10-Q 1 micropac10q3rdquarter.htm

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

FORM 10-Q

 

 

(Mark One)

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 25, 2018

OR

     
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-5109

 

MICROPAC INDUSTRIES, INC.

 

 

Delaware                                                                                                                                                             75-1225149        

(State of Incorporation)                                                                                                   (IRS Employer Identification No.)

 

905 E. Walnut, Garland, Texas                                                                                                                         75040                 

(Address of Principal Executive Office)                                                                                                         (Zip Code)

 

Registrant’s Telephone Number, including Area Code (972) 272-3571

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  [  ] Accelerated filer  [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

On October 8, 2018 there were 2,578,315 shares of Common Stock, $0.10 par value outstanding.

 

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MICROPAC INDUSTRIES, INC.

 

FORM 10-Q

 

August 25, 2018

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

  ITEM 1 -  FINANCIAL STATEMENTS 
     Condensed Balance Sheets as of August 25, 2018 (unaudited) and November 30, 2017 
     Condensed Statements of Operations for the three and nine months ended August 25, 2018 and August 26, 2017 (unaudited) 
     Condensed Statements of Cash Flows for the nine months ended August 25, 2018 and August 26, 2017 (unaudited) 
     Notes to Condensed Financial Statements (unaudited) 
       
  ITEM 2 -  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
       
  ITEM 3 -  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
       
  ITEM 4 -  CONTROLS AND PROCEDURES 
       
       

 

 

PART II - OTHER INFORMATION

 

 ITEM   1 - LEGAL PROCEEDINGS
 ITEM   1A -RISK FACTORS
 ITEM   2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 ITEM   3 - DEFAULTS UPON SENIOR SECURITIES
 ITEM   4 - MINE SAFETY DISCLOSURE
 ITEM   5 - OTHER INFORMATION
 ITEM   6 - EXHIBITS

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MICROPAC INDUSTRIES, INC.

CONDENSED BALANCE SHEETS

(Dollars in thousands, except share data)

ASSETS

CURRENT ASSETS  08/25/18  11/30/17
  (Unaudited)   
Cash and cash equivalents  $9,839   $9,388 
Short-term investments   2,052    2,031 
Receivables, net of allowance for doubtful accounts of
$0 at August 25, 2018 and November 30, 2017
   2,705    3,462 
Inventories:          
Raw materials and supplies   4,289    3,874 
Work-in process   2,275    1,991 
                             Total inventories   6,564    5,865 
Prepaid income tax   487    227 
Prepaid expenses and other assets   422    274 
                             Total current assets   22,069    21,247 
PROPERTY, PLANT AND EQUIPMENT, at cost:          
Land   1,518    1,518 
Buildings   498    498 
Facility improvements   1,109    1,109 
Furniture and fixtures   945    938 
Construction in process equipment   597    678 
Machinery and equipment   8,815    8,492 
                      Total property, plant, and equipment   13,482    13,233 
Less accumulated depreciation   (9,664)   (9,429)
                                     Net property, plant, and equipment   3,818    3,804 
Deferred income taxes, net   116    203 

 

Total assets

  $26,003   $25,254 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable  $613   $372 
Accrued compensation   560    704 
Deferred revenue   637    392 
Property taxes   67    86 
Commission payable   26    113 
Other accrued liabilities   44    27 
                        Total current liabilities   1,947    1,694 
SHAREHOLDERS’ EQUITY          
Common stock, $.10 par value, authorized 10,000,000
shares, 3,078,315 issued and 2,578,315 outstanding at
August 25, 2018 and November 30, 2017
   308    308 
Additional paid-in capital   885    885 
       Treasury stock, 500,000 shares, at cost   (1,250)   (1,250)
Retained earnings   24,113    23,617 
                                Total shareholders’ equity   24,056    23,560 
                                        Total liabilities and shareholders’ equity  $26,003   $25,254 

 

See accompanying notes to financial statements.

