AI assistant
Tower Semiconductor Ltd. Investor Presentation 2021
7095_rns_2021-05-04_9d6b051c-f9cb-412f-a071-2f0d6eb2dee2.pdf
Investor Presentation
Open in viewerOpens in your device viewer
Tower Semiconductor Ltd.
May 3, 2021
Primary Credit Analyst:
Sivan Mesilati, 972-3-7539735 [email protected]
Secondary Contact:
Tamar Stein, 972-3-7539721 [email protected]
Please note that this translation was made for convenience purposes and for the company's use only and under no circumstances shall obligate S&P Global Ratings Maalot Ltd. The translation has no legal status and S&P Global Ratings Maalot Ltd. does not assume any responsibility whatsoever as to its accuracy and is not bound by its contents. In the case of any discrepancy with the official Hebrew version published on May 3, 2021, the Hebrew version shall apply.
Table of Contents
| (Verview |
|---|
| Outlook |
| Downside Scenario |
| Upside Scenario |
| Base Case Scenario |
| Key Assumptions |
| Key Metrics |
| Company Description |
| Business Risk Profile |
| Financial Risk |
| Liquidity |
| Debt Maturities |
| Covenant Analysis |
| Compliance Expectations |
| Requirements |
| Environmental, Social and Governance |
| Modifiers |
| Recovery Analysis |
| Key analytical factors | |
|---|---|
| Simulated default assumptions | |
| Simplified Waterfall | |
| Reconciliation | |
| Related Criteria And Research | |
| Ratings List |
Tower Semiconductor Ltd.
Issuer Credit Affirmed ilAA-/Stable
Overview
| Key Strengths | Key Risks | ||
|---|---|---|---|
| • | High competitive position in the analog chip market. |
• | Dependence on a major client - Nuvoton Technology Corporation Japan. |
| • | Long-term relationships with clients. | • | Diseconomies of scale, compelling the |
| • | Low leverage. | Company to invest in R&D and fixed assets in order to maintain its technological advantage. |
|
| • | Strong liquidity. |
Tower Semiconductor Ltd.'s ("Tower" or "the Company") operation grew in 2020. The Company's revenues increased by about 2.6% due to an increase in products sold and stability in selling price. The increase in products sold was mainly the result of the expansion of the Uozu facility in Japan. Accordingly, the Company's adjusted EBITDA grew by about 10.2%. The coronavirus crisis did not adversely affect the Company, and a large part of demand growth starting mid-2020 and into 2021 may have actually resulted from an increase in clients' computing needs for remote work and data storage. At the same time, the Company's adjusted debt increased by about 25% due to increased capital expenditures (capex) designed to increase utilization rates in the Company's facilities in Japan. As a result, the Company's gross debt to EBITDA was about 1.1x, compared with about 1.0x in 2019.
We expect the utilization improvement in the Company's facilities to continue in the next two
years. Due to investments of about \$150 million in machinery acquisitions in 2020, mainly for the expansion of the Uozu facility in Japan, the Company's adjusted EBITDA rate increased to about 28% from about 26% in 2019, and we expect it to remain at this level in the upcoming years.
At the same time, we believe the Company's debt may increase due to continued investments in increasing the product supply in order to meet increased demand for 8" and 12" chips. We also assume that the Company will continue supporting growth in the upcoming years, and therefore will refrain from distributing dividends in the short term. As a result, we expect adjusted gross debt to EBITDA to be in the 1.0x-1.5x range in the next two years.
We believe there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research on S&P Maalot website as well as on S&P Global Ratings website). As the situation evolves, we will update our assumptions and estimates accordingly.
Outlook
The stable outlook reflects our assessment that the Company will maintain its competitive position in the analog chip market and strong liquidity in the medium term. We also expect the Company to continue improving its facilities' utilization rates and prevent a decrease in its operating margin over the business cycle. We expect the Company to maintain an adjusted gross debt to EBITDA ratio below 1.5x, commensurate with the current rating.
