NVE Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing is an annual report, not a standalone 2014 fourth-quarter filing; fourth-quarter results are noted below.
Business context
NVE develops and sells spintronics-based magnetic sensors and data couplers and licenses magnetoresistive RAM (MRAM) technology. It reports one operating segment. Product sales accounted for 97.7% of FY2015 revenue; contract research and development accounted for 2.3%. Foreign sales were approximately 61% of revenue.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $30.58 million | $25.93 million | +17.9% |
| Product sales | $29.89 million | $25.51 million | +17.2% |
| Contract R&D revenue | $0.69 million | $0.42 million | +63.2% |
| Gross profit / margin | $24.56 million / 80.3% | $20.21 million / 77.9% | Margin +2.4 points |
| Operating income / margin | $19.25 million / 62.9% | $14.39 million / 55.5% | +33.8% |
| Net income | $14.37 million | $11.14 million | +29.0% |
| Diluted EPS | $2.95 | $2.29 | +$0.66 |
| Operating cash flow | $14.87 million | $12.40 million | +$2.47 million |
Management attributed the revenue increase mainly to higher purchases by existing customers. Gross-margin expansion reflected a more favorable product sales mix. Total expenses declined 8.7%, principally because R&D expense fell 16.3%; interest income was $2.19 million. The effective tax rate was approximately 33%.
At March 31, 2015, cash and cash equivalents were $9.44 million and marketable securities were $91.01 million, for combined cash and securities of $100.45 million. Total assets were $110.09 million and shareholders’ equity was $108.33 million. The balance sheet reports no debt. Current liabilities were $1.49 million. Free cash flow, defined by the company as operating cash flow less fixed-asset purchases, was $14.69 million.
FY2015 fourth-quarter revenue was $7.57 million, net income was $3.66 million, and diluted EPS was $0.75. In the prior-year fourth quarter, revenue was $5.98 million, net income was $2.56 million, and diluted EPS was $0.53.
Material changes and notable items
- Revenue recovered from FY2014’s 4.1% decline; product sales rose 17.2% in FY2015. Contract R&D revenue remained a small share of sales but increased from the prior year.
- Company-sponsored R&D spending declined to $2.47 million from $3.13 million; customer-sponsored R&D spending increased to $1.11 million from $0.79 million.
- The company paid $10 million in dividends in FY2015, reported as $2.06 per common share. After year-end, the board declared a further $1.00-per-share dividend, approximately $4.88 million based on shares outstanding on May 1, 2015.
- Firm contract R&D backlog was $2.20 million at year-end, versus $0.17 million a year earlier; management expected it to be filled in FY2016. The company cautions that contracts may have milestones and backlog may not become revenue.
- Four customers each represented at least 10% of FY2015 revenue and together represented 62%; they accounted for 64% of year-end receivables. Customer identities are anonymized in the concentration note.
Outlook, risks, and contingencies
Management said working capital and operating cash generation should be adequate at least through FY2016. It plans to fund dividends partly from operating cash flow and proceeds from security maturities, and expects interest income to decline as maturing securities are used to help fund dividends. The filing provides no formal revenue or earnings guidance. Management said future quarterly dividends may exceed current free cash flow and that recent and declared dividend levels may be unsustainable; dividends remain subject to board approval and may change or stop.
- Customer concentration and agreements: Large customers can reduce, postpone, or cancel orders. The St. Jude agreement was scheduled to expire January 1, 2016, and the Avago agreement June 27, 2016; renewal and terms were uncertain.
- Investments: Marketable securities were approximately 83% of assets. The company disclosed that some securities had been downgraded, while reporting that its bond portfolio remained investment grade and no other-than-temporary impairment was recorded.
- Supply and operations: Risks include single-source wafer and materials suppliers, specialized manufacturing equipment, and packaging dependencies. Packaging vendor CEI had notified the company it planned to close its operation.
- Intellectual property: NVE’s patent dispute with Everspin and patent reexamination proceedings could affect its ability to enforce certain claims; the outcome was uncertain.
- Medical products and competition: Product liability, recalls, customer qualification requirements, increased competition, and pricing pressure could adversely affect results.
- Other: Government R&D funding, foreign operations, and environmental requirements present risks. No material pending or threatened legal proceedings were identified. Management and the auditor concluded internal controls were effective at March 31, 2015; the company disclosed a material weakness in the prior-year assessment.
Important facts for investors to verify
- Whether large-customer purchases and contract renewals support continued revenue growth, especially following the scheduled St. Jude and Avago agreement expirations.
- Whether the $2.20 million R&D backlog converts to FY2016 revenue and whether government contract funding remains available.
- The credit quality, valuation, maturities, and realized performance of the $91.01 million securities portfolio.
- Whether dividend payments remain sustainable relative to operating cash flow and capital needs; management explicitly cautioned that dividends may exceed free cash flow.
- The impact of the CEI closure and other supplier or equipment interruptions, and developments in the Everspin patent proceedings.