ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Overview
The following should be read in conjunction with the condensed
consolidated financial statements and notes in Item I above and
with the audited consolidated financial statements and notes, the
information under the headings “Risk Factors” and
“Management’s discussion and analysis of financial
condition and results of operations” in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2019.
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 Block 1008 Toa Payoh North, Unit 03-09
Singapore 318996, and our telephone number is (65) 6265
3300.
The Company primarily 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 99.8% 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, 2019.
The Real Estate segment contributed only 0.2% to the total revenue
and was immaterial to the overall business.
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 Asia and the 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 Year 2020 Highlights
●
Total
revenue decreased by $728 or 7.5%, to $8,962 in the second quarter
of fiscal year 2020, compared to $9,690 for the same period in
fiscal year 2019.
●
Manufacturing
segment revenue decreased by $307, or 9.2%, to $3,045 for the
second quarter of fiscal year 2020, compared to $3,352 for the same
period in fiscal year 2019.
●
Testing
segment revenue decreased by $506, or 11.5%, to $3,887 for the
second quarter of fiscal year 2020, compared to $4,393 for the same
period in fiscal year 2019.
●
Distribution
segment revenue increased by $98, or 5.1%, to $2,014 for the second
quarter of fiscal year 2020, compared to $1,916 for the same period
in fiscal year 2019.
●
Real
estate segment rental revenue decreased by $13 or 44.8% to $16 for
the second quarter of fiscal year 2020 compared to $29 for the same
period in fiscal year 2019.
●
The
overall gross profit margin decreased by 2.0% to 21.3% for the
second quarter of fiscal year 2020, from 23.3% for the same period
in fiscal year 2019.
●
Loss
from operations was $173 for the second quarter of fiscal year
2020, a decrease of $400, as compared to the income from operations
of $227 for the same period in fiscal year 2019.
●
General
and administrative expenses increased by $55, or 3.2%, to $1,777
for the second quarter of fiscal year 2020, from $1,722 for the
same period in fiscal year 2019.
●
Selling
expenses decreased by $11, or 5.9%, to $176 for the second quarter
of fiscal year 2020, from $187 for the same period in fiscal year
2019.
●
Other
income decreased by $9 to $40 in the second quarter of fiscal year
2020 compared to $49 in the same period in fiscal year
2019.
●
There
was a gain of sale of asset held for sale amounted to $1,172 in the
second quarter of fiscal year 2020.
●
Income
tax expense was $120 in the second quarter of fiscal year 2020, a
change of $244 as compared to the income tax benefits of $124 in
the same period in fiscal year 2019.
●
During
the second quarter of fiscal year 2020, income from continuing
operations before non-controlling interest, net of tax was $864, as
compared to $302 for the same period in fiscal year
2019.
●
Net
profit attributable to non-controlling interest for the second
quarter of fiscal year 2020 was $439, an increase of $481, as
compared to net loss attributable to non-controlling interest of
$42 in the same period in fiscal year 2019.
●
Basic
Earnings per share for the second quarter of fiscal year 2020 were
$0.12, as compared to earnings per share of $0.09 for the same
period in fiscal year 2019.
●
Dilutive
Earnings per share for the second quarter of fiscal year 2020 were
$0.11, as compared to earnings per share of $0.09 for the same
period in fiscal year 2019.
●
Total
assets increased by $1,928, or 5.3% to $38,455 as of December 31,
2019 compared to $36,527 as of June 30, 2019.
●
Total
liabilities increased by $944, or 8.1% to $12,610 as of December
31, 2019 compared to $11,666 as of June 30, 2019.
Results of Operations and Business Outlook
The following table sets forth our revenue components for the three
and six months ended December 31, 2019 and 2018,
respectively.
|
Revenue
Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
34.0%
|
34.6%
|
33.9%
|
35.4%
|
|
Testing
Services
|
43.4
|
45.3
|
44.1
|
44.7
|
|
Distribution
|
22.4
|
19.8
|
21.8
|
19.6
|
|
Real
Estate
|
0.2
|
0.3
|
0.2
|
0.3
|
|
|
|
|
|
|
|
Total
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
Revenue for the three and six months ended December 31, 2019 was
$8,962 and $18,785, respectively, a decrease of $728 and $950,
respectively, when compared to the revenue for the same period of
the prior fiscal year. As a percentage, revenue decreased by 7.5%
and 4.8% for the three and six months ended December 31, 2019,
respectively, when compared to revenue for the same period of the
prior year.
