ORBK » Topics » (i) Year Ended December 31, 2006 Compared To Year Ended December 31, 2005

This excerpt taken from the ORBK 20-F filed Mar 28, 2008.

(j)    Year Ended December 31, 2006 Compared To Year Ended December 31, 2005

The Company’s financial results for 2006 reflected a strong year, which was marked by record revenues and significantly increased profitability compared to 2005. This was driven principally by solid growth in the Company’s bare PCB business, which was a function of a robust global electronics industry in which new

 

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product introductions and applications led to increased capital investments. The Company’s increased bare PCB revenues also served to offset a decline during the year in its FPD business.

Revenues in 2006 totaled $416.5 million compared with $379.9 million in 2005. This increase of approximately 10% was traceable primarily to higher demand for the Company’s PCB-AOI and direct imaging systems. Revenues from service activities increased to a record $83.2 million from the $76.6 million recorded in 2005, reflecting the Company’s success in securing additional service contracts for its steadily increasing global installed base of systems in all areas of its business.

Revenues from the sale and service of PCB-related equipment increased to $273.7 million from the $233.2 million recorded in 2005. Of these revenues, $234.0 million, representing approximately 56% of the Company’s total revenues, was attributable to sales and service of equipment for bare PCBs and $39.7 million, representing approximately 10% of the Company’s total revenues, was attributable to sales and service of AOI systems for assembled PCBs. In 2005, $201.1 million of revenues, representing approximately 52% of the Company’s total revenues, was attributable to sales and service of systems for bare PCBs and $32.1 million of revenues, representing approximately 9% of the Company’s total revenues, was attributable to sales and service of AOI systems for assembled PCBs.

During 2006, the Company sold over 400 Discovery PCB-AOI systems, and 75 Paragon direct imaging systems. These systems are designed to respond to the increasingly specialized inspection and imaging needs of PCB manufacturers, who require high throughput and registration accuracy in their manufacturing processes to enable them to meet the challenges they face as part of the ongoing trend of increasingly sophisticated electronic devices. Their industry-wide acceptance reinforced the Company’s position of leadership in the provision of AOI and process control systems and imaging solutions for use in the manufacture of bare PCBs.

Revenues during the year from sales of AOI systems for assembled PCBs increased by approximately 24% from 2005, despite the fact that revenues were slightly lower in the second half of 2006 than the first. The Company’s main offering to the assembled PCB industry, its Symbion series of post-paste and post-reflow systems, were well received by customers since their introduction in the second quarter of 2005. The Company’s revenues in this area of its business were impacted by the strongly competitive environment, which was and remains fragmented and characterized by a large number of relatively small suppliers.

Revenues from the sale and service of FPD-related equipment decreased by 4% to $129.1 million from the $135.0 million recorded in 2005. Although consumer demand for LCD televisions remained very strong, some FPD manufacturers, out of caution and in light of a certain degree of overcapacity, delayed additional investments until industry developments became clearer. The Company maintained its position at the forefront of development and production of state-of-the-art solutions for FPD manufacturers and, through its in-line and off-line products, continued to provide comprehensive yield-enhancement systems to meet the critical needs of these customers.

Revenues from the Company’s automatic check reading products increased to $13.1 million in 2006 from $11.5 million in 2005, reflecting Orbograph’s continued successes in diversifying its product portfolio and achieving increased installations at larger banks and financial institutions.

The increase in the cost of products sold in 2006 of $9.0 million, or 5.6%, arose principally from the 5.9% increase in expenditures on materials and components, resulting mainly from the increased volume of products sold. Labor costs decreased by 5.7%, as a result of the Company’s policy of increased outsourcing of certain subassemblies to third party suppliers. Overhead and other expenses remained stable despite increased production volume.

The cost of services rendered in 2006 increased by $1.2 million, or 1.8%, against an increase in revenues from services rendered of $6.5 million, or 8.5%. This relatively small cost increase, comprised mainly of

 

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materials consumed, reflected the more efficient utilization of the Company’s global customer support infrastructure and was achieved despite the growth in the Company’s installed base of systems during the year.

