NVE Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2011, the second quarter and first half of fiscal 2012. NVE develops and sells spintronic sensors and couplers and licenses MRAM technology.
Financial performance
| Metric | Quarter ended Sept. 30, 2011 | Year-over-year change | Six months ended Sept. 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $6.60 million | Down 15.5% | $14.81 million | Down 1.6% |
| Gross profit / margin | $4.32 million / 65.5% | Down 17.0%; margin down from 66.6% | $9.94 million / 67.1% | Down 4.2%; margin down from 68.9% |
| Operating income | $3.10 million | Down 27.2% | $7.61 million | Down 10.0% |
| Net income | $2.56 million | Down 20.3% | $5.99 million | Down 5.0% |
| Diluted EPS | $0.52 | Compared with $0.66 | $1.22 | Compared with $1.30 |
Quarterly product sales fell 13% to $5.56 million, attributed to lower purchasing volume from existing customers. Contract R&D revenue declined 26% to $1.04 million as certain contracts and activities ended. For the six-month period, product sales were essentially flat at $12.58 million, while contract R&D revenue fell 9% to $2.23 million.
Research and development expense rose 97% for the quarter to $612,000 and 70% for the half year to $1.11 million, reflecting increased product development and resources shifted from contract work to expensed R&D. Management attributed lower gross margins to increased labor costs, and for the quarter also to decreased product sales. Interest income increased 20% for the quarter and 19% for the half year as interest-bearing investments increased.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $1.32 million at September 30, 2011. Marketable securities totaled $66.27 million, including $11.12 million classified as short-term; cash plus securities were $67.60 million, versus $62.18 million at March 31, 2011.
- Six-month operating cash flow was $6.38 million, compared with $5.71 million a year earlier. Investing activities used $6.01 million, principally for net purchases of marketable securities.
- Current assets were $20.27 million and current liabilities $1.39 million. Shareholders’ equity was $75.62 million. The balance sheet reports no debt.
- Marketable securities represented approximately 86% of total assets. The portfolio had $456,126 of gross unrealized losses, all on positions held for less than 12 months. Management considered the securities not other-than-temporarily impaired and said it expected to recover their cost basis.
- The company reported $2.61 million in operating lease payment obligations, including an extension of its facility lease through December 31, 2020. Monthly base rent under the extension begins at $13,422.46 in 2016 and increases 2.5% annually thereafter.
Management believes working capital and cash generated from operations will be adequate for at least the next 12 months. The filing provides no earnings or revenue guidance.
Developments, risks, and other disclosures
- In October 2011, packaging vendor Circuit Electronic Industries (CEI) temporarily shut down after flooding at its facility in Thailand. NVE said it had alternate or potential vendors for the substantial majority of product sales and had moved many products, but transferring certain products could be costly, time-consuming, or technically challenging. Supply disruption or loss of inventory could impair deliveries and revenue.
- Other cited risks include competition, R&D outcomes, sales declines, supplier performance, obtaining customers, meeting technical requirements, licensing agreements, and eligibility for SBIR awards. The company reported no other material change to its previously disclosed risk factors.
- Quarterly comprehensive income was $2.03 million, including a $526,232 after-tax unrealized loss on marketable securities, versus $3.88 million in the prior-year quarter.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No shares were repurchased during the quarter.
Most important facts for investors to verify
- Whether product demand from existing customers and contract R&D activity recover, particularly as completed contracts are not assured of renewal or replacement.
- Whether CEI’s flood-related shutdown or other vendor constraints affect production, inventory, or customer deliveries, and how readily remaining products can be transferred to alternate vendors.
- Whether higher product-development spending yields commercial results and how it affects margins and earnings.
- The credit quality, valuation changes, and liquidity of the sizable marketable-securities portfolio, including the unrealized losses disclosed at quarter-end.
- The ongoing cost and commitments associated with the extended facility lease and other contractual obligations.