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GIGA > SEC Filings for GIGA > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for GIGA TRONICS INC

Form 10-Q for GIGA TRONICS INC


13-Nov-2012

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The forward-looking statements included in this report including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "intends" and words of similar import, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those listed in Giga-tronics' Annual Report on Form 10-K for the fiscal year ended March 31, 2012 Part I, under the heading "Certain Factors Which May Adversely Affect Future Operations or an Investment in Giga-tronics", and Part II, under the heading "Management's Discussion and Analysis of Financial Conditions and Results of Operations".

Overview

Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. The Company consists of two operating and reporting segments: Giga-tronics Division and Microsource.

Our business is highly dependent on government spending in the defense electronics sector and wireless telecommunications markets. The Company has seen an increase in defense orders for the second quarter of fiscal 2013 versus the second quarter of fiscal 2012. Commercial orders have decreased slightly for the quarter ended September 29, 2012 as compared to the quarter ended September 24, 2011. The Company has seen an increase in defense orders and commercial orders for the first half of fiscal 2013 versus the same period last year.

The Company continues to monitor costs; including personnel, facilities and other expenses to more appropriately align costs with revenues.

Results of Operations

New orders received by segment are as follows:

NEW ORDERS
                                   Three Month Periods Ended
(Dollars in thousands)      September 29, 2012         September 24, 2011       % change
Giga-tronics Division     $              2,101       $              2,330            (10 %)
Microsource                              1,717                        135           1172 %
Total                     $              3,818       $              2,465             55 %



                                    Six Month Periods Ended
(Dollars in thousands)      September 29, 2012        September 24, 2011      % change
Giga-tronics Division     $              4,282       $             6,215           (31 %)
Microsource                              8,216                     1,798           357 %
Total                     $             12,498       $             8,013            56 %

New orders received in the second quarter of fiscal 2013 increased by 55% to $3,818,000 from the $2,465,000 received in fiscal 2012. New orders received in the first half of fiscal 2013 increased 56% to $12,498,000 from the $8,013,000 received in the first half of fiscal 2012. Orders at Giga-tronics Division decreased for the three month period ended September 29, 2012 primarily due to a decrease in commercial orders, whereas orders for the first half of fiscal 2013 decreased primarily due to a decrease in military demand for its products. In fiscal year 2012, Giga-tronics Division received a large first quarter signal generator order from the military which did not repeat in the first quarter of fiscal 2013. Orders at Microsource increased for the three and six month periods ended September 29, 2012 compared to the three and six month periods ended September 24, 2011, primarily due to booking a significant order from the military sector.


The following table shows order backlog and related information at the end of the respective periods:

BACKLOG
                                                 September 29,       September 24,
(Dollars in thousands)                                    2012                2011         % change
Backlog of unfilled orders at end of period:
Giga-tronics Division                          $         1,484     $         1,675              (11 %)
Microsource                                              7,390               2,404              207 %
Total                                          $         8,874     $         4,079              118 %

Backlog of unfilled orders shippable within
one year:
Giga-tronics Division                          $         1,478     $         1,675              (12 %)
Microsource                                              5,577               1,262              342 %
Total                                          $         7,055     $         2,937              140 %

Previous fiscal year end (FYE) long term
backlog reclassified during the period as
shippable within one year:
Giga-tronics Division                          $             -     $             -                0 %
Microsource                                                  -                 163             (100 %)
Total                                          $             -     $           163             (100 %)

Net cancellations during the period of
previous FYE one-year backlog:
Giga-tronics Division                          $             -     $             -                0 %
Microsource                                                  -                   -                0 %
Total                                          $             -     $             -                0 %

Backlog at the end of the second quarter of fiscal 2013 increased 118% as compared to the end of the same period last year. A significant order from the defense sector for Microsource components was received but not shipped in the second quarter of fiscal 2013. Approximately one half of the order is classified as noncurrent as of September 29, 2012.

