Item 2. Management’s Discussion and Analysis
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 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 related to our reliance on several large customers for a significant percentage of revenue, our dependence on critical suppliers and packaging vendors, uncertainties related to the economic environments in the industries we serve, uncertainties related to future sales and revenues, risks of credit losses, risks and uncertainties related to future stock repurchases and dividend payments, 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 is contained in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2023, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 and Part II, Item 1A of this report.
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.
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, 2023. As of December 31, 2023, 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, 2023, compared to quarter ended December 31, 2022
The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items:
Percentage of Revenue
Quarter Ended December 31,
Quarter-
to-Quarter
2023
2022
Change
Revenue
Product sales
94.2
%
97.3
%
(11.6
)%
Contract research and development
5.8
%
2.7
%
93.9
Total revenue
100.0
%
100.0
%
(8.7
)%
Cost of sales
20.1
%
20.0
%
(8.3
)%
Gross profit
79.9
%
80.0
%
(8.8
)%
Expenses
Research and development
8.0
%
9.5
%
(22.8
)%
Selling, general, and administrative
5.8
%
5.4
%
(3.5
)%
Total expenses
13.8
%
14.9
%
(15.7
)%
Income from operations
66.1
%
65.1
%
(7.2
)%
Interest income
7.3
%
5.5
%
21.1
%
Income before taxes
73.4
%
70.6
%
(5.0
)%
Provision for income taxes
11.5
%
13.4
%
(21.7
)%
Net income
61.9
%
57.2
%
(1.1
)%
Total revenue for the quarter ended December 31, 2023 (the third quarter of fiscal 2024) decreased 9% compared to the quarter ended December 31, 2022 (the third quarter of fiscal 2023). The decrease was due to a 12% decrease in product sales partially offset by a 94% increase in contract research and development revenue. The decrease in product sales was primarily due to decreased purchases by existing customers, particularly in the defense industry, and a semiconductor industry downturn. The increase in contract research and development revenue was due to new customer-funded research and development contracts.
Total expenses decreased 16% for the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023 primarily due to a 23% decrease in research and development expense and a 4% decrease in selling, general, and administrative expense. The decrease in research and development expense was primarily due to the redeployment of resources to customer-funded research and development projects. The decrease in selling, general, and administrative expense was primarily due to decreased performance-based compensation accruals.
Interest income for the third quarter of fiscal 2024 increased 21% due to increased yields on securities purchased after December 31, 2022.
Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, decreased to 16% for the third quarter of fiscal 2024 compared to 19% for the third quarter of fiscal 2023. The decrease was primarily due to an increase in certain tax deductions. Our effective tax rate can vary from quarter to quarter. Our effective tax rate in future quarters may be higher than the effective tax rate in the quarter ended December 31, 2023.
The 1% decrease in net income for the third quarter of fiscal 2024 compared to the prior-year quarter was primarily due to decreased revenue, which was nearly offset by decreased expenses, increased interest income, and a lower effective tax rate.
15
Nine months ended December 31, 2023, compared to nine months ended December 31, 2022
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
2023
2022
Change
Revenue
Product sales
97.6
%
97.4
%
(10.5
)%
Contract research and development
2.4
%
2.6
%
(19.5
)%
Total revenue
100.0
%
100.0
%
(10.7
)%
Cost of sales
22.2
%
21.7
%
(9.0
)%
Gross profit
77.8
%
78.3
%
(11.2
)%
Expenses
Research and development
8.5
%
7.7
%
(2.7
)%
Selling, general, and administrative
5.7
%
4.8
%
7.3
%
Provision for credit losses
0.0
%
-
-
Total expenses
14.2
%
12.5
%
1.4
%
Income from operations
63.6
%
65.8
%
(13.6
)%
Interest income
6.3
%
4.1
%
38.4
%
Income before taxes
69.9
%
69.9
%
(10.6
)%
Provision for income taxes
11.3
%
13.1
%
(22.0
)%
Net income
58.6
%
56.8
%
(8.0
)%
Total revenue for the nine months ended December 31, 2023, decreased 11% compared to the nine months ended December 31, 2022. The decrease was due to an 11% decrease in product sales and a 20% decrease in contract research and development revenue. The decrease in product sales was primarily due to decreased purchases by existing customers, particularly in the defense industry, and a semiconductor industry downturn. The decrease in contract research and development revenue was due to the completion of certain contracts.
Total expenses increased 1% for the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023 due to a 7% increase in selling, general, and administrative expense partially offset by a 3% decrease in research and development expense. The increase in selling, general, and administrative expenses was primarily due to increased staffing and increased employee compensation expenses. The decrease in research and development expense was due to variations in staffing.
Interest income for the first nine months of fiscal 2024 increased 38% due to higher yields on securities purchased after December 31, 2022.
Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, decreased to 16% for the first nine months of fiscal 2024 from 19% for the first nine months of fiscal 2023. The decrease was primarily due to an increase in certain tax deductions.
The 8% decrease in net income for the first nine months of fiscal 2024 compared to the prior-year period was primarily due to decreased revenue and increased expenses, partially offset by increased interest income and a lower effective tax rate.
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Liquidity and Capital Resources
Overview
Cash and cash equivalents were $4,684,910 as of December 31, 2023, compared to $1,669,896 as of March 31, 2023. The $3,015,014 increase in cash and cash equivalents during the first nine months of fiscal 2024 was due to $15,115,031 of cash provided by operating activities and $2,280,084 of cash provided by investing activities, partially offset by $14,380,101 of cash used in financing activities.
Operating Activities
Net cash provided by operating activities related to product sales was our primary source of working capital for the current and prior-year quarters. Net cash provided by operating activities was $15,115,031 for the first nine months of fiscal 2024 compared to $14,748,911 for the first nine months of fiscal 2023.
Accounts receivable decreased by $4,268,102 during the first nine months of fiscal 2024 due to the timing of customer payments and decreased revenue.
Inventories increased by $932,801 during the first nine months of fiscal 2024 primarily due to our decision to increase inventories to mitigate longer vendor lead times and to support growth.
Accounts payable and accrued expenses decreased $1,147,278 during the first nine months of fiscal 2024 primarily due to decreases in income tax payable, long-term operating lease liability, and accruals for performance-based compensation.
Investing Activities
Cash provided by investing activities during the first nine months of fiscal 2024 consisted of $8,400,000 in proceeds from maturities of marketable securities, partially offset by $16,731 of fixed assets purchases and $6,103,185 of marketable securities purchases. Purchases of fixed assets can vary from period to period depending on our needs, strategic goals, and equipment purchasing opportunities. Such purchases are likely to increase significantly in future periods.
Financing Activities
Cash used in financing activities during the nine months ended December 31, 2023, consisted of $14,497,628 of cash dividends paid to shareholders, partially offset by $117,527 in proceeds from the exercise of stock options.
In addition to cash dividends to shareholders paid in the third quarter of fiscal 2024, on January 17, 2024, we announced that our Board of Directors had declared a cash dividend of $1.00 per share of Common Stock, or $4,833,401 based on shares outstanding as of January 12, 2024, to be paid February 28, 2024, to shareholders of record as of the close of business January 29, 2024.
We plan to fund dividends through cash provided by operating activities and proceeds from maturities 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.