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GIGA > SEC Filings for GIGA > Form 10-K on 28-Jun-2013All Recent SEC Filings

Show all filings for GIGA TRONICS INC

Form 10-K for GIGA TRONICS INC


28-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. In fiscal years 2013 and 2012 Giga-tronics business consisted of two operating and reporting segments: Giga-tronics Division and Microsource. Both the Giga-tronics Division and Microsource sell into the commercial and government / defense markets.

In fiscal 2013 the Giga-tronics Division saw decreases in new orders and sales from the defense sector, due to less demand associated with two older product lines. One product line, a synthesizer used in the maintenance of defense communications equipment ("SG VXI"), is no longer manufactured. A second product, a family of switch modules associated the SCPM product line, was sold to Teradyne in April 2013 (see Note 15, Subsequent Events).

In fiscal 2013 Microsource saw increases in new orders and sales from the defense sector associated with radar filter components used for existing military aircraft being retrofitted and new military aircraft being manufactured.

In fiscal 2013 the commercial market orders for the Giga-tronics Division were relatively even when compared to fiscal 2012. Commercial sales for Microsource increased during fiscal 2013 when compared to fiscal 2012.

Fiscal 2013 saw a continuation of losses for the Company. As part of the effort to improve the Company's future operating performance, the Company reduced costs and expenses, except in engineering. In engineering the Company increased expenses to develop a new product platform that is currently scheduled to be released in the second half of fiscal 2014.

The Company business is highly dependent on government spending in the defense electronics sector and on the wireless telecommunications market. The Company continues to monitor costs, including personnel, facilities and other expenses, to more appropriately align costs with revenues.

Results of Operations

New orders by segment are as follows for the fiscal years ended:

Allocation of New Orders by Segment                                  % change
                                                                  2013       2012
                                                                   vs.        vs.
(Dollars in thousands)                    2013         2012       2012       2011
Giga-tronics Division
Commercial                            $  5,160     $  5,267        (2% )     (52% )
Government / Defense                     3,853        6,038       (36% )      68%
Total Giga-tronics Division           $  9,013     $ 11,305       (20% )     (23% )

Microsource
Commercial                            $    464     $    382         21 %       15 %
Government / Defense                     8,215        1,619        407 %       30 %
Total Microsource                     $  8,679     $  2,001        334 %       27 %

Total                                 $ 17,692     $ 13,306         33 %     (18% )

New orders received in fiscal 2013 increased 33% to $17,692,000 from the $13,306,000 received in fiscal 2012. The increase is primarily due to a $6,596,000 increase in Microsource defense orders associated with radar filter components used for existing military aircraft being retrofitted and new military aircraft being manufactured. This was partially offset by a $2,185,000 decrease in Giga-tronics Division defense orders, primarily from a decrease of switch modules associated with the older SCPM product line that was sold to Teradyne in April 2013 (see Note 15, Subsequent Events).


New orders received in fiscal 2012 decreased 18% to $13,306,000 from the $16,182,000 received in fiscal 2011. The decrease is primarily due to a $5,736,000 reduction in Giga-tonics Division commercial orders driven by a decrease in test equipment orders from a major consumer electronics and smart phone manufacturer. This was partially offset by a $2,438,000 increase in Giga-tonics Division military orders, primarily due to orders for switch modules of the older SCPM product line, and additional orders from an end of life buy of the SG VXI.

The following table shows order backlog and related information at fiscal year-end:

Backlog                                                                         % change
                                                                             2013           2012
                                                                              vs.            vs.
(Dollars in thousands)                          2013          2012           2012           2011
Backlog of unfilled orders                 $   7,344     $   3,839             91 %            5 %
Backlog of unfilled orders shippable
within one year                                6,706         3,839             75 %           15 %
Long term backlog reclassified during
year as shippable within one year              2,162         1,648             31 %           47 %

The increase in backlog at year-end 2013 of 91% was primarily due to orders received from Microsource defense orders associated with radar filter components.

The increase in backlog at year-end 2012 of 5% was primarily due to orders received for both Giga-tronics Division switch module and from Microsource defense radar filter component orders.