Gross profit for 2006 was $189.6 million, or 45.5% of revenues, compared to $163.2 million, or 43.0% of revenues, in 2005. Gross profit for 2006 from sales of equipment was $173.7 million, or 52.1% of product sales, compared to $152.6 million, or 50.3%, during 2005. The increase in gross margins arose principally from the favorable product mix of sales revenues during 2006. Gross profit for 2006 from services rendered was $15.9 million, or 19.1% of service revenues, compared to $13.8 million, or 13.8%, during 2005. This increase also reflected the more efficient utilization during the year of the Company’s global customer support infrastructure.

The increase in gross research and development expenditure, to $62.2 million in 2006 from $56.7 million in 2005, reflected the Company’s ongoing significant investment in research and development and the high priority placed on its efforts to expand into new technologies and product areas. The expenditures during 2006 included a full year of the research and development activities of OMS, which focused on improving the yield of its CZT production line, as well as on independent development of application specific integrated circuits and digital interface electronics for the new version of its CZT detector module for use in nuclear imaging applications. This expense was principally responsible for the operating loss of $5.6 million in the Company’s Medical Imaging segment. During 2006, the Company received $1.7 million in Israeli Government participations in its research and development expenditures, compared to $1.0 million in 2005.

Selling, general and administrative expenses increased by 16% to $68.9 million in 2006 from the $59.4 million recorded in 2005. This was partly due to the higher levels of investment by the Company in its sales and marketing infrastructure in the Far East in light of the continued migration of PCB manufacturing to that region, as reflected in the significant increase in sales to China during 2006. The increase also included $3.3 million expensed as a result of the implementation of FAS 123(R) and costs related to internal control reviews. After giving effect to these expenses, selling, general and administrative expenses as a percentage of revenues was virtually unchanged from 2005. This reflected the Company’s continued efforts to leverage its global infrastructure to offset other increases in general and administrative expenses.

The amortization of other intangible assets during 2006 decreased to $0.6 million from the $2.6 million recorded in 2005.

In the fourth quarter of 2006 the Company initiated a restructuring program related to its assembled PCB product line, consisting primarily of the closure of the Company’s assembled PCB facility in Bad Pyrmont, Germany and the dismissal of 25 persons employed there. This restructuring program was designed to centralize the Company’s assembled PCB research and development activities at Company headquarters in Israel, so as to enable more efficient utilization of core research and development capabilities and, ultimately, develop new and improved solutions for its assembled PCB customers. The program resulted in total restructuring charges of $3.3 million, which were recorded in the fourth quarter of 2006. Liabilities related to the program in the amount of $241,000 were paid during the last quarter of 2006 and the remaining liabilities were paid through the second quarter of 2007. The restructuring resulted in an estimated $1.6 million annual cost reduction to the Company.

Net financial income totaled $7.4 million in 2006, compared with $3.5 million in 2005. The increase in interest income, to $9.2 million from $5.2 million in 2005, resulted from both increased cash balances and the significant increase in prevailing interest rates during 2006. The Company incurred costs relating to factoring of letters of credit of approximately $1.1 million and had small translation losses. The Company incurred no interest expenses in 2006.

Taxes on income in 2006 reflected a charge of $7.9 million, compared to a charge of $5.6 million in 2005. The Company’s effective tax rates for 2006 and 2005 were 12.4% and 11.4%, respectively. Generally, the Company’s effective tax rate varies largely as a function of benefits received from the State of Israel, particularly those relating to Approved Enterprises or Benefiting Enterprises. See Effective Corporate Tax Rate.

 

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The share in losses of an associated company of $0.3 million in 2006, compared with a profit of $0.1 million in 2005, reflected the Company’s share in the profits of Coreflow, in which the Company previously held a 38% equity interest (calculated on a fully diluted basis). The equity interest was reduced to approximately 30% at year-end after the Company received a repayment of $1.0 million from this investment. The minority share in profits of a consolidated subsidiary of $0.3 million in 2006 reflected the 11% minority interest in Orbograph. This compared to the minority share in profits of $0.2 million in 2005.

Net income for the year ended December 31, 2006 was $55.0 million, or $1.65 per share (diluted), compared with a net income of $43.3 million, or $1.30 per share (diluted), for the year ended December 31, 2005.

This excerpt taken from the ORBK 20-F filed Mar 29, 2007.

