Tower Semiconductor Ltd. — FY2011 Form 20-F
Reporting period: Year ended December 31, 2011; filed April 30, 2012. This is an annual report, not a standalone fourth-quarter filing, and the supplied filing text does not provide a clear set of Q4-only financial results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars. Tower is a specialty semiconductor foundry operating fabs in Israel, California and, following its June 2011 acquisition, Japan.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $611.0 million | $509.3 million |
| Gross profit / margin | $84.8 million / 13.9% | $107.2 million / 21.0% |
| Operating profit / margin | $10.2 million / 1.7% | $43.3 million / 8.5% |
| Net loss | $18.5 million | $42.4 million |
| Net loss per share | $0.06 | $0.18 |
| Cash from operating activities | $108.0 million | $121.4 million |
| Cash and cash equivalents at year-end | $101.1 million | $100.4 million |
| Working capital | $35.8 million | $72.1 million |
FY2011 revenue rose about 20%, primarily as wafer shipments increased 32%, including shipments from Fab 4 after its acquisition; average selling price fell 4%. Management attributed weaker gross profit to softer semiconductor demand affecting the Israeli and U.S. fabs. Operating margin compressed substantially despite higher revenue.
Capital expenditures were approximately $132 million for the year; cash purchases of property and equipment were $117.2 million. The company also received $33.3 million in Israeli Investment Center grants, received $31.4 million net from selling its HHNEC investment, paid $40 million cash for TJP and repaid $141.2 million of debt. Operating cash flow was below capital spending, before grants and asset-sale proceeds.
At year-end, the balance sheet reported $109.1 million of bank loans and $240.7 million of debentures at carrying value, including current maturities. Separately, disclosed principal amounts were approximately $131 million of Tower bank loans, $15.3 million of Jazz borrowings, $177.2 million of Tower debentures and $93.6 million of Jazz notes. Tower’s bank loans carried LIBOR plus 2.75%; Jazz’s revolving facility had $15.3 million outstanding and $7.1 million available. Debt and debentures are subject to security, subordination and covenant provisions. Total assets were $857.2 million; shareholders’ equity was $174.7 million.
Material changes and unusual items
- Tower acquired Micron’s Nishiwaki, Japan fab in June 2011 for consideration valued at $62.6 million: $40 million cash and $22.6 million in Tower shares. The acquisition added Fab 4 and was included in consolidated results from June 3.
- The TJP acquisition generated a $19.5 million gross bargain-purchase gain, with an approximately $10.1 million net positive effect after related tax provisions and expenses. The filing cites weak demand forecasts and Japan’s 2011 natural disasters among reasons the acquired net assets’ fair value exceeded the purchase price.
- Tower sold its approximately 10% HHSL holding for about $32 million gross cash proceeds and recorded an approximately $15 million gross gain.
- Financing expense declined to $40.3 million from $72.9 million, reflecting changes in fair-value adjustments, foreign exchange and other financing items; it remained a significant expense.
- Inventory increased to $69.0 million from $42.5 million, while trade receivables rose to $75.4 million from $67.4 million. The filing reports inventory write-downs of $5.8 million at year-end 2011.
Outlook, risks and contingencies
Management described weakening customer demand and reduced industry growth amid global economic uncertainty, and cautioned that renewed semiconductor or economic downturns could pressure orders, pricing, utilization, cash generation and financing access. It provided no consolidated revenue or earnings forecast in the supplied text. Specific operational expectations included approximately $25 million less 2012 revenue from the Asian turnkey project than in 2011; a 700V power platform ramp targeted for the second half of 2012; and expected production ramp of SEMCO and other products on a 700V platform in 2013.
- Debt and funding: Management was exploring refinancing or restructuring, new securities, asset sales, real-estate sale-leasebacks, licensing and operating efficiencies. It warned that funding might not be available on time or on acceptable terms. Tower reported compliance with its bank covenants at December 31, 2011; failure to comply without a waiver or amendment could permit acceleration of loans and enforcement of liens.
- Fab 4 and Micron: Micron was Fab 4’s sole customer at the time, with minimum purchases declining through mid-2014. Tower must attract additional customers and fund technology qualification and conversion; Micron-related covenants and remedies, potentially including liquidated damages up to $100 million, apply through June 2013.
- Customer concentration: One customer represented 32% of 2011 revenue; four customers each contributed between 5% and 32%. One customer represented 43% of year-end receivables.
- Capacity and cyclicality: Fab 2 had not reached full ramp-up; its estimated full capacity is about 45,000 wafers per month, conditional on funding, demand and equipment installation. Low utilization, price erosion and limited order visibility could impair margins and cash flow.
- Other risks: Significant fixed costs and depreciation, currency and floating-rate exposure, potential dilution, Israeli operational and geopolitical risks, earthquakes in California and Japan, environmental regulation, and possible restrictions under a U.S. Department of Defense security agreement for Jazz.
- Listing: NASDAQ had notified Tower that its share price did not meet the $1 minimum bid requirement. The extension ran through September 17, 2012; the filing warned of possible delisting or a reverse stock split.
- Subsequent financing: In February 2012, Tower raised approximately $80 million by expanding Series F debentures, bearing 7.8% interest and due in December 2015 and 2016. Tower also reported that Series B debentures were redeemed in January 2012 and Series C debentures in December 2011.
The independent auditor gave an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2011. Management also concluded disclosure controls were effective. The LSI patent action was dismissed without prejudice in 2011; the filing states no material legal proceeding was pending or threatened in management’s opinion.
Most important facts for investors to verify
- How much of the FY2011 revenue increase was sustainable core wafer demand versus the partial-year inclusion of Fab 4 and the Asian turnkey project.
- Fab 4’s customer diversification, utilization, qualification costs and cash needs before Micron’s minimum purchase commitments decline and expire.
- Available unrestricted liquidity, debt principal and maturity schedules, covenant headroom, and the terms and use of the February 2012 $80 million financing.
- The effect of lower utilization and pricing on gross margin, operating cash flow and the ability to fund capital expenditures and scheduled debt service.
- Potential dilution from convertible debentures, capital notes, warrants, options and future financing, as well as NASDAQ minimum-bid compliance.
- The extent to which reported losses and financing results depended on acquisition gains, the HHSL sale and fair-value accounting items.