations in the
market.
Real Estate Segment
The real estate segment accounted for 0.4% of total net revenue for
both the three and six months ended December 31, 2016. The absolute
amount of revenue in the real estate segment increased by $21 to
$39 from $18 and by $28 to $78 from $50 for the three and six
months ended December 31, 2016, respectively, compared to the same
periods of the last fiscal year. The increase was primarily
due to an increase in rental income in the real estate segment
for the three and six months ended December 31, 2016 as described
below.
The two main revenue components for the real estate segment were
investment income and rental income.
During
fiscal year 2007, TTI invested in real estate property in
Chongqing, China, which has generated income from rental revenue
and investment returns from deemed loan receivables, which are
classified as other income. The rental income is generated from the
rental properties in MaoYe, JiangHuai and FuLi in Chongqing, China.
In the second quarter of fiscal 2015, the investment in JiaSheng,
which was deemed as loans receivable, was transferred to down
payment for purchase of investment property in China.
Trio-Tech
Chongqing Co., Ltd. (“TTCQ”) invested RMB 5,554 in
rental properties in Maoye during fiscal year 2008, RMB 3,600 in
rental properties in JiangHuai during fiscal year 2010 and RMB
4,025 in rental properties in FuLi during fiscal year 2010. The
total investment in properties in China was RMB 13,179, or
approximately $1,897 and $1,983 as at December 31, 2016 and June
30, 2016, respectively. The carrying value of these investment
properties in China was RMB 8,571 and RMB 8,901, or approximately
$1,234 and $1,340 as at December 31, 2016 and June 30, 2016,
respectively.
For the three and six
months ended December 31, 2016,
these properties generated a
total rental income of $39 and $78, respectively, as compared to
$18 and $50, respectively, for the same periods of the last fiscal
year. TTCQ’s investment in properties that generated rental
income is discussed further in this Form 10-Q.
TTCQ
has yet to receive the title deed for properties purchased from
JiangHuai. TTCQ is in the legal process of obtaining the title
deed, which is dependent on JiangHuai completing the entire
project. JiangHuai property did not generate any income during the
three and six months ended December 31, 2016, and
2015.
“Investments”
in the real estate segment were the cost of an investment in a
joint venture in which we had a 10% interest. During the second
quarter of fiscal year 2014, TTCQ disposed of its 10% interest in
the joint venture. The joint venture had to raise funds for the
development of the project. As a joint-venture partner, TTCQ was
required to stand guarantee for the funds to be borrowed;
considering the amount of borrowing, the risk involved was higher
than the investment made and hence TTCQ decided to dispose of the
10% interest in the joint venture investment. On October 2, 2013,
TTCQ entered into a share transfer agreement with Zhu Shu. Based on
the agreement, the purchase price was to be paid by (1) RMB 10,000
worth of commercial property in Chongqing China, or approximately
$1,634 based on exchange rates published by the Monetary Authority
of Singapore as of October 2, 2013, by non-monetary consideration
and (2) the remaining RMB 8,000, or approximately $1,307 based on
exchange rates published by the Monetary Authority of Singapore as
of October 2, 2013, by cash consideration. The consideration
consisted of (1) commercial units measuring 668 square meters to be
delivered in June 2016 and (2) sixteen quarterly equal installments
of RMB500 per quarter commencing from January 2014. Based on ASC
Topic 845 Non-monetary Consideration, the Company deferred the
recognition of the gain on disposal of the 10% interest in joint
venture investment until such time that the consideration is paid,
so that the gain can be ascertained. The recorded value of the
disposed investment amounting to $783, based on exchange rates
published by the Monetary Authority of Singapore as of June 30,
2014, is classified as “other assets” under non-current
assets, because it is considered a down payment for the purchase of
the commercial property in Chongqing. TTCQ performed a valuation on
a certain commercial unit and its market value was higher than the
carrying amount. The first three installment amounts of RMB 500
each due in January 2014, April 2014 and July 2014. were all
outstanding until the date of disposal of the investment in the
joint venture. Out of the outstanding RMB 8,000, TTCQ had received
RMB 100 during May 2014.
On
October 14, 2014, TTCQ and Jun Zhou Zhi Ye entered into a
memorandum of understanding. Based on the memorandum of
understanding, both parties have agreed to register a sales and
purchase agreement upon Jun Zhou Zhi Ye obtaining the license to
sell the commercial property (the Singapore Themed Resort Project)
located in Chongqing, China. The proposed agreement is for the sale
of shop lots with a total area of 1,484.55 square meters as
consideration for the outstanding amounts owed to TTCQ by Jun Zhou
Zhi Ye as follows:
a) Long
term loan receivable RMB 5,000, or approximately $814, as disclosed
in Note 5, plus the interest receivable on long term loan
receivable of RMB 1,250;
b)
Commercial units measuring 668 square meters, as mentioned above;
and
c) RMB
5,900 for the part of the unrecognized cash consideration of RMB
8,000 relating to the disposal of the joint venture.
The consideration does not include the remaining outstanding amount
of RMB 2,000, or approximately $326, which will be paid to TTCQ in
cash.
The shop lots are to be delivered to TTCQ upon completion of the
construction of the shop lots in the Singapore Themed Resort
Project. The initial targeted date of completion was December 31,
2016. Based on discussions with the developers, the completion date
is estimated to be December 31, 2018.
The share transfer (10% interest in the joint venture) was
registered with the relevant authorities in China during October
2016.
