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MICROPAC INDUSTRIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Twelve Months Ended
11/30/11 11/30/10
Net Sales 100.0 % 100.0 %
Cost of sales 65.8 % 63.3 %
R & D 3.0 % 2.0 %
S, G, & A 19.2 % 17.4 %
Total Cost & Expenses 88.0 % 82.7 %
Operating Income 12.0 % 17.3 %
Other and Interest Income .5 % .5 %
Income Before Income Taxes 12.4 % 17.8 %
Provision for taxes 4.3 % 6.1 %
Net Income 8.1 % 11.7 %
The Company manufactures and distributes various types of hybrid microelectronic
circuits, solid state relays, power operational amplifiers, 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. Custom-designed components accounted for approximately 34% of the
Company's sales for the fiscal year ended November 30, 2011, and were 30% for
fiscal 2010.Standard components accounted for approximately 66% of the Company's
sales for the fiscal year ended November 30, 2011, and were 70% for fiscal 2010.
The Company provides microelectronic and optoelectronic components and
assemblies along with contract electronic manufacturing services and offers a
wide range of products sold to the industrial, medical, military, aerospace and
space markets.
Sales in 2011 were approximately $20,205,000, a decrease of 12.4% or $2,865,000
compared to 2010 sales. The major decrease in sales was in microcircuits space
level products with a delay or decrease in new orders in the space industry.
Sales through the Company's distribution channels were $3,790,000 in 2011
compared to $3,026,000 in 2010, or 19% and 13% of sales, respectively.
9
--------------------------------------------------------------------------------Approximately 21% of the sales for fiscal year 2011 (13% in 2010) were to
international customers.
The Company's major customers include contractors to the United States
government with fixed price contracts. Sales to these customers for the
Department of Defense (DOD) and National Aeronautics and Space Administration
(NASA) contracts accounted for approximately 62% of the Company's sales in 2011
compared to 76% in 2010.
New orders for fiscal year 2011 totaled $15,538,000 compared to $20,111,000 for
fiscal 2010. Approximately $9,977,000 of the new orders received in 2011 were
delivered to customers in 2011, along with approximately $10,091,000 of the
Company's $11,143,000 backlog of orders at November 30, 2010 resulting in a
total billing of $20,068,000. In addition, the Company recognized $133,000 in
deferred revenue from advance billings and $4,000 in other revenue for total
revenue of $20,205,000 in 2011.
The Company's backlog as of November 30, 2011 was approximately $6,231,000,
compared to approximately $11,143,000 on November 30, 2010.
The Company's management expects sales and operating income to decrease in 2012,
based on the current backlog of space level product. The backlog of space level
product decreased approximately $3,500,000 at November 30, 2011 compared to
November 30, 2010.
Cost of sales, as a percentage of net sales, was 65.8% in 2011 compared to63.3%
in 2010. The increase of 2.5% as a percent of sales is attributable to lower
sales volume of microcircuit space level products in 2011. In actual dollars,
cost of sales decreased $1,301,000 for 2011 versus 2010 with a material cost
decrease of $1,076,000 and labor cost decrease of $129,000 with the lower sales
of space level products.
In 2011, the Company's investment in technology through research and
development, which was expensed, totaled approximately $610,000 ($455,000 in
2010). The Company's research and development expenditures were directed
primarily toward long-term specific customer requirements, some of which have
future potential as Micropac proprietary products, and product development and
improvement associated with the Company's space level and other high reliability
programs.
Selling, general, and administrative expenses totaled 19.2% of net sales in
2011, compared to 17.4% in 2010, based on lower sales in 2011. In dollars
expensed, selling, general and administrative expenses totaled $3,878,000 in
2011 compared to $4,018,000 in 2010, a decrease of $140,000. The majority of the
decrease was associated with lower commission expense associated with the lower
sales in 2011.
Interest and other income for fiscal 2011 totaled $95,000 compared to $120,000
for fiscal 2010. The other income is related to the reclamation of precious
metals in 2011, such as gold and silver(from scrap and obsolete material), and
sale of obsolete inventory during 2010.
Income before taxes for fiscal 2011 was approximately $2,511,000 or 12.4% of net
sales, compared to $4,115,000 or 17.8% of net sales in fiscal 2010.The decrease
in income was associated with the lower space level product sales.
Provisions for income tax for fiscal 2011 totaled $868,000 compared to
$1,419,000 for fiscal 2010. The Company's effective income tax rate was 35% for
the year ended November 30, 2011, which is the same rate as in the prior year.
Net income after taxes totaled approximately $1,643,000 or $0.64 per share in
2011 versus 2010 net income of $2,696,000 or $1.05 per share.
Liquidity and Capital Resources
On June 1, 2011, the Company renewed a $6,000,000 revolving line of credit
agreement with a Texas banking institution for a term of two years. The interest
rate is equal to the prime rate. The line of credit requires that the Company
maintain a quick ratio of at least 1:1, maintain a tangible net worth of
$10,000,000 and maintain a total liabilities to tangible net worth of less than
1.25:1. The Company has not, to date, used any of the available line of credit.
The Company realized $1,468,000 of cash inflows from operations in 2011,
primarily from the combination of net income totaling $1,643,000 offset by a net
change in working capital, depreciation and deferred taxof $175,000. The Company
used $807,000 in cash for investment in additional manufacturing equipment and
improvements to buildings in 2011 compared to $388,000 in 2010.
10
--------------------------------------------------------------------------------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, 2011, the Company had $8,488,000 in cash and cash equivalents
compared to $9,085,000 in cash and cash equivalents on November 30, 2010. The
Company held $2,000,000 in short term investments at November 30, 2011 and
$1,000,000 at November 30, 2010.
The Company continues on-going investigations for the use of cumulative cash for
business expansion andimprovements, such asoperational improvements, new product
expansion, facility upgrades, and acquisition opportunities.
Company management believes it will meet its 2012 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, 2011.
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 hasoccurred or services have been
rendered; (3) the fee is fixed and determinable;and (4) collectibility is
reasonably assured.
Inventories
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.
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