ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Overview
The following should be read in conjunction with the condensed
consolidated 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 99.7% 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 March 31, 2017. 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 0.3% 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.
Third Quarter Fiscal 2017 Highlights
●
Total revenue increased by $470, or 5.0%, to
$9,825 for the third quarter of fiscal 2017, as compared to $9,355
for the same period in fiscal 2016.
●
Manufacturing segment revenue decreased by $238,
or 5.3%, to $4,230 for the third quarter of fiscal 2017, as
compared to $4,468 for the same period in fiscal
2016.
●
Testing segment revenue increased by $355, or
9.8%, to $3,977 for the third quarter of fiscal 2017, as compared
to $3,622 for the same period in fiscal 2016.
●
Distribution segment revenue increased by $349, or
28.3%, to $1,581 for the third quarter of fiscal 2017, as compared
to $1,232 for the same period in fiscal 2016.
●
Real estate segment revenue increased by $4, or
12.1%, to $37 for the third quarter of fiscal 2017, as compared to
$33 for the same period in fiscal 2016.
●
Gross profit margin in absolute dollars increased
by $315, or 14.8%, to $2,447 for the third quarter of fiscal 2017,
as compared to $2,132 for the same period in fiscal
2016.
●
The overall gross profit margin increased by 2.1%
to 24.9% for the third quarter of fiscal 2017, from 22.8% for the
same period in fiscal 2016.
●
Income from operations for the third quarter of
fiscal 2017 was $485, an increase of $162 or 50.2%, as compared to
$323 for the same period in fiscal 2016.
●
General and administrative expenses increased by
$59, or 3.7%, to $1,659 for the third quarter of fiscal year 2017,
from $1,600 for the same period in fiscal year
2016.
●
Selling expenses increased by $64, or 40.5%, to
$222 for the third quarter of fiscal year 2017, from $158 for the
same period in fiscal year 2016.
●
Other income improved by $142 to $45 in the third
quarter of fiscal year 2017 compared to a loss of $97 for the same
period in fiscal year 2016.
●
Tax expense for the third quarter of fiscal year
2017 was $106, an increase of $91, as compared to $15 in the same
period in fiscal year 2016.
●
During the third quarter of fiscal year 2017,
income from continuing operations before non-controlling interest,
net of tax was $381, an increase of $217, as compared to $164 for
the same period in fiscal year 2016.
●
Net income attributable to non-controlling
interest for the third quarter of fiscal year 2017 was $30, as
compared to $13 in the same period in fiscal year
2016.
●
Working capital increased by $632, or 9.8%, to
$7,111 as of March 31, 2017, compared to $6,479 as of June 30,
2016.
●
Earnings per share for the three months ended
March 31, 2017 was $0.10, an increase of $0.06, as compared to
$0.04 for the same period in fiscal year 2016.
●
Total assets decreased by $684 or 2.1% to $31,535
as of March 31, 2017, compared to $32,219 as of June 30,
2016,
●
Total liabilities decreased by $564 or 5.0% to
$10,784 as of March 31, 2017, 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 nine months ended March 31, 2017 and 2016,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Manufacturing
|
43.1
%
|
47.8
%
|
40.2
%
|
42.5
%
|
Testing
Services
|
40.5
|
38.7
|
43.7
|
43.3
|
Distribution
|
16.1
|
13.2
|
15.6
|
13.9
|
|
0.3
|
0.3
|
0.5
|
0.3
|
Total
|
100.0
%
|
100.0
%
|
100.0
%
|
100.0
%
|
Revenue for the three months and nine months ended March 31, 2017
was $9,825 and $27,900, respectively, an increase of $470 and
$2,261, respectively, when compared to the revenue for the same
periods of the prior fiscal year. As a percentage, revenue
increased by 5.0% and 8.8% for the three and nine months ended
March 31, 2017, respectively, when compared to total revenue for
the same periods of the prior year.
For the three months ended March 31, 2017, the $470 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, Suzhou, China and Bangkok, Thailand
operations,
●
an increase in the distribution segment in the
Singapore 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 Singapore and U.S. operations,
●
decrease in revenue in the distribution segment in
the Malaysia and Suzhou, China operations
●
exchange differences between local currency and
U.S. dollar
For the nine months ended March 31, 2017, the $2,261 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 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,
●
decrease in revenue in the testing segment in the
Suzhou, China operations,
●
decrease in revenue in the manufacturing segment
in the Malaysia operations
●
exchange differences between local currency and
U.S. dollar
Revenue into and within China, the Southeast Asia regions and other
countries (except revenue into and within the U.S.) increased by
$633 (or 7.2%) to $9,406, and by $2,490 (or 10.3%) to $26,739 for
the three and nine months ended March 31, 2017, respectively, as
compared to $8,773 and $24,249, respectively, for the same periods
of last fiscal year.
Revenue into and within the U.S. was $419 and $1,162 for the three
and nine months ended March 31, 2017, respectively, a decrease of
$163 (or 28.0%) and $228 (or 16.4%), respectively, from $582 and
$1,390 for the same periods of last fiscal year,
respectively.