Uncertainties and Remedies
There are several influencing factors which create uncertainties
when forecasting performance, such as the constantly changing
nature of technology, specific requirements from the customer,
decline in demand for certain types of burn-in devices or
equipment, decline in demand for testing services and fabrication
services, and other similar factors. One factor that
influences uncertainty is the highly competitive nature of the
semiconductor industry. Another is that some customers are unable
to provide a forecast of the products required in the upcoming
weeks; hence it is difficult to plan for the resources needed to
meet these customers’ requirements due to short lead time and
last minute order confirmation. This will normally result in a
lower margin for these products, as it is more expensive to
purchase materials in a short time frame. However, the
Company has taken certain actions and formulated certain plans to
deal with and to help mitigate these unpredictable
factors. For example, in order to meet manufacturing
customers’ demands upon short notice, the Company maintains
higher inventories, but continues to work closely with its
customers to avoid stock piling. We have also been improving
customer service from staff by keeping our staff up to date on the
newest technology and stressing the importance of understanding and
meeting the stringent requirements of our
customers. Finally, the Company is exploring new markets
and products, looking for new customers, and upgrading and
improving burn-in technology while at the same time searching for
improved testing methods of higher technology chips.
We are in the process of implementing an Enterprises Resources
Planning (“ERP”) system, as part of multi-year plan to
integrate and upgrade our systems and processes. The implementation
of this ERP system is scheduled to occur in phases over the next
few years, and began with the migration of certain of our
operational and financial systems in our Singapore operations to
the new ERP system during the second quarter of fiscal 2017. This
implementation effort will continue in the third and fourth
quarters of fiscal 2017, when the operational and financial systems
in Singapore will be substantially transitioned to the new system.
Implementation of a new ERP system involves risks and
uncertainties. Any disruptions, delays or deficiencies in the
design or implementation of the new system could result in
increased costs and adversely affect our ability to timely report
our financial results, which could negatively impact our business
and results of operations.
The Company’s primary exposure to movements in foreign
currency exchange rates relates to non-U.S. dollar-denominated
sales and operating expenses in its subsidiaries. Strengthening of
the U.S. dollar relative to foreign currencies adversely affects
the U.S. dollar value of the Company’s foreign
currency-denominated sales and earnings, and generally leads the
Company to raise international pricing, potentially reducing demand
for the Company’s products. Margins on sales of the
Company’s products in foreign countries and on sales of
products that include components obtained from foreign suppliers
could be materially adversely affected by foreign currency exchange
rate fluctuations. In some circumstances, for competitive or other
reasons, the Company may decide not to raise local prices to fully
offset the dollar’s strengthening, or at all, which would
adversely affect the U.S. dollar value of the Company’s
foreign currency-denominated sales and earnings. Conversely, a
strengthening of foreign currencies relative to the U.S. dollar,
while generally beneficial to the Company’s foreign currency
denominated sales and earnings could cause the Company to reduce
international pricing, thereby limiting the benefit. Additionally,
strengthening of foreign currencies may also increase the
Company’s cost of product components denominated in those
currencies, thus adversely affecting gross margins.
There are several influencing factors which create uncertainties
when forecasting performance of our real estate segment, such as
obtaining the rights by the joint venture to develop the real
estate projects in China, inflation in China, currency fluctuations
and devaluation, and changes in Chinese laws, regulations, or their
interpretation.
Comparison of the Three Months Ended December 31, 2016 and December
31, 2015
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the three months ended
December 31, 2016 and 2015, respectively:
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Revenue
|
100.0
%
|
100.0
%
|
|
Cost
of sales
|
74.8
|
74.7
|
|
Gross Margin
|
25.2
%
|
25.3
%
|
|
Operating
expenses
|
|
|
|
General
and administrative
|
19.5
%
|
19.1
%
|
|
Selling
|
2.0
|
1.7
|
|
Research
and development
|
0.6
|
0.6
|
|
Loss
on disposal of property, plant and equipment
|
0.1
|
-
|
|
Total
operating expenses
|
22.2
%
|
21.4
%
|
|
Income from Operations
|
3.0
%
|
3.9
%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue was approximately
constant, at 25.2% and 25.3% for the three months ended December
31, 2016 and 2015, respectively. Decrease in the gross profit
margin in the manufacturing segment was offset by an increase in
gross profit margin in the testing segment, distribution segment
and real estate segment. In terms of absolute dollar amounts, gross
profits increased by $179 to $2,294 for the three months ended
December 31, 2016, from $2,115 as compared to the same period of
the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment decreased by 3.6% to 21.0% for the three months ended
December 31, 2016, from 24.6% in the same period of the last fiscal
year. The decrease in gross margin was due to the change in product
mix in the Singapore and Suzhou, China operations, where there was
an increase in sales of products that had lower profit margins and
a decrease in sales of products that had higher profit margins as
compared to the same period of last fiscal year. In our U.S.
operations, a delay in sales due to external factors also
contributed to a decrease in the gross margin. As a result, the
increase in cost was higher than the increase in manufacturing
revenue for the three months ended December 31, 2016, as compared
to the same period last fiscal year. In absolute dollar amounts,
gross profits in the manufacturing segment decreased by $107 to
$698 for the three months ended December 31, 2016 from $805 for the
same period of last fiscal year.
Gross profit margin as a percentage of revenue in the testing
segment increased by 2.2% to 34.7% for the three months ended
December 31, 2016, from 32.5% in the same period of the last fiscal
year. The increase was primarily due to an increase in
testing volume in the Singapore, Malaysia and Bangkok, Thailand
operations, which was partially offset by the decrease in gross
profit margin in the Tianjin, China operations due to a lower
selling price. Significant portions of our cost of goods
sold are fixed in the testing segment. Thus, as the
demand of services and factory utilization increase, the fixed
costs are spread over the increased output, which increases the
gross profit margin. Overall, the testing operations increased
their capacity utilization. In absolute dollar amounts, gross
profit in the testing segment increased by $210 to $1,412 for the
three months ended December 31, 2016 from $1,202 for the
same
period of the last fiscal
year.
