Business context and reporting period
NVE Corporation develops and sells spintronic sensors and couplers and licenses MRAM technology. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2018, ended December 31, 2017; comparisons are with the same periods of fiscal 2017.
Financial performance and position
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $7.36 million | $7.46 million | $21.96 million | $21.47 million |
| Product sales | $6.45 million | $7.12 million | $19.72 million | $19.78 million |
| Contract R&D revenue | $0.91 million | $0.35 million | $2.25 million | $1.69 million |
| Gross profit / margin | $5.70 million / 77.5% | $5.96 million / 79.9% | $17.16 million / 78.1% | $16.84 million / 78.4% |
| Operating income | $4.54 million | $4.75 million | $13.31 million | $13.37 million |
| Net income / net margin | $3.57 million / 48.5% | $3.48 million / 46.7% | $10.03 million / 45.7% | $9.92 million / 46.2% |
| Diluted EPS | $0.74 | $0.72 | $2.07 | $2.05 |
| Operating cash flow | Not separately reported for the quarter | $11.32 million | $11.01 million |
At December 31, 2017, cash and cash equivalents were $4.73 million and marketable securities totaled $75.54 million ($18.81 million short-term and $56.73 million long-term). Total assets were $88.84 million; total liabilities were $0.79 million. The filing reports no debt. Cash plus marketable securities totaled approximately $80.27 million. Nine-month dividends paid were $14.52 million, and cash declined $3.47 million to $4.73 million. The company declared a further $1.00-per-share dividend, payable February 28, 2018.
Material changes versus prior comparable periods
- Quarterly revenue declined 1.4% as product sales fell 9%, partly offset by a 164% rise in contract R&D revenue attributed to new contracts. Management cited lower purchases by existing customers for the product-sales decrease.
- Quarterly gross margin fell to 77.5% from 79.9% because of a less profitable revenue mix. Net income increased 2.5%, supported by higher contract R&D revenue, lower SG&A, and a lower tax provision.
- For the nine months, revenue rose 2.3%, principally from 32.9% growth in contract R&D. Net income rose 1.1%. R&D expense increased 18.5%, reflecting new product development; interest income decreased 8.7% as marketable securities declined.
- Marketable securities had $445,206 of gross unrealized losses at December 31, 2017, versus $247,149 at March 31, 2017. Management did not consider the securities impaired and stated it expected to recover their cost basis.
Outlook, commentary, risks, and unusual items
- Management said working capital and operating cash generation should be adequate for at least the next 12 months. No revenue or earnings guidance was provided.
- Following enactment of the Tax Reform Act, management estimated an effective tax rate of approximately 29% for fiscal 2018 and approximately 22% for fiscal 2019; it expected approximately 29% for the quarter ending March 31, 2018. These are estimates and the company cautioned actual impacts could differ materially.
- The new tax law caused a one-time $206,693 increase in the tax provision from remeasurement of deferred tax assets. The reported effective tax rates were 27.7% for the quarter and 30.6% for the nine months.
- Key stated uncertainties include customer and industry conditions, future contract R&D revenue, dividends and stock repurchases, and the effects of federal tax reform. The company said there were no material changes to previously disclosed risk factors other than adding the Tax Reform Act risk. It reported no material pending or threatened legal proceedings.
- The company had $4.54 million remaining under its stock repurchase authorization and made no repurchases in the quarter. Future dividends and repurchases are discretionary and may be changed or discontinued.
Important facts for investors to verify
- Whether new contract R&D work can offset weaker product demand from existing customers, and the durability and timing of that contract revenue.
- Whether product mix, gross margin, and increased new-product R&D spending affect future profitability.
- The realized tax rate and financial effects of tax reform, including the stated fiscal 2018 and fiscal 2019 estimates.
- Marketable-security portfolio values and unrealized losses, and the company’s ability to sustain dividends while funding operations and investment needs.
- The filing states that operating cash flow and working capital are expected to cover needs for at least 12 months; investors may verify subsequent cash generation and capital allocation.