Business context and reporting period
Nova Measuring Instruments Ltd. filed this audited Form 20-F for the fiscal year ended December 31, 2011. It is an annual report, not a standalone fourth-quarter filing. Nova designs and sells integrated and stand-alone metrology systems and related services for semiconductor manufacturing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars; amounts below are in millions unless noted.
Financial results and liquidity
- Revenue: $102.8, up 18.7% from $86.6 in 2010. Product revenue was $85.6 (+19.2%) and service revenue $17.3 (+16.4%).
- Profit: Gross profit was $58.0, operating income $24.7, and net income $28.1, compared with $47.4, $21.9, and $22.2, respectively, in 2010. Basic and diluted EPS were $1.07 and $1.04.
- Margins: Gross margin improved to 56.4% from 54.7%; operating margin was 24.0% versus 25.2%; net margin was 27.3% versus 25.6%. The 2011 result included a $2.5 deferred-tax benefit from partially reversing a valuation allowance.
- Expenses: Net R&D increased 50.1% to $18.7 (18.2% of revenue), while sales and marketing rose 12.2% to $11.4 and general and administrative expenses rose 8.8% to $3.2.
- Cash flow and investment: Operating activities generated $25.1, compared with $25.8 in 2010. Cash, short- and long-term interest-bearing deposits, and held-to-maturity securities totaled approximately $87.1 at year-end, versus $61.6 a year earlier. Capital expenditures were $4.5 in the filing’s capital-expenditure table; management expected approximately $6.0 in 2012.
- Liquidity and debt: Working capital was $94.7, up from $65.4. The company reported no significant long-term debt and no readily available long-term credit line. Total assets were $122.9 and shareholders’ equity was $99.9.
Material changes versus 2010
- Revenue continued to grow, but at a slower rate than the exceptional 120.3% increase reported in 2010. Management attributed 2011 growth to market-share gains, customer repeat orders, additional metrology applications, and industry spending, particularly in the first half.
- Gross margin increased 1.7 percentage points, reflecting higher sales volume, product mix, and service-parts and repair sales. Operating margin declined 1.2 points as operating expenses grew faster than revenue, chiefly because of increased R&D investment.
- Stand-alone metrology became a larger part of the business; more than 70% of 2011 revenue came from technology nodes below 30nm. Product sales represented 83% of revenue, compared with 17% from services.
- Cash reserves increased despite lower operating cash flow; much of the increase in deposits reflects investment of cash rather than cash-equivalent balances. Fixed assets rose to $6.0 from $3.1, and inventory declined to $9.6 from $10.8.
Outlook, risks, and unusual items
- Nova gave no specific revenue or earnings guidance for 2012. It planned to increase aggregate operating expenses, continue investing in R&D and infrastructure, and spend about $6.0 on capital expenditures. Management said available cash should fund planned activities for at least 12 months.
- Management cited collaboration with leading customers and equipment makers, continued development of next-generation products, and opportunities in stand-alone Optical CD, advanced etch, and 3-D interconnect. It also identified product-roadmap execution, market forecasting, competition, and expense control as challenges.
- The industry outlook was mixed: Gartner forecast 2012 semiconductor revenue growth of 4.6% but a 9.8% decline in wafer-fab-equipment spending. Results are exposed to semiconductor-industry cyclicality, concentrated customers and product lines, long sales cycles, and orders that may be delayed or canceled with little penalty.
- Other material exposures include reliance on one manufacturing site in Israel, limited or sole-source suppliers, geopolitical and currency risks, and concentration of cash at Israeli banks (about 96% of reserves). Government grants carry a contingent royalty liability of approximately $17.5 and restrictions on certain technology transfers and manufacturing outside Israel.
- Inventory write-offs were $1.0 in 2011, compared with $0.3 in 2010. The $2.5 deferred-tax benefit increased reported net income. The company reported no significant legal proceedings, no off-balance-sheet arrangements, and no expected cash dividends for the foreseeable future.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Confirm the 2011 customer-concentration disclosure: one table reports the five largest customers at 58% of revenue, while another passage reports 59%; the largest customer represented 29%.
- Assess the durability of 2011 growth and margins against the forecast decline in wafer-fab-equipment spending, customer order volatility, and Nova’s increased R&D and operating costs.
- Separate recurring earnings from the $2.5 deferred-tax benefit and review the assumptions supporting deferred-tax-asset realization.
- Review the liquidity composition and accessibility of deposits, including the concentration of cash reserves in Israeli banks, and the company’s lack of a long-term credit facility.
- Monitor the $17.5 contingent Office of the Chief Scientist royalty obligation, grant-related restrictions, and the potential effect of currency movements and Israeli operating risks.