Gross profit margin of the distribution segment is not only
affected by the market price of our products, but also by our
product mix, which changes frequently as a result of changes in
market demand. Gross profit margin as a percentage of revenue in
the distribution segment increased by 1.6% to 10.4% for the three
months ended December 31, 2016, from 8.8% in the same period of the
last fiscal year. The increase in gross margin as a percentage
of revenue was due to the change in product mix in the distribution
segment, as the Singapore, Malaysia and Suzhou, China had an
increase in sales of products that had higher profit margin and a
decline in sales of products that had lower profit margin, as
compared to the same period of last fiscal year. In terms of
absolute dollar amounts, gross profit in the distribution segment
for the three months ended December 31, 2016 was $174, an increase
of $55 as compared to $119 in the same period of last fiscal
year.
Gross profit margin as a percentage of revenue in the real estate
segment was 25.6% for the three months ended December 31, 2016, as
compared to a gross loss margin of 61.1% in the same period of the
last fiscal year. In absolute dollar amounts, gross profit in the
real estate segment for the three months ended December 31, 2016
was $10, an improvement of $21 from a gross loss of $11 in the
same period of last fiscal year. The improvement was
primarily due to an increase in rental income from both investment
properties, MaoYe and FuLi, due to an increase in space rented out,
as compared to the same period in the last fiscal
year.
Operating Expenses
Operating expenses for the three months ended December 31, 2016 and
2015 were as follows:
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|
|
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|
|
(Unaudited)
|
|
|
|
General
and administrative
|
$
1,776
|
$
1,599
|
|
Selling
|
180
|
141
|
|
Research
and development
|
52
|
51
|
|
Loss
/ (gain) on disposal of property, plant and equipment
|
8
|
(4
)
|
|
Total
|
$
2,016
|
$
1,787
|
General and administrative expenses increased by $177, or 11.1%,
from $1,599 to $1,776 for the three months ended December 31, 2016
compared to the same period of last fiscal year. The increase in
the general and administrative expenses was mainly attributable to
the increase in expenses in the Singapore and Malaysia operations,
which was partially offset by the decrease in the Tianjin, Suzhou
and Chongqing, China operations.
The increase in general and administrative expenses was primarily
due to the increase in payroll related and bonus expenses in the
Singapore and Malaysia operations, as well as an increase in
software licensing expense in the Singapore operations. This
increase was partially offset by a decrease in legal and
professional feels in the Chongqing, China operations, a decrease
in headcount and payroll related expense in the Suzhou and Tianjin,
China operations as part of cost cutting measures and a decrease in
stock option expenses for the three months ended December 31, 2016
as compared to the same period of last fiscal year.
Selling expenses increased by $39, or 27.7%, for the three months
ended December 31, 2016, from $141 to $180, as compared to the same
period of the last fiscal year. The increase was mainly due to an
increase in
entertainment expense and commission expenses in
the Singapore operations as the commissionable revenue increased,
and an increase in travel expenses in the Singapore and Malaysia
operations as compared to the same period last fiscal
year.
Income from Operations
Income from operations was $278 for the three months ended December
31, 2016, as compared to $328 for the same period of last fiscal
year. The decrease was mainly due to the increase in operating
expenses, which was partially offset with the increase in gross
margin, as previously discussed.
Interest Expense
Interest expense for the second quarter of fiscal years 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Interest expense
|
$
(48
)
|
$
(51
)
|
Interest expense decreased by $3 to $48 from $51 for the three
months ended December 31, 2016. Lines of credit utilized were
$1,419 as at December 31, 2016 as compared to $1,472 as at December
31, 2015. We are trying to keep our debt at a minimum in order to
save financing costs. As of December 31, 2016, the Company had
unused lines of credit of $4,629 as compared to $5,626 as at
December 31, 2015.
Other Income
Other income for the three months ended December 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Other
income
|
$
83
|
$
110
|
|
Exchange
gain/loss
|
120
|
(92
)
|
|
Other income, net
|
$
203
|
$
18
|
Other income for the three months ended December 31, 2016 was $203,
an increase of $185 as compared to $18 for the same period last
fiscal year. This increase was mainly attributable to foreign
currency exchange difference between functional currency and U.S.
dollars contributing to an exchange gain of $120 for the three
months ended December 31, 2016 as compared to an exchange loss of
$92 for the same period in last fiscal year.
Income Tax Expenses
Income tax expenses for the three months ended December 31, 2016
were $67, a decrease of $19 as compared to $86 for the same period
last fiscal year. The decrease in income tax expenses was mainly
due to an increase in income in the subsidiaries which has carry
forward tax losses and lower withholding tax payment, which was
partially offset by an increase in deferred tax for timing
differences recorded by Singapore and Malaysia
operation.
We record a provision for income taxes for the anticipated tax
consequences of the reported results of operations using the asset
and liability method. Under this method, we recognize deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting and tax bases
of assets and liabilities, as well as for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using the tax rates that are expected to apply to taxable
income for the years in which those tax assets and liabilities are
expected to be realized or settled. We record a valuation allowance
to reduce our deferred tax assets to the net amount that we believe
is more likely than not to be realized.
Tax expense for the three months ended December 31, 2016 and 2015
included $5 and $3, respectively, representing the tax withheld by
the China, Malaysia and Thailand subsidiaries for the payments made
to the Singapore subsidiary that is not recoverable. The taxes
withheld by the China, Malaysia and Thailand subsidiaries were paid
to the Inland Revenue department of the respective
countries.
Non-controlling Interest
As of December 31, 2016, we held a 55% interest in Trio-Tech
(Malaysia) Sdn. Bhd., Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI
International Pte. Ltd. and PTSHI Indonesia, and a 76% interest in
Prestal Enterprise Sdn. Bhd. The non-controlling interest for the
three months ended December 31, 2016, in the net income of
subsidiaries, was $52, an increase of $27 compared to $25 for the
same period of the previous fiscal year. The increase in the
non-controlling interest in the net income of subsidiaries was
attributable to the increase in net income generated by the
Malaysia testing operation due to an increase in other income as
compared to the same period in the last fiscal year.
