Nova Measuring Instruments (NVMI) Enters Royalty Buyout Agreement Israel's OCS

August 18, 2016 6:10 AM EDT

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Nova Measuring Instruments (Nasdaq: NVMI) announced it has entered into a royalty buyout agreement ("Agreement") with the Office of the Chief Scientist ("OCS") in Israel.

The company previously participated in royalty-bearing research and development grants with the OCS, under which the company paid royalties at the rate of 3.5%-5% on sales of products developed with funds provided by the OCS. The company ceased its participation in royalty-bearing programs in December 2014. The contingent net royalty liability to the OCS at the time of the Agreement was approximately $24 million, and this obligation included different annual interest rates ranging up to 5%.

As part of the Agreement, Nova agreed to pay approximately $14 million to the OCS in Israel. As a result of this payment, Nova is released from any future royalty payments on the previous funds received from the OCS. The payment is planned to take place by the end of September 2016. Following this payment, the company expects to have over $90 million in total cash reserves at the end of the third quarter of 2016.

The Agreement enables Nova to apply for R&D program funding without future royalty payments, beginning in 2017, and is expected to improve the company's reported gross margin on products starting the fourth quarter of 2016. In addition, the payment is expected to be tax deductible in Israel and to reduce the company future tax payments by approximately $2 million.

"By taking advantage of this attractive buyout agreement we are reducing future royalty payments and increasing our financial flexibility for investment in future R&D projects and increased profitability," commented Eitan Oppenhaim, President and Chief Executive Officer of Nova. "As part of our plans to continue our long-term profitable growth, we are leveraging our financial strength to invest in maximizing shareholder value. This agreement supports these efforts and improves Nova's position."

The $14 million payment of Nova's royalty obligations to the OCS, will be presented as a one-time expense in the products cost of goods sold in 2016 third quarter financial results, and is expected to be adjusted for non-GAAP purpose.

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