MICROPAC INDUSTRIES, INC.
Twelve Months Ended
11/30/19 11/30/18
Net Sales 100.0 % 100.0 %
Cost of goods sold 54.0 % 62.0 %
Research and Development 6.7 % 6.1 %Selling, General, and Administrative 22.3 % 25.6 %
Cost & Expenses 83.0 % 93.7 % Operating Income 17.0 % 6.3 %
Other income and interest income net 0.5 % 0.5 %
Income before Income Taxes 17.4 % 6.8 % Provision for taxes 2.9 % (0.1 )% Net Income 14.6 % 6.9 % The Company 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 theDefense 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 9100C. Micropac is aNational Aeronautics and Space Administration (NASA) core supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company hasUnderwriters 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. Company sales totaled$25,450,000 resulting in an increase of$4,483,000 from 2018. The increase was associated with an increase in sales of standard solid state relay microelectronic products and two custom medical products.
At
New orders for fiscal year 2019 totaled$30,179,000 compared to$25,532,000 for fiscal 2018. Approximately$11,464,000 of the new orders received in 2019 was delivered to customers in 2019, along with approximately$13,896,000 of the Company's$17,132,000 backlog of orders atNovember 30, 2018 resulting in revenue of$25,450,000 .
Cost of goods sold, as a percentage of net sales, was 54.0% in 2019 compared to
62.0% in 2018 with higher margins from the increase in sales of solid state
relay microelectronic products. In actual dollars, cost of sales increased
10 In 2019, the Company's investment in technology through research and development, which was expensed, totaled approximately$1,707,000 ($1,271,000 in 2018). The Company's research and development expenditures were directed primarily toward standard proprietary power management products, including industrial power controllers and DC-DC converters, fiber optic transceivers, high voltage optocouplers and continued product development and improvement associated with the Company's space level and other high reliability products. In addition to the Company's investment in research and development, various customers paid the Company approximately$2,326,000 in non-recurring engineering revenue with$1,716,000 recorded within cost of goods sold associated with the development of custom products for specific applications. Selling, general, and administrative expenses totaled 22.3% of net sales in 2019 compared to 25.6% in 2018. In dollars expensed, selling, general and administrative expenses totaled$5,673,000 in 2019 as compared to$5,384,000 in 2018, an increase or$289,000 with the addition of outside sales employees
and associated travel expense.
Other income and net interest income for fiscal 2019 totaled
Income before taxes for fiscal 2019 was approximately
Provisions for income tax for fiscal 2019 totaled$726,000 compared to a tax benefit of$(19,000) for fiscal 2018. The Company's effective income tax rate was 16.5% for the year endedNovember 30, 2019 and (1.3)% for the year endedNovember 30, 2018 . The effective tax rate in 2018 is associated with a R&D tax credit of$390,000 offset by a$52,000 change related to the change in tax
law in 2018.
Net income totaled approximately
Liquidity and Capital Resources
OnApril 23, 2018 , the Company renewed the Loan Agreement with aTexas 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. The Company provided$3,944,000 of cash from operating activities in 2019 compared to the$1,674,000 of cash provided by operating activities in 2018. The increase in net cash provided by operations is due to higher revenues in 2019. The Company used$249,000 in cash for investment in additional manufacturing equipment in 2019 compared to$293,000 in 2018. The Company issued a dividend payment of$0.10 per share to all shareholders of record for each of the last two years. The total dividend payment was$258,000 per year. As ofNovember 30, 2019 , the Company had$13,890,000 in cash and cash equivalents compared to$10,483,000 in cash and cash equivalents onNovember 30, 2018 . The Company held$2,089,000 in short term investments atNovember 30, 2019 and$2,058,000 atNovember 30, 2018 . The Company anticipates that it will use some of this cash for the construction of a new manufacturing center. In addition, the Company continues on-going investigations for the use of cumulative cash for business expansion and improvements, such as operational improvements, new product expansion, facility upgrades, and acquisition opportunities.
