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                Nine months ended
                                      8/29/2020        8/24/2019        8/29/2020        8/24/2019
NET SALES                                 100.0 %          100.0 %          100.0 %          100.0 %

COST AND EXPENSES:
  Cost of Goods Sold                       63.0 %           55.7 %           59.6 %           56.4 %
  Research and development                  6.2 %            5.9 %            7.1 %            7.0 %
  Selling, general &
administrative expenses                    27.2 %           19.9 %           24.3 %           22.5 %
                  Total cost and
expenses                                   96.4 %           81.5 %           91.1 %           86.0 %

OPERATING INCOME BEFORE INTEREST            3.4 %           18.5 %            9.0 %           14.0 %
      AND INCOME TAXES

  Interest and other income                 0.1 %            0.5 %            0.2 %            0.5 %

INCOME BEFORE TAXES                         3.3 %           19.0 %            9.2 %           14.5 %

  Provision for taxes                        .7 %            2.3 %            1.4 %            1.9 %

NET INCOME                                  2.6 %           16.7 %            7.8 %           12.6 %

Sales for the three and nine month periods ended August 29, 2020 totaled $4,926,000 and $16,760,000, respectively. Sales for the third quarter decreased $2,326,000 from the same period of 2019, while sales for the first nine months of 2020 decreased $1,206,000 from the first nine months of 2019. The majority of the decrease in sales in the third quarter were due to timing of shipments of $8,268,000 of backlog from customers on custom sensor products and a decrease in sales of space level solid state relays compared to the third quarter of 2019. Sales were 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 compared to 10% in the commercial market, 17% in



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the medical market, 57% in the military market, and 16% in the space market for the nine months ended August 24, 2019.

One customer accounted for 20% of the Company's sales for the three months ended August 29, 2020 and two customers accounted for 13% and 10% of the Company's sales for the nine months ended August 29, 2020, while 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.

Cost of goods sold for the third quarter of 2020 and 2019 totaled 63.0% and 55.7% of net sales, respectively, while cost of goods sold for the nine months ended August 29, 2020 and August 24, 2019 totaled 59.6% and 56.4% of net sales, respectively. In actual dollars, cost of goods sold decreased $927,000 in the third quarter of 2020 compared to the same period of 2019. Year to date cost of goods sold decreased $156,000 for the first nine months of 2020 as compared to the same period in 2019. The delay in shipments of custom products, lower sales of space level solid state relays with traditional higher margins, and approximately $250,000 associated with COVID-19 production down time resulted in lower overall gross margin.

Research and development expense decreased $122,000 for the third quarter of 2020 versus 2019 and decreased $68,000 for the first nine 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 third quarter and first nine months of 2020 totaled 27.2% and 24.3% respectively of net sales compared to 19.9% and 22.5% for the same periods in 2019. In actual dollars, selling, general and administrative expense decreased $98,000 for the third quarter and increased $31,000 for the first nine months of 2020 compared to the same periods in 2019. The majority of the increase for the first nine months resulted from the addition on business development staff at the end of 2019.

Provisions for taxes decreased $158,000 for the third quarter of 2020 and increased $128,000 for the first nine 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 $1,059,000 for the third quarter of 2020 versus 2019 and decreased $935,000 for the first nine months of 2020 compared to the same period of 2019.

Liquidity and Capital Resources

Cash and cash equivalents totaled $14,342,000 as of August 29, 2020 compared to $13,890,000 on November 30, 2019, an increase of $452,000. The increase in cash and cash equivalents is primarily attributable to a net use of cash flow from operations of $984,000, and payment of a cash dividend of $258,000, and offset by proceeds for the sales of investments of $2,089,000 and $395,000 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 $23,930,000 compared to $20,857,000 for 2019.

Backlog totaled $29,237,000 on August 29, 2020 compared to $20,241,000 as of August 24, 2019 and $22,021,000 on November 30, 2019. The backlog represents a good mix of the company's products and technologies with 11% in the commercial market, 11% in the medical market, 66% in the military market, and 12% in the space market compared to 15% in the commercial market, 9% in the medical market, 64% in the military market, and 12% in the space market on August 24, 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 August 29, 2020, the Company's operations have been impacted due to the practices described below. The Company cannot at this time predict the impact that the COVID-19 pandemic will have on its financial condition and operations, although we are continuing to monitor



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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 third 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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