Tower Semiconductor Ltd. — FY2012 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2012. Although the request references 2012 Q4, this filing is an annual report and does not provide a clear standalone fourth-quarter results summary. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
Tower is an independent specialty semiconductor foundry operating four fabs in Israel, California and Japan. It manufactures customer-designed chips and provides design and engineering services, with a focus on analog and mixed-signal, image sensors, RF, power management and related specialty processes.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $638.8 million | $611.0 million |
| Gross profit / margin | $78.8 million / 12.3% | $84.8 million / 13.9% |
| Operating profit (loss) / margin | $(2.5) million / (0.4)% | $10.2 million / 1.7% |
| Net loss | $(70.3) million | $(18.5) million |
| Basic loss per share | $(3.25) | $(0.92) |
| Depreciation and amortization | $173.6 million | $162.7 million |
| Cash provided by operating activities | $75.2 million | $108.0 million |
| Capital expenditures | $103.8 million cash-flow statement | $117.2 million cash-flow statement |
Management separately described FY2012 operating cash generation as $95.3 million before $20.1 million of TJP reorganization payments. The cash-flow statement reports $75.2 million net cash from operations after those payments.
At year-end, cash and cash equivalents were $123.4 million, with a further $10.0 million in interest-bearing deposits, including designated deposits. Working capital was $129.2 million, compared with $35.8 million in 2011. Total assets were $814.6 million; total liabilities were $594.6 million; shareholders’ equity was $220.0 million.
Year-end debt included approximately $131 million of Tower bank loans, $13.3 million of TJP bank borrowings, $19.1 million drawn on Jazz’s revolving facility, and $255.9 million principal of Tower debentures and $93.6 million principal of Jazz notes. These principal figures differ from certain balance-sheet carrying amounts. The contractual-obligations table lists $436.2 million of debentures and $173.7 million of bank loans, including scheduled interest.
Changes versus comparable periods
- Revenue rose 4.6% year over year. Management attributed the increase mainly to roughly 10% higher average selling prices, partly offset by 3% lower wafer volume and a $28 million reduction in revenue from the Asian turnkey project.
- Gross profit declined $6.0 million and gross margin fell 1.6 percentage points. Management cited weaker semiconductor demand; full-year inclusion of TJP partly offset the pressure.
- Operating results moved from $10.2 million profit to a $2.5 million loss. FY2012 included $5.8 million of Japanese-facility reorganization costs.
- Net loss widened by $51.7 million. FY2011 included a $19.5 million gross gain on the TJP acquisition and approximately $14 million gross gain from selling the HHNEC investment. FY2012 also had $15.1 million more net other financing expense and lower operating profit, partly offset by lower tax expense.
- Operating cash flow fell $32.8 million, while year-end cash and cash equivalents increased $22.2 million. The company raised $104.7 million net from debenture and equity issuances, drew $14.4 million under the TJP credit line and repaid $55.9 million of debt principal.
Outlook, risks and unusual items
- Management reported weakening customer demand and slower growth, and noted cautious industry forecasts. It gave no quantified revenue, earnings or cash-flow guidance.
- The business has substantial fixed manufacturing costs and needs high fab utilization to cover costs. Cyclical demand, price pressure, excess capacity and limited advance order visibility may affect revenue, margins and cash generation.
- Management was exploring refinancing or restructuring, new financing, asset sales, intellectual-property licensing, real-estate sale-and-leaseback and operating efficiencies. It cautioned that funding may not be available, or available on acceptable terms, in time to meet obligations and growth needs.
- In March 2013, after year-end, Tower agreed with its Israeli banks to a revised repayment schedule for the approximately $131 million loan, beginning in March 2014 and ending in June 2016, at LIBOR plus 3.5%. Financial covenants were revised, with further revisions to be agreed by July 31, 2013. The loan is secured by substantially all Tower assets; covenant or payment defaults could permit acceleration and enforcement of liens.
- Series F debentures carry 7.8% interest and are convertible; a roughly $110 million beneficial conversion feature was recorded in equity and as a debt discount. Its amortization increases reported interest expense over time, with the largest stated effect expected in 2015 and 2016. Fair-value changes in certain debt and share-linked obligations can also cause substantial non-cash financing expense.
- TJP’s Japanese operations were reorganized, including workforce reductions and $5.8 million of FY2012 costs. Micron’s minimum-volume, take-or-pay supply commitment runs through the second quarter of 2014; Micron-related covenants and remedies were disclosed through June 2013.
- Other significant risks include customer concentration (one customer represented 43% of 2012 revenue), potential dilution from convertible securities and warrants, currency and floating-rate exposure, natural disasters and operational interruptions, and required compliance with investment-grant conditions. Management reported no pending or threatened litigation it believed likely to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements and stated that internal control over financial reporting was effective as of December 31, 2012.
Important facts for investors to verify
- Standalone Q4 2012 revenue, profitability, cash flow and fab utilization; this annual filing’s provided text does not give clear quarterly figures.
- Current liquidity, covenant compliance and the status of the revised bank covenants and scheduled repayments.
- Whether operating cash flow, utilization and customer demand can support debt service, capital spending and ongoing fixed costs.
- Series F conversion, dilution and interest-cost implications, alongside the full debt maturity and interest schedule.
- Progress in diversifying revenue away from the largest customer and replacing Micron volumes at Fab 4 after the supply commitment period.
- The assumptions supporting deferred tax asset realization, significant non-cash financing charges and the absence of impairment charges.