UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number:
000-12196 
NVE CORPORATION(Exact name of registrant as specified in its charter)
| Minnesota | | 41-1424202 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
| 11409 Valley View Road, Eden Prairie, Minnesota | | 55344 |
| (Address of principal executive offices) | | (Zip Code) |
| |
| (952) 829-9217 |
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | Large accelerated filer [ ] | Accelerated filer [X] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value – 4,842,010 shares outstanding as of January 12, 2018
NVE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets Statements of Income for the Quarters Ended December 31, 2017 and 2016 Statements of Comprehensive Income for the Quarters Ended December 31, 2017 and 2016 Statements of Income for the Nine Months Ended December 31, 2017 and 2016 Statements of Comprehensive Income for the Nine Months Ended December 31, 2017 and 2016 Statements of Cash Flows Notes to Financial Statements Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and ProceduresPART II. OTHER INFORMATION Item 1. Legal Proceedings Item 1A. Risk Factors Item 4. Mine Safety Disclosures Item 6. ExhibitsSIGNATURES2
Table of Contents
PART I–FINANCIAL INFORMATION
Item 1. Financial Statements.
NVE CORPORATION
BALANCE SHEETS
| (Unaudited)
December 31, 2017 | | March 31, 2017* |
| ASSETS |
| Current assets |
| Cash and cash equivalents | $ | 4,728,352 | | | $ | 8,199,364 | |
| Marketable securities, short-term | | 18,808,203 | | | | 19,591,833 | |
| Accounts receivable, net of allowance for uncollectible accounts of $15,000 | | 2,165,866 | | | | 3,436,802 | |
| Inventories | | 3,596,326 | | | | 3,358,298 | |
| Prepaid expenses and other assets | 967,958 | | | 607,283 | |
| Total current assets | | 30,266,705 | | | | 35,193,580 | |
| Fixed assets |
| Machinery and equipment | | 9,504,983 | | | | 9,007,455 | |
| Leasehold improvements | 1,751,646 | | | 1,644,419 | |
| | | 11,256,629 | | | | 10,651,874 | |
| Less accumulated depreciation and amortization | 9,742,050 | | | 9,238,626 | |
| Net fixed assets | | 1,514,579 | | | | 1,413,248 | |
| Long-term deferred tax assets | 333,023 | | | 357,055 | |
| Marketable securities, long-term | 56,729,730 | | | 56,810,923 | |
| Total assets | $ | 88,844,037 | | | $ | 93,774,806 | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities |
| Accounts payable | $ | 258,869 | | | $ | 376,275 | |
| Accrued payroll and other | 534,194 | | | 576,313 | |
| Deferred revenue | - | | | 142,733 | |
| Total current liabilities | | 793,063 | | | | 1,095,321 | |
| |
| Shareholders’ equity |
Common stock, $0.01 par value, 6,000,000 shares authorized;
4,842,010 issued and outstanding as of December 31, 2017 and 4,841,010 issued and outstanding as of March 31, 2017 | | 48,420 | | | | 48,410 | |
| Additional paid-in capital | | 19,599,298 | | | | 19,507,348 | |
| Accumulated other comprehensive loss | | (265,991 | ) | | | (38,298 | ) |
| Retained earnings | 68,669,247 | | | 73,162,025 | |
| Total shareholders’ equity | 88,050,974 | | | 92,679,485 | |
| Total liabilities and shareholders’ equity | $ | 88,844,037 | | | $ | 93,774,806 | |
*The March 31, 2017 Balance Sheet is derived from the audited financial statements contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
See accompanying notes.
