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MICROPAC INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Business Micropac Industries, Inc. (the "Company"), a Delaware corporation, 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 NASA core 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 3/01/2014 3/02/2013 NET SALES 100.0 % 100.0 % COST AND EXPENSES: Cost of Goods Sold 56.5 % 64.3 % Research and development 8.4 % 7.3 % Selling, general & administrative expenses 21.1 % 21.3 % Total cost and expenses 86.0 % 92.9 % OPERATING INCOME BEFORE INTEREST AND INCOME TAXES 14.0 % 7.1 % Interest expense (0.1 )% - INCOME BEFORE TAXES 13.9 % 7.1 % Provision for taxes 5.0 % 2.5 % NET INCOME 8.9 % 4.6 % Sales for the first quarter ended March 1, 2014 totaled $4,859,000. Sales for the first quarter increased 4.8% or $221,000 above sales for the same period of 2013. Sales were 21% in the commercial market, 68% in the military market, and 11% in the space market compared to 19% in the commercial market, 52% in the military market, and 29% in the space market for the same period of 2013. One customer accounted for 15% of the Company's sales for the first quarter of 2014 while another customer accounted for 18% of the Company's sales for the first quarter of 2013. 8 --------------------------------------------------------------------------------Cost of goods sold for the first quarter of 2014 and 2013 totaled 56.5% and 64.3% of net sales, respectively. The decrease in cost of goods sold as a percentage of sales resulted from the higher sales realized during the first quarter of 2014 with lower cost. Cost of goods sold decreased $238,000 in the first quarter of 2014 as compared to 2013 with a decrease in material cost of $68,000, a decrease in overhead cost of $179,000 and a small increase of $9,000 in other cost. The overhead cost decrease was due to a reduction of salary and wages with a small reduction of employees in February 2013 and lower overall production process related supplies cost. Research and development cost increased $71,000 for the first quarter of 2014 compared to the same period of 2013. The research and development expenditures were associated with the development of power management products, high voltage optocouplers and process automation improvements. Selling, general and administrative expenses for the first quarter of 2014 totaled 21.1% of net sales, compared to 21.3% for the same period in 2013. Selling, general and administrative expenses increased $34,000 in the first quarter of 2014 as compared to 2013. Provisions for taxes increased $126,000 for the first quarter of 2014 compared to the same period in 2013. The estimated effective tax rate was 36% for both periods. Net income for the first quarter of 2014 was $434,000, an increase of $223,000 from the first quarter of 2013. The increase resulted from an increase in sales and lower cost of goods sold. Liquidity and Capital Resources Cash and cash equivalents totaled $9,120,000 as of March 1, 2014 compared to $9,263,000 on November 30, 2013, a decrease of $143,000. The decrease in cash and cash equivalents is attributable to $236,000 cash from operations offset by the payment of a cash dividend of $258,000, short-term investment of $1,000 and the investment of $120,000 in equipment. On January 23, 2013, Micropac Industries, Inc. entered into a Loan Agreement with a Texas banking institution. The Loan Agreement replaces the Company's current 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 to the Company 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. Outlook New orders for the first quarter of 2014 totaled $3,373,000 compared to $4,346,000 for the comparable period of 2013, a decrease of 22%. Backlog totaled $11,045,000 on March 1, 2014 compared to $9,558,000 as of March 2, 2013 and $12,531,000 on November 30, 2013. The backlog decrease from November 30, 2013 is attributable to a reduction in new orders for standard optocouplers and various power management products. The majority of the backlog is expected to be completed and shipped in the next twelve months. 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. Approximately $1,566,000 of the Company's backlog is dependent on these semiconductors. The Company disclaims any responsibility to update the forward-looking statements contained herein, except as may be required by law. 9-------------------------------------------------------------------------------- |