# NVE Corp: Form 10-Q for the period ended Dec 31, 2009

- Company: [NVE Corp](/companies/nvec.md) (CIK 724910)
- Form: 10-Q
- Filed: 2010-01-20
- Accepted by EDGAR: Jan 20, 2010, 21:15 ET
- Period: 2009-12-31
- Accession: 0000724910-10-000004
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/724910/000072491010000004/q3q10.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/724910/000072491010000004/

## Management's discussion and analysis

As filed, 13,136 characters.

### 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 an uncertain economic environment, risks associated with our marketable securities, competition including entry of new competitors, progress in research and development activities by us and others, variations in costs that are beyond our control, adverse legal proceedings, lower sales, failure of suppliers to meet our requirements, failure to obtain new customers, inability to carry out marketing and sales plans, inability to meet customer technical requirements, inability to consummate license agreements, ineligibility for SBIR awards, loss of key executives, 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, 2009, as updated in 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, 2009. At December 31, 2009 our critical accounting policies and estimates continued to include research and development contract percentage of completion estimation, product warranty estimation, inventory valuation, allowance for doubtful accounts estimation, and deferred tax assets estimation.

### Quarter ended December 31, 2009 compared to quarter ended December 31, 2008

The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items:

*Revenue*

| 2009 | Percentage of Revenue Quarter Ended Dec. 31 | 2008 | Quarter- to-Quarter Change |
| --- | ---: | ---: | ---: |
| Product sales | 79.9% | 78.1% | 15.1% |
| Contract research and development | 20.1% | 21.9% | 3.5% |
| Total revenue | 100.0% | 100.0% | 12.6% |
| Cost of sales | 31.7% | 30.0% | 19.3% |
| Gross profit | 68.3% | 70.0% | 9.7% |
| Expenses |  |  |  |
| Selling, general, and administrative | 8.3% | 8.6% | 7.9% |
| Research and development | 3.8% | 4.4% | (2.8)% |
| Total expenses | 12.1% | 13.0% | 4.3% |
| Income from operations | 56.2% | 57.0% | 11.0% |
| Interest and other income | 6.2% | 5.2% | 34.8% |
| Income before taxes | 62.4% | 62.2% | 13.0% |
| Provision for income taxes | 20.6% | 20.2% | 14.8% |
| Net income | 41.8% | 42.0% | 12.1% |

Total revenue for the quarter ended December 31, 2009 (the third quarter of fiscal 2010) increased 13% to $6,624,857 compared to $5,884,113 for the quarter ended December 31, 2008 (the third quarter of fiscal 2009). The increase was due to a 15% increase in product sales and a 4% increase in contract research and development revenue.

The increase in product sales from the prior-year quarter was due to the addition of new customers and increased purchase volume by existing customers. Product sales for the quarter ended December 31, 2009 increased 2% sequentially from $5,177,445 for the quarter ended September 30, 2009. Until this fiscal year, our product sales had been less in quarters ended December 31 than the immediately preceding quarters in every year since fiscal 2007. This seasonality may have been due in part to distributor ordering patterns or customer vacations and shutdowns late in calendar years. The departure from product sale seasonal weakness in the current fiscal year may have been due to an improving economic environment. We cannot predict whether the seasonal pattern prior to fiscal 2010 will return in future fiscal years, and we cannot predict the possible impact of economic conditions on future results of operations. Furthermore, in every year since fiscal 2007 our product sales have increased in quarters ended March 31 from the quarters ended December 31, but we cannot predict whether this pattern will continue this fiscal year.

The increase in research and development revenue was due to new contracts and increased activities on certain contracts. The increase in research and development revenue for the quarter may not be representative of future trends. Contract research and development activities can fluctuate for a number of reasons, some of which are beyond our control, and there can be no assurance of additional or follow-on contracts for expired or completed contracts.

Gross profit margin decreased to 68% of revenue for the third quarter of fiscal 2010 compared to 70% for the third quarter of fiscal 2009, due to a less favorable product mix.

Selling, general, and administrative expense for the third quarter of fiscal 2010 increased 8% compared to the third quarter of fiscal 2009, primarily due to an increase in commissions and the timing of professional services.

Research and development expense decreased 3% for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 due to an increase in contract research and development activities, which caused resources to be reallocated from expensed research and development activities. Research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development activities.

Interest and other income increased 35% to $414,669 for the third quarter of fiscal 2010 compared to $307,614 for the third quarter of fiscal 2009. The increase was due to an increase in interest-bearing marketable securities.

The provision for income taxes was $1,368,590 for the third quarter of fiscal 2010 compared to $1,192,282 for the third quarter of fiscal 2009. The effective tax rate was 33% of income before taxes in both quarters, although our effective tax rate can fluctuate due to a number of factors, some of which are outside our control.

The 12% increase in net income in the third quarter of fiscal 2010 compared to the prior-year quarter was primarily due to increased product sales.