Downside Scenario
We may lower the rating if the Company's competitive position is undermined. This could happen if market conditions worsen, leading to a decrease in the utilization rate of the Company's facilities and to a continued or material decline in profitability. The rating will also come under pressure if the Company materially increases its financial debt in order to finance acquisitions or large dividend distributions to shareholders, such that adjusted gross debt to EBITDA exceeds 1.5x, or if we see that the Company is not generating positive free cash flows over time.
Upside Scenario
We may consider a positive rating action if Tower's business risk profile materially improves, as reflected, among other things, by increased market share, materially improved profitability, wider product variety compared with peers and improved utilization rates. All this alongside consistently maintaining an adjusted gross debt to EBITDA ratio below 1.5x over time.
Base Case Scenario
Key Assumptions
- Adjusted EBITDA margin of about 28% in 2021-2022, similar to 2020.
- Capital expenditures on maintenance and new investments of about \$200 million \$300 million in 2021-2022.
- Use of cash on hand for mergers and acquisitions in the short- to medium-term.
- No dividend distribution.
We are taking into account gross debt without deducting cash.
| Financial Metric | 2020A | 2021E | 2022E |
|---|---|---|---|
| Debt/EBITDA | 1.1x | 1.0x-1.5x | 1.0x-1.5x |
| FFO/debt | 90.1% | 70%-75% | 85%-90% |
Key Metrics
A - actual. E – Estimate. FFO – funds from operations.
Company Description
Tower Semiconductor Ltd. is an Israeli manufacturer of semiconductors and integrated circuits ("chips"). It is a pure-play foundry, i.e. focused on production according to clients' or third parties' specifications. Chips produced by the Company are embedded in a wide variety of products in various markets, including electronic consumer products, personal computers, communication products, auto products, industrial products and medical products. Tower also provides engineering support services and complimentary manufacturing services. The Company produces in seven facilities located in Israel, U.S.A. and Japan.
Business Risk Profile
Tower's business risk profile is supported by a leading market share in its niche – analog chip production, and by its competitive position as one of the leading analog specialty foundries in the world. The Company's business risk profile is also supported by relatively high barriers to entry based on technological know-how, long-term relationships with clients and high replacement costs when changing chip suppliers, since up to 18 months may pass between the initial order of a product and its commercial manufacturing, due to the design and development process.
On the other hand, Tower's business risk profile is constrained by its niche-type activity and by its product variety compared with global peers, and is affected by inherent risks in the chip industry and by its small size. These require the Company to invest heavily in R&D and fixed assets in order to maintain its technological advantage. We believe the fast technological developments in the chip market is a material risk for the Company. However, the analog chip segment on which Tower focuses is characterized by lower capital expenditures compared with the digital chip segment, as analog chip technology is less affected by the chip size minimization race which largely dictates the need to develop new technologies and make large investments. Accordingly, the lifecycle of products and technologies in the analog chip segment tends to be longer.
The Company's business risk profile is also constrained by its concentrated customer base – the Company's largest client, Nuvoton Technology Corporation Japan, was responsible for about 25% of its 2020 revenues.
We expect that the increase in demand for the Company's products will continue in the medium term, due to the increase in demand for 8" and 12" chips. However, we believe that in order to meet increased demand, the Company will have to continue investing in increasing its chip production capacity and improving utilization in its facilities. We note that in the past year Tower invested about \$150 million in machinery acquisition in order to increase utilization in its facilities, especially in Japan.
Financial Risk
Tower's financial risk profile reflects low leverage, similarly to other companies in the chip market, but potentially high volatility in operating performance over the business cycle due to the high correlation between demand and the business cycle, production and utilization rates at the Company's plants.
The Company's adjusted debt increased in 2020 to about \$390 million from about \$312 million due to increased capital expenditures (capex) designed to increase utilization rates in the Company's facilities in Japan. As a result, the Company's gross debt to EBITDA ratio was about 1.1x, compared with about 1.0x in 2019.