 

 

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MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands except share data)

(Unaudited)

 

 

 

  Three months ended

  Nine months ended
    08/25/18    08/26/17    08/25/18    08/26/17 
NET SALES  $5,002   $4,717   $13,842   $13,591 
COST AND EXPENSES:                    
    Cost of goods sold   (3,272)   (2,952)   (8,611)   (8,526)
    Research and development   (314)   (413)   (963)   (1,305)
    Selling, general & administrative expenses   (1,303)   (1,034)   (3,750)   (3,006)
                                    Total cost and expenses   (4,899)   (4,399)   (13,324)   (12,837)
OPERATING INCOME   113    318    518    754 
    Other income   21    19    25    23 
    Interest income (expense), net   17    8    47    10 
INCOME BEFORE TAXES  $151   $345   $590   $787 
    Benefit (provision) for taxes   113    32    163    (109)
NET INCOME  $264   $377   $753   $678 
NET INCOME PER SHARE, BASIC AND DILUTED  $0.10   $0.15   $0.29   $0.26 
DIVIDENDS PER SHARE  $—     $—     $0.10   $0.10 
WEIGHTED AVERAGE OF SHARES, basic and diluted   2,578,315    2,578,315    2,578,315    2,578,315 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

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MICROPAC INDUSTRIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

  Nine months ended
    8/25/18    8/26/17 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $753   $678 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
    Depreciation   236    217 
                  Deferred tax expense   86    6 
    Changes in certain current assets and liabilities          
       Accounts receivable   757    190 
       Inventories   (699)   1,003 
       Prepaid expenses and other current assets   (147)   (108)
       Prepaid income taxes   (259)   87 
       Deferred revenue   244    (859)
       Accounts payable   241    (154)
       Accrued compensation   (144)   56 
       Other accrued liabilities   (89)   (55)
                                 Net cash provided by operating activities   979    1,061 
CASH FLOWS FROM INVESTING ACTIVITIES:          
        Sale of short term investments   4,082    4,036 
        Purchase of short term investments   (4,104)   (4,047)
        Additions to property, plant and equipment   (248)   (407)
                         Net cash used in investing activities   (270)   (418)
CASH FLOWS FROM FINANCING ACTIVITIES          
         Cash dividend   (258)   (258)
                                  Net cash used in financing activities   (258)   (258)
Net change in cash and cash equivalents   451    385 
Cash and cash equivalents at beginning of period   9,388    10,012 
Cash and cash equivalents at end of period  $9,839   $10,397 
Supplemental Cash Flow Disclosure:          
               Cash paid for income taxes  $16   $17 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

 

 

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MICROPAC INDUSTRIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 BASIS OF PRESENTATION

 

Business Description

 

Micropac Industries, Inc. (the “Company”), a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits, solid state relays, power controllers, and optoelectronic 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 the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and is certified to ISO 9001:2008 and AS 9100C. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology is 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.

 

The business of the Company was started in 1963 as a sole proprietorship. On March 3, 1969, the Company was incorporated under the name of “Micropac Industries, Inc.” in the state of Delaware. The stock was publicly held by 445 shareholders on August 25, 2018.

 

In the opinion of management, the unaudited condensed financial statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position as of August 25, 2018, the results of operations for the three months and nine months ended August 25, 2018 and August 26, 2017, and the cash flows for the nine months ended August 25, 2018 and August 26, 2017. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended November 30, 2017. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The Company’s fiscal year ends on the last day of November. The quarterly results end on the last Saturday of the quarter.

 

It is suggested that these financial statements be read in conjunction with the November 30, 2017 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.

 

 

Note 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

Revenues are recorded as shipments are made based upon contract prices. Any losses anticipated on fixed price contracts are provided for currently. Sales are recorded net of sales returns, allowances and discounts.

 

Deferred revenue represents prepayments from customers and will be recognized as revenue when the products are shipped per the terms of the contract.

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the modified retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. On July 9, 2015, the FASB agreed to defer the effective date to annual reporting periods beginning after December 15, 2017 and the interim periods within that year. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The standard will be effective for the Company for fiscal year ending November 30, 2019 and the interim periods within the year.

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Short-Term Investments

 

The Company has $2,052,000 in short-term investments at August 25, 2018. Short-term investments consist of certificates of deposits with maturities greater than 90 days. These investments are reported at historical cost, which approximates fair value. All highly liquid investments with maturities of 90 days or less are classified as cash equivalents. All short-term investments are securities which the Company has the ability and intent to hold to maturity and mature within one year.

