# NVE Corp: Form 10-Q for the period ended Dec 31, 2010

- Company: [NVE Corp](/companies/nvec.md) (CIK 724910)
- Form: 10-Q
- Filed: 2011-01-19
- Accepted by EDGAR: Jan 19, 2011, 21:17 ET
- Period: 2010-12-31
- Accession: 0000724910-11-000003
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/724910/000072491011000003/q3q11.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/724910/000072491011000003/

## Management's discussion and analysis

As filed, 13,002 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 risks associated with competition, progress in research and development activities by us and others, decreased sales, failure of suppliers to meet our requirements, inability to meet customer technical requirements, inability to consummate license agreements, ineligibility for SBIR awards, inability to renew agreements with large customers, risks of losses on our marketable securities, 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, 2010, as updated in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, and 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, 2010. At December 31, 2010 our critical accounting policies and estimates continued to include research and development contract percentage of completion estimation, inventory valuation, allowance for doubtful accounts estimation, and deferred tax assets estimation.

### Quarter ended December 31, 2010 compared to quarter ended December 31, 2009

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

*Revenue*

| 2010 | Percentage of Revenue Quarter Ended Dec. 31 | 2009 | Quarter- to-Quarter Change |
| --- | ---: | ---: | ---: |
| Product sales | 84.0% | 79.9% | 26.3% |
| Contract research and development | 16.0% | 20.1% | (4.2)% |
| Total revenue | 100.0% | 100.0% | 20.2% |
| Cost of sales | 30.9% | 31.7% | 17.1% |
| Gross profit | 69.1% | 68.3% | 21.7% |
| Expenses |  |  |  |
| Selling, general, and administrative | 8.0% | 8.3% | 16.3% |
| Research and development | 4.2% | 3.8% | 31.4% |
| Total expenses | 12.2% | 12.1% | 21.0% |
| Income from operations | 56.9% | 56.2% | 21.8% |
| Interest and other income | 6.5% | 6.2% | 23.5% |
| Income before taxes | 63.4% | 62.4% | 22.0% |
| Provision for income taxes | 20.9% | 20.6% | 21.4% |
| Net income | 42.5% | 41.8% | 22.3% |

Total revenue for the quarter ended ended December 31, 2010 (the third quarter of fiscal 2011) increased 20% to $7,963,508 compared to $6,624,857 for the quarter ended ended December 31, 2009 (the third quarter of fiscal 2010). The increase was due to a 26% increase in product sales, partially offset by a 4% decrease 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. Until last 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. This sequential decrease did not occur in fiscal 2010 or 2011, possibly due to the addition of new customers, increased purchase volume by existing customers, or improved economic environments. We cannot predict whether seasonal weakness in quarters ending December 31 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 decrease in research and development revenue was due to the completion of certain contracts and contract activities. 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 increased to 69% of revenue for the third quarter of fiscal 2011 compared to 68% for the third quarter of fiscal 2010, due to a more favorable revenue mix.

Total expenses increased 21% for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 due to a 16% increase in selling, general, and administrative expense and a 31% increase in research and development expense. The increase in selling, general, and administrative expense was due to an increase in performance-based compensation and commissions, and the timing of professional services. The increase in research and development expense was due to increased product development activities. Research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development activities.

Interest income increased 24% to $512,203 for the third quarter of fiscal 2011 compared to $414,669 for the third quarter of fiscal 2010. The increase was due to an increase in interest-bearing marketable securities.

The provision for income taxes was $1,661,090 for the third quarter of fiscal 2011 compared to $1,368,590 for the third quarter of fiscal 2010. The effective tax rate was 33% of income before taxes for the third quarter of fiscal 2011, which was approximately the same rate as the prior-year quarter. Our effective tax rate can fluctuate, however, due to a number of factors, some of which are outside our control.

The 22% increase in net income in the second quarter of fiscal 2011 compared to the prior-year quarter was primarily due to increased product sales.

### Nine months ended December 31, 2010 compared to nine months December 31, 2009

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

*Revenue*

| 2010 | Percentage of Revenue Nine Months Ended Dec. 31 | 2009 | Period- to-Period Change |
| --- | ---: | ---: | ---: |
| Product sales | 83.8% | 80.1% | 20.5% |
| Contract research and development | 16.2% | 19.9% | (6.1)% |
| Total revenue | 100.0% | 100.0% | 15.3% |
| Cost of sales | 31.0% | 29.9% | 19.5% |
| Gross profit | 69.0% | 70.1% | 13.5% |
| Expenses |  |  |  |
| Selling, general, and administrative | 8.3% | 9.0% | 5.2% |
| Research and development | 4.3% | 4.1% | 21.2% |
| Total expenses | 12.6% | 13.1% | 10.2% |
| Income from operations | 56.4% | 57.0% | 14.2% |
| Interest and other income | 6.5% | 5.9% | 26.1% |
| Income before taxes | 62.9% | 62.9% | 15.3% |
| Provision for income taxes | 20.8% | 20.8% | 15.3% |
| Net income | 42.1% | 42.1% | 15.4% |

Total revenue for the nine months ended December 31, 2010 increased 15% to $23,013,962 compared to $19,967,890 for the nine months ended December 31, 2009. The increase was due to a 21% increase in product sales, partially offset by a 6% decrease in contract research and development revenue.