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

Allocation of Net Sales                                  % change
                                                     2013       2012
                                                      vs.        vs.
(Dollars in thousands)        2013         2012      2012       2011
Commercial                $  6,010     $  5,673         6 %     (51% )
Government / Defense         8,177        7,443        10 %     (21% )
Total                     $ 14,187     $ 13,116         8 %     (38% )

The allocation of net sales by segment was as follows for the fiscal years shown:

Allocation of Net Sales by Segment                                  % change
                                                                 2013       2012
                                                                  vs.        vs.
(Dollars in thousands)                   2013         2012       2012       2011
Giga-tronics Division
Commercial                           $  5,596     $  5,355         5%       (48% )
Government / Defense                    3,789        5,148       (26% )      40%
Total Giga-tronics Division          $  9,385     $ 10,503       (11% )     (25% )

Microsource
Commercial                           $    414     $    318         30 %     (76% )
Government / Defense                    4,388        2,295         91 %     (60% )
Total Microsource                    $  4,802     $  2,613         84 %     (63% )

Total                                $ 14,187     $ 13,116          8 %     (38% )

Net sales in fiscal 2013 were $14,187,000, an 8% increase from $13,116,000 of net sales in fiscal 2012. Microsource sales increased 84% or $2,189,000 primarily due to increased defense sales caused by the fulfillment of radar filter component orders. Sales at Giga-tronics Division decreased 11% or $1,118,000 primarily due to lower defense sales caused by the SG VXI product end of life.


Fiscal 2012 net sales were $13,116,000, a 38% decrease from the $21,029,000 of net sales in 2011. The decrease in sales was primarily due to lower commercial shipments. Sales at Giga-tronics Division decreased 25%, or $3,443,000, primarily due to the decrease in orders from a major consumer electronics and smart phone manufacturer. Microsource sales decreased by $4,470,000 primarily due to a gap in 2012 between the initial deliveries of beta radar filter components to a customer, which mainly occurred in fiscal 2011, and the delivery of production units to the same customer that began to increase in fiscal 2013.

The allocation of cost of sales by segment was as follows for the fiscal years shown:

Cost of Sales by Segment                                % change
                                                     2013       2012
                                                      vs.        vs.
(Dollars in thousands)        2013        2012       2012       2011
Giga-tronics Division      $ 5,727     $ 6,990       (18% )     (10% )
Microsource                  2,983       2,996         0%       (31% )
Total                      $ 8,710     $ 9,986       (13% )     (17% )

In fiscal 2013, cost of sales decreased 13% to $8,710,000 from $9,986,000 in fiscal 2012. The decrease is primarily due to a $1,549,000 excess and obsolete inventory reserve charge in fiscal 2012, which is discussed below, which was partially offset by increased costs associated with the fiscal 2013 increase in sales.

In fiscal 2012, cost of sales decreased 17% to $9,986,000 from $12,100,000 in fiscal 2011, driven primarily by lower sales volume at both Giga-tronics Division and Microsource, which was partially offset by increases in cost of sales at both Giga-tronics Division and Microsource from $1,549,000 in excess and obsolete inventory reserves including reserves established on end of life products.

Operating expenses were as follows for the fiscal years shown:

Operating Expenses                                                % change
                                                                2013      2012
                                                                 vs.       vs.
(Dollars in thousands)                   2013        2012       2012      2011
Engineering                           $ 4,282     $ 2,893         48 %      34 %
Selling, general and administrative     4,976       6,054       (18% )       2 %
Restructuring                             418          31       1248 %     100 %
Total                                 $ 9,676     $ 8,978          8 %      11 %

Operating expenses increased $698,000 in fiscal 2013 over 2012 due to an increase of $1,389,000 in engineering expenses that include $829,000 in product development costs associated with constructing prototype and beta test units of our new product platform, and restructuring costs of $387,000 (see below). This was partially offset by a $1,078,000 reduction in selling, general and administrative expenses, primarily related to personnel reductions of $386,000, lower sales commission expense of $275,000 due to increased non commissionable Microsource sales, and $138,000 less in marketing programs. The Company plans to aggressively invest in its new product platform but anticipates a future reduction in operating costs once the planned move of the Microsource operation from Santa Rosa to San Ramon is completed in fiscal 2014. The Company recorded $310,000 of share based compensation expense in fiscal 2013.

Operating expenses increased $892,000 in fiscal 2012 over 2011 due to an increase of $734,000 in product development expenses excluding NRE costs and an increase of $158,000 in selling, general and administrative expense. The increase in product development expenses is due to a more aggressive investment in instrument products. In fiscal year 2012 Giga-tronics strengthened marketing activities with a new Vice President of Marketing along with increased travel and spending on advertising. The increase in selling, general and administrative expense is a result of higher marketing expense of $255,000, higher commission expense of $96,000 offset by lower administrative expense of $193,000. The Company recorded $289,000 of share based compensation expense in fiscal 2012.