Company management believes it will meet its 2019 capital requirements through
the use of cash derived from operations for the year and/or usage of the
Company's cash and cash equivalents. There were no significant outstanding
commitments for equipment purchases or improvements at
Off-Balance Sheet Arrangements
The Company has no significant off-balance sheet arrangements.
Critical Accounting Policies 11 Revenue Recognition OnMay 28, 2014 , theFinancial 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 inthe 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.
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 (200oC) products. The Company's revenues are from purchase orders and/or contracts with customers associated with manufacture of products. 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 shipment of products.
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. To the extent our actual costs vary from the fixed price that was negotiated, we will generate more or less profit or could incur a loss.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the Company satisfies a performance obligation.
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. The Company accounting policy treats shipping and handling activities as a fulfillment cost. 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, the Company recognizes revenue for the cost incurred of work in process 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 and the contract require us to manage and limit the level of work in process to meet the scheduled delivery dates. 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 we recognize revenue at the point in time in which each performance obligation is fully satisfied.
Effective as of the beginning of the first quarter of fiscal 2019, we adopted Topic 606 using the modified retrospective
12 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
Balance at Balance at
Adjustment due to
Assets November 30, 2018 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 line
items within the Company's Condensed Statement of Operations for three months
and year ended November 30, 2019 .
Three months ended November 30, 2019
Balance without
adoption of
As Reported Topic 606 Effect of change
Net sales $ 7,484 $ 7,515 $ 31
Cost of goods sold $ (3,615 ) $ (3,597 ) $ (18 )
Income before taxes $ 1,829 $ 1,842 $ 13
Income tax $ 362 $ 365 $ 3
Net Income $ 1,468 $ 1,478 $ 10
Year ended November 30, 2019
Balance without adoption of
As Reported Topic 606 Effect of change
Net sales $ 25,450 $ 24,931 $ (519 )
Cost of goods sold $ (13,753 ) $ (14,105 ) $ 352
Income before taxes $ 4,439 $ 4,272 $ (167 )
Income tax $ 726 $ 691 $ (35 )
Net Income $ 3,713 $ 3,581 $ (132 )
Disaggregation of Revenue
The following table summarizes the Company's net sales by product line.
Nov. 30, 2019 Nov. 30, 2018
Microelectronics $ 8,037 $ 5,395
Optoelectronics 6,356 5,419
Sensors and Displays 11,057 10,153
$ 25,450 $ 20,967
Timing of revenue recognition
Recognized at a point in time $ 24,931 $ 20,967
Recognized over time 519 -
Total Revenue $ 25,450 $ 20,967 The following table summarizes the Company's net sales by major market.
13
2019 Sales by Major Market
Military Space Medical Commercial Total
Domestic Direct 6,517 1,777 4,220 1,730 14,244
Domestic Distribution 7,705 210 120 471 8,507
International 358 2,003 - 338 2,699
14,580 3,990 4,341 2,539 25,450
2018 Sales by Major Market
Military Space Medical Commercial Total
Domestic Direct 8,024 2,285 1,881 1,360 13,550
Domestic Distribution 4,964 178 - 254 5,396
International 535 1,383 - 103 2,021
13,523 3,846 1,881 1,717 20,967
Receivables, net, Contract Assets and Contract Liabilities
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet.
Receivables, net, contract assets and contract liabilities were as follows:
November 30, 2019 November 30, 2018
Receivables, net 3,382 3,772
Contract assets 519 243
Deferred Revenue 390 1,238
Revenue recognized in 2019 that was included in the deferred revenue liability
balance at the beginning of the year was
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. 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. 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
OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Tax Act") was signed intoUnited States tax law, which among other provisions lowered the corporate tax rate to 21%.
In
14 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 withSAB 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 endedNovember 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 provision of$77,000 to income tax expense and a corresponding reduction in the net deferred tax asset.
New Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The ASU requires the use of an "expected loss" model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance is effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years and requires a modified-retrospective approach to adoption. The Company believes that adopting ASU 2016-13 will have no material impact on the financial statements and related disclosures.
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