NVE Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013. The filing also provides unaudited fourth-quarter results for the three months ended March 31, 2013; this is not a standalone calendar-year 2012 report.
Business context
NVE develops and sells spintronic sensors and couplers, conducts customer-sponsored research and development, and licenses magnetoresistive random access memory (MRAM) technology. It reports one operating segment. Product sales represented 90.4% of FY2013 revenue; foreign sales were approximately 56%.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $27.03 million | $28.58 million |
| Product sales | $24.43 million | $25.15 million |
| Contract R&D revenue | $2.60 million | $3.43 million |
| Gross profit / margin | $20.01 million / 74.0% | $19.25 million / 67.4% |
| Operating income / margin | $15.20 million / 56.2% | $14.27 million / 49.9% |
| Net income / diluted EPS | $11.83 million / $2.43 | $11.38 million / $2.34 |
| Operating cash flow | $12.65 million | $12.81 million |
FY2013 revenue declined 5.4% year over year: product sales fell 2.9% and contract R&D revenue fell 24.2%. Net income rose 3.9%, mainly on improved gross margin and lower expenses, partly offset by lower revenue and higher taxes. The effective tax rate was approximately 33%.
For the March 2013 quarter, revenue was $7.22 million versus $7.61 million a year earlier; net income was $3.11 million versus $3.10 million, and diluted EPS was $0.64 versus $0.63.
Cash, cash equivalents, and marketable securities totaled $85.26 million at March 31, 2013, up from $73.54 million. Marketable securities were $82.75 million, about 86% of total assets; cash and cash equivalents were $2.51 million. Total assets were $95.77 million and shareholders’ equity was $93.98 million. The balance sheet reports no borrowings or other debt. Capital expenditures were $1.82 million. Current liabilities were $1.78 million; operating lease obligations totaled $2.14 million.
Material changes and outlook
- Gross margin improved from 67.4% to 74.0%, attributed to more favorable revenue and product mix and more efficient manufacturing.
- Contract R&D revenue continued to decline as certain contracts ended and government-funding conditions remained challenging. Firm contract R&D backlog was $194,416 at year-end, down from $1.06 million a year earlier; NVE expected to fulfill the year-end backlog in fiscal 2014.
- Management said working capital and operating cash generation should be adequate at least through fiscal 2014. The filing provides no specific revenue or earnings guidance.
- Research and development expense was $2.57 million, approximately flat with FY2012. Company-sponsored R&D spending rose to $2.30 million; customer-sponsored R&D spending fell to $2.04 million.
- NVE began marketing new coupler lines and continued development of couplers, power converters, and sensors. It plans to expand sensor and coupler offerings and pursue MRAM licensing.
Risks, contingencies, and unusual items
- Customer concentration is significant: three customers each accounted for at least 10% of revenue, at 16%, 15%, and 14%. Large-customer orders may be reduced, postponed, or canceled. The Avago distribution agreement was due to expire June 27, 2013.
- NVE and Everspin are involved in patent litigation. NVE’s infringement case against Everspin was stayed until June 28, 2013; two NVE patents in suit were undergoing Patent Office reexamination. Everspin also sued NVE; the company did not expect that claim to materially affect its financial statements. The filing does not quantify potential litigation exposure or recovery.
- Two identified MRAM patents were set to expire July 23, 2013. NVE also disclosed dependence on successful patent enforcement and uncertainty over its historical Motorola/Freescale licensing arrangements.
- Marketable securities were predominantly corporate bonds. NVE reported rating downgrades among some holdings but no other-than-temporary impairment at year-end; unrealized losses were $13,342. The large investment portfolio exposes results and financial condition to credit and market risk.
- Operations depend on certain single-source wafer, material, and packaging suppliers, as well as specialized production equipment. The company also cited medical-device product-liability, quality, competition, government-funding, and foreign-supplier risks.
- The company paid no cash dividends and did not repurchase shares in FY2013 or FY2012. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported controls were effective.
Most important facts for investors to verify
- Whether major customers renewed or continued purchasing after agreement expirations, particularly the Avago agreement, and how concentrated revenue remains.
- Whether product sales stabilize and new coupler and sensor launches offset further declines in contract R&D and legacy customer volumes.
- Subsequent outcomes of NVE/Everspin litigation and patent reexaminations, including implications for the patents approaching expiration and any financial exposure.
- Credit quality, rating changes, and realized or unrealized performance of the $82.75 million securities portfolio.
- Whether management’s fiscal 2014 liquidity expectation remains supported by operating cash flow, given the low contract R&D backlog and planned investment needs.