Revenue for the three and nine months ended March 31, 2017 is
discussed within the four segments as follows:
Manufacturing Segment
Revenue in the manufacturing segment as a percentage of total
revenue was 43.1% and 40.2% for the three and nine months ended
March 31, 2017, respectively, a decrease of 4.7% and 2.3% of total
revenue, respectively, when compared to the same periods of the
last fiscal year. The absolute amount of revenue
decreased by $238 to $4,230 from $4,468 and increased by $337 to
$11,221 from $10,884 for the three and nine months ended March 31,
2017, respectively, compared to the same periods of the last fiscal
year.
Revenue in the manufacturing segment for the three months ended
March 31, 2017 decreased primarily due to a decrease in the
manufacturing revenue from customers in our Singapore and U.S.
operations, which was partially offset by an increase in
manufacturing revenue from customers in our Suzhou, China
operations.
Revenue in the manufacturing segment for the nine months ended
March 31, 2017 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
manufacturing revenue from customers in our U.S.
operations.
The revenue in the manufacturing segment from a major customer
accounted for 55.9% and 66.6% of our total revenue in the
manufacturing segment for the three months ended March 31, 2017 and
2016, respectively, and 56.0% and 59.6% of our total revenue in the
manufacturing segment for the nine months ended March 31, 2017 and
2016, 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
40.5% and 43.7% for the three and nine months ended March 31, 2017,
an increase of 1.8% and 0.4%, respectively, of total revenue when
compared to the same periods of the last fiscal
year. The absolute amount of revenue increased by $355
to $3,977 from $3,622 and by $1,098 to $12,204 from $11,106 for the
three and nine months ended March 31, 2017, respectively, compared
to the same periods of the last fiscal year.
Revenue in the testing segment for the three and nine months ended
March 31, 2017 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 as a result
of foreign currency exchange differences between local currency and
U.S dollar in our Tianjin, China operations, where the increase in
volume more than compensated for the decrease in average selling
price.
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 16.1% and 15.6% for the three and nine months ended
March 31, 2017, an increase of 2.9% and 1.7%, respectively,
when compared to the same periods of the prior fiscal
year. The absolute amount of revenue increased by $349
to $1,581 from $1,232, and increased by $794 to $4,360 from $3,566
for three and nine months ended March 31, 2017, respectively,
compared to the same periods of the last fiscal
year.
Revenue in the distribution segment for the three and nine months
ended March 31, 2017 increased primarily due to an increase in
demand for products in the Singapore operation, which was partially
offset by a decrease in demand in the Malaysia and Suzhou, 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 0.3% of total net revenue for
both the three and nine months ended March 31, 2017. The absolute
amount of revenue in the real estate segment increased by $4 to $37
from $33 and by $32 to $115 from $83 for the three and nine months
ended March 31, 2017, 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 nine months ended March 31, 2017 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 in the form of 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 $1,913 and $1,983 as at March 31, 2017 and June 30,
2016, respectively. The carrying value of these investment
properties in China was RMB 8,407 and RMB 8,901, or approximately
$1,221 and $1,340 as at March 31, 2017 and June 30, 2016,
respectively.
For the three and nine
months ended March 31, 2017,
these properties generated a
total rental income of $37 and $115, respectively, as compared to
$33 and $83, 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 nine months ended March 31, 2017, and 2016.
“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 installments, amounting 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 as of end 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 believe that we have
improved customer service from staff by keeping our staff through
our efforts to keep 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 fourth quarter 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 March 31, 2017 and March 31,
2016
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the three months ended
March 31, 2017 and 2016, respectively:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
100.0
%
|
100.0
%
|
Cost
of sales
|
75.1
|
77.2
|
Gross Margin
|
24.9
%
|
22.8
%
|
Operating
expenses
|
|
|
General
and administrative
|
16.9
%
|
17.1
%
|
Selling
|
2.3
|
1.7
|
Research
and development
|
0.5
|
0.5
|
Loss
on disposal of property, plant and equipment
|
0.3
|
-
|
Total
operating expenses
|
20.0
%
|
19.3
%
|
Income from Operations
|
4.9
%
|
3.5
%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue increased by 2.1%
to 24.9% for the three months ended March 31, 2017, from 22.8% for
the same period of the last fiscal year, primarily due to an
increase in the gross profit margin across all business segments.
In terms of absolute dollar amounts, gross profit increased by $315
to $2,447 for the three months ended March 31, 2017, from $2,132 as
compared to the same period of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment increased by 1.4% to 20.9% for the three months ended March
31, 2017, from 19.5% in the same period of the last fiscal year.
The increase in gross margin was due to the change in product mix,
which changes frequently as a result of changes in market demand.
