Tower Semiconductor Ltd. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Tower is an independent specialty semiconductor foundry, manufacturing customer-designed integrated circuits and providing design and technical services. It operates seven fabs across Israel, the United States, and Japan, with a focus on specialty analog and mixed-signal technologies. Tower owns 51% of Japan-based TPSCo.
Key financial metrics
| Metric | FY2018 / Dec. 31, 2018 | FY2017 / Dec. 31, 2017 |
|---|---|---|
| Revenue | $1,304.0 million | $1,387.3 million |
| Gross profit / margin | $292.9 million / 22.5% | $354.3 million / 25.5% |
| Operating profit / margin | $154.9 million / 11.9% | $219.8 million / 15.8% |
| Net profit attributable to Tower | $135.6 million; $1.35 basic EPS | $298.0 million; $3.08 basic EPS |
| Cash flow from operations | $312.9 million | $355.6 million |
| Capital expenditures, net of asset-sale proceeds | Approximately $169.7 million | Approximately $167.6 million |
| Cash and cash equivalents | $385.1 million | $446.0 million |
| Short-term deposits and marketable securities | $255.9 million | $113.9 million in marketable securities; no short-term deposits reported |
| Working capital | $784.2 million | $572.0 million |
| Total assets / shareholders’ equity | $1,790.0 million / $1,236.2 million | $1,673.6 million / $1,029.7 million |
FY2018 operating cash flow less net capital expenditures was approximately $143 million. The balance sheet reports $203.7 million of current liabilities against $988.0 million of current assets. At year-end, debt included $124.9 million of debenture principal, $100.1 million of bank-loan principal, and $47.2 million of capital-lease liabilities; reported debt carrying amounts and principal amounts differ.
Material changes versus FY2017
- Revenue fell about 6%, mainly because fewer wafer layers were shipped; management said average selling price per layer was unchanged.
- Gross profit declined $61.4 million and gross margin contracted 3.0 percentage points. Operating profit fell $64.9 million.
- Net profit attributable to Tower fell $162.4 million. The comparison is significantly affected by FY2017’s $99.9 million income-tax benefit, including an approximately $82 million benefit from releasing a valuation allowance and an approximately $13 million benefit related to U.S. tax reform. FY2018 recorded $5.9 million of income-tax expense.
- Operating cash flow decreased $42.7 million. Cash and cash equivalents declined by $60.9 million, while year-end short-term deposits and marketable securities were higher.
- R&D expense increased 8% to $73.1 million, which management attributed to investment in the medium- and long-term product pipeline and technology capabilities.
- FY2018 included conversion of approximately $58 million of Jazz convertible notes into about 5.8 million Tower shares. TPSCo refinanced its Japanese loans with a new approximately $100 million loan; TJT repaid its $40 million loan early.
Outlook, risks, and unusual items
- Panasonic/TPSCo: PSCS, Panasonic’s semiconductor subsidiary, generated 33% of Tower’s FY2018 revenue, versus 30% in FY2017. The manufacturing relationship was extended for three years from April 2019 under amended terms, including revised pricing. Management expected lower quarterly revenue from PSCS and identified securing replacement business and utilizing TPSCo capacity as important to profitability.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. Management describes specialty-technology investment, customer diversification, and utilization of its global fabs as strategic priorities.
- Customer and industry exposure: Four customers each contributed between 7% and 33% of FY2018 revenue. Semiconductor cyclicality, limited order visibility, pricing pressure, and high fixed manufacturing costs could affect results and utilization.
- Debt and liquidity: The company reported covenant compliance at year-end. Series G debentures have 2.79% fixed interest and principal installments from 2020 through 2023; the TPSCo loan carries 1.95% fixed interest, with principal payments scheduled from 2021 through 2025. The filing warns that further financing may be needed for strategic opportunities or obligations.
- Other commitments and contingencies: Contractual obligations totaled $615.7 million, including equipment and raw-material purchase commitments. Customer advances of approximately $41.7 million may be applied to future purchases. Tower also disclosed Israeli government-grant conditions and liens, environmental and operational risks, and a dispute with the Fab 3 landlord over noise-abatement obligations.
- China project: Agreements contemplate Tower providing technology and operational support for a planned Nanjing fab, with possible minority investment and potential allocation of up to half of targeted capacity. The filing does not establish that the fab will be completed or that the contemplated capacity will be used.
- Accounting and audit: Adoption of ASC 606 had no material financial-statement effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the amended PSCS manufacturing agreement, its pricing and volume terms, and subsequent customer loading at TPSCo.
- Reconcile cash, short-term deposits, marketable securities, debt principal, carrying values, and scheduled repayments using the audited statements and notes.
- Assess the trend in wafer shipments, utilization, gross margin, and operating cash flow, including the impact of lower FY2018 volume.
- Examine customer concentration, receivable quality, and the $3 million specific doubtful-account allowance disclosed for one Far East customer.
- Confirm the status, required investment, capacity rights, and expected economics of the Nanjing project and other fab expansion plans.
- Consider the nonrecurring FY2017 tax benefits when comparing earnings, and review the assumptions supporting realization of tax-loss carryforwards.