CAMTEK LTD annual report, Q4 FY2015

Business context and reporting period

Camtek Ltd. designs and sells automated optical inspection (AOI) systems and functional ink technology for semiconductor fabrication and printed circuit board (PCB) manufacturing. This is its audited annual report for the fiscal year ended December 31, 2015, not a standalone fourth-quarter filing; quarterly results are not provided in the supplied filing text. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.

Financial performance and liquidity

Amounts below are in millions of U.S. dollars unless stated otherwise.

• Product sales rose 18% to $84.1 million; service fees fell 10% to $15.2 million, primarily following the end of Camtek’s Sela business involvement.
• Microelectronics revenue was $69.1 million, up from $57.8 million; PCB revenue was $30.1 million, versus $30.5 million. Segment operating losses were $2.7 million for microelectronics and $5.9 million for PCB in 2015.
• Gross margin declined 3.0 percentage points. Management cited product mix and higher inventory write-offs, including approximately $1.2 million associated mainly with Gryphon/FIT inventory.
• Cash and cash equivalents were $30.8 million at year-end, alongside $7.9 million of restricted deposits; 2014 included $8.6 million of unrestricted short-term deposits. Working capital was approximately $53.2 million.
• There were no bank loans outstanding. Total liabilities were $48.1 million, including a $14.6 million litigation liability. Long-term liabilities included $4.8 million owed to the Israeli Office of the Chief Scientist (OCS).
• Operating cash flow fell from $6.0 million to $1.5 million. Investing activities used $0.4 million; financing activities provided $11.7 million, mainly from the May 2015 share offering, which raised net proceeds of $11.9 million.

Material changes versus the prior comparable period

• Revenue grew 12%, driven by microelectronics AOI product sales; however, higher operating expenses and the $14.6 million litigation charge drove a swing from 2014 operating and net income to losses in 2015.
• Operating expenses included $14.6 million for litigation. Camtek also recorded $1.6 million of Printar-related impairment, partly offset by $1.5 million of income from settling its contingent payment obligation to Printar.
• In May 2015, Camtek issued 4.66 million shares at $2.85 per share. Year-end shares outstanding rose to 35.35 million from 30.49 million.
• Camtek completed the transfer of the Sela division in January 2015 and decided to focus semiconductor activity on its Eagle platform while gradually phasing out other semiconductor product lines.

Outlook, commentary, risks and contingencies

• Management said improving semiconductor-industry activity and capital spending, supported in part by advanced packaging, continued through 2015 and expected positive momentum to continue into 2016 despite global economic uncertainty.
• Management expected existing resources and operating cash flows to cover liquidity needs for at least the next 12 months; the filing also says resources were expected to cover needs through calendar 2016 after considering the litigation payment. It warned that further financing or spending reductions might be needed if liquidity proved insufficient.
• The Gryphon system was undergoing qualification at four customer sites. Management described commercialization as a potential growth opportunity, but the filing emphasizes uncertain adoption, lengthy qualification cycles, technology and customer-requirement risks, and possible further inventory write-offs.
• On February 3, 2016, after year-end, the Federal Circuit affirmed the Rudolph Technologies judgment concerning Falcon systems, with damages and interest totaling approximately $14.6 million, and reinstated an injunction against U.S. Falcon sales until patent expiration. Camtek accrued the loss in 2015 and expected payment in the first quarter of 2016. The $7.9 million restricted deposit secured the appeal bond and was expected to be released upon payment.
• Two additional Rudolph matters remained: a stayed case involving the ’528 patent, for which Camtek said it could not estimate a possible loss, and a claim alleging that Eagle infringed the ’298 patent. Camtek said it intended to defend itself and believed Eagle did not infringe.
• Other key risks include cyclical electronics-equipment spending, intense competition and pricing pressure, concentration of approximately 84% of 2015 revenue in Asia-Pacific, reliance on limited or sole-source suppliers, foreign-exchange exposure, and Israel-related geopolitical and operational risks. An OCS royalty-rate dispute remained unaccrued because management assessed an unfavorable outcome as less than 50% probable.

Important facts for investors to verify

• Confirm the final cash cost, timing, and any collateral release associated with the $14.6 million Rudolph judgment, and assess the remaining Eagle and ’528 patent litigation exposure.
• Track Gryphon customer qualifications, commercial orders, and related inventory utilization or further write-offs.
• Assess whether operating cash flow and unrestricted liquidity can support operations and planned investment after the litigation payment.
• Review the drivers of lower gross margin and the continuing operating losses in both reportable segments.
• Verify subsequent share count and dilution, and monitor revenue concentration in Asia-Pacific and dependence on key suppliers.