Tower Semiconductor Ltd. — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone Q4 filing; the supplied filing text does not provide separate Q4 financial results. Financial statements are prepared under U.S. GAAP and were audited with an unqualified opinion.
Business context
Tower is an independent specialty semiconductor foundry serving fabless companies and integrated device manufacturers. Its offerings include analog and mixed-signal, RF, power management, CMOS image sensor, SiGe, silicon photonics and MEMS processes. Revenue is primarily from wafer manufacturing, with a smaller contribution from design and technical services.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $1,677.6 million | $1,508.2 million |
| Gross profit / margin | $466.3 million / 27.8% | $329.1 million / 21.8% |
| Operating profit / margin | $311.7 million / 18.6% | $166.5 million / 11.0% |
| Net profit | $266.5 million | $154.1 million |
| Net profit attributable to Tower | $264.6 million | $150.0 million |
| Diluted EPS | $2.39 | $1.37 |
| Cash from operating activities | $529.8 million | $421.3 million |
Revenue rose 11.2% year over year, driven mainly by higher average selling prices and increased wafer shipments. Gross margin improved 6.0 percentage points. The company attributed operating-profit growth primarily to higher gross profit and a $20.2 million gain on equipment sales related to the Arai restructuring.
At December 31, 2022, cash and cash equivalents were $340.8 million; short-term deposits were $495.4 million; and marketable securities were $169.7 million. Together these totaled approximately $1.006 billion. Current assets were $1.495 billion and current liabilities $387.4 million. Current and long-term debt on the balance sheet totaled $272.3 million. Capital lease liabilities were $158.1 million; the TPSCo JPY loan was $83.4 million. Tower’s $19.0 million Series G debentures were repaid in full on March 31, 2023.
Gross investment in property and equipment was $366.4 million; proceeds from equipment and property sales were $152.9 million. Operating cash flow less gross capital investment was approximately $163.4 million. Management stated that operating cash generation, available lease lines and cash, deposits and marketable securities were sufficient for operating needs, existing-fab capital expenditure and debt repayment in the short and long term.
Material changes versus FY2021
- Revenue increased $169.4 million; cost of revenue increased $32.3 million, leaving gross profit up $137.2 million.
- Net profit attributable to Tower rose $114.6 million. Income tax expense increased to $25.5 million from $1.0 million, while other income of $1.5 million in 2021 became other expense of $6.9 million in 2022.
- In July 2022, the Arai factory in Japan, which served NTCJ and not Tower’s other foundry customers, ceased operations. Tower recorded a $20.2 million net restructuring gain from equipment sales and $10.7 million of restructuring expense. The remaining transfer, installation and sale activities were expected to finish in 2023.
- Tower and TPSCo renewed their commercial relationship with NTCJ through March 2027 under amended terms. NTCJ accounted for 14% of 2022 revenue, down from 21% in 2021.
- Cash and cash equivalents increased $129.8 million. Inventory rose to $302.1 million from $234.5 million, while total liabilities rose to $659.1 million from $615.9 million.
Outlook, commentary and key risks
The filing gives no specific revenue or earnings guidance. Management described plans to keep investing in capacity, technology and global operations, including equipment for the shared 300mm Agrate, Italy facility; Tower’s operations there had not commenced by year-end 2022. Gross investments in property and equipment rose 17% in 2022 to $367 million. Management noted that returns on expansion could be lower than expected and that further growth transactions may require additional financing.
The pending Intel merger was a major uncertainty at the filing date. Under the agreement, shareholders would receive $53 per share in cash if it closed; shareholder approval had been obtained, but certain regulatory approvals remained outstanding. The filing stated an Outside Date of August 15, 2023, subject to the agreement’s terms. A failed or delayed transaction could affect the share price, operations, liquidity and ability to raise capital. Termination fees may apply in specified circumstances.
Other material risks include semiconductor cyclicality and customer order volatility; reliance on significant customers; fixed manufacturing costs and utilization; production, equipment and supply-chain disruptions; currency exposure; and competition and pricing pressure. The Fab 3 landlord disputed the adequacy of noise-abatement measures and sought a declaration that it could terminate the lease; Tower disputed the claims. The filing also identifies geopolitical and operating risks in Israel, natural disasters, cybersecurity, environmental regulation and potential workforce actions. COVID-19 had not materially adversely affected 2022 operations or results, according to the company.
The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2022; the independent auditor also gave an unqualified opinion on internal controls. The audit identified income-tax provision and taxable-income allocation across jurisdictions as a critical audit matter, involving transfer-pricing judgments.
Important facts for investors to verify
- Confirm the current status and outcome of the Intel merger, including any amendments, termination or completion; the $53-per-share consideration was conditional, not assured.
- Assess whether revenue, pricing, wafer shipments and margins remained sustainable after FY2022, including any effects from the Arai closure and revised TPSCo–NTCJ terms.
- Review the scale and funding of capacity investments, especially the Agrate facility, and compare actual spending, qualification, utilization and returns with management’s plans.
- Monitor liquidity and debt service, including lease obligations, the TPSCo loan, and any financing needs for expansion.
- Track the Fab 3 lease dispute and assess potential operational or financial consequences if the landlord’s claims or construction activity affect the facility.
- Review tax estimates and transfer-pricing positions, foreign-exchange exposure and hedging, and the value and credit profile of marketable securities.