The allocation of net sales was as follows for the periods shown:

ALLOCATION OF NET SALES
                                    Three Month Periods Ended
(Dollars in thousands)       September 29, 2012         September 24, 2011      % change
Giga-tronics Division      $              2,244       $              3,588           (37 %)
Microsource                               1,161                        498           133 %
Total                      $              3,405       $              4,086           (17 %)



                                    Six Month Periods Ended
(Dollars in thousands)      September 29, 2012         September 24, 2011      % change
Giga-tronics Division     $              5,071       $              6,011           (16 %)
Microsource                              2,392                      1,572            52 %
Total                     $              7,463       $              7,583            (2 %)


Net sales in the second quarter of fiscal 2013 were $3,405,000, a 17% decrease from the $4,086,000 in fiscal 2012. Net sales in the first half of fiscal 2013 decreased 2% to $7,463,000 from the $7,583,000 in the first half of fiscal 2012. Sales at Giga-tronics Division decreased for the three and six month periods ended September 29, 2012 primarily due to a decrease in military shipments. The prior year shipments included a last time sale to a military customer for a now discontinued model. Sales in the first half of fiscal year 2013 were not enough to compensate for the sales lost to a discontinued model. Shipments at Microsource increased for the three and six month periods ended September 29, 2012 compared to the three and six month periods ended September 24, 2011, primarily due to shipment of a significant order for the military.

Cost of sales was as follows for the periods shown:

COST OF SALES

Three Month Periods Ended
(Dollars in thousands) September 29, 2012 September 24, 2011 % change Cost of sales $ 2,122 $ 2,554 (17 %)

Six Month Periods Ended (Dollars in thousands) September 29, 2012 September 24, 2011 % change Cost of sales $ 4,550 $ 4,608 (1 %)

Cost of sales as a percentage of sales decreased by 0.2% for the second quarter of fiscal 2013 to 62.3% compared to 62.5% for the second quarter of fiscal 2012.

Cost of sales as a percentage of sales increased by 0.2% for the first half of fiscal 2013 to 61.0% compared to 60.8% from the first half of fiscal 2012.

Operating expenses were as follows for the periods shown:

OPERATING EXPENSES
                                                   Three Month Periods Ended
                                                 September 29,        September 24,
(Dollars in thousands)                                    2012                 2011         % change
Engineering                                     $        1,047       $          635               65 %
Selling, general and administrative                      1,206                1,562              (23 %)
Restructuring                                               92                    -                0 %
Total                                           $        2,345       $        2,197                7 %



                                                       Six Month Periods Ended
                                                 September 29,
(Dollars in thousands)                                    2012         September 24, 2011         % change
Engineering                                     $        1,980       $              1,315               51 %
Selling, general and administrative                      2,516                      2,996              (16 %)
Restructuring                                              184                          -                0 %
Total                                           $        4,680       $              4,311                9 %

Operating expenses increased 7% or $148,000 in the second quarter of fiscal 2013 over the second quarter of fiscal 2012 primarily due to an increase of $412,000 in product development expenses including costs associated with constructing prototype and beta test units, which was partially offset by a $356,000 reduction in selling, general and administrative expenses primarily related to lower sales commission expense due to house account sales and personnel reductions in fiscal 2012. The Company plans to aggressively invest in its new instrument products but anticipates a future reduction in operating costs once the planned move of the Microsource operation from Santa Rosa to San Ramon is completed later this fiscal year.


Operating expenses increased 9% or $369,000 in the first half of fiscal 2013 over fiscal 2012 due to an increase of $665,000 in product development expenses including prototype and beta test unit costs, which was partially offset by a $480,000 reduction in selling, general and administrative expenses primarily related to lower sales commission expense due to house account sales and personnel reductions in fiscal 2012. The Company plans to aggressively invest in its instrument products but anticipates a future reduction in operating costs once the planned move of the Microsource operation from Santa Rosa to San Ramon is completed later this fiscal year.

In the fourth quarter of fiscal 2012, Giga-tronics made the decision to move ahead with the relocation of its Santa Rosa, CA operation into one facility in San Ramon, CA to help with overhead absorption in San Ramon and to eliminate the facility expense in Santa Rosa. The Company announced its intentions to employees in February, 2012 and entered into employment agreements with all key Santa Rosa individuals to retain the talent needed to continue shipments during the transition and to ensure the new operation in San Ramon will run smoothly.

The major types of cost associated with this move and estimates of their respective total costs are shown:

                                       Estimated Total Expense
Type of Cost                                    (In thousands)
Retention Agreements for employees   $                     506
Preparation of San Ramon facility                          103
Training of San Ramon Employees                             34
Moving expenses                                             56
Clean-up of Santa Rosa facility                             67
Total                                $                     766

Of the total estimated expense, only a prorated portion of the retention bonuses have been accrued as of September 29, 2012. The total expense related to retention bonuses for the three and six month periods ending September 29, 2012 were $92,000 and $184,000, respectively. The balance of the restructuring costs will be expensed throughout the remainder of fiscal 2013 and through the third quarter of fiscal year 2014. The Company is required to vacate its Santa Rosa facility by May of 2013.