For the three months ended December 31, 2019, the $728 decrease in
overall revenue was primarily due to
●
decrease
in the manufacturing segment in the U.S. and Singapore operations;
and
●
decrease
in the testing segment in the Malaysia and China
operations
These decreases were partially offset by the
●
an
increase in the distribution segment in the Singapore operations;
and
●
an
increase in the testing segment in the Singapore and Thailand
operations
For the six months ended December 31, 2019, the $950 decrease in
overall revenue was primarily due to
●
decrease
in the manufacturing segment in the Singapore operations;
and
●
decrease
in the testing segment in the Malaysia and China
operations
These decreases were partially offset by the
●
an
increase in the testing segment in the Singapore and Thailand
operations; and
●
an
increase in the distribution segment in the Singapore and China
operations
Total revenue into and within China, the Southeast Asia regions and
other countries (except revenue into and within the United States)
decreased by $629 (or 6.7%), to $8,831 and by $1,017 (or 5.3%) to
$18,018 for the three and six months ended December 31, 2019
respectively, as compared with $9,460 and $19,035, respectively,
for the same period of last fiscal year.
Total revenue into and within the U.S. was $131 and $767 for the
three and six months ended December 31, 2019, respectively, a
decrease of $99 and an increase of $67 from $230 and $700 for the
same period of the prior year.
Revenue within our four current segments for the three and six
months ended December 31, 2019 is discussed below.
Manufacturing Segment
Revenue in the manufacturing segment was 34.0% and 33.9% as a
percentage of total revenue for the three and six months ended
December 31, 2019, respectively, a decrease of 0.6% and 1.5% of
total revenue, respectively, when compared to the same period of
the last fiscal year. The absolute amount of revenue decreased
by $307 to $3,045 from $3,352 and decreased by $627 to $6,362 from
$6,989 for the three and six months ended December 31, 2019,
respectively, compared to the same period of the last fiscal
year.
Revenue in the manufacturing segment for the three months ended
December 31, 2019 decreased primarily due to a decrease in orders
by customers in the Singapore operations in the second quarter. The
decrease was mainly due to our customers’ capital purchases
were being affected by the uncertainty associated with the trade
disputes between the U.S. and China. In addition, the
customers’ requests to delay the delivery of the orders in
the U.S. operation also contributed to the decrease.
Revenue in the manufacturing segment from one customer accounted
for 39.7% and 39.0% of our total revenue in the manufacturing
segment for the three and six months ended December 31, 2019 and
2018, respectively, and 39.5% and 39.4% of our total revenue in the
manufacturing segment for the six months ended December 31, 2019,
and 2018, respectively.
The future revenue in our manufacturing segment will be affected by
the purchase and capital expenditure plans of this one customer if
the customer base cannot be increased.
Testing Services Segment
Revenue in the testing segment was 43.4% and 44.1% as a percentage
of total revenue for the three and six months ended December 31,
2019, respectively, a decrease of 1.9% and 0.6% of the total
revenue when compared to the same period of the last fiscal
year. The absolute amount of revenue decreased by $506 to
$3,887 from $4,393 and decreased by $553 to $8,277 from $8,830 for
the three and six months ended December 31, 2019, respectively, as
compared to the same period of the last fiscal
year.
The revenue in the testing segment from the one customer noted
above accounted for 61.6% and 73.3% of our revenue in the testing
segment for the three months ended December 31, 2019 and 2018,
respectively, and 64.1% and 74.6% of our total revenue in the
testing segment for the six months ended December 31, 2019 and
2018, respectively. The future revenue in the testing segment will
be affected by the demands of this customer if the customer base
cannot be increased. Demand for testing services varies from
country to country, depending on any changes taking place in the
market and our customers’ forecasts. As it is difficult
to forecast fluctuations in the market accurately, management
believes it is necessary to maintain testing facilities in close
proximity to the 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 was 22.4% and 21.8% as a
percentage of total revenue for
the three and six months ended December 31, 2019, an increase of
2.6% and 2.2%, respectively, when compared to the same period of
the last fiscal year. The absolute amount of revenue increased
by $98 to $2,014 from $1,916 and increased by $253 to $4,113 from
$3,860 for the three and six months ended December 31, 2019,
respectively, compared to the same period of the last fiscal
year.
Demand for the distribution segment varies depending on the demand
for our customers’ products, the changes taking place in the
market and our customers’ forecasts. Hence it is
difficult to forecast fluctuations in the market
accurately.
Real Estate Segment
The real estate segment accounted for 0.2% of total revenue for the
three and six months ended December 31, 2019, respectively. The
absolute amount of revenue in the real estate segment decreased by
$13 to $16 from $29 and decreased by $23 to $33 from $56 for the
three and six months ended December 31, 2019, respectively,
compared to the same periods of the last fiscal year. This was due
to the sales of properties in the real estate segment in the China
operation after the third quarter of the last fiscal year, which
resulted in a decrease in rental income.
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 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 for higher technology chips.
We are in the process of implementing an Enterprise Resource
Planning (“ERP”) system, as part of a multi-year plan
to integrate and upgrade our systems and processes. The
implementation of this ERP system is scheduled to occur in phases
over 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.
During the third quarter of fiscal 2018, the operational and
financial systems in Singapore were substantially transitioned to
the new system. The operational and financial systems in our
Malaysia operation were substantially transitioned to the new
system during the first quarter of fiscal 2019.
