Tower Semiconductor Ltd. — 2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone 2023 fourth-quarter filing; quarterly Q4 results are not separately provided in the filing text summarized here. Financial statements are prepared under U.S. GAAP. Amounts below are U.S. dollars unless stated otherwise.
Business context
Tower is a pure-play specialty semiconductor foundry. It manufactures wafers and provides related engineering and design services, primarily for analog and mixed-signal applications; it does not sell proprietary end products. Operations span Israel, the United States and Japan, with capacity projects in Italy and, under an agreement signed in September 2023, a planned capacity corridor at Intel’s New Mexico facility.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $1,422.7 million | $1,677.6 million |
| Gross profit / margin | $353.5 million / 24.8% | $466.3 million / 27.8% |
| Operating profit | $547.3 million | $311.7 million |
| Net profit attributable to Tower | $518.5 million | $264.6 million |
| Basic / diluted EPS | $4.70 / $4.66 | $2.42 / $2.39 |
| Cash from operating activities | $676.6 million | $529.8 million |
| Cash and cash equivalents at year-end | $260.7 million | $340.8 million |
- Revenue fell 15.2%, mainly because fewer CMOS wafers were shipped and because the Arai facility in Japan, which ceased operations in 2022, generated no 2023 revenue.
- Gross profit declined $112.8 million as lower revenue more than offset reduced cost of revenue. Gross margin contracted 3.0 percentage points.
- Reported operating profit and net profit include a $313.5 million net Intel merger-termination fee. Intel paid a $353 million gross reverse termination fee; associated costs reduced the amount recognized in the income statement.
- 2023 also included a $52.2 million net gain from sales of machinery and equipment related to Japan restructuring and $19.7 million of restructuring expense. These unusual items, together with the Intel fee, make reported year-over-year profit growth a poor indicator of recurring operating performance.
- Financing income was $30.5 million, versus $12.8 million of financing expense in 2022, primarily reflecting higher deposit balances and interest rates. Income tax expense rose to $65.3 million from $25.5 million.
- Operating cash flow increased to $676.6 million. Net cash invested in property and equipment was $432.2 million; the difference between operating cash flow and this investment was approximately $244 million.
- Capital expenditures were $445 million before $12.3 million of proceeds from equipment and fixed-asset sales, compared with $366.4 million net investment in 2022. The filing also reports gross investment of $445 million in 2023 versus $367 million in 2022.
- Year-end short-term deposits were $790.8 million and marketable securities were $185.0 million, in addition to cash. Total current assets were $1,709.2 million and current liabilities were $276.8 million.
- Short- and long-term debt on the balance sheet totaled $231.6 million ($59.0 million current and $172.6 million long-term), including loans and lease liabilities. The filing describes approximately $102 million of JPY loans at a fixed 1.95% rate and $118.3 million of capital-lease liabilities. Tower repaid its Series G debentures in full in March 2023.
Material changes and management commentary
- Management attributed the revenue decline principally to lower wafer shipments and the absence of Arai operations. Japan restructuring included equipment transfers and sales; the process was completed in the first half of 2023.
- Tower and Intel terminated their proposed acquisition in August 2023 after certain required regulatory approvals were not received. In September 2023, the companies agreed to a separate capacity-corridor arrangement: Tower may invest up to $300 million in equipment and fixed assets for use in Intel’s New Mexico facility.
- Tower continued preparing to use one-third of the installed capacity in ST’s shared 300mm Agrate, Italy facility. Tool installation, process development, qualification and ramp-up were ongoing.
- Management stated that cash, deposits, marketable securities, operating cash generation and available lease lines were sufficient for operating needs, existing-fab capital expenditure and scheduled debt repayments. Larger capacity expansion or acquisition plans could require additional financing; availability and terms are not assured.
- No numerical revenue or earnings guidance is provided in the summarized filing text. Management emphasizes cyclical demand, customer orders placed relatively close to shipment, pricing pressure and the importance of utilization and capacity expansion.
Risks, contingencies and subsequent events
- Demand and concentration: Semiconductor markets are cyclical, and lower utilization can pressure margins because of fixed costs. NTCJ represented 14% of 2023 revenue; four other customers together contributed 30%.
- Fab 3 lease dispute: The Newport Beach landlord alleges inadequate noise abatement and seeks a declaration that could permit lease termination. Tower disputes the claims. The lease currently runs through March 2027; continued operations thereafter may require an extension, property acquisition or costly alternative capacity.
- Expansion execution and funding: The Intel corridor and Agrate project require equipment investment, qualification and customer ramp-up. Delays, weaker demand or unavailable financing could reduce returns or strain liquidity.
- Geopolitical and operational exposure: The filing describes the Israel conflict and possible effects on personnel, operations, customers and supply chains. As of the filing, Tower reported no material adverse impact from the war and said business-continuity measures were in place.
- Post-year-end Japan earthquake: The January 1, 2024 earthquake damaged some tools and work in progress and inventory, causing temporary shutdowns. The filing says the facilities returned to operation after several weeks; the financial impact is not clearly quantified in the filing text provided.
- Israeli operations restructuring: In the first quarter of 2024, Tower decided to cease Fab 1 operations within approximately one year and integrate some 150mm operations into Fab 2. Related income or expenses will be recognized as incurred; the filing text does not provide a clear amount.
- Other exposures: Risks include foreign-exchange movements, supply constraints, process or yield problems, cybersecurity incidents, environmental requirements, export controls, intellectual-property disputes and potential labor actions. Tower disclosed no cybersecurity incident with a material adverse effect to date.
- Tax: Tower’s Israeli Preferred Enterprise income benefits from a 7.5% tax rate, but OECD Pillar Two rules could raise the effective rate in future periods; management was assessing the impact and possible transitional relief. An Israeli tax audit for 2018–2021 was ongoing.
Most important facts for investors to verify
- How revenue, wafer shipments, utilization and gross margin trend after the 2023 decline; distinguish recurring operations from the Intel fee and restructuring items.
- Actual equipment spending, qualification milestones, customer commitments and expected returns for the Intel New Mexico corridor and Agrate facility.
- Cash, deposits and marketable securities available for investment, debt repayments and potential additional financing.
- Status and potential operational consequences of the Fab 3 lease dispute and arrangements beyond March 2027.
- Financial and operational effects of the January 2024 earthquake and the planned Fab 1 closure and Israeli operations integration.
- Customer concentration, including continued NTCJ demand, and developments in the Israeli conflict and any effects on staffing or operations.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2023.