TRIO-TECH INTERNATIONAL - Quarter Report: 2006 December (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___to ___

TRIO-TECH INTERNATIONAL

(Exact name of Registrant as specified in its Charter)

California		95-2086631
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
14731 Califa Street
Van Nuys, California		91411
(Address of principle executive offices)		(Zip Code)

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

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

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

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

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

Number of shares of common stock outstanding as of February 05, 2007 is 3,225,242

 

 

TRIO-TECH            INTERNATIONAL

INDEX TO CONSOLIDATED FINANCIAL INFORMATION, OTHER INFORMATION AND SIGNATURE

		Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2006 (Unaudited) and June 30, 2006			3
Condensed Consolidated Statements of Operations and Comprehensive Income (loss) for the Three and Six Months Ended December 31, 2006 (Unaudited) and December 31, 2005 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 (Unaudited) and December 31, 2005 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			29
Item 4. Controls and Procedures			31
Part II. Other Information
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			33
Signatures			34
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT NUMBER OF SHARES)

		December 31,				June 30,
		2006				2006
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	5,021			$	2,551
Short-term deposits			5,528				7,839
Trade accounts receivable, less allowance for doubtful accounts of $63 and $225			11,823				8,518
Other receivables			207				306
Inventories, less provision for obsolete inventory of $592 and $448			4,637				2,447
Prepaid expenses and other current assets			220				170
Total current assets			27,436				21,831
PROPERTY, PLANT AND EQUIPMENT, Net			8,161				7,073
OTHER INTANGIBLE ASSETS, Net			260				311
OTHER ASSETS			315				169
TOTAL ASSETS		$	36,172			$	29,384
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Line of credit		$	1,947			$	116
Accounts payable			6,308				3,809
Dividend payable			323
Accrued expenses			3,356				3,045
Income taxes payable			532				311
Current portion of notes payable			726				856
Current portion of capital leases			121				107
Current portion of deferred tax liabilities			241				319
Total current liabilities			13,554				8,563
NOTES PAYABLE, net of current portion			364				644
CAPITAL LEASES, net of current portion			200				230
DEFERRED TAX LIABILITIES			458				359
TOTAL LIABILITIES			14,576				9,796
MINORITY INTEREST			2.327				2,196
SHAREHOLDERS’ EQUITY:
Common stock; no par value, 15,000,000 shares authorized; 3,225,242 shares issued and outstanding as of December 31, 2006, and 3,219,407 shares issued and outstanding as of June 30, 2006, respectively			10,354				10,338
Paid-in capital			458				337
Accumulated retained earnings			8,382				7,150
Accumulated other comprehensive gain (loss) translation adjustments			75				(433	)
Total shareholders’ equity			19,269				17,392
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	36,172			$	29,384

See notes to condensed consolidated financial statements.     

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
UNAUDITED, IN THOUSANDS, EXCEPT (LOSS) EARNINGS PER SHARE

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2006				2005				2006				2005
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue
Products		$	14,772			$	5,870			$	8,794			$	3,710
Services			9,171				7,260				5,273				3,715
			23,943				13,130				14,067				7,425
Cost of Sales
Cost of products sold			12,429				4,915				7,632				3,220
Cost of service rendered			5,658				4,525				3,069				2,339
			18,087				9,440				10,701				5,559
Gross Margin			5,856				3,690				3,366				1,866
Operating Expenses
General and administrative			3,044				3,282				1,653				1,993
Selling			536				515				274				230
Research and development			34				33				17				16
Impairment Loss			172				15				172				—
Total operating expenses			3,786				3,845				2,116				2,239
Income (Loss ) from Operations			2,070				(155	)			1,250				(373	)
Other Income (Expenses)
Interest expense			(66	)			(74	)			(37	)			(38	)
Other income			110				112				73				82
Total Other income			44				38				36				44
Income (Loss) from Continuing Operations before Income Taxes			2,114				(117	)			1,286				(329	)
Income Tax Provision			478				184				453				112
Income (Loss) from Continuing Operations before Minority Interest			1,636				(301	)			833				(441	)
Minority Interest			(81	)			19				(34	)			(5	)
Income (Loss) from Continuing Operations			1,555				(282	)			799				(446	)
Discontinued Operations (NOTE 10)
Income from discontinued operations			—				8,459				—				8,837
Net Income Attributed to Common Shares		$	1,555			$	8,177			$	799			$	8,391
BASIC EARNINGS PER SHARE
Basic (loss) earnings per share from Continuing operations		$	0.48			$	(0.09	)		$	0.25			$	(0.15	)
Basic earnings per share from Discontinued operation			0.00				2.80				0.00				2.91
Basic earnings per share		$	0.48			$	2.71			$	0.25			$	2.76

