Tower Semiconductor(TSEM) - 2023 Q2 - Quarterly Report

First Quarter 2023 Financial Results Overview Tower Semiconductor's Q1 2023 results show decreased revenue and gross profit, but increased operating and net profit year-over-year due to restructuring income, with reduced operating cash flow Key Financial Highlights The company's Q1 2023 financial performance saw revenue and gross profit decline, while operating and net profit rose significantly year-over-year, influenced by restructuring income Key Financial Highlights (Q1 2023 vs. Q4 2022 vs. Q1 2022) | Metric | Q1 2023 | Q4 2022 | Q1 2022 | | :----------------------- | :------ | :------ | :------ | | Revenue (Millions) | $356 | $403 | $421 | | Gross Profit (Millions) | $96 | $125 | $105 | | Operating Profit (Millions) | $89 | $99 | $63 | | Net Profit (Millions) | $71 | $83 | $54 | | Basic EPS | $0.65 | $0.76 | $0.50 | | Diluted EPS | $0.64 | $0.75 | $0.49 | | Cash Flow from Operating Activities (Millions) | $73 | $133 | N/A | | Investment in Fixed Assets, net (Millions) | $105 | N/A | N/A | | Debt Repaid (Millions) | $29 | N/A | N/A | - Operating profit for Q1 2023 increased to $89 million from $63 million in Q1 2022, including restructuring income, net, from the reorganization of Japan operations[3] - Net profit for Q1 2023 increased to $71 million ($0.65 basic EPS) from $54 million ($0.50 basic EPS) in Q1 2022, also benefiting from restructuring income[4] - Cash flow generated from operating activities in Q1 2023 was $73 million, a decrease from $133 million in Q4 2022, mainly due to the purchase of starting material against a present reduction in shipment[5] - The Company repaid $29 million of its debt during Q1 2023, resulting in full bonds' redemption[5] Corporate Updates This section details the company's re-affirmed credit rating and its decision to withhold future revenue guidance and earnings calls Corporate Credit Rating Standard & Poor's Maalot re-affirmed Tower Semiconductor's corporate credit rating as "ilAA"/stable in May 2023 - Standard & Poor's Maalot re-affirmed the Company's corporate credit rating as "ilAA"/stable in May 2023[6] Guidance and Conference Call Status Due to the definitive agreement with Intel Corporation, Tower Semiconductor is not providing Q2 2023 revenue guidance and will not host an earnings conference call - The Company is not providing revenue guidance for the second quarter of 2023[7] - The Company will not host an earnings conference call due to the definitive agreement with Intel Corporation[7] Non-GAAP Financial Measures Explanation This section defines the company's non-GAAP financial measures, including adjusted metrics, EBITDA, Net Cash, and Free Cash Flow Adjusted Financial Measures Adjusted financial measures exclude amortization of acquired intangible assets, equity grant compensation, and net restructuring income from the Arai factory cessation - Adjusted financial measures exclude (1) amortization of acquired intangible assets, (2) compensation expenses for equity grants, and (3) restructuring income, net, from the Arai manufacturing factory cessation[8] - Restructuring income, net, was approximately $32 million for Q1 2023, compared to $14 million for Q4 2022[8] EBITDA EBITDA is defined as GAAP operating profit, excluding depreciation, stock-based compensation, amortization of acquired intangibles, and net restructuring income from the Arai factory - EBITDA consists of GAAP operating profit, excluding depreciation expenses, stock-based compensation expense, amortization of acquired intangible assets, and restructuring income, net, from the Arai manufacturing factory[8] Net Cash Net Cash is a non-GAAP measure comprising cash, cash equivalents, short-term deposits, and marketable securities, less debt - Net Cash is comprised of cash, cash equivalents, short-term deposits, and marketable securities less debt amounts[8] Free Cash Flow Free Cash Flow is calculated as net cash provided by operating activities less net cash used for investments in property and equipment - Free Cash Flow is calculated as net cash provided by operating activities less cash used