Business context and reporting period
Camtek Ltd.’s Form 20-F reports the fiscal year ended December 31, 2017; it is an annual filing, not a standalone fourth-quarter report. The company designs and sells automated optical inspection and metrology systems for semiconductor manufacturing. Following the September 2017 sale of its PCB inspection business, semiconductor operations are its continuing business and its sole operating segment.
Key financial metrics
Amounts are in U.S. dollars; figures below are annual unless noted.
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue from continuing operations | $93.5 million | $79.2 million |
| Gross profit / gross margin | $45.5 million / 48.7% | $32.5 million / 41.0% |
| Operating income (loss) | $(3.0) million | $2.0 million |
| Net income from continuing operations | $1.7 million | $0.9 million |
| Net income from discontinued operations | $12.3 million | $3.9 million |
| Total net income | $14.0 million | $4.7 million |
| Basic / diluted earnings per share | $0.40 / $0.39 | $0.13 / $0.13 |
| Cash and cash equivalents at year-end | $43.7 million | $19.7 million |
| Operating cash flow | $1.6 million | $(17.3) million |
At year-end, total assets were $113.0 million, total liabilities $28.7 million, and shareholders’ equity $84.3 million. The company reported no bank loans outstanding and had an unused $4 million credit facility. Working capital was approximately $63.6 million. Cash flow from investing activities was $26.6 million, largely reflecting the PCB sale; financing activities used $3.7 million, including a $5.0 million dividend payment ($0.14 per share).
Material changes versus the prior comparable period
- Revenue rose 18%, primarily due to higher product unit sales. Gross profit increased 40%, and gross margin improved by 7.7 percentage points. Management attributed much of the margin comparison to the approximately $4.8 million FIT inventory write-off recorded in 2016.
- Operating results moved from $2.0 million of operating income to a $3.0 million operating loss, principally because of the $13.0 million Rudolph patent litigation settlement expense in 2017.
- Cash increased by $24.0 million, mainly from the PCB sale and operating cash flow, partly offset by the Rudolph settlement. Operating cash flow improved substantially from 2016, although 2017 continuing operations generated $12.9 million while discontinued operations used $11.2 million.
- Total net income increased sharply, but includes the PCB disposal gain and discontinued-operation earnings; it is not a direct measure of ongoing semiconductor operating performance.
Outlook, commentary, risks and unusual items
- Management said semiconductor industry conditions and capital spending improved in 2016 and 2017 and expected positive momentum to continue into 2018. It provided no quantitative revenue or earnings guidance.
- Management expected existing resources and operating cash flows to meet liquidity needs for at least the next 12 months. The filing also identifies alternative financing or expenditure reductions as contingencies if liquidity proves insufficient.
- The PCB business was sold for gross cash consideration of $32.0 million, subject to approximately $2.0 million of deductions for transaction expenses and working-capital adjustments; reported net cash consideration was approximately $30.0 million. Camtek recognized a $12.8 million disposal gain and may receive up to an additional $3.0 million tied to the business’s 2018 performance; no contingent-consideration asset was recorded at year-end.
- The $13.0 million settlement with Rudolph resolved pending patent claims and provides Camtek perpetual rights to sell existing Condor, Gannet and Eagle products and future products without claims from the specified patent families. The parties agreed to a three-year period during which neither may bring an action seeking damages against the other.
- Other notable items include a $4.9 million income-tax benefit from continuing operations, primarily associated with deferred tax recognition, and a $2.1 million payment to the Israeli Innovation Authority in connection with a dispute over grants related to PCB products. The FIT printer-development program was discontinued; activity was narrowed to developing FIT ink with a third party, with commercialization uncertain.
- Key risks include cyclical semiconductor capital spending, intense competition, customer and supplier concentration, long evaluation and sales cycles, inventory obsolescence, foreign-exchange exposure, and geopolitical or operational disruption in Israel and Asia. Approximately 85% of 2017 revenue came from Asia Pacific, including approximately 65% from China, Taiwan and South Korea. The U.S. dollar weakened 10% against the shekel during 2017; Camtek had net shekel-denominated liabilities of approximately $6.8 million and no open hedges at year-end.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Important facts for investors to verify
- Separate continuing semiconductor performance from discontinued PCB results and the $12.8 million disposal gain; confirm the underlying revenue and cash-generation trend.
- Assess whether revenue growth and the 48.7% gross margin are sustainable after the 2016 FIT write-off comparison, and monitor inventory growth and customer-system evaluations.
- Review the effect of the $13.0 million Rudolph settlement on operating profitability and confirm the scope and duration of the settlement protections.
- Track the contingent PCB-sale payment of up to $3.0 million and whether its 2018 performance condition is met.
- Evaluate Asia revenue concentration, shekel exposure, supplier dependence, and the company’s ability to maintain liquidity through the semiconductor cycle.
- Check future cash conversion, tax benefits and deferred-tax-asset assumptions, including the treatment of Israeli tax-exempt earnings and outstanding Innovation Authority obligations.