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2006				2005				2006				2005
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
DILUTED EARNINGS PER SHARE
Diluted earnings (loss) per share from Continuing operations		$	0.48			$	(0.09	)		$	0.25			$	(0.15	)
Diluted earnings per share from Discontinued operation			0.00				2.80				0.00				2.91
Diluted earnings per share		$	0.48			$	2.71			$	0.25			$	2.76
Weighted Average Shares Outstanding
Basic		$	3,222			$	3,016			$	3,223			$	3,038
Diluted			3,234				3,016				3,235				3,038
COMPREHENSIVE INCOME
Net income		$	1,555			$	8,177			$	799			$	8,391
Foreign currency translation adjustment			508				(746	)			482				(766	)
COMPREHENSIVE INCOME		$	2,063			$	7,431			$	1,281			$	7,625

See notes to condensed consolidated financial statements.     

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED, IN THOUSAND

		Dec. 31				Dec. 31
		2006				2005
		(unaudited)				(unaudited)
Cash Flow from Operating Activities
Net income		$	1,555			$	8,177
Adjustments to reconcile net income to net cash flow provided by (used in) operating activities
Depreciation and amortization			1,124				792
Bad debts expense, net			119				48
Inventory provision			144				1
Interest income on short-term deposits			(45	)			(79	)
Impairment Loss			172				15
Stock compensation			3				44
Gain on sale of property — continued operations			(40	)			—
Gain on sale of property — discontinued operations			—				(8,909	)
Deferred tax provision			21				8
Minority interest			81				(19	)
Changes in operating assets and liabilities, net of acquisition effects
Accounts receivables			(3,424	)			277
Other receivables			99				(185	)
Other assets			(146	)			—
Inventories			(2,334	)			330
Prepaid expenses and other liabilities			(50	)			(182	)
Accounts payable and accrued liabilities			2,810				350
Income tax payable			221				71
Net cash provided by operating activities			310				739
Cash Flow from Investing Activities
Proceeds from short-term deposit matured			7,063				6,576
Investments in short-term deposits			(4,707	)			(9,913	)
Additions to property, plant and equipment			(2,020	)			(704	)
Proceeds from sale of equipment-continuing operation			49				—
Proceeds from sale of property-discontinued operation			—				8,401
Advances to seller			—				(138	)
Net cash provided by investing activities			385				4,222
Cash Flow from Financing Activities
Net borrowings (payments) on lines of credits			1,831				(77	)
Repayment of bank loans and capital leases			(463	)			(501	)
Proceeds from long-terms bank loans and capital leases			6				1,025
Proceeds from exercising stock options			16				232
Proceeds from 10% shareholder on the short swing profit of the company stock			118				—
Dividends paid to minority interest			(42	)			(27	)
Net cash provided by financing activities			1,466				652
Effect of Changes in Exchange Rate			309				(18	)

		Dec. 31				Dec. 31
		2006				2005
		(unaudited)				(unaudited)
NET INCREASE IN CASH			2,470				5,595
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			2,551				1,439
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,021			$	7,034
Supplementary Information Of Cash Flows
Cash paid during the period for:
Interest		$	66			$	77
Income taxes		$	254			$	2,071
NON-CASH Transactions
Capital lease of property, plant and equipment		$	30			$	—
Declaration of cash dividends to be paid		$	323			$	1,608

See notes to condensed consolidated financial statements.     

