GIGA TRONICS INC - Quarter Report: 2003 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

GIGA-TRONICS INCORPORATED

Yes     (X)           No (  )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act).
Yes [  ]     No [X]

Table of Contents

2

GIGA-TRONICS INCORPORATED

INDEX

Table of Contents

3

ITEM 1

GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

4

GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

5

GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Supplementary disclosure of cash flow information:

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

6

GIGA-TRONICS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

7

Table of Contents

8

Table of Contents

9

Table of Contents

10

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION

Table of Contents

11

Operating expenses on continuing operations for the three-month period decreased 13% ($334,000) compared with the same period last year due to decreases of $151,000 in SG&A, $177,000 in product development costs and $6,000 in amortization expense. For the six-month period, operating expenses decreased 15% ($875,000) due to decreases of $188,000 in SG&A, $677,000 in product development costs and $10,000 in amortization expense. Research and development expenses on continuing operations for the three and six-month periods decreased 17% ($177,000) and 27% ($677,000), respectively, compared with the prior year. The decrease was primarily due to a reduction in product development costs associated with a new product being designed at the Instrument division that was discontinued last year. Selling, general and administrative expenses on continuing operations were down 10% ($151,000) for the three months ended September 27, 2003 compared to the prior year. The decrease is a result of lower marketing expenses of $141,000 and administrative expenses of $53,000, offset by higher commission expenses of $43,000, due to an increase in commissionable sales in the quarter. For the six months, selling, general and administrative expenses on continuing operations were down 6% ($188,000) as compared to the same period a year ago. The reduction is a result of decreases in marketing expenses of $203,000 and administrative expenses of $124,000, offset by higher commission expenses of $139,000, due to an increase in commissionable sales in the period. These expense reductions were primarily personnel reductions, but also include decreases in rent expense due to renegotiated lease terms. Amortization of intangibles decreased 100% ($6,000) for the three months and 100% ($10,000) for the six months as compared to the prior year. The decrease in the amortization of intangibles is a result of the full amortization of patents and licenses that occurred in the fourth quarter of fiscal year 2003 at the Microsource division. Interest income for the three and six month periods increased from the prior year due to favorable interest rates on cash available for investment.

The pre-tax loss from continuing operations for the three and six month periods ended September 27, 2003 decreased 61% ($561,000) and 29% ($675,000), respectively, compared to the same period last year as our improved cost structure helped offset the reduction in sales that occurred during the first half of the year versus last year. The net loss from continuing operations for the first half of the year decreased 26% ($571,000) to $1,633,000 versus $2,204,000 for the same period last year.

FINANCIAL CONDITION AND LIQUIDITY

Giga-tronics had working capital of $10,104,000 and a ratio of current assets to current liabilities of 3.6 to 1.0 at September 27, 2003. Giga-tronics continues to fund all of its working capital needs from existing cash and operating cash flows.

Cash and cash equivalents at September 27, 2003 decreased $873,000 from March 29, 2003, and increased $321,000 from the prior quarter. Cash provided from operations during the quarter was $361,000. In addition, Giga-tronics spent $29,000 on new manufacturing and test equipment and other capital items. Giga-tronics intends to continue investing in capital items that support growth and new product development, raise productivity, and improve the quality of its products. Historically, the Company has satisfied its cash needs internally for both operating and capital expenditures, and management expects to continue to do so for at least the next twelve months.

Management believes that cash and cash equivalents remain adequate to meet anticipated operating needs. Discontinued operations should reduce cash used in operations. In the prior year, the discontinued operations used approximately $1,000,000 in cash. From time to time, Giga-tronics considers a variety of acquisition opportunities to also broaden its product lines and expand its market. Such acquisition activity could also increase the Company’s operating expenses and require the additional use of capital resources. The Company also intends to maintain research and development expenditures for the purpose of broadening its product line.

