NVE Corporation — Form 10-Q Summary
Business context and period: NVE develops and sells spintronic devices, including sensors and couplers, and licenses MRAM technology. This report covers the quarter ended June 30, 2014, the first quarter of fiscal 2015; comparisons are with the quarter ended June 30, 2013 unless otherwise stated.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $8.453 million | $6.177 million | +36.8% |
| Gross profit / margin | $6.895 million / 81.6% | $4.799 million / 77.7% | +43.7%; margin +3.9 points |
| Operating income | $5.462 million | $3.283 million | +66.4% |
| Net income | $4.037 million | $2.567 million | +57.3% |
| Diluted EPS | $0.83 | $0.53 | +$0.30 |
| Operating cash flow | $4.483 million | $3.619 million | +23.9% |
Revenue and margins: Product sales rose 39.7% to $8.348 million and represented 98.8% of revenue. Contract research and development revenue fell 48.1% to $105,000. Management attributed product growth to new customers, higher orders from existing customers, and favorable order timing. Gross margin improved mainly from a more favorable revenue and product mix.
Expenses and taxes: Operating expenses declined 5.5% to $1.433 million. R&D expense decreased 16.6% to $803,000 following completion of certain development work; SG&A increased 13.9% to $630,000, primarily from higher sales commissions and performance-based compensation. The effective tax rate was 33% in both periods.
Cash, investments, and liquidity: At June 30, cash was $3.313 million and marketable securities totaled $96.936 million, for combined cash and securities of $100.249 million, up from $95.645 million at March 31, 2014. Operating cash flow was $4.483 million; investing activities used $2.433 million, principally for net purchases of securities. Capital expenditures were $27,710. The filing reports no debt. Management believes working capital and operating cash generation will meet needs for at least 12 months. Current liabilities were $3.036 million, including $1.744 million of income taxes payable.
Changes, outlook, and risks
- Management provided no specific revenue or earnings guidance. It cautioned that quarterly results are not necessarily indicative of full-year results.
- Management cited challenging U.S. Government funding conditions as a factor in lower contract R&D revenue, noting that some commercial customers also depend on government support. Follow-on contracts are not assured.
- Marketable securities were approximately 87% of total assets. The portfolio consisted of investment-grade corporate and municipal bonds; unrealized losses were $71,192 and were attributed to market-price declines. The company did not consider the securities other-than-temporarily impaired and did not intend to sell them before recovery.
- Disclosure controls were deemed ineffective at June 30 because of previously reported material weaknesses involving segregation of duties, documented revenue and journal-entry controls, monitoring-control documentation, and compensating reviews. New remediation controls were implemented during the quarter but had not operated long enough to assess effectiveness; management expected full remediation by March 31, 2015. Management nevertheless concluded the financial statements fairly present the company’s financial position and results.
- The company and Everspin Technologies agreed to settle their patent-infringement litigation; both cases were dismissed with prejudice in April and June 2014.
- Other stated risks include economic conditions in served industries, government funding uncertainty, new-product revenue potential, and internal-control weaknesses. The filing reported no material changes to the risk factors in the fiscal 2014 Form 10-K.
Key facts for investors to verify
- Whether strong product-sales growth and improved gross margin persist, particularly given management’s reference to favorable order timing and product mix.
- Whether contract R&D revenue stabilizes or new government-related contracts are secured.
- Progress and effectiveness of internal-control remediation by the stated March 31, 2015 target.
- Portfolio composition, interest-rate and market-value exposure, and the continued liquidity of the company’s substantial bond holdings.
- Tax-payment timing and resulting cash-flow effects; the quarter ended with $1.744 million of income taxes payable.