This segment increased sales of products that had lower profit
margins and decreased sale of products that had higher profit
margins due to the change in product mix in the manufacturing
segment, as compared to the same period of last fiscal year. As a
result of the change in product mix, the decrease in manufacturing
revenue was less than the decrease in cost for the three months
ended March 31, 2017, as compared to the same period last fiscal
year. In absolute dollar amounts, gross profits in the
manufacturing segment increased by $14 to $885 for the three months
ended March 31, 2017 from $871 for the same period of last fiscal
year.
Gross profit margin as a percentage of revenue in the testing
segment increased by 5.7% to 34.7% for the three months ended March
31, 2017, from 29.0% in the same period of the last fiscal year.
The increase was primarily due to an increase in testing volume in
the testing operations throughout all the testing operations,
namely the Singapore, Malaysia, Tianjin, China, Suzhou, China and
Bangkok, Thailand operations. These increases were despite a lower
average selling price in the Tianjin, China operations.
Furthermore, the Tianjin, China operations increased production
efficiency, reducing their labor cost. A significant portion of our
cost of goods sold is 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 utilization. In absolute dollar amounts, gross profit in the
testing segment increased by $328 to $1,380 for the three months
ended March 31, 2017 from $1,052 for the same period of the last
fiscal year.
The gross profit margin of the distribution segment is not only
affected by the market price of our products, but also our product
mix, which changes frequently as a result of changes in market
demand. Gross profit margin as a percentage of revenue in the
distribution segment decreased by 5.8% to 11.0% for the three
months ended March 31, 2017, from 16.8% in the same period of the
last fiscal year. The decrease in gross margin as a percentage of
revenue was due to the change in product mix in the distribution
segment and an increase in volume, as this segment had an increase
in sales of products that had lower profit margin and a decline in
sales of products that had higher profit margin, as compared to the
same period of last fiscal year. This resulted in the distribution
segment seeing a lower gross profit margin. In terms of absolute
dollar amounts, gross profit in the distribution segment for the
three months ended March 31, 2017 was $174, a decrease of $33 as
compared to $207 in the same period of last fiscal
year.
Gross profit margin as a percentage of revenue in the real estate
segment was 21.6% for the three months ended March 31, 2017, as
compared to a gross profit margin of 6.1% 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 March 31, 2017 was
$8, as compared to $2 in the same period of last fiscal
year.
Operating Expenses
Operating expenses for the three months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
General
and administrative
|
$
1,659
|
$
1,600
|
Selling
|
222
|
158
|
Research
and development
|
51
|
51
|
Loss
on disposal of property, plant and equipment
|
30
|
-
|
Total
|
$
1,962
|
$
1,809
|
General and administrative expenses increased by $59, or 3.7%, from
$1,600 to $1,659 for the three months ended March 31, 2017 compared
to the same period of last fiscal year. The increase in the general
and administrative expenses was mainly attributable to the increase
in stock option and issuance expenses, in addition to timing
difference in professional fees in the same period last fiscal
year, which did not exist during the three months ended March 31,
2017. This was partially offset by a decrease in payroll related
expenses in the Singapore operations.
Selling expenses increased by $64, or 40.5%, for the three months
ended March 31, 2017, from $158 to $222, as compared to the same
period of the last fiscal year. The increase was mainly due to an
increase in travel expenses and commission expenses as the
commissionable revenue increased in the Singapore operations, as
compared to the same period last fiscal year.
During the three months ended March 31, 2017, there was a loss on
disposal of property, plant and equipment amounting to $30, as
compared to nil in the same period of last fiscal year. Fixed
assets were written off in the Malaysia and Tianjin, China
operations as part of routine operational review of assets during
the nine months ended March 31, 2017, as compared to the same
period last fiscal year.
Income from Operations
Income from operations was $485 for the three months ended March
31, 2017, as compared to $323 for the same period of last fiscal
year. The increase was mainly due to the increase in gross margin,
which was partially offset with the increase in operating expenses,
as previously discussed.
Interest Expense
Interest expense for the third quarter of fiscal years 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Interest expense
|
$
(43
)
|
$
(47
)
|
Interest expenses decreased primarily due to repayment of lines of
credit and decrease of interest rate charged by the financial
institution in one of the operations. Lines of credit were $6,017
for the period ending March 31, 2017, as compared to $7,776 for the
same period in the previous fiscal year. Although overall lines of
credit decreased, utilization increased. $2,107 were used as at
March 31, 2017, as compared to $1,321 as at March 31, 2016. As of
March 31, 2017, the Company had unused lines of credit of $3,910 as
compared to $6,455 as at March 31, 2016.
Other Income/(Loss)
Other income/(loss) for the three months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Subsidies
and Productive innovative credit
|
$
39
|
$
62
|
Other
miscellaneous income
|
94
|
59
|
Exchange
loss
|
(88
)
|
(218
)
|
Other income/(loss), net
|
$
45
|
$
(97
)
|
Other income for the three months ended March 31, 2017 was $45, an
improvement of $142 as compared to a loss of $97 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 a $130 decrease in exchange loss
of $88 for the three months ended March 31, 2017 as compared to
$218 for the same period in last fiscal year.