(Loss) / Income from Discontinued Operations
Loss from discontinued operations was $4 for the three months ended
December 31, 2016, as compared to an income of $6 for the same
period of the last fiscal year. The change in income from
discontinued operations was primarily due to an increase in other
expenses by $12 for the three months ended December 31, 2016, as
compared to the same period last fiscal year.
Net Income
Net income was $310 for the three months ended December 31, 2016,
an increase of $120 as compared to net income of $190 for the three
months ended December 31, 2015. The increase in net income was
mainly due to the increase in gross profit margin and other income
due to exchange differences, which were partially offset by the
increase in operating expenses, as discussed earlier.
Earnings per Share
Basic and diluted earnings per share from continuing operations was
$0.09 for the three months ended December 31, 2016 as compared to
$0.05 for the same period in the last fiscal year. Basic and
diluted earnings per share from discontinued operations were nil
for both the three months ended December 31, 2016 and
2015.
Segment Information
The revenue, gross margin and income from each segment for the
second quarter of fiscal years 2017 and 2016, respectively, are
presented below. As the 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 (loss) / income from operations
for the manufacturing segment for the three months ended December
31, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
3,320
|
$
3,276
|
|
Gross margin
|
21.0
%
|
24.6
%
|
|
(Loss) / income from operations
|
$
(229
)
|
$
129
|
Loss from operations in the manufacturing segment was $229 for
the three months ended December 31, 2016, a deterioration of $358,
as compared to an income of $129 in the same period of the last
fiscal year. The deterioration was primarily due to a decrease of
$107 in the gross margin, as discussed earlier, and an increase of
$251 in operating expenses. Operating expenses for the
manufacturing segment were $927 and $676 for the three months ended
December 31, 2016 and 2015, respectively. The increase
in operating expenses was mainly due to an increase in general and
administrative expenses of $199, an increase in selling expenses of
$28 and an increase in corporate overhead by $23, as compared to
the same period of last fiscal year. The increase in general and
administrative expenses was primarily due to the increase in
headcount, payroll related expenses and software license expenses
in the Singapore operations. This increase was partially offset by
a decrease in payroll related expenses in the Suzhou, China
operations, as compared to the same period last fiscal year. The
increase in selling expenses was due to an increase in
entertainment expenses, travel expenses and commission expenses in
the Singapore operations as the commissionable revenue increased as
compared to the same period last fiscal year. The increase in
corporate overhead expenses was due to a change in the corporate
overhead allocation method as compared to the same period last
fiscal year. Corporate charges are allocated on a pre-determined
fixed charge basis.
Testing Segment
The revenue, gross margin and income from operations for the
testing segment for the three months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
4,070
|
$
3,701
|
|
Gross margin
|
34.7
%
|
32.5
%
|
|
Income from operations
|
$
388
|
$
282
|
Income from operations in the testing segment for the three months
ended December 31, 2016 was $388, an increase of $106 compared to
$282 in the same period of last fiscal year. The increase in
operating income was mainly attributable to an increase of $210 in
gross margin, as discussed earlier, which was partially offset by
an increase of $104 in operating expenses. Operating expenses
were $1,024 and $920 for the three months ended December 31, 2016
and 2015, respectively. The increase in operating expenses was
mainly attributable to an increase in general and administrative
expenses by $75 because of an increase in payroll related expenses
in the Singapore and Malaysia operations and an increase in
travelling expenses in the Tianjin, China operations, and an
increase of $12 in selling expenses due to an increase in
commission expenses in the Singapore operations, and an increase in
loss on disposal of property, plant and equipment of $8 for the
three months ended December 31, 2016, while there was no such loss
on disposal for the same period in the last fiscal
year.
Distribution Segment
The revenue, gross margin and income from operations for the
distribution segment for the three months ended December 31, 2016
and 2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
1,675
|
$
1,359
|
|
Gross margin
|
10.4
%
|
8.8
%
|
|
Income from operations
|
$
100
|
$
51
|
Income from operations in the distribution segment increased by $49
to $100 for the three months ended December 31, 2016, as compared
to $51 in the same period of last fiscal year. The increase in
operating income was mainly due to an increase in gross profit by
$55, which was partially offset by an increase in operating
expenses by $6. Operating expenses were $74 and $68 for the three
months ended December 31, 2016 and 2015, respectively. Operating
expenses increased mainly due to an increase in general and
administrative expenses of $20, mainly due to payroll related
expenses in the Singapore operations, and a decrease in gain on
sale of property, plant and equipment in the Malaysia operations of
$4 as there was no such sale in the three months ended December 31,
2016 as compared to last fiscal year. The increase was partially
offset by a $17 decrease in corporate charges. Corporate charges
are allocated on a pre-determined fixed charge basis.
Real Estate Segment
The revenue, gross margin and loss from operations for the real
estate segment for the three months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
39
|
$
18
|
|
Gross margin / (loss)
|
25.6
%
|
(61.1
)%
|
|
Loss from operations
|
$
(8
)
|
$
(46
)
|
Loss from operations in the real estate segment for the three
months ended December 31, 2016 was $8, a decrease of $38, as
compared to $46 for the same period of the last fiscal
year. The decrease in operating loss was mainly due to
an increase in gross margin as discussed earlier, which was
partially offset by a decrease in operating expenses of $17. The
operating expenses were $18 and $35 for the three months ended
December 31, 2016 and 2015, respectively. The decrease in operating
expenses as compared to the same quarter in last fiscal year was
primarily due to a decrease legal and professional
expense.
