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TSEM: Intel Strikes Deal to Buy Tower Semiconductor for $53 Per Share

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By Lisa Thompson

NASDAQ:TSEM

READ THE FULL TSEM RESEARCH REPORT

Intel plans to buy Tower Semiconductor (NASDAQ:TSEM) for $53 per share in cash. Using its fully diluted share count this equals an enterprise value of $5.4 billion or 3.6 times Tower’s revenues for 2021. The deal is expected to be accretive to Intel upon close. This acquisition will aid Intel’s foundry strategy and give it capacity and expertise to pursue its expansion plans particularly in the US where Tower already has fabs in California and Texas. With Intel’s cash it can expand its fabs with far greater ease and speed as it has the demand to fill them. While Intel analysts whine about Tower’s margins, they do not realize that incremental revenues carry margins over 50%. Nor are they taking into account the licensing arrangement with the Japanese fabs, which was structured to reduce taxes and increase overall profitability at the expense of gross margins.

The deal is expected to take a year to close as the companies get the regulatory approvals from various countries.

Q4 2021 Results

Today Tower Semiconductor reported revenues and earnings in Q4 of $412 million versus $345 million in Q4 2020. The company is no longer providing guidance nor hosting earnings calls. This was year over year growth of 19%. It was also up sequentially as it has been since Q1 2020. Organic (i.e. excluding revenues generated by the Nuvoton Japan JV and Maxim) growth was 28% year over year. This was lower than in Q3 because in Q3 last year, the company had a cybersecurity breach and as a result Tower shut down all of its Israeli and US IT systems, which stopped all activities in those locations. In less than a week, all the factories were back operating. Because of this shut down, Tower missed between 8-12 days of new wafer starts and a few weeks of full fab activity levels during the third quarter.

Q4 2021 gross margin increased to 24.3% from 20.2% a year ago and 22.1% in Q3 2021. Gross margin dollars increased $31 million, or 44%. Operating expenses increased $8.1 million year over year, and were up $3.1 million sequentially. The operating margin improved to 14% from 10% last year. On a dollar basis it was up 67%. Other income was an expense of $372,000 compared to $1.4 million a year ago.

Pretax profit was $55.5 million versus $18.5 million a year ago. Taxes were $3.6 million in the quarter compared $1.8 million last year.

GAAP net income was $51.7 million versus $31.0 million last year, while non-GAAP net income was $61.1 million versus $36.6 million, up 67%.

Diluted GAAP EPS was $0.48 per share versus $0.28 last year. Adjusted non-GAAP diluted EPS increased to $0.55 versus $0.34 a year ago (up 40%). Average diluted shares for the quarter were 110.3 million, up from 109.0 million last year. EBITDA for the fourth quarter of 2021 was $129.9 million compared to $95.9 million a year ago and sequentially up from $113.1 million in Q3 2021.

Balance Sheet and Capacity

On December 31st the company had cash, short-term deposits, and marketable securities of $765 million compared to $718 million last quarter while decreasing debt by $3 million to $315 million. Its quick ratio is high at 3.5s and it has $920 million in working capital. Operating cash flow was $128 million and free cash flow was $42 million.

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