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GIGA TRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 experienced an increase in defense orders for the third quarter of fiscal 2013 versus the third quarter of fiscal 2012. Commercial orders have decreased slightly for the quarter ended December 29, 2012 as compared to the quarter ended December 31, 2011. The Company has seen an increase in defense orders for the first nine months 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) December 29, 2012 December 31, 2011 % change Giga-tronics Division $ 1,935 $ 2,190 (12 %) Microsource 312 310 1 % Total $ 2,247 $ 2,500 (10 %) Nine Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 % change Giga-tronics Division $ 6,217 $ 8,405 (26 %) Microsource 8,528 2,108 305 % Total $ 14,745 $ 10,513 40 % New orders received in the third quarter of fiscal 2013 decreased by 10% to $2,247,000 from the $2,500,000 received in fiscal 2012. New orders received in the first nine months of fiscal 2013 increased 40% to $14,745,000 from the $10,513,000 received in the first nine months of fiscal 2012. Orders at Giga-tronics Division decreased for the three month period ended December 29, 2012 primarily due to a decrease in commercial orders, whereas orders for the first nine months 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 fiscal 2013. Orders at Microsource increased for the three and nine month periods ended December 29, 2012 compared to the three and nine month periods ended December 31, 2011, primarily due to a significant order from the military sector. 13-------------------------------------------------------------------------------- The following table shows order backlog and related information at the end of the respective periods: BACKLOG December 29, December 31, (Dollars in thousands) 2012 2011 % change Backlog of unfilled orders at end of period: Giga-tronics Division $ 1,169 $ 1,658 (29 %) Microsource 6,006 2,122 183 % Total $ 7,175 $ 3,780 90 % Backlog of unfilled orders shippable within one year: Giga-tronics Division $ 1,169 $ 1,658 (29 %) Microsource 4,977 2,122 135 % Total $ 6,146 $ 3,780 63 % Backlog at the end of the third quarter of fiscal 2013 increased 90% as compared to the end of the same period last year and was primarily the result of booking of a substantial defense sector contract by Microsource. The allocation of net sales was as follows for the periods shown: ALLOCATION OF NET SALES Three Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 % change Giga-tronics Division $ 2,250 $ 2,207 2 % Microsource 1,696 592 186 % Total $ 3,946 $ 2,799 41 % Nine Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 % change Giga-tronics Division $ 7,321 $ 8,218 (11 %) Microsource 4,088 2,164 89 % Total $ 11,409 $ 10,382 10 % Net sales in the third quarter of fiscal 2013 were $3,946,000, a 41% increase from the $2,799,000 in fiscal 2012. Net sales in the first nine months of fiscal 2013 increased 10% to $11,409,000 from the $10,382,000 in the first nine months of fiscal 2012. Sales at Giga-tronics Division remained flat for the third quarter of fiscal 2013 versus the same period last year. Sales at Giga-tronics Division decreased for the nine month period ended December 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 nine months 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 nine month periods ended December 29, 2012 compared to the three and nine month periods ended December 31, 2011, primarily due to shipment of a significant order for the military. 14 --------------------------------------------------------------------------------Cost of sales was as follows for the periods shown: COST OF SALES Three Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 % change Cost of sales $ 2,342 $ 3,269 (28 %) Nine Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 % change Cost of sales $ 6,892 $ 7,877 (13 %) Cost of sales as a percentage of sales decreased by 57.4% for the third quarter of fiscal 2013 to 59.4% compared to 116.8% for the third quarter of fiscal 2012. In the third quarter of fiscal year 2012 there was a large charge to inventory reserves for products deemed by Giga-tronics management to have limited or no likelihood of future sales. Cost of sales as a percentage of sales decreased by 15.5% for the first nine months of fiscal 2013 to 60.4% compared to 75.9% from the same period a year ago. The decrease is due to a large charge to inventory reserves in the third quarter of fiscal year 2012 as described above. Operating expenses were as follows for the periods shown: Total Operating Three Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 change % change Engineering $ 1,179 $ 745 $ 434 58 % Sales & Mktg and Administration 1,187 1,397 $ (210 ) (15 %) Restructuring 99 - $ 99 0 % Total $ 2,465 $ 2,142 $ 323 15 % Nine Month Periods Ended (Dollars in thousands) December 29, 2012 December 31, 2011 change % change Engineering $ 3,159 $ 2,060 $ 1,099 53 % Sales & Mktg and Administration 3,703 4,393 $ (690 ) (16 %) Restructuring 283 - $ 283 0 % Total $ 7,145 $ 6,453 $ 692 11 % Operating expenses increased 15% or $323,000 in the third quarter of fiscal 2013 over the third quarter of fiscal 2012 primarily due to an increase of $434,000 in product development expenses including costs associated with constructing prototype and beta test units and restructuring costs of $99,000 (see below), which was partially offset by a $210,000 reduction in selling, general and administrative expenses primarily related to personnel reductions in fiscal 2012 and lower sales commission expense due to increased house account sales. 