By Ken Nagy, CFA
On November 15, 2012, Tower Semiconductor Ltd. (), the Israel based global specialty foundry leader, reported financial results for its third quarter and nine months ended September 30, 2012.
The Company reported mixed results with thirdquarter revenues of $154.594 million, which fell $21.518 millionyear over year and $14.043 million sequentially. Still, Year over year, GAAP gross margin improved from 9.3 percent to 12.4 percent for the three months ended September 30, 2012.
The improvement in margins are as a result of the efficiency measures that management has executed, including the cost reduction plan in the Japanese facility, with the aim of lowering operating expenses by more than $30 million on an annual basis.
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.
Furthermore, Tower reported third quarter 2012 EBITDA of $40 million, up year-over-year from $39 million for the third quarter of 2011 which excludes the one-time gain from the sale of HHNEC holdings. Operating loss for the three months ended September 30, 2012 was $513,000 compared to an operating loss of $4.619 million for the comparable quarter of 2011.
However, Tower reported a third quarter 2012 GAAP net loss of $18.159 million, down year over year from net income of $1.839 million for the third quarter 2012.
Financing expenses increased significantly primarily as a result of GAAP, non-cash financing expenses resulting from the changes in the fair market value of part of the Company’s debentures and warrants which are recorded at fair market value per GAAP and from the effect of the NIS/USD exchange rate changes on Tower’s NIS denominated debentures.
Excluding financing expenses and the net effect of the one-time gain from the sale of the Company's investment in HHNEC in the third quarter of 2011, net loss in the quarter was reduced by $6 million compared with that of the third quarter last year.
Based on a weighted average number of ordinary shares outstanding of 21.539million, GAAP basicnet loss per share resulted in a net loss of $0.84 per share during the third quarter of fiscal 2012. This compared to basic net income per ordinary share of $0.09 on a weighted average number of ordinary shares of 21.140 million during the three months ended September 30, 2011.
Non-GAAP third quarter 2012 gross profit was $57.413 million representing gross margin of 37.1 percent while non-GAAP net profit was $31.567 million. This compares to non-GAAP gross margin of32.6 percent and a non-GAAP net profit of $31.695 million for the thirdquarter ended September 30, 2011.
Tower Semiconductor’s balance sheet remained strong with $160.973 million in cash and short-term deposits and working capital of $129.053 million for the period ended September 30, 2012. This compares to $170.661 million in cash and short-term deposits and working capital of $138.577 million for the period ended June 30, 2012.
Similarly, during October 2012, Tower successfully completed a private placement that raised $25 million, in an expansion of its long-term debentures series F, due December 2015 and December 2016.
Net cash from operating activities was $15 million, or $26 million excluding one-time reorganization payments of $11 million related to the previously announced efficiency and cost reduction plan in its Japanese facility resulting in $30 million of savings on an annual basis.
Finally, while Tower’s third quarter results were in line with the Company’s guidance, the Company continues to execute on its operational and strategic plans.
Along the same lines, during the quarter, Tower announced its largest single customer manufacturing engagement in the Company’s history, which is multi-year through 2018 and includes advanced flows in the Nishiwaki, Japan factory, and increased activities in both Migdal Haemek factories and the operation of a jointly built epitaxial center for super junction families.
Furthermore, management believes it continues to make strong progress in growing markets such as Front End Module for mobile communication, power management and high-end image sensors as evidenced by the record number of new masks that have entered Tower factories.
Likewise, the Company is in the final stages of signing a unique contract in Japan, and is in advanced stages of an enabling agreement for one of its strong strategic initiatives.
As a result, Tower anticipates fiscal 2012 fourth quarter revenues to be in the range of $147 million to $157million.
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