NVE CORP /NEW/ 10-Q

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 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 September 30, 2023, our critical accounting policies and estimates continued to include investment valuation, inventory valuation, and deferred tax assets estimation. 14 Quarter ended September 30, 2023, compared to quarter ended September 30, 2022 The table shown below summarizes the percentage of revenue and quarter-to-quarter changes for various items: Percentage of Revenue Quarter Ended September 30, Quarter- to-Quarter 2023 2022 Change Revenue Product sales 99.8 % 98.1 % (32.3 )% Contract research and development 0.2 % 1.9 % (92.1 )% Total revenue 100.0 % 100.0 % (33.4 )% Cost of sales 22.4 % 22.4 % (33.4 )% Gross profit 77.6 % 77.6 % (33.5 )% Expenses Research and development 9.6 % 6.2 % 2.0 % Selling, general, and administrative 6.0 % 4.1 % (0.4 )% Provision for credit losses (2.8 )% — % — % Total expenses 12.8 % 10.3 % (17.3 )% Income from operations 64.8 % 67.3 % (35.9 )% Interest income 7.2 % 3.2 % 45.7 % Income before taxes 72.0 % 70.5 % (32.1 )% Provision for income taxes 5.8 % 13.7 % (72.3 )% Net income 66.2 % 56.8 % (22.4 )% Total revenue for the quarter ended September 30, 2023 (the second quarter of fiscal 2024) decreased 33% compared to the quarter ended September 30, 2022 (the second quarter of fiscal 2023). The decrease was due to a 32% decrease in product sales and a 92% 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 most contracts. Total expenses decreased 17% for the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023 primarily due to a $202,926 credit loss provision reversal, partially offset by a 2% increase in research and development expense. The change in the provision for credit losses was due to a reassessment of our allowance for credit losses based on payments and debtor customer information as of September 30, 2023. Interest income for the second quarter of fiscal 2024 increased 46% due to higher yields on securities purchased after September 30, 2022. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, decreased to 8% for the second quarter of fiscal 2024 compared to 19% for the second quarter of fiscal 2023. The decrease was due to the impact of the $202,926 credit loss provision reversal and changes in the amounts and timing of tax deductions and credits. Our effective tax rate can vary from quarter to quarter. Our effective tax rate in subsequent quarters will likely be higher than the effective tax rate in the quarter ended September 30, 2023. The 22% decrease in net income for the second quarter of fiscal 2024 compared to the prior-year quarter was primarily due to decreased revenue, partially offset by decreased expenses, increased interest income, and a lower effective tax rate. 15 Six months ended September 30, 2023, compared to six months ended September 30, 2022 The table shown below summarizes the percentage of revenue and period-to-period changes for various items: Percentage of Revenue Six Months Ended Sept. 30, Period- to-Period 2023 2022 Change Revenue Product sales 99.1 % 97.4 % (10.1 )% Contract research and development 0.9 % 2.6 % (68.4 )% Total revenue 100.0 % 100.0 % (11.6 )% Cost of sales 23.0 % 22.5 % (9.3 )% Gross profit 77.0 % 77.5 % (12.2 )% Expenses Research and development 8.6 % 7.0 % 8.4 % Selling, general, and administrative 5.7 % 4.5 % 12.6 % Provision for credit losses 0.1 % — % — % Total expenses 14.4 % 11.5 % 10.5 % Income from operations 62.6 % 66.0 % (16.2 )% Interest income 5.9 % 3.5 % 49.5 % Income before taxes 68.5 % 69.5 % (12.9 )% Provision for income taxes 11.3 % 12.8 % (22.2 )% Net income 57.2 % 56.7 % (10.8 )% Total revenue for the six months ended September 30, 2023, decreased 12% compared to the six months ended September 30, 2022. The decrease was due to a 10% decrease in product sales and a 68% 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 most contracts. Total expenses increased 11% for the first six months of fiscal 2024 compared to the first six months of fiscal 2023 due to an 8% increase in research and development expense and a 13% increase in selling, general, and administrative expense. The increases in research and development and selling, general, and administrative expenses were primarily due to increased staffing and increased employee compensation expenses. Interest income for the first six months of fiscal 2024 increased 50% due to higher yields on securities purchased after September 30, 2022. Our effective tax rate, which is the provision for income taxes as a percentage of income before taxes, decreased to 17% for the first six months of fiscal 2024 from 19% for the first six months of fiscal 2023. The decrease was due to changes in the amount and timing of tax deductions and tax credits. The 11% decrease in net income for the first six 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. 16 Liquidity and Capital Resources Overview Cash and cash equivalents were $6,953,448 as of September 30, 2023, compared to $1,669,896 as of March 31, 2023. The $5,283,552 increase in cash and cash equivalents during the first six months of fiscal 2024 was due to $10,384,818 of cash provided by operating activities and $4,445,434 of cash provided by investing activities, partially offset by $9,546,700 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 $10,384,818 for the first six months of fiscal 2024 compared to $9,351,238 for the first six months of fiscal 2023. Accounts receivable decreased $3,598,068 during the first six months of fiscal 2024 due to the timing of customer payments and decreased revenue. Inventories increased $550,756 during the first six 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 $953,886 during the first six months of fiscal 2024 primarily due to decreases in income tax payable, long-term operating lease, and a decrease in accruals for performance-based compensation. Investing Activities Cash provided by investing activities during the first six 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 $3,937,835 of marketable securities purchases. Purchases of fixed assets can vary from period to period depending on our needs and equipment purchasing opportunities. Such purchases could increase significantly in future periods. Financing Activities Cash used in financing activities during the six months ended September 30, 2023, consisted of $9,664,227 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 second quarter of fiscal 2024, on October 18, 2023, we announced that our Board of Directors had declared a cash dividend of $1.00 per share of Common Stock, or $4,833,401, to be paid November 30, 2023, to shareholders of record as of the close of business October 30, 2023. 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. 17