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 11% or $692,000 in the first nine months of fiscal 2013 over fiscal 2012 due to an increase of $1,099,000 in product development expenses including prototype and beta test unit costs and restructuring costs in fiscal 2013 (see below), which was partially offset by a $690,000 reduction in selling, general and administrative expenses primarily related to personnel reductions in fiscal 2012 and lower sales commission expense due to increased house account sales. 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. 15 -------------------------------------------------------------------------------- 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: Type of Cost Estimated Total Expense (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 and a portion of the preparation of the San Ramon facility have been accrued as of December 29, 2012. The total restructuring expense for the three and nine month periods ending December 29, 2012 were $99,000 and $283,000, 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 $865,000 for the third quarter of fiscal 2013 versus a loss before income taxes of $2,613,000 for the same period last year. The loss before income taxes for the first nine months of fiscal 2013 was $2,634,000 compared to $3,950,000 for the first nine months of fiscal 2012. Financial Condition and Liquidity As of December 29, 2012, Giga-tronics had $2,421,000 in cash and cash equivalents, compared to $2,365,000 as of March 31, 2012. Working capital at December 29, 2012 was $4,146,000 compared to $6,568,000 at March 31, 2012. The Company's current ratio (current assets divided by current liabilities) at December 29, 2012 was 1.92 compared to 4.14 on March 31, 2012. The decrease in working capital and current ratio was primarily attributable to the net loss of $2,636,000 for the first nine months of fiscal 2013. Cash used in operating activities amounted to $841,000 for the nine month period ended December 29, 2012, compared to cash provided by operating activities of $272,000 for the nine month period ended December 31, 2011. Cash used in operating activities during the first nine months of fiscal 2013 was primarily attributed to the net loss which was partially offset by a decrease in inventory and by cash received through advance customer payments which is recorded as deferred revenue. Cash provided by operations in the first nine months of fiscal 2012 was primarily attributable to decreases in accounts receivable, inventory, and deferred revenue which was substantially offset by the net loss for the period. 16-------------------------------------------------------------------------------- Additions to property and equipment were $213,000 in the first nine months of fiscal 2013, of which $170,000 were related to capital lease obligations, compared to $192,000, of which $31,000 were related to capital lease obligations, in the first nine months 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 $1,263,000 at December 29, 2012 compared to $7,000 at March 31, 2012. The increase of $1,256,000 was due primarily to cash received from advance customer billings during the first nine 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, 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 which requires a minimum cash balance of $750,000. Giga-tronics was borrowing base eligible at December 29, 2012 with an aggregate borrowing capacity of $1.5 million. 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. If the Company was not borrowing base eligible at December 29, 2012, the borrowing capacity would have been reduced to approximately $1.2 million. As of December 29, 2012, the Company's outstanding borrowings under the New Credit Facility were $975,000. Subsequent to quarter end $695,000 of the outstanding borrowing was repaid. As the Company continues to fund development of a new product cash requirements are expected to fluctuate throughout the research and development phase and continue through the new product launch. Management intends to draw upon the New Credit Facility from time to time to meet shortfalls in cash. All borrowings will be of short duration. In order to achieve sustained profitability and positive cash flows from operations, the Company may need to further reduce operating expenses and increase revenue. During the prior fiscal year Giga-tronics completed a series of cost reduction actions which management anticipated would improve 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, and available borrowings under its bank line of credit which management expects to be available 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, including from existing major shareholders. However, the Company cannot assure that such financing will be available or on terms favorable to the Company. At the date of this filing the Company has entered into negotiations to sell production rights for one of its products in a cash sale. |