高塔半導體 (TSEM) 2011 Q2 法說會逐字稿

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  • Operator

  • Thank you and welcome to TowerJazz financial results conference call for the second quarter of 2011.

  • Joining us today are Mr.

  • Russell Ellwanger, TowerJazz CEO and Mr.

  • Oren Shirazi, CFO.

  • Russell will open the call, followed by Oren with a discussion of our results in the second quarter of 2011.

  • After management's prepared remarks, we will open up the call to the question-and-answer session.

  • Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected.

  • These uncertainties and risk factors are fully disclosed in our Forms 20-F, S-4, S-3, and 6-K filed with the Securities and Exchange Commission as well as filings with the Israeli Securities Authority.

  • They are also available on our website.

  • TowerJazz assumes no obligation to update any such forward-looking statements.

  • Now, I would like to turn the call to our CEO Mr.

  • Russell Ellwanger.

  • Russell, please go ahead.

  • Russell Ellwanger - CEO

  • Thank you, Noit.

  • I would like to welcome all of you to our second-quarter 2011 results conference call.

  • It's been a very exciting time for our Company.

  • As we closed the first half of 2011, we review a long list of achievements and we are quite pleased.

  • We entered into and continue executing on multiple strategic projects with multiple blue chip customers, each one of these projects increasing our market share and once success has been achieved, together will lead to potential revenue of hundreds of millions of dollars.

  • However, I believe that is the best is yet yet to come.

  • The second quarter of 2011 saw a lot of fantastic developments, and I see us now starting a new chapter in TowerJazz history where each of the last several chapters showed a substantial increase in performance, excitement and long-term outlook.

  • The recent steps we've taken, particularly the acquisition of the Nishiwaki fab in Japan which has nearly doubled our potential production capacity to 140,000 wafers per month gives the realization of our target goal of becoming a $1 billion plus revenue company by 2014 a sure execution path.

  • The acquisition is an excellent strategic fit for TowerJazz and provides us now with four facilities widely distributed across the globe We have two fabs in Israel, one fab on the Western coast of the United States and the newly acquired fab in East Asia in Japan.

  • As a result, this acquisition greatly expands our geographic reach and distribution capabilities and enables us to take advantage of increased inter-fab efficiencies in manufacturing.

  • The Nishiwaki fab provides us with a very strong foothold in the growing Asia-Pacific market and in Japan in particular.

  • This local presence creates significant opportunities for revenue enhancement, several of which have already begun.

  • The acquisition could not have happened at a better time for the Company.

  • This new capacity coming online means that we can capture all of the opportunities that come our way.

  • It sends a clear message to all current customers as well as potential customers that we are positioned to meet their growing needs.

  • Additionally, we have signed a take-or-pay supply agreement with the former owner of the fab Micron Technologies.

  • TowerJazz will manufacture products for Micron at Nishiwaki for at least the next three years with processing technology licensed for Micron.

  • This is an especially valuable agreement and guarantees that we will continue to operate the Japanese facility at committed utilization independent of market conditions.

  • It also gives us time to grow into the fab, bringing new attractive technologies there as well as attracting new customers.

  • In addition, through this acquisition, Micron has become a strategic shareholder of TowerJazz holding 6% of our shares.

  • We see this strategic investment as well as our three-year supply agreement as critical steps in our long-term growing partnership with Micron.

  • I would like to add how impressed both myself and the management team have been with the Nishiwaki operation.

  • The professionalism, work ethic, expertise, experience, and talent of our staff in Japan are of the highest level.

  • There are as well several other unique advantages.

  • Having been owned previously by Texas Instruments and for the past decade by Micron, they are fluent in English and know well how to work with foreign ownership.

  • As an added extremely high-value benefit, most all of the key technical staff have had experience working in advanced deep submicron 300 mm overseas factory startups for Micron.