Income Tax Expenses
Income tax expense for the three months ended March 31, 2017 was
$106, as compared to $15 for the same period last fiscal year. The
increase in income tax expenses was mainly due to an increase in
income in the subsidiaries which do not have carry forward tax
losses and higher withholding tax payment, and a change from
deferred tax benefit in the same period last fiscal year to
deferred tax expense for timing differences recorded by the
Malaysia operations.
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 carry-forwards. 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 March 31, 2017 and 2016
included $26 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 March 31, 2017, 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 March 31, 2017, in the net income of
subsidiaries, was $30, as compared to $13 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.
Loss from Discontinued Operations
The discontinued operations in Indonesia incurred general and
administrative expenses of $1 for three months ended March 31, 2017
and did not incur general and administrative expenses for the same
period in last fiscal year.
The discontinued operation in Shanghai was wound up in March 2017.
That operation did not incur any general and administrative
expenses for three months ended March 31, 2017 and
2016.
Net Income
Net income attributable to Trio-Tech International Common
shareholders was $350 for the three months ended March 31, 2017, an
increase of $200 as compared to $150 for the three months ended
March 31, 2016. The increase in net income was mainly due to the
increase in gross margin and improvement in other income, which was
partially offset by the increase in operating expenses and tax
expenses, as previously discussed.
Earnings per Share
Basic and diluted earnings per share from continuing operations was
$0.10 for the three months ended March 31, 2017 as compared to
$0.04 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 March 31, 2017 and
2016.
Segment Information
The revenue, gross margin and income from each segment for the
third 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 income or loss from operations
for the manufacturing segment for the three months ended March 31,
2017 and 2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
4,230
|
$
4,468
|
Gross margin
|
20.9
%
|
19.5
%
|
Income/(loss) from operations
|
$
169
|
$
(13
)
|
Income from operations in the manufacturing segment was $169 for
the three months ended March 31, 2017, an increase of $182,
compared to a loss of $13 in the same period of the last fiscal
year. The increase was primarily due to a decrease in operating
expenses by $168, and an increase of $14 in gross margin as
discussed earlier. Operating expenses for the manufacturing segment
were $716 and $884 for the three months ended March 31, 2017 and
2016, respectively. The decrease in operating expenses was mainly
due to a decrease in general and administrative expenses by $350,
which was partially offset by an increase of $28 in selling
expenses and increase of $154 in Corporate charges as compared to
the same period of last fiscal year. General and administrative
expenses decreased primarily due to the decrease in allocation of
regional office expenses as compared to last fiscal year. The
decrease was due to restructuring the basis of charging the
regional office expenses. Selling expenses were higher as compared
to the same period in the prior year primarily due to an increase
in travel expenses and commission expenses as a result of higher
commissionable sales in the Singapore operations, whereas 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 March 31, 2017 and 2016
were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
3,977
|
$
3,622
|
Gross margin
|
34.7
%
|
29.0
%
|
Income from operations
|
$
200
|
$
109
|
Income from operations in the testing segment for the three months
ended March 31, 2017 was $200, an increase of $91, compared to $109
for the same period of last fiscal year. The increase in operating
income was mainly attributable to an increase in revenue by $355,
resulting in an increase of $328 in gross margin, as discussed
earlier. Operating expenses were $1,180 and $943 for the three
months ended March 31, 2017 and 2016, respectively. This increase
was mainly due to an increase in general and administrative
expenses, selling expenses and loss on disposal of property, plant
and equipment. General and administrative expenses increased
primarily due to the increase in allocation of regional office
expenses as compared to last fiscal year. The increase was due to
restructuring the basis of charging the regional office expenses,
as compared to last fiscal year and an increase in withholding tax,
renovation and professional expenses in the Malaysia operations,
while selling expenses increased due to travelling and commission
expenses. Selling expenses were higher as compared to the same
period in the prior year primarily due to an increase in travel
expenses and commission expenses as a result of higher
commissionable sales.
Distribution Segment
The revenue, gross margin and income from operations for the
distribution segment for the three months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
1,581
|
$
1,232
|
Gross margin
|
11.0
%
|
16.8
%
|
Income from operations
|
$
101
|
$
112
|
Income from operations in the distribution segment for the three
months ended March 31, 2017 was $101 as compared to $112 for the
same period of last fiscal year. The decrease in operating
income of $11 was mainly due to the decrease in gross margin of
$33, as discussed earlier. Operating expenses were $73 and $95 for
the three months ended March 31, 2017 and 2016, respectively.
Operating expenses decreased primarily due to the $26 decrease in
corporate charges which are allocated on a pre-determined fixed
charge basis. This decrease was partially offset by an increase in
selling expenses in the Singapore operations. Selling expenses were
higher as compared to the same period in the prior year primarily
due to an increase in travel expenses and commission expenses as a
result of higher commissionable sales.
