MICROPAC INDUSTRIES, INC. Business
Micropac Industries, Inc. (the "Company"), aDelaware corporation, designs, manufactures and distributes various types of microelectronic circuits including solid state relays and power controllers, optoelectronic components, and sensor and display components and assemblies. The Company's products are used as components and assemblies in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, satellite systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products. The Company's facilities are certified and qualified by theDefense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and are certified to ISO 9001:2008 and AS 9100D. Micropac is aNational Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company hasUnderwriters Laboratories (UL) approval on our industrial power controllers. The Company's core technology are microelectronic and optoelectronic designs to include the packaging and interconnecting of multi-chip microelectronics modules. Other technologies include light emitting and light sensitive materials and products, including light emitting diodes and silicon phototransistors, and electronic integration used in the Company's optoelectronic components and assemblies.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances. Note 2 to the Financial Statements in the Quarterly Report Form 10-Q for the quarter endedAugust 28, 2021 , describes the significant accounting policies and methods used in the preparation of the Financial Statements. liabilities. Actual results could differ from these estimates. The core principle of revenue recognition under accounting principles generally accepted in the Unites States of America (GAAP) is that the Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company's revenue on the majority of its customer contracts are recognized at a point in time, generally upon shipment of products. The application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, the determination of whether revenues related to our revenue contracts should be recognized over time or at a point in time, as these determinations impact the timing and amount of our reported revenues and net income. Other significant judgments include the estimation of the point in the manufacturing process at which we are entitled to receive payment, as well as the progress of the job order to completion in order to determine the amount of consideration earned for contractual revenue recognized over time. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. Inventory purchases and commitments are based upon future demand. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of changing customer requirements, we may be required to increase our inventory allowances and our gross margin could
be adversely affected. The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. If we were to determine we would not be able to realize all or part of the deferred tax asset in the future, an adjustment to the deferred tax asset would be necessary which would reduce our net income for that period. 13
Depreciable and useful lives estimated for property and equipment are based on
initial expectations of the period of time these assets will provide benefit.
Changes in circumstances related to a change in our business or other factors
could result in these assets becoming impaired, which could adversely affect the
value of these assets.
Results of Operations
Three months ended Nine months ended
8/28/2021 8/29/2020 8/28/2021 8/29/2020
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
COST AND EXPENSES:
Cost of goods sold 53.9 % 63.2 % 56.6 % 59.6 %
Research and development 6.2 % 6.2 % 6.3 % 7.1 %
Selling, general and
administrative expenses 20.2 % 27.2 % 23.3 % 24.3 %
Total cost and
expenses 80.3 % 96.6 % 86.2 % 91.0 %
OPERATING INCOME BEFORE INTEREST 19.7 % 3.4 %
13.8 % 9.0 %
AND INCOME TAXES
Other income (loss), net (2.6 %) 0.0 % (0.9 %) 0.2 %
INCOME BEFORE TAXES 17.2 % 3.4 % 12.9 % 9.2 %
Provision for taxes 3.9 % .7 % 2.4 % 1.4 %
NET INCOME 13.3 % 2.7 % 10.5 % 7.8 %
Sales for the three and nine month periods ended August 28, 2021 totaled
$8,180,000 and $19,865,000 , respectively. Sales for the third quarter increased
$3,254,000 from the same period of 2020, while sales for the first nine months
of 2021 increased $3,105,000 from the first nine months of 2020. The majority of
the increase in sales in the third quarter and nine months ended August 28, 2021
were due to an increase in shipments of standard solid state relays and
non-recurring engineering funded by customers on several custom products
compared to the third quarter of 2020. Sales were 5% in the commercial market,
14% in the medical market, 66% in the military market, and 15% in the space
market for the nine months ended August 28, 2021 compared to 7% in the
commercial market, 13% in the medical market, 67% in the military market, and
13% in the space market for the nine months ended August 29, 2020 .
One customer accounted for 21% of the Company's sales for the three months ended
August 28, 2021 and one customers accounted for 20% of the Company's sales for
the nine months ended August 28, 2021 , while one customer accounted for 20% of
the Company's sales for the three months ended August 29, 2020 , and two customer
accounted for 13% and 10%of the Company's sales for the nine months ended August
29, 2020 .