Corporate
The income / (loss) from operations for corporate for the three
months ended December 31, 2016 and 2015 were as
follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Income / (Loss) from operations
|
$
27
|
$
(88
)
|
Corporate
operating loss changed by $115 to an income of $27 for the three
months ended December 31, 2016 from a loss of $88 in the same
period of the last fiscal year. The change from
operating loss to income was mainly due to a decrease in general
and administrative expense due to a decrease in provision for bonus
and stock option expenses as compared to the same period in last
fiscal year. There were no stock options granted during the three
months ended December 31, 2016, while stock options covering an
aggregate of 50,000 shares were granted to directors during the
same period of last fiscal year, resulting in no stock option
expenses for the three months ended December 31, 2016, as compared
to $51 for the same period of last
fiscal year.
Comparison of the Six Months Ended December 31, 2016 and December
31, 2015
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the three months ended
December 31, 2016 and 2015, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
100.0
%
|
100.0
%
|
|
Cost
of sales
|
74.3
|
73.6
|
|
Gross Margin
|
25.7
%
|
26.4
%
|
|
Operating
expenses:
|
|
|
|
General
and administrative
|
19.6
%
|
20.0
%
|
|
Selling
|
2.0
|
1.9
|
|
Research
and development
|
0.6
|
0.6
|
|
Total
operating expenses
|
22.2
%
|
22.5
%
|
|
Income from Operations
|
3.5
%
|
3.9
%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue decreased by 0.7%
to 25.7% for the six months ended December 31, 2016, from 26.4% in
the same period of last fiscal year, primarily due to a decrease in
the gross profit margin in the manufacturing segment, which was
partially offset by an increase in the gross profit margin in the
testing segment and real estate segment. In terms of absolute
dollar amounts, gross profits increased by $359 to $4,652 for the
six months ended December 31, 2016, from $4,293 for the same period
of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment decreased by 6.1% to 22.5% for the six months ended
December 31, 2016, from 28.6% in the same period of the last fiscal
year. In absolute dollar amounts, gross profit decreased by $262 to
$1,574 for the six months ended December 31, 2016 as compared to
$1,836 for the same period in last fiscal year. The decrease in
absolute dollar amount of gross margin was primarily due to the
change in product mix in the Singapore and Suzhou, China
operations, where there was an increase in sales of products that
had lower profit margins and a decrease in sales of products that
had higher profit margins as compared to the same period of last
fiscal year. In our U.S. operations, a delay in orders from a
customer while also contributed to a decrease in the gross margin.
As a result, the increase in cost was higher than the increase in
manufacturing revenue for the six months ended December 31, 2016,
as compared to the same period last fiscal year.
Gross profit margin as a percentage of revenue in the testing
segment increased by 3.7% to 33.5% for the six months ended
December 31, 2016 from 29.8% in the same period of the last fiscal
year. The increase was primarily due to an increase in testing
volume in the Singapore, Malaysia and Bangkok, Thailand operations.
Despite a decrease in testing volume in the Suzhou, China
operations, gross margin increased due to a reduction in headcount.
These increases in gross margin were partially offset by a decrease
in gross margin in the Tianjin, China operations because of lower
average selling price despite higher volume. As the demand for
services and factory utilization increase, the fixed costs are
spread over an increased output, which increases the gross profit
margin. In terms of absolute dollar amounts, gross profit in the
testing segment increased by $528 to $2,755 for the six months
ended December 31, 2016, from $2,227 for the
same
period
of the last fiscal year.
Gross profit margin as a percentage of revenue in the distribution
segment remained constant at 10.3% for the six months ended
December 31, 2016 and 2015, respectively. In terms of absolute
dollar amounts, gross profit in the distribution segment for the
six months ended December 31, 2016 was $287, an increase of $46 as
compared to $241 in the same period of the last fiscal year. The
increase in gross margin in absolute dollars was due to the change
in product mix, as this segment had fewer sales of products with a
lower profit margin as compared to the same period of last fiscal
year. The gross profit margin of the distribution segment was
not only affected by the market price of our products, but also our
product mix, which changes frequently as a result of changes in
market demand
.
Gross
profit margin as a percentage of revenue in the real estate segment
was 46.2% for the six months ended December 31, 2016, an
improvement of 68.2% from gross loss margin of 22.0% for the same
period in the last fiscal year. In terms of absolute dollar
amounts, gross profit in the real estate segment for the six months
ended December 31, 2016 was $36, an improvement of $47 from a
gross loss $11 in the same period of the last fiscal year. The
improvement
was primarily due to an
increase in rental income from both investment properties, MaoYe
and FuLi, due to an increase in space rented during the period, and
a decrease in cost of sales, due to a reversal of overprovision for
taxes, as compared to the same period in the last fiscal
year.
Operating Expenses
Operating expenses for the six months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
General
and administrative
|
$
3,519
|
$
3,261
|
|
Selling
|
365
|
312
|
|
Research
and development
|
105
|
97
|
|
Loss
/ (gain) on disposal of property, plant and equipment
|
8
|
(4
)
|
|
Total
|
$
3,997
|
$
3,666
|
General and administrative expenses increased by $258, or 7.9%,
from $3,261 to $3,519 for the six months ended December 31, 2016
compared to the same period of the last fiscal year. There was an
increase in general and admin expenses in the Singapore and
Malaysia operations, which was partially offset by the decrease in
general and administrative expenses in all other
operations.
The increase in general and administrative expenses was primarily
due to the increase in payroll related and bonus expenses in the
Singapore and Malaysia operations, as well as an increase in
software licensing expense in the Singapore
operations.
This
increase was partially offset by a decrease in legal and
professional feels in the Chongqing, China operations, a decrease
in headcount and payroll related expense in the Suzhou and Tianjin,
China operations as part of cost cutting measures, there not being
certain payroll related expenses in the Bangkok, Thailand
operations and a decrease in stock option expenses for the six
months ended December 31, 2016 as compared to the same period of
last fiscal year.
Selling expenses increased by $53, or 17.0%, for the six months
ended December 31, 2016, from $312 to $365 compared to the same
period of the last fiscal year, which was mainly due to an increase
in entertainment expenses and commission expenses as a result of an
increase in commissionable sales in our Singapore operations, and
increase in travel expenses in our Singapore and Malaysia
operations.
