NVE Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended June 30, 2018; comparisons are with the quarter ended June 30, 2017. NVE develops and sells spintronics-based sensors and couplers and licenses MRAM technology.
Financial results
| Metric | Quarter ended June 30, 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $7.108 million | $7.608 million | Down 6.6% |
| Product sales | $6.871 million | $6.883 million | Down 0.2% |
| Contract R&D revenue | $0.237 million | $0.725 million | Down 67.3% |
| Gross profit / margin | $5.712 million / 80.4% | $5.809 million / 76.4% | Margin up 4.0 percentage points |
| Operating income | $4.394 million | $4.504 million | Down 2.4% |
| Interest income | $0.425 million | $0.362 million | Up 17.4% |
| Net income | $3.945 million | $3.298 million | Up 19.6% |
| Diluted earnings per share | $0.81 | $0.68 | Up $0.13 |
| Operating cash flow | $4.650 million | $5.223 million | Down 11.0% |
Research and development expense was $0.989 million, up 9.2%, reflecting increased new-product development. Selling, general and administrative expense was $0.329 million, down 17.7%, due to staffing changes and lower performance-based compensation. The effective tax rate fell to approximately 18% from 32%, primarily reflecting federal tax reform; this, along with improved gross margin, drove higher net income despite lower revenue and operating income.
Liquidity, capital resources and dividends
- At June 30, 2018, cash and cash equivalents were $8.452 million, short-term marketable securities $22.924 million, and long-term marketable securities $46.558 million. Total assets were $87.053 million.
- Current liabilities were $1.615 million, including $0.720 million of income taxes payable. No debt is presented on the balance sheet.
- Cash increased $3.697 million during the quarter. Investing activities provided $3.889 million, including $7.300 million of securities maturities, partly offset by $3.373 million of securities purchases and $0.038 million of capital spending.
- The company paid $4.842 million in dividends during the quarter. A further $1.00-per-share dividend, approximately $4.842 million based on shares outstanding, was declared for payment August 31, 2018.
- Management said working capital and cash generated from operations should be adequate for at least the next 12 months. Future dividends remain subject to board approval and may be changed or discontinued.
Changes, outlook and risks
- The revenue decline reflected completion of certain contract R&D projects; product sales were essentially flat. Management cited a more profitable revenue mix for the higher gross margin.
- No quantitative revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Marketable securities had a reported fair value of $77.649 million, approximately 89% of total assets. The portfolio included $1.386 million of gross unrealized losses; management did not consider the securities impaired and stated it expected to recover their cost basis. Corporate bonds with a fair value of $51.558 million were reclassified from Level 1 to Level 2 in the fair-value hierarchy.
- Risks highlighted include dependence on several large customers, uncertainty in served industries and future contract R&D revenue, effects of federal tax reform, and uncertainty regarding future repurchases and dividends. The company reported no material change to its previously disclosed risk factors and no known material pending or threatened legal proceedings.
- Adoption of the new revenue recognition standard and other accounting updates had no significant financial-statement impact. Adoption of ASU 2018-02 resulted in a $60,365 reclassification from accumulated other comprehensive loss to retained earnings. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the decline in contract R&D revenue is temporary and whether replacement contracts or product demand can sustain revenue.
- Customer concentration and the status of major customer relationships, given management’s stated reliance on several large customers.
- Portfolio composition, maturity profile, interest-rate exposure and unrealized losses, given the securities’ large share of total assets.
- Whether operating cash generation can support the recurring $1.00-per-share quarterly dividend and other cash needs.
- The durability of the lower effective tax rate and the effect of tax reform on future results.