(i)    Year Ended December 31, 2006 Compared To Year Ended December 31, 2005

 

The Company’s financial results for 2006 reflected another strong year, which was marked by record revenues and significantly increased profitability compared to 2005. This was driven principally by solid growth in the Company’s bare PCB business, which was a function of a robust global electronics industry in which new product introductions and applications led to increased capital investments. The Company’s increased bare PCB revenues also served to offset a decline during the year in its FPD business.

 

Revenues in 2006 totaled $416.5 million compared with $379.9 million in 2005. This increase of approximately 10% was traceable primarily to higher demand for the Company’s PCB-AOI and direct imaging systems. Revenues from service activities increased to a record $83.2 million from the $76.6 million recorded in 2005, reflecting the Company’s success in securing additional service contracts for its steadily increasing global installed base of systems in all areas of its business.

 

Revenues from the sale and service of PCB-related equipment increased to $273.7 million from the $233.2 million recorded in 2005. Of these revenues, $234.0 million, representing approximately 56% of the Company’s total revenues, was attributable to sales and service of equipment for bare PCBs and $39.7 million, representing approximately 10% of the Company’s total revenues, was attributable to sales and service of AOI systems for assembled PCBs. In 2005, $201.1 million of revenues, representing approximately 52% of the Company’s total

 

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revenues, was attributable to sales and service of systems for bare PCBs and $32.1 million of revenues, representing approximately 9% of the Company’s total revenues, was attributable to sales and service of AOI systems for assembled PCBs.

 

During 2006, the Company sold over 400 Discovery PCB-AOI systems, and 75 Paragon direct imaging systems. These systems are designed to respond to the increasingly specialized inspection and imaging needs of PCB manufacturers, who require high throughput and registration accuracy in their manufacturing processes to enable them to meet the challenges they face as part of the ongoing trend of increasingly sophisticated electronic devices. Their industry-wide acceptance has reinforced the Company’s position of leadership in the provision of AOI and process control systems and imaging solutions for use in the manufacture of bare PCBs.

 

Revenues during the year from sales of AOI systems for assembled PCBs increased by approximately 24% from 2005, despite the fact that revenues were slightly lower in the second half of 2006 than the first. The Company’s main offering to the assembled PCB industry is its Symbion series of post-paste and post-reflow systems, which have been well received by customers since their introduction in the second quarter of 2005. The Company’s revenues in this area of its business are impacted by the strongly competitive environment, which remains fragmented and characterized by a large number of relatively small suppliers.

 

Revenues from the sale and service of FPD-related equipment decreased by 4% to $129.1 million from the $135.0 million recorded in 2005. Although consumer demand for LCD televisions remains very strong, some FPD manufacturers have, out of caution and in light of a certain degree of overcapacity, delayed additional investments until industry developments become clearer. The Company remains at the forefront of development and production of state-of-the-art solutions for FPD manufacturers and, through its in-line and off-line products, continues to provide comprehensive yield-enhancement systems to meet the critical needs of these customers.

 

Revenues from the Company’s automatic check reading products increased to $13.1 million in 2006 from $11.5 million in 2005, reflecting Orbograph’s continuing successes in diversifying its product portfolio and achieving increased installations at larger banks and financial institutions.

 

The increase in the cost of products sold in 2006 of $9.0 million, or 5.6%, arose principally from the 5.9% increase in expenditures on materials and components, resulting mainly from the increased volume of products sold. Labor costs decreased by 5.7%, as a result of the Company’s policy of increased outsourcing of certain subassemblies to third party suppliers. Overhead and other expenses remained stable despite increased production volume.

 

The cost of services rendered in 2006 increased by $1.2 million, or 1.8%, against an increase in revenues from services rendered of $6.5 million, or 8.5%. This relatively small cost increase, comprised mainly of materials consumed, reflects the more efficient utilization of the Company’s global customer support infrastructure and was achieved despite the growth in the Company’s installed base of systems during the year.

 

Gross profit for 2006 was $189.6 million, or 45.5% of revenues, compared to $163.2 million, or 43.0% of revenues, in 2005. Gross profit for 2006 from sales of equipment was $173.7 million, or 52.1% of product sales, compared to $152.6 million, or 50.3%, during 2005. The increase in gross margins arose principally from the favorable product mix of sales revenues during 2006. Gross profit for 2006 from services rendered was $15.9 million, or 19.1% of service revenues, compared to $13.8 million, or 13.8%, during 2005. This increase also reflected the more efficient utilization during the year of the Company’s global customer support infrastructure.

