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Nova Measuring Instruments Ltd.

Conflict Minerals Report

For the Year Ended December 31, 2019

 

Introduction

 

This Conflict Minerals Report of Nova Measuring Instruments Ltd. (the “Company”, “our Company”, “Nova”, “we”, “us” or “our”) for the reporting period from January 1, 2019 to December 31, 2019 is presented to comply with Rule 13p-1 under the Securities Exchange Act of 1934, as amended (the “Rule”). The Rule was adopted by the Securities and Exchange Commission (the “SEC”) to implement reporting and disclosure requirements related to conflict minerals as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Rule imposes certain reporting obligations on SEC registrants whose manufactured products contain cassiterite, columbite-tantalite (coltan), gold, wolframite and their derivatives, which are limited to tin, tantalum, tungsten and gold (“Conflict Minerals”), and which are necessary to the functionality or production of their products. The Rule requires each of these registrants to conduct a reasonable country of origin inquiry (“RCOI”) with respect to the sourcing of the Conflict Minerals that such company uses in its products and, if it has no reason to believe that the Conflict Minerals originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country (the “Covered Countries”), file a description of the inquiry performed and the results of such inquiry on Form SD. If after conducting a RCOI as required by SEC rules a registrant has reason to believe that any of the Conflict Minerals in its supply chain may have originated in the DRC or Covered Countries, or if it is unable to determine the country of origin of those Conflict Minerals, then the registrant must exercise due diligence with respect to the source and chain of custody of the Conflict Minerals in order to determine whether or not such Conflict Minerals directly or indirectly financed or benefited armed groups in the DRC or Covered Countries, and describe such due diligence measures in a Conflict Minerals Report that is included as an exhibit to its Form SD.

 

Nova is committed to responsible sourcing of minerals and has taken action to increase transparency in its supply chain and ensure responsible procurement by its suppliers and sub-suppliers. Nova has adopted a policy with respect to the sourcing of Conflict Minerals, which is available on its website at: www.novami.com under “Company”— “Corporate Responsibility” —“Conflict Minerals”. The content of any website referred to in this Conflict Minerals Report is included for general information only and is not incorporated by reference into this document.

 

Company and Products Overview

 

We are a leading innovator and a key provider of metrology solutions for advanced process control used in semiconductor manufacturing. We offer in-line optical and x-ray stand-alone metrology systems and integrated optical metrology systems, each of which is attached directly to wafer fabrication process equipment. Our metrology product portfolio, combined with our modeling software, aim to deliver unique measurement solutions to measure the most advanced semiconductor technology nodes. Our metrology systems measure various film thickness and composition properties as well as critical-dimension (CD) variables during various front-end and back-end of line steps in the semiconductor wafer fabrication process, allowing semiconductor manufacturers to improve quality, productivity and yields, lower manufacturing costs and increase profitability. We supply our metrology solutions to major semiconductor manufacturers worldwide and serve customers from offices in Taiwan, the Republic of Korea, Japan, the United States and Europe.

 

The scope of this report includes all of our consolidated businesses and subsidiaries. We have one manufacturing facility for our Optical CD product lines, which is located in Ness-Ziona, Israel, and one manufacturing facility for our x-ray product line, which is located in Fremont, California, in the United States. This report refers to the purchase of parts and sub-assemblies (“Components”) used for our manufacturing facilities in both Israel and California. During 2019, all such Components were purchased from third parties and were delivered to these facilities, where they were integrated into complete systems that constitute the tools that we sold to others.

 

Because metals such as tin, tantalum, tungsten and gold that are included in the definition of Conflict Minerals are generally contained in our Components, we believe that our products contain Conflict Minerals that are necessary for the functionality or production of our products.

 

Reasonable Country of Origin Inquiry (“RCOI”)

 

Because we believe that Conflict Minerals were necessary to the functionality or production of products manufactured, or contracted to be manufactured, by us during 2019, we performed an RCOI to determine whether the Conflict Minerals in such products originated from the DRC or Covered Countries and whether such Conflict Minerals come from recycled or scrap sources.

 

The products that we manufacture, or contract to manufacture, are highly complex, and typically contain thousands of Components from many manufacturers. We have an extensive and varied supply chain and do not have a direct relationship with Conflict Minerals smelters or refiners. Rather, the manufacturing process for our products is significantly removed from the mining, smelting and refining of Conflict Minerals. In this regard, we do not purchase Conflict Minerals directly from mines, smelters or refiners, and there are many third parties in the supply chain between the original sources of Conflict Minerals and the ultimate manufacture of our products. Therefore, tracing these minerals to their sources is a challenge that requires us to rely on our first-tier (i.e., direct) manufacturers and suppliers (“Suppliers”) in our efforts to achieve supply chain transparency, including obtaining information regarding the origin of the Conflict Minerals. Accordingly, to gather information from our Suppliers, we utilize a standard template for Conflict Minerals reporting designed by the Responsible Business Initiative (“RMI”) (formerly the Conflict Free Sourcing Initiative (“CFSI”)), known as the Conflict Minerals Reporting Template (the “CMRT”). We relied on our Suppliers to complete the CMRT in order to provide information on the origin of the Conflict Minerals contained in Components supplied to us – including information regarding the sources of Conflict Minerals that are supplied to our Suppliers from lower tiers in the chain (i.e., sub-suppliers). In addition, with respect to the certification of smelters or refiners as conflict-free, we have relied upon the latest findings of the RMI’s Responsible Minerals Assurance Process (the “RMAP”), formerly the CFSI’s Conflict-Free Smelter Program (the “CFSP”).