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Table of Contents
NVE CORPORATION
STATEMENTS OF INCOME
(Unaudited)
| Quarter Ended Dec. 31 |
| 2017 | | 2016 |
| Revenue |
| Product sales | $ | 6,448,831 | | | $ | 7,116,931 | |
| Contract research and development | 911,958 | | | 345,748 | |
| Total revenue | | 7,360,789 | | | | 7,462,679 | |
| Cost of sales | 1,657,700 | | | 1,502,848 | |
| Gross profit | | 5,703,089 | | | | 5,959,831 | |
| Expenses |
| Selling, general, and administrative | | 313,033 | | | | 384,322 | |
| Research and development | 852,739 | | | 826,816 | |
| Total expenses | 1,165,772 | | | 1,211,138 | |
| Income from operations | | 4,537,317 | | | | 4,748,693 | |
| Interest income | 404,665 | | | 395,207 | |
| Income before taxes | | 4,941,982 | | | | 5,143,900 | |
| Provision for income taxes | 1,370,380 | | | 1,660,156 | |
| Net income | $ | 3,571,602 | | | $ | 3,483,744 | |
| Net income per share – basic | $ | 0.74 | | | $ | 0.72 | |
| Net income per share – diluted | $ | 0.74 | | | $ | 0.72 | |
| Cash dividends declared per common share | $ | 1.00 | | | $ | 1.00 | |
| Weighted average shares outstanding |
| Basic | | 4,841,369 | | | | 4,836,336 | |
| Diluted | | 4,847,290 | | | | 4,839,777 | |
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Quarter Ended Dec. 31 |
| 2017 | | 2016 |
| Net income | $ | 3,571,602 | | | $ | 3,483,744 | |
| Unrealized loss from marketable securities, net of tax | (295,458 | ) | | (571,862 | ) |
| Comprehensive income | $ | 3,276,144 | | | $ | 2,911,882 | |
See accompanying notes.
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NVE CORPORATION
STATEMENTS OF INCOME
(Unaudited)
| Nine Months Ended Dec. 31 |
| 2017 | | 2016 |
| Revenue |
| Product sales | $ | 19,718,584 | | | $ | 19,782,529 | |
| Contract research and development | 2,246,105 | | | 1,690,461 | |
| Total revenue | | 21,964,689 | | | | 21,472,990 | |
| Cost of sales | 4,809,235 | | | 4,628,840 | |
| Gross profit | | 17,155,454 | | | | 16,844,150 | |
| Expenses |
| Selling, general, and administrative | | 1,060,757 | | | | 1,117,925 | |
| Research and development | 2,788,968 | | | 2,353,372 | |
| Total expenses | 3,849,725 | | | 3,471,297 | |
| Income from operations | | 13,305,729 | | | | 13,372,853 | |
| Interest income | 1,154,303 | | | 1,263,924 | |
| Income before taxes | | 14,460,032 | | | | 14,636,777 | |
| Provision for income taxes | 4,429,780 | | | 4,715,291 | |
| Net income | $ | 10,030,252 | | | $ | 9,921,486 | |
| Net income per share – basic | $ | 2.07 | | | $ | 2.05 | |
| Net income per share – diluted | $ | 2.07 | | | $ | 2.05 | |
| Cash dividends declared per common share | $ | 3.00 | | | $ | 3.00 | |
| Weighted average shares outstanding |
| Basic | | 4,841,130 | | | | 4,835,639 | |
| Diluted | | 4,846,036 | | | | 4,837,815 | |
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Nine Months Ended Dec. 31 |
| 2017 | | 2016 |
| Net income | $ | 10,030,252 | | | $ | 9,921,486 | |
| Unrealized loss from marketable securities, net of tax | (227,693 | ) | | (587,068 | ) |
| Comprehensive income | $ | 9,802,559 | | | $ | 9,334,418 | |
See accompanying notes.
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NVE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended Dec. 31 |
| 2017 | | 2016 |
| OPERATING ACTIVITIES |
| Net income | $ | 10,030,252 | | | $ | 9,921,486 | |
| Adjustments to reconcile net income to net cash provided by operating activities: |
| Depreciation and amortization | | 726,842 | | | | 868,218 | |
| Stock-based compensation | | 40,920 | | | | 22,000 | |
| Excess tax deficiencies | | - | | | | 293 | |
| Deferred income taxes | | 153,954 | | | | (61,076 | ) |
| Changes in operating assets and liabilities: |
| Accounts receivable | | 1,270,936 | | | | 782,427 | |
| Inventories | | (238,028 | ) | | | 42,755 | |
| Prepaid expenses and other assets | | (360,675 | ) | | | (16,909 | ) |
| Accounts payable and accrued expenses | | (159,525 | ) | | | 162,906 | |
| Deferred revenue | | (142,733 | ) | | | (714,805 | ) |
| Net cash provided by operating activities | | 11,321,943 | | | | 11,007,295 | |
| |
| INVESTING ACTIVITIES |
| Purchases of fixed assets | (604,755 | ) | | | (200,447 | ) |
| Purchases of marketable securities | | (16,256,210 | ) | | | (11,528,240 | ) |
| Proceeds from maturities of marketable securities | | 16,540,000 | | | | 11,400,000 | |
| Net cash used in investing activities | | (320,965 | ) | | | (328,687 | ) |
| |
| FINANCING ACTIVITIES |
| Proceeds from sale of common stock | | 51,040 | | | | 92,310 | |
| Excess tax (deficiencies) | | - | | | | (293 | ) |
| Payment of dividends to shareholders | | (14,523,030 | ) | | | (14,506,030 | ) |
| Net cash used in financing activities | | (14,471,990 | ) | | | (14,414,013 | ) |
| |
| Decrease in cash and cash equivalents | | (3,471,012 | ) | | | (3,735,405 | ) |
| Cash and cash equivalents at beginning of period | 8,199,364 | | | 7,534,593 | |
| |
| Cash and cash equivalents at end of period | $ | 4,728,352 | | | $ | 3,799,188 | |
| |
| Supplemental disclosures of cash flow information: |
| Cash paid during the period for income taxes | $ | 4,615,019 | | | $ | 4,720,000 | |
See accompanying notes.
