NVE Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2014. This was NVE’s second quarter of fiscal 2015; comparisons are with the same periods in fiscal 2014. NVE develops and sells spintronic sensors and couplers and licenses MRAM technology.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $8.27 million, up 13.2% | $16.72 million, up 24.1% |
| Gross profit / margin | $6.66 million / 80.5%, versus 79.4% | $13.55 million / 81.1%, versus 78.6% |
| Operating income | $5.24 million, up 23.1% | $10.71 million, up 41.9% |
| Net income | $3.88 million, up 20.0% | $7.91 million, up 36.5% |
| Diluted EPS | $0.80, versus $0.66 | $1.63, versus $1.19 |
| Operating cash flow | Not stated for the quarter | $7.00 million, versus $5.99 million |
Quarter revenue growth reflected product sales up 12.2% and contract research and development (R&D) revenue up 119.3%. For the six months, product sales rose 24.7%, while contract R&D revenue declined 5.1%. Reported gross-margin improvement was attributed to a more favorable product mix. Six-month net income also benefited from lower total expenses and higher interest income.
Financial position and liquidity
- At September 30, cash and cash equivalents were $3.28 million; short- and long-term marketable securities totaled $99.18 million. Cash plus marketable securities were $102.46 million, up from $95.64 million at March 31, 2014.
- Total assets were $113.11 million and shareholders’ equity was $111.69 million. The balance sheet reports no borrowings or other debt.
- Management said working capital and cash generated from operations should meet needs for at least the next 12 months.
- Six-month investing cash outflow was $5.31 million, primarily reflecting net purchases of marketable securities; fixed-asset purchases were $27,710. Financing provided $0.33 million, including stock-sale proceeds. No shares were repurchased during the quarter.
Management commentary, outlook, and risks
- Management attributed higher product sales to greater purchases by existing customers, favorable order timing, and new customers. The filing cautions that favorable order timing may affect comparisons.
- Contract R&D revenue can fluctuate; the quarter’s increase followed new contracts and may not indicate future periods. Six-month revenue fell after most activities on a large contract were completed, with no assurance of follow-on contracts.
- R&D expense declined following completion of certain product development activities. SG&A declined in the quarter, primarily due to lower legal expense, but rose for the six months, primarily from higher sales commissions and performance-based compensation. Management cautioned that these expense changes may not recur.
- No specific revenue or earnings guidance was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Disclosure controls were deemed ineffective at September 30 because of previously reported material weaknesses involving segregation of duties, documentation of revenue and journal-entry controls, monitoring-control documentation, and compensating reconciliations and reviews. Remediation steps were implemented during the quarter but had not operated long enough to assess effectiveness; management expected full remediation by March 31, 2015.
- Marketable securities were available-for-sale and represented approximately 88% of total assets. The portfolio had $252,010 of gross unrealized losses, attributed to market-price declines and rating downgrades; management expected recovery of cost basis and did not consider the securities other-than-temporarily impaired. The filing says all bonds held had investment-grade ratings.
- The filing reported no material changes to the risk factors in the fiscal 2014 Form 10-K. It identifies risks including economic conditions in served industries, U.S. Government funding, new-product revenue potential, and internal-control weaknesses.
Key facts for investors to verify
- Whether product-sales growth and favorable order timing persist in subsequent quarters.
- Whether new contract R&D work replaces completed or expiring contracts.
- Whether gross margins remain elevated as product mix changes.
- Progress and effectiveness of internal-control remediation, particularly the stated March 31, 2015 target.
- Changes in marketable-security values, yields, and unrealized losses given the portfolio’s size relative to total assets.