NVE Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016. The filing also presents unaudited fourth-quarter results for the quarter ended March 31, 2016; this is an annual report, not a standalone quarterly filing.
Business context
NVE develops and sells spintronics-based magnetic sensors and data couplers, conducts contract research and development, and licenses MRAM technology. It operates as one reportable segment. Product sales are primarily through distributors, with customers in more than 75 countries; foreign sales represented approximately 55% of FY2016 revenue.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $27.72 million | $30.58 million |
| Product sales | $24.41 million | $29.89 million |
| Contract R&D revenue | $3.31 million | $0.69 million |
| Gross profit / margin | $21.10 million / 76.1% | $24.56 million / 80.3% |
| Operating income | $16.29 million | $19.25 million |
| Net income | $12.29 million | $14.37 million |
| Diluted EPS | $2.53 | $2.95 |
| Operating cash flow | $14.31 million | $14.87 million |
| Free cash flow | $14.02 million | Not stated in the filing text provided |
At March 31, 2016, cash and cash equivalents were $7.53 million and marketable securities were $85.39 million, together $92.93 million, versus $100.45 million a year earlier. Total assets were $100.85 million and shareholders’ equity was $99.26 million. Current assets of $33.42 million substantially exceeded current liabilities of $1.59 million. The filing reports no borrowings or other interest-bearing debt; verify the complete financial statements for the company’s debt position. Lease and purchase obligations totaled $1.51 million, including $1.32 million of operating leases.
Changes versus FY2015
- Revenue declined 9.4%: product sales fell 18.3%, partly offset by contract R&D revenue increasing 379.2% on new contracts.
- Management attributed lower product sales to reduced purchasing by existing customers and a more aggressive pricing strategy.
- Gross margin fell to 76.1% from 80.3%, reflecting a less profitable mix as product sales declined and contract R&D increased.
- Operating income decreased 15.4% and net income decreased 14.4%. Lower SG&A spending and higher contract R&D revenue partly offset the decline.
- Cash from operations was $14.31 million. Financing used $21.08 million, mainly for $19.41 million of dividends and $2.31 million of share repurchases; cash balances consequently declined.
Outlook, risks and unusual items
- Management said working capital and cash generated from operations should be adequate at least through FY2017. The $2.12 million firm contract R&D backlog at year-end was expected to be filled in FY2017, but performance requirements and milestones mean it may not all convert to revenue. Product orders are generally cancellable and are excluded from firm backlog.
- The company declared $4.00 per share in FY2016 dividends, totaling $19.41 million. Management cautioned that recent dividend amounts significantly exceed current free cash flow and may be unsustainable. A further $1.00-per-share dividend was declared May 4, 2016, payable May 31, 2016; future dividends remain subject to Board approval.
- Customer concentration is material: two customers accounted for 23% and 20% of FY2016 revenue. The filing warns that cancellations, reduced purchases, price pressure, or loss of major customers could materially harm results.
- Avago’s coupler distribution agreement was due to expire June 27, 2016. The filing does not state whether it was renewed.
- Marketable securities represented about 85% of assets. Management reported investment-grade ratings and no other-than-temporary impairment, but disclosed that some holdings had been downgraded and that losses could affect income, liquidity, dividends, or cash flows.
- Patent risk increased: in December 2015, the Patent Trial and Appeal Board affirmed rejection of claims in NVE patent 6,538,921. NVE also cited ongoing intellectual-property disputes and uncertainty over enforcement of its MRAM patents.
- Other material risks include single-source wafer and materials supply, specialized production equipment and packaging dependencies, medical-device product liability and quality requirements, government contract funding, and competition. No material pending or threatened legal proceeding expected to materially affect results was identified; the filing nevertheless describes patent-related risks.
- NVE began marketing new network transceivers, angle sensors, high-isolation couplers, medical sensors, and antitamper sensors. These are development and commercialization initiatives, not quantified sales guidance.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Whether the FY2016 product-sales decline and pricing pressure continued after year-end, and how much new-product activity converted into sales.
- Current customer concentration and the status and terms of major customer and distributor agreements, especially Avago’s agreement expiring in June 2016.
- Realization of the $2.12 million R&D backlog and associated contract milestones and funding.
- Dividend coverage by recurring operating cash flow, given FY2016 dividends exceeded reported free cash flow, and the remaining securities available to support distributions.
- Credit quality and valuation of the securities portfolio, as well as developments in the disputed MRAM patent claims and related litigation.