This implementation effort will continue in fiscal 2020, when the
operational and financial system in our Tianjin and Suzhou
operations will be substantially transitioned to the new
system.
As a phased implementation of this system occurs, we are
experiencing certain changes to our processes and procedures which,
in turn, result in changes to our internal control over financial
reporting. While we expect the new ERP system to strengthen our
internal financial controls by automating certain manual processes
and standardizing business processes and reporting across our
organization, management will continue to evaluate and monitor our
internal controls as processes and procedures in each of the
affected areas evolve.
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.
Our
operation in Tianjin, China, encountered numerous limitations due
to the outbreak of the Novel Coronavirus, named Covid-19 in China
during early 2020. The Chinese government had taken emergency
measures to combat the spread of the virus, including an extension
of the Lunar New Year holidays. Management is currently assessing
the impact of the outbreak on our Tianjin, China operation, and
exploring various options to minimize the financial
impact.
Numerous variables and uncertainties related to this outbreak has
restricted our ability to calculate the impact on the Tianjin
operation in the third quarter of fiscal year 2020. We expect that
the extended Lunar New Year Holidays and the shortage of manpower
due to travel restriction will limit our ability to generate the
same level of revenue under normal
circumstances.
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, 2019 and December
31, 2018
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the three months ended
December 31, 2019 and 2018 respectively:
|
|
Three
Months Ended
December
31,
|
|
|
|
|
|
Revenue
|
100.0%
|
100.0%
|
|
Cost
of sales
|
78.7
|
76.7
|
|
Gross Margin
|
21.3%
|
23.3%
|
|
Operating
expenses
|
|
|
|
General
and administrative
|
19.8%
|
17.8%
|
|
Selling
|
2.0
|
1.9
|
|
Research
and development
|
1.4
|
1.3
|
|
Total
operating expenses
|
23.2%
|
21.0%
|
|
(Loss)/Income from Operations
|
(1.9)%
|
2.3%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue decreased by 2.0%
to 21.3% for the three months ended December 31, 2019, from 23.3%
for the same period of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment increased by 0.6% to 21.7% for the three months ended
December 31, 2019, as compared to 21.1% for the same period in the
last fiscal year. In absolute dollar amounts, gross profits in the
manufacturing segment decreased by $44 to $662 for the three months
ended December 31, 2019, from $706 for the same period in the last
fiscal year.
Gross profit margin as a percentage of revenue in the testing
segment decreased by 4.4% to 24.9% for the three months ended
December 31, 2019, from 29.3% in the same period of the last fiscal
year. The further deterioration of the testing revenue in Malaysia
and China operations resulted in a decrease in gross profit margin
in the testing segment where significant portions of the cost of
goods sold are fixed in the testing segment. Thus,
as the demand for services and factory utilization decreases, the
fixed costs are spread over the decreased output, which decreases
the gross profit margin. However, the negative impact was mitigated
by the management’s effort in cost-saving measure. In
absolute dollar amounts, gross profit in the testing segment
decreased by $318 to $969 for the three months ended December 31,
2019 from $1,287 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 the products we distribute, but
also the mix of products we distribute, which frequently changes as
a result of changes in market demand. Gross profit margin as a
percentage of revenue in the distribution segment increased by 0.4%
to 13.7% for the three months ended December 31, 2019, from 13.3%
in the same period of the last fiscal year. In terms of
absolute dollar amounts, gross profit in the distribution segment
for the three months ended December 31, 2019 was $276 as compared
to $254 in the same period of the last fiscal
year.
In absolute dollar amounts, for the three months ended December 31,
2019, gross loss in the real estate segment was $2, as compared to
the gross profit margin of $11 for the same period of last fiscal
year. The increase in gross loss was mainly due to the sales of
properties in the real estate segment after the third quarter of
the last fiscal year, which resulted in a decrease in rental
income.
Operating Expenses
Operating expenses for the three months ended December 31, 2019 and
2018 were as follows:
|
|
Three Months
Ended
December
31,
|
|
(Unaudited)
|
|
|
|
General
and administrative
|
$1,777
|
$1,722
|
|
Selling
|
176
|
187
|
|
Research
and development
|
125
|
122
|
|
Total
|
$2,078
|
$2,031
|
General and administrative expenses increased by $55, or 3.1%, from
$1,722 to $1,777 for the three months ended December 31, 2019
compared to the same period of last fiscal year. The increase in
general and administrative expenses was mainly attributable to the
increase in payroll-related expenses and a provision of doubtful
debt in the manufacturing segment of the Singapore
operations.
Selling expenses decreased by $11, or 5.9%, from $187 to $176 for
the three months ended December 31, 2019, compared to the same
period of the last fiscal year. The decrease was mainly due to the
lower of traveling and entertainment expenses incurred in the
Singapore operations.
Loss/Income from Operations
Loss from operations was $173 for the three months ended December
31, 2019, a decrease of $400, as compared to income from operations
of $227 for the three months ended December 31, 2018. The result
was mainly due to the decrease in gross profit and the increase in
operating expenses, as previously discussed.
