10-Q 1 micropac10q.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 24, 2019

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 every Interactive Data File required to be submitted 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 such files). Yes [X] No[  ]

 

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

 

Large accelerated filer  [  ] Accelerated filer  [  ]
Non-accelerated filer    [X]

Smaller reporting company [X]

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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 7, 2019 there were 2,578,315 shares of Common Stock, $0.10 par value outstanding.

 

 

1 
 

MICROPAC INDUSTRIES, INC.

 

FORM 10-Q

 

August 24, 2019

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

Condensed Balance Sheets as of August 24, 2019 (unaudited) and November 30, 2018

 

Condensed Statements of Operations for the three and nine months ended August 24, 2019 and

August 25, 2018 (unaudited)

 

Condensed Statements of Cash Flows for the six months ended August 24, 2019 and

August 25, 2018 (unaudited)

 

Statements of Shareholders’ Equity for the six months ended August 24, 2019 and

August 25, 2018 (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)

 

ASSETS

 

CURRENT ASSETS  08/24/19   11/30/18
   (Unaudited)    
       
       
Cash and cash equivalents  $12,457   $10,483 
Short-term investments   2,081    2,058 
Receivables, net of allowance for doubtful accounts of
$0 at August 24, 2019 and November 30, 2018
   3,392    3,772 
        Contract Assets   550    —   
Inventories:          
Raw materials and supplies   4,166    4,593 
Work-in process   2,310    1,985 
                             Total inventories   6,476    6,578 
Prepaid income tax   79    407 
Prepaid expenses and other assets   585    511 
                             Total current assets   25,620    23,809 
           
PROPERTY, PLANT AND EQUIPMENT, at cost:          
Land   1,518    1,518 
Buildings   498    498 
Facility improvements   1,109    1,109 
Furniture and fixtures   977    953 
Construction in process equipment   644    607 
Machinery and equipment   8,991    8,841 
                      Total property, plant, and equipment   13,737    13,526 
Less accumulated depreciation   (10,027)   (9,746)
                                     Net property, plant, and equipment   3,710    3,780 
           
Deferred income taxes, net   42    57 

 

Total assets

  $29,372   $27,646 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $1,010   $707 
Accrued compensation   948    747 
Deferred revenue   531    1,238 
Property taxes   72    88 
Other accrued liabilities   26    123 
                        Total current liabilities   2,587    2,903 
Commitments          
           
SHAREHOLDERS’ EQUITY          
Common stock, $.10 par value, authorized 10,000,000
shares, 3,078,315 issued and 2,578,315 outstanding at
August 24, 2019 and November 30, 2018
   308    308 
Additional paid-in capital   885    885 
       Treasury stock, 500,000 shares, at cost   (1,250)   (1,250)
Retained earnings   26,842    24,800 
           
                                Total shareholders’ equity   26,785    24,743 
           
                                        Total liabilities and shareholders’ equity  $29,372   $27,646 
           

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

    08/24/19    08/25/18    08/24/19    08/25/18 
                     
                     
NET SALES  $7,252   $5,002   $17,966   $13,842 
                     
COST AND EXPENSES:                    
                     
    Cost of goods sold   (4,042)   (3,272)   (10,138)   (8,611)
                     
    Research and development   (428)   (314)   (1,260)   (963)
                     
    Selling, general & administrative expenses   (1,440)   (1,303)   (4,045)   (3,750)
                     
                                    Total cost and expenses   (5,910)   (4,899)   (15,443)   (13,324)
                     
OPERATING INCOME   1,342    113    2,523    518 
                     
                     
    Other income   —      21    —      25 
    Interest income, net   39    17    87    47 
                     
INCOME BEFORE TAXES  $1,381   $151   $2,610   $590 
                     
    Provision (benefit) for taxes   193    (113)   365    (163)
                     