 

The increase in gross research and development expenditure, to $62.2 million in 2006 from $56.7 million in 2005, reflects the Company’s ongoing significant investment in research and development and the high priority which it places on its efforts to expand into new technologies and product areas. The expenditures during 2006 included a full year of the research and development activities of OMS, which focused on improving the yield of its CZT production line, as well as on independent development of application specific integrated circuits

 

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(ASICs) and digital interface electronics for the new version of its CZT detector module for use in medical nuclear imaging applications. This expense was responsible for the operating loss in the Company’s Other operating segment. During 2006, the Company received $1.7 million in Israeli Government participations in its research and development expenditures, compared to $1.0 million in 2005.

 

Selling, general and administrative expenses increased by 16% to $68.9 million in 2006 from the $59.4 million recorded in 2005. This was partly due to the higher levels of investment by the Company in its sales and marketing infrastructure in the Far East in light of the continued migration of PCB manufacturing to that region, as reflected in the significant increase in sales to China during 2006. The increase also included $3.3 million expensed as a result of the implementation of FAS 123(R) and costs related to internal control reviews. After giving effect to these expenses, selling, general and administrative expenses as a percentage of revenues was virtually unchanged from 2005. This reflects the Company’s continued efforts to leverage its global infrastructure to offset other increases in general and administrative expenses.

 

The amortization of other intangible assets during 2006 decreased to $0.6 million from the $2.6 million recorded in 2005.

 

In the fourth quarter of 2006 the Company initiated a restructuring program related to its assembled PCB product line, consisting primarily of the closure of the Company’s assembled PCB facility in Bad Pyrmont, Germany and the dismissal of 25 persons employed there. This restructuring program is designed to centralize the Company’s assembled PCB research and development activities at Company headquarters in Israel, so as to enable more efficient utilization of core research and development capabilities and, ultimately, develop new and improved solutions for its assembled PCB customers. The program resulted in total restructuring charges of $3.3 million, which were recorded in the fourth quarter of 2006. Liabilities related to the program in the amount of $241,000 were paid during the last quarter of 2006 and the remaining liabilities will be paid through the second quarter of 2007. The restructuring will result in an estimated $1.6 million annual cost reduction to the Company.

 

Net financial income totaled $7.4 million in 2006, compared with $3.5 million in 2005. The increase in interest income, to $9.2 million from $5.2 million in 2005, resulted from both increased cash balances and the significant increase in prevailing interest rates during 2006. The Company incurred costs relating to factoring of letters of credit of approximately $1.1 million and had small translation losses. The Company incurred no interest expenses in 2006.

 

Taxes on income in 2006 reflected a charge of $7.9 million, compared to a charge of $5.6 million in 2005. The Company’s effective tax rates for 2006 and 2005 were 12.4% and 11.4%, respectively. Generally, the Company’s effective tax rate varies largely as a function of benefits received from the State of Israel, particularly those relating to Approved Enterprises. See Effective Corporate Tax Rate.

 

The share in losses of an associated company of $0.3 million in 2006, compared with a profit of $0.1 million in 2005, reflected the Company’s share in the profits of Coreflow Scientific Solutions Ltd. (“Coreflow”), in which the Company previously held a 38% equity interest (calculated on a fully diluted basis). The equity interest was reduced to approximately 30% at year-end after the Company received a repayment of $1.0 million from this investment. The minority share in profits of a consolidated subsidiary of $0.3 million in 2006 reflected the 11% minority interest in Orbograph. This compared to the minority share in profits of $0.2 million in 2005.

 

Net income for the year ended December 31, 2006 was $55.0 million, or $1.65 per share (diluted), compared with a net income of $43.3 million, or $1.30 per share (diluted), for the year ended December 31, 2005. The results for the year ended December 31, 2006 included restructuring charges of $3.3 million, as discussed above.

 

EXCERPTS ON THIS PAGE:

20-F
Mar 28, 2008
20-F
Mar 29, 2007
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