We expect this trend to continue in the next two years due to the need to increase product supply and meet the increased demand as described above, and adjusted gross debt to EBITDA to be about 1.0x-1.5x in 2021-2022. We also expect the Company will continue supporting growth in the upcoming years, and therefore will refrain from distributing dividends in the short term.
Table 1.
Tower Semiconductor Ltd. – Financial Summary (Mil. \$)
Industry Sector: High Tech Equipment
| 2020 | 2019 | 2018 | 2017 | 2016 | |
|---|---|---|---|---|---|
| Revenue | 1,265.7 | 1,234.0 | 1,304.0 | 1,387.3 | 1,249.6 |
| EBITDA | 356.2 | 323.5 | 383.1 | 442.1 | 384.4 |
| Funds from operations (FFO) | 351.6 | 302.7 | 364.8 | 413.5 | 370.6 |
| Interest expense | 7.1 | 7.2 | 11.3 | 8.5 | 12.7 |
| Cash interest paid | 7.0 | 7.8 | 12.5 | 10.9 | 10.4 |
| Cash flow from operations | 283.8 | 299.0 | 315.0 | 357.7 | 329.4 |
| Capital expenditure | 313.7 | 191.4 | 210.2 | 187.7 | 217.5 |
| Free operating cash flow (FOCF) | (29.8) | 107.6 | 104.8 | 170.1 | 111.9 |
| Discretionary cash flow (DCF) | (29.8) | 107.6 | 104.8 | 165.7 | 109.4 |
| Cash and short-term investments | 710.9 | 747.2 | 641.0 | 559.8 | 389.4 |
| Gross available cash | 710.9 | 747.2 | 641.0 | 559.8 | 389.4 |
| Debt | 390.3 | 311.8 | 277.7 | 343.9 | 355.0 |
| 2020 | 2019 | 2018 | 2017 | 2016 | |
|---|---|---|---|---|---|
| Equity | 1,454.9 | 1,346.7 | 1,236.2 | 1,029.7 | 682.6 |
| Adjusted ratios | |||||
| EBITDA margin (%) | 28.1 | 26.2 | 29.4 | 31.9 | 30.8 |
| Return on capital (%) | 5.4 | 6.6 | 11.2 | 18.0 | 21.1 |
| EBITDA interest coverage (x) | 50.1 | 45.1 | 33.9 | 51.7 | 30.3 |
| FFO cash interest coverage (x) | 51.3 | 39.8 | 30.2 | 38.9 | 36.8 |
| Debt/EBITDA (x) | 1.1 | 1.0 | 0.7 | 0.8 | 0.9 |
| FFO/debt (%) | 90.1 | 97.1 | 131.4 | 120.2 | 104.4 |
| Cash flow from operations/debt (%) | 72.7 | 95.9 | 113.4 | 104.0 | 92.8 |
| FOCF/debt (%) | (7.6) | 34.5 | 37.7 | 49.5 | 31.5 |
| DCF/debt (%) | (7.6) | 34.5 | 37.7 | 48.2 | 30.8 |
Data are based on S&P Global Ratings adjusted number and ratios.
Liquidity
According to our criteria, we estimate Tower's liquidity as strong, based on our assessment that the ratio between the Company's sources and uses will exceed 1.5x in the next 12-24 months. This assessment mainly reflects expected operating cash flow and the Company's cash and liquid investment balance, which can support its investment and working capital needs. We note that the Company has a large share of liquid and available assets to finance its debt maturities in the next two years. In addition, the Company intends to avoid distributing dividends in the medium term in accordance with its organic-growth-oriented strategy.
Following are the Company's main sources and uses for the 12 months starting January 1, 2021:
| Principal Liquidity Sources | Principal Liquidity Uses | |||
|---|---|---|---|---|
| • | Cash and liquid investments of about \$711 million. |
• | Series G bond maturities of about \$70 million. |
|
| • | Operating cash flow of about \$350 million. | • | Working capital needs of about \$60 million - \$70 million. |
|
| • | Maintenance capital expenditures of about \$180 million. |
Debt Maturities
Covenant Analysis
Compliance Expectations
We expect the Company to maintain adequate headroom (over 30%) on all its financial covenants.
