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NVEC > SEC Filings for NVEC > Form 10-K on 6-Jun-2014All Recent SEC Filings

Show all filings for NVE CORP /NEW/

Form 10-K for NVE CORP /NEW/


6-Jun-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read this discussion together with our financial statements and notes included elsewhere in this Report. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. Our actual future results could differ materially from those presently anticipated due to a variety of factors, including those discussed in Item 1A of this Report.

General
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. We manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. We also receive contracts for research and development and are a licensor of spintronic magnetoresistive random access memory technology, commonly known as MRAM.

Application of Critical Accounting Policies and Estimates In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below.

Investment Valuation
Our investments consist primarily of corporate and municipal obligations. We have generally invested excess cash in high-quality investment grade long-term marketable securities with less than five years to maturity. We classify all of our marketable securities as available-for-sale, thus securities are recorded at fair value and any associated unrealized gain or losses, net of tax, is included as a separate component of shareholders' equity, "Accumulated other comprehensive income (loss)." If we judged a decline in fair value for any security to be other than temporary, the cost basis of the individual security would be written down and a charge recognized to net income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. We consider a number of factors in determining whether other-than-temporary impairment exists, including: credit market conditions; the credit ratings of the securities; historical default rates for securities of comparable credit rating; the presence of insurance of the securities and, if insured, the credit rating and financial condition of the insurer; the effect of market interest rates on the value of the securities; and the duration and extent of any unrealized losses. We also consider the likelihood that we will be required to sell the securities prior to maturity based on our financial condition and anticipated cash flows. If any of these conditions and estimates change in the future, or, if different estimates are used, the fair value of the investments may change significantly and could result in other-than-temporary decline in value, which could have an adverse impact on our results of operations.

Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Where there is evidence that inventory could be disposed of at less than carrying value, the inventory is written down to the net realizable value in the current period. Additionally, we periodically examine our inventory in the context of inventory turnover, sales trends, competition and other market factors, and we record provisions to inventory reserve when we determine certain inventory is unlikely to be sold. If reserved inventory is subsequently sold, corresponding reductions in inventory and inventory reserves are made. Our inventory reserve was $295,000 at March 31, 2014 and $285,000 at March 31, 2013.

Deferred Tax Assets Estimation
In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions to realize the benefit of these assets. We evaluate the realizability of the deferred assets quarterly and assess the need for valuation allowances or reduction of existing allowances quarterly.

As of March 31, 2014 our net deferred tax liabilities were $117,213 compared to $440,736 as of March 31, 2013. Net deferred tax liabilities included $120,008 in deferred tax assets for stock-based compensation deductions as of March 31, 2014 and $145,592 as of March 31, 2013. Utilization of certain of our deferred tax assets is subject to limitations based on Internal Revenue Code Section 382.


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Results of Operations
The following table summarizes the percentage of revenue and year-to-year changes for various items for the last three fiscal years:

                                            Percentage of Revenue                     Year-to-Year Change
                                             Year Ended March 31                     Years Ended March 31
                                        2014          2013        2012        2013 to 2014          2012 to 2013
Revenue
Product sales                           98.4 %         90.4 %      88.0 %           4.4 %               (2.9 )%
Contract research and development        1.6 %          9.6 %      12.0 %         (83.7 )%             (24.2 )%
Total revenue                          100.0 %        100.0 %     100.0 %          (4.1 )%              (5.4 )%
Cost of sales                           22.1 %         26.0 %      32.6 %         (18.6 )%             (24.7 )%
Gross profit                            77.9 %         74.0 %      67.4 %           1.0 %                3.9 %
Expenses
Selling, general, and administrative     8.6 %          8.3 %       8.4 %          (0.2 )%              (5.9 )%
Research and development                13.8 %          9.5 %       9.1 %          39.5 %               (1.1 )%
Total expenses                          22.4 %         17.8 %      17.5 %          21.0 %               (3.4 )%
Income from operations                  55.5 %         56.2 %      49.9 %          (5.3 )%               6.5 %
Interest income                          8.2 %          8.7 %       8.3 %         (10.1 )%               0.4 %
Income before taxes                     63.7 %         64.9 %      58.2 %          (5.9 )%               5.6 %
Income tax provision                    20.8 %         21.1 %      18.4 %          (6.1 )%               9.3 %
Net income                              42.9 %         43.8 %      39.8 %          (5.9 )%               3.9 %

Total revenue for fiscal 2014 decreased 4% compared to fiscal 2013, and decreased 5% in fiscal 2013 compared to fiscal 2012. The decrease in total revenue in fiscal 2014 was due to an 84% decrease in contract research and development revenue, partially offset by a 4% increase in product sales. The decrease in fiscal 2013 was due to a 24% decrease in contract research and development revenue and a 3% decrease in product sales. The decreases in contract research and development revenue for fiscal 2014 compared to fiscal 2013 and for fiscal 2013 compared to fiscal 2012 were due to completion of certain contracts and contract activities and a challenging environment for government contract funding. 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. The increase in product sales for fiscal 2014 was primarily due to increased purchase volume by existing customers, and the decrease in product sales for fiscal 2013 was due to decreased purchase volume by existing customers.

