Trio-Tech International (AMEX: TRT) is engaged in testing services, equipment manufacturing, and distribution for the semiconductor industry (SIC: 3559). The company generated global sales of US$38.5 million in the year ended June 30, 2017, up 11.8% over the previous year. Net income for the year was US$1.4 million, up 37.1% from the prior year. Free cash flow was 120.5% of net income for the year, whereas free cash flow was negative in the previous fiscal year. Although the company seems to have turned around its operations, events in China that were outside of the company’s control drove these results. At the same time, there are significant opportunities within China to improve future free cash flow.
To support an 11.9% increase in revenue, the company’s cost of goods sold increased 13.2%. The company was not able to control costs. Only the testing segment was able to both grow sales and increase gross margin year-over-year.
The company increased income from continuing operations before income taxes by US$499K year-over-year. However, almost all of that came from a US$467K favorable increase in foreign exchange transactions. The company transacts in the Singapore dollar, Malaysian Ringgit, Thai baht, Chinese renminbi, and Indonesian rupiah. According to the Monetary Authority of Singapore, the renminbi devalued against the U.S. dollar more than the four other currencies during the relevant period. This positively impacted the company’s cross-currency invoicing, but was completely out of the company’s control.
Globally, the company increased additions to property, plant, and equipment by 52.5% year-over-year. However, all of this increase occurred in Southeast Asia. Capital expenditures declined year-over-year at the Tianjin facility, but specific amounts were not disclosed. Although the company had overall decent execution on accounts receivables, the Tianjin subsidiary signed an agreement with a bank for an Accounts Receivable Financing facility for approximately US$871K. This would indicate the company is having cash flow issues in China.
Despite the fact that the company is engaged in the semiconductor industry, about 7.3% of the company’s total non-current assets as of June 30, 2017 were composed of depreciated investment properties in Chongqing, China that were acquired in 2008 and 2010. The current market value of these properties is likely much higher than the book value. The proceeds from these sales, as well as the $4.0 million in cash the company had on its balance sheet, could be deployed elsewhere. If this capital is taken out of China, the company could expand its geographic or product diversification. If this capital is kept in China, the company could expand the testing segment’s capabilities at the Suzhou facility or reduce the need for bank credit at the Tianjin facility.
