Nova Measuring Instruments Ltd. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter filing. Financial statements are in U.S. dollars and prepared under U.S. GAAP. The company designs and sells metrology systems and related services for semiconductor manufacturing.
Key financial metrics
Amounts in US$ millions except per-share data. Figures are consolidated.
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | 222.0 | 163.9 |
| Product revenue | 174.3 | 122.4 |
| Service revenue | 47.6 | 41.5 |
| Gross profit / margin | 131.2 / 59.1% | 75.3 / 45.9% |
| Operating income / margin | 57.8 / 26.0% | 10.2 / 6.2% |
| Net income | 46.5 | 9.6 |
| Basic / diluted EPS | $1.68 / $1.63 | $0.35 / $0.35 |
| Cash from operations | 61.8 | (4.2) |
| Cash, cash equivalents and bank deposits | 149.8 | 91.7 |
| Working capital | 179.8 | 128.9 |
| Total assets / shareholders’ equity | 283.3 / 226.7 | 218.6 / 174.7 |
Revenue rose 35.4% year over year. Product sales were approximately 78.5% of revenue and services 21.5%. The filing reports no significant long-term debt; it also says the company has no readily available long-term credit line. Current liabilities were $52.1 million against current assets of $231.9 million.
Material changes versus prior year
- Revenue increased $58.1 million, led by Optical CD and XPS product sales; service revenue benefited from a larger installed base.
- Gross margin improved substantially. The company attributes the 2016 comparison in part to a $12.9 million Israel Innovation Authority (IIA) royalty buyout expense and a $1.9 million inventory write-off included in product-margin discussion; 2017 benefited from higher-margin software sales and scale efficiencies.
- Operating cash flow swung from a $4.2 million use in 2016 to $61.8 million provided in 2017, which management attributes to higher earnings and working-capital management, including improved collections.
- Cash and deposits increased about $58 million. Inventory rose from $29.3 million to $34.9 million, while receivables declined from $42.6 million to $40.9 million.
- Income tax expense rose to $13.6 million from $1.7 million; the reported effective tax rate increased to 23% from 15%.
Outlook, risks and unusual items
- Management outlook: For 2018, Nova planned continued growth, product innovation and expansion into new metrology applications. Management expected overall capital spending and wafer-fab-equipment spending to remain solid and saw positive investment prospects for metrology. The filing also cites Gartner estimates of 2018 semiconductor revenue growth of 7.5%, but WFE sales decline of 3.0% and capital-spending decline of 0.6%. These are estimates, not company guidance.
- Nova planned approximately $8 million of 2018 capital expenditures and expected operating expenses to increase versus 2017. Management said available cash was sufficient for planned activities for at least 12 months.
- Customer and market concentration: The five largest customers accounted for 75% of 2017 revenue; the largest individually accounted for 23%. The business is highly exposed to semiconductor capital spending cycles, and sales may fluctuate with orders and shipment timing.
- Currency and cash concentration: Most revenue is in U.S. dollars, while a substantial portion of expenses is in other currencies, especially NIS. The dollar weakened against the NIS by approximately 9.8% in 2017. More than 40% of cash reserves were held at one banking institution, according to the risk disclosures. Nova used currency forwards and options; year-end hedge notional was $54.3 million.
- Tax items: The 2017 tax provision included a $3.553 million prior-year assessment and $0.355 million of related interest; the tax reconciliation reports $4.174 million of prior-year tax adjustments. Nova recorded a provisional $0.837 million tax benefit from the U.S. Tax Cuts and Jobs Act and said its accounting for the law’s effects was not complete. Its claimed eligibility for Israeli technological-enterprise tax benefits remains subject to tax-authority agreement.
- Commitments and contingencies: Non-cancelable supplier purchase obligations totaled approximately $31.1 million at year-end. IIA-funded technology remains subject to restrictions on overseas manufacturing, licensing and transfer. The company reported no significant pending legal proceedings and no material off-balance-sheet arrangements.
- Nova reported no impairment of goodwill or acquired intangible assets in 2017. It wrote off $3.4 million of inventory during the year. It adopted the new revenue-recognition standard effective January 1, 2018 and expected no significant financial-statement impact, but anticipated additional disclosures.
- The financial-statement audit and the audit of internal control over financial reporting received unqualified opinions; management and the auditor reported effective controls as of December 31, 2017.
Important facts for investors to verify
- Whether revenue growth and margin gains persist, particularly across Optical CD, XPS, software and service offerings.
- Exposure to major customers, including the 75% revenue share of the five largest customers, and the impact of changes in their purchasing plans.
- Cash placement and bank-counterparty concentration, along with the liquidity and terms of deposits.
- How the NIS exchange rate, hedging arrangements and operating-cost growth affect margins.
- The final tax effects of the U.S. tax law, Israeli tax assessments and eligibility for Israeli tax incentives.
- Execution of the 2018 investment and growth plans, and the effect of semiconductor-cycle changes on demand and cash flow.