NVE Corporation — FY2014 Form 10-K
Business context and reporting period. NVE develops and sells spintronic sensors and couplers, and licenses MRAM technology. This annual report covers the fiscal year ended March 31, 2014; quarterly figures below identify the quarter ended that date.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $25.93 million | $27.03 million |
| Product sales | $25.51 million | $24.43 million |
| Contract R&D revenue | $0.42 million | $2.60 million |
| Gross profit / margin | $20.21 million / 77.9% | $20.01 million / 74.0% |
| Operating income | $14.39 million | $15.20 million |
| Net income / diluted EPS | $11.14 million / $2.29 | $11.83 million / $2.43 |
| Operating cash flow | $12.40 million | $12.65 million |
| Cash and marketable securities | $95.64 million | $85.26 million |
| Total assets / shareholders’ equity | $105.24 million / $103.70 million | $95.77 million / $93.98 million |
Gross margin improved as revenue and product mix became more favorable and manufacturing efficiency increased. Research and development expense rose to $3.59 million from $2.57 million. The filing reports no borrowings; liabilities consisted mainly of accounts payable, accrued items, and deferred taxes. Cash plus marketable securities substantially exceeded current liabilities of $1.18 million.
For the quarter ended March 31, 2014, revenue was $5.98 million and net income was $2.56 million, compared with $7.22 million and $3.11 million, respectively, in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue fell 4.1%, primarily because contract R&D revenue declined 83.7% as contracts ended and government funding conditions remained challenging. Product sales increased 4.4%, mainly on higher purchases by existing customers.
- Gross margin rose to 77.9% from 74.0%, but operating income declined 5.3% and net income declined 5.9% as R&D spending increased and interest income fell.
- Cash and marketable securities increased by $10.38 million. Operating cash flow was partly offset by $1.26 million of share repurchases and a $1.07 million net unrealized investment loss.
- Foreign sales were approximately 57% of revenue. Four customers each represented at least 10% of revenue; the largest accounted for 19%.
Outlook, risks, contingencies, and unusual items
- Management said working capital and operating cash generation should be adequate for needs at least through fiscal 2015. No specific revenue or earnings guidance was provided.
- New products marketed during the year included high-performance and high-isolation couplers, automotive-network and battery-management couplers, current sensors, and medical-device sensors. The company intends to expand sensor and coupler sales and license MRAM technology.
- Firm contract R&D backlog was $165,308 at March 31, 2014, all from U.S. Government agencies, and was expected to be completed in fiscal 2015. Product orders are generally cancellable and are excluded from firm backlog.
- Marketable securities totaled $94.38 million, about 90% of assets. The portfolio included securities with rating downgrades and unrealized losses; management reported no other-than-temporary impairment and expected recovery of cost basis.
- Management identified material weaknesses in segregation of duties, revenue and journal-entry documentation, monitoring-control documentation, and compensating review controls. Remediation controls had been introduced but were not sufficiently tested; management concluded financial-reporting and disclosure controls were ineffective. The auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- NVE’s patent litigation with Everspin and related patent reexaminations were significant contingencies. After year-end, on April 7, 2014, the parties agreed to dismiss their lawsuits with prejudice and not assert the litigated patents against each other; the filing also reports an adverse Patent Trial and Appeal Board decision on one NVE patent and an appeal pending on another.
- Other key risks include dependence on major customers and expiring customer agreements, competition and pricing pressure, government funding uncertainty, single-source wafer and materials supply, specialized manufacturing equipment, overseas packaging and supplier disruption, medical-device product liability, and patent enforceability. The company did not plan to pay dividends.
Important facts for investors to verify
- Whether the new internal controls were tested and the reported material weaknesses remediated in subsequent filings.
- Current customer concentration, renewals of major customer agreements, and product-sales growth relative to declining contract R&D revenue.
- Subsequent changes in marketable-security credit quality, unrealized losses, and portfolio concentration.
- Final status and consequences of the Everspin settlement and patent reexaminations.
- Progress in diversifying critical suppliers and converting new products and development programs into revenue.