Tower Semiconductor Ltd. — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; the figures below are full-year amounts. Financial statements are presented in U.S. dollars under U.S. GAAP. Results include TowerJazz Panasonic Semiconductor Co. (TPSCo) from April 1, 2014, while operations at the Nishiwaki fab ceased during 2014, limiting comparability with prior years.
Business context and key financial metrics
Tower is a specialty semiconductor foundry serving fabless companies and integrated device manufacturers. Its offerings include image-sensor, analog and mixed-signal, RF, power-management, SiGe and related process technologies. Following the March 2014 acquisition of a 51% interest in TPSCo, the company operated fabs in Israel, the United States and Japan.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $828.0 million | $505.0 million |
| Gross profit / margin | $63.8 million / 7.7% | $28.1 million / 5.6% |
| Operating loss / margin | $(103.6) million / (12.5)% | $(55.3) million / (10.9)% |
| Net income (loss) attributable to Tower | $4.3 million | $(107.7) million |
| Operating cash flow | $97.8 million | $42.3 million |
| Cash and cash equivalents, year-end | $187.2 million | $112.9 million |
| Working capital, year-end | $93.8 million | $150.5 million |
| Total assets / shareholders’ equity | $884.1 million / $195.6 million | $705.9 million / $141.2 million |
| Depreciation and amortization | $243.4 million | $164.8 million |
Revenue increased 64% year over year. Management attributed the increase primarily to 20% more wafers shipped and a 35% increase in average selling price per wafer; the acquisition and changing Japan operations also materially affect comparisons. Gross margin improved, but operating loss widened, principally due to Nishiwaki closure charges. The small reported net profit was not a measure of underlying operating profitability: it included a $166.4 million TPSCo acquisition gain and a $24.7 million income-tax benefit.
Cash generated from operations was $97.8 million after $27.6 million of Nishiwaki employee-retirement payments; excluding those payments, operating cash flow was $125.3 million. Capital expenditures, net of asset-sale proceeds, were approximately $50.2 million. The balance sheet showed $300.3 million of current liabilities and $394.1 million of current assets. Reported current and long-term loans and debentures together were approximately $387.1 million at year-end; this includes debt due within one year. Debt carrying values are affected by U.S. GAAP fair-value and convertible-debt accounting.
Material changes versus comparable periods
- Revenue rose from $505.0 million in 2013, when sales were affected by scheduled Micron volume reductions at Fab 4, to $828.0 million in 2014. Japan represented 40% of revenue in 2014 versus 2% in 2013, largely reflecting TPSCo’s inclusion.
- Gross profit increased by $35.7 million, but operating loss increased by $48.2 million. Excluding the $55.5 million Nishiwaki impairment and restructuring charge, management said operating loss improved by $7.3 million year over year.
- Other non-cash financing expense rose to $55.4 million from $27.8 million, including $39.5 million of Series F debenture accretion and amortization and $9.8 million of one-time financing expense related to Jazz’s 2014 notes exchange.
- Cash and cash equivalents increased by $74.3 million. Working capital declined by $56.7 million, while current maturities of loans and debentures increased to $120.0 million from $36.4 million.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management’s stated priorities include integrating TPSCo, increasing utilization at the acquired fabs, transferring and ramping new customer processes, and developing specialty technologies. The company noted that customer qualification and sales cycles can take two years or longer.
- TPSCo and restructuring: Tower recognized a $166.4 million acquisition gain because the estimated fair value of acquired net assets exceeded consideration. Panasonic’s subsidiary was expected to remain a major TPSCo customer during the initial five-year arrangement. Failure to add third-party business or obtain sufficient Panasonic orders could leave capacity underutilized. Nishiwaki closure resulted in $47.5 million of impairment and $8.0 million of restructuring costs; further claims or insufficient asset-sale proceeds could create additional funding needs.
- Debt and financing: As of March 31, 2015, the company disclosed approximately $296 million of consolidated debt. Tower’s Israeli bank facility was secured by substantially all Tower assets and included financial and ownership covenants; a change in major shareholder Kenon’s holdings could require lender consent or a waiver. Management warned that funds from operations or other financing sources might not be sufficient to meet obligations or growth needs.
- Post-year-end convertible-debt activity: Approximately $162 million of Series F debentures converted into shares in the first quarter of 2015. The filing expected about $70 million of associated non-cash accelerated accretion and amortization expense in that quarter, with reduced debt and higher equity, and lower financing expense in later periods.
- Other key risks: Revenue concentration was substantial: one customer accounted for 38% of 2014 sales, and four customers each represented 7%–38%. The business is exposed to semiconductor cycles, pricing and utilization pressure, production interruptions, customer order variability, foreign exchange and interest rates, environmental and natural-disaster risks, and labor actions. The filing also describes grant-compliance obligations and related liens on Tower assets.
- Controls and contingencies: Management and the auditor reported effective internal control over financial reporting, but TPSCo—which represented 38% of consolidated assets and revenue—was excluded from the 2014 assessment and audit of controls. Management reported no pending or threatened legal proceeding expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the $166.4 million TPSCo acquisition gain and tax benefit obscure continuing operating performance, and how TPSCo’s post-acquisition results compare on a like-for-like basis.
- Current debt balances, maturities, covenant compliance and any lender consent or waiver needed for changes in Kenon’s shareholdings; distinguish year-end debt from the March 31, 2015 post-conversion figure.
- TPSCo utilization, Panasonic’s actual order commitments, third-party customer qualification progress and the costs required to ramp production.
- Cash conversion and liquidity after Nishiwaki closure payments, capital spending and scheduled debt service; monitor working capital and near-term maturities.
- The effect of Series F conversions and accelerated non-cash financing charges on reported 2015 earnings, share count and future interest expense.
- Customer concentration and the status of the Nishiwaki closure, including remaining liabilities, claims and asset-sale proceeds.
- 2014 internal-control coverage: TPSCo was excluded despite its material share of consolidated assets and revenue.