### Nine months ended December 31, 2009 compared to nine months ended December 31, 2008

The table shown below summarizes the percentage of revenue and period-to-period changes for various items:

*Revenue*

| 2009 | Percentage of Revenue Nine Months Ended Dec. 31 | 2008 | Period- to-Period Change |
| --- | ---: | ---: | ---: |
| Product sales | 80.1% | 85.1% | 14.2% |
| Contract research and development | 19.9% | 14.9% | 61.1% |
| Total revenue | 100.0% | 100.0% | 21.2% |
| Cost of sales | 29.9% | 29.9% | 21.6% |
| Gross profit | 70.1% | 70.1% | 21.0% |
| Expenses |  |  |  |
| Selling, general, and administrative | 9.0% | 9.8% | 11.3% |
| Research and development | 4.1% | 5.6% | (12.5)% |
| Total expenses | 13.1% | 15.4% | 2.7% |
| Income from operations | 57.0% | 54.7% | 26.2% |
| Interest and other income | 5.9% | 5.1% | 39.8% |
| Income before taxes | 62.9% | 59.8% | 27.4% |
| Provision for income taxes | 20.8% | 19.3% | 30.5% |
| Net income | 42.1% | 40.5% | 25.9% |

Total revenue for the nine months ended December 31, 2009 increased 21% to $19,967,890 compared to $16,475,689 for the nine months ended December 31, 2008. The increase was due to a 14% increase in product sales and a 61% increase in contract research and development revenue. The increase in product sales was due to the addition of new customers and increased purchase volume by existing customers. The increase in research and development revenue was due to new contracts and increased activity on certain contracts. The increase in research and development revenue for the nine month period may not be representative of future trends. Contract research and development activities can fluctuate for a number of reasons, some of which are beyond our control, and there can be no assurance of additional or follow-on contracts for expired or completed contracts.

Selling, general, and administrative expense for the first nine months of fiscal 2010 increased 11% compared to the first nine months of fiscal 2009, primarily due to increased salaries, performance-based compensation, commissions, and stock-based compensation expense. Stock-based compensation expenses for the nine months ended December 31, 2009 and 2008 were primarily due to the issuance of automatic stock options to our non-employee directors on their reelection to our Board. The increase in stock-based compensation for the nine months ended December 31, 2009 compared to the prior-year period was primarily due to a higher stock price at the date of grant compared to the prior-year date of grant.

Research and development expense decreased 13% for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009 due to an increase in contract research and development activities, which caused resources to be reallocated from expensed research and development activities. The decrease in research and development expense for the nine-month period may not be representative of future expense trends. Research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development activities.

Interest and other income increased 40% to $1,177,892 for the first nine months of fiscal 2010 compared to $842,523 for the first nine months of fiscal 2009. The increase was due to an increase in interest-bearing marketable securities.

The provision for income taxes was $4,148,270, or 33% of income before taxes, for the first nine months of fiscal 2010 compared to $3,178,968 or 32% of income before taxes, for the first nine months of fiscal 2009. The effective tax rate can fluctuate due to a number of factors, some of which are outside our control, and our effective tax rate for the first nine months of fiscal 2010 is not necessarily indicative of the rate that may be expected for the full fiscal year ending March 31, 2010.

The 26% increase in net income in the first nine months of fiscal 2010 compared to the prior-year period was primarily due to increases in product sales, contract research and development revenue, and interest income.

### Liquidity and capital resources

At December 31, 2009 we had $46,366,580 in cash plus short-term and long-term marketable securities compared to $34,321,811 at March 31, 2009. Our entire portfolio of short-term and long-term marketable securities is classified as available for sale. The increase in cash plus marketable securities in the first nine months of fiscal 2010 was primarily due to $9,391,521 in net cash provided by operating activities, a $2,008,329 net increase in the market value of our marketable securities due to market-price changes, and $622,423 in net proceeds from the sale of common stock related to option exercises.

Deferred taxes were a $46,436 liability at December 31, 2009 compared to a $667,729 asset at March 31, 2009. The change was primarily due to a $723,332 increase in deferred taxes related to the net increase in the value of our marketable securities. Accounts receivable decreased by $438,350 at December 31, 2009 compared to March 31, 2009 due to the timing of payments by our customers. Inventories decreased by $455,404 due to raw material purchase timing and our efforts to manage certain inventories.

We currently believe our working capital is adequate for our needs at least for the next 12 months.

## Market risk

As filed, 1,033 characters.

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 a variety of securities including government agency obligations, 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, net of estimated tax. Marketable securities as of December 31, 2009 had remaining maturities between four and 59 months. Our short-term and long-term marketable securities had a fair market value of $45,202,361 at December 31, 2009, representing approximately 85% of our total assets. We have not used derivative financial instruments in our investment portfolio.

## Controls and procedures

As filed, 1,284 characters.

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (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 the end of the period covered by this report, our disclosure controls and procedures were effective.

During the quarter ended December 31, 2009, 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.

## Risk factors

As filed, 1,057 characters.

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, 2009, except the risk factor titled “We may lose revenue if we are unable to renew agreements with large customers” is replaced in its entirety by the following:

### We may lose revenue if we are unable to renew agreements with large customers.

Our agreement with Avago Technologies, Inc., as amended, expires June 26, 2010; our Supplier Partnering Agreement with St. Jude Medical, as amended, expires December 31, 2010; and our Phonak AG Supply Agreement expires May 1, 2012. We cannot predict if any of these agreements will be renewed, or if renewed, under what terms. The inability to agree on mutually acceptable terms or the loss of any of these large customers could have a significant adverse impact on our revenue and our profitability.

We are updating the expiration date of our Supplier Partnering Agreement with St. Jude Medical in this risk factor because an amendment extended the term of that agreement.

Filed Jan 20, 2010.
Source: SEC EDGAR, the filing index for accession 0000724910-10-000004. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.