OUTLOOK

Giga-tronics is experiencing an increase in inquiries for its products and that has resulted in an incremental increase in new orders in the first half of the year. New orders in the military sector are showing indications of increased strength, however it is still too early to determine if the commercial wireless telecommunications market we serve has

Table of Contents

12

rebounded. Our cost reduction programs, including reductions in personnel and new lease terms, are on track and have positioned Giga-tronics to take advantage of any potential opportunities in our market. Giga-tronics will continue monitoring our cost structure and will make appropriate changes when needed. With the discontinuing of operations at the Dymatix division, Giga-tronics will be able to focus on its core business in order to release new products more quickly to market. The Company has recently released the first in a new line of microwave synthesizers that have been well received in the marketplace. This release demonstrates our commitment in new product development. We intend to continue research and development in order to expand our product lines and update our existing lines with additional features. While the management at the Microsource division hopes that prospects for new orders will improve results for the balance of the fiscal year, its short-term growth will be less than previously anticipated as there are timing delays associated with currently booked orders.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this section of the report, including statements regarding sales under “OUTLOOK” and statements under “FINANCIAL CONDITION”, are forward-looking. While Giga-tronics believes that these statements are accurate, Giga-tronics’ business is dependent upon general economic conditions and various conditions specific to the test and measurement, wireless and semiconductor industries. Future trends and these factors could cause actual results to differ materially from the forward-looking statements that we have made. In particular:

Giga-tronics’ core business is test and measurement, as well as components for the wireless communications market, which continues to be soft. The Company’s commercial product backlog has a number of risks and uncertainties such as the cancellation or deferral of orders, dispute over performance and our ability to collect amounts due. If the commercial market should decline further, then shipments in the current year could fall short of plan resulting in a decline in earnings. Also, Giga-tronics has a significant number of defense-related orders. While Giga-tronics has seen some improvement in the defense sector, it is not significant enough to offset the decline in the commercial sector. If the defense market should decline, shipments in the current year could be less than anticipated and cause a decrease in earnings.

The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards. Giga-tronics believes that its future success will depend, in part, upon its ability to develop and commercialize its existing products, develop new products and applications and in part to develop, manufacture and successfully introduce new products and product lines with improved capabilities and continue enhancing existing products. There can be no assurance that Giga-tronics will successfully complete the development of current or future products or that such products will achieve market acceptance. Giga-tronics may also experience difficulty obtaining critical parts or components required in the manufacturing of our products, resulting in our inability to fulfill orders in a timely manner, which may have a negative impact on our earnings. Also, the Company may not timely ramp manufacturing capacity to meet order demand and quickly adapt cost structures to changing market conditions.

As part of our business strategy, Giga-tronics has in the past broadened its product lines and expanded its markets, in part through the acquisition of other business entities, and it may do so in the future. The Company acquired Microsource, Inc. in fiscal 1999 in a transaction accounted for as a purchase. The Company is subject to various risks in connection with past and any future acquisitions. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company’s business, the inability of the Company’s management to maximize the financial and strategic position of the Company by the successful incorporation of acquired technology and rights into the Company’s product offerings, the maintenance of uniform standards, controls, procedures and policies, and the potential loss of key employees of acquired companies. No assurance can be given that any acquisition by Giga-tronics will or will not occur, that if an acquisition does occur, that it will not materially and adversely affect the Company or that any such acquisition will be successful in enhancing the Company’s business. Giga-tronics currently contemplates that future acquisitions may involve the issuance of additional shares of the Company’s common stock. Any such issuance may result in dilution to all shareholders of the Company, and sales of such shares in significant volume by the shareholders of acquired companies may depress the price of the Company’s common stock.

Table of Contents

13

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial instruments that expose the Company to market risk are cash and cash equivalents. The Company’s cash and cash equivalents are held in recognized financial institutions and have limited market risk due to the short-term maturities of the instruments.

ITEM 4

CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II - OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

As of November 4, 2003, Giga-tronics has no material pending legal proceedings. From time to time, Giga-tronics is involved in various disputes and litigation matters that arise in the ordinary course of business.

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (A.) Annual Meeting of stockholders was held on September 9, 2003.

Table of Contents

14

ITEM 6

EXHIBITS AND REPORTS ON FORM 8-K

Table of Contents

15

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.