Real Estate Segment
The revenue, gross margin and loss from operations for the real
estate segment for the three months ended March 31, 2017 and 2016
were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
37
|
$
33
|
Gross margin
|
21.6
%
|
6.1
%
|
Loss from operations
|
$
(14
)
|
$
(19
)
|
Loss from operations in the real estate segment for the three
months ended March 31, 2017 was $14, as compared to $19 for the
same period of last fiscal year. The decrease in operating loss was
mainly due to an increase in gross margin by $6, as discussed
earlier. Operating expenses were $22 and $21 for the three months
ended March 31, 2017 and 2016, respectively.
Corporate
The income from operations for corporate for the three months ended
March 31, 2017 and 2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Income from operations
|
$
29
|
$
134
|
Operating
income in the corporate office for the three months ended March 31,
2016 was $29, as compared to $134 for the same period of the last
fiscal year. The decrease in operating income was mainly due to an
increase in payroll related expenses and professional fees, in
addition to timing difference in professional fees in the same
period last fiscal year, which did not exist during the three
months ended March 31, 2017.
Comparison of the Nine Months Ended March 31, 2017 and March 31,
2016
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the nine months ended
March 31, 2017 and 2016, respectively:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
100.0
%
|
100.0
%
|
Cost
of sales
|
74.6
|
74.9
|
Gross Margin
|
25.4
%
|
25.1
%
|
Operating
expenses:
|
|
|
General
and administrative
|
18.6
%
|
19.0
%
|
Selling
|
2.1
|
1.8
|
Research
and development
|
0.6
|
0.6
|
Loss
on disposal of property, plant and equipment
|
0.1
|
-
|
Total
operating expenses
|
21.4
%
|
21.4
%
|
Income from Operations
|
4.1
%
|
3.7
%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue increased by 0.3%
to 25.4% for the nine months ended March 31, 2017, from 25.1% in
the same period of last fiscal year, primarily due to an increase
in the gross profit margin in the testing segment and real estate
segment, which was partially offset by a decrease in the gross
profit margin in the manufacturing segment. In terms of absolute
dollar amount, gross profit increased by $674 to $7,099 for the
nine months ended March 31, 2017, from $6,425 for the same period
of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment decreased by 3.0% to 21.9% for the nine months ended March
31, 2017, from 24.9% in the same period of the last fiscal year. In
absolute dollar amounts, the gross profit decreased by $248 to
$2,459 for the nine months ended March 31, 2017, as compared to
$2,707 for the same period in last fiscal year. The decrease in
absolute dollar amount of gross margin was primarily due to a
change in product mix. as this segment had fewer sales of products
with a higher profit margin as compared to the same period of last
fiscal year.
Gross profit margin as a percentage of revenue in the testing
segment increased by 4.4% to 33.9% for the nine months ended March
31, 2017, from 29.5% 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. The
increase was partially offset by a decrease in volume in the
Suzhou, China operations and a lower average selling price, despite
higher volume, in the Tianjin, China operations. A significant
portion of our cost of goods sold is fixed in the testing segment.
Thus, as the demand of services and factory utilization increases,
the fixed costs are spread over the increased output, which
increases the gross profit margin. Overall, the testing operations
increased their utilization. In terms of absolute dollar amounts,
gross profit in the testing segment increased by $856 to $4,135 for
the nine months ended March 31, 2017, from $3,279 for the same
period of the last fiscal year. .
Gross profit margin as a percentage of revenue in the distribution
segment decreased by 2.0% to 10.6% for the nine months ended March
31, 2017 from 12.6% for the same period of the last fiscal year.
The decrease in gross margin was due to the change in product mix,
as this segment had fewer sales of products with a higher 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 nine months ended March 31, 2017 was $461, an
increase of $13 as compared to $448 in the same period of the 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 38.3% for the nine months ended March 31, 2017, an
improvement of 49.1% from a gross profit margin of negative 10.8%
for the same period in the last fiscal year. In terms of absolute
dollar amounts, gross margin in the real estate segment for the
nine months ended March 31, 2017 was $44, an improvement of $53
from a gross loss of $9 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, as a result of
increase in space rented during the period, and a decrease in cost
of sales due to a change in tax structure as compared to the same
period in the last fiscal year.
Operating Expenses
Operating expenses for the nine months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
General
and administrative
|
$
5,178
|
$
4,861
|
Selling
|
587
|
470
|
Research
and development
|
156
|
148
|
Loss
/ (gain) on disposal of property, plant and equipment
|
38
|
(4
)
|
Total
|
$
5,959
|
$
5,475
|
General and administrative expenses increased by $317, or 6.5%,
from $4,861 to $5,178 for the nine months ended March 31, 2017
compared to the same period of the last fiscal year. There was an
increase in general and administrative expenses in all operations,
except in Suzhou and Chongqing, China and Bangkok,
Thailand.
The increase in general and administrative expenses was mainly
attributable to an increase in headcount and payroll related
expenses in the Singapore and Malaysia operations and increase in
software related expenses in the Singapore operations. These
increases were partially offset by a decrease in payroll related
expenses in the Suzhou, China operations as part of cost control
measures for the nine months ended March 31, 2017 as compared to
the same period of last fiscal year.