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHARES)

1.		ORGANIZATION AND BASIS OF PRESENTATION
		Trio-Tech International (“the Company” or “TTI” thereafter) was incorporated in fiscal 1958 under the laws of the State of California. TTI provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. In addition, TTI operates test facilities in the United States. The Company also designs, develops, manufactures and markets a broad range of equipment and systems used in the manufacturing and testing of semiconductor devices and electronic components. TTI conducts business in three business segments: Testing Services, Manufacturing and Distribution. TTI has subsidiaries in the U.S., Singapore, Malaysia, Thailand, China and Ireland as follows:

		Ownership		Location
Express Test Corporation (Dormant)		100%		Van Nuys, California
Trio-Tech Reliability Services (Dormant)		100%		Van Nuys, California
KTS Incorporated, dba Universal Systems (Dormant)		100%		Van Nuys, California
European Electronic Test Centre (Operation ceased on November 1, 2005)		100%		Dublin, Ireland
Trio-Tech International Pte. Ltd.		100%		Singapore
Universal (Far East) Pte. Ltd.		100%		Singapore
Trio-Tech Thailand		100%		Bangkok, Thailand
Trio-Tech Bangkok		100%		Bangkok, Thailand
Trio-Tech Malaysia		55%		Penang and Selangor, Malaysia
Trio-Tech Kuala Lumpur – 100% owned by		55%		Selangor, Malaysia
Trio-Tech Malaysia
Prestal Enterprise Sdn. Bhd.		76%		Selangor, Malaysia
Trio-Tech (Suzhou) Co. Ltd.		100%		Suzhou, China
Trio-Tech (Shanghai) Co. Ltd.		100%		Shanghai, China

		The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant inter-company accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements are presented in U.S. dollars. The accompanying financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report for the fiscal year ended June 30, 2006.
		Reclassification: Certain prior year balances may have been reclassified to conform to the current presentation.
2.		NEW ACCOUNTING PRONOUNCEMENTS
		In June 2006, the Financial Accounting Standard Board “FASB” issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 will be effective as of the beginning of our fiscal year 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We expect that the adoption of FIN 48 will not have a material impact on our consolidated results of operations or financial position.
		In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements’ (SAB 108), which will be effective for the fiscal year ending after November 15, 2006. The objective of SAB 108 is to eliminate diversity in practice surrounding how public companies quantify financial statement

		misstatements. SAB requires quantification of financial statement misstatements based on the effects of the misstatements on the consolidated statement of income, the consolidated balance sheet and related financial statement disclosures.
		According to SAB 108, both “rollover” and “iron curtain” approaches must be considered when evaluating a misstatement for materiality. This is referred to as the “dual approach.” For the companies that have previously evaluated misstatements under one, but not both, of these methods, SAB 108 provides companies with a one-time option to record the cumulative effect of their prior unadjusted misstatements in a manner similar to a change in accounting principle in their annual financial statements during the effective time period if (i) the cumulative amount of the unadjusted misstatements at the beginning of the adopting year would have been material under the dual approach to their annual financial statements for the prior year or (ii) the effect of correcting the unadjusted misstatements during the adopting year would cause these annual financial statements to be materially misstated under the dual approach. In accordance with SAB 108, companies are allowed, upon adoption, to record the effects as a cumulative–effect adjustment to the retained earnings. We are currently assessing what impact, if any, that adoption of SAB 108 will have on our financial position and results of operations.
		In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS’) No. 157, “Fair Value Measurements” (“SFAS157”), which defines fair value, established a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact adoption may have on its financial condition or results of operations.
		In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ accounting for Defined Benefit Pension and Other Postretirement Plans,” which require an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. We expect that the adoption of SFAS No. 158 will not have a material impact on our consolidated results of operations or financial position.
3.		INVENTORIES
		Inventories consisted of the following:

		Dec. 31,				June 30,
		2006				2006
		(Unaudited)
Raw materials		$	1,272			$	827
Works in progress			3,723				1,803
Finished goods			234				265
Less: provision for obsolete inventory			(592	)			(448	)
		$	4,637			$	2,447

