NVE Corporation 10-Q Summary: Quarter Ended June 30, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for NVE Corporation, a developer and seller of spintronic devices (nanotechnology relying on electron spin). The report covers the first quarter of fiscal year 2011, ended June 30, 2010. The company is an accelerated filer incorporated in Minnesota.
Key Financial Metrics
| Metric | Q1 FY2011 (Jun 30, 2010) | Q1 FY2010 (Jun 30, 2009) |
|---|---|---|
| Total Revenue | $7,241,294 | $6,834,532 |
| Net Income | $3,101,097 | $2,938,932 |
| Diluted EPS | $0.64 | $0.61 |
| Gross Margin | 71.3% | 72.3% |
| Operating Cash Flow | $5,424,535 | $4,792,111 |
| Cash & Marketable Securities | $54,675,483 | $49,543,766 (Mar 31, 2010) |
| Total Assets | $61,733,420 | $57,462,914 (Mar 31, 2010) |
| Current Liabilities | $2,840,530 | $1,509,620 (Mar 31, 2010) |
Revenue Breakdown: Product sales were $6,193,876 (85.5% of revenue); Contract research and development was $1,047,418 (14.5% of revenue).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 6.0% year-over-year, driven by a 11.9% increase in product sales due to new customers and higher volume from existing customers. This was partially offset by a 19.5% decline in contract research and development revenue due to the completion of specific contracts.
- Profitability: Net income rose 5.5% to $3.1 million. Gross margin decreased slightly to 71.3% from 72.3% due to a less favorable product sales mix.
- Expenses: Total expenses increased 7.4%, primarily due to a 27.8% rise in R&D expenses. This increase resulted from reallocating resources from contract work to expensed internal R&D and product development.
- Interest Income: Interest income increased 28.6% to $475,730, attributed to a larger portfolio of interest-bearing marketable securities.
- Liquidity: Cash and cash equivalents increased by $265,005 during the quarter. Total cash and marketable securities grew to approximately $54.7 million.
Outlook, Risks, and Unusual Items
- Investment Portfolio Risk: The company holds approximately 85% of its total assets ($53.0 million) in marketable securities. During the quarter, $324,356 in gross unrealized losses occurred, primarily due to a downgrade of BP Capital Markets plc notes (from Aa1/A+ to A2/A) following the Macondo subsea well oil spill. Management does not consider these impairments other-than-temporary as they intend to hold the securities to maturity.
- Customer Concentration: Significant revenue depends on agreements with large customers. Key agreements include St. Jude Medical (expires Dec 31, 2010), Avago Technologies (expires June 27, 2013), and Phonak AG (expires May 1, 2012, with a letter of intent to extend to March 31, 2015). Failure to renew these could materially impact revenue.
- Capital Expenditures: Fixed asset purchases were $61,953 for the quarter. Management expects significantly higher quarterly spending for the remainder of the fiscal year to expand production capacity.
- Tax Rate: The effective tax rate was 34% for the quarter, up from 33% in the prior year, due to a higher Federal effective tax rate.
Investor Verification Checklist
- Verify the renewal status of the St. Jude Medical agreement expiring December 31, 2010.
- Monitor the credit rating and fair value of the BP Capital Markets plc securities held in the portfolio.
- Confirm the timeline and funding for the planned expansion of production capacity.
- Review the sustainability of product sales growth given the decline in contract R&D revenue.
- Assess the impact of the 1% decrease in gross margin on future profitability targets.