NVE Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2012; filed October 17, 2012. NVE develops and sells spintronic sensors and couplers and licenses MRAM technology. Financial statements are unaudited.
Financial performance
| Metric | Quarter ended Sept. 30, 2012 | Year-over-year change | Six months ended Sept. 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $5.82 million | Down 11.8% | $13.29 million | Down 10.3% |
| Gross profit / margin | $4.22 million / 72.4% | Margin up from 65.5% | $9.88 million / 74.3% | Margin up from 67.1% |
| Operating income | $3.00 million | Down 3.4% | $7.43 million | Down 2.3% |
| Net income | $2.44 million | Down 4.4% | $5.82 million | Down 2.9% |
| Diluted EPS | $0.50 | Prior year: $0.52 | $1.19 | Prior year: $1.22 |
Quarterly revenue comprised $5.23 million of product sales and $0.59 million of contract research and development (R&D). For the six-month period, product sales were $12.26 million and contract R&D revenue was $1.02 million.
Six-month operating cash flow was $6.43 million, compared with $6.38 million in the prior-year period. Investing activities used $6.11 million, including $1.02 million for fixed assets; financing activities provided $0.07 million. Cash and cash equivalents increased $0.39 million to $1.93 million.
At September 30, cash and marketable securities totaled $79.86 million, including $15.91 million of short-term and $62.02 million of long-term securities. Total assets were $89.87 million; current liabilities were $1.92 million and shareholders’ equity was $87.95 million. The balance sheet presents no debt balance. Marketable securities were approximately 87% of total assets.
Material changes and management commentary
- Revenue declines primarily reflected lower contract R&D revenue: down 43% for the quarter and 54% for six months, following completion of certain contracts and activities. Management cautioned that additional or follow-on contracts are not assured.
- Product sales fell 6% for the quarter, which management attributed to lower purchase volumes from existing customers; six-month product sales declined 2.5%.
- Gross margin improved due to a more favorable revenue and product mix and more efficient manufacturing. Six-month R&D expense rose 18%, attributed to increased product development and resources shifted from contract work to expensed R&D.
- Management stated that working capital and cash generated from operations should be adequate for at least the next 12 months. No revenue or earnings guidance was provided.
Risks, contingencies, and other notable items
- NVE’s patent infringement lawsuit against Everspin Technologies concerning MRAM remained ongoing. Everspin denied the allegations and filed counterclaims; the USPTO granted requests for inter partes reexamination of two NVE patents in suit. NVE disclosed expiration dates of July 24, 2013 for two patents and August 14, 2021 for the third.
- Management identified risks including competition, R&D outcomes, reduced sales, supplier or packaging interruptions, failure to gain customers or meet technical requirements, cost variability, and litigation. The company reported no material changes to previously disclosed risk factors.
- Marketable securities were available-for-sale. The portfolio had $3,085 of gross unrealized losses on two of 46 bonds; management did not consider the securities other-than-temporarily impaired and expected recovery of cost basis.
- Income tax years 1999–2011 remained open to examination. The filing reported no unrecognized tax benefits as of September 30, 2012.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether product demand and contract R&D activity stabilize or decline further, particularly given the lack of assurance of replacement contracts.
- Progress and potential financial consequences of the Everspin litigation and patent reexaminations.
- Composition, maturity profile, and market-value sensitivity of the investment portfolio, which represents most of total assets.
- Whether higher product-development spending and improved gross margins persist; interim results are not necessarily indicative of the full fiscal year.