4.		STOCK OPTIONS
		The Company had two share-based compensation plans, which are described below. The Company historically adopted the APB No. 25 approach – intrinsic value method – and presented the pro forma information in line with the requirements of SFAS No. 123. Historically, there was no stock based compensation cost charged against income for the fiscal years ended June 30, 2005 and 2004. There was no income tax benefit related to share-based compensation for the fiscal years ended June 30, 2005 and 2004, as the Company did not claim a deduction for corporate income tax purposes.
		Effective July 1, 2005, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payments,” using the modified prospective application method. Under this transition method, compensation cost recognized during the six months ended December 31, 2006 included the applicable amounts of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of, July 1, 2005 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123) and (b) compensation cost for all share-based payments

		granted subsequent to July 1, 2005 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123R). Amortization of unrecognized fair value of the non-vested options was $2 and $1 for the six months ended and three months ended December 31, 2006, respectively.
		On December 2, 2005, the Board of Directors terminated these two share-based compensation plans due to the cost of such compensation exceeding the benefits. There were no stock options granted during the six months ended December 31, 2006.
		Assumptions
		The disclosure of the above fair value for these awards was estimated using the Black-Scholes option pricing model with the assumptions listed below:

		Six Months
		Ended				Years Ended
		December 31, 2006				June 30, 2006				June 30, 2005				June 30, 2004
Expected volatility			73.22-81.96	%			49.5-51.53	%			33.5 - 36.8	%			41.9	%
Weighted average volatility			81.96	%			49.5	%			33.9	%			41.9	%
Risk free interest rate			4.67-5.12	%			3.71-4.50	%			2.89 - 3.27	%			2.76	%
Expected life (years)			2.00				2.00				2.00				2.00

The expected volatilities are based on the historical volatility of the Company’s stock. The observation is made on a weekly basis. The observation period covered is consistent with the expected terms of options. The expected terms of stock options are based on the average vesting period on a basis consistent with the historical experience of the similar option grants. The risk-free rate is consistent with the expected terms of the stock option and based on the United States Treasury yield curve in effect at the time of grant.

1998 Stock Option Plan

The Company’s 1998 Stock Option Plan (the “1998 Plan”), which is shareholder-approved, permits the grant of stock options to its employees of up to 300,000 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. These options have a five-year contractual life term. Awards generally vest over four years; with 25% vesting on the grant date, and the balance vesting in equal installments on the next three succeeding anniversaries of the grant date. The share-based compensation will be amortized based on an accelerated method over the four periods. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the 1998 Plan).

A summary of option activities under the 1998 Plan during the six months of fiscal 2007 ended December 31, 2006 is presented as follows:

										Weighted –
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Term				Value
Outstanding at July 1, 2006			28,885			$	2.97
Granted			—				—
Exercised			(5,835	)			2.74
Forfeited or expired			(7,250	)			3.18
Outstanding at December 31, 2006			15,800			$	2.96				2.00			$	130,937
Exercisable at December 31, 2006			14,425			$	2.83				2.00			$	121,518

The intrinsic value of the 5,835 options exercised was $48. Cash received from options exercised during the six months ended December 31, 2006 was approximately $16. There were no options granted during the six months ended December 31, 2006 under the 1998 Stock Option Plan.

A summary of the status of the Company’s non-vested stock options during the six months of fiscal 2007 ended December 31, 2006 is presented below:

						Weighted-
						Average Grant-
						Date
		Options				Fair Value
Non-vested at July 1, 2006			13,250			$	0.81
Granted			—				—
Vested			(11,625	)			0.76
Forfeited			(250	)			0.68
Non-vested at September 30, 2006			1,375			$	1.31