Income from Operations
Income from operations was $655 for the six months ended December
31, 2016 as compared to $627 for the same period of the last fiscal
year. The increase was mainly due to the increase in gross profit
margin being greater than the increase in operating expenses, as
discussed earlier.
Interest Expense
Interest expense for the six months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Interest expense
|
$
(106
)
|
$
(104
)
|
Interest expense increased by $2 to $106 from $104 for the six
months ended December 31, 2016 as compared to the same period of
the last fiscal year.
Other Income
Other income for the six months ended December 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Other
income
|
$
131
|
$
134
|
|
Exchange
gain
|
182
|
92
|
|
Other income, net
|
$
313
|
$
226
|
Other income for the six months ended December 31, 2016 was $313,
an increase of $87 as compared to $226 for the same period last
fiscal year. This increase was mainly attributable to foreign
currency exchange difference between functional currency and U.S.
dollars contributing to an exchange gain of $182 for the six months
ended December 31, 2016 as compared to $92 for the same period last
fiscal year.
Income Tax Expenses
Income tax expense for the six months ended December 31, 2016 was
$150, a decrease of $3, as compared to $153 for the same period of
last fiscal year. The decrease in income tax expense was due to an
increase in income in the subsidiaries which have carry forward tax
losses and lower withholding tax payment, which was partially
offset by an increase in deferred tax for timing differences
recorded by Singapore and Malaysia operation
We record a provision for income taxes for the anticipated tax
consequences of the reported results of operations using the asset
and liability method. Under this method, we recognize deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting and tax bases
of assets and liabilities, as well as for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using the tax rates that are expected to apply to taxable
income for the years in which those tax assets and liabilities are
expected to be realized or settled. We record a valuation allowance
to reduce our deferred tax assets to the net amount that we believe
is more likely than not to be realized.
Tax expenses for the six months ended December 31, 2016 and 2015
included $28 and $23, respectively, representing the tax withheld
by the China, Malaysia and Thailand subsidiaries for the payments
made to the Singapore subsidiary that is not recoverable. The taxes
withheld by the China, Malaysia and Thailand subsidiaries were paid
to the Inland Revenue department of the respective
countries.
Non-controlling Interest
As of December 31, 2016, we held a 55% interest in Trio-Tech
Malaysia, Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI International
Pte. Ltd. and PTSHI Indonesia, and a 76% interest in Prestal
Enterprise Sdn. Bhd. The net income attributable to our
non-controlling interest in these subsidiaries for the six months
ended December 31, 2016 was $96, a decrease of $47, as compared to
$143 for the same period of last fiscal year. The decrease was
attributable to the decrease in net income generated by the
Malaysia testing operations due to higher operating expenses as
compared to the same period in the last fiscal year.
(Loss) / Income from Discontinued Operations
Loss from discontinued operations was $3 for the six months ended
December 31, 2016, a decrease of $1 as compared to a loss of $4 for
the same period of the last fiscal year.
Net Income
Net income was $613 for the six months ended December 31, 2016, an
increase of $164, as compared to a net income of $449 for the same
period in the last fiscal year. The improvement was mainly due to
an increase in gross margin and other income due to exchange
differences, which was partially offset by an increase in operating
expenses as discussed earlier.
Earnings per Share
Basic earnings per share from continuing operations was $0.18 for
the six months ended December 31, 2016 as compared to $0.13 for the
same period in the last fiscal year. Basic earnings per share from
discontinued operations were nil for both the six months ended
December 31, 2016 and 2015.
Diluted earnings per share from continuing operations was $0.17 for
the six months ended December 31, 2016 as compared to $0.13 for the
same period in the last fiscal year. Diluted earnings per share
from discontinued operations were nil for both the six months ended
December 31, 2016 and 2015.
Segment Information
The revenue, gross profit margin, and income or loss from each
segment for the six months ended December 31, 2016 and 2015,
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 or loss from operations for
the manufacturing segment for the six months ended December 31,
2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
6,991
|
$
6,416
|
|
Gross margin
|
22.5
%
|
28.6
%
|
|
(Loss) / Income from operations
|
$
(322
)
|
$
371
|
Loss from operations from the manufacturing segment was $322
for the six months ended December 31, 2016, a deterioration of $693
as compared to an income of $371 in the same period of the last
fiscal year, primarily due to a decrease in gross margin by $262
coupled with an increase in operating expenses. Operating expenses
for the manufacturing segment were $1,896 and $1,465 for the six
months ended December 31, 2016 and 2015, respectively. The increase
in operating expenses of $431 was mainly due to an increase in
general and administrative expenses of $346, an increase in selling
expenses of $18 and an increase in corporate overhead by $59, as
compared to the same period of last fiscal year. The increase in
general and administrative expenses was primarily due to the
increase in headcount, payroll related expenses, software license
expenses, depreciation expenses and bank charges in the Singapore
operations. This increase was partially offset by a decrease in
payroll related expenses in the Suzhou, China operations, as
compared to the same period last fiscal year. The increase selling
expenses is due to an increase in entertainment expenses, travel
expense, and commission expenses in the Singapore operations as the
commissionable revenue increased as compared to the same period
last fiscal year. The increase in corporate overhead expenses is
due to increase in allocation in corporate expenses which is
charged on a predetermined fixed basis, which is higher as compared
to the same period last fiscal year.