Requirements
According to the terms of its bond series, the Company must maintain a net financial debt to EBITDA ratio of up to 2.5x and equity of at least \$850 million.
Environmental, Social and Governance
We consider the environmental risk to be neutral for the rating. The Company's operations are subject to a variety of governmental laws and regulations pertaining to the use, emission and disposal of toxins and other hazardous materials used in the semiconductors production process in its various facilities. In addition, the Company is required to obtain operating permits and licenses for its eight production facilities. Government entities in the countries where the Company operates may cancel, change and renew these permits and licenses. The Company currently meets the conditions of these permits and licenses.
Modifiers
Diversification/portfolio effect: Neutral Capital structure: Neutral
Liquidity: Neutral Financial policy: Neutral Management and governance: Neutral Comparable ratings analysis: Neutral
Recovery Analysis
Key analytical factors
- We are affirming our 'ilAA-' issue rating, identical to the issuer rating, on Tower Semiconductor Ltd.'s unsecured bond series G.
- The recovery rating for this series is '3', reflecting our assessment that in the hypothetical default scenario, the recovery rate would be at the higher end of the 50%-70% range.
- Our recovery assessment is constrained to the 50%-70% range despite the simplified waterfall, due to our assessment that the Company will replace unsecured debt with secured or senior debt on the way to default, and because at an 'ilAA-' issuer rating the likely default event is at a later date, making waterfall projections less certain.
Simulated default assumptions
- Simulated year of default: 2026
- A deep recession in the countries of operation will be reflected, among other things, by a sharp drop in demand for the Company's products. At the same time, competitive pressures in the semiconductor and analog chips market will materially increase and lead to a decline in gross profit margins. These changes will lead to a deterioration in the Company's operating performance and to a material decline in its net worth.
- The company will continue operating as a going concern, an assessment supported by long-term signed contract with clients and by the high costs of replacing existing chip suppliers.
Simplified Waterfall
- EBITDA at default: \$95 million
- Industry EBITDA multiple: 6.0x
- Gross enterprise value as going concern: about \$570 million.
- Administrative and operating costs: 5%
- Enterprise value available for secured debt: about \$540 million
- Total first tier secured debt: about \$155 million
- Net value available for unsecured debt: about \$390 million
- Total unsecured debt: about \$121 million
- Unsecured debt recovery expectation (Series G): 50%-70% (constrained as noted above)
- Unsecured recovery rating (1 to 6): 3
All debt amounts include six months' prepetition interest.
| Mapping Recovery Percentages To Recovery Ratings | |||||||
|---|---|---|---|---|---|---|---|
| Recovery expectations (%) |
Description | Recovery rating | Notching above/below issuer rating |
||||
| 100% | Full recovery | 1+ | +3 notches | ||||
| 90%-100% | Very high recovery | 1 | +2 notches | ||||
| 70%-90% | Substantial recovery | 2 | +1 notch | ||||
| 50%-70% | Meaningful recovery | 3 | 0 notches | ||||
| 30%-50% | Average recovery | 4 | 0 notches | ||||
| 10%-30% | Modest recovery | 5 | -1 notch | ||||
| 0%-10% | Negligible recovery | 6 | -2 notches |
Recovery ratings are capped in certain countries to adjust for reduced creditor recovery prospects in these jurisdictions. Recovery ratings on unsecured debt issues are generally also subject to caps (see Step 6, paragraphs 90-98 of Recovery Rating Criteria For Speculative-Grade Corporate Issuers, December 7, 2016, for further detail). ICR--Issuer credit rating.
Reconciliation
In order to create a basis for comparison with other rated companies, we adjust the data reported in the financial statements which we use to calculate financial ratios. The main adjustment for Tower Semiconductor Ltd.'s consolidated data for 2020 is adding about \$17 million to EBITDA due to share based payments.