Interest Expense
Interest expense for the three months ended December 31, 2019 and
2018 were as follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Interest expenses
|
$55
|
$98
|
Interest expense was $55 for the three months ended December 31,
2019, a decrease of $43, or 44% as compared to $98 for the three
months ended December 31, 2018. The decrease was due to a decrease
in the utilization of short-term loans in the Singapore and China
operations. As of December 31, 2019, the Company had an unused
line of credit of $6,325 as compared to $6,251 at June 30,
2019.
Other Income
Other income for the three months ended December 31, 2019 and 2018
were as follows:
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
Interest
income
|
52
|
26
|
|
Other
rental income
|
30
|
29
|
|
Exchange
loss
|
(66)
|
(28)
|
|
Other
miscellaneous income
|
24
|
22
|
|
Total
|
$40
|
$49
|
Other income decreased by $9 to $40 for the three months ended
December 31, 2019 from $49 as compared to the same period of last
fiscal year. The decrease was primarily due to an increase in
exchange loss, which was resulted by the unfavorable foreign
exchange movement for the three months ended December 31, 2019 as
compared to same period in the last fiscal year. The decrease was
partially offset by the increase from interest income, which
resulted from the increase of fixed deposit placement.
Income Tax Expenses/Benefits
The
Company's income tax expense was $120 for the three months ended
December 31, 2019, a change of $224 as compared to income tax
benefit of $124 for the same period in the last fiscal year. The
change was mainly due to the reversal of $145 from provision of
income tax, which was arising from the One-Time Mandatory
Repatriation Tax in last fiscal year. In addition, there was provision for GILTI of $35
and a capital gain tax of $94 incurred from the sale of asset held
for sale in the Malaysia operation for the three months ended
December 31, 2019.
Non-controlling Interest
As of December 31, 2019, we held a 55% interest in Trio-Tech
(Malaysia) Sdn. Bhd., Trio-Tech (Kuala Lumpur) Sdn. Bhd., SHI
International Pte. Ltd., and PT. SHI Indonesia. We also held a 76%
interest in Prestal Enterprise Sdn. Bhd. The share of net income
from the subsidiaries by the non-controlling interest for the three
months ended December 31, 2019 was $439, an increase of $481
compared to the net loss of $42 for the same period of the previous
fiscal year. The increase in the net income of the
non-controlling interest in the subsidiaries was attributable to
the increase in net income generated by the Malaysia operation from
the sale of the asset held for sale.
Net Income
Net income for the three months ended December 31, 2019 was $426,
an increase of $78, as compared to a net income of $348 for the
same period last fiscal year.
Earnings per Share
Basic earnings per share from continuing operations were $0.12 for
the three months ended December 31, 2019 as compared to $0.09 for
the same period in the last fiscal year. Basic earnings per share
from discontinued operations were Nil for both the three months
ended December 31, 2019 and 2018.
Diluted earnings per share from continuing operations were $0.11
for the three months ended December 31, 2019 as compared to $0.09
for the same period in the last fiscal year. Diluted earnings per
share from discontinued operations were $Nil for both the three
months ended December 31, 2019 and 2018.
Segment Information
The revenue, gross margin and income or loss from operations for
each segment during the second quarter of fiscal year 2020 and
fiscal year 2019 are presented below. As the revenue and gross
margin for each segment have been discussed in the previous
section, only the comparison of income or loss 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, 2019
and 2018 were as follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Revenue
|
$3,045
|
$3,352
|
|
Gross margin
|
21.7%
|
21.1%
|
|
(Loss)/Income from operations
|
$(87)
|
$76
|
Loss from operations from the manufacturing segment was $87 as
compared to income from operation of $76 in the same period of the
last fiscal year, primarily due to a decrease in gross margin of
$44 and an increase in operating expenses of $119. Operating
expenses for the manufacturing segment were $749 and $630 for the
three months ended December 31, 2019 and 2018, respectively. The
increase in operating expenses was mainly due to an increase of $86
in general and administrative expenses and an increase of $27 in
corporate overhead expenses. The increase in general and
administrative expenses was mainly attributable to an increase in
payroll-related expenses and a provision of doubtful debt in
Singapore operations. The increase in corporate overhead expenses
was due to a change in the corporate overhead allocation 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 (loss)/income from operations for the
testing segment for the three months ended December 31, 2019 and
2018 were as follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Revenue
|
$3,887
|
$4,393
|
|
Gross margin
|
24.9%
|
29.3%
|
|
(Loss)/Income from operations
|
$(161)
|
$21
|
Loss from operations in the testing segment for the three months
ended December 31, 2019 was $161, reflecting a net decrease of $182
compared to income from operations of $21 in the same period of the
last fiscal year. The decrease in operating income were mainly
attributable to a decrease in gross profit margin, as discussed
earlier. The decreases in the operating income were partially
offset with a decrease in operating expenses. Operating expenses
were $1,130 and $1,266 for the three months ended December 31, 2019
and 2018, respectively. The decrease of $136 in operating expenses was
mainly due to a decrease in general and administrative expenses,
which was mainly due to lower payroll-related expenses incurred in
the Malaysia and China operations as part of the cost-saving
measures, as discussed earlier.
