Business Context and Reporting Period
This Form 6-K filing by Tower Semiconductor Ltd. (Tower), dated November 23, 2011, details the acquisition of a fabrication facility in Nishiwaki City, Japan, from Micron Technology Inc. (Micron). The transaction closed in June 2011, with the assets held through Tower's wholly-owned subsidiary, TowerJazz Japan Ltd. (TJP). The filing includes unaudited pro forma financial information and the historical financial statements of Micron Japan Ltd. (MJP) to satisfy SEC disclosure requirements.
Key Financial Metrics
Acquisition Details
- Total Consideration: $62.6 million ($40 million cash + $22.6 million in Tower ordinary shares).
- Shares Issued: 19,678,322 ordinary shares subject to a 25% semi-annual lock-up release.
- Acquisition Costs: Approximately $1.5 million (expensed in operating expenses).
- Gain on Acquisition: Approximately $19.5 million recognized due to the purchase price being lower than the fair value of net assets ($82.1 million).
Pro Forma Financial Results (Nine Months Ended Sept 30, 2011)
| Metric | Pro Forma Combined |
|---|---|
| Revenues | $571.2 million |
| Gross Profit | $91.3 million |
| Operating Profit | $33.9 million |
| Net Income (Loss) | $0.5 million |
| Loss per Share | $0.00 |
Historical MJP Results (Six Months Ended March 3, 2011)
- Net Sales: $370.1 million
- Gross Margin: $31.2 million
- Net Income: $7.9 million
- Cash and Equivalents: $102.4 million
Material Changes and Valuation
The acquisition resulted in a significant one-time gain of $19.5 million. Management attributes this gain to declining demand for the specific products manufactured at the Nishiwaki facility, the cost efficiency of acquiring a whole fab versus individual components, limited market opportunities for the seller, and the impact of the March 2011 natural disasters in Japan.
The purchase price allocation (in thousands) was as follows:
- Property, plant, and equipment: $145,559
- Current assets: $25,783
- Intangible assets: $11,156
- Total Liabilities assumed: $103,301
Final valuations are preliminary and may vary significantly.
Outlook, Risks, and Contingencies
- Wafer Supply Agreement: TJP is committed to manufacturing products for Micron for at least three years. Micron is committed to purchasing a minimum volume until the end of Q2 2014.
- Material Payments: TJP must pay Micron approximately $19.3 million for transferred materials in 12 equal monthly installments starting December 2011.
- Transition Services: Both parties agreed to provide transition services for approximately two to three years.
- Pro Forma Limitations: The pro forma results do not include the complete realization of cost savings or synergies. They exclude acquisition costs and the gain on acquisition to show a normalized view.
- Valuation Risk: The fair values of assets and liabilities are based on preliminary third-party valuations; final numbers may differ.
Investor Verification Checklist
- Verify the final valuation of the Nishiwaki facility assets and liabilities, as current figures are preliminary.
- Monitor the execution of the $19.3 million material payment schedule to Micron starting December 2011.
- Assess the impact of the 19.7 million share issuance on future earnings per share dilution.
- Review the actual realization of synergies and cost savings compared to the pro forma assumptions.
- Confirm the status of the registration statement for the resale of shares issued to Micron.