for investments in property and equipment, net[8] Free Cash Flow (Millions) | Period | Net Cash Provided by Operating Activities (Millions) | Cash Used for Investments in Property and Equipment, Net (Millions) | Free Cash Flow (Millions) | | :------------------- | :-------------------------------------- | :----------------------------------------------------- | :------------- | | Three months ended March 31, 2023 | $73 | $105 | -$32 | | Three months ended December 31, 2022 | $133 | $38 | $95 | | Three months ended March 31, 2022 | $137 | $81 | $56 | Company Profile This section outlines Tower Semiconductor's business as a leading analog semiconductor foundry, its technology platforms, and global manufacturing footprint About Tower Semiconductor Tower Semiconductor is a leading foundry for high-value analog semiconductor solutions, offering diverse process platforms and operating multiple global manufacturing facilities - Tower Semiconductor is a leading foundry of high value analog semiconductor solutions[9] - The company provides technology and manufacturing platforms for integrated circuits (ICs) in markets such as consumer, industrial, automotive, mobile, infrastructure, medical, and aerospace and defense[9] - Tower Semiconductor offers a broad range of customizable process platforms including SiGe, BiCMOS, mixed-signal/CMOS, RF CMOS, CMOS image sensor, non-imaging sensors, integrated power management, and MEMS[9] - The company owns two manufacturing facilities in Israel, two in the U.S., two in Japan (through 51% holdings in TPSCo), and shares a 300mm facility being established in Italy by STMicroelectronics[9] Legal and Risk Disclosures This section outlines forward-looking statements and associated risks, encompassing market, operational, and acquisition-related uncertainties Forward-Looking Statements and Risks Forward-looking statements are subject to risks and uncertainties, including market fluctuations, operational challenges, debt, acquisition execution, and regulatory compliance, which could materially alter actual results - Forward-looking statements are subject to risks and uncertainties, and actual results may vary[10] - Potential risks include demand fluctuations, capacity issues, customer retention, operating result volatility, debt impact, acquisition execution, cash flow fluctuations, pending litigation, and meeting regulatory requirements[10] - Specific risks related to the Intel Corporation acquisition include timely receipt of regulatory approvals, potential divestitures, termination of the merger agreement, impact on business relationships, integration challenges, litigation, and retention of key personnel and customers[10][11] - A more complete discussion of risks is available under "Risk Factors" in Tower's most recent filings on Forms 20-F and 6-K with the SEC[12] Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, encompassing balance sheets, statements of operations, sources and uses, and cash flows Condensed Consolidated Balance Sheets As of March 31, 2023, the balance sheet shows a slight decrease in total current assets but an increase in total assets, with total liabilities decreasing and shareholders' equity rising Condensed Consolidated Balance Sheets (Thousands of Dollars) | Asset/Liability | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $304,934 | $340,759 | | Short-term deposits | $469,284 | $495,359 | | Marketable securities | $171,747 | $169,694 | | Inventories | $358,715 | $302,108 | | Total current assets | $1,484,291 | $1,495,174 | | Property and equipment, net | $1,009,632 | $962,258 | | Total assets | $2,577,086 | $2,547,608 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Short-term debt | $42,224 | $62,275 | | Trade accounts payable | $191,006 | $150,930 | | Total current liabilities | $354,135 | $387,388 | | Long-term debt | $201,445 | $210,069 | | Total liabilities | $600,834 | $659,067 | | Total shareholders' equity | $1,976,252 | $1,888,541 | | Total liabilities and shareholders' equity | $2,577,086 | $2,547,608 | - Total assets increased from $2,547,608 thousand at December 31, 2022, to $2,577,086 