Tower Semiconductor Ltd. — 2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone 2015 Q4 report. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context and reporting period
Tower is a global specialty semiconductor foundry serving fabless chip companies and integrated device manufacturers. Its offerings include analog and mixed-signal, RF, image-sensor, power-management, SiGe/BiCMOS and related manufacturing and design services. In 2015, it operated six fabs in Israel, the United States and Japan. TPSCo, 51%-owned by Tower, was consolidated from April 1, 2014; the former Nishiwaki operation ceased in July 2014. These changes limit direct period-to-period comparability.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $960.6 million | $828.0 million |
| Gross profit / margin | $205.4 million / 21.4% | $63.8 million / 7.7% |
| Operating income (loss) / margin | $81.9 million / 8.5% | $(103.6) million / (12.5)% |
| Net income (loss) attributable to Tower | $(29.6) million | $4.3 million |
| Basic earnings (loss) per share | $(0.40) | $0.08 |
| Cash provided by operating activities | $170.3 million | $97.8 million |
| Capital investment in property and equipment, net | $165.4 million | $50.2 million |
| Cash, cash equivalents and interest-bearing deposits | $205.6 million | $187.2 million |
| Working capital | $235.6 million | $93.8 million |
| Total assets | $966.2 million | $884.1 million |
| Shareholders’ equity | $385.6 million | $195.6 million |
At year-end, bank-loan principal was approximately $245.6 million and debenture principal approximately $65.1 million, or about $310.7 million combined. The balance sheet carried loans and debentures at lower amounts under U.S. GAAP fair-value and debt-accounting adjustments. Tower reported $33.3 million of current maturities of loans and debentures. Cash flow from operations was $170.3 million as reported; management also described approximately $195.2 million excluding $24.9 million of Nishiwaki employee-termination payments.
Material changes versus the prior comparable period
- Revenue increased $132.6 million, or about 16%. Management attributed the change to a full year of TPSCo results, increased sales to customers other than Panasonic and Micron, and the absence of Micron revenue after Nishiwaki closed. For other customers excluding Panasonic and Micron, revenue rose $120.4 million, with wafers shipped up 21% and average selling price up 8%.
- Gross profit rose $141.6 million. Cost of revenue declined $9.0 million despite higher production, reflecting the Nishiwaki closure and lower depreciation after Tower extended estimated useful lives; higher variable manufacturing costs partly offset those reductions.
- Operating results moved from a $103.6 million loss to $81.9 million of income. The 2014 result included $55.5 million of Nishiwaki impairment and restructuring charges.
- Despite operating improvement, Tower recorded a $29.6 million net loss, compared with $4.3 million of net income in 2014. Other financing expense increased to $109.9 million, principally because conversion of Series F debentures accelerated recognition of non-cash accretion and amortization costs. The 2014 comparison included a $166.4 million non-cash gain on the TPSCo acquisition.
- Interest expense fell to $13.2 million from $33.4 million, reflecting debt reduction, including conversion of approximately $196 million of Series F debentures into shares and early redemption of Jazz notes. Outstanding shares increased from 58.0 million to 82.1 million.
- Operating cash flow increased, while net capital investment rose substantially to $165.4 million. Cash and equivalents alone declined to $175.6 million, but the company also held $30.0 million of interest-bearing deposits.
Outlook, commentary, risks and unusual items
- No quantified forward guidance is provided. Management described a strategy focused on specialty processes and growth markets including IoT, mobile, communications, automotive and industrial applications. It emphasized expanding and utilizing capacity and attracting third-party customers to recently acquired or expanded fabs.
- Management cautioned that semiconductor demand is cyclical, orders are often placed only a few months before shipment, and long qualification cycles make forecasting difficult. High fixed costs mean low utilization or price pressure could materially harm profitability.
- Customer concentration is significant: one customer contributed 40% of 2015 revenue, and the next-largest listed customer contributed 13%. Panasonic is described as a significant customer of TPSCo, but the filing’s customer table anonymizes customer identities; do not assume which listed customer corresponds to each share without checking the underlying disclosures.
- In February 2016, after year-end, Tower acquired Maxim’s San Antonio fab for $40 million payable in approximately 3.3 million Tower shares. Maxim entered a 15-year manufacturing agreement and provided $17 million of working-capital support, repayable during the first 18 months. The filing says Maxim was expected to be a major customer initially; the acquired facility’s successful ramp and third-party customer additions remain execution risks.
- Tower’s Israeli bank facility had approximately $83 million outstanding, bore interest at USD LIBOR plus 3.90%, and required principal payments of about $6 million in 2016, $56 million in 2017 and $21 million in 2018. The facility includes financial covenants, restrictions and liens over substantially all Tower assets; a default could permit acceleration. Tower was exploring refinancing and, in May 2016, had a shelf prospectus for potential Israeli bond issuance; this was a plan, not completed financing in the reported year.
- A significant accounting estimate changed in 2015: machinery and equipment useful lives were extended from 7 to 15 years and facility infrastructure from 14 to 25 years. This reduced 2015 depreciation by approximately $42 million and reduced the reported net loss by approximately $27 million. Investors should assess the sensitivity of earnings to this estimate.
- Other unusual items include 2015 Nishiwaki restructuring and impairment credits/charges, a $12.3 million income-tax benefit, and the $87.97 million Series F accretion and amortization expense. Management said remaining Nishiwaki closure procedures were expected to conclude in 2016 and no further costs were expected.
- In January 2016, shareholder class actions were filed in the United States and Israel following a short-seller report. Tower disputes the allegations and intends to defend the claims; outcomes are uncertain.
- Principal risks include customer loss or order reductions, fab underutilization or production disruption, acquisition integration and technology qualification, debt and covenant obligations, competition and price erosion, foreign exchange and interest-rate exposure, environmental and natural-disaster events, and geopolitical risks affecting Israeli operations.
The independent auditor issued an unqualified opinion on the 2015 U.S. GAAP financial statements and on internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Revenue composition and customer concentration, including the identities and ongoing commitments of the customers representing 40% and 13% of revenue.
- Whether improved gross and operating margins persist after separating the benefit from longer useful-life estimates, the Nishiwaki closure and changing fab utilization.
- Cash generation after capital spending, scheduled debt service and the repayment of Maxim’s $17 million working-capital support.
- Compliance with Tower, Jazz and TPSCo debt covenants, Tower’s 2016–2018 repayment schedule, and the status and terms of any refinancing or bond issuance.
- Utilization, customer diversification, qualification spending and profitability at TPSCo and the acquired Texas fab, including performance under Panasonic and Maxim manufacturing agreements.
- Potential financial, operational and disclosure impacts of the shareholder litigation and any material developments after the filing date.
- Reconcile stated liquidity measures: the filing reports $205.6 million including deposits, while cash and cash equivalents alone were $175.6 million at December 31, 2015.