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NVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
We develop and sell devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information.
NOTE 2. INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements of NVE Corporation are prepared consistent with accounting principles generally accepted in the United States and in accordance with Securities and Exchange Commission rules and regulations. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial statements. Although we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited financial statements be read in conjunction with the audited financial statements and the notes included in our latest annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017. The results of operations for the quarter or nine months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2018.
NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting Pronouncements Recently Adopted
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. We adopted ASU 2015-11 prospectively in the first quarter of the current fiscal year, and the adoption has not had a significant impact on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, which simplifies the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified. We adopted ASU 2016-09 prospectively in the first quarter of the fiscal year ending March 31, 2018. The adoption did not have a significant impact on our financial statements.
Future Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, which will be fiscal 2019 for us. We plan to adopt the guidance retrospectively with any effect of initially applying the guidance recognized at the date of initial application. Under this approach, we would not restate prior financial statements presented. Based on an evaluation, we do not expect there to be a material impact on our financial statements, because we do not expect to change the manner or timing of recognizing revenue. We have evaluated each of our revenue streams, product sales and contract research and development. We recognize revenue on product sales to customers and distributors when we satisfy our performance obligations as the products are shipped. We recognize contract research and development revenue pro-rata as work progresses using costs incurred relative to the total expected costs as the measurement basis for progress toward completion. We are currently evaluating the impact of new disclosure requirements required under the guidance.
Information regarding all other applicable recently issued accounting standards, on which our position have not changed since our latest annual financial statements, are contained in the financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2017.
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NOTE 4. NET INCOME PER SHARE
Net income per basic share is computed based on the weighted-average number of common shares issued and outstanding during each period. Net income per diluted share amounts assume exercise of all stock options. Stock options totaling 4,000 for the quarter and 6,000 for the nine months ended December 31, 2016 were not included in the computation of diluted earnings per share because the exercise prices were greater than the market price of the common stock. The following tables show the components of diluted shares:
| Quarter Ended Dec. 31 |
| 2017 | | 2016 |
| Weighted average common shares outstanding – basic | 4,841,369 | | 4,836,336 |
| Dilutive effect of stock options | 5,921 | | 3,441 |
| Shares used in computing net income per share – diluted | 4,847,290 | | 4,839,777 |
| Nine Months Ended Dec. 31 |
| 2017 | | 2016 |
| Weighted average common shares outstanding – basic | 4,841,130 | | 4,835,639 |
| Dilutive effect of stock options | 4,906 | | 2,176 |
| Shares used in computing net income per share – diluted | 4,846,036 | | 4,837,815 |
NOTE 5. MARKETABLE SECURITIES
Marketable securities with remaining maturities less than one year are classified as short-term, and those with remaining maturities greater than one year are classified as long-term. The fair value of our marketable securities as of December 31, 2017, by maturity, were as follows:
| Total | | <1 Year | | 1–3 Years | | 3–5 Years |
| $ | 75,537,933 | | $ | 18,808,203 | | $ | 29,512,416 | | $ | 27,217,314 |
As of December 31 and March 31, 2017, our marketable securities were as follows:
| As of December 31, 2017 | | As of March 31, 2017 |
Adjusted
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Market
Value |
Adjusted
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Market
Value |
| Corporate bonds | $ | 75,955,697 | | $ | 27,442 | | $ | (445,206 | ) | | $ | 75,537,933 | | $ | 75,158,087 | | $ | 187,001 | | $ | (246,935 | ) | | $ | 75,098,153 |
| Municipal bonds | - | | - | | - | | | - | | 1,304,817 | | - | | (214 | ) | | 1,304,603 |
| Total | $ | 75,955,697 | | $ | 27,442 | | $ | (445,206 | ) | | $ | 75,537,933 | | $ | 76,462,904 | | $ | 187,001 | | $ | (247,149 | ) | | $ | 76,402,756 |
Fifteen securities were in unrealized loss positions as of December 31, 2017. The following table shows the gross unrealized losses and fair value of our investments with unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31 and March 31, 2017:
| Less Than 12 Months | | 12 Months or Greater | | Total |
Fair
Market
Value | | Gross
Unrealized
Losses | Fair
Market
Value | | Gross
Unrealized
Losses | Fair
Market
Value | | Gross
Unrealized
Losses |
| As of December 31, 2017 |
| | Corporate bonds | $ | 44,282,521 | | $ | (325,912 | ) | | $ | 9,224,878 | | $ | (119,294 | ) | | $ | 53,507,399 | | $ | (445,206 | ) |
| | Municipal bonds | - | | - | | | - | | - | | | - | | - | |
| | Total | $ | 44,282,521 | | $ | (325,912 | ) | | $ | 9,224,878 | | $ | (119,294 | ) | | $ | 53,507,399 | | $ | (445,206 | ) |
| As of March 31, 2017 |
| | Corporate bonds | $ | 32,198,766 | | $ | (246,935 | ) | | $ | - | | $ | - | | | $ | 32,198,766 | | $ | (246,935 | ) |
| | Municipal bonds | 1,304,603 | | (214 | ) | | - | | - | | | 1,304,603 | | (214 | ) |
| | Total | $ | 33,503,369 | | $ | (247,149 | ) | | $ | - | | $ | - | | | $ | 33,503,369 | | $ | (247,149 | ) |
Three bonds, with a total fair market value of $9,224,878, had been in continuous unrealized loss positions for 12 months or greater as of December 31, 2017. For these securities, we also considered the severity of unrealized losses, which were less than 2% of adjusted cost for each security.
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Because we expect to recover the cost basis of investments held, we do not consider any of our marketable securities to be impaired as of December 31, 2017.
NOTE 6. INVENTORIES
Inventories are shown in the following table:
| December 31,
2017 | | March 31,
2017 |
| Raw materials | $ | 1,044,845 | | $ | 786,775 |
| Work in process | | 1,710,799 | | | 1,968,990 |
| Finished goods | 840,682 | | 602,533 |
| Total inventories | $ | 3,596,326 | | $ | 3,358,298 |
NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense was $40,920 for the first nine months of fiscal 2018 and $22,000 for the first nine months of fiscal 2017. The stock-based compensation expenses were due to the automatic issuance to our non-employee directors of options to purchase 1,000 shares of stock on their reelection to our Board. We calculate the share-based compensation expense using the Black-Scholes standard option-pricing model. The increase in stock-based compensation expense for fiscal 2018 compared to fiscal 2017 was due to an increase in the model valuation for the same number of options to purchase shares.
NOTE 8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Act “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the “Tax Reform Act”) was enacted December 22, 2017. The Tax Reform Act reduced certain Federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. Effective tax rates for the quarter and nine months ended December 31, 2017 are blended rates reflecting the estimated benefit of one quarter of Federal tax rate reductions for fiscal 2018. These benefits were partially offset by a one-time $206,693 unfavorable impact of a revaluation of our deferred tax assets that increased income tax provisions for the quarter and nine months ended December 31, 2017 and reduced long-term deferred tax assets as of December 31, 2017. As a result of the Tax Reform Act, our estimated tax rate decreased from 32% to 29% for fiscal 2018.
We had no unrecognized tax benefits as of December 31, 2017, and we do not expect any significant unrecognized tax benefits within 12 months of the reporting date. We recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2017 we had no accrued interest related to uncertain tax positions. The tax years 1999 and 2013 through 2016 remain open to examination by the major taxing jurisdictions to which we are subject.
