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Gigatronics Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: February 10, 2012 04:36PM

Gigatronics Inc. (GIGA) filed Quarterly Report for the period ended 2011-12-31. Gigatronics Inc. has a market cap of $7.2 million; its shares were traded at around $1.39 with and P/S ratio of 0.4.



Highlight of Business Operations:

Fiscal 2012 third quarter net sales decreased by 40%, or $1,841,000, to $2,799,000 from the $4,640,000 received in the third quarter of fiscal 2011. Net sales for both Giga-tronics Division and Microsource were down for the quarter, however, military sales at Giga-tronics Division increased by $130,000. Net sales for the nine month period ended December 31, 2011 were $10,382,000, a 26% decrease from the $14,090,000 in the nine month period ended December 25, 2010. Sales at Giga-tronics Division increased for the nine month period ended December 31, 2011 primarily due to an increase in military shipments which was accomplished by shipping out of backlog; whereas shipments at Microsource decreased for the nine month period ended December 31, 2011 due to decreases in both military and commercial demand for its products. The Company anticipates increased business pending final negotiations with Boeing.

Cost of sales as a percentage of sales increased by 61.3% for the third quarter of fiscal 2012 to 116.8% compared to 55.5% for the third quarter of fiscal 2011. The increase at both Giga-tronics and Microsource was due to volume-based low manufacturing overhead absorption; and, a large charge to inventory reserves. Giga-tronics management undertook a critical review of products offered for sale resulting in a 100% reserve for products deemed to have limited or no likelihood of future sales.

Giga-tronics recorded loss before income taxes of $2,613,000 for the third quarter of fiscal 2012 versus income before income taxes of $18,000 for the same period last year. The loss before income taxes for the first nine months of fiscal 2012 was $3,950,000 compared to a loss of $101,000 for the first nine months of fiscal 2011. The increase in loss before income taxes was primarily due to a decrease in volume, an increase in cost of sales driven by higher inventory reserves and an increase in operating expenses primarily associated with an increase in R&D efforts in fiscal 2012.

Deferred tax assets are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized from the results of operations. The Company has reviewed all available evidence (both positive and negative) as described in Accounting Standards Codification 740. Midway through fiscal 2012 the Company renewed its emphasis on developing next generation instrument products with the goal of driving sustained revenue growth; and during fiscal 2012, the Company increased its product development expenses to more aggressively invest in its instrument products. Because of this change in outlook the Company sales forecast for fiscal 2012 has been reduced by approximately $10 million. During the third quarter of fiscal 2012, the Company also re-examined its excess inventory and end of life calculations, resulting in a charge to operations of approximately $1,200,000. The cumulative operating income for the preceding 36 months through the third quarter of fiscal 2012 was a net operating loss of $1,415,000. 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 projected future taxable income and tax planning strategies in making this assessment. Based on historical operations and projections for future operations over the periods in which the deferred tax assets become deductible, management believes it is more likely than not the Company will not generate taxable income sufficient to realize the benefits of deferred tax assets prior to expiration, and consequently, has recorded a full valuation allowance against the company's net deferred tax assets resulting in an income tax expense for the nine months ending December 31, 2011 of $13,258,000.

Deferred tax assets are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized from the results of operations. The Company has reviewed all available evidence (both positive and negative) as described in Accounting Standards Codification 740. Midway through fiscal 2012 the Company renewed its emphasis on developing next generation instrument products with the goal of driving sustained revenue growth; and during fiscal 2012, the Company increased its product development expenses to more aggressively invest in its instrument products. Because of this change in outlook the Company sales forecast for fiscal 2012 has been reduced by approximately $10 million. During the third quarter of fiscal 2012, the Company also re-examined its excess inventory and end of life calculations, resulting in a charge to operations of approximately $1,200,000. The cumulative operating income for the preceding 36 months through the third quarter of fiscal 2012 was a net operating loss of $1,415,000. 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 projected future taxable income and tax planning strategies in making this assessment. Based on historical operations and projections for future operations over the periods in which the deferred tax assets become deductible, management believes it is more likely than not the Company will not generate taxable income sufficient to realize the benefits of deferred tax assets prior to expiration, and consequently, has recorded a full valuation allowance against the company's net deferred tax assets resulting in an income tax expense for the nine months ending December 31, 2011 of $13,258,000.

Read the The complete Report



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