		As of December 31, 2006, there was approximately $3 of accumulated unrecognized stock compensation based on fair value on the grant date related to non-vested options granted under the 1998 Plan. That cost was expected to be recognized during the weighted average period of 1.5 years.
		Directors’ Stock Option Plan
		The Directors’ Stock Option Plan (the “Directors’ Plan”), which is shareholder-approved, permits the grant of stock options to its duly elected non-employee Directors and one of the corporate officers of the Company (if he or she is also a director of the Company) and covers 300,000 shares of common stock. Prior to July 1, 2003, option awards were granted with an exercise price equal to 85% of the fair market price of the Company’s stock at the grant date. Subsequent to July 1, 2003, the Board approved an amendment to the Directors’ Plan requiring options to purchase the Company’s common stock to be exercisable at a price equal to 100% of the fair market value of the underlying shares on the grant date. These options have five-year contractual terms. Options awards are exercisable immediately as of the grant date.
		As of July 1, 2006, there were no stock options outstanding under the Directors’ plan, and there were no options exercisable. Because the Directors’ plan was terminated in December 2005, there were no options granted during the six months ended December 31, 2006.
5.		EARNINGS PER SHARE
		The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (“EPS”). Basic EPS are computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during a period. In computing diluted EPS, the average price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.
		Stock options to purchase 15,800 shares at exercise prices ranging from $2.66 to $4.40 per share were outstanding as of December 31, 2006. No options were excluded in the determination of common shares equivalents, because the average market price of common shares was greater than the exercise price of the stock options. The resulted common shares equivalents were approximately 12,000 shares and are presented in the following table for earnings per share calculation purposes.
		Stock options to purchase 203,550 shares at exercise prices ranging from $2.25 to $4.50 per share were outstanding as of December 31, 2005. No options were excluded in the determination of common shares equivalents because the average market price of common shares was greater than the exercise price of the stock options. The resulted common shares equivalents were approximately 76,000 shares. However, since there was a loss from continued operations, the common share equivalents were not presented in the following table for earning per share calculation purposes.

The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted EPS for the years presented herein:

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2006				2005				2006				2005
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Net (loss) income from continuing operations		$	1,555			$	(282	)		$	799			$	(446	)
Net income from discontinued operation		$	—			$	8,459			$	—			$	8,837
Net income attribute to common shares		$	1,555			$	8,177			$	799			$	8,391
Basic Earnings (Loss) Per Share
Basic (loss) earnings per share from Continuing operations		$	0.48			$	(0.09	)		$	0.25			$	(0.15	)
Basic earnings per share from Discontinued operation			0.00				2.80				0.00				2.91
Basic earnings per share from Net Income		$	0.48			$	2.71			$	0.25			$	2.76
Diluted (Loss) Earnings Per Share
Diluted (loss) earnings per share from Continuing operations		$	0.48			$	(0.09	)		$	0.25			$	(0.15	)
Diluted earnings per share from Discontinued operation			0.00				2.80				0.00				2.91
Diluted earnings per share from Net Income		$	0.48			$	2.71			$	0.25			$	2.76
Weighted average number of common shares outstanding — basic			3,222				3,016				3,223				3,038
Dilutive effect of stock options			12				—				12				—
Number of shares used to compute earnings per share — diluted			3,234				3,016				3,235				3,038

6.		ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
		Accounts receivable are customer obligations due under normal trade terms. We sell our products and services to manufacturers in the semiconductor industry. We perform continuing credit evaluations of our customers’ financial condition, and although we generally do not require collateral, letters of credit may be required from our customers in certain circumstances.
		Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are determined to be uncollectible in our allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts for the six months ended December 31, 2006 and the twelve months ended June 30, 2006 was adequate.
		The following table represents the changes in the allowance for doubtful accounts:

		Dec. 31,				June 30,
		2006				2006
		(Unaudited)
Beginning		$	225			$	147
Additions charged to expenses			8				260
Recovered			(127	)			(85	)
Actual write-offs			(43	)			(97	)
Ending		$	63			$	225

7.		DIVIDEND PAID TO SHAREHOLDERS
		On December 5, 2006, the Board of Directors of Registrant declared a cash dividend of ten cents (U.S. 10¢) per share payable to the shareholders of record on December 15, 2006. The total number of shares issued and outstanding as of December 15, 2006 was 3,225,242 and the total cash dividends paid on January 15, 2007 were $323.
8.		WARRANTY ACCRUAL