Table 2.
Tower Semiconductor Ltd.--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. \$) for the Fiscel Year Ended Dec 31, 2020 Tower Semiconductor Ltd. reported amounts
| Debt | Shareholders' equity |
EBITDA | Operating income |
Interest expense |
S&P Global Ratings' adjusted EBITDA |
Cash flow from operations |
|
|---|---|---|---|---|---|---|---|
| Reported | 211.6 | 1,457.8 | 331.6 | 91.0 | 6.8 | 356.2 | 276.6 |
| S&P Global Ratings adjustments |
|||||||
| Cash taxes paid | -- | -- | -- | -- | -- | 2.4 | -- |
| Cash interest paid | -- | -- | -- | -- | -- | (6.6) | -- |
| Reported lease liabilities | 178.6 | -- | -- | -- | -- | -- | -- |
| Operating leases | -- | -- | 7.6 | 0.4 | 0.4 | (0.4) | 7.3 |
| Share-based compensation expense |
-- | -- | 17.0 | -- | -- | -- | -- |
| Nonoperating income | |||||||
| (expense) | -- | -- | -- | 3.3 | -- | -- | -- |
| Noncontrolling | |||||||
| interest/minority interest | -- | (2.9) | -- | -- | -- | -- | -- |
| Total adjustments | 178.6 | (2.9) | 24.6 | 3.6 | 0.4 | (4.6) | 7.3 |
S&P Global Ratings adjusted amounts
| Funds | Cash flow | ||||||
|---|---|---|---|---|---|---|---|
| Interest | from | from | |||||
| Debt | Equity | EBITDA | EBIT | expense | operations | operations | |
| Adjusted | 390.3 | 1,454.9 | 356.2 | 94.7 | 7.1 | 351.6 | 283.8 |
Related Criteria And Research
- Principles Of Credit Ratings, February 16, 2011
- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, November 13, 2012
- Methodology: Industry Risk, November 19, 2013
- Country Risk Assessment Methodology And Assumptions, November 19, 2013
- Corporate Methodology, November 19, 2013
- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, December 16, 2014
- Recovery Rating Criteria For Speculative-Grade Corporate Issuers, December 7, 2016
- Methodology For National And Regional Scale Credit Ratings, June 25, 2018
- Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Group Rating Methodology, July 1, 2019
- S&P Global Ratings Definitions, January 5, 2021
Ratings List
| Tower Semiconductor Ltd. | Rating | Date when the rating was first published |
Last date when the rating was updated |
|---|---|---|---|
| Issuer rating(s) | |||
| Long term | ilAA-/Stable | 09/05/2016 | 06/05/2020 |
| Issue rating(s) Senior Unsecured Debt Series G |
ilAA- | 31/05/2016 | 06/05/2020 |
| Issuer Credit Rating history | |||
| Long term | |||
| April 30, 2018 | ilAA-/Stable | ||
| May 10 ,2017 | ilA+/Stable | ||
| May 09 ,2016 | ilA/Stable | ||
| Additional details Time of the event Time when the event was learned of Rating requested by |
03/05/2021 13:10 03/05/2021 13:10 Issuer |
S&P Maalot is the commercial name of S&P Global Ratings Maalot Ltd. For a list of the most up -to-date ratings and for additional information regarding S&P Maalot's surveillance policy, see S&P Global Ratings Maalot Ltd. website at www.maalot.co.il.
All rights reserved © No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (collectively, "the Content") may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of of S&P Global Ratings Maalot Ltd. or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. &P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, "S&P Parties") do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's ratings and other analyses are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on in making investment decisions or any other business decision, and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making such decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. Rating reports are correct as of the time of their publication. S&P updates rating reports following ongoing surveillance of events or annual surveillance..
While S&P obtains information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P publishes rating-related reports for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P receives compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on S&P Maalot's website, www.maalot.co.il and on S&P Global's website, www.standardandpoors.com, and may be distributed through other means, including via S&P publications and third-party redistributors.