NVE Corporation 10-Q Summary: Quarter Ended December 31, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for NVE Corporation, a developer and seller of spintronic devices (nanotechnology using electron spin). The report covers the third quarter and the first nine months of fiscal year 2010, ended December 31, 2009. The company is an accelerated filer incorporated in Minnesota.
Key Financial Metrics
| Metric | Quarter Ended Dec 31, 2009 | Nine Months Ended Dec 31, 2009 |
|---|---|---|
| Total Revenue | $6,624,857 | $19,967,890 |
| Net Income | $2,767,483 | $8,400,598 |
| Diluted EPS | $0.57 | $1.73 |
| Gross Margin | 68.3% | 70.1% |
| Operating Cash Flow (9mo) | $9,391,521 | |
| Cash & Marketable Securities | $46,366,580 (as of Dec 31, 2009) | |
| Total Assets | $53,352,426 | |
| Current Liabilities | $1,095,547 |
Debt & Liquidity: The company reported no long-term debt. Current liabilities totaled approximately $1.1 million. Liquidity is strong, with cash and marketable securities comprising approximately 85% of total assets.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.6% for the quarter and 21.2% for the nine-month period compared to the prior year. This was driven by a 15.1% increase in product sales (new customers and higher volume) and a 61.1% increase in contract research and development revenue (new contracts).
- Profitability: Net income rose 12.1% for the quarter and 25.9% for the nine-month period. Operating income increased 11.0% (quarter) and 26.2% (nine months).
- Margins: Gross margin for the quarter decreased slightly to 68.3% from 70.0% in the prior year due to a less favorable product mix. However, the nine-month gross margin remained stable at 70.1%.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 7.9% (quarter) and 11.3% (nine months), primarily due to commissions and stock-based compensation. Research and development expenses decreased 2.8% (quarter) and 12.5% (nine months) as resources were reallocated to billable contract work.
- Investment Income: Interest income increased 34.8% for the quarter and 39.8% for the nine months due to a larger portfolio of interest-bearing marketable securities.
Outlook, Risks, and Management Commentary
- Seasonality: Management noted a departure from historical seasonal weakness in December quarters, potentially due to an improving economic environment. However, they cautioned that future seasonal patterns are unpredictable.
- Investment Portfolio: The company holds significant marketable securities ($45.2 million). While some bonds were downgraded, all held investment-grade ratings. Management determined no securities were other-than-temporarily impaired.
- Key Risks: The primary risk highlighted is the potential loss of revenue if agreements with large customers are not renewed. Specific agreements with Avago Technologies (expires June 2010), St. Jude Medical (expires Dec 2010), and Phonak AG (expires May 2012) are critical.
- Legal Proceedings: A consolidated securities class action lawsuit filed in 2006 was dismissed with prejudice in 2007, and the dismissal was affirmed by the Court of Appeals in 2008. Derivative actions filed in 2006 were dismissed in October 2009.
- Stock Repurchase: The company has a $2.5 million stock repurchase plan authorized in January 2009 but did not repurchase any shares during this period.
Investor Verification Checklist
- Verify the renewal status and terms of the supply agreements with Avago Technologies, St. Jude Medical, and Phonak AG, given their expiration dates in 2010 and 2012.
- Monitor the composition of the $45.2 million marketable securities portfolio for credit rating changes or interest rate sensitivity.
- Assess the sustainability of the 61% year-over-year growth in contract research and development revenue, as management noted this may not be representative of future trends.
- Review the impact of the "less favorable product mix" on future gross margins if the trend continues beyond the current quarter.