		Dec. 31				June 30,
		2006				2006
		(Unaudited)
Beginning		$	142			$	155
Additions charged to cost and expenses			63				—
Recovered			4				(1	)
Actual write-offs			(1	)			(12	)
Ending		$	208			$	142

9.		ACQUISITION OF A SUBSIDIARY
		On January 3, 2006, the Company acquired a 100% interest in Globetronics (Shanghai) Co., Ltd. The results of operations of Globetronics, which were not material, have been included in the Condensed Consolidated Statements of Earnings (Loss) of the Company since January 3, 2006.
		Pro Forma Financial Information
		The unaudited pro forma financial information presented below summarizes the combined operating results of the Company and the acquired entity for the three months ended December 31, 2005 and six months ended December 31, 2005 as if the acquisition had occurred on July 1, 2005.
		The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place on July 1, 2005. The unaudited pro forma combined statements of operations combine the historical results of the Company and the historical results of the acquired entity for the periods described above.

PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005

Historical

						Historical
						information of				Pro forma
		Historical information of the				the acquired				Adjustments
		Company (1)				business (2)				(3)				Pro forma
Net sales		$	7,425			$	115			$	—			$	7,540
Net income		$	8,391			$	1			$	(3	)		$	8,389
Basic earnings per share		$	2.76											$	2.76
Diluted earnings per share		$	2.76											$	2.76
Basic weighted average common shares outstanding			3,038												3,038
Diluted weighted average common shares outstanding			3,038												3,038

	1.		The historical information of the Company was based on the Form 10-Q filed with the SEC for the three months ended December 31, 2005.
	2.		The historical information of the acquired entity covers the three-month operating results from the books and records of Globetronics for the period from September 30, 2005 to December 31, 2005.
	3.		Pro forma adjustment was based on the assumption that the fair value of the identified customer relationship needs to be amortized over a one-year period of time, assuming the acquisition took place on July 1, 2005.

PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005

Historical

						Historical
						information of				Pro forma
		Historical information of the				the acquired				Adjustments
		Company (1)				business (2)				(3)				Pro forma
Net sales		$	13,130			$	230			$	—			$	13,360
Net (loss) income		$	8,177			$	2			$	(6	)		$	8,173
Basic loss per share		$	2.71											$	2.71
Diluted loss per share		$	2.71											$	2.71
Basic weighted average common shares outstanding			3,016												3,016
Diluted weighted average common shares outstanding			3,016												3,016

	1.		The historical information of the Company was based on the Form 10-Q filed with the SEC for the six months ended December 31, 2005.
	2.		The historical information of the acquired entity covers the six-month operating results from the books and records of Globetronics for the period from July 31, 2005 to December 31, 2005.

3.

Pro forma adjustment was based on the assumption that the fair value of the identified customer relationship needs to be amortized over a one-year period of time, assuming the acquisition took place on July 1, 2005.

10.		DISCONTINUED OPERATIONS
		The Company’s Ireland operation, as a component of the testing segment, suffered continued operating losses for three consecutive fiscal years and the cash flow was minimal for three consecutive years. In August 2005, the Company established a restructuring plan to close the testing operation in Dublin, Ireland. In November 2005, the Company completed the sale of said property. In accordance with EITF 03-13, we presented the operation results from Ireland as a discontinued operation.
11.		BUSINESS SEGMENTS
		The Company operates principally in three industry segments; the testing service industry (which performs structural and electronic tests of semiconductor devices), the designing and manufacturing of equipment (which equipment tests the structural integrity of integrated circuits and other products) and the distribution of various products from other manufacturers in Singapore and Southeast Asia. The following net sales were based on customer location rather than subsidiary location.
		The allocation of the cost of equipment, the current year investment in new equipment and depreciation expenses have been made on the basis of the primary purpose for which the equipment was acquired.
		All inter-segment sales were sales from the manufacturing segment to the testing and distribution segments. Total inter-segment sales were $61 and $30 for the six months ended December 31, 2006 and 2005, respectively. Corporate assets mainly consisted of cash and prepaid expenses. Corporate expenses mainly consisted of salaries, insurance, professional expenses and directors’ fees.
		The following segment information is unaudited:

     Business Segment Information:

		Quarter								Operating								Depr.
		Ended				Net				Income				Total				and				Capital
		Dec. 31				Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing			2006			$	8,196			$	250			$	3,698			$	52			$	34
			2005				3,111			$	(117	)		$	2,842			$	27			$	187
Testing Services			2006				5,273				942				31,101				610				1,710
			2005				3,715				561				21,160				369				385
Distribution			2006				598				28				811				4				1
			2005				599				(1	)			748				4				1
Corporate and			2006				—				30				562				—				—
unallocated			2005				—				(817	)			2,145				—				—
Total Company			2006			$	14,067			$	1,250			$	36,172			$	666			$	1,745
			2005			$	7,425			$	(374	)		$	26,895			$	400			$	573

Business Segment Information:

		Six
		Months								Operating								Depr.
		Ended				Net				Income				Total				and				Capital
		Dec. 31				Sales				(loss)				Assets				Amort.				Expenditures
Manufacturing			2006			$	13,679			$	690			$	3,698			$	94			$	148
			2005				4,466			$	(292	)		$	2,842			$	50			$	198
Testing Services			2006				9,171				1,344				31,101				1,022				1,901
			2005				7,260				1,020				21,160				735				505
Distribution			2006				1,093				(9	)			811				8				1
			2005				1,404				(2	)			748				7				1
Corporate and			2006				—				45				562				—				—
unallocated			2005				—				(881	)			2,145				—				—
Total Company			2006			$	23,943			$	2,070			$	36,172			$	1,124			$	2,050
			2005			$	13,130			$	(155	)		$	26,895			$	792			$	704

Geographic Area Information:

																										Elimin-
		Quarter								China																ations
		Ended				United				and other																and				Total
		Dec. 31				States				countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to			2006			$	3,486			$	2,051			$	6,313			$	634			$	1,636			$	(53	)		$	14,067
customers			2005				1,093				363				4,589				488				892				—				7,425
Operating			2006				277				182				560				56				145				30				1,250
Income (loss)			2005				12				(2	)			343				37				67				(830	)			(373	)
Long-lived			2006				14				903				4,082				774				2,688				(40	)			8,421
Assets			2005				23				20				3,683				822				2,743				(40	)			7,251

Geographic Area Information:

		Six																								Elimin-
		Months								China																ations
		Ended				United				and other																and				Total
		Dec. 31				States				countries				Singapore				Thailand				Malaysia				Other				Company
Net sales to			2006			$	3,851			$	3,616			$	12,537			$	1,146			$	2,854			$	(61	)		$	23,943
customers			2005				1,527				691				8,380				949				1,613				(30	)			13,130
Operating			2006				247				311				1,112				102				253				45				2,070
Income (loss)			2005				(8	)			(2	)			584				66				113				(908	)			(155	)
Long-lived			2006				14				903				4,082				774				2,688				(40	)			8,421
Assets			2005				23				20				3,683				822				2,743				(40	)			7,251

TRIO-TECH INTERNATIONAL AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings “Risk factors” and “ Management’s discussion and analysis of financial condition and results of operations” in the most recent Annual Report on Form 10-K.

Forward-Looking Statements

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

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

Overview

Founded in 1958, Trio-Tech International provides third-party semiconductor testing and burn-in services primarily through its laboratories in Southeast Asia. The Company also designs, manufactures and markets equipment and systems, and distributes semiconductor processing and testing equipment manufactured by others. The Company operates in three business segments: Testing Services, Manufacturing and Distribution.