NOTE 9. FAIR VALUE MEASUREMENTS
Generally accepted accounting principles establish a framework for measuring fair value, provide a definition of fair value and prescribe required disclosures about fair-value measurements. Generally accepted accounting principles define fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Generally accepted accounting principles utilize a valuation hierarchy for disclosure of fair value measurements. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The categories within the valuation hierarchy are described as follows:
Level 1 – Financial instruments with quoted prices in active markets for identical assets or liabilities. Our Level 1 financial instruments consist of publicly-traded marketable corporate debt securities, which are classified as available-for-sale. On the balance sheets, these securities are included in “Marketable securities, short term” and “Marketable securities, long term.” All of our marketable securities were Level 1 as of December 31, 2017. The fair value of these securities was $75,537,933 as of December 31, 2017 and $75,098,153 as of March 31, 2017.
Level 2 – Financial instruments with quoted prices in active markets for similar assets or liabilities. Level 2 fair value measurements are determined using either prices for similar instruments or inputs that are either directly or indirectly observable, such as interest rates. We had no Level 2 financial instruments as of December 31, 2017. We had one Level 2 instrument, a municipal debt security with a fair value of $1,304,603, as of March 31, 2017. This security was classified as available-for-sale and included in “Marketable securities, short term” on the March 31, 2017 balance sheet.
Level 3 – Inputs to the fair value measurement are unobservable inputs or valuation techniques. We do not have any financial assets or liabilities being measured at fair value that are classified as Level 3 financial instruments.
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NOTE 10. STOCK REPURCHASE PROGRAM
On January 21, 2009 we announced that our Board of Directors authorized the repurchase of up to $2,500,000 of our Common Stock, and on August 27, 2015 we announced that our Board authorized $5,000,000 of additional repurchases. We did not repurchase any of our Common Stock under the program during the quarter ended December 31, 2017. The remaining authorization was $4,540,806 as of December 31, 2017. The Repurchase Program may be modified or discontinued at any time without notice.
NOTE 11. SUBSEQUENT EVENTS
On January 17, 2018 we announced that our Board had declared a quarterly cash dividend of $1.00 per share of Common Stock to be paid February 28, 2018 to shareholders of record as of the close of business January 29, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements
Some of the statements made in this Report or in the documents incorporated by reference in this Report and in other materials filed or to be filed by us with the Securities and Exchange Commission (“SEC”) as well as information included in verbal or written statements made by us constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue, or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of NVE, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to uncertainties related to the economic environments in the industries we serve, uncertainties related to future contract research and development revenue, uncertainties related to future stock repurchases and dividend payments, uncertainties related to the future impact of Federal tax reform, and other specific risks that may be alluded to in this Report or in the documents incorporated by reference in this Report.
Further information regarding our risks and uncertainties are contained in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2017, as updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.
General
NVE Corporation, referred to as NVE, we, us, or our, develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information. We manufacture high-performance spintronic products including sensors and couplers that are used to acquire and transmit data. We have also licensed our spintronic magnetoresistive random access memory technology, commonly known as MRAM.
Critical accounting policies
A description of our critical accounting policies is provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2017. As of December 31, 2017 our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation.
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Quarter ended December 31, 2017 compared to quarter ended December 31, 2016
The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items:
| Percentage of Revenue
Quarter Ended Dec. 31 | | Quarter-
to-Quarter
Change |
| 2017 | | 2016 |
| Revenue |
| Product sales | 87.6 | % | | 95.4 | % | | (9.4 | )% |
| Contract research and development | 12.4 | % | | 4.6 | % | | 163.8 | % |
| Total revenue | 100.0 | % | | 100.0 | % | | (1.4 | )% |
| Cost of sales | 22.5 | % | | 20.1 | % | | 10.3 | % |
| Gross profit | 77.5 | % | | 79.9 | % | | (4.3 | )% |
| Expenses |
| Selling, general, and administrative | 4.3 | % | | 5.2 | % | | (18.5 | )% |
| Research and development | 11.6 | % | | 11.1 | % | | 3.1 | % |
| Total expenses | 15.9 | % | | 16.3 | % | | (3.7 | )% |
| Income from operations | 61.6 | % | | 63.6 | % | | (4.5 | )% |
| Interest income | 5.5 | % | | 5.3 | % | | 2.4 | % |
| Income before taxes | 67.1 | % | | 68.9 | % | | (3.9 | )% |
| Provision for income taxes | 18.6 | % | | 22.2 | % | | (17.5 | )% |
| Net income | 48.5 | % | | 46.7 | % | | 2.5 | % |
Total revenue for the quarter ended December 31, 2017 (the third quarter of fiscal 2018) decreased 1% compared to the quarter ended December 31, 2016 (the third quarter of fiscal 2017). The decrease was due to a 9% decrease in product sales, partially offset by a 164% increase in contract research and development revenue.
