Twelve Months Ended
11/30/20 11/30/19
Net Sales 100.0 % 100.0 %
Cost of goods sold 61.4 % 54.0 %
Research and Development 6.4 % 6.7 %
Selling, General, and Administrative 24.9 % 22.3 %
Cost & Expenses 92.7 % 83.0 %
Operating Income 7.3 % 17.0 %
Other income and interest income net 0.3 % 0.5 %
Income before Income Taxes 7.6 % 17.4 %
Provision for taxes 1.0 % 2.9 %
Net Income 6.6 % 14.6 %
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 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 9100C. 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.
Company sales totaled $22,274,000 resulting in a decrease of $3,176,000 from
2020. The majority of the decrease in sales 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 2019.
At November 30, 2020, the Company had a backlog of unfilled orders totaling
approximately $29,793,000 compared to approximately $22,021,000 at November 30,
2019. The majority of the increase was associated with 3 new custom products
orders for $4,000,000 and an increase in $2,900,000 in orders on existing
products.
New orders for fiscal year 2020 totaled $30,012,000 compared to $30,179,000 for
fiscal 2019. Approximately $6,677,000 of the new orders received in 2020 was
delivered to customers in 2020, along with approximately $15,597,000 of the
Company's $22,021,000 backlog of orders at November 30, 2019 resulting in
revenue of $22,208,000.
Cost of goods sold, as a percentage of net sales, was 61.4% in 2020 compared to
54.0% in 2019 with lower margins from the decrease in sales of space level solid
state relay microelectronic products. In actual dollars, cost of sales decreased
$78,000 for 2020 versus 2019. The delay in shipments of custom products, lower
sales of space level solid state relays with traditional higher margins, and
approximately $540,000 associated with COVID-19 production down time resulted in
lower overall gross margin.
In 2020, the Company's investment in technology through research and
development, which was expensed, totaled
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approximately $1,431,000 ($1,707,000 in 2019). The Company's research and
development expenditures were directed primarily toward standard proprietary
microelectronic 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 $2,227,000 in non-recurring engineering
revenue with $1,722,000 recorded within cost of goods sold associated with the
development of custom products for specific applications.
Selling, general, and administrative expenses totaled 24.9% of net sales in 2020
compared to 22.3% in 2019. In dollars expensed, selling, general and
administrative expenses totaled $5,543,000 in 2020 as compared to $5,673,000 in
2019, an decrease or $130,000.
Other income and net interest income for fiscal 2020 totaled $65,000 compared to
$122,000 for fiscal 2019.
Income before taxes for fiscal 2020 was approximately $1,690,000, or 7.6% of net
sales, compared to $4,439,000, or 17.4% of net sales in fiscal 2019.
Provisions for income tax for fiscal 2020 totaled $218,000 compared $726,000 for
fiscal 2019. The Company's effective income tax rate was 13.0% for the year
ended November 30, 2020 and 16.5% for the year ended November 30, 2019.
Net income totaled approximately $1,472,000 or $0.57 per share in 2020 versus
2019 net income of $3,713,000 or $1.44 per share.
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 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 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 3% in 2020 due to overhead
cost that could not be allocated to work in process.
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.
Liquidity and Capital Resources
On August 29, 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 with a rate equal to prime
rate. 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
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of credit and is currently in compliance with the financial covenants. The
Company has not received any indication that borrowing under the Loan Agreement
may be restricted due to COVID-19 uncertainties. The agreement termination date
is April 23, 2021.
On April 17, 2020, Micropac Industries, Inc. (the Company) obtained an unsecured
$1,924,400 loan under the Paycheck Protection Program (the PPP Loan). The
Paycheck Protection Program (or PPP) was established under the recently
congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the
CARES Act) and is administered by the U.S. Small Business Administration. The
PPP Loan to the Company is being made through Frost Bank, the Company s existing
lender (the Lender).
Based upon updated guidance issued April 23, 2020 by the Federal Government
including a presumption that no publicly traded companies with sources of
liquidity are eligible for a PPP loan, the Company returned the loan proceeds
within the time period imposed under these new guidelines and paid off the loan
on May 4, 2020.
The Company used $416,000 of cash from operating activities in 2020 compared to
the $3,944,000 of cash provided by operating activities in 2019. The decrease in
net cash provided by operations is due to lower revenues in 2020 and an increase
in inventory associated with the increase in backlog. The Company used $686,000
in cash for investment in additional manufacturing equipment and construction in
process on the new facility in 2020 compared to $249,000 in 2019.
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 of November 30, 2020, the Company had $14,619,000 in cash and cash
equivalents compared to $13,890,000 in cash and cash equivalents on November 30,
2019. The Company held $2,089,000 in short term investments at November 30,
2019.
The Company anticipates that it will use a combination of cash and a commercial
real estate construction loan for the construction of a new 76,000 square foot
manufacturing center on the 9.2 acres of land in Garland, Texas the Company
purchased. In addition, the Company continues on-going investigations for the
use of cumulative cash for business expansion and improvements, such as
operational improvements and new product expansion.
Company management believes it will meet its 2021 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 November 30, 2020.
The Company has no significant off-balance sheet arrangements.
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
Annual Report on Form 10-K for the year ended November 30, 2020, 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.
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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.
New Accounting Pronouncements
In June 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 after December 15, 2022 for
Smaller Reporting Companies, 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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MICROPAC INDUSTRIES, INC. 