Selling expenses increased by $117, or 24.9%, for the nine months
ended March 31, 2017, from $470 to $587 compared to the same period
of the last fiscal year, which was mainly due to an increase in
travel, entertainment and commission in our Singapore and Malaysia
operations as a result of an increase in commissionable sales.
These increases were partially offset by the decrease in warranty
related expenses.
During the nine months ended March 31, 2017, there was a loss on
disposal of property, plant and equipment amounting to $38, as
compared to a gain of $4 in the same period of last fiscal year.
During the nine months ended March 31, 2017 certain assets that
were no longer required was disposed resulting in a loss. The
difference is mainly due to fixed assets written off in the
Malaysia and Tianjin, China operations as part of routine
operational review of assets during the nine months ended March 31,
2017, as compared to the same period last fiscal year.
Income from Operations
Income from operations was $1,140 for the nine months ended March
31, 2017 as compared to $950 for the same period of the last fiscal
year. The increase was mainly due to an increase in gross margin,
as discussed earlier.
Interest Expense
Interest expense for the nine months ended March 31, 2017 and 2016
were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Interest expense
|
$
(149
)
|
$
(151
)
|
Interest expense decreased by $2 to $149 from $151 for the nine
months ended March 31, 2017 as compared to the same period of the
last fiscal year due to repayment of credit facilities by the
Singapore and Malaysia operations.
Other Income
Other income for the nine months ended March 31, 2017 and 2016 were
as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Subsidies
and Productive innovative credit
|
$
69
|
$
74
|
Other
miscellaneous income
|
195
|
181
|
Exchange
gain
|
94
|
(126
)
|
Other income, net
|
$
358
|
$
129
|
Other income for the nine months ended March 31, 2017 was $358, an
increase of $229 as compared to $129 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 $94 for the nine months
ended March 31, 2017 as compared to an exchange loss of $126 for
the same period last fiscal year.
Income Tax Expenses
Income tax expense for the nine months ended March 31, 2017 was
$256, an increase of $88, as compared to $168 for the same period
of last fiscal year. The increase in income tax expenses was mainly
due to an increase in taxable income in the subsidiaries in this
fiscal year as compared to prior fiscal year, increase in
withholding tax not claimable, and a change from deferred tax
benefit in the same period last fiscal year to deferred tax expense
for timing differences recorded by the Malaysia
operations.
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 carry forwards. 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 nine months ended March 31, 2017 and 2016
included $54 and $60, 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 March 31, 2017, 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 non-controlling interest for the nine months ended March 31,
2017, in the net income of subsidiaries, was $126, a decrease of
$30, as compared to $156 for the same period of last fiscal year.
The decrease in the non-controlling interest in the net income of
subsidiaries was attributable to the decrease in net income
generated by the Malaysia testing operations due to higher foreign
exchange losses as compared to the same period in the last fiscal
year.
Loss from Discontinued Operations
The discontinued operations in Indonesia incurred general and
administrative expenses of $1 for nine months ended March 31, 2017,
as compared to $8 for the same period of the last fiscal
year.
The discontinued operation in Shanghai was wound up in March
2017.That operation did not incur any general and administrative
expenses for nine months ended March 31, 2017 and 2016,
respectively.
Net Income
Net income attributable to Trio-Tech International Common
shareholders was $963 for the nine months ended March 31, 2017, an
improvement of $364, as compared to a net income of $599 for the
same period in the last fiscal year. The improvement was mainly due
to an increase in operating profits caused by an increase in gross
margin, which was partially offset by the increase in operating
expenses.
Earnings per Share
Basic earnings per share from continuing operations was $0.28 for
the nine months ended March 31, 2017 as compared to $0.17 for the
same period in the last fiscal year. Basic earnings per share from
discontinued operations were nil for both the nine months ended
March 31, 2017 and 2016.
Diluted earnings per share from continuing operations was $0.27 for
the nine months ended March 31, 2017 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 nine months
ended March 31, 2017 and 2016.
Segment Information
The revenue, gross profit margin, and income or loss from each
segment for the nine months ended March 31, 2017 and 2016,
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 loss or income from operations for
the manufacturing segment for the nine months ended March 31, 2017
and 2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
11,221
|
$
10,884
|
Gross margin
|
21.9
%
|
24.9
%
|
(Loss) / income from operations
|
$
(153
)
|
$
358
|
Loss from operations from the manufacturing segment was $153 for
the nine months ended March 31, 2017, a deterioration of $511 as
compared to an income of $358 in the same period of the last fiscal
year, due to a decrease in gross margin by $248, as discussed
earlier, and an increase in operating expenses. Operating expenses
for the manufacturing segment were $2,612 and $2,349 for the nine
months ended March 31, 2017 and 2016, respectively. The increase in
operating expenses of $263 was mainly due to an increase in selling
expenses, research and development expenses and corporate charges.