 

The RCOI undertaken by us in 2019 consisted of sending letters and CMRTs to 36 of our largest first-tier Suppliers that we concluded were providing us with Components that do, or may, contain Conflict Minerals that are necessary for the functionality or production of our products and that accounted for approximately 88% of all our applicable 2019 product material expenditures. These Suppliers include our turnkey Suppliers, which means that they are in direct contact with our supply chain management team, and are considered to be our strategic partners, having long-term relationships with our Company. The letters we sent to such Suppliers explained the Rule and referred the Suppliers to online training materials and instructions, sought their support and cooperation in our efforts in connection with Conflict Minerals, provided a copy of our Conflict Minerals policy, and asked them to complete the CMRT. Working with a third-party service provider to conduct the survey and compile the survey results, we reviewed the responses and followed up as necessary by sending periodic reminders to non-responsive Suppliers and following up on responses that appeared to be inconsistent, incomplete or inaccurate.  In the end, the response rate from Suppliers asked to participate was 100%.

 

Based on information obtained in the RCOI, and taking into account the complexities of our supply chain, we concluded that we did not have sufficient information to determine the country of origin of the Conflict Minerals in our products and were unable to rule out the possibility that Conflict Minerals used in our products originated, or may have originated, from the DRC or Covered Countries. Therefore, in accordance with the Rule, we undertook due diligence on the source and chain of custody of the Conflict Minerals that were necessary to the functionality or production of our products during 2019. There is significant overlap between our RCOI efforts and our due diligence measures performed.

 

Due Diligence

 

Design of Due Diligence Framework

 

Our due diligence measures have been designed, in all material respects, to conform as far as practicable with the internationally recognized due diligence framework prescribed by the Organization for Economic Co-operation and Development (“OECD”), known as “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High Risk Areas” and related supplements for Conflict Minerals (the “OECD Guidance”).

 

Due Diligence Measures Performed

 

In substantial conformance with the OECD Guidance, our due diligence efforts for calendar year 2019 included the following steps:

 

Step 1. Establish Strong Company Management Systems

 

In addition, we made training materials available to those first-tier Suppliers that included an overview of the Rule and instructions on how to complete the CMRT survey.

For each purchase order issued by our computerized purchase order system for purchasing Components, Suppliers are required to accept our terms and conditions, which include, among others, that (i) upon request, a Supplier shall provide us with information regarding its products that contain Conflict Minerals, and (ii) in certain cases, we reserve the right to immediately terminate the purchase order and cease all procurement activity with the supplier.

 

Step 2. Identify and Assess Risks in the Supply Chain

 

We identified and assessed risk in our supply chain as follows: First, we identified our major first-tier (i.e., direct) Suppliers that provide Components that potentially incorporate Conflict Minerals that are necessary to the functionality or production of our products that we manufactured, or contracted to manufacture, in 2019 (and which accounted for a substantial portion of all applicable expenditures on Components by our Company in 2019). We then requested information from relevant Suppliers regarding the source and chain of custody of Conflict Minerals in their supply chain. To facilitate the collection of complete, accurate, standardized and verifiable information, we relied primarily on the CMRT, which seeks information regarding country of origin of Conflict Minerals, mine location and smelters or refiners used.

 

 

We reviewed Suppliers’ responses in order to track information regarding smelters or refiners of Conflict Minerals in our supply chain that have not received a conflict-free designation based on the RMAP.

 

Step 3. Design and Implement a Strategy to Respond to Identified Risks

 

We initiated a supply chain survey with selected Suppliers using the CMRT in order to identify those smelters or refiners that supplied Conflict Minerals used in our products. We monitored and tracked our performance in this area by reviewing Supplier responses. Each CMRT completed by a Supplier was entered into a database maintained by a third-party service provider and reviewed.  For Suppliers that provided unclear or incomplete responses, an escalation process was used in order to obtain complete and accurate required information, sometimes requiring multiple telephone and/or email contacts to further the data collection process. Our Conflict Minerals steering committee held regular meetings to review progress and assess the risks identified.

 

In addition, smelters or refiners that were identified in the Suppliers’ responses were compared against the list of facilities that have received a conflict-free designation from the RMAP (“conflict-free” meaning generally that they did not directly or indirectly finance or benefit armed groups in the Covered Countries), and country of origin information for the smelters or refiners identified by the supply chain responses were reviewed using RMAP data.  In accordance with our risk management plan, we contacted suppliers that have been identified as having non-certified smelters or refiners within the smelters or refiners list that they have provided to us.

 

Finally, representatives of our senior management were briefed about our due diligence efforts and findings on a regular basis.