Gross profit margin increased to 78% of revenue for fiscal 2014 from 74% for fiscal 2013 due to a more favorable revenue mix, a more favorable product sales mix, and more efficient product manufacturing. Gross profit margin increased to 74% for fiscal 2013 from 67% for fiscal 2012 due to a more favorable revenue mix, a more favorable product sales mix, and more efficient product manufacturing.

Total expenses increased 21% for fiscal 2014 compared to fiscal 2013 and decreased 3% for fiscal 2013 compared to fiscal 2012. The increase in total expenses in fiscal 2014 compared to fiscal 2013 was due to a 39% 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. The decrease in total expenses in fiscal 2013 compared to fiscal 2012 was due to a 1% decrease in research and development expense and a 6% decrease in selling, general, and administrative expense. The decrease in selling, general, and administrative expense in fiscal 2013 was primarily due to a reduction in staffing.

Interest income decreased 10% in fiscal 2014 compared to fiscal 2013, and was approximately the same for fiscal 2013 as fiscal 2012. For fiscal 2014, a decrease in interest rates earned on reinvested funds was partially offset by an increase in interest-bearing marketable securities. For fiscal 2013, the increase in interest-bearing marketable securities was offset by a decrease in interest rates earned on reinvested funds.

The effective income tax rate in fiscal 2014 was 33% of income before taxes, compared to 33% for fiscal 2013 and 32% for fiscal 2012. Our effective tax rates can fluctuate due to a number of factors, including Federal and state tax rates and regulations, the mix between taxable and tax-exempt securities in our marketable securities, and other factors, some of which are outside our control.

Net income decreased 6% in fiscal 2014 compared to fiscal 2013, primarily due to decreased contract research and development revenue, increased research and development expense, and decreased interest income, partially offset by increased product sales and increased gross profit margin as a percentage of revenue. Net income increased 4% in fiscal 2013 compared to fiscal 2012 primarily due to increased gross profit margin and decreased expenses, partially offset by decreased revenue and increased taxes.


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Liquidity and Capital Resources
Our primary source of working capital for fiscal years 2012 through 2014 was cash provided by operating activities related to product sales and research and development contract revenue. At March 31, 2014 we had $95,644,701 in cash plus short-term and long-term marketable securities compared to $85,260,969 at March 31, 2013. All of our marketable securities were classified as available for sale. The $10,383,732 increase in cash plus marketable securities was primarily due to $12,401,424 in net cash provided by operating activities, partially offset by $1,263,405 in repurchases of our Common Stock and a $1,067,800 net unrealized loss from marketable securities.

Purchases of fixed assets were $160,718 during fiscal 2014 compared to $1,824,324 in fiscal 2013 and $1,480,237 in fiscal 2012. Purchases were primarily for capital equipment and leasehold improvements to increase our production capacity and were financed with cash provided by operating activities. Purchases of fixed assets could increase significantly in future years compared to fiscal 2014 and our capital expenditures can vary significantly from year to year depending on our needs, equipment purchasing opportunities, and production expansion activities.

We repurchased $1,263,405 of our Common Stock in fiscal 2014 and did not repurchase any in fiscal 2013 or 2012. The repurchases were under a program announced January 21, 2009 authorizing the repurchase of up to $2,500,000 of our Common Stock, $1,236,595 of which remained available as of March 31, 2014. The repurchase program may be modified or discontinued at any time without notice.

For the past three fiscal years, after purchasing fixed assets and repurchasing our Common Stock, we invested excess cash provided by operating activities in long-term marketable securities. As of March 31, 2014 our marketable securities had remaining maturities between one month and 258 weeks (see "Note 4 - Marketable Securities" to the Financial Statements, included elsewhere in this Report for additional information). As our marketable securities mature, we currently plan to either use the proceeds to meet future capital needs or reinvest the proceeds in other marketable securities.

The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:

                                                Payments Due by Period
Contractual obligations         Total       <1 Year    1-3 Years    3-5 Years    >5 Years
Operating lease obligations  $ 1,895,391   $ 272,600   $  552,302   $  564,530   $ 505,959
Purchase obligations             291,485     291,485            -            -           -
Total                        $ 2,186,876   $ 564,085   $  552,302   $  564,530   $ 505,959

Operating lease obligations are primarily for our facility lease. "Note 9 - Commitments and Contingencies" to the Financial Statements, included elsewhere in this report, provides additional information about our lease obligations. Purchase obligations as of March 31, 2014 consisted of raw materials purchase commitments. We expect to meet these obligations from cash provided by operating activities or proceeds from maturities of marketable securities. We plan to evaluate raw materials purchases based on a variety of factors including forecasted requirements and anticipated supply leadtimes, and our obligations could vary significantly in the future. We had no fixed asset purchase obligations as of March 31, 2014. We plan to evaluate capital expenditures as needs and opportunities arise, and our future capital expenditures and purchase obligations could vary significantly from expenditures and obligations in the past.

We believe our working capital and cash generated from operations will be adequate for our needs at least through fiscal 2015.

Inflation
Inflation has not had a significant impact on our operations in any of our three most recent fiscal years. Prices for our products and for the materials and labor costs for those products are governed by market conditions. It is possible that inflation in future years could impact both materials and labor used for the production of our products.

Off-Balance-Sheet Arrangements
Our off-balance sheet arrangements consist of purchase commitments and operating leases for our facility. We believe that our off-balance sheet arrangements do not have a material current or anticipated future effect on our profitability, cash flows, or financial position.


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