Tower Semiconductor Ltd. — FY 2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not clearly provided in the supplied text. Financial statements are prepared under U.S. GAAP and presented in USD.
Business context
Tower is an independent specialty semiconductor foundry manufacturing customer-designed wafers and offering design and technical services. Its facilities span Israel, the United States and Japan, with specialty offerings including analog and mixed-signal, RF, image-sensor and power-management processes. Consolidated results include TPSCo, in which Tower owns 51%, and TowerJazz Texas (TJT), acquired in February 2016.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | USD 1,249.6 million | USD 960.6 million |
| Gross profit / margin | USD 303.1 million / 24.3% | USD 205.4 million / 21.4% |
| Operating profit / margin | USD 175.2 million / 14.1% | USD 81.9 million / 8.6% |
| Net profit (loss) attributable to Tower | USD 203.9 million | USD (29.6) million |
| Basic / diluted EPS | USD 2.33 / USD 2.09 | Basic USD (0.40) |
| Cash from operating activities | USD 327.5 million | USD 170.3 million |
| Capital investment in property and equipment | USD 217.5 million cash outflow | USD 172.1 million cash outflow |
| Cash, cash equivalents and short-term deposits | USD 389.4 million | USD 205.6 million |
| Working capital | USD 450.9 million | USD 235.6 million |
| Total assets / shareholders’ equity | USD 1,379.9 million / USD 682.6 million | USD 965.4 million / USD 385.6 million |
Revenue rose about 30% year over year. Management attributed the increase mainly to 27% more wafers shipped and a 6% rise in average selling price per wafer. Gross margin improved by 2.9 percentage points. Operating cash flow increased, while investment in property and equipment also rose.
At December 31, 2016, principal bank loans were USD 166.4 million and debentures were USD 186.2 million, or USD 352.6 million combined; USD 48.1 million of debt was current. Carrying values differed from principal amounts. The filing’s risk discussion separately describes approximately USD 346 million of consolidated long-term debt. Cash and short-term deposits exceeded the combined principal debt figure, but cash availability, restrictions and the full debt schedule should be assessed alongside contractual obligations.
Material changes and unusual items
- In February 2016, Tower acquired the San Antonio fab from Maxim for USD 40 million, paid in Tower shares. The fair value of net assets acquired exceeded consideration, generating a reported net acquisition gain of USD 50.5 million. A further USD 6 million earn-out gain and USD 5 million gain on equipment sales contributed to other income.
- The net profit turnaround was also aided by a sharp reduction in other financing expense: USD 12.5 million in 2016 versus USD 109.9 million in 2015. The prior-year expense included approximately USD 88 million of non-cash accretion and amortization related mainly to conversion of Series F debentures.
- Cash from operating activities increased to USD 327.5 million. Cash increased despite USD 132.0 million of loan repayments and substantial capital spending; the company also issued Series G debentures and received proceeds from exercise of warrants and options.
- In 2015, extending estimated useful lives of machinery and facility infrastructure reduced depreciation by approximately USD 42 million and reduced the reported net loss by about USD 27 million. This accounting estimate change affects comparability across periods.
- Reported revenue and operating comparisons are affected by changes in the consolidated business, including the TJT acquisition in 2016, the full-year inclusion of TPSCo in 2015, and cessation and dissolution of the Nishiwaki operation.
Outlook, risks and contingencies
The filing gives no specific numerical revenue, earnings or margin guidance. Management describes a strategy of expanding specialty-process offerings, increasing utilization across its global fabs, adding customers and targeting markets such as IoT, communications, automotive, industrial and consumer electronics. The company expects to continue investing in technology and capacity, but results depend on customer demand and successful ramp-up of acquired and expanded facilities.
- Customer concentration: PSCS accounted for 35% of 2016 revenue, down from 40% in 2015. The five-year manufacturing agreement runs through March 2019, and discussions on renewal had begun. Pricing or volume deterioration could materially affect TPSCo and Tower.
- Acquired-fab utilization: Maxim is expected to remain a significant TJT customer under a 15-year manufacturing agreement, with quantities expected to decrease over time. New third-party processes may take one to three years to reach mass production. Failure to attract sufficient business could leave acquired capacity underutilized.
- Operating and industry risks: Semiconductor cyclicality, order volatility, pricing pressure, fixed manufacturing costs, capacity bottlenecks, equipment or utility disruptions, yield issues and supply constraints could reduce margins or interrupt deliveries.
- Debt and financing: Loans include floating-rate exposure, and some borrowing is secured by fab assets or customer-related receivables. Tower issued approximately USD 115 million of Series G debentures in 2016, with principal installments from 2020 to 2023 and a 2.79% annual coupon; it used proceeds to repay approximately USD 78 million of Israeli bank loans and release related liens. The company reported covenant compliance at year-end.
- Currency and interest rates: Operations expose Tower to NIS, JPY, LIBOR and TIBOR movements. Hedging mitigates but does not eliminate these exposures.
- Litigation: A U.S. shareholder class action following a 2016 short-seller report was dismissed. Related alleged claims in Israel remained outstanding; Tower said it considered them without merit and would defend them.
- Other contingencies: Risks include environmental and safety compliance, fire and natural disasters, Israeli political and security conditions, union actions, customer claims, intellectual-property disputes and conditions attached to government investment grants. The filing reports approximately USD 68 million of customer liabilities potentially usable against future purchases.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded TJT from the 2016 internal-control assessment; TJT represented 13% of consolidated assets and 8% of revenue. The company said the 2017 assessment would include TJT.
Investor verification priorities
- Reconcile annual earnings to recurring operating performance by separating the USD 50.5 million acquisition gain, earn-out and equipment-sale gains, and the prior-year non-cash financing charge.
- Verify PSCS contract renewal terms, pricing and wafer-volume commitments ahead of the March 2019 agreement expiration, and monitor PSCS’s share of revenue.
- Assess utilization, customer ramp and operating economics at TJT and TPSCo, including the expected decline in Maxim purchases and the timing of third-party production.
- Reconcile principal and carrying debt balances, maturities, security, covenants and cash restrictions; review planned capital spending against operating cash generation.
- Review the outstanding Israeli shareholder litigation, grant-program compliance, and the integration of TJT into internal-control testing.
- Evaluate dilution and share-count changes: outstanding shares increased from approximately 82.1 million at year-end 2015 to 93.0 million at year-end 2016, including shares issued for the TJT acquisition and exercises of equity awards.