Tower Semiconductor Ltd. — Form 20-F summary
Reporting period: Fiscal year ended December 31, 2017. Although the request references 2017 Q4, this filing is an annual report and does not provide a standalone fourth-quarter results summary. Financial statements are presented in U.S. dollars under U.S. GAAP.
Business context
Tower is an independent specialty semiconductor foundry, manufacturing customer-designed chips and providing design and technical services. Its seven fabs operate in Israel, the United States and Japan. The company focuses on analog and mixed-signal technologies, including RF, power management and image sensors.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1,387.3 million | $1,249.6 million |
| Gross profit / margin | $354.3 million / 25.5% | $303.1 million / 24.3% |
| Operating profit / margin | $219.8 million / 15.8% | $175.2 million / 14.1% |
| Net profit attributable to Tower | $298.0 million | $203.9 million |
| Basic earnings per share | $3.08 | $2.33 |
| Cash provided by operating activities | $355.6 million | $327.5 million |
| Capital spending on property and equipment | $187.7 million gross | $217.5 million gross |
| Cash and cash equivalents at year end | $446.0 million | $355.3 million |
| Working capital at year end | $572.0 million | $450.9 million |
| Total assets at year end | $1,673.6 million | $1,379.9 million |
| Total shareholders’ equity at year end | $1,029.7 million | $682.6 million |
At December 31, 2017, principal debt comprised approximately $138.2 million of bank loans, $193.3 million of debentures and $15.9 million of capital leases. The balance sheet reported $106.0 million of current maturities and $228.7 million of long-term debt, including leases. The company also held $113.9 million of current marketable securities. Tower reported compliance with applicable debt covenants.
Material changes versus prior periods
- Revenue rose 11.0% year over year, which management attributed mainly to higher wafer shipments and utilization.
- Gross profit increased $51.2 million; gross margin improved 1.2 percentage points. Operating profit rose $44.7 million.
- Operating cash flow increased to $355.6 million from $327.5 million. Net investing cash outflow was $245.4 million, including $187.7 million of equipment investment; net financing cash outflow was $23.3 million.
- Net profit attributable to Tower increased to $298.0 million. The 2017 result included a $99.9 million income tax benefit, principally reflecting an $82.4 million release of valuation allowance on Israeli loss carryforwards and a $13.0 million benefit from U.S. tax reform. Management cautioned that the valuation-allowance change was not indicative of the expected future tax rate.
- Unlike 2016, 2017 included no $50.5 million bargain-purchase gain on the San Antonio fab acquisition. The company also recorded a $3.0 million impairment of non-public equity investments in 2017.
- Cash and cash equivalents increased by $90.7 million. Debt repayment and investment in marketable securities were among the period’s significant cash uses.
Outlook, commentary and principal risks
- The filing provides no specific revenue or earnings guidance. Management describes demand and utilization as cyclical and says results can fluctuate materially; customers generally place orders only a few months ahead, limiting backlog visibility.
- Customer concentration is material: the largest customer accounted for 30% of 2017 revenue, down from 35% in 2016; another accounted for 12%. The largest customer’s sales were under the Panasonic-related manufacturing agreement. Its extension, effective April 2019, was under negotiation, with pricing and volume important to TPSCo’s economics.
- Maxim is expected to remain a significant customer of the San Antonio fab under a 15-year agreement with gradually declining purchase volumes. New third-party customer processes may take one to three years to reach mass production, according to the filing.
- A 2017 framework agreement for a planned Nanjing, China fab provides for Tower to receive up to 50% of targeted capacity of 40,000 wafers per month. Further terms and milestones remained to be agreed. Tower received $18 million for an initial licensing and services phase, completed by year-end.
- Key risks include customer loss or price reductions, underutilized or constrained fab capacity, production interruptions, semiconductor-cycle downturns, long sales and qualification cycles, competition and technology shifts, and availability and cost of equipment and materials.
- Financial risks include approximately $347 million of principal debt, scheduled maturities, floating-rate exposure on certain loans, and foreign-exchange exposure to the NIS and JPY. Hedging reduces but does not eliminate currency risk.
- The Israeli shareholder action following a 2016 short-selling report was dismissed by an Israeli court in February 2018; the plaintiff appealed in April 2018. The related U.S. action had been voluntarily dismissed in 2016. Tower said it considered the appeal without merit and intended to defend itself.
- Other disclosed operational and legal exposures include environmental and fire risks, seismic activity at several fab locations, construction-related risks at the Newport Beach facility, and restrictions or repayment obligations associated with Israeli government grants and funded technology.
Most important facts for investors to verify
- Progress and final terms of the Panasonic/TPSCo manufacturing agreement and technology-license extension effective April 2019, including committed volume and wafer pricing.
- Whether revenue concentration remains high and whether new customers can replace any declining Panasonic or Maxim volumes.
- Fab utilization, capacity additions, customer qualifications and the timing and cost of bringing new business to production, particularly at San Antonio and the proposed Nanjing project.
- The sustainability of operating cash flow and margins after separating recurring operating performance from the large 2017 tax benefit and other unusual items.
- Debt maturities, covenant compliance, access to liquidity and the effect of foreign-exchange or interest-rate movements despite hedging.
- Status and potential consequences of the Israeli litigation appeal, and any developments in the Newport Beach landlord dispute or grant-related obligations.
The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2017.