  • [It won't add] to the value of the experienced employee base the value of the 60,000 wafer per month equipment facilities [and land], the acquisition ROI appears assured.

  • In turn through the integration process, we have already started working on qualifying several process platforms that are presently internal to TowerJazz at the Nishiwaki facility.

  • And this has been progressing very well, fully in line with our plans.

  • In particular we are working on quickly qualifying our core power management platforms and building high-end RF capabilities to serve the substantial [growth demand] from Korean customers.

  • 20 engineers from the Nishiwaki facility arrived at our Migdal HaEmek facility in Israel within one month of completing the acquisition to gain hands-on familiarity with these processes.

  • We're excited about the potential of this acquisition and believe it is a great opportunity to bring our analog specialty leadership to the next level.

  • Our now increased manufacturing scale and expanded addressable market further cements our position as the number one specialty foundry worldwide.

  • A few other strategic events occurred recently.

  • We signed a definitive agreement to sell Jazz's 10% holdings in Hua Hong Semiconductor Limited or HHSL which owns 100% of Shanghai Hua Hong NEC Electronics Ltd.

  • known as HHNEC in an HHSL buyback transaction for $32 million in cash.

  • This transaction will provide us with additional cash, further increasing our ability to fund our continued growth initiatives.

  • The equity stake does not affect our relationship and supply agreements with HHNEC.

  • Oren will discuss in a few moments how the sale will benefit our third-quarter results.

  • The transaction is still subject to customary closing conditions and we expect to close it within the third quarter of 2011.

  • In Argentina, we signed an agreement with Tecnopolis del Sur, a body designed to help foster research and technology development in the region.

  • We will train R&D groups on process design kits and technology and provide some discounted multiproject wafer space in our fabs.

  • In exchange, Tecnopolis del Sur will grant us with the right to use its facilities in Bahia Blanca, Argentina.

  • This agreement will greatly expand our global reach through close access to this important region.

  • During the quarter we also announced a cost-sharing collaboration between Jazz and DARPA to advance its roadmap for high-frequency silicon-germanium heterojunction bipolar transistor devices.

  • The DARPA program will employ the use of [grading math] combined with conventional full lithography to achieve very fine dimension features.

  • Our team in Newport Beach is already demonstrating abilities to print sub 90 micron features with very good depth of focus.

  • We also announced a new design partnership incentive program during this quarter.

  • This encourages design centers to refer new customers to and manufacture new product at TowerJazz.

  • We will also increase our IT portfolio, specifically increasing the number of specialty designs [taped into] TowerJazz and in turn, these design partners will receive benefits from TowerJazz on products and services.

  • This is a win-win program not only for our design partners and TowerJazz, but especially for our mutual customers as they will benefit from best in class design and manufacturing services.

  • At the end of May, we announced the availability of our wireless antenna switch Silicon-on-Insulator process technology which is applicable to multiple wireless standards and with a cost substantially less than legacy solutions.

  • The TowerJazz SOI technology is unique relative to other silicon insulator processes in that it maintains full compatibility with its bulk CMOS process, enabling integration of control functions, low noise amplifiers and tower amplifiers on a single chip.

  • High-end smartphones can benefit most from integration while lower-end phones can benefit simply from the lower cost of SOI.

  • This makes the technology relevant for most of the 1.4 billion handsets sold each year.

  • Also in May, we announced cooperation with the Institute of Microelectronics on breakthrough projects in microelectromechanical systems or MEMS packaging and application-specific integrated circuits.

  • This joint effort with TowerJazz has already yielded outcomes in the areas of inertia sensors, pressure sensors, micro-mirrors with MEMS product companies.

  • These capabilities and experience as an 8 inch technology development site for MEMS and ASICs combined with our blend of business and technical competencies for MEMS and IT fabrication creates a major technical and cost advantage for our customers.

