Tower Semiconductor Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone Q4 filing; the supplied text does not provide separate Q4 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, providing wafer manufacturing, process technologies, design support and related services. At year-end 2013 it operated four fabs: two in Israel, Jazz’s fab in California and Fab 4 in Japan. The March 2014 Panasonic joint venture and the 2014 decision to cease Fab 4 operations occurred after the reporting date.
Financial performance and position
| Metric | FY2013 / Dec. 31, 2013 | FY2012 / Dec. 31, 2012 |
|---|---|---|
| Revenue | $505.0 million | $638.8 million |
| Gross profit; gross margin | $28.1 million; 5.6% | $78.8 million; 12.3% |
| Operating loss; operating margin | $55.3 million; (10.9%) | $2.5 million; (0.4%) |
| Net loss | $107.7 million | $70.3 million |
| Basic loss per share | $2.72 | $3.17 |
| Cash provided by operating activities | $42.3 million | $75.2 million |
| Capital expenditures, net cash used for property and equipment | $81.8 million | $103.8 million |
| Cash, cash equivalents and interest-bearing deposits | $122.9 million | $133.4 million |
| Working capital | $150.5 million | $128.8 million |
| Total assets | $705.9 million | $814.2 million |
| Shareholders’ equity | $141.2 million | $220.0 million |
Cash and deposits include $10 million designated for scheduled bank-loan payments. The cash-flow statement reports net operating cash flow of $42.3 million; management separately describes approximately $75 million generated from operations before approximately $33 million of interest payments. Cash and cash equivalents declined by $10.5 million during 2013.
At year-end, bank-loan principal was approximately $161.1 million, including about $131 million under Tower’s Israeli-bank facility and approximately $11 million under TJP’s GE facility; the reported bank-loan carrying values reflect fair-value adjustments. Outstanding debenture principal was approximately $345 million. Tower’s facility loans were scheduled to mature through June 2016; Tower Series F debentures were due in December 2015 and December 2016, while Jazz notes were due in June 2015. These obligations are subject to security, subordination and covenant terms described in the filing.
Material changes versus FY2012
- Revenue fell $133.8 million, or about 21%. The scheduled Micron volume decline at Fab 4 reduced revenue by $139.4 million; the Asian fab-upgrade project contributed $13.4 million less. Excluding those two items, revenue increased 5.45%, from $348.1 million to $367.0 million.
- Cost of revenue declined $83.1 million, mainly from efficiency and cost-reduction measures, the 2012 workforce reduction and lower Micron volumes. The revenue decline nevertheless reduced gross profit by $50.7 million.
- Operating loss widened to $55.3 million, including $7.5 million of non-cash amortization related to early termination of an office lease. Net loss increased to $107.7 million, despite a $9.4 million income-tax benefit.
- Net operating cash flow declined to $42.3 million from $75.2 million. Investing activities used $77.5 million, while financing activities provided $32.4 million, including net proceeds from the 2013 rights offering. The offering raised approximately $40 million and increased shares outstanding substantially; year-end shares were 47.9 million versus 22.3 million a year earlier.
- Gross margin contracted to 5.6% from 12.3%. Interest expense was $33.0 million and other financing expense was $27.8 million, broadly similar to and above FY2012, respectively.
Outlook, risks and unusual items
- No numerical outlook: The filing provides no specific revenue, earnings or cash-flow guidance. Management describes semiconductor demand as cyclical and industry forecasts as cautious, and emphasizes utilization, efficiency, growth and meeting debt obligations.
- Debt and liquidity: Management says it is exploring refinancing or restructuring, new debt or equity, asset sales, intellectual-property licensing and potential sale-leasebacks. It cautions that funding may not be available on timely or commercially reasonable terms. Tower’s bank facility has financial covenants and liens over substantially all its assets; default could permit acceleration.
- Japan restructuring: Micron represented 27% of 2013 revenue. Its minimum-volume commitment ran through June 2014; Tower expected Micron to represent less than 10% of 2014 revenue and none in 2015. Tower decided in 2014 to cease Fab 4 operations, sell assets, reduce staff and transfer selected customers and products. The filing warns of possible claims and a potentially significant, initially non-cash 2014 charge; the amount is not stated clearly in the supplied text.
- Panasonic JV: In March 2014 Tower acquired 51% of TPSC, issuing 870,454 shares valued at approximately $7.5 million. Panasonic committed to a five-year manufacturing arrangement and provided TPSC loans totaling 8.8 billion yen (about $85 million). TPSC’s initial business depends substantially on Panasonic orders; attracting and qualifying third-party customers may take more than two years.
- Customer and operating exposure: Three customers each contributed between 7% and 27% of FY2013 revenue. Short order lead times, long qualification cycles, fixed manufacturing costs, competition, pricing pressure and fluctuating fab utilization may affect results and cash generation.
- Financing and currency effects: Floating-rate bank loans, NIS- and CPI-linked debt, and foreign-currency operations expose results to interest, exchange-rate and inflation changes. Fair-value accounting and debt-discount amortization can also create significant non-cash financing expenses.
- Contingencies and controls: The filing reports no pending or threatened legal proceeding management believes likely to have a material adverse effect. Israeli investment grants are conditional and could require repayment if requirements are breached. Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Debt maturities, covenant compliance, refinancing progress and available liquidity, including the distinction between cash flow after and before interest payments.
- Fab 4 closure costs, asset-sale proceeds, employee and other liabilities, and the timing and accounting treatment of any restructuring charge.
- TPSC’s Panasonic order commitments, financing, workforce transfer, capacity utilization and progress qualifying third-party customers.
- Revenue and receivables concentration, particularly the post-contract decline in Micron business and dependence on major customers.
- Whether operating cash generation and utilization can support fixed costs, capital spending and debt service as gross margins remain compressed.
- Potential dilution from outstanding convertible debentures, warrants, options and other share-linked instruments.