Look for Towerjazz to Show Strength - Analyst Blog

Ken Nagy, CFA

Look for Towerjazz (TSEM) to Show Strength

Earnings Preview/ Foundry Position/ 2011 Outlook
Towerjazz will continue to make good on its promises of $500 million revenue run rate and 70% year over year growth. For good measure the firm got to GAAP net profit one quarter (last quarter) earlier than the firm originally promised. (The first in 10 years) The firm has been building capacity due to accelerated design-win momentum. We expect another strong quarter in the fourth quarter, similar to quarter three and expect the GAAP net profit to be a regular occurrence.

We feel Towerjazz should outpace its foundry competitors as well as the overall semiconductor industry in 2011. Specialty foundry enjoys higher margins and is less susceptible to industry downturns. In addition the firm is out in front on several industry leading technologies such as HPA, Power, and optical. The Tower and Jazz merger was completed at a time when the rest of the industry was struggling to survive. The balance sheet improvements are a source of strength which likely sets up the firm for further growth activity in the future. The firm ranks number one in specialty foundry.

Foundry Landscape 2008-2010

Tower Semiconductor Raises $100 Million

On October 25, 2010, Tower Semiconductor successfully completed the institutional stage of a fund raising in Israel, receiving commitments from investors to a new series of long-term bonds it intends to issue. The bonds will mature in two equal installments on December 2015 and December 2016.

The series F bonds will be NIS denominated and will be linked to the exchange rate of the NIS into the US Dollar. Under the terms of the bonds, it will carry an interest rate of 7.8% per annum, payable semi-annually on June 30 and on December 31 of each year through 2016, commencing December 31, 2010, and will be convertible into the Company’s ordinary shares commencing September 2012 at about 20 percent premium over the Company’s ordinary shares market price. (With a 2 year vesting period ending September 2012)

By October 27th the firm had $100 million in commitments. Cash will be used to grow internal capacity (mainly fab2) potential M&A.

Looking at the past year this completes a comprehensive debt restructure. This restructure comprised the extension of the $45 million Wells-Fargo credit lines, $80 million Jazz level bonds exchange to bonds due in 2015, $50 million pay down and restructure of the remaining $160 million Israeli banks debt to a long term loan and this deal. Tower has created a new balance sheet with zero bank loans’ principal due during the coming 3 years, servable debt ratios and a cash balance which will enable the firm to be flexible if M&A opportunities present themselves.

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