NVE Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012 (not a calendar-year 2011 fourth-quarter filing). NVE develops and sells spintronic sensors and couplers, conducts contract research and development, and licenses MRAM technology. It reports one operating segment.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Product sales | $25.15 million | $26.02 million |
| Contract R&D revenue | $3.43 million | $5.17 million |
| Total revenue | $28.58 million | $31.20 million |
| Gross profit / margin | $19.25 million / 67.4% | $21.41 million / 68.6% |
| Operating income / margin | $14.27 million / 49.9% | $17.67 million / 56.6% |
| Net income / net margin | $11.38 million / 39.8% | $13.36 million / 42.8% |
| Diluted EPS | $2.34 | $2.76 |
| Operating cash flow | $12.81 million | $12.81 million |
| Cash, cash equivalents and marketable securities | $73.54 million | $62.18 million |
| Total assets / shareholders’ equity | $83.13 million / $81.46 million | $71.84 million / $69.97 million |
Cash and cash equivalents were $1.54 million; marketable securities were $72.00 million, including $17.55 million classified short-term. Current assets were $26.17 million and current liabilities $1.67 million. The balance sheet reports no borrowings or other debt. Capital expenditures were $1.48 million; investing activities used $12.22 million, largely reflecting security purchases. The company said operating cash flow and working capital should meet needs at least through FY2013.
Changes versus the prior year
- Revenue fell 8.4%: product sales declined 3.4% and contract R&D revenue declined 33.7%. Management attributed the product-sales decline to lower purchase volumes from existing customers; contract revenue fell as contracts were completed amid challenging government funding conditions.
- Gross margin declined about 1.2 percentage points, attributed to lower revenue and higher labor costs.
- R&D expense increased 105% to $2.60 million, reflecting greater product development and resources shifting from contract work to company-sponsored development. Company-sponsored R&D spending was $1.89 million; customer-sponsored R&D activity was $3.26 million.
- Net income declined 14.8%, principally due to lower contract revenue and higher R&D expense. Interest income rose 16% to $2.35 million.
- Operating cash flow was nearly unchanged. Cash and marketable securities increased $11.36 million, primarily due to operating cash flow.
- Firm contract R&D backlog fell to $1.06 million from $2.96 million; NVE expected the FY2012 year-end backlog to be fulfilled in FY2013. Product backlog is not included because most orders may be canceled and the noncancelable portion was not significant.
Outlook, risks and notable items
- Management provided no specific revenue or earnings guidance. It planned to broaden sensor and coupler lines, develop products including spintronic compasses, tamper-detection MRAM, automotive/factory-network couplers and biosensors, and pursue MRAM licensing. It cautioned that contract awards and follow-on work are uncertain.
- Customer concentration is material: three customers each represented at least 10% of FY2012 revenue, with two accounting for 16% and 14%; the third was below 10%. The U.S. Government contributed less than 10% of revenue in each of the last three years, although it represented about 59% of year-end firm backlog.
- Marketable securities represented approximately 87% of total assets. The portfolio included corporate and municipal bonds; some holdings had rating downgrades and unrealized losses. NVE reported no other-than-temporary impairment in FY2012 and disclosed that it could incur investment losses.
- NVE and Everspin filed patent-infringement lawsuits against each other in 2012. NVE sought an injunction and compensation from Everspin; Everspin sought an injunction and compensation from NVE. NVE said it believed Everspin’s claims were without merit. Outcomes and financial effects were not quantified in the filing.
- A packaging vendor in flood-prone Thailand was shut down from October 2011 through March 2012 due to flooding. NVE described vendor-conversion and supply-interruption risks.
- Other principal risks include dependence on large customers and single-source suppliers, competition and pricing pressure, technical and quality requirements, medical-device product liability, government funding and SBIR eligibility, MRAM commercialization and IP enforcement, and potential securities losses. Seasonal product-sales weakness was observed in quarters ending December, including FY2012.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. No cash dividends were anticipated.
Important facts for investors to verify
- Subsequent revenue, margins and cash conversion, especially whether product sales recover and R&D investment yields commercial sales.
- Renewal or replacement of completed R&D contracts and conversion of the $1.06 million firm backlog into revenue.
- Revenue exposure to the largest customers and the status of the Avago private-brand distribution agreement, which expires in June 2013.
- Credit quality, maturities and realized or unrealized losses in the $72.00 million securities portfolio.
- Developments and potential costs or recoveries in the NVE–Everspin litigation, and the ability to protect or license MRAM intellectual property.
- Supplier continuity, particularly wafer and packaging capacity, and whether the Thailand flood disruption affected production or deliveries.