Distribution Segment
The revenue, gross margin and income from operations for the
distribution segment for the three months ended December 31, 2019
and 2018 were as follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Revenue
|
$2,014
|
$1,916
|
|
Gross margin
|
13.7%
|
13.3%
|
|
Income from operations
|
$188
|
$170
|
Income from operations in the distribution segment was $188, for
the three months ended December 31, 2019, as compared to $170 for
the same period of last fiscal year. The increase in income
from operations of $18 was mainly due to an increase of $22 in the
gross margin, as discussed earlier. Operating expenses were $88 and
$84 for the three months ended December 31, 2019 and 2018,
respectively.
Real Estate Segment
The revenue, gross margin and loss from operations for the real
estate segment for the three months ended December 31, 2019 and
2018 were as follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Revenue
|
$16
|
$29
|
|
Gross (loss)/margin
|
(12.5)%
|
37.9%
|
|
Loss from operations
|
$(35)
|
$(5)
|
Loss from operations in the real estate segment for the three
months ended December 31, 2019 was $35 compared to a loss $5 for
the same period of last fiscal year. The increase in
operations loss of $30 was mainly due to the decrease in gross
margin of $13 and the increase in operating expenses by $17.
Operating expenses were $33 and $16 for the three months ended
December 31, 2019 and 2018, respectively. The increase in operating
expenses was mainly due to one-off payroll-related expenses made
during the three months ended December 31, 2019.
Corporate
The loss from operations for Corporate for the three months ended
December 31, 2019 and 2018 was as
follows:
|
|
Three
Months Ended
December
31,
|
|
(Unaudited)
|
|
|
|
Loss from operations
|
$(78)
|
$(35)
|
The increase in loss from operations of $43 was mainly due to a
change in the corporate overhead allocation as compared to the same
period last fiscal year. Corporate charges are allocated on a
pre-determined fixed charge basis.
Comparison of the Six Months Ended December 31, 2019 and December
31, 2018
The following table sets forth certain consolidated statements of
income data as a percentage of revenue for the six months ended
December 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
100.0%
|
100.0%
|
|
Cost
of sales
|
77.9
|
77.9
|
|
Gross Margin
|
22.1%
|
22.1%
|
|
Operating
expenses:
|
|
|
|
General
and administrative
|
19.0%
|
17.6%
|
|
Selling
|
1.9
|
1.7
|
|
|
1.0
|
1.0
|
|
Gain
on disposal of plant and equipment
|
(0.1)
|
-
|
|
Total
operating expenses
|
21.8%
|
20.3%
|
|
Income from Operations
|
0.3%
|
1.8%
|
Overall Gross Margin
Overall gross margin as a percentage of revenue remained consistent
as 22.1% for the six months ended December 31, 2019, as compared to
the same period of the last fiscal year. In terms of absolute
dollar amounts, gross profits decreased by $202 to $4,157 for the
six months ended December 31, 2019, from $4,359 for the same period
of the last fiscal year.
Gross profit margin as a percentage of revenue in the manufacturing
segment increased by 1.1% to 22.4% for the six months ended
December 31, 2019, from 21.3% in the same period of the last fiscal
year. In absolute dollar amounts, gross profit decreased by $62 to
$1,424 for the six months ended December 31, 2019 as compared to
$1,486 for the same period in last fiscal year. The decrease in
absolute dollar amount of gross margin was primarily due to the
decrease in orders in the Singapore operation. However, the orders
in the second quarter of fiscal year had the higher margin as
compared to the same period of the last fiscal year, which
contributed to an increase in the gross margin as a percentage of
revenue.
Gross profit margin as a percentage of revenue in the testing
segment decreased by 0.3% to 26.2% for the six months ended
December 31, 2019 from 26.5% in the same period of the last fiscal
year. There was a further deterioration in testing revenue in
Malaysia and Chinas operation where significant portions of our
cost of goods sold are fixed. As the demand of services and factory
utilization decrease, the fixed costs are spread over the decreased
output, which decreases the gross profit margin. However, this
negative impact was partially mitigated by the management’s
effort in reducing the cost in Malaysia and China operations. In
terms of absolute dollar amounts, gross profit in the testing
segment decreased by $173 to $2,168 for the six months ended
December 31, 2019, from $2,341 for the same period of the last fiscal
year.