Selling expenses increased due to an increase in travel and
entertainment expenses, warranty expenses and commission expenses
due to an increase in commissionable sales. There was an increase
in allocation of corporate charges, which 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 nine months ended March 31, 2017 and 2016
were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
12,204
|
$
11,106
|
Gross margin
|
33.9
%
|
29.5
%
|
Income from operations
|
$
990
|
$
469
|
Income from operations in the testing segment for the nine months
ended March 31, 2017 was $990, an increase of $521 compared to $469
in the same period of the last fiscal year. The increase in
operating income was attributable to an increase in revenue by
$1,098 and an increase in gross profit of $856, as discussed
earlier, these were partially offset by an increase in operating
expenses by $335. Operating expenses were $3,145 and $2,810 for the
nine months ended March 31, 2017 and 2016, respectively. The
increase in operating expenses was mainly attributable to an
increase in general and administrative expenses, selling expenses,
and loss on disposal of property, plant and equipment. General and
administrative expenses increased due to an increase in payroll
related expenses and professional expenses in the Malaysian
operations and an increase in tax and welfare expenses in the
Tianjin, China operations. Selling expenses increased due to travel
expenses in the Singapore, Malaysia, and Tianjin, China operations
and commission expenses in the Singapore operations. Increase in
commission expenses was due to increase in commissionable sales.
During the nine months ended March 31, 2017 certain assets that
were no longer required was disposed resulting in a loss. These
increases were partially offset by a decrease in allocation of
corporate charges, which are allocated on a pre-determined fixed
charge basis.
Distribution Segment
The revenue, gross margin and income from operations for the
distribution segment for the nine months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
4,360
|
$
3,566
|
Gross margin
|
10.6
%
|
12.6
%
|
Income from operations
|
$
235
|
$
182
|
Income from operations in the distribution segment for the nine
months ended March 31, 2017 was $235, an increase of $53 compared
to an operating income of $182 in the same period of the last
fiscal year. The increase was mainly due to a decrease in operating
expenses. Operating expenses were $226 and $266 for the nine months
ended March 31, 2017 and 2016, respectively. The decrease in
operating expenses by $40 was mainly due to a decrease in
allocation of corporate expenses, which are charged on a
predetermined fixed basis. This decrease was partially offset by
the increase in general and administrative expenses due to an
increase in payroll related expenses and bank charges in the
Singapore operations.
Real Estate Segment
The revenue, gross margin or loss and loss from operations for the
real estate segment for the nine months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
$
115
|
$
83
|
Gross margin / (loss)
|
38.3
%
|
(10.8
)%
|
Loss from operations
|
$
(20
)
|
$
(89
)
|
Loss from operations in the real estate segment for the nine months
ended March 31, 2017 was $20, an improvement of $69 as compared to
$89 for the same period of the last fiscal year. The improvement in
operating loss was due to an increase in revenue resulting in an
increase in gross margin by $53, as discussed earlier, and a
decrease in operating expenses. Operating expenses decreased by $16
to $64 for the nine months ended March 31, 2017 as compared to $80
for the same period in the last fiscal year. The decrease in
operating expenses was mainly due to a decrease general and
administrative expenses as travel and entertainment expenses and
property management fee decreased.
Corporate
The income from operations for corporate for the nine months ended
March 31, 2017 and 2016 were as
follows:
|
|
|
|
|
(Unaudited)
|
|
|
Income from operations
|
$
88
|
$
30
|
Operating gain in the corporate office for the nine months ended
March 31, 2017 was $88, an improvement of $58, as compared to $30
for the same period of the last fiscal year. This was mainly due to
an increase in corporate charges allocation to other segments,
which are allocated on a pre-determined fixed charge basis, and was
partially offset by an increase in general and administrative
charges due to increase in payroll related expenses and
professional fees.
Financial Condition
During the nine months ended March 31, 2017, total assets decreased
by $684, from $32,219 as at June 30, 2016 to $31,535 as at March
31, 2017. 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, prepaid expenses and other
assets.
Cash and cash equivalents were $4,009 as at March 31, 2017,
reflecting an increase of $202 from $3,807 as at June 30,
2016, primarily due to an improvement in collections from our major
customers in the Singapore, Suzhou, China 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
83 days at the end of the third 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 Malaysia operations and other
staff related expenses in the Singapore operations, placement of
deposits in the China Operation and purchase of Property, plant and
equipment in Malaysia and Singapore operations.
Short-term deposits were $536 as at March 31, 2017, reflecting an
increase of $241 from $295 as at June 30, 2016, primarily due to
placement of deposit of $38. This increase was partially offset by
the currency translation.
At March 31, 2017, the trade accounts receivable balance decreased
by $476 to $8,350 from $8,826 as at June 30, 2016, primarily due to
an improvement in collection in the Singapore, Malaysia and
Tianjin, China operations, outstanding payment received from a
major customer in the U.S. operations. The decrease was offset by
an increase in the Singapore operations due to higher sales and
delay in payment by a major customer. The number of days’
sales outstanding was 83 days at the end of the third 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
nine months ended March 31, 2017, as compared to the year-end of
last fiscal year.