The decrease in product sales from the prior-year quarter was primarily due to decreased purchases by existing customers. The increase in contract research and development revenue for the third quarter of fiscal 2018 was due to new contracts.
Gross profit margin decreased to 77% of revenue for the third quarter of fiscal 2018 compared to 80% for the third quarter of fiscal 2017 due to a less profitable revenue mix.
Total expenses decreased 4% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017, due to a 19% decrease in selling, general, and administrative expense, partially offset by a 3% increase in research and development expense. The decrease in selling, general, and administrative expense was due to decreased performance-based compensation and decreased legal expenses. The increase in research and development expense was due to increased new product development activities.
Interest income for the third quarter of fiscal 2018 increased 2% due to an increase in the average interest rates on our marketable securities, partially offset by a decrease in our securities.
Our effective tax rate was 27.7% of net income before taxes for the quarter, compared to 32.3% in the prior-year quarter. The decrease was due to the blended effect of a decrease in the Federal tax rate with the enactment of the Tax Reform Act, partially offset by a $206,693 one-time increase in our provision for income taxes from the effect of the new rate on our deferred tax assets. Although we have not yet fully assessed the impact of the Tax Reform Act on our future taxes or net income, we currently expect our effective tax rate to be approximately 29% for the quarter ending March 31, 2018. See Note 8 to the financial statements for more information on income taxes.
The 3% increase in net income in the third quarter of fiscal 2018 compared to the prior-year quarter was primarily due to increased contract research and development revenue, decreased selling, general, and administrative expense, and a decrease in the provision for income taxes, partially offset by decreased product sales, decreased gross profit margin, and increased research and development expense.
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Nine months ended December 31, 2017 compared to nine months ended December 31, 2016
The table shown below summarizes the percentage of revenue and period-to-period changes for various items:
| Percentage of Revenue
Nine Months Ended Dec. 31 | | Period-
to-Period
Change |
| 2017 | | 2016 |
| Revenue |
| Product sales | 89.8 | % | | 92.1 | % | | (0.3 | )% |
| Contract research and development | 10.2 | % | | 7.9 | % | | 32.9 | % |
| Total revenue | 100.0 | % | | 100.0 | % | | 2.3 | % |
| Cost of sales | 21.9 | % | | 21.6 | % | | 3.9 | % |
| Gross profit | 78.1 | % | | 78.4 | % | | 1.8 | % |
| Expenses |
| Selling, general, and administrative | 4.8 | % | | 5.2 | % | | (5.1 | )% |
| Research and development | 12.7 | % | | 10.9 | % | | 18.5 | % |
| Total expenses | 17.5 | % | | 16.1 | % | | 10.9 | % |
| Income from operations | 60.6 | % | | 62.3 | % | | (0.5 | )% |
| Interest income | 5.2 | % | | 5.9 | % | | (8.7 | )% |
| Income before taxes | 65.8 | % | | 68.2 | % | | (1.2 | )% |
| Provision for income taxes | 20.1 | % | | 22.0 | % | | (6.1 | )% |
| Net income | 45.7 | % | | 46.2 | % | | 1.1 | % |
Total revenue for the nine months ended December 31, 2017 increased 2% compared to the nine months ended December 31, 2016. The increase was due to a 33% increase in contract research and development revenue. The increase in contract research and development revenue from the prior-year period was due to new contracts.
Total expenses increased 11% for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017, due to a 19% increase in research and development expense, partially offset by a 5% decrease in selling, general, and administrative expense. The decrease in selling, general, and administrative expense was primarily due to decreased sales commissions. The increase in research and development expense was due to increased new product development activities.
Interest income for the first nine months of fiscal 2018 decreased 9% due to a decrease in marketable securities.
