EARNINGS PER COMMON SHARE

9 Months Ended

Aug. 28, 2021

Accounting Policies [Abstract]

EARNINGS PER COMMON SHARE

Note 6 EARNINGS PER COMMON SHARE

On December 8, 2020, 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 6, 2021. The dividend was paid to shareholders on February 12, 2021.

On December 10, 2019, 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 8, 2020. The dividend was paid to shareholders on February 14, 2020.

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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 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 (200^o 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 9001:2008 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 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 in the 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 ended August 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.

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 ended August 28, 2021 and August 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,

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 $959,000 for the third quarter of 2021 versus 2020 and increased $770,000 for the first nine months of 2021 compared to the same period of 2020 associated with higher overall sales.

Liquidity and Capital Resources

Cash and cash equivalents totaled $14,376,000 as of August 28, 2021 compared to $14,619,000 on November 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 $19,792,000 compared to $23,930,000 for 2020. The decrease resulted from timing of new orders for the Company’s standards solid state relays and custom sensor products.

Backlog totaled $29,943,000 on August 28, 2021, compared to $29,237,000 as of August 29, 2020, and $29,793,000 on November 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 on August 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. In March 2020 the World 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.

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 in Mexico 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.

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 28, 2021 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 28, 2021.

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 ended August 28, 2021 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, 2020

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.

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 12, 2021	/s/ Mark King
Date	Mark King
	Chief Executive Officer

October 12, 2021	/s/ Patrick Cefalu
Date	Patrick Cefalu
	Chief Financial Officer