NVE Corporation — Form 10-Q Summary
Business context and reporting period
NVE develops and sells spintronics-based devices, including sensors and couplers, and licenses MRAM technology. This unaudited filing covers the quarter and nine months ended December 31, 2015, in fiscal 2016; comparisons are with the corresponding fiscal 2015 periods.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2015 | Nine months ended Dec. 31, 2015 |
|---|---|---|
| Revenue | $6.02 million | $21.62 million |
| Product sales | $5.03 million | $19.20 million |
| Contract R&D revenue | $0.99 million | $2.42 million |
| Gross profit / margin | $4.51 million / 74.9% | $16.47 million / 76.2% |
| Operating income | $3.36 million | $13.01 million |
| Net income | $2.58 million | $9.69 million |
| Diluted earnings per share | $0.53 | $2.00 |
| Operating cash flow | Not separately reported | $11.90 million |
At December 31, 2015, cash and cash equivalents were $3.59 million and marketable securities totaled $91.76 million ($23.63 million short term and $68.13 million long term). Current assets were $33.14 million and current liabilities $1.58 million. The balance sheet reports no debt. Total assets were $103.17 million and shareholders’ equity $101.60 million. Nine-month capital expenditures were $0.18 million; reported free cash flow, defined as operating cash flow less fixed-asset purchases, was $11.72 million.
Material changes versus prior-year periods
- Quarterly revenue fell 4.4%; product sales declined 14.6%, partly offset by contract R&D revenue growth of 142.9%. Nine-month revenue declined 6.1%, as product sales fell 14.1% while contract R&D grew 262.9%.
- Gross margin decreased to 74.9% from 76.6% for the quarter and to 76.2% from 79.8% for the nine months, reflecting a less profitable mix as product sales declined and contract R&D increased.
- Quarterly net income declined 7.7% and nine-month net income declined 9.5%. Management attributed the decreases mainly to lower product sales and interest income, partly offset by increased contract R&D revenue and lower expenses.
- Nine-month operating cash flow rose to $11.90 million from $10.85 million. Cash declined $5.84 million from March 31, 2015, primarily as financing outflows—including $14.57 million of dividends and $1.85 million of share repurchases—exceeded operating cash generation.
Outlook, commentary, risks, and unusual items
- Management said working capital and operating cash generation should be adequate for at least the next 12 months. It expected fourth-quarter R&D expense to increase year over year due to planned product development; R&D spending may fluctuate.
- The board declared a further $1.00-per-share quarterly dividend, payable February 29, 2016. Future dividends and repurchases are subject to board discretion and may be changed or discontinued. Repurchase authorization remaining at December 31 was $5.00 million.
- Management cited lower customer purchase volumes, more aggressive pricing in certain markets, and a challenging global economic environment as factors affecting product sales. It also warned of dependence on several large customers and uncertainty over renewing large-customer agreements. The Avago agreement expires June 27, 2016; the Sonova agreement was extended through March 1, 2020.
- Marketable securities represented approximately 89% of total assets. The portfolio had $153,811 of gross unrealized losses at December 31; management attributed them to market-price movements, expected recovery of cost basis, and did not consider the securities other-than-temporarily impaired.
- Nine-month comprehensive income was $9.03 million, including a $0.67 million after-tax unrealized securities loss. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Customer concentration, purchase trends, pricing, and the renewal terms or consequences of the Avago agreement expiring in June 2016.
- Whether new contract R&D activity and the Sonova agreement support revenue as product sales remain pressured, and how the resulting revenue mix affects margins.
- Dividend sustainability and any further buybacks relative to operating cash flow, cash balances, and marketable-security maturities.
- Portfolio credit quality, maturity profile, and sensitivity to market-value changes; the filing states all bonds held were investment grade.
- Potential tax examination exposure: tax years 1999–2014 remained open, although the company reported no unrecognized tax benefits at December 31, 2015.