Our effective tax rate was 30.6% of net income before taxes for the first nine months of fiscal 2018, compared to 32.2% in the prior-year period. The decreased rate was due to a decrease in the Federal tax rate with the enactment of the Tax Reform Act, partially offset by a $206,693 one-time increase in our provision for income taxes from the effect of the new rate on our deferred tax assets. Although we have not yet fully assessed the impact of the Tax Reform Act on our future taxes or net income, we currently expect our effective tax rate to decrease to approximately 29% for the full fiscal year ending March 31, 2018, and to approximately 22% for the fiscal year ending March 31, 2019. The lower Federal tax rate is effective for one quarter of fiscal 2018 and all of fiscal 2019. See Note 8 to the financial statements for more information on income taxes.
The 1% increase in net income in the first nine months of fiscal 2018 compared to the prior-year period was primarily due to increased contract research and development revenue and a decrease in the provision for income taxes, partially offset by increased research and development expense and decreased interest income.
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Liquidity and capital resources
Overview
Cash and cash equivalents were $4,728,352 as of December 31, 2017 compared to $8,199,364 as of March 31, 2017. The $3,471,012 decrease in cash and cash equivalents during the nine months ended December 31, 2017 was due to $14,471,990 cash used in financing activities and $320,965 cash used in investing activities, partially offset by $11,321,943 in net cash provided by operating activities. We currently believe our working capital and cash generated from operations will be adequate for our needs at least for the next 12 months.
Operating Activities
Accounts receivable as of December 31, 2017 decreased $1,270,936 compared to March 31, 2017, primarily due to the timing of sales to and payments from certain customers.
Investing Activities
Cash used in investing activities in the nine months ended December 31, 2017 was due to $16,256,210 in purchases of marketable securities and $604,755 in purchases of fixed assets, partially offset by $16,540,000 of marketable security maturities.
Financing Activities
Cash used in financing activities in the first nine months of fiscal 2018 was primarily due to $14,523,030 of cash dividends paid to shareholders. In addition to dividends paid in the first nine months of fiscal 2018, on January 17, 2018 we announced that our Board had declared a cash quarterly dividend of $1.00 per share of common stock, or $4,842,010 based on shares outstanding as of January 12, 2018, to be paid February 28, 2018. We plan to fund dividends through cash provided by operating activities and proceeds from maturities and sales of marketable securities. All future dividends will be subject to Board approval and subject to the company’s results of operations, cash and marketable security balances, estimates of future cash requirements, and other factors the Board may deem relevant. Furthermore, dividends may be modified or discontinued at any time without notice.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, we are exposed to financial market risks, primarily marketable securities and, to a lesser extent, changes in currency exchange rates.
Marketable Securities
The primary objective of our investment activities is to preserve principal while at the same time maximizing after-tax yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in securities including municipal obligations, corporate obligations, and money market funds. Short-term and long-term marketable securities are generally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss, net of estimated tax. Our marketable securities as of December 31, 2017 had remaining maturities between 12 days and 56 months. Marketable securities had a market value of $75,537,933 as of December 31, 2017, representing approximately 85% of our total assets. We have not used derivative financial instruments in our investment portfolio.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures that are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Report. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were effective.
Changes in Internal Controls
During the quarter ended December 31, 2017, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II–OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of business we may become involved in litigation. At this time we are not aware of any material pending or threatened legal proceedings or other proceedings contemplated by governmental authorities that we expect would have a material adverse impact on our future results of operation and financial condition.
Item 1A. Risk Factors. There have been no material changes from the risk factors disclosed in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2017, except the following risk factor is added:
The impacts of the Tax Reform Act could be materially different from our current estimates. The Act “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the “Tax Reform Act”) was enacted December 22, 2017. The Tax Reform Act reduced Federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. We expect the new law to significantly reduce our tax rate in future periods, and we expect our fourth-quarter tax provision to reflect the benefit of a Federal tax rate reduction. Our estimated impacts of the new law are based on our current knowledge and assumptions, and recognized impacts could be materially different from current estimates based on our actual results in the fourth quarter of fiscal 2018 and our further analysis of the Act.
Item 4. Mine Safety Disclosures. Not applicable.
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Item 6. Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NVE CORPORATION |
| (Registrant) |
|
January 17, 2018 | /s/ DANIEL A. BAKER |
| Date | Daniel A. Baker |
| President and Chief Executive Officer |
|
January 17, 2018 | /s/ CURT A. REYNDERS |
| Date | Curt A. Reynders |
| Chief Financial Officer |
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