  • A few days back, we press released another extension of our silicon germanium processing, this being the 0.13 silicon germanium process being run presently in Newport Beach having been transferred to Migdal HaEmek factory where we have a copper backend and that backend having been then integrated into the silicon germanium module.

  • This technology is targeted at the greater than $1 billion combined wireless RF and digital TV tuner markets where higher performance, lower cost and higher digital integration are required.

  • TowerJazz's [SBL 13] process is well suited for wireless WAN transceivers, cellphone transceivers and new TV tuners.

  • To look at revenues and our outlook, we reported revenues of just under $140 million in this quarter, 11% above those of the second quarter last year and a sequential increase of 16%.

  • We also guided for revenues of $173 million to $183 million in the upcoming third quarter, which is a massive mid-range increase of 32% over last year and 27% over the quarter we are presently reporting.

  • Our industry sector has weakened in the past few months but we believe we will continue to grow and exceed industry growth rate by at least a factor of two and hence we continue to foresee 2011 as a nice double-digit growth year for the Company.

  • We grew our non-GAAP net income to $46 million or 40% over last, year, demonstrating six quarters of significant profitability of over $35 million.

  • It is important to note that following the acquisition of the Nishiwaki fab, our operating expenses will increase accordingly in the next quarter.

  • However, as we proved a few years ago, following our Jazz acquisition, we're very good at extracting shared synergies while minimizing cost, and I do expect the rewards from this acquisition to accrue and our margins to continue to increase over the coming quarters.

  • Looking at design wins, our momentum remains solid and we achieved a triple digit number of above 110 new design wins this quarter.

  • This has further broadened our diversified and global customer roster, many of which are leading companies in their respective markets including top technology platform leaders.

  • These recent design wins will benefit our revenue in 2012 and beyond.

  • As far as overall capacity, our growth depends strongly on our ability and capacity to manufacture.

  • In recent months, we've executed a number of projects to grow our capacity in our Israeli fab, ramping the 8 inch factory to 40,000 wafers a month and in fab 3 in Newport Beach to 24,000 per month.

  • The additional capacity serves the growing demand of our expanding customer base.

  • Increased manufacturing scale both internally and through the Nishiwaki acquisition together with the expanded addressable market further support our strategy to extend our position as the number one specialty foundry worldwide.

  • At the same time, we continue to look for additional ways to increase our capacity.

  • So to summarize, I just returned from the US having met with CEOs and other senior executives from multibillion-dollar revenue companies with which we are now entering business relationships by extending market share in segments where we have served them to date.

  • The relationships are strong and the multiyear outlooks remain very, very bright.

  • Our business will contain much growth potential and over the coming months and years, we will work hard to realize all of it.

  • The cornerstone of our strategy is the close relationship with our customers and we're looking forward to extending this to the Asia-Pacific customers that the Nishiwaki fab will bring.

  • Our relationship with customers are based on an ongoing cycle of meeting and exceeding our customers' expectations, managed through open and honest communication with a continuous cycle of feedback and adjustment to meet their goals.

  • At TowerJazz we're in a continual process of reinvention and acquisition, and our new acquisition allows us to go back and reinvent ourselves again.

  • We have proven our abilities over the past few years by substantially outgrowing all of our industry peers by virtue of our customers who see value in giving us an ever-increasing share of their business.

  • I remain very excited with regard to the rest of 2011 and beyond and look forward to continuing to bring you good news over the coming quarters and years.

  • With that, I would like now to hand over the call to our CFO Oren Shirazi.

  • Oren, please go ahead.

  • Oren Shirazi - SVP and CFO

  • Thank you, Russell.

  • Hello, everyone.

  • 2011 continues on strong momentum that we've seen over the past few quarters.

  • Our revenue grew 11% year over year to a record $179.7 million, slightly above the mid-range guidance we issued in June.

  • Sequentially, we grew 16%.

  • Further, we recorded a net [profit target basic] and provided a 27% additional revenue growth forecast for the third quarter of 2011.

  • We achