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 (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 9001:2008 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 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 Six months ended
5/30/2020 5/25/2019 5/30/2020 5/25/2019
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
COST AND EXPENSES:
Cost of Goods Sold 60.3 % 54.3 % 58.0 % 56.9 %
Research and development 6.9 % 6.4 % 7.5 % 7.8 %
Selling, general &
administrative expenses 23.1 % 18.7 % 23.1 % 24.3 %
Total cost and
expenses 90.3 % 79.4 % 88.6 % 89.0 %
OPERATING INCOME BEFORE INTEREST 9.7 % 20.6 % 11.4 % 11.0 %
AND INCOME TAXES
Interest and other income 0.0 % 0.4 % 0.2 % 0.5 %
INCOME BEFORE TAXES 9.7 % 21.0 % 11.6 % 11.5 %
Provision for taxes 1.4 % 2.9 % 1.6 % 1.6 %
NET INCOME 8.3 % 18.1 % 10.0 % 9.9 %
Sales for the three and six month periods ended May 30, 2020 totaled $5,877,000
and $11,834,000, respectively. Sales for the second quarter decreased $1,031,000
from the same period of 2019, while sales for the first six months of 2020
increased $1,120,000 from the first six months of 2019. The majority of the
increase is related to an increase in sales for two custom sensor products.
Sales were 7% in the commercial market, 15% in the medical market, 63% in the
military market, and 15% in the space market for the six months ended May 30,
2020 compared to 10% in the commercial market, 17% in the medical market, 57% in
the military market, and 16% in the space market for the six months ended May
25, 2019.
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One customer accounted for 25% of the Company's sales for the three months ended
May 30, 2020 and two customers accounted for 23% and 11% of the Company's sales
for the six months ended May 30, 2020, while three customers accounted for 14%,
13% and 11% of the Company's sales for the three months ended May 25, 2019, and
two customers accounted for 15% and 10% of the Company's sales for the six
months ended May 25, 2019.
Cost of goods sold for the second quarters of 2020 and 2019 totaled 60.3% and
54.3% of net sales, respectively, while cost of goods sold for the six months
ended May 30, 2020 and May 25, 2019 totaled 58.0% and 56.9% of net sales,
respectively. In actual dollars, cost of goods sold decreased $205,000 in the
second quarter of 2020 compared to the same period of 2019. Year to date cost of
goods sold increased $772,000 for the first six months of 2020 as compared to
the same period in 2019. The majority of the increase is associated with the
increase in overall sales and a decrease in overall gross margin with higher
cost of goods sold in the second quarter due to product mix and approximately
$200,000 associated with COVID-19 production down time.
Research and development expense decreased $33,000 for the second quarter of
2020 versus 2019 and increased $54,000 for the first six months of 2020 compared
to the same period of 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.
Selling, general and administrative expense for the second quarter and first six
months of 2020 totaled 23.1% and 23.1% respectively of net sales compared to
18.7% and 24.3% for the same periods in 2019. In actual dollars, selling,
general and administrative expense increased $69,000 for the second quarter and
increased $128,000 for the first six months of 2020 compared to the same periods
in 2019. The majority of the increase for the first six months resulted from an
increase in commission expense in 2020 and the addition on business development
staff at the end of 2019.
Provisions for taxes decreased $124,000 for the second quarter of 2020 and
increased $20,000 for the first six months of 2020 compared to the same period
in 2019. The estimated effective tax rate was 14% for 2020 and for 2019.
Net income decreased $762,000 for the second quarter of 2020 versus 2019 and
increased $124,000 for the first six months of 2020 compared to the same period
of 2019
Liquidity and Capital Resources
Cash and cash equivalents totaled $15,320,000 as of May 30, 2020 compared to
$13,890,000 on November 30, 2019, an increase of $1,430,000. The increase in
cash and cash equivalents is primarily attributable to a net use of cash flow
from operations of $279,000, and payment of a cash dividend of $258,000, and
offset by proceeds for the sales of investments of $2,089,000 and $122,000
invested 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 2020 totaled $10,732,000 compared to $12,386,000 for
2019. The decrease resulted from timing of new orders for the Company's
standards solid state relays and custom sensor products.
Backlog totaled $20,996,000 on May 30, 2020 compared to $18,903,000 as of May
25, 2019 and $22,021,000 on November 30, 2019. The backlog represents a good mix
of the company's products and technologies with 15% in the commercial market, 9%
in the medical market, 64% in the military market, and 12% in the space market
compared to 8% in the commercial market, 7% in the medical market, 74% in the
military market, and 11% in the space market on May 25, 2019.
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. As of May 30, 2020, the Company's
operations have been impacted due to the practices described below. The Company
cannot at this time predict the impact that
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the COVID-19 pandemic will have on its financial condition and operations,
although we are continuing 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 one confirmed case of COVID-19, 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 but reopened as of
mid-June at limited capacity due to local restrictions in that area. We have
relocated some of that production to our Garland facility. We are working with
our customers to meet their current requirements and believe that our customers
have not incurred any major impact related to our position in their supply chain
as of the date of this filing. The combined impact of reduced production in the
Garland facility as well as stopped production from Mexico has impacted our cost
of production by an estimated 2% to 4% in the second quarter of 2020 due to
overhead cost that could not be allocated to work in process. While the current
impacts of COVID-19 are reflected in our results of operations, we cannot at
this time separate the direct COVID-19 impacts from other factors that cause our
performance to vary from year to year.
The impact of the COVID-19 pandemic continues to unfold. The extent of the
pandemic's effect on our operational and financial performance will depend in
large part on future developments, which cannot be predicted with confidence at
this time. Future developments include the duration, scope and severity of the
pandemic, the actions taken to contain or mitigate its impact, the impact on
governmental programs and budgets, the development of treatments or vaccines,
and the resumption of widespread economic activity. Due to the inherent
uncertainty of the unprecedented and rapidly evolving situation, we are unable
to predict with any confidence the likely impact of the COVID-19 pandemic on our
future operations.
Cautionary Statement
This Form 10-Q contains forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially. Investors are warned that
forward-looking statements involve risks and unknown factors including, but not
limited to: our expectations regarding the potential impacts on our operations
of the COVID-19 pandemic; our expectations regarding the potential impacts on
our supply chain and on our customers of the COVID-19 pandemic; overall changes
in governmental spending for military and space programs; customer cancellation
or rescheduling of orders, problems affecting delivery of vendor-supplied raw
materials and components, unanticipated manufacturing problems and availability
of direct labor resources.
The Company does not intend to update the forward-looking statements contained
herein, except as may be required by law.
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