 

Inventories

 

Inventories are stated at lower of cost or net realizable value and include material, labor and manufacturing overhead. All inventories are valued using the FIFO (first-in, first-out) method of inventory valuation. The Company determines the need to write inventory down to the lower of cost or net realizable value via an analysis based on the usage of inventory over a three year period and projected usage based on current backlog.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU eliminates from GAAP the requirement to measure inventory at the lower of cost or market. Market under the previous requirement could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. Entities within scope of this update will now be required to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted, and should be applied prospectively. The Company adopted this guidance on December 1, 2017 and the adoption did not have a material impact on its consolidated financial statements.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method. Under this method the Company records deferred income taxes for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax law or rates in the period that includes the enactment date.

 

The Company records a liability for an unrecognized tax benefit for a tax position that is not “more-likely-than-not” to be sustained.  The Company did not record any liability for uncertain tax positions as of August 25, 2018 and November 30, 2017.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into United States tax law, which among other provisions lowered the corporate tax rate to 21%.

 

Our effective tax rate (benefit) was (28)% for the nine months ended August 25, 2018 compared to 14% for the nine months ended August 26, 2017 due primarily to the enactment of the Tax Act on December 22, 2017 and research and development tax credit filed on amended 2014 and 2015 federal tax returns.

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to provide guidance for companies that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements.

 

ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the nine months ended August 25, 2018, we revalued all deferred tax assets and liabilities at the newly enacted Federal corporate US income tax rate.  This revaluation as of enactment resulted in a non-cash provisional estimate of $52,000 to income tax expense and a corresponding reduction in the net deferred tax asset.

 

 

7 
 

Property, Plant, and Equipment

 

Property, plant, and equipment are carried at cost, and depreciation is provided using the straight-line method at rates based upon the following estimated useful lives (in years) of the assets:

 

 Buildings  15
 Facility improvements  8-15
 Machinery and equipment  5-10
 Furniture and fixtures  5-8

 

The Company assesses long-lived assets for impairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) ASC 360-10-35, Property, Plant and Equipment – Subsequent Measurement. When events or circumstances indicate that an asset may be impaired, an assessment is performed. The estimated future undiscounted cash flows associated with the asset are compared to the asset’s net book value to determine if a write down to market value less cost to sell is required.

 

Repairs and maintenance are expensed as incurred. Improvements which extend the useful lives of property, plant, and equipment are capitalized.

 

Research and Development Costs

 

Costs for the design and development of new products are expensed as incurred.

 

 

Note 3 NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under the new standard, lessees will be required to recognize lease assets and liabilities for all leases, with certain exceptions, on their balance sheets. Public business entities are required to adopt the standard for reporting periods beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

Note 4 FAIR VALUE MEASUREMENT

 

The Company had no financial assets or liabilities measured at fair value on a recurring basis as of August 25, 2018 and November 30, 2017.  The fair value of financial instruments such as cash and cash equivalents, short term investments, accounts receivable, and accounts payable approximate their carrying amount based on the short maturity of these instruments.  There were no nonfinancial assets measured at fair value on a nonrecurring basis at August 25, 2018 and November 30, 2017.

 

Note 5 COMMITMENTS

 

On April 23, 2018, the Company renewed the Loan Agreement with a Texas banking institution. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000. The Loan Agreement also contains financial covenants to maintain at all times including (i) minimum working capital of not less than $4,000,000, (ii) a ratio of senior funded debt, minus the Company’s balance sheet cash on hand to the extent in excess of $2,000,000 to EBITDA of not more than 3.0 to 1.0, and (iii) a ratio of free cash flow to debt service of not less than 1.2 to 1.0. The Company has not, to date, drawn any amounts under the revolving line of credit and is currently in compliance with the financial covenants.

 

Note 6 EARNINGS PER COMMON SHARE

 

Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective periods. Diluted earnings per share gives effect to all dilutive potential common shares. For the three and nine months ended August 25, 2018 and August 26, 2017, the Company had no dilutive potential common stock.

 

Note 7 SHAREHOLDERS’ EQUITY

 

On December 13, 2016, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January 10, 2017. The dividend was paid to shareholders on February 8, 2017.

 

On December 12, 2017, the Board of Directors of Micropac Industries, Inc. approved the payment of a $0.10 per share special dividend to all shareholders of record as of January, 10 2018. The dividend was paid to shareholders on February 8, 2018.

 

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MICROPAC INDUSTRIES, INC.

