2
PART I
Item 1.
Business
INTRODUCTION
Micropac Industries, Inc. (the “Company” or “Micropac”), a Delaware corporation, 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 facilities are certified and qualified by Defense Logistics Agency (DLA)to MIL-PRF-38534 (class K-space level); MIL-PRF-19500 JANS (space level), 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 business of the Company was started in 1963 as a sole proprietorship. On March 3, 1969, the Company was incorporated under the name of “Micropac Industries, Inc.” in the state of Delaware. The stock was publicly held by 490 shareholders on November 30, 2011.
PRODUCTS AND TECHNOLOGIES
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. 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.
The microcircuits product line, including custom microcircuits, solid state relays, power operational amplifiers, and regulators accounted for 38% of the Company’s business in 2011, and the optoelectronics product line accounted for 62% of the Company’s business in 2011, compared to 51% and 49% in 2010, respectively.
The Company’s core technology is the packaging and interconnects of miniature electronic components, utilizing thick film and thin 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. The Company’s basic products and technologies include:
·
Custom design hybrid microelectronic circuits
Solid state relays and power controllers
Custom optoelectronic assemblies and components
Optocouplers
Light-emitting diodes
Hall-Effect devices
Displays
Power operational amplifiers
Fiber optic components and assemblies
High temperature (200º C) products
Micropac’s products are primarily sold to original equipment manufacturers (OEM’s) who serve the following major markets:
Military/Aerospace – aircraft instrumentation, guidance and navigations systems, control circuitry, powersupplies, laser positioning
Space – control circuitry, power monitoring and sensing
Industrial – power control equipment, robotics
3
The Company has no patents, licenses, franchises or labor contracts. The Company’s trademark “Mii” is registered with the U.S. Patent and Trademark Office.
Sales of our products internationally are subject to government regulations, including export control regulations of the U.S. Department of State and Department of Commerce. Violation of these regulations by the Company could result in monetary penalties and denial of export privileges.We are not aware of any violations of export control regulations or any other applicable government regulations.
Five of the Company’s principal product families require government approval. Further, a significant portion of our business is military and is dependent on maintaining our facility certifications to MIL-PRF-38534, MIL-PRF-19500 and MIL-PRF-28750. We expect to maintain these certifications and qualifications; however, the loss of any of these certifications would have a significant negative impact on our business.
Government regulations impose certain controls on chemicals used in electronics and semiconductor manufacturing. Micropac has obtained all the necessary environmental permits, and routinely monitors and reports the wastewater stream results to the local governing agency. Micropac is classified as a small generator of hazardous waste, and the annual cost of complying with the regulations is minimal.
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.
In addition to the Company’s investment in research and development, various customers paid the Company approximately $516,000 in non-recurring engineering revenue with offsetting costs recorded within cost of goods sold associated with the development of custom products for specific applications.
The Company provides a one year warranty from the date of shipment to the original purchaser. The Company is obligated under this warranty to either replace or repair defective goods or refund the purchase price paid by the buyer.
CUSTOMERS
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 2011 (13% in 2010) 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 $3,790,000 in 2011 compared to $3,026,000 in 2010 or 19% and 13% of sales, respectively.
The Company’s major customers include contractors to the United States government. Sales to these customers for the Department of Defense (DOD) and NASAcontracts accounted for approximately 62% of the Company’s revenues in 2011 compared to 76% in 2010.
The Company’s major customers are Lockheed Martin, Northrop Grumman, Boeing, Rockwell Int’l, and NASA.Noneof the Company’s customers accounted for 10% or more of the Company’s sales during 2011 and one customer, TRAX International, accounted for 23% of the Company’s sales during 2010.
BACKLOG
At November 30, 2011, the Company had a backlog of unfilled orders totaling approximately $6,231,000 compared to approximately $11,143,000 at November 30, 2010. The Company expects to complete and ship most of its November 30, 2011 backlog during fiscal 2012.
EMPLOYEES
At November 30, 2011, the Company had 125 full-time employees (compared to 133 at November 30, 2010), of which 29 were executive and managerial employees, 30 were engineers and quality-control personnel, 14 were clerical and administrative employees, and 52 were production personnel. None of the Company’s employees are covered by collective bargaining agreements.
4
The Company is an equal opportunity employer. It is the Company’s policy to recruit, hire, train and promote personnel in all job classifications, without regard to race, religion, color, national origin, sex or age. Above and beyond non-discrimination, we are committed to an Affirmative Action Program, dedicated to the hiring, training, and advancement within the Company of minority group members, women, veterans, and handicapped individuals.
COMPETITION
The Company competes with two or more companies with respect to each of its major products. Some of these competitors are larger and have greater capital resources than the Company. Management believes the Company’s competitive position is favorable with regard to our product reliability and integrity, past performance, customer service and responsiveness, timely delivery and pricing; however, no assurance can be given that the Company can compete successfully in the future.
There are approximately 52 independent hybrid microcircuit manufacturing companies who are certified to supply microcircuits to MIL-PRF-38534, in addition to OEM’s, who manufacture hybrid microcircuits for their internal needs. Micropac may compete with all of these for hybrid microcircuit business. Some of the Company’s primary competitors are Teledyne Industries, Inc., MS Kennedy, Honeywell, Avago, and International Rectifier.
SUPPLY CHAIN
The parts and raw materials for the Company’s products are generally available from more than one source. Except for certain optoelectronic products, the Company does not manufacture the basic parts or materials used in production of its products. From time to time, the Company has experienced difficulty in obtaining certain materials when needed. The Company’s inability to secure materials for any reason could have adverse effects on the Company’s ability to deliver products on a timely basis and could result in loss of customers or sales. The Company uses capacitors, active semiconductor devices (primarily in chip form), hermetic packages, ceramic substrates, resistor inks, conductor pastes, precious metals and other materials in its manufacturing operations. However, the Company has not been materially affected by such shortages. The Company’s delivery commitments to customers allow for adequate lead times for production of the products including lead time for order and receipt from the supply chain.
Some of the Company’s primary suppliers are International Rectifier, NTK Technologies, Electrovac, Schott Glass, Micross Components, Kyocera, Microsemi, and Aborn Electronics.
Item 1A.
Risk Factors
This annual report on Form 10-K 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.