NVE Corporation — Form 10-Q
Reporting period: Quarter ended June 30, 2015, NVE’s first quarter of fiscal 2016. Comparisons are with the quarter ended June 30, 2014 unless noted. NVE develops and sells spintronic sensors and couplers and licenses MRAM technology.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $8.321 million | $8.453 million | Down 1.6% |
| Product sales | $7.736 million | $8.348 million | Down 7.3% |
| Contract research and development revenue | $585,054 | $104,954 | Up 457.4% |
| Gross profit / margin | $6.327 million / 76.0% | $6.895 million / 81.6% | Margin down 5.6 percentage points |
| Operating income | $5.161 million | $5.462 million | Down 5.5% |
| Net income | $3.803 million | $4.037 million | Down 5.8% |
| Diluted earnings per share | $0.78 | $0.83 | Down $0.05 |
| Operating cash flow | $5.173 million | $4.483 million | Up $689,454 |
Cost of sales rose 28.0%, while selling, general and administrative expense fell 23.0% and research and development expense fell 15.2%. The lower gross margin reflected a less profitable revenue mix as contract R&D revenue increased. Lower expenses partly offset weaker product sales and interest income. The effective tax rate was 33% in both periods.
Financial position and liquidity
- At June 30, 2015, cash and cash equivalents were $12.290 million; marketable securities totaled $87.992 million, including $17.559 million short-term and $70.432 million long-term. Together, cash and securities were approximately $100.3 million, about 92% of total assets.
- Total assets were $109.558 million. Current liabilities were $2.431 million, including $1.475 million of income taxes payable. The balance sheet reports no debt.
- Operating activities provided $5.173 million of cash. Investing activities provided $2.514 million, principally from $2.4 million of securities maturities. Financing activities used $4.833 million, mainly for a $4.858 million dividend payment.
- Capital expenditures were $23,057; management reported free cash flow of $5.150 million. Cash increased $2.853 million from March 31, 2015.
- Marketable securities had a fair value of $87.992 million. Unrealized losses were $36,779 on six investment-grade corporate bonds; management did not consider the securities other-than-temporarily impaired.
Outlook, risks and other matters
- Management said it expects product sales in future quarters, including the rest of fiscal 2016, to be significantly below Q1 FY2016, citing customer forecasts and a more aggressive pricing strategy in certain markets.
- Management believes working capital and operating cash generation will meet needs for at least 12 months. It expects to fund dividends from operating cash and maturities of marketable securities.
- After quarter-end, the board declared a further $1.00-per-share quarterly dividend, approximately $4.866 million, payable August 31, 2015. Future dividends remain subject to board approval and may be changed or discontinued.
- The company identifies reliance on several large customers, possible renewal of large-customer agreements, industry conditions, and uncertain contract R&D revenue as risks. It reported no material changes to the risk factors in its FY2015 Form 10-K.
- No material pending or threatened legal proceedings were identified. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- NVE had not evaluated the impact of the new revenue-recognition standard, ASU 2014-09, which it expected to adopt in fiscal 2019.
Key facts for investors to verify
- Customer forecasts and actual product sales against management’s expectation of significantly lower sales for the remainder of fiscal 2016.
- Whether new contract R&D revenue continues, and how its mix affects gross margin and reported R&D expense.
- Cash generation and the company’s ability to sustain the declared dividend while relying partly on securities maturities.
- Market value, maturities and credit quality of the substantial securities portfolio, and any future impairment indicators.