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. The Company expects to save approximately $500,000 annually in facility costs once the consolidation is completed. The Company announced its intentions to employees in February, 2012 and entered into employment agreements with all key Santa Rosa employees to retain the talent needed to continue shipments during the transition and to help 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 as follows:

Type of cost (In thousands)
Retention agreements for employees   $ 506
Preparation of San Ramon facility      113
Training of San Ramon employees          4
Moving expenses                         26
Clean-up of Santa Rosa facility         67
Total                                $ 716

Of the total estimated expense, $418,000 was expensed during fiscal 2013. A prorated portion of the retention agreements (73%) and a portion of the preparation of the San Ramon facility (35%) have been accrued for as of March 30, 2013. During fiscal 2012, $31,000 was expensed related to the retention agreements. The balance of the restructuring costs will be expensed through the third quarter of fiscal year 2014. The Company vacated its Santa Rosa facility in May of 2013.

Net interest expense in fiscal 2013 was $16,000, an increase of $14,000 over fiscal 2012 and was due to borrowings under the Company's line of credit.

Net interest expense in fiscal 2012 was $2,000 and net interest income in fiscal 2011 was $4,000.

Giga-tronics recorded a pretax loss of $4,204,000 for fiscal year 2013 versus pretax loss of $5,850,000 for fiscal year 2012. The lower pre-tax loss in fiscal 2013 compared to fiscal 2012 was primarily due to increased sales and lower selling, general & administrative expenses which was partially offset by increased engineering expenses related to new product development and increased expenses related to the restructuring. Giga-tronics recorded a pre-tax loss of $5,850,000 for fiscal year 2012 versus pre-tax income of $847,000 for fiscal year 2011. The loss before income taxes in fiscal 2012 was primarily due to a decrease in sales volume and an increase in operating expenses primarily associated with an increase in R&D efforts in fiscal 2012.

Inventories consist of the following:

Net Inventories                                             % change
                                                                2013
                            March 30,       March 31,            vs.
(Dollars in thousands)           2013            2012           2012
Raw materials             $     2,157     $     2,313            (7% )
Work-in-progress                2,049           1,651            24%
Finished goods                     50             241           (79% )
Demonstration inventory           304             495           (39% )
Total                     $     4,560     $     4,700            (3% )

Net inventories decreased by $140,000 at March 30, 2013 compared to March 31, 2012 and was primarily due to lower levels of long lead items and lower safety stock.

Financial Condition and Liquidity

As of March 30, 2013, Giga-tronics had $1,882,000 in cash and cash-equivalents, compared to $2,365,000 as of March 31, 2012.

Working capital at the end of fiscal year 2013 was $3,267,000 as compared to $6,568,000 at the end of fiscal year 2012. The current ratio (current assets divided by current liabilities) at March 30, 2013 was 1.61 as compared to 4.14 at March 31, 2012. The decrease in working capital and current ratio was primarily attributable to the operating loss in fiscal 2013.

Cash used in operating activities amounted to $1,568,000 in fiscal 2013 and $806,000 in fiscal 2012. Cash used in fiscal year 2013 operating activities was primarily attributed to the net loss of $4,206,000 for the year which was partially offset by a $2,271,000 increase in deferred revenue associated with the Company progress billing a customer for contracted milestones completed, but before final delivery of the finished product. Cash used in operating activities in fiscal year 2012 of $806,000 was primarily attributed to the net loss of $5,852,000 for the year, which was partially offset by a $4,510,000 decrease of accounts receivable associated with collections.


Additions to property and equipment were $349,000 in fiscal 2013, of which $170,000 were related to capital lease obligations, compared to $214,000 in fiscal 2012, of which $31,000 were related to capital lease obligations. 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.

Cash provided by financing activities in fiscal year 2013 $1,264,000 was primarily due to $857,000 in proceeds from the Company's line of credit with Silicon Valley Bank and $457,000 in net proceeds from the issuance of Series C convertible preferred stock. Cash provided by financing activities in fiscal 2012 was primarily due to $1,997,000 in net proceeds from the issuance of Series B convertible preferred stock shares and from the sale of common stock in connection with the exercise of stock options.

