News Column

MICROPAC INDUSTRIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 13, 2014

Twelve Months Ended 11/30/13 11/30/12 Net Sales 100.0 % 100.0 % Cost of sales 60.9 % 71.1 % Research and Development 7.8 % 3.2 % Selling , General, and Administrative 20.6 % 21.7 % Cost & Expenses 89.3 % 96.0 % Operating Income 10.7 % 4.0 % Other and Interest Income .2 % .4 % Income before Income Taxes 10.9 % 4.4 % Provision for taxes 3.9 % 1.8 % Net Income 7.0 % 2.6 %

Micropac Industries, Inc. (the "Company"), a Delaware corporation, manufactures and distributes various types of hybrid microelectronic circuits, solid state relays, power controllers, and optoelectronic components and assemblies. The Company's products are used as components in a broad range of military, space and industrial systems, including aircraft instrumentation and navigation systems, power supplies, electronic controls, computers, medical devices, and high-temperature (200o C) products. The Company's products are either custom (being application specific circuits designed and manufactured to meet the particular requirements of a single customer) or standard, proprietary components such as catalog items.

9 --------------------------------------------------------------------------------

The Company's facilities are certified and qualified by Defense Logistics Agency (DLA) to MIL-PRF-38534 (class K-space level), MIL-PRF-19500 JANS (space level), and MIL-PRF-28750 (class K-space level) and is certified to ISO 9001-2002. 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 UL approval on the new industrial power controllers.

The Company's core technology is 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 used in the Company's optoelectronic components and assemblies.

Power management and controls product and technologies, including custom microcircuits, solid state relays, power operational amplifiers, and regulators accounted for 34% of the Company's business in 2013. Sensors and displays accounted for 35% of the Company's business and optocoupler products line accounted for 31% of the Company's business in 2013, compared to 30%, 38%, and 32% in 2012, respectively.

The Company's products are marketed throughout the United States and in Western Europe, through a direct technical sales staff, independent representatives and independent stocking distributors. Approximately 21% of the sales for fiscal year 2013 (18% in 2012) were to international customers. Sales to Western European customers are made by independent representatives under the coordination of the Company's office in Bremen, Germany.

Sales through the Company's distribution channels were $4,199,000 in 2013 compared to $5,127,000 in 2012, or 21% and 29% of sales, respectively.

Company sales totaled $19,677,000 resulting in an increase of $1,978,000 from 2012. The major increase was in a custom medical device to one customer and a standard optocoupler to a new international industrial customer.

The Company's major customers include contractors to the United States government. Sales to these customers for the Department of Defense (DOD) and NASA contracts accounted for approximately 61% of the Company's revenues in 2013 compared to 65% in 2012.

The Company's major customers are Lockheed Martin, Northrop Grumman, Boeing, Rockwell, Goodrich, Raytheon, Rockwell Int'l, and L-3. No customer accounted for 10% or more of the Company's sales during 2013 while two of the Company's distributors accounted for 13% and 10% of the Company's sales during 2012.

New orders for fiscal year 2013 totaled $22,343,000 compared to $21,240,000 for fiscal 2012. Approximately $9,746,000 of the new orders received in 2013 were delivered to customers in 2013, along with approximately $9,916,000 of the Company's $9,850,000 backlog of orders at November 30, 2012 resulting in total revenue of $19,662,000. In addition, the Company had other revenue of $15,000 for total revenue of $19,677,000 in 2013.

At November 30, 2013, the Company had a backlog of unfilled orders totaling approximately $12,531,000 compared to approximately $9,850,000 at November 30, 2012. The Company expects to complete and ship most of its November 30, 2013 backlog during fiscal 2014.

Cost of sales, as a percentage of net sales, was 60.9% in 2013 compared to 71.1% in 2012. The decrease of 10.2% as a percent of sales is associated with reductions in charges to overhead cost due to the increase in research and development activities. In addition, there was a decrease in salary and wages with a small reduction of employees in 2013. In actual dollars, cost of sales decreased $599,000 for 2013 versus 2012.

In 2013, the Company's investment in technology through research and development, which was expensed, totaled approximately $1,544,000 ($574,000 in 2012). The Company's research and development expenditures were directed primarily toward standard proprietary power management products, including the industrial power controllers and DC-DC converters, and continued product development and improvement associated with the Company's space level and other high reliability programs.

Selling, general, and administrative expenses totaled 20.6% of net sales in 2013 compared to 21.7% in 2012, based on higher sales in 2013. In dollars expensed, selling, general and administrative expenses totaled $4,049,000 in 2013 as compared to $3,836,000 in 2012, an increase of $213,000. The majority of the increase was associated with increased consulting services and commission expenses associated with the increase in sales in 2013.

Interest and other income for fiscal 2013 totaled $42,000 compared to $79,000 for fiscal 2012. The reduction in other income is related to lower reclamation of precious metals, such as gold and silver (from scrap and obsolete material).

10 --------------------------------------------------------------------------------

Income before taxes for fiscal 2013 was approximately $2,139,000, or 10.9% of net sales, compared to $782,000, or 4.4% of net sales in fiscal 2012. The increase in income was associated with the increase in revenues and lower overhead cost offset by additional investments in research and development.

Provisions for income tax for fiscal 2013 totaled $746,000 compared to $326,000 for fiscal 2012. The Company's effective income tax rate was 35% for the year ended November 30, 2013 and was 42% for the year ended November 30, 2012. The decrease in the effective rate was the result of a decrease in the estimated Texas Franchise Tax that is based on margins as opposed to net income before taxes. As a percent of income before taxes, the estimated Texas franchise tax was 3.2% in 2013 compared to 7.7% in 2012.

Net income totaled approximately $1,393,000 or $0.54 per share in 2013 versus 2012 net income of $456,000 or $0.18 per share.

Liquidity and Capital Resources

On January 23, 2013, the Company entered into a Loan Agreement with a Texas banking institution. The Loan Agreement replaces the Company's revolving line of credit with the Texas banking institution entered into on June 1, 2011. The Loan Agreement provides for revolving credit loans, in amounts not to exceed a total principal balance of $6,000,000, and specific advance loans for acquisitions with an aggregate amount not to exceed $7,500,000 in a single advance or in multiple advances. 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 loan agreement or the revolving line of credit and is currently in compliance with the financial covenants.

The Company generated $2,365,000 net cash flow from operations in 2013, primarily from net income which totaled $1,393,000 and a net change in working capital of $972,000. The Company used $257,000 in cash for investment in additional manufacturing equipment in 2013 compared to $408,000 in 2012.

The Company issued a dividend payment of $.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, 2013, the Company had $9,263,000 in cash and cash equivalents compared to $7,415,000 in cash and cash equivalents on November 30, 2012. The Company held $2,006,000 in short term investments at November 30, 2013 and $2,004,000 at November 30, 2012.

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 2014 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, 2013.

Off-Balance Sheet Arrangements

The Company has no significant off-balance sheet arrangements.

Critical Accounting Policies

Revenue Recognition

Revenues are recorded as shipments are made based upon contract prices. Any losses anticipated on fixed price contracts are provided for currently. Sales are recorded net of sales returns, allowances and discounts.

The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 605-10-S99, Revenue Recognition (ASC 605-10-S99). ASC 605-10-S99 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) shipment has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.

11 --------------------------------------------------------------------------------


Inventories are stated at lower of cost or market 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 below its cost 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.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

For more stories covering the world of technology, please see HispanicBusiness' Tech Channel

Source: Edgar Glimpses

Story Tools