Testing Segment
The revenue, gross margin and income from operations for the
testing segment for the six months ended December 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
8,227
|
$
7,484
|
|
Gross margin
|
33.5
%
|
29.8
%
|
|
Income from operations
|
$
790
|
$
360
|
Income from operations in the testing segment for the six months
ended December 31, 2016 was $790, an increase of $430 compared to
$360 in the same period of the last fiscal year. The increase
in operating income was attributable to an increase in gross profit
of $528, which was partially offset by an increase in operating
expenses of $98. Operating expenses were $1,965 and $1,867 for
the six months ended December 31, 2016 and 2015, respectively. The
increase in operating expenses was mainly attributable to an
increase in selling expenses, general and administrative expenses
and corporate overheads. Selling expenses increased due to an
increase in travelling expenses in our Malaysia and Tianjin
operations and higher commission expenses due to an increase in
commissionable sales in our Singapore operations. The increase in
general and administrative expenses was due to payroll related
expenses in the Singapore and Malaysia operations, an increase in
travelling expenses in the Tianjin, China operations and an
increase in loss on disposal of property, plant and equipment of $8
for the six months ended December 31, 2016, while there was no such
loss on disposal for the same period in the last fiscal year. The
increase in corporate overhead expenses was due to increase in
allocation in corporate expenses which is charged on a
predetermined fixed basis, which was higher as compared to the same
period last fiscal year.
Distribution Segment
The revenue, gross margin and income from operations for the
distribution segment for the six months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
2,779
|
$
2,334
|
|
Gross margin
|
10.3
%
|
10.3
%
|
|
Income from operations
|
$
134
|
$
70
|
Income from operations in the distribution segment for the six
months ended December 31, 2016 was $134, as increase of $63 as
compared to $70 in the same period of the last fiscal
year. The increase in operating income was mainly due to an
increase in gross profit, as discussed earlier, and a decrease in
operating expenses. Operating expenses were $153 and $171 for the
six months ended December 31, 2016 and 2015, respectively. The
decrease in operating expenses was mainly due to a decrease in
allocation of corporate expenses, which is charged on a
predetermined fixed basis, which was lower than corporate expenses
in the same period in last fiscal year, and there being no disposal
of property, plant and equipment for the six months ended December
31, 2016, as compared to gain on disposal of property, plant and
equipment amounting to $4 for the same period in last fiscal year,
which was partially offset by an increase in general and
administrative expenses due to payroll related expenses in the
Singapore operations.
Real Estate Segment
The revenue, gross loss or margin and loss from operations for the
real estate segment for the six months ended December 31, 2016 and
2015 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$
78
|
$
50
|
|
Gross margin / (loss)
|
46.2
%
|
(22.0
)%
|
|
Loss from operations
|
$
(6
)
|
$
(70
)
|
Loss from operations in the real estate segment for the six months
ended December 31, 2016 was $6, a decrease of $64 as compared to a
loss of $70 for the same period of the last fiscal
year. The decrease in operating loss was mainly due to
an increase in gross profit, as discussed earlier, and a decrease
in operating expenses. Operating expenses decreased by $17 to $42
for the six months ended December 31, 2016 as compared to $59 for
the same period in the last fiscal year. The decrease in operating
expenses was mainly due to a decrease in legal fees and
professional expenses.
Corporate
The loss from operations for corporate for the six months ended
December 31, 2016 and 2015 were as
follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Income / (loss) from
operations
|
$
59
|
$
(104
)
|
Operating income in the corporate office for the six months ended
December 31, 2016 was $59, an improvement of $163, as compared to
$104 for the same period of the last fiscal year. This
was mainly due to a decrease in stock option expenses and
staff-related expenses. Stock option expenses for the six months
ended December 31, 2016 was $1, a decrease of $54 from $55 for the
same period in the last fiscal year.
Financial Condition
During the six months ended December 31, 2016 total assets
decreased by $1,523, from $32,219 as at June 30, 2016 to $30,696 as
at December 31, 2016. The decrease in total assets was primarily
due to a decrease in trade accounts receivables, other receivables,
asset held for sale, deferred tax assets, investment properties,
property, plant and equipment and restricted term deposits, which
were partially offset by an increase in cash and cash equivalents,
short term deposits, inventories and prepaid expenses.
Cash and cash equivalents were $4,336 as at December 31, 2016,
reflecting an increase of $529 from $3,807 as at June 30,
2016, primarily due to an improvement in collections from our major
customers in the Singapore, Malaysia and Bangkok, Thailand
operations. The increase was partially offset by the decrease due
to placements in short term deposit in the Malaysia operations. The
number of days’ sales outstanding in accounts receivables was
82 days at the end of the second quarter of fiscal year 2017 and 87
days for the fiscal year ended 2016. The cash inflow from the
improvement in collections was partially offset by the cash outflow
from the payment of bonus in the Singapore and Malaysia
operations.
Short-term deposits were $658 as at December 31, 2016, reflecting
an increase of $363 from $295 as at June 30, 2016, primarily due to
placement of deposit of RM 1.7 million equivalent approximately
$379 by the Malaysia operations. This increase was partially offset
by the currency translation.
At December 31, 2016, the trade accounts receivable balance
decreased by $1,249 to $7,577 from $8,826 as at June 30, 2016,
primarily due to an improvement in collection in the Singapore and
Malaysia operations, outstanding payment received from a major
customer in the U.S. operations and a decrease in revenue in the
China operations for the second quarter of fiscal 2017. The number
of days’ sales outstanding was 82 days at the end of the
second quarter of fiscal 2017 compared to 87 days at the end of
fiscal year 2016. The decrease in days’ sales outstanding was
primarily due to improved collections processes in the Singapore
operations for the six months ended December 31, 2016, as compared
to the year-end of last fiscal year.
At December 31, 2016, other receivables were $316 reflecting a
decrease of $280 from $596 as at June 30, 2016. The decrease was
primarily due to transfer of down-payment for purchase of property,
plant and equipment to fixed assets, decreased advance payments to
creditors and goods and services tax receivables in the Singapore
operations during the six months ended December 31,
2016.
Inventories at December 31, 2016 were $1,666, an increase of $206
compared to $1,460 as at June 30, 2016. The number of days’
inventory held was 52 days at the end of the second quarter of
fiscal 2017 compared to 38 days at the end of fiscal year
2016.