The increase in product sales from the prior-year period was due to the addition of new customers and increased purchase volume by existing customers.

The decrease in research and development revenue was due to the completion of certain contracts and contract activities. 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 69% of revenue for the first nine months of fiscal 2011 compared to 70% for the first nine months of fiscal 2010, due to a less favorable product sales mix.

Total expenses increased 10% for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 due primarily to a 21% increase in research and development expense. The increase in research and development expense was due to increased product development activities, and a decrease in contract research and development activities, which caused resources to be reallocated to expensed research and development activities. Research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development activities.

Interest income increased 26% to $1,485,664 for the first nine months of fiscal 2011 compared to $1,177,892 for the first nine months of fiscal 2010. The increase was due to an increase in interest-bearing marketable securities.

The provision for income taxes was $4,782,699 for the first nine months of fiscal 2011 compared to $4,148,270 for the first nine months of fiscal 2010. The effective tax rate was 33% of income before taxes for the first nine months of fiscal 2011, which was approximately the same rate as the prior-year period. Our effective tax rate can fluctuate, however, due to a number of factors, some of which are outside our control.

The 15% increase in net income in the first nine months of fiscal 2011 compared to the prior-year period was primarily due to increased product sales and increased interest income.

### Liquidity and capital resources

At December 31, 2010 we had $58,310,820 in cash plus short-term and long-term marketable securities compared to $49,543,766 at March 31, 2010. 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 2011 was primarily due to $8,952,319 in net cash provided by operating activities.

The $2,888,583 increase in short-term marketable securities in the first nine months of fiscal 2011 was due to marketable securities previously classified as long-term approaching maturity. We expect short-term marketable securities to increase in the remaining quarter of the fiscal year as more of our securities approach maturity.

Accounts receivable decreased $750,129 dollars due to the timing of payments by our customers.

Inventories increased by $1,457,731 due to raw material purchase timing and to support an increased rate of product sales.

We had no deferred revenue as of December 31, 2010 compared to $20,833 at March 31, 2010. Deferred revenue at March 31, 2010 was due to a nonrefundable payment of $250,000 by Avago to us under the terms of Amendment No. 2 to an agreement between us and Agilent. We recognized revenue from the payment over the term of Amendment No. 2, which was effective as of June 27, 2007 and ended June 27, 2010.

Purchases of fixed assets were $501,957 during the nine months ended December 31, 2010, primarily for production equipment.

Proceeds from maturities and sales of marketable securities were $1,573,370 for the nine months ended December 31, 2010 compared to $175,256 for the nine months ended December 31, 2009. The increase was due to the maturation of marketable securities.

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, 2010 had remaining maturities between five and 58 months. Our short-term and long-term marketable securities had a fair market value of $57,132,411 at December 31, 2010, 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, 2010, 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, 2,854 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, 2010 as updated in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2010 and September 30, 2010, except the risk factors titled “We may lose revenue if we are unable to renew agreements with large customers” and “We could incur losses on our marketable securities” are replaced in their entirety by the following:

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

Our Supplier Partnering Agreement with St. Jude Medical, as amended, expires December 31, 2011; our agreement with Avago Technologies, Inc., as amended, expires June 27, 2013; and our Phonak AG Supply Agreement, as amended, expires March 31, 2015. We cannot predict if any of these agreements will be renewed, or if renewed, under what terms. Although it is possible we could continue to sell products to these customers without formal agreements, an 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.

This risk factor is being updated because we executed an amendment that extended the term of our Phonak AG Supply Agreement.

### We could incur losses on our marketable securities.

At December 31, 2010, we held $57,132,411 in short-term and long-term marketable securities, representing approximately 85% of our total assets. For the first nine months of the fiscal year ending March 31, 2011 we earned $1,485,664 in interest, virtually all of which was from those securities. During the past two fiscal years a number of the securities we hold were downgraded by Moody’s or Standard and Poor’s indicating a possible increase in default risk. The credit crisis may have caused or contributed to many of these downgrades. Conditions and circumstances beyond our control or ability to anticipate can cause downgrades and increases in default risk. For example, in fiscal 2011 guaranteed global notes issued by BP Capital Markets plc that we hold were downgraded due to the impact of BP’s Macondo subsea well oil spill on BP’s financial profile. Although we recovered an unrealized loss in BP securities, downgrades of any of our marketable securities are possible at any time for reasons beyond our control, which could cause us to incur losses on those securities. Additionally, the assignment of a high credit rating does not preclude the risk of default on any marketable security. Losses for any reason on our marketable securities could have a material adverse impact on our financial condition, income, or cash flows.

The value of our marketable securities, the portion of our total assets in marketable securities, and interest earned are being updated in this risk factor.

Filed Jan 19, 2011.
Source: SEC EDGAR, the filing index for accession 0000724910-11-000003. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.