NET INCOME  $1,188   $264   $2,245   $753 
NET INCOME PER SHARE, BASIC AND DILUTED  $0.46   $0.10   $0.87   $0.29 
                     
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
    8/24/19    8/25/18 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $2,245   $753 
Adjustments to reconcile net income to net cash provided by operating activities:          
    Depreciation   281    236 
    Deferred tax   —      86 
    Changes in certain current assets and liabilities          
       Accounts receivable   380    757 
       Inventories   (24)   (699)
                     Contract asset   (307)   —   
       Prepaid expense and other current assets   (74)   (147)
       Prepaid income taxes   328    (259)
       Deferred revenue   (706)   244 
       Accounts payable   256    241 
       Accrued compensation   201    (144)
       Other accrued liabilities   (114)   (89)
                                 Net cash provided by operating activities   2,466    979 
CASH FLOWS FROM INVESTING ACTIVITIES:          
        Sale of short term investments   4,138    4,082 
        Purchase of short term investments   (4,161)   (4,104)
        Additions to property, plant and equipment   (211)   (248)
                         Net cash used in investing activities   (234)   (270)
CASH FLOWS FROM FINANCING ACTIVITIES          
         Cash dividend   (258)   (258)
                                  Net cash used in financing activities   (258)   (258)
Net change in cash and cash equivalents   1,974    451 
Cash and cash equivalents at beginning of period   10,483    9,388 
Cash and cash equivalents at end of period  $12,457   $9,839 
Supplemental Cash Flow Disclosure:          
               Cash paid for income taxes  $36   $16 

 

 

See accompanying notes to financial statements.

 

 

5 
 

MICROPAC INDUSTRIES, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE PERIODS ENDED AUGUST 24, 2019 AND AUGUST 25, 2018

(Dollars in thousands)

(Unaudited)

 

 

   
   Common  Additional  Treasury  Retained   
   Stock  paid-in-capital  Stock  Earnings  Total
                
BALANCE, November 30, 2017  $308   $885   $(1,250)  $23,617   $23,560 
                          
Dividend   —      —      —      (258)   (258)
Net loss   —      —      —      753    753 
                          
BALANCE, August 25, 2018  $308   $885   $(1,250)  $24,112   $24,055 
                          
                          
                          
BALANCE, November 30, 2018  $308   $885   $(1,250)  $24,800   $24,743 
Impact of change in accounting policy   —      —      —      55    55 
                          
Dividend   —      —      —      (258)   (258)
Net loss   —     —     —     2,245    2,245 
                          
BALANCE, August 24, 2019  $308   $885   $(1,250)  $26,842   $26,785 

 

 

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 are certified to ISO 9001:2015 and AS 9100D. 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 442 shareholders on August 24, 2019.

 

In the opinion of management, the unaudited financial statements include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position as of August 24, 2019, the results of operations for the three and nine months ended August 24, 2019 and August 25, 2018, and the cash flows for the nine months ended August 24, 2019 and August 25, 2018 including the statement of shareholders equity. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended November 30, 2018. 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, 2018 Form 10-K filed with the SEC, including the audited financial statements and the accompanying notes thereto.

 

 

Note 2 SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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 replaces most existing revenue recognition guidance in the United States. The standard permits the use of either the full retrospective or modified retrospective transition method.

Based on a review of its customer contracts, the Company has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with the Company’s historical revenue recognition model. 

The core principle of the guidance in Topic 606 is that an entity 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.

 

To achieve that core principle, the Company applied the following steps:

 

1. Identify the contract(s) with a customer.

 

7 
 

The Company designs, manufactures and distributes various types of microelectronic circuits, optoelectronics, and sensors and displays. 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 revenues are from purchase orders associated with manufacture of products and/or contracts with customers. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

2. Identify the performance obligations in the contract.

 

The majority of the Company’s purchase orders or contracts with customers contain a single performance obligation, the sale of products. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company receives purchase orders for products to be delivered over multiple dates that may extend across reporting periods. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. The Company accounting policy treats shipping and handling activities as a fulfillment cost.

 

3. Determine the transaction price.

 

The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer at a fixed price per unit shipped based on the terms of the contract or purchase order with the customer.

 

4. Allocate the transaction price to the performance obligations in the contract.

 

The Company transaction price is the fixed price per unit per each delivery upon shipment.

 

5. Recognize revenue when (or as) the Company satisfies a performance obligation.

 

The Company invoices for each delivery upon shipment and recognizes revenues at the fixed price for each distinct product delivered when transfer of control has occurred, which is generally upon shipment.

 

For certain contracts under which the Company produces products with no alternative use and for which the Company has an enforceable right to payment during the production cycle, Topic 606 requires the Company to recognize revenue using an over-time recognition model as opposed to recognizing revenue at the time of shipment. The Company recognizes this revenue at work in process cost plus a margin at the end of each period and records a contract asset (unbilled receivable). The majority of these products are shipped weekly and monthly to the customer.

