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LOS
ANGELES
SINGAPORE
SELANGOR
PENANG
BANGKOK
SUZHOU
SHANGHAI
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March 2,
2009
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Eric
Atallah
Division
of Corporation Finance
Securities
and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20002
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Re: Trio-Tech
International
Form
10-K for the fiscal year ended June 30, 2008
File
No. 1-14523
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Dear Mr.
Atallah:
Reference
is made to your comment letter, dated January 30, 2009 to our Company, Trio-Tech
International, Inc. (the “Company”), relating to Form 10-K for the fiscal year
ended June 30, 2008, which was filed on September 26, 2008 (the “Comment
Letter”).
The
Company acknowledges that the Company is responsible for the adequacy and
accuracy of the disclosure in the filing. SEC staff comments or changes to
disclosure in response to SEC staff comments do not foreclose the Commission
from taking any action with respect to the filing; and the Company will not
assert staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United
States.
Set forth
below are the comments contained in the Comment Letter followed by our response
thereto.
Form 10-K for the fiscal
year ended June 30, 2008
Note11-Adoption of FIN 48,
page 58
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1.
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We
note that you recorded a charge of $256,000 to opening retained earnings
as a result of implementing FIN 48. We do not see this adjustment on your
statement of shareholder’s equity on page 45. Please clarify for us how
his adjustment was recorded and revise future filings accordingly. Refer
to paragraph 23 of Fin 48.
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Our
Response:
We
believe that the above statement, recording a charge of $256,000 to opening
retained earnings as a result of implementing FIN 48, was
incorrect. In fact, we did not change the opening retained earnings
as a result of implementing FIN 48. The Company has no uncertain tax positions,
except the potential non-deductible corporate management fees that the corporate
office allocates to and collects from its subsidiaries in Singapore for those
expenses incurred by corporate for the benefit of the whole
organization.
-1-
Due to
the limited tax technical guidance of the Singapore tax law, the Company
believes that a portion of these management fees are not “more likely than not”
allowable for a tax deduction. Based on the suggestions from tax experts that
are experienced with this similar expense at other companies, approximately 35%
of these corporate management fees may potentially be disallowed as a tax
deduction. The remaining 65% of the fees has a greater than 50%
likelihood of being allowable.
Before
the implementation of FIN 48, the Company applied the effective tax rate to 35%
of the management fees that are uncertain as income tax expenses in the income
statement and recorded the deferred liabilities in the long-term liability
section of its balance sheet. On July 1, 2007, the Company adopted the
provisions of FIN 48 and classified the unrecognized income tax benefits of
$256,000 from deferred liabilities to income tax payable in the current
liability section of its balance sheet.
The
Company has revised its FIN 48 disclosure in the Form 10-Q for the quarter ended
December 31, 2008, stating that there was no change in the beginning retained
earnings as a result of implementing FIN 48, which was filed on February 23,
2009, and will make appropriate disclosure in its future filings.
Form 10-Q for the quarter
ended September 30, 2008
Condensed Consolidation
Balance Sheet, page2
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2.
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We
note that during your most recent fiscal year, and subsequent interim
period since the completion of the your 2008 fiscal year, the Company’s
common share price and its related market capitalization has significantly
declined and totaled approximately $16.4 million at June 30, 2008. We
further note that your revenues have been decreasing and that you have
incurred operating losses since the third quarter of 2008. Finally, we
note that in the third quarter of fiscal year 2008, one of your major
customers ceased its contract with you. Tell us how you have considered
each of these events in applying the guidance in paragraph 8 of SFAS 144
at each of June 30, 2008 and September 30,
2008.
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Our
response:
In the
third quarter of fiscal 2008, one of our major customers ceased their advanced
burn-in testing service contracts at our Singapore subsidiary
only. This major customer still had a testing contract with us in our
Suzhou operation and we continued to manufacture testing equipment for them in
the Singapore operation. Management considered this a triggering
event and immediately reviewed its assets in the Singapore operation affected by
the termination of these contracts. In the third quarter ended March
31, 2008, the Company recorded an impairment loss of $221,000 related to all the
assets located in Singapore associated with the terminated contract from this
major customer. . These assets were determined to have no salvage
value since they were specifically designed for the testing service for that
major customer, therefore, their carrying value was written to zero. This impairment
amount was based on the facts and circumstances known by the Company at that
time. Due to decreased revenue from other testing contracts in the Shanghai and
Singapore operations in the third quarter of fiscal 2008, management also
reviewed other testing assets in all other locations. Based on our
discounted cash flow analysis for all locations, certain other testing assets
were also impaired due to a decrease in our backlog and projected future sales
in our Singapore and Shanghai locations. These assets were also
determined to have no salvage value since they were also specifically designed
for a certain type of testing service for that major
customer. Another impairment loss of $220,000 was recorded for these
assets. All of the other remaining testing assets were reviewed and
determined to have adequate cash flow to support their book value at that
time.
