NVE Corporation — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2012. NVE develops and sells spintronics-based sensors and couplers and licenses MRAM technology.
Financial performance
- Quarter: Revenue was $6.53 million, up 6.0% year over year; product sales rose 6.8% to $5.76 million, while contract R&D revenue was essentially flat at $0.76 million. Gross profit was $4.79 million, with a 73.4% margin versus 64.7%. Operating income was $3.71 million; net income was $2.90 million, up 26.7%, or $0.60 per diluted share versus $0.47.
- Nine months: Revenue was $19.81 million, down 5.5%; product sales were nearly unchanged at $18.03 million, while contract R&D revenue declined 40.4% to $1.79 million. Gross profit was $14.66 million, with a 74.0% margin versus 66.4%. Operating income was $11.15 million and net income was $8.72 million, up 5.3%, or $1.80 per diluted share versus $1.71.
- Cash flow: Nine-month operating cash flow was $8.42 million, compared with $8.55 million a year earlier. Capital spending was $1.61 million, primarily for production equipment and leasehold improvements. Investing activities used $9.20 million, mainly reflecting purchases of marketable securities.
- Liquidity and debt: Cash and marketable securities totaled $81.23 million at December 31, versus $73.54 million at March 31, 2012. Current assets were $24.16 million and current liabilities $1.77 million. The balance sheet reports no debt. Marketable securities of $80.39 million represented approximately 87% of total assets.
- Other balance-sheet data: Total assets were $92.60 million, up from $83.13 million at March 31, 2012. Inventory was $3.76 million, up from $3.23 million. Shareholders’ equity was $90.83 million.
Changes and management commentary
- Quarterly revenue growth and higher gross margin drove improved quarterly earnings. Management attributed the margin improvement to a more favorable revenue and product mix and more efficient manufacturing.
- For the nine-month period, lower contract R&D revenue—following completion of certain contracts and activities—more than offset modestly higher product sales. Management noted that additional or follow-on contracts are not assured.
- Quarterly R&D expense fell 30%, which management linked to completed projects and cautioned may not indicate future trends. Quarterly selling, general and administrative expense rose 10%, primarily due to sales commissions and legal expenses.
- Management believes working capital and operating cash generation will be adequate for at least the next 12 months. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Disclosed business risks include competition, R&D outcomes, sales declines, supplier or packaging-vendor disruptions, difficulty obtaining new customers or meeting technical requirements, cost variability, and litigation. The company reported no material changes to previously disclosed risk factors.
- The available-for-sale bond portfolio had $27,166 of gross unrealized losses, all on positions held for less than 12 months. Management did not consider any securities other-than-temporarily impaired, stating it expected to recover their cost basis and did not expect to need to sell them before recovery.
- The nine-month effective tax rate was 33%, versus 32% a year earlier; management cited tax-rate factors including the mix of taxable and tax-exempt securities. Tax years 1999–2011 remained open to examination; there were no unrecognized tax benefits reported.
- No shares were repurchased during the quarter under the company’s repurchase authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether product-sales growth can continue to offset the decline and variability in contract R&D revenue.
- Whether the improved gross margin is sustainable given product mix and manufacturing efficiency.
- The concentration of assets in marketable securities, including portfolio credit quality, duration, and sensitivity to market-value changes.
- Future capital spending, operating cash generation, and the company’s stated liquidity outlook.
- Potential variability in R&D spending, legal and selling costs, and effective tax rates.