NVE Corporation 10-Q Summary
Business and reporting period: NVE develops and sells spintronics-based sensors and couplers, and licenses magnetoresistive random access memory (MRAM) technology. This report covers the quarter and nine months ended December 31, 2011, the third quarter of fiscal 2012.
Financial performance
| Metric | Quarter ended Dec. 31, 2011 | Year-over-year change | Nine months ended Dec. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $6.16 million | Down 22.7% | $20.97 million | Down 8.9% |
| Gross profit / margin | $3.98 million / 64.7% | Margin down from 69.1% | $13.92 million / 66.4% | Margin down from 69.0% |
| Operating income | $2.74 million | Down 39.4% | $10.35 million | Down 20.3% |
| Net income | $2.29 million | Down 32.4% | $8.28 million | Down 14.5% |
| Diluted earnings per share | $0.47 | Compared with $0.70 | $1.71 | Compared with $2.00 |
| Operating cash flow | Not separately provided for the quarter | $8.55 million | Compared with $8.95 million |
Revenue mix and cost trends: Quarterly product sales were $5.39 million, down 19.3%, while contract research and development revenue was $0.76 million, down 40.2%. For the nine-month period, product sales declined 6.8% and contract research and development revenue declined 19.5%. Management attributed lower product sales to reduced purchases by existing customers and lower contract revenue to completed contracts and activities.
Quarterly research and development expense increased 117% to $0.72 million; nine-month expense increased 85.8% to $1.83 million. Management cited increased product development and resources shifting from contract work to expensed R&D. Higher labor costs and lower product sales contributed to lower gross margins. Interest income rose 15.5% for the quarter and 18.1% for the nine months, reflecting more interest-bearing securities.
Financial position and liquidity
- At December 31, 2011, total assets were $79.07 million and shareholders’ equity was $77.67 million. Current liabilities were $1.40 million.
- Cash and cash equivalents were $0.44 million; short- and long-term marketable securities totaled $68.47 million. Cash plus marketable securities were $68.91 million, up from $62.18 million at March 31, 2011.
- Marketable securities represented approximately 87% of total assets. The portfolio was available-for-sale and had maturities of up to 250 weeks. NVE reported no derivative instruments.
- Operating cash flow of $8.55 million was more than offset by $9.06 million of investing cash outflow, including $0.76 million of fixed-asset purchases and net purchases of marketable securities. Cash declined $0.51 million over the nine months.
- No debt or borrowing balance is reported in the supplied financial statements. Management said working capital and operating cash generation should be adequate for at least the next 12 months.
Outlook, risks, and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management noted that contract research activity can fluctuate and that there is no assurance of replacement or follow-on contracts. Other stated risks include competition, product development progress, supplier and packaging-vendor issues, customer requirements, and obtaining new customers or SBIR awards.
- The securities portfolio had $728,122 of gross unrealized losses at December 31, 2011, versus $157,490 at March 31, 2011. Losses reflected market-price declines and credit-rating downgrades; the affected securities were investment grade where rated. Management expected recovery of cost and did not consider the securities other-than-temporarily impaired.
- NVE filed a patent infringement lawsuit against Everspin Technologies on January 3, 2012, seeking an injunction and compensation related to MRAM technology. The filing cautions that enforcement may be costly or unsuccessful and that no outcome or recovery is assured.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors apart from updates concerning patent enforcement and MRAM licensing.
Important facts for investors to verify
- Whether lower purchase volumes from existing customers continue and whether completed research contracts are replaced by new awards.
- Whether elevated R&D spending produces commercial products and how it affects margins and profitability.
- The credit quality, maturity profile, and fair-value changes of the large marketable-securities portfolio.
- Developments, costs, and potential outcomes in the Everspin patent litigation and any related MRAM licensing discussions.
- Whether operating cash generation and available liquidity remain sufficient to fund operations and planned investment.