At March 31, 2017, other receivables were $321 reflecting a
decrease of $275 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 and decrease in advance
payments to creditors in the Singapore operations during the nine
months ended March 31, 2017.
Inventories at March 31, 2017 were $2,172, an increase of $712
compared to $1,460 as at June 30, 2016. The number of days’
inventory held was 56 days at the end of the third 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 rate of the inventory by the Singapore operations in
the nine-month period ended March 31, 2017, as compared to the year
end of fiscal 2016.
Prepaid expenses and other current assets were $308 as at March 31,
2017, as compared to $264 as at June 30, 2016. The increase of $44
was primarily due to prepayments for rental and insurance upon
renewal by the Malaysia, Suzhou, China and Tianjin, China
operations.
Investment properties, net in China as at March 31, 2017 were
$1,221, a decrease of $119 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 nine months ended
March 31, 2017.
Property, plant and equipment decreased by $589 from $11,283 as at
June 30, 2016 to $10,694 as at March 31, 2017, mainly due to
depreciation charges amounting to $1,358, foreign currency exchange
difference between functional currency and U.S. dollars from June
30, 2016 to March 31, 2017, and an increase in the disposal of
fixed assets by the Malaysia and Tianjin, China operations for the
nine months ended March 31, 2017.
Restricted term deposits decreased by $438 from $2,067 as at June
30, 2016 to $1,629 as at March 31, 2017. This decrease was due to
the uplift of fixed deposit in the Singapore operations and foreign
currency exchange difference between functional currency and U.S.
dollars from June 30, 2016 to March 31, 2017.
Other assets increased by $48 from $1,788 as at June 30, 2016 to
$1,836 as at March 31, 2017. The increase in other assets was
primarily due to down-payment for capital purchases in the Malaysia
operations and by the foreign currency exchange difference between
functional currency and U.S. dollars from June 30, 2016 to March
31, 2017.
Utilized lines of credit as at March 31, 2017 decreased by $384 to
$2,107, 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 March 31, 2017.
Accounts payable as at March 31, 2017 increased by $458 to $3,379
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 cost of sales as a result of increased minimum wages
passed on by sub-contractors to the Malaysian operations during the
first three quarters of fiscal year 2017, as compared to the end of
fiscal year 2016. This increase was partially offset by the
decrease in accounts payable in the Tianjin, China operations due
to non-recurring payments to suppliers in fiscal 2016 which did not
exist during the three quarters of fiscal year 2017.
Accrued expenses as at March 31, 2017 decreased by $68 to $2,574
from $2,642 as at June 30, 2016. The decrease in accrued expenses
was mainly due to a decrease in payroll-related expenses as a
result of labor cost control measures in the Tianjin, China
operations, reversal of overprovision of sales tax in the
Chongqing, China operations, operations recording a bonus provision
for 9 months as at March 31, 2017 as compared to 12 months as at
June 30, 2016 and foreign currency exchange difference between
functional currency and U.S. dollars from June 30, 2016 to March
31, 2017. This decrease was partially offset by an increase in
accrued purchases and commission expenses in the Singapore
operations.
Bank loans payable as at March 31, 2017 decreased by $440 to
$1,627, 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 March 31,
2017.
Capital leases as at March 31, 2017 decreased by $176 to $562, 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 March 31, 2017. 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 $1,667 to
$3,013 for the nine months ended March 31, 2017, compared to $1,346
in the same period of the last fiscal year. The increase in net
cash generated by operating activities was primarily due to improve
in collection from accounts receivable by $1,582, a decrease in
other receivables by $263 and an increase in deferred tax liability
by $165. These were partially offset by an increase in inventories
by $525, a decrease in accounts payable by $231 and an increase in
other assets by $99.
Net cash used in investing activities increased by $703 to $1,317
for the nine months ended March 31, 2017, compared to $614 for the
same period of the last fiscal year. The increase in cash outflow
in investing activities was primarily due to an increase in
additions to property, plant and equipment, and investments in
restricted and unrestricted deposits, while the decrease in cash
inflow was due to a decrease in proceeds from disposal of property,
plant and equipment during the nine months ended March 31, 2017.
This was partially offset by an increase in proceeds from maturing
of restricted and unrestricted term deposits.
Net cash used in financing activities for the nine months ended
March 31, 2017 was $1,045, representing an increase of $313, as
compared to $732 during the same period of the last fiscal year.
The increase in outflow was mainly due to an increase in repayment
of lines of credit by $153, an increase in repayment of bank loans
and capital leases by $31 and an increase in dividends paid to
non-controlling interests in our Malaysia operations by $60 as
compared to the same period of last fiscal year. Furthermore, net
cash generated from financing activities decreased due to a
decrease in borrowings from bank loan and capital
leases.
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.