The higher days’ inventory on hand
was mainly due to a decrease in
utilization of the inventory by the Singapore operations in the
six-month period ended December 31, 2016, as compared to the year
end of fiscal 2016.
Prepaid expenses and other current assets were $363 as at December
31, 2016, as compared to $264 as at June 30, 2016. The increase of
$99 was primarily due to prepayments for rental and insurance upon
renewal by the Singapore and Tianjin, China
operations.
Investment properties, net in China as at December 31, 2016 were
$1,234, a decrease of $106 from $1,340 as at June 30,
2016. The decrease was primarily due to depreciation
charged and by the foreign currency exchange difference between the
functional currency and U.S. dollars for the six months ended
December 31, 2016.
Property, plant and equipment decreased by $993 from $11,283 as at
June 30, 2016 to $10,290 as at December 31, 2016, mainly due to
depreciation charges amounting to $916, foreign currency exchange
difference between functional currency and U.S. dollars from June
30, 2016 to December 31, 2016, and an increase in the disposal of
fixed assets by the Malaysia operations for the six months’
period ended December 31, 2016.
Restricted term deposits decreased by $146 from $2,067 as at June
30, 2016 to $1,921 as at December 31, 2016. This decrease was due
to the foreign currency exchange difference between functional
currency and U.S. dollars from June 30, 2016 to December 31, 2016
which was partially offset by the interest income from the
restricted deposits.
Other assets increased by $94 from $1,788 as at June 30, 2016 to
$1,882 as at December 31, 2016. The increase in other assets
was primarily due to down-payment for purchase of property, plant
and equipment for capital purchases in the Tianjin, China
operations and by the foreign currency exchange difference between
functional currency and U.S. dollars from June 30, 2016 to December
31, 2016.
Utilized lines of credit as at December 31, 2016 decreased by
$1,072 to $1,419, from to $2,491 as at June 30, 2016. The decrease
in lines of credit was mainly due to re-payment of lines of credit
by the Singapore and Tianjin, China operations and foreign currency
exchange difference between functional currency and U.S. dollars
from June 30, 2016 to December 31, 2016.
Accounts payable as at December 31, 2016 increased by $809 to
$3,730 from $2,921 as at June 30, 2016. The increase was mainly due
to the increase in creditors’ turnover in the Singapore
operations and increased purchases for a new project in the
Malaysian operations in the second quarter of fiscal year 2017, as
compared to the end of fiscal year 2016. This increase was
partially offset by the decrease in the Tianjin, China operations
due to non-recurring payments to suppliers which did not exist
during the second quarter of fiscal year 2017, as compared to the
end of fiscal year 2016.
Accrued expenses as at December 31, 2016 increased by $39 to $2,681
from $2,642 as at June 30, 2016. The increase in accrued expenses
was mainly due to an increase in commission expenses and accrued
purchases in the Singapore operations and an increase in customer
deposits in the Singapore and Chongqing, China operations. These
increases were partially offset by the reversal of overprovision of
sales tax in the Chongqing, China operations, reversal of accrued
legal expenses in the Singapore, Malaysia and Tianjin, China
operations and foreign currency exchange difference between
functional currency and U.S. dollars from June 30, 2016 to December
31, 2016,
Bank loans payable as at December 31, 2016 decreased by $378 to
$1,689, as compared to $2,067 as at June 30, 2016. This was due to
the repayment of loans by the Singapore and Malaysia operations and
by the foreign currency exchange difference between functional
currency and U.S. dollars from June 30, 2016 to December 31,
2016.
Capital leases as at December 31, 2016 decreased by $131 to $607,
as compared to $738 as at June 30, 2016. This was due to the
repayment of capital leases by the Singapore and Malaysia
operations and by the foreign currency exchange difference between
functional currency and U.S. dollars from June 30, 2016 to December
31, 2016. The decrease was partially offset by an increase in
capital leases in the Malaysia operations.
Liquidity Comparison
Net cash provided by operating activities increased by $2,322 to
$3,671 for the six months ended December 31, 2016, compared to
$1,349 during the same period of the last fiscal year. The increase
in net cash generated by operating activities was primarily due to
increase in net income of $117 from June 30, 2016 and an increase
in working capital by $41. The increase in working capital was
mainly caused by the increase accounts payable and accrued expenses
by $930, and decrease in trade accounts receivable by $1,249, other
receivables by $217. These were partially offset by the increase in
inventories by $284 and an increase in net income by $117, increase
in prepaid expenses by $63.
Net cash used in investing activities increased by $906 to $1,102
for the six months ended December 31, 2016, compared to $196 during
the same period of the last fiscal year. The increase in
cash outflow in the investing activities was primarily due to an
increase in investments in restricted and un-restricted deposits by
$421, an increase in capital spending by $450 and a decrease in
proceeds from maturing restricted term deposits by $63 during the
six months ended December 31, 2016. These decreases were partially
offset by the increase in proceeds from disposal of property, plant
and equipment by $28.
Net cash used in financing activities increased by $1,176 to $1,475
for the six months ended December 31, 2016, compared to $299 during
the same period of the last fiscal year. The increase was mainly
due to dividends payment to non-controlling interest of $117 and an
increase in repayments of bank loans and capital leases by $32.
Moreover, cash generated from financing activities decreased due to
a decrease in borrowings from bank loans and capital leases by $912
and decrease in proceeds from lines of credit by $115.
We believe that our projected cash flows from operations, borrowing
availability under our revolving lines of credit, cash on hand,
trade credit and the secured bank loan will provide the necessary
financial resources to meet our projected cash requirements for at
least the next 12 months.
Critical Accounting Estimates & Policies
There have been no significant changes in the critical accounting
policies, except as disclosed in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included in the most recent Annual Report on Form
10-K.