Cost of goods sold for the third quarter of 2021 and 2020 totaled 53.9% and 63.2% of net sales, respectively, while cost of goods sold for the nine months endedAugust 28, 2021 andAugust 29, 2020 totaled 56.6% and 59.6% of net sales, respectively. In actual dollars, cost of goods sold increased$1,292,000 in the third quarter of 2021 compared to the same period of 2020. Year to date cost of goods sold increased$1,255,000 for the first nine months of 2021 as compared to the same period in 2020. The increase in cost of goods sold were due to the overall increase in sales during 2021 compared to 2020. Research and development expense increased$204,000 for the third quarter of 2021 versus 2020 and increased$61,000 for the first nine months of 2021 compared to the same period of 2020. The increase in the third quarter of 2021 was associated with outside consultant services on a new internal development project. The research and development expenditures were associated with continued development of several power management products, fiber optic transceivers and high voltage optocouplers. The Company will continue to invest in research and development of these products and other new opportunities. Selling, general and administrative expense for the third quarter and first nine months of 2021 totaled 20.2% and 23.3% respectively of net sales compared to 27.2% and 24.3% for the same periods in 2020. In actual dollars, 14 selling, general and administrative expense increased$307,000 for the third quarter and increased$552,000 for the first nine months of 2021 compared to the same periods in 2020. The majority of the dollar increase for the first nine months resulted from the additional commission expense associated with higher sales. Provisions for taxes increased$181,000 for the third quarter of 2021 and increased$250,000 for the first nine months of 2021 compared to the same period in 2020. The estimated effective tax rate was 18% for 2021 and 14% for 2020.The increase in the effective rate is associated with higher profit before taxes and a decrease in the research and development credits.
Net income increased
Liquidity and Capital Resources
Cash and cash equivalents totaled$14,376,000 as ofAugust 28, 2021 compared to$14,619,000 onNovember 30, 2019 , a decrease of$243,000 . The decrease in cash and cash equivalents is primarily attributable to net cash provided by operations of$3,307,000 , payment of a cash dividend of$258,000 , and$3,175,000 invested in construction of new facility and$188,000 in equipment.
In addition to cash on hand, the Company also has the ability to borrow under a loan agreement as discussed in Note 5 to the condensed financial statements.
Outlook
New orders for year-to-date 2021 totaled
Backlog totaled$29,943,000 onAugust 28, 2021 , compared to$29,237,000 as ofAugust 29, 2020 , and$29,793,000 onNovember 30, 2020 . The backlog represents a good mix of the company's products and technologies with 9% in the commercial market, 4% in the medical market, 77% in the military market, and 10% in the space market compared to 11% in the commercial market, 11% in the medical market, 66% in the military market, and 12% in the space market onAugust 29, 2020 . 2021 Current Backlog by Major Market Military Space Medical Commercial Total Domestic Direct$ 13,884 $ 1,699 $ 1,313 $ 2,169 $ 19,065
Domestic Distribution 8,916 801 - 283
10,000
International 140 597 - 141 878
$ 22,940 $ 3,097 $ 1,313 $ 2,593 $ 29,943
2021 Current Backlog by Product Line
Microelectronics $ 9,868
Optoelectronics 8,343
Sensors and Displays 11,732
$ 29,943
The Company cannot assure that the results of operations for the interim period
presented are indicative of total results for the entire year due to
fluctuations in customer delivery schedules, or other factors over which the
Company has no control.
Impact of COVID-19 on our Business
The spread of the COVID-19 virus during the first half of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. InMarch 2020 theWorld Health Organization declared the spread of the COVID-19 virus a pandemic. The Company continues to monitor our supply chain and orders from customers for COVID-19 pandemic related changes. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking precautions to provide a safe work environment for our employees and customers. We have been staggering some shifts and otherwise adjusting work schedules to maximize our capacity while adhering to recommended precautions such as social distancing. We have established and implemented a work from home provision where possible. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. 15 We experienced multiple confirmed case of COVID-19 during 2021 and 2020, which caused us to shut down our Garland facility for a few days to thoroughly clean the facility and address employee concerns. Production in the Garland facility has been impacted, although we are not able to quantify the impact at this time. Our maquiladora contractor inMexico was shut down during April and May of 2020 but reopened as of mid-June at limited capacity due to local restrictions in that area.
The impact of the COVID-19 pandemic continues to unfold. The extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. Cautionary Statement This Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially. Investors are warned that forward-looking statements involve risks and unknown factors including, but not limited to: our expectations regarding the potential impacts on our operations of the COVID-19 pandemic; our expectations regarding the potential impacts on our supply chain and on our customers of the COVID-19 pandemic; overall changes in governmental spending for military and space programs; customer cancellation or rescheduling of orders, problems affecting delivery of vendor-supplied raw materials and components, unanticipated manufacturing problems and availability of direct labor resources.
The Company does not intend to update the forward-looking statements contained herein, except as may be required by law.
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