(Unaudited)

 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Business

 

Micropac Industries, Inc. (the “Company”), a Delaware corporation, designs, manufactures and distributes various types of microelectronic circuits, solid state relays, power controllers, and optoelectronic 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 the Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level) and MIL-PRF-19500 JANS (space level) and is certified to ISO 9001:2008 and AS 9100C. Micropac is a National Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has Underwriters Laboratories (UL) approval on our industrial power controllers.

 

The Company’s core technology is 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.

 

Results of Operations

 

 

      Three months ended      Nine months ended 
    8/25/2018    8/26/2017    8/25/2018    8/26/2017 
NET SALES   100.0%   100.0%   100.0%   100.0%
COST AND EXPENSES:                    
    Cost of Goods Sold   65.4%   62.6%   62.2%   62.7%
    Research and development   6.3%   8.8%   7.0%   9.6%
    Selling, general & administrative expenses   26.0%   21.9%   27.1%   22.1%
                                    Total cost and expenses   97.7%   93.3%   96.3%   94.4%
OPERATING INCOME BEFORE INTEREST   2.3%   6.7%   3.7%   5.6%
           AND INCOME TAXES                    
    Interest and other income   0.8%   0.6%   0.4%   0.2%
INCOME BEFORE TAXES   3.0%   7.3%   4.3%   5.8%
    Benefit (provision) for taxes   2.3%   .7%   1.1%   (.8%)
NET INCOME   5.3%   8.0%   5.4%   5.0%

Sales for the three and nine month periods ended August 25, 2018 totaled $5,002,000 and $13,842,000, respectively. Sales for the third quarter increased 6% or $285,000 above sales for the same period of 2017, while sales for the first nine months of 2018 increased $251,000 above the first nine months of 2017. Sales were 16% in the commercial market, 64% in the military market, and 20% in the space market for the nine months ended August 25, 2018 compared to 10% in the commercial market, 65% in the military market, and 25% in the space market for the nine months ended August 26, 2017.

 

Two customers accounted for 14% and 10% of the Company’s sales for the three months ended August 25, 2018 and two customers accounted for 12% and 11% of the Company’s sales for the nine months ended August 25, 2018, while three customers accounted for 17%, 15% and 13% of the Company’s sales for the three

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months ended August 25, 2017 and three customers accounted for 17%, 13% and 12% of the Company’s sales for the nine months ended August 25, 2017.

 

Cost of goods sold for the third quarters of 2018 and 2017 totaled 65.4% and 62.6% of net sales, respectively, while cost of goods sold for the nine months ended August 25, 2018 and August 26, 2017 totaled 62.2% and 62.7% of net sales, respectively. In actual dollars, cost of goods sold increased $320,000 in the third quarter of 2018 compared to the same period of 2017. Year to date cost of goods sold increased $85,000 for the first nine months of 2018 as compared to the same periods in 2017. The increase in the third quarter is associated non-recurring engineering cost supporting customer funded projects.

 

Research and development expense decreased $99,000 for the third quarter of 2018 versus 2017 and decreased $342,000 for the first nine months of 2018 compared to the same period of 2017. The decrease in research and development expense is associated with an increase in non-recurring engineering customer funded projects during 2018. 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. The Company had non-recurring customer funded sales of $1,141,000 and cost of goods sold of $751,000 for the first nine months of 2018 compared to sales of $542,000 and cost of goods sold of $518,000 for the same period on 2017.

 

Selling, general and administrative expense for the third quarter and first nine months of 2018 totaled 26.0% and 27.1% respectively of net sales compared to 21.9% and 22.2% for the same periods in 2017. In actual dollars, selling, general and administrative expense increased $269,000 for the third quarter and increased $744,000 for the first nine months of 2018 compared to the same periods in 2017. The increase is associated with $345,000 in consulting expense with the implementation of a new ERP system, $126,000 in consulting expenses for the research and development tax credit study, $72,000 in additional commission expenses, and an increase of $260,000 in additional sales and marketing expenses with the addition of outside sales staff.

