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Solid Quarter and Weak Guidance for Tower

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Solid Quarter and Weak Guidance for Tower

Ken Nagy, CFA

On August 9, 2012, Tower Semiconductor Ltd. , the Israel based global specialty foundry leader, reported financial results for its second quarter, ended June 30, 2012.

The Company reported solid second quarter revenues of $168.637 million, up nearly 21% year over year from $139.707 million, and up $624,000 sequentially from $168.013 million for the three months ended March 31, 2011.

Similarly, revenues for the first half of 2012 were $76 million higher, or 29 percent as compared to the first half of 2011. The Company’s revenue growth was well ahead of its industry peer’s performance.

Still, Tower reported a second quarter 2012 GAAP net loss of $9.404 million, down year over year from net income of $1.743 million for the second quarter 2012 but improving sequentially from a net loss of $19.317 million during the first quarter of 2012.

However, it’s important to note that excluding the onetime acquisition gain of $19.467 million received in the second quarter of 2011, the 2012 GAAP net loss of $9.404 million would have been an improvement of $8.32 million year over year.

Furthermore, Tower reported EBITDA of $52 million, up $11 million or 28 percent quarter over quarter and up 42 percent year-over-year, excluding the acquisition related and reorganization costs and the one-time acquisition gain last year.

Year over year, gross margin improved from 14.6 percent to 16.8 percent for the three months ended June 30, 2012.

Sequentially, gross margin for the second quarter jumped from 13.5 percent for the three months ended March 31, 2012.

Based on a weighted average number of ordinary shares outstanding of 21.473 million, GAAP basic net loss per share resulted in a net loss of $0.44 per share during the second quarter of fiscal 2012.  This compared to a basic loss per ordinary share of $0.91 on a weighted average number of ordinary shares of 21.240 million during the three months ended June 30, 2011.

Still, non-GAAP first quarter 2012 gross profit was $67.958 million representing gross margin of 40 percent while non-GAAP net profit was $44.767 million.

This compares to Non-GAAP gross margin of 36 percent and a non-GAAP net profit of $28.046 million for the second quarter ended June 30, 2011.

Tower Semiconductor’s balance sheet continued to improve with $170.661 million in cash and short-term deposits and working capital of $138.577 million for the period ended June 30, 2012.

This compares to $158.226 million in cash and short-term deposits and working capital of $124.702 million for the period ended March 31, 2012.

Likewise, net cash from operating activities was $33 million, or $42 million excluding one-time reorganization payments of $9 million.

During the second quarter of 2012, Tower executed a cost reduction plan to increase its efficiency of its Japanese facility in Nishiwaki City.

The plan is expected to enable improved margins by greater than $30 million on an annual basis and should enable an approximately 10 point increase in the gross margins produced in this factory as compared to the previous operating expense baseline.

One-time payments in regards to this cost reduction plan are presented under cash flow from operating activities, in the amount to be $9 million for each of the second and third quarters of 2012. One-time expenses of $6 million were included in the statement of operations for the second quarter of 2012 under a separate line named "reorganization costs". No additional expenses are expected to be accrued in future periods following the execution of the cost reduction plan.

The Company’s Nishiwaki, Japan factory has met or exceeded all of Tower’s forecasts and metrics since the acquisition as well as enabled significant growth throughout the Asia region.

The facility greatly expands Tower’s geographic reach and distribution capabilities enabling the Company to take advantage of increased interfab efficiencies in manufacturing.

Management went on to state that there are a number of top tier integrated device manufactures for whom the Company is actively qualifying their flows into the Nishiwaki Fab, with production being expected to start from early 2013.

Similarly, a top tier and existing top five Jazz customer invested in tools and agreed to a ‘take or pay’ contract for one of its most advanced flows to be transferred into high volume manufacturing in Nishiwaki while a top tier Japanese automotive supplier selected, and in the second quarter began to design to the Company’s shallow epi platform, targeting high volumes within the next few years.

Last, management added that the Company is in advanced negotiations with a premier Japanese IDM who plans to shut down a highly specialized lower volume factory with the aim of transferring its entire product for manufacturing at Tower’s Nishiwaki facility.

Furthermore, In Korea, Tower has now grown from one image sensor customer in 2010 to over 40 active engagements in part due to the proximity of the Nishiwaki facility.

Management also updated its initiative in India, in which it announced last quarter.

The important business opportunity would expand Tower’s presence in India through an initiative by the Indian government for a 300 millimeter factory.

The initiative would provide the Company with a major revenue stream during the portion of Fab build out and subsequent Fab operation and give it the specific portion of the Fab capacity for its own customer needs.

The Company went on to report that within past weeks it received feedback that its consortium is moving to the next step in the approval process and that it expects to receive a decision before the year’s end.

Still, it should be noted that there is no guarantee that Tower will receive the initiative from the Indian government.

Finally, Tower anticipates fiscal 2012 third quarter revenues to be in the range of $152 million to $162 million resulting in year-to-date 2012 revenues of $489 to $499 million.

The guidance for the nine months ending September 30, 2012 would represent a 12 percent to 14 percent year over year growth in revenues over the $436 million in revenues recorded in the nine months ended September 30, 2011.

Furthermore, the Company went on to state that it continues to expect the margin improvements which it realized in the second quarter 2012.


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