Gross profit margin as a percentage of revenue in the distribution
segment increased by 0.5% to 13.8% for the six months ended
December 31, 2019, from 13.3% in the same period of the last fiscal
year. In terms of absolute dollar amounts, gross profit in the
distribution segment for the six months ended December 31, 2019 was
$568, an increase of $56 as compared to $512 in the same period of
the last fiscal year. The increase in absolute dollar amount of
gross margin was due to the increase of distribution revenue
in Singapore Operation. 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
loss margin as a percentage of revenue in the real estate segment
increased by 44.8% to 9.1% for the six months ended December 31,
2019, from the gross profit margin of 35.7% in the same period of
the last fiscal year. In terms of absolute dollar amounts, gross
loss increased by $23 to $3 for the six months ended December 31,
2019 as compared to gross profit of $20 for the same period of the
last fiscal year. The increase in
gross loss was mainly due to the sales of properties in the real
estate segment in the China operation after the third quarter of
the last fiscal year, which resulted in a decrease in rental
income.
Operating Expenses
Operating expenses for the six months ended December 31, 2019 and
2018 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
General
and administrative
|
$3,565
|
$3,481
|
|
Selling
|
366
|
334
|
|
Research
and development
|
201
|
194
|
|
Gain
on disposal of plant and equipment
|
(24)
|
-
|
|
Total
|
$4,108
|
$4,009
|
General and administrative expenses increased by $84, or 2.4%, from
$3,481 to $3,565 for the six months ended December 31, 2019
compared to the same period of the last fiscal year. The increase
in general and administrative expenses was primarily due to the
increase in payroll-related expenses in the U.S. and Singapore
operations.
Selling expenses increased by $32, or 9.6%, for the six months
ended December 31, 2019, from $334 to $366 compared to the same
period of the last fiscal year. The increase was mainly due to an
increase in commission expenses in the manufacturing segment of the
Singapore operations.
Research and development expenses increased by $7, for the six
months ended December 31, 2019, from $194 to $201, as compared to
the same period of the last fiscal year.
During the six months ended December 31, 2019, there was a gain on
disposal of plant and equipment of $24 as compared to $nil in the
same period of last fiscal year.
Income from Operations
Income from operations was $49 for the six months ended December
31, 2019 as compared to $350 for the same period of the last fiscal
year. The decrease was mainly due to the decrease in gross profit
margin and an increase in operating expenses, as discussed
earlier.
Interest Expense
Interest expense for the six months ended December 31, 2019 and
2018 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Interest expense
|
$123
|
$176
|
Interest expense decreased by $53 to $123 from $176 for the six
months ended December 31, 2019 as compared to the same period of
the last fiscal year. The decrease was mainly due to lower
utilization of short-term loans in the Singapore and China
Operations. Additionally, the bank loan payable decreased by $231
to $2,549 as of December 31, 2019 as compared to $2,780 as at June
30, 2019.
Other Income
Other income for the six months ended December 31, 2019 and 2018
were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Interest
income
|
$84
|
$36
|
|
Other
rental income
|
60
|
56
|
|
Exchange
loss
|
(61)
|
(67)
|
|
Bad
debt recovery
|
11
|
2
|
|
Other
miscellaneous income
|
56
|
65
|
|
Total
|
$150
|
$92
|
Other income for the six months ended December 31, 2019 was $150,
an increase of $58 as compared to $92 for the same period of last
fiscal year. This increase mainly due to the higher interest income
earned from the placement of fixed deposits during the six months
ended December 31, 2019.
Income Tax Expenses
Income tax expenses for the six months ended December 31, 2019 was
$120, a change of $170 as compared to income tax benefits of $50
for the same period last fiscal year. This change was mainly due to
the reversal from provision of One-Time Mandatory
Repatriation Tax for the six months ended December 31, 2018. The
provisions for the six months ended December 31, 2019 was primarily
due to provision for GILTI and the capital gain tax incurred from
the sale of asset held for sale in the Malaysia operation, offset
by the tax refund in the China operation.
Non-controlling Interest
As of December 31, 2019, 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 the
non-controlling interest in these subsidiaries for the six months
ended December 31, 2019 was $429, a change of $530, as compared to
net loss of $101 for the same period of last fiscal year. The
increase was attributable to the increase in net income generated
by the Malaysia operation from the sale of asset held for
sale.
Net Income
Net income was $699 for the six months ended December 31, 2019, an
increase of $286, as compared to $413 for the same period of the
last fiscal year. The increase was mainly due to the gain on sale
of asset held for sale in the Malaysia operation. However, the
increase was partially offset by a decrease in revenue, gross
margin and increase in operating expenses, as discussed
earlier.
Earnings per Share
Basic earnings per share from continuing operations was $0.19 for
the six months ended December 31, 2019 as compared to $0.11 for the
same period of the last fiscal year. Basic earnings per share from
discontinued operations were nil for both the six months ended
December 31, 2019 and 2018.
Diluted earnings per share from continuing operations was $0.19 for
the six months ended December 31, 2019 as compared to $0.11 for the
same period of the last fiscal year. Diluted earnings per share
from discontinued operations were nil for both the six months ended
December 31, 2019 and 2018.