The Company has incurred net losses of $4,206,000 in fiscal 2013, and $5,852,000 in fiscal 2012. These net losses have contributed to an accumulated deficit of $14,278,000 at March 30, 2013, and elevate a cause for concern regarding the Company's future. To address this concern Management has taken numerous actions to provide additional working capital over the next twelve months, and reduce the costs and expenses going forward. On March 18, 2013 the Company entered into an Asset Purchase agreement with Teradyne Inc. ("Teradyne"), whereby Teradyne agreed to purchase the Giga-tronics Division product line known as SCPM for $1,000,000. The $1,000,000 for SCPM is payable over the first nine months of fiscal 2014 (see Note 15, Subsequent Events). To ensure the Company has the ability to continue borrowing over the next two fiscal years, on June 11, 2013 the Company extended its line of credit from October 12, 2012 to April 15, 2015, and increased the maximum advances associated with the Company's accounts receivable from $2,000,000 to $3,000,000 (see Note 12, Line of Credit). Using the terms pursuant to the new line of credit, management estimates $152,000 of additional borrowing capacity would have been available as of March 30, 2013. To provide additional working capital for operations, on June 27, 2013 the Company entered into Securities Purchase Agreement ("SPA") with Alara Capital AVI II, LLC, a Delaware limited liability company (the "Investor"). Under the terms of the SPA, the Company will sell to the Investor 5,111.86 shares of a new Series D Convertible Voting Perpetual Preferred Stock and warrants to purchase up to 511,186 additional shares of common stock at the price of $1.43 per share for approximately $858,000 in proceeds at the closing of the transaction, which is anticipated to be in July 2013 (see Note 15, Subsequent Events).

To assist with the upfront purchases of inventory required for future product deliveries, the Company has entered into advance payment arrangements with a large customer, whereby the customer reimburses the Company for raw material purchases prior to the shipment of the finished products. In fiscal 2013 these advance payments totaled approximately $2,300,000. In fiscal 2014 the Company has currently contracted approximately $1,300,000, and will seek similar terms with future agreements with the Customer, and other customers. On May 31, 2013 the Company completed the consolidation of its Santa Rosa, California facility into its headquarters in San Ramon, California. The Company expects to save approximately $500,000 annually in facility costs, plus the Company expects other operational efficiencies associated with having the majority of the company at one location. Management also plans to further increase operational efficiencies by continuing to work down product inventories that are on hand at March 30, 2013, and paid for. In addition, Management will continue to review all aspects of the business in an effort to reduce costs and expenses, while continuing to invest in new product development for future revenue streams. Management believes that through these efforts the Company will have the working capital required to continue its operations through fiscal 2014.

There are also no assurances that we will not be required to seek additional working capital through debt or equity offerings. If such additional working capital is required, there are no assurances that such financing will be available on favorable terms to the Company, if at all, though we have been successful in the past in obtaining the levels of capital needed to continue operations and believe that we would be able to do so if necessary through fiscal 2014.

Contractual Obligations

The Company leases various facilities under operating leases that expire through December 2016. Total future minimum lease payments under these leases amount to approximately $2,550,000.

The Company leases equipment under capital leases that expire through August 2015. The future minimum lease payments under these leases amount to approximately $170,000.

The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 30, 2013, total non-cancelable purchase orders were approximately $1,027,000 through fiscal 2014 and are scheduled to be delivered to the Company at various dates through February 2014.


Critical Accounting Policies

The Company's discussion and analysis of its financial condition and the results of operations are based upon the consolidated financial statements included in this report and the data used to prepare them. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and management is required to make judgments, estimates and assumptions in the course of such preparation. The Summary of Significant Accounting Policies included with the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, the Company re-evaluates its judgments, estimates and assumptions, including those related to revenue recognition, product warranties, allowance for doubtful accounts, valuation of inventories, valuation allowance on deferred tax assets, product development costs and share based compensation. The Company bases its judgment and estimates on historical experience, knowledge of current conditions, and its beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Management of Giga-tronics has identified the following as the Company's critical accounting policies:

Revenue Recognition

Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Revenue related to products shipped subject to customers' evaluation is recognized upon final acceptance. Revenue recognized under the milestone method is recognized once milestones are met. Determining whether a milestone is substantive is a matter of judgment and that assessment is performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:

a. It is commensurate with either of the following:

1. The Company's performance to achieve the milestone

2. The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's performance to achieve the milestone.

b. It relates solely to past performance.

c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones will be tied to product shipping while others will be tied to design review.

On certain contracts with one of the Company's significant customers the Company receives payments in advance of manufacturing. Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.

Product Warranties

The Company's warranty policy generally provides one to three years of coverage depending on the product. The Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the Company's actual historical experience with its current products or similar products. For new products, the required reserve is based on historical experience of similar products until sufficient historical data has been collected on the new product. Adjustments are made as new information becomes available.

Accounts Receivable

Accounts receivable are stated at their net realizable values. The Company has estimated an allowance for uncollectible accounts based on analysis of specifically identified problem accounts, outstanding receivables, consideration of the age of those receivables, the Company's historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company periodically reviews inventory on hand to identify and write down excess and obsolete inventory based on estimated product demand.


Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in making this assessment.

The Company considers all tax positions recognized in the consolidated financial statements for the likelihood of realization. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by . . .

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