In addition, the Company may have a contract or purchase order to provide a non-recurring engineering service to a customer. These contracts are reviewed and performance obligations are determined and revenue recognized upon terms and conditions of the contract from the customer.

Effective as of the beginning of the first quarter of fiscal 2019, we adopted Topic 606 using the modified retrospective method and recognized a cumulative effect adjustment to retained earnings based on any open contracts at that time for which revenue recognition has changed from a point-in-time recognition model to an over-time recognition model. While the impact to net sales and net income was not material to our results of operations, the future impact of Topic 606 is dependent on the mix and nature of specific customer contracts.

Upon adoption, we recognized an increase in retained earnings of $55,000. The details of the adjustment to retained earnings upon adoption as well as the effects of the balance sheet are as follows:

   Balance at     Balance at
Assets  November 30, 2018  Adjustment due to Topic 606  December 1, 2018
   Contract assets  $0   $242   $242 
   Work in process  $1,985   $(173)  $1,812 
Deferred income tax net  $57   $(15)  $42 
Shareholder equity               
   Retained Earnings  $24,800   $55   $24,855 

 

The following table summarize the effects of the new standard on selected unaudited line items within the Company’s Condensed Statement of Operations for three and nine months ended August 24, 2019.

8 
 

Three months ended August 24, 2019

   As Reported

 

Balance without

adoption of

Topic 606

  Effect of change
Net sales  $7,252   $7,116   $(136)
Cost of goods sold  $(4,042)  $(3,970)  $72 
Income before taxes  $1,381   $1,317   $(64)
Income tax  $(193)  $(180)  $13 
Net Income  $1,188   $1,137   $(51)

 

Nine months ended August 24, 2019

   As Reported

 

Balance without

adoption of

Topic 606

  Effect of change
Net sales  $17,966   $17,414   $(552)
Cost of goods sold  $(10,138)  $(9,769)  $369 
Income before taxes  $2,610   $2,427   $(183)
Income tax  $365   $327   $(38)
Net Income  $2,245   $2,100   $(145)

 

Disaggregation of Revenue

The following table summarizes the Company’s net sales by product line.

   8/24/2019  8/25/2018
Microcircuits  $5,660   $3,121 
Optoeletronics   4,730    6,559 
Sensors and Displays   7,576    4,162 
   $17,966   $13,842 
           
Timing of revenue recognition          
Recognized at a point in time  $17,414   $13,842 
Recognized over time   552    —   
    Total Revenue  $17,966   $13,842 

 

Deferred Revenue represents advance payments from customers and will be recognized as revenue when the performance obligations are met based on the terms of the contract.

Contract costs

 

The Company does not have material incremental costs to obtain a contract in the form of sales commissions or bonuses. The Company incurs other immaterial costs to obtain and fulfill a contract; however, the Company has elected the practical expedient under ASC 340-40-24-4 to recognize all incremental costs to obtain a contract as an expense when incurred if the amortization period is one year or less

Short-Term Investments

 

The Company has $2,081,000 in short-term investments at August 24, 2019. 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.

 

9 
 

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 24, 2019.

 

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

 

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 twelve months ended November 30, 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 $77,000 to income tax expense and a corresponding reduction in the net deferred tax asset.

 

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 24, 2019 and November 30, 2018.  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 24, 2019 and November 30, 2018.

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Note 5 COMMITMENTS

 

On May 30, 2019, 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 24, 2019 and February 24, 2018, the Company had no dilutive potential common stock instruments.

 

Note 7 SHAREHOLDERS’ EQUITY

 

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.

 

On December 11, 2018, 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 9, 2019. The dividend was paid to shareholders on February 8, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11 
 

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 are certified to ISO 9001:2015 and AS 9100D. 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
    8/24/2019    8/25/2018    8/24/2019    8/25/2018 
NET SALES   100.0%   100.0%   100.0%   100.0%
                     
COST AND EXPENSES:                    
    Cost of Goods Sold   55.7%   65.4%   56.4%   62.2%
    Research and development   5.9%   6.3%   7.0%   7.0%
    Selling, general & administrative expenses   19.9%   26.0%   22.5%   27.1%
                                    Total cost and expenses   81.5%   97.7%   86.0%   96.3%
                     