Segment Information
The revenue, gross profit margin, and income or loss from
operations in each segment for the six months ended December 31,
2019 and 2018, 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)/income from operations for the
manufacturing segment for the six months ended December 31, 2019
and 2018 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$6,362
|
$6,989
|
|
Gross margin
|
22.4%
|
21.3%
|
|
(Loss)/Income from operations
|
$(99)
|
$183
|
Loss from operations from the manufacturing segment was $99
for the six months ended December 31, 2019, a change of $282 as
compared to income from operations $183 in the same period of the
last fiscal year, due to a decrease in gross margin and an increase
in operating expenses. Operating expenses for the manufacturing
segment were $1,523 and $1,303 for the six months ended December
31, 2019 and 2018, respectively. The increase in operating expenses
of $220 was mainly due to an increase in general and administrative
expenses by $146, increased in selling expenses by $58, increase in
corporate overhead by $8 and increase in research and development
expenses by $8 as compared to the same period of last fiscal year.
The increase in general and administrative expenses was mainly
attributable to an increase in payroll-related expenses and a
provision of doubtful debt in Singapore operations. The increase in
selling expenses was primarily due to higher commission expenses
incurred for the six months ended December 31, 2019.
Testing Segment
The revenue, gross margin and loss from operations for the testing
segment for the six months ended December 31, 2019 and 2018 were as
follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$8,277
|
$8,830
|
|
Gross margin
|
26.2%
|
26.5%
|
|
Loss from operations
|
$93
|
$117
|
Loss from operations in the testing segment for the six months
ended December 31, 2019 was $93, an improvement of $24 compared to
loss from operation of $117 in the same period of the last fiscal
year. The improvement was attributable to management’s
efforts in cost savings although there was deterioration of the
revenue. The decrease in gross margin of $173 offset with a further
decrease in operating expenses of $197, also contributable to the
decrease in operating loss. Operating expenses were $2,261 and
$2,458 for the six months ended December 31, 2019 and 2018,
respectively. The lower operating expenses were mainly attributable
to a decrease in general and administrative expenses by $96 and a
decrease in corporate overheads by $55. The decrease in general and
administrative expenses was due to decrease in payroll-related
expenses in the Malaysia and China operations as part of the cost
savings measures, as discussed earlier. The decrease in corporate
overhead expenses was due to a change in the corporate overhead
allocation as compared to the same period last fiscal year.
Corporate charges 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 six months ended December 31, 2019 and
2018 were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$4,113
|
$3,860
|
|
Gross margin
|
13.8%
|
13.3%
|
|
Income from operations
|
$392
|
$342
|
Income from operations in the distribution segment for the six
months ended December 31, 2019 was $392, an increase by $50 as
compared to $342 in the same period of the last fiscal
year. The increase in operating income was primarily due to an
increase in gross margin as discussed earlier which was partially
offset by the increase of operating expenses of $6. Operating
expenses were $176 and $170 for the six months ended December 31,
2019 and 2018, respectively.
Real Estate Segment
The revenue, gross margin and loss from operations for the real
estate segment for the six months ended December 31, 2019 and 2018
were as follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Revenue
|
$33
|
$56
|
|
Gross margin
|
(9.1)%
|
35.7%
|
|
Loss from operations
|
$(52)
|
$(17)
|
Loss from operations in the real estate segment for the six months
ended December 31, 2019 was $52, a further deterioration of $35 as
compared to a loss from operations of $17 for the same period of
the last fiscal year. The increase in operating loss was
mainly due to a decrease in gross margin, as discussed earlier.
Operating expenses were $49 and $37 for the six months ended
December 31, 2019 and 2018, respectively. The increase in operating
expenses was mainly due to one-off payroll-related expenses made
during the six months ended December 31, 2019.
Corporate
The loss from operations for corporate for the six months ended
December 31, 2019 and 2018 were as
follows:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Loss from operations
|
$(99)
|
$(41)
|
The increase of $58 was mainly due to a change in the corporate
overhead allocation as compared to the same period of last fiscal
year. Corporate charges are allocated on a pre-determined fixed
charge basis.
Financial Condition
During the six months ended December 31, 2019 total assets
increased by $1,928 from $36,527 as at June 30, 2019 to $38,455.
The increase in total assets was due to an increase in short term
deposits, prepaid expenses and other current assets, deferred tax
assets, operating lease right-of-use assets and restricted term
deposits, which was partially offset by a decrease in cash and cash
equivalents, trade account receivable, other receivables,
inventory, asset held for sale, investment properties, property,
plant and equipment and other assets.
Cash and cash equivalents were $4,743 as at December 31, 2019,
reflecting a decrease of $120 from $4,863 as at June 30, 2019,
primarily due to further placement made into fixed deposits in the
Singapore and China operations.
Short term deposits were $6,888 as at December 31, 2019,
reflecting an increase of $2,744 from $4,144 as at June 30,
2019, primarily due to an increase in deposits in the Singapore and
China operations. The short term deposits include proceeds received
from the sale of assets held for sale.
As at December 31, 2019, the trade accounts receivable balance
decreased by $176 to $6,937, from $7,113 as at June 30, 2019,
primarily due to the decrease in revenue for the six months ended
December 31, 2019 in the Singapore, Malaysia and U.S. operations.