-2-
The
Company reviewed all operations and assets at year-end as required under SFAS
144, and no additional impairments were considered necessary based on the facts
and circumstances at that time. During the first quarter of 2009, as
our Shanghai operation was not meeting forecasted revenues, management reviewed
the remaining assets in the Shanghai operation for impairment. During
that time, the same major customer announced in their press release the creation
of a U.S. based leading-edge semiconductor manufacturing facility to address
growing demand for independent, leading-edge foundry production
capabilities. Furthermore, the Company’s only competitor in China
decided to shut down its facility in Shanghai. After discussion with
that same major customer, management estimated that after that major customer
ceased its testing contract with us in Singapore, it may relocate its
manufacturing and testing from Singapore to Shanghai for certain products to
reduce its import tax and also the transportation costs, as their customers are
mainly based in China. Based on our forecast of securing orders from
this major customer at our Shanghai operation, we expected our Shanghai
operation would continue to generate sufficient cash flow from its testing
assets to recover their net book value. Since the net book value of
our Shanghai operation testing assets as of June 30, 2008 and September 30, 2008
was lower than the forecasted future cash flows for the period from fiscal 2009
to fiscal 2011, no impairment was considered necessary.
Affected
by the negative impact of the international economic financial crisis and the
semiconductor industry recession, the decline trend of demands for electronic
products and semiconductor equipment has been continued. The business
activities in all our operations began experiencing declines, and based on our
analysis, the sharp decline during the second quarter of fiscal 2009 was a
triggering event for impairment testing at some of our operations. At
our largest location, Singapore, and in Malaysia and Thailand, the carrying
amount of the remaining assets are still recoverable through the estimated
undiscounted cash flows expected from the use and eventual disposition of all
the testing and manufacturing assets. In reviewing the remaining
assets in the Shanghai and Suzhou operations, the Company concluded an
additional impairment was necessary during the second quarter of
2009. This was based on a recently available indicator from
communications with our major customer and also its financial report, which
indicated that its need for testing service continued to decline in the second
quarter of fiscal 2009. At this time, management realized that this
major customer would likely not sign new contracts with us in the Shanghai
operation related to the relocation of its manufacturing facility from Singapore
to China. Management also concluded the customer would not continue
its contract with our Suzhou operation. Management revised the expected future
cash flows analysis accordingly for the testing assets located in Suzhou and all
assets in Shanghai. The assets in Shanghai and certain identified
testing equipment in Suzhou were determined to have no salvage value due to
their specific design, and were therefore written down to
zero. Consequently, an aggregate impairment
loss of $520,000 was recorded in the second quarter of fiscal 2009. The other
assets in Suzhou which are currently used to provide line support, maintenance
and training service for that major customer are still generating revenue and
the expected cash flows are sufficient to recover the book carrying amount of
these assets.
Management
continues to do a review of all long lived assets in all other
subsidiaries at the end of each reporting period whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets under SFAS
144. When such events happen, a three-year forecast of undiscounted cash
flows is prepared and compared to the net book value of the fixed assets of
these subsidiaries. As the carrying amount of these assets are still
recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the asset, no impairment loss was
recorded in other subsidiaries in Singapore, Thailand, Chongqing, China, the
U.S. or Malaysia locations.
-3-
Note 2-New Accounting
Pronouncements, page 6
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3.
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We
do not see where you have provided the disclosure required by SFAS 157.
This standard became effective for you on July 1, 2008. Paragraph 39 of
SFAS 157 indicated that in the initial period of adoption, all of the
disclosure required by paragraphs 32-35 of SFAS 157, including those that
relate to annual periods only, should be provide. Please provide the
disclosure required by SFAS 157 for your short term deposits and loans
payable in your next Form 10-Q.
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Our
Response:
Effective
July 1, 2008, the Company adopted the provisions of SFAS 157 as it relates to
financial assets and financial liabilities. The adoption of SFAS 157 did not
have a material effect on our results of operations, financial position or
liquidity.
The
Company’s short-term deposits are fixed rate deposits. Since the
valuations are based on quoted prices that are readily and regularly available
in an active market, the valuation of these short-term deposits does not entail
a significant degree of judgment. The book value of the short-term
deposits in the Company’s balance sheet reflects its fair market
value.
The above
disclosure required by SFAS 157 is disclosed in the Form 10-Q for the quarter
ended December 31, 2008, which was filed on February 23, 2009, and will be
contained in future filings as appropriate.
The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115 as of July 1, 2008. SFAS 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value. We did not elect the fair value option for the Company’s loans payable.
Therefore, valuation of the Company’s loans payable is not affected by the
adoption of SFAS 157 and SFAS 159.
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Very
truly yours,
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/s/ VICTOR TING
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Victor
H. M. Ting, Chief Financial
Officer
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