NVE Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2014. The quarter is compared with the three months ended December 31, 2013; year-to-date results are compared with the corresponding prior-year period. NVE develops and sells spintronic devices, including sensors and couplers, and licenses MRAM technology.
Key financial results
| Metric | Quarter ended Dec. 31, 2014 | Quarter ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $6.29 million | $6.47 million | $23.01 million | $19.95 million |
| Gross profit / margin | $4.82 million / 76.6% | $5.02 million / 77.6% | $18.37 million / 79.8% | $15.62 million / 78.3% |
| Operating income / margin | $3.59 million / 57.1% | $3.58 million / 55.2% | $14.30 million / 62.1% | $11.12 million / 55.7% |
| Net income | $2.79 million | $2.78 million | $10.71 million | $8.57 million |
| Diluted earnings per share | $0.57 | $0.57 | $2.20 | $1.76 |
Cash flow: For the nine months, operating cash flow was $10.85 million, capital expenditures were $114,139, and company-defined free cash flow (operating cash flow less capital expenditures) was $10.73 million. Investing activities used $641,000; financing activities provided $327,000. Cash and cash equivalents increased by $10.53 million.
Liquidity and debt: At December 31, 2014, cash was $11.80 million and marketable securities totaled $94.36 million, approximately 81% of total assets. Current assets were $30.60 million versus current liabilities of $1.16 million. The balance sheet reports no borrowings; total liabilities also included $217,000 of long-term deferred tax liabilities. Management said working capital and operating cash generation should meet needs for at least 12 months.
Changes versus comparable periods
- Quarter: Revenue declined 2.8%, as product sales fell 8.8% to $5.88 million; contract research and development revenue rose to $408,000 from $25,000, reflecting a new contract. Net income increased 0.6%. Gross margin slipped to 76.6%, primarily due to a less favorable mix with a greater share of contract R&D.
- Nine months: Revenue grew 15.3%, with product sales up 13.7% and contract R&D revenue up 123.9%. Net income rose 24.9%. Gross margin improved to 79.8%, attributed to a more favorable product-sales mix. Lower R&D expense, following completion of certain product development work and resource reallocation to contract R&D, also contributed to improved operating results.
- Year-to-date interest income increased 5.8%; management cautioned it may decline as securities maturities are used to help fund dividends rather than reinvested.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Contract R&D activity may fluctuate, and the filing gives no assurance of future contract revenue.
- On January 21, 2015, the Board declared a cash dividend totaling approximately $10 million and said it planned quarterly dividends. Management expects dividends to exceed free cash flow and to be funded by operating cash flow and securities maturities. The filing states planned dividend amounts are likely unsustainable; any future payments remain subject to Board approval and business conditions. Reducing or ending dividends could pressure the share price.
- The company did not repurchase shares in the first nine months of fiscal 2015. Approximately $1.24 million remained available under its existing repurchase authorization, which may be changed or discontinued without notice.
- Disclosure controls were deemed ineffective at December 31, 2014 because of previously reported material weaknesses involving segregation of duties, documented revenue and journal-entry controls, monitoring-control documentation, and compensating reviews. Remediation measures had been implemented but not yet evaluated for operating effectiveness; management expected full remediation by March 31, 2015. Management nevertheless concluded the financial statements fairly present the periods shown.
- Risks highlighted include dependence on several large customers and possible renewal of their agreements, uncertain industry conditions and contract R&D revenue, internal-control weaknesses, and dividend sustainability. The filing reported no material changes to other previously disclosed risk factors.
- Marketable securities were investment-grade and available for sale. Unrealized losses were $102,420; management did not consider the securities other-than-temporarily impaired. The filing identifies no derivatives in the investment portfolio.
Important facts for investors to verify
- Whether product demand, customer concentration, and large-customer agreements support sustained sales growth.
- Whether the new contract R&D activity continues, and how its revenue mix affects margins.
- Dividend payments and funding relative to free cash flow, operating requirements, and securities maturities.
- Whether management completed and tested remediation of the material weaknesses by the expected March 31, 2015 date.
- The composition, maturities, and valuation exposure of the substantial marketable-securities portfolio.