The number of days’ sales outstanding in accounts receivables
for the Group was 67 and 74 days at the end of the second quarter
of fiscal year 2020 and for the end of fiscal year of 2019,
respectively.
As at December 31, 2019, other receivables were $752, reflecting a
decrease of $65 from $817 as at June 30, 2019. The decrease was
primarily due to a decrease in advance payments made to suppliers
in the Singapore operation and a decrease in contract asset,
recognized in accordance to the ASC 606 Revenue from contracts
with customers in the China
entity.
Inventories as at December 31, 2019 were $2,182, a decrease of
$245, as compared to $2,427 as at June 30, 2019. The decrease in
inventories was in line with a decrease in orders by customers in
the manufacturing segment of Singapore operations
Prepaid expenses were $330 as at December 31, 2019 compared to $287
as at June 30, 2019. The increase of $43 was primarily due to the
prepaid insurance and accounting software expenses in the Singapore
operation.
Investment properties, net in China were $734 as at December 31,
2019 and $782 as at June 30, 2019. The decrease was primarily
due to the depreciation charged for the period and the foreign
currency exchange movement between June 30, 2019 and December 31,
2019.
Assets held for sales were $nil as at December 31, 2019 and $89 as
at June 30, 2019. Management entered into a Sales and Purchase
Agreement with a potential buyer during fiscal year 2019 and the
sale was completed during the second quarter of fiscal
2020.
Property, plant and equipment decreased by $508 from $12,159 as at
June 30, 2019, to $11,651 as at December 31, 2019, mainly due to
depreciation charged for the period and the foreign currency
exchange movement between June 30, 2019 to December 31,
2019. The decrease was partially offset by the new acquisition
of plant and equipment in the Malaysia operation.
Other assets decreased by $124 to $1,626 as at December 31, 2019,
as compared to $1,750 as at June 30, 2019. This was
mainly due to the reclassification of down payments made for the
purchase of equipment to property, plant and equipment in the
Malaysia operation.
Accounts payable increased by $293 to $3,565 as at December 31,
2019, as compared to $3,272 as at June 30, 2019. This was due to
less payments made in the second quarter of the fiscal year
2020.
Accrued expenses decreased by $310 to $3,176 as at December 31,
2019, as compared to $3,486 as at June 30, 2019. The decrease in
accrued expenses was mainly due to a decrease in the accrued
purchase in the Singapore operation and a decrease in accrued
payroll liability in the Singapore and China operations during the
six months ended December 31, 2019.
Bank loans payable decreased by $231 to $2,549 as at December 31,
2019, as compared to $2,780 as at June 30, 2019. This was due to
the repayments made in the Singapore and Malaysia operations during
the six months ended December 31, 2019.
Finance leases increased by $131 to $856 as at December 31, 2019,
as compared to $725 as at June 30, 2019. This was due to the
increase of finance leases in the Singapore and Malaysia
operation.
Operating lease right of use assets and the corresponding leased
liability were $475 and $477 as of December 31, 2019 and June 30,
2019 respectively, after taking into effect the new accounting
standard, ASC 842
leases.
Liquidity Comparison
Net cash provided by operating activities decreased by $678 to an
inflow of $1,573 for the six months ended December 31, 2019 from an
inflow of $2,251 for the same period of the last fiscal year. The
decrease in net cash inflow provided by operating activities was
primarily due to a decrease in cash inflow of $621 from account
receivable, a decrease in cash inflow of $331 from other assets and
increase of cash outflow of $ 359 from repayment of operating
leases. These were partially offset by an increase in depreciation
and amortization of $431, an increase in cash inflow of $175 from
other receivable and also absent of reversal of income tax
provision of $145.
Net cash used in investing activities decreased by $1,639 to an
outflow of $2,116 for the six months ended December 31, 2019 from
an outflow of $3,755 for the same period of the last fiscal year.
The decrease in cash outflow was primarily due to an increase in
proceeds from sale of asset held for sale of $1,261 and also
decrease in capital expenditure of $1,553. These were partially
offset by a increase of $1,211 from the investment in unrestricted
deposits.
Net cash generated in financing activities for the six months ended
December 31, 2019 was $395, representing a decrease of $1,027, as
compared to net cash generated in financing activities of $1,422
during the six months ended December 31, 2018. The decrease in cash
inflow was mainly attributable to a decrease in cash inflow by
$4,625 from proceeds of lines of credit and a decrease of $1,475
from bank loans. These were partially offset by a decrease in cash
outflow of $5,179 from repayment of lines of credit.
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
Effective
as of July 1, 2019, the Company has adopted ASU 2016-02, Leases (Topic 842), and
its related amendments using modified retrospective transition
method. We have completed our adoption and implemented policies,
processes and controls to support the standard’s measurement
and disclosure requirements as
described in note 1 to the financial statements included in item 1
of this Form 10-Q.