NVE Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended December 31, 2013 (fiscal 2014). NVE develops and sells spintronic devices, including sensors and couplers, and licenses MRAM technology. Financial statements are unaudited.
Financial performance
| Metric | Quarter ended Dec. 31, 2013 | Quarter ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $6.47 million | $6.53 million | $19.95 million | $19.81 million |
| Gross profit | $5.02 million | $4.79 million | $15.62 million | $14.66 million |
| Gross margin | 77.6% | 73.4% | 78.3% | 74.0% |
| Operating income | $3.58 million | $3.71 million | $11.12 million | $11.15 million |
| Net income | $2.78 million | $2.90 million | $8.57 million | $8.72 million |
| Diluted EPS | $0.57 | $0.60 | $1.76 | $1.80 |
Quarterly product sales grew 11.9% to $6.45 million, while contract research and development (R&D) revenue fell 96.7% to $25,290. For the nine-month period, product sales rose 9.0% to $19.65 million and contract R&D revenue declined 83.3% to $297,648. Product sales represented 99.6% of quarterly revenue and 98.5% of nine-month revenue.
Research and development expense increased 80.6% in the quarter to $905,246 and 52.3% for nine months to $2.74 million. SG&A decreased 4.7% in the quarter to $543,698 and increased 2.5% for nine months to $1.76 million. Interest income declined 11.7% in the quarter and 11.6% for nine months, attributed to lower rates on investments. Net income fell 4.2% for the quarter and 1.7% for nine months.
Cash, liquidity, and capital
- Cash and cash equivalents were $1.96 million at December 31, 2013, versus $2.51 million at March 31, 2013.
- Short- and long-term marketable securities totaled $90.88 million, up from $82.75 million at March 31. Cash plus securities totaled $92.84 million, compared with $85.26 million.
- Operating cash flow for the nine months was $9.82 million, versus $8.42 million a year earlier. Investing activities used $9.36 million, including $17.88 million of security purchases and $33,893 of fixed-asset purchases, partly offset by $8.56 million of maturities and sales. Financing activities used $1.01 million, including $1.26 million of share repurchases.
- Total assets were $102.24 million and shareholders’ equity was $100.84 million at quarter-end. The filing reports no debt; liabilities consisted of accounts payable, accrued payroll and other accruals, and deferred taxes.
- Management said working capital and operating cash generation should be adequate for at least the next 12 months. The repurchase plan had $1,236,595 remaining under its $2.5 million authorization; it may be changed or discontinued without notice.
Material changes, outlook, and risks
Management attributed lower contract R&D revenue to completion of most work on a large contract and a challenging environment for new U.S. Government funding. Some non-government customers also depend on government support. The filing cautions that there is no assurance of replacement or follow-on contracts. Product-sales growth came from increased purchases by existing customers.
Gross margin improved because of more favorable revenue and product mix; management also cited more efficient manufacturing for the nine-month period. R&D expense increased as product-development activity rose and resources shifted from contract work to expensed development. No specific revenue or earnings guidance was provided.
Marketable securities were approximately 89% of total assets. Unrealized losses on securities were $497,711 at December 31, all on positions held for less than 12 months; management expected recovery of cost and did not consider the securities other-than-temporarily impaired. Comprehensive income was $2.63 million for the quarter and $7.81 million for nine months, reflecting after-tax unrealized losses of $151,829 and $762,475, respectively. Management identified risks including uncertain government funding, revenue and growth, new-product commercialization, patent enforcement, and litigation. It reported no material change in risk factors from the fiscal 2013 Form 10-K. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether product-sales growth among existing customers can offset the sharp reduction in contract R&D revenue.
- The timing and scale of new government-funded or other R&D contracts, given the filing’s stated funding uncertainty.
- Whether higher product-development spending leads to marketable products and sustainable revenue growth.
- The market value, credit quality, and interest-rate exposure of the large available-for-sale securities portfolio.
- Future share repurchases and the extent to which investment income and operating cash flow support results and liquidity.