Business context and reporting period
Nova Measuring Instruments Ltd. (Nasdaq: NVMI) filed an audited Form 20-F for the fiscal year ended December 31, 2018, prepared under U.S. GAAP. Although the request identifies 2018 Q4, this filing reports annual results; it does not provide a clear standalone fourth-quarter income statement or cash-flow value. Nova develops metrology and process-control systems, software, and services for semiconductor manufacturing.
Key financial metrics
Amounts are U.S. dollars; figures are in millions unless stated otherwise.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $251.1 | $222.0 | +13.1% |
| Gross profit / margin | $145.2 / 57.8% | $131.2 / 59.1% | Profit +10.7%; margin -1.3 percentage points |
| Operating income / margin | $60.4 / 24.1% | $57.8 / 26.0% | Income +4.5% |
| Net income / margin | $54.4 / 21.7% | $46.5 / 20.9% | Income +17.0% |
| Diluted EPS | $1.89 | $1.63 | +16.0% |
| Cash from operations | $36.1 | $61.8 | Down $25.7 |
- Product revenue was $193.3 million, up 10.9%; service revenue was $57.8 million, up 21.4%. Products and services represented 77% and 23% of revenue, respectively.
- Product gross margin fell to 62.9% from 64.3%, which management attributed mainly to lower software sales. Service gross margin improved to 40.9% from 40.1%.
- Net R&D expense increased 16.7% to $45.5 million, or 18.1% of revenue; the increase reflected investment in technologies targeted for market introduction in 2019–2020. Sales and marketing expense rose 17.5% to $28.8 million.
- Cash, cash equivalents, and short- and long-term bank deposits totaled $177.8 million at year-end, versus $149.8 million a year earlier. Working capital was $233.5 million; total assets were $333.4 million and shareholders’ equity was $280.7 million.
- Nova reported no significant long-term debt and no readily available long-term credit line. Year-end total liabilities were $52.7 million. Undiscounted operating lease obligations were $48.5 million, and purchase commitments were $31.0 million.
Material changes versus prior year
- Revenue increased for a sixth consecutive year, but annual growth moderated to 13.1% from 35.4% in 2017.
- Profitability remained strong, though gross and operating margins declined. Net income rose, helped in part by lower income-tax expense: $9.1 million versus $13.6 million, with reported effective tax rates of 14.3% and 21.0%, respectively.
- Operating cash flow declined as receivables and inventory grew. Receivables rose to $53.5 million from $40.9 million; inventory rose to $41.8 million from $34.9 million.
- Customer concentration eased: the five largest customers contributed 66% of revenue, compared with 75% in 2017. The largest customer represented 20%, and the second largest 19%.
- Nova repurchased 200,000 shares for $4.8 million under a new $25 million repurchase authorization announced in November 2018; $20.2 million remained available at year-end.
Outlook, commentary, risks, and unusual items
- Management’s 2019 priorities include continued R&D and product launches, expanding into new metrology applications, and growth in memory and foundry markets. Nova expects operating expenses to increase in 2019 and capital expenditures of approximately $25 million, mainly for new facilities and R&D equipment. It stated that current cash reserves should fund planned activity for at least 12 months.
- The filing cites Gartner forecasts for 2019 semiconductor revenue growth of 2.6%, but declines of 16.2% in semiconductor capital spending and 16.6% in wafer-fab-equipment sales. These are industry forecasts, not Nova revenue guidance.
- Principal risks include semiconductor-industry cyclicality; dependence on three main product lines and a limited number of large customers; rapid technology change and competition; reliance on process-equipment partners and certain suppliers; and production concentration in one facility per product line.
- Geopolitical and trade exposure includes U.S. export restrictions affecting Fujian Jinhua: Nova said its U.S. subsidiary and MMD division could not ship tools or parts or provide services to the customer pending authorization. The filing notes restrictions could also apply to products exported from Israel.
- Nova holds much of its cash in bank deposits, with approximately 50% of cash reserves at one institution. Foreign-exchange exposure is significant because most revenue is in U.S. dollars while substantial costs are in NIS. The company uses currency forwards and options, not for trading.
- ASC 606 adoption in 2018 changed the timing of recognition for certain acceptance-related sales, but management said the overall impact was not material. From January 1, 2019, ASC 842 was expected to add approximately $29.2 million of right-of-use assets and lease liabilities; NIS- and CPI-linked lease exposure could affect reported results.
- Inventory write-offs were $3.4 million in 2018. No goodwill or in-process R&D impairment was identified. The filing reports no significant legal proceedings and no off-balance-sheet arrangements. Auditors issued unqualified opinions on the financial statements and internal controls.
- The company does not expect to pay cash dividends for at least several years. It believes it was not a PFIC in 2018 and expects not to be one in 2019, while noting uncertainty in that determination.
Important facts for investors to verify
- Confirm current customer concentration and exposure to the largest customers, especially as demand and semiconductor capital spending change.
- Monitor 2019 industry spending trends, Nova’s order conversion and shipments, and whether its new products and R&D investments generate sales at expected margins.
- Track receivables, inventory, and operating cash flow to assess whether working-capital growth reverses or continues.
- Verify progress and total costs for the new facilities and the expected lease-accounting impact, including NIS and inflation-linked liabilities.
- Assess the status and financial effect of export restrictions affecting Jinhua, as well as broader trade and supply-chain developments.
- Review cash placement and bank concentration, foreign-exchange hedging, and remaining share-repurchase authorization.