thousand at March 31, 2023[15] - Total liabilities decreased from $659,067 thousand to $600,834 thousand, while total shareholders' equity increased from $1,888,541 thousand to $1,976,252 thousand[15] Condensed Consolidated Statements of Operations Q1 2023 statements of operations show declining revenues and gross profit, but a significant year-over-year increase in operating and net profit, driven by substantial restructuring income Condensed Consolidated Statements of Operations (Thousands of Dollars, except per share data) | Metric | Three months ended March 31, 2023 | Three months ended December 31, 2022 | Three months ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------- | | Revenues | $355,611 | $403,227 | $421,132 | | Gross Profit | $95,717 | $124,726 | $104,631 | | Restructuring income, net | $(31,655) | $(13,592) | -- | | Operating Profit | $89,412 | $98,732 | $63,060 | | Net Profit | $81,368 | $85,842 | $55,774 | | Net Profit Attributable to the Company | $71,402 | $83,324 | $54,033 | | Basic Earnings Per Share | $0.65 | $0.76 | $0.50 | | Diluted Earnings Per Share | $0.64 | $0.75 | $0.49 | - Restructuring income, net, was $(31,655) thousand in Q1 2023, significantly higher than $(13,592) thousand in Q4 2022, and zero in Q1 2022[16] - Operating profit increased by 41.8% year-over-year (Q1 2023 vs. Q1 2022), from $63,060 thousand to $89,412 thousand[16] - Net profit attributable to the company increased by 32.2% year-over-year (Q1 2023 vs. Q1 2022), from $54,033 thousand to $71,402 thousand[16] Consolidated Sources and Uses Report The report shows a decrease in cash and cash equivalents in Q1 2023, primarily due to significant investments in property and equipment and debt repayment, despite positive operating cash flow Consolidated Sources and Uses Report (Thousands of Dollars) | Item | Three months ended March 31, 2023 | Three months ended December 31, 2022 | Three months ended March 31, 2022 | | :------------------------------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------- | | Cash and cash equivalents - Beginning of Period | $340,759 | $390,369 | $210,930 | | Net cash provided by operating activities | $72,727 | $132,750 | $136,571 | | Investments in property and equipment, net | $(105,245) | $(38,186) | $(80,840) | | Debt repaid, net | $(28,796) | $(11,465) | $(30,539) | | Cash and cash equivalents - End of Period | $304,934 | $340,759 | $203,484 | - Net cash provided by operating activities was $72,727 thousand in Q1 2023, a decrease from $132,750 thousand in Q4 2022[18] - Investments in property and equipment, net, significantly increased to $(105,245) thousand in Q1 2023 from $(38,186) thousand in Q4 2022[18] Condensed Consolidated Statements of Cash Flows Despite positive net profit, Q1 2023 cash flow statements show an overall decrease in cash and cash equivalents, driven by increased investments in property and equipment and reduced operating cash flow Condensed Consolidated Statements of Cash Flows (Thousands of Dollars) | Cash Flow Category | Three months ended March 31, 2023 | Three months ended December 31, 2022 | Three months ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------- | | Net profit for the period | $81,368 | $85,842 | $55,774 | | Depreciation and amortization | $62,387 | $79,893 | $70,780 | | Inventories (change) | $(57,420) | $(23,423) | $(18,328) | | Trade accounts payable (change) | $44,542 | $(57,952) | $30,595 | | Net cash provided by operating activities | $72,727 | $132,750 | $136,571 | | Net cash used in investing activities | $(81,051) | $(188,609) | $(110,451) | | Net cash used in financing activities | $(26,864) | $(5,249) | $(30,495) | | Decrease in cash and cash equivalents | $(35,825) | $(49,610) | $(7,446) | | Cash and cash equivalents - End of Period | $304,934 | $340,759 | $203,484 | - A significant change in inventories, from $(23,423) thousand in Q4 2022 to $(57,420) thousand in Q1 2023, contributed to the decrease in operating cash flow[19] - Net cash used in investing activities was $(81,051) thousand in Q1 2023, primarily driven by investments in property and equipment[19]