In summary, Giga-tronics recorded a loss before income taxes of $1,064,000 for the second quarter of fiscal 2013 versus a loss before income taxes of $666,000 for the same period last year. The loss before income taxes for the first half of fiscal 2013 was $1,769,000 compared to $1,337,000 for the first half of fiscal 2012.

Financial Condition and Liquidity

As of September 29, 2012, Giga-tronics had $2,096,000 in cash and cash equivalents, compared to $2,365,000 as of March 31, 2012.

Working capital at September 29, 2012 was $4,860,000 compared to $6,568,000 at March 31, 2012. The decrease in working capital was primarily attributable to the net loss of $1,771,000 for the first half of fiscal 2013.

The Company's current ratio (current assets divided by current liabilities) at September 29, 2012 was 2.10 compared to 4.14 on March 31, 2012.

Cash used in operating activities amounted to $177,000 for the six month period ended September 29, 2012, compared to cash provided by operating activities of $1,608,000 for the six month period ended September 24, 2011. Cash used in operating activities during the first half of fiscal 2013 was primarily attributed to the net loss which was partially offset by cash received through advance customer payments which is recorded as deferred revenue. Cash provided by operating activities for the first half of fiscal 2012 which was primarily attributable to the collection of accounts receivable.


Additions to property and equipment were $252,000 in the first half of fiscal 2013, of which $170,000 were related to new capital lease obligations, compared to $117,000 in the first half of fiscal 2012. The increase in property and equipment in fiscal 2013 was attributable to new engineering projects. The increase in property and equipment in fiscal 2012 was due to an upgrade of manufacturing equipment required for certain new products.

Deferred revenue was $1,967,000 at September 29, 2012 compared to $7,000 at March 31, 2012. The increase of $1,960,000 was due primarily to cash received from advance customer billings during the first six months of fiscal 2013 associated with a contract with a large aircraft manufacturer.

On October 12, 2012, the Company entered into a Second Amended and Restated Loan and Security Agreement" (the "New Credit Facility") with Silicon Valley Bank (the "Bank"). The New Credit Facility replaced the Company's previous revolving line of credit with the Bank with an expiration date of September 12, 2012, which was subsequently extended to October 15, 2012. The New Credit Facility, which expires on October 12, 2013, is secured by all assets of the Company and provides for a borrowing capacity equal to 80% of eligible accounts receivable on an aggregate basis, up to a maximum $2.0 million, provided the Company maintains borrowing base eligibility, that is, a minimum cash balance of $750,000. When the Company is not borrowing base eligible the Bank may limit credit extension to the 80% advance rate multiplied by the face amount of specific eligible accounts. The New Credit Facility contains a collateral handling fee of one-tenth of one percent (0.10%) on outstanding financed receivables for each calendar month based upon a 360 day year. When borrowing base eligible, the collateral handling fee is not applicable. Interest accrues on the average outstanding borrowings at a floating per annum rate equal to the greater of the Prime Rate plus two percent (2.00%) or six percent (6.00%). Any borrowings under the New Credit Facility may be repaid and such repaid amounts re-borrowed until the maturity date. Unless terminated by the Company or accelerated by the Bank in accordance with the terms of the agreement, the New Credit Facility will terminate on October 12, 2013, at which time all outstanding borrowings must be repaid by the Company. The total borrowing capacity for Giga-tronics would have been in excess of $2 million if the New Credit Facility had been in effect at September 29, 2012. If Giga-tronics does not maintain borrowing base eligibility, that is, a cash balance of $750,000.00 or greater, then the borrowing capacity is not based upon accounts receivable in the aggregate but rather it is limited to 80% of specific eligible accounts receivable. The specific eligible accounts receivable are subject to the Bank's discretion and will generally exclude past due accounts, foreign receivables and certain receivables from the government among other exclusions. Thus Giga-tronics would be able to borrow funds from the Bank; however, the borrowing capacity would be reduced. Using balances at September 29, 2012 as an illustration, had the cash balance fallen below $750,000, the borrowing capacity would have been reduced to approximately $1.9 million.

In order to achieve sustained profitability and positive cash flows from operations, the Company may need to further reduce operating expenses and increase revenue. Last year Giga-tronics completed a series of cost reduction actions which have improved the operating expense structure, exclusive of new product development expense. The Company will continue to perform additional actions, as necessary. The ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for the Company's products. Management believes that existing cash and cash equivalent balances, along with cash expected to be generated from product sales, and the careful management of working capital requirements, will be sufficient to fund operations, new product development efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months. In order to increase working capital, the Company may seek to obtain additional debt or equity financing. However, the Company cannot assure that such financing will be available or on terms favorable to the Company.


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