OPERATING INCOME   18.5%   2.3%   14.0%   3.7%
                     
    Interest and other income   0.5%   0.8%   0.5%   0.4%
                     
INCOME BEFORE TAXES   19.0%   3.0%   14.5%   4.3%
                     
    Provision (benefit) for taxes   2.3%   (2.3%)   1.9%   (1.1%)
                     
NET INCOME   16.7%   5.3%   12.6%   5.4%

 

 

Sales for the three and nine month periods ended August 24, 2019 totaled $7,252,000 and $17,966,000, respectively. Sales for the third quarter increased 45% or $2,250,000 above sales for the same period of 2018, while sales for the first nine months of 2019 increased 30% or $4,124,000 above the first nine months of 2018. Sales of various solid state relays increased by $2,539,000 and sales of various custom products increased by $1,585,000.

 

One customer accounted for 20% of the Company’s sales for the three months ended August 24, 2019 and the same customer accounted for 20% of the Company’s sales for the nine months ended August 24, 2019, while two customers accounted for 14% and 10% of the Company’s sales for the three months ended August 25, 2018 and the same two customers accounted for 12% and 11% of the Company’s sales for the nine months ended August 25, 2018.

 

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Cost of goods sold for the third quarters of 2019 and 2018 totaled 55.7% and 56.4% of net sales, respectively, while cost of goods sold for the nine months ended August 24, 2019 and August 25, 2018 totaled 56.9% and 62.2% of net sales, respectively. In actual dollars, cost of goods sold increased $770,000 in the third quarter of 2019 compared to the same period of 2018. Year to date cost of goods sold increased $1,527,000 for the first nine months of 2019 as compared to the same periods in 2018. The increase is associated with the increase in overall sales.

 

Research and development expense increased $114,000 for the third quarter of 2019 versus 2018 and increased $297,000 for the first nine months of 2019 compared to the same period of 2018. The increase in research and development expense is associated with an increase in internal funded projects during 2019. 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 $1,046,000 and cost of goods sold of $1,160,000 for the first nine months of 2019 compared to sales of $1,141,000 and cost of goods sold of $751,000 for the same period on 2018.

 

Selling, general and administrative expense for the third quarter and first nine months of 2019 totaled 19.9% and 22.5% respectively of net sales compared to 26.0% and 27.1% for the same periods in 2018. In actual dollars, selling, general and administrative expense increased $137,000 for the third quarter and increased $295,000 for the first nine months of 2019 compared to the same periods in 2018. The increase is associated with additional commission expenses and additional sales and marketing expenses following the addition of outside sales staff.

 

Provisions for taxes increased $306,000 for the third quarter of 2019 and increased $528,000 for the first nine months of 2019 compared to the same period in 2018. The estimated effective tax rate was 14% for 2019 and (28)% for 2018. 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 years 2012 and 2015 completed in the third quarter of 2017. The Company filed an amended tax return for 2012 reflecting a R&D tax credit 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 R&D tax credits of $222,963 in 2018.

 

Net income increased $924,000 for the third quarter of 2019 versus 2018 and increased $1,492,000 for the first nine months of 2019 compared to the same period of 2018.

 

Liquidity and Capital Resources

 

Cash and cash equivalents totaled $12,457,000 as of August 24, 2019 compared to $10,483,000 on November 30, 2018, an increase of $1,974,000. The increase in cash and cash equivalents is primarily attributable to a cash flow from operations of $2,466,000 offset by the payment of a cash dividend of $258,000 and the investment of $211,000 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 2019 totaled $20,951,000 compared to $17,552,000 for 2018. The increase resulted from higher orders on various standard solid state relays.

 

Backlog totaled $20,241,000 on August 24, 2019 compared to $16,575,000 as of August 25, 2018 and $17,132,000 on November 30, 2018. The backlog represents a good mix of the company’s products and technologies with 22% in the commercial market, 68% in the military market, and 10% in the space market compared to 18% in the commercial market, 65% in the military market, and 17% in the space market on August 25, 2018.

 

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

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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 24, 2019 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 24, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 1ARISK FACTORS

 

Information about risk factors for the three months ended August 24, 2019 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, 2018.

 

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 135, 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.

 

 

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 8, 2019   /s/ Mark King
Date   Mark King
    Chief Executive Officer

 

October 8, 2019   /s/ Patrick Cefalu
Date   Patrick Cefalu
    Chief Financial Officer