NVE Corporation — Form 10-Q Summary
Business context and reporting period
NVE develops and sells spintronics-based devices, including sensors and couplers, and licenses magnetoresistive random access memory (MRAM) technology. This filing reports the fiscal second quarter and six months ended September 30, 2015; comparisons are with the corresponding 2014 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Quarter ended September 30, 2015 | Six months ended September 30, 2015 |
|---|---|---|
| Revenue | $7.280 million, down 11.9% | $15.601 million, down 6.7% |
| Product sales | $6.437 million, down 20.7% | $14.173 million, down 13.9% |
| Contract research and development revenue | $0.843 million, up 449.0% | $1.428 million, up 452.4% |
| Gross profit / margin | $5.635 million / 77.4% | $11.962 million / 76.7% |
| Operating income | $4.482 million | $9.643 million |
| Net income | $3.311 million, down 14.6% | $7.114 million, down 10.1% |
| Diluted earnings per share | $0.68 | $1.46 |
| Operating cash flow | Not separately reported for the quarter | $7.841 million |
At September 30, cash and cash equivalents were $12.716 million and marketable securities totaled $83.957 million, approximately 80% of assets. Total assets were $105.335 million; current assets were $42.567 million and current liabilities $1.073 million. The balance sheet reports no borrowings or other debt. Shareholders’ equity was $104.188 million. Six-month capital expenditures were $0.147 million, producing reported free cash flow of $7.694 million.
Changes versus the prior comparable periods
Lower product sales, which management attributed to reduced purchase volumes from existing customers and more aggressive pricing in certain markets, drove the revenue declines. New contracts sharply increased contract R&D revenue but changed the revenue mix: gross margin fell from 80.5% to 77.4% in the quarter and from 81.1% to 76.7% for the six months. Lower SG&A and R&D expenses partly offset the revenue and margin pressure. Interest income also declined, reflecting fewer interest-bearing securities after maturities were used to help fund dividends. Net income and diluted EPS fell in both comparison periods.
Six-month operating cash flow rose to $7.841 million from $7.000 million. Investing activities provided $6.370 million, mainly from security maturities, while financing activities used $10.931 million, principally for $9.725 million of dividends and $1.851 million of share repurchases. Cash increased by $3.279 million from March 31, 2015.
Outlook, risks and unusual items
- Management said working capital and cash from operations should be adequate for at least the next 12 months. It gave no specific revenue or earnings guidance.
- Management expects R&D expense to increase in the third and fourth fiscal quarters from the second quarter due to planned product development; R&D expense can fluctuate with staffing, projects, and contract activity.
- The Board declared an additional $1.00-per-share quarterly dividend on October 21, 2015, payable November 30, 2015. The company said future dividends remain subject to Board approval and may be changed or discontinued.
- The company repurchased $1.235 million of stock during the quarter and had $5.001 million of remaining repurchase authorization at September 30. Repurchases and dividends are discretionary.
- Management identified dependence on several large customers, possible renewal of customer agreements, industry economic conditions, and uncertainty in future contract R&D revenue, dividends, and repurchases as risks. It reported no material change to the risk factors in its latest Form 10-K.
- The investment portfolio consisted of investment-grade bonds. Unrealized losses were $17,615; management did not consider the securities other-than-temporarily impaired. The company reported no unrecognized tax benefits and no accrued interest on uncertain tax positions; tax years 1999–2014 remained open to examination.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether product sales and purchase volumes from existing customers recover, and how customer concentration or contract renewals affect results.
- Whether new contract R&D revenue continues and what its contribution to revenue mix and gross margins will be.
- Whether planned product development increases R&D spending as expected and how that affects profitability.
- The sustainability of dividends and repurchases relative to operating cash generation, security maturities, and the company’s large investment portfolio.
- Portfolio composition, maturity profile, valuation changes, and interest-income trends; reported securities had maturities ranging from one month to 198 weeks.