 

Step 4. Carry Out Independent Third-Party Audit of Smelter/Refiner’s Due Diligence Practices

 

We are several steps away in the supply chain from smelters or refiners that process the Conflict Minerals used in our products, do not have any direct relationships with such smelters or refiners and did not obtain from a third party or perform ourselves a direct audit of smelters or refiners within our supply chain. Instead, we relied on conflict-free designations based on the activities of other organizations such as the RMI (through the RMAP).

 

Step 5.  Report Annually on Supply Chain Due Diligence

 

We report annually on our supply chain due diligence, as required by the Rule, and have posted our Form SD and Conflict Minerals Report on our website at: www.novami.com under “Company”— “Corporate Responsibility” —“Conflict Minerals”.

 

Results of assessment

 

On account of incomplete information, we are unable at this time to determine and describe with complete certainty in this report a complete list of either the facilities used to process the Conflict Minerals used in our products or the countries of origin of those Conflict Minerals. We have, nevertheless, described below the results of our assessment on the source of the Conflict Minerals, to the extent that we received information from our relevant suppliers through our due diligence efforts.

 

As indicated above, the products that we manufacture, or contract to manufacture, are highly complex, and typically contain thousands of Components from many Suppliers. Because there are generally multiple tiers between the mines that extract Conflict Minerals and our Suppliers, we relied on our Suppliers to provide information on the origin of the Conflict Minerals contained in Components supplied to us.

 

In all, we surveyed 36 Suppliers to whom we paid approximately 88% of the applicable expenditures by our Company on Component costs for our products in 2019. 100% of the Suppliers whom we surveyed provided a complete response.

 

As part of our due diligence efforts and based on the information received from our Suppliers, we identified 425 smelters or refiners of Conflict Minerals used generally in their supply chains, of which 61% have been certified as conflict free by the RMI’s RMAP, and of which 1% are currently engaged in the RMI audit process. A list of these identified smelters or refiners is provided in Appendix A hereto.

 

Some Suppliers were unable to provide a complete list of smelters or refiners. In addition, despite receiving information regarding smelters or refiners used generally by some Suppliers in their supply chains, these Suppliers were unable to report which smelters or refiners were part of the supply chain applicable to the specific Components that were sold to us. Furthermore, for the significant majority of smelters reported by these Suppliers, there is inadequate information available to assess the source of the conflict minerals that they process. As a result, we are unable to identify with complete accuracy the country of origin of the Conflict Minerals used in our products in 2019 and we concluded in good faith that we lack sufficient information to trace the chain of custody of any Conflict Minerals contained in our products in 2019 up through the supply chain to a specific smelter or, in turn, to a country or mine of origin

 

 We have, however, become aware that certain smelters or refiners from Covered Countries that have been identified as part of the supply chain of our Suppliers have not been certified as conflict free under the RMI’s RMAP— specifically, smelter CID002567 of Sudan (Sudan Gold Refinery); smelter CID002854 of Zambia (Universal Precious Metals Refining Zambia); and smelter CID003185 of Uganda (African Gold Refinery). We have therefore activated our risk management procedures in respect of those smelters or refiners, and have approached the Supplier that provided us the relevant Conflict Minerals sourced from those smelters or refiners and have asked for corrective action to be taken.

 

We furthermore note that information is not gathered from our Suppliers on a continuous, real-time basis. We can therefore only provide reasonable, not absolute, assurance regarding the source and chain of custody of the Conflict Minerals used in our products, since the information comes from direct Suppliers, not the underlying smelters or refiners, and is based on independent third-party audit programs, not our own auditing.

 

Continuous efforts to mitigate risk

 

We intend to maintain our approach for responsible sourcing of the minerals used in our products and to continue to comply with any applicable regulations related to the sourcing of, and disclosure concerning, the Conflict Minerals that may be contained in our products.

 

Forward Looking Statements

 

Forward looking statements in this Conflict Minerals Report are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. Investors are cautioned that statements in this Conflict Minerals Report that are not strictly historical statements, including without limitation, the Company’s intentions and expectations regarding further Supplier engagement, due diligence and risk mitigation efforts and strategy, constitute forward looking statements that involve risks and uncertainties. Actual results could differ materially from the forward looking statements. Words such as “expects,” “anticipates,” “intends,” variations of these words, and similar expressions, are intended to identify such forward looking statements. Risks and uncertainties that could cause actual results to differ include, without limitation, risks and uncertainties associated with the progress of industry and other supply chain transparency and smelter or refiner validation programs for Conflict Minerals (including the possibility of inaccurate information, fraud and other irregularities), inadequate Supplier education and knowledge, limitations on the ability or willingness of Suppliers to provide more accurate, complete and detailed information and limitations on the Company’s ability to verify the accuracy or completeness of any supply chain information provided by Suppliers or others. Except as otherwise required by law, the Company undertakes no obligation to update publicly the information contained in this Conflict Minerals Report, or any forward looking statements, to reflect new information, events or circumstances after the date they were made, or to reflect the occurrence of unanticipated events.

 

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