Micropac Industries, Inc.(the "Company"), a Delawarecorporation, manufactures and distributes various types of hybrid microelectronic circuits, solid state relays, power management products, 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. 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 NASAcore supplier, and is registered to AS9100-Aerospace Industry standard for supplier certification. The Company has UL approval on the new isolated solid state industrial power controllers. The Company's core technology is the packaging and interconnecting of miniature electronic components, utilizing thick film substrates, forming microelectronics circuits. 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. Results of Operations Three months ended Six months ended 5/31/2014 6/01/2013 5/31/2014 6/01/2013 NET SALES 100.0 % 100.0 % 100.0 % 100.0 % COST AND EXPENSES: Cost of Goods Sold 62.7 % 60.2 % 59.7 % 62.2 % Research and development 8.6 % 8.5 % 8.5 % 7.9 % Selling, general & administrative expenses 21.0 % 19.4 % 21.0 % 20.3 % Total cost and expenses 92.3 % 88.1 % 89.2 % 90.4 % OPERATING INCOME BEFORE INTEREST 7.7 % 11.9 % 10.8 % 9.6 % AND INCOME TAXES Interest income - - (0.1 )% - INCOME BEFORE TAXES 7.7 % 11.9 % 10.7 % 9.6 % Provision for taxes 2.7 % 4.3 % 3.8 % 3.5 % NET INCOME 4.9 % 7.6 % 6.9 % 6.1 % 8
-------------------------------------------------------------------------------- Sales for the three and six month periods ended
May 31, 2014totaled $5,162,000and $10,021,000, respectively. Sales for the second quarter increased 1.4% or $69,000above sales for the same period of 2013, while sales for the first six months of 2014 increased 3.0% or $290,000above the first six months of 2013. Sales were 24% in the commercial market, 63% in the military market, and 13% in the space market for the six months ended May 31, 2014compared to 25% in the commercial market, 53% in the military market, and 22% in the space market for the six months ended June 1, 2013.
Two customers accounted for 12% and 10% of the Company's sales for the three months ended
Cost of goods sold for the second quarters of 2014 and 2013 totaled 62.7% and 60.2% of net sales, respectively, while cost of goods sold for the six months ended
May 31, 2014and June 1, 2013totaled 59.7% and 62.2% of net sales, respectively. In actual dollars, cost of goods sold increased $177,000in the second quarter of 2014 compared to the same period of 2013. The increase in the second quarter resulted from additional cost on light emitting diode die produced in the Company's front end manufacturing area and additional cost on one standard solid state relay product. Year to date cost of goods sold decreased $61,000for the first six months of 2014 as compared to the same periods in 2013 attributable to changes in product mix and lower overhead cost. Research and development expense increased $9,000for the second quarter of 2014 versus 2013 and increased $80,000for the first six months of 2014 compared to the same period of 2013. 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 2014 totaled 21.0% of net sales for both periods compared to 19.4% and 20.3% for the same periods in 2013. In actual dollars, selling, general and administrative expense increased $93,000for the second quarter and increased $127,000for the first six months of 2014 compared to the same periods in 2013. The increase was associated with an increase in sales and marketing activity including consultant and travel expenses. Provisions for taxes increased $49,000for the first six months of 2014 compared to the same period in 2013. The estimated effective tax rate was 36% for both periods. Net income decreased $135,000for the second quarter of 2014 versus 2013 and increased $88,000for the first six months of 2014 compared to the same period of 2013.
Liquidity and Capital Resources
Cash and cash equivalents totaled
$9,310,000as of May 31, 2014compared to $9,263,000on November 30, 2013, an increase of $47,000. The increase in cash and cash equivalents is primarily attributable to $454,000cash provided from operations with an inventory decrease of $210,000since November 30, 2013associated with the completion and shipment of contracts that required the purchase of long lead material in 2013 and a deferred revenue decrease of $297,000since November 30, 2013with completion and shipment of contracts with advance payments offset by a payment of a cash dividend of $258,000, and the investment of $147,000in equipment and an increase of $2,000in investments. On January 23, 2013, the Company entered into a Loan Agreement with a Texasbanking institution. The Loan Agreement replaces the Company's revolving line of credit with the Texasbanking 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 $7,500,000in 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 expects to continue to generate adequate amounts of cash to meet its liquidity needs from the sale of products and services and the collection thereof for at least the next twelve months.
New orders for the second quarter and year-to-date 2014 totaled
$3,753,000and $7,126,000, respectively, compared to $5,380,000and $9,728,000for the comparable periods of 2013. The reduction resulted from lower orders on power management space level products and down-hole oil production products as compared to the same periods of last year. The major decrease is associated with the decrease of new orders of various power management space level products and delays in new orders on various custom products. Backlog totaled $9,639,000on May 31, 2014compared to $9,847,000as of June 1, 2013and $12,531,000on November 30, 2013. The majority of the backlog on May 31, 2014is expected to be shipped in the next twelve (12) months and represents a mix of the company's products and technologies with 13% in the commercial market, 75% in the military market, and 12% in the space market compared to 23% in the commercial market, 66% in the military market, and 11% in the space market on June 1, 2013. 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. 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, 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 produces silicon phototransistors and light emitting diode die for use in certain military, standard and custom products. Fabrication efforts sometimes may not result in successful results, limiting the availability of these components. Competitors offer commercial level alternatives and our customers may purchase our competitors' products if the Company is not able to manufacture the products using these technologies to meet the customer demands.
The Company disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law.