We own and operate facilities that provide testing services for semiconductor devices and other electronic components to meet the requirements of military, aerospace, industrial and commercial applications. We currently operate five testing facilities, one in the United States and four in Southeast Asia. The Company uses its own proprietary equipment for certain burn-in, centrifugal and leak tests, and commercially available equipment for various other environmental tests. The Company conducts the majority of its testing operations in Southeast Asia with facilities in Singapore, Malaysia and Thailand. In the second quarter of fiscal 2007, our China operations in Suzhou started its testing operation. We believe that the burn-in testing business in Suzhou will enhance our future growth opportunities and develop our China market share in testing services. Our facilities require substantial investment to construct and are largely fixed-costs assets once in operation. Because we own most of the testing capacity, a significant portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or our utilization of our testing capacity, and can adversely affect profit margin as a result. Conversely, as product demand rises and factory utilization increases, the fixed costs are spread over the increased output, which should improve profit margins.

Our manufacturing segment manufactures “Artic Temperature Controlled Wafer Chucks,” which are used for test, characterization and failure analysis of semiconductor wafers, “Wet Process Stations,” which wash and dry wafers at a series of 100 to 300 additional processing steps after the etching or deposition of integrated circuits, and other microelectronic substrates in what is commonly called the “front-end,” or creation of semiconductor circuits. Additionally, we also manufacture centrifuges, leak detectors, HAST (Highly Accelerated Stress Test) systems and “burn-in” systems that are used primarily in the “back-end” of the semiconductor manufacturing process to test finished semiconductor devices and electronic components.

In the United States, our manufacturing segment focuses on marketing used and refurbished equipment, which some of our customers are more willing to purchase as it is less expensive than new equipment.

Due to the competitive environment in the manufacturing segment, we anticipate that we will continue to implement our ongoing cost reduction plan by outsourcing a portion of our manufacturing process to outside suppliers, such as electrical and mechanical fabrication houses, and seek competitively priced materials.

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

Second Quarter Fiscal 2007 Highlights

	•		Revenue increased 89.5% to $14,067 for the second quarter of fiscal 2007, compared with revenue of $7,425 for the second quarter of fiscal 2006.
	•		Manufacturing segment revenues grew to $8,196, compared to $3,111 for the second quarter of fiscal 2006.
	•		Income from continuing operations increased by $1,245 to $799 for the second quarter of fiscal 2007, compared with a net loss of $446 for the second quarter of fiscal 2006.
	•		Gross profit margins decreased slightly by 1.2% to 23.9% for the second quarter of fiscal 2007, compared with gross profit margins of 25.1% for the same period last fiscal year.
	•		General and administrative expenses were 11.8% of revenue, decreased from 26.8% of revenue for the second quarter of fiscal 2006.
	•		Selling expenses were 2.0% of revenue, decreased from 3.1% of revenue for the second quarter of fiscal 2006.
	•		On December 5, 2006, we declared a dividend of $0.10 per share, paid on January 15, 2007, to shareholders of record on December 15, 2006.

Results of Operations and Business Outlook

The following table sets forth our revenue components for the six and three months ended December 31, 2006 and 2005, respectively.

Revenue Components

		Six Months Ended								Three Months Ended
		Dec. 31,				Dec. 31,				Dec. 31,				Dec. 31,
		2006				2005				2006				2005
Net Sales:
Manufacturing			57.13	%			34.02	%			58.26	%			41.90	%
Testing			38.30				55.29				37.49				50.03
Distribution			4.57				10.69				4.25				8.07
Total			100.00	%			100.00	%			100.00	%			100.00	%

Net sales for the six months and three months ended December 31, 2006 were $23,943 and $14,067, an increase of $10,813 and $6,642, respectively, when compared to the same periods last fiscal year. As a percentage, total net sales expanded by 82.4% and 89.5% for the six months and three months ended December 31, 2006, respectively, when compared to total net sales for the same periods last fiscal year.

Net sales into and within China and the Southeast Asia regions and other countries increased by $8,489 to $20,092 and by $4,249 to $10,581 for the six months and three months ended December 31, 2006, respectively, compared to the same periods last fiscal year. This overall increase was primarily due to an increase in sales from the manufacturing segment. Net sales into and within the United States were $3,851 and $3,486 for the six months and three months ended December 31, 2006, an increase of $2,324 and $2,393, respectively, when compared to the same periods last fiscal year.

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