 

Provisions for taxes benefit decreased $81,000 for the third quarter of 2018 and the provision for tax expense decreased $272,000 for the first nine months of 2018 compared to the same period in 2017. The estimated effective tax rate was (28)% for 2018 and 14% for 2017. During 2017, the Company had a Research and Development tax credit study performed for fiscal 2013, 2014, 2015, and 2016 by a third party with tax year 2012 and 2015 completed in the third quarter of 2017. The Company filed an amended tax return for 2012 reflecting a R&D tax credits of approximately $77,000. In addition, the Company had a $66,000 R&D tax credit on the tax return for 2015 (fiscal year 2016) filed in 2017. The Company filed an amended tax return for 2013 and 2014 reflecting a R&D tax credits of $222,963 in 2018.

 

Net income decreased $113,000 for the third quarter of 2018 versus 2017 and increased $75,000 for the first nine months of 2018 compared to the same period of 2017.

 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $9,839,000 as of August 25, 2018 compared to $9,388,000 on November 30, 2017, an increase of $451,000. The increase in cash and cash equivalents is primarily attributable to a cash flow from operations of $979,000 offset by the payment of a cash dividend of $258,000 and the investment of $248,000 in equipment.

 

The Company expects to continue to generate adequate amounts of cash to meet its liquidity needs from the sale of products and services and the collection thereof for at least the next twelve months.

 

The one year specific advance loan for acquisitions with an aggregate amount not to exceed $7,500,000 in a single advance or in multiple advances was not renewed on April 22, 2017. The revolving credit loan in amounts not to exceed a total principal balance of $6,000,000 was renewed on April 23, 2018 for a two year term.

 

Outlook

 

New orders for year-to-date 2018 totaled $17,552,000 compared to $8,412,000 for 2017. The increase resulted from higher orders on various standard solid state relay products totaling $5,770,000 and an increase of several custom sensor and display orders totaling $3,400,000. The lower new orders in 2017 was primarily due to the de-booking of one large international order for solid state power products. This order was originally booked in November 2015 for $2,836,550. This order was removed from the backlog as a result of not receiving the down payment required to start the fabrication along with the uncertainties of the international market. As a result, no cost were incurred for this order.

 

Backlog totaled $16,575,000 on August 25, 2018 compared to $11,924,000 as of August 26, 2017 and $12,864,000 on November 30, 2017. The backlog represents a good mix of the company’s products and technologies with 18% in the commercial market, 65% in the military market, and 17% in the space market

10 
 

compared to 17% in the commercial market, 54% in the military market, and 29% in the space market on August 26, 2017.

 

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.

 

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, 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 produces silicon phototransistors and light emitting diode die for use in certain military, standard and custom products. Fabrication efforts sometimes may not result in successful results, limiting the availability of these components. Competitors offer commercial level alternatives and our customers may purchase our competitors’ products if the Company is not able to manufacture the products using these technologies to meet the customer demands. Approximately $2,600,000 of the Company’s backlog is dependent on these semiconductors.

 

The Company disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Chief Executive Officer and Chief Financial Officer of the Company evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of August 25, 2018 and, based on this evaluation, concluded that the Company’s disclosure controls and procedures are functioning in an effective manner to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  
(b) Changes in internal controls .
There has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting during the three month period ended August 25, 2018.  

 

 

 

 

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PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS
  The Company is not involved in any material current or pending legal proceedings.
ITEM 1A  RISK FACTORS
  Information about risk factors for the three months and nine months ended August 25, 2018 does not differ materially from that set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended November 30, 2017. 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  None
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  None
ITEM 4.  MINE SAFETY DISCLOSURE
  Not Applicable
ITEM 5.  OTHER INFORMATION
  None
ITEM 6.  EXHIBITS
(a)        Exhibits   
31.1

Certification of Chief Executive Officer pursuant to Section 302 of the

Sarbanes- Oxley Act of 2002

31.2

Certification of Chief Accounting Officer pursuant to Section 302 of the

Sarbanes- Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350,

as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

32.2

Certification of Chief Accounting Officer pursuant to 18 U. S. C. section 1350,

as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.

 

                                                            101 Interactive data files pursuant to Rule 405 of Regulation S-T.

 

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 duly authorized.

 

 

 

 

MICROPAC INDUSTRIES, INC.

 

 

 

 

October 9, 2018                                                                                                               Mark King                         

Date                                                                                                                                   Chief Executive Officer

 

 

 

 

October 9, 2018                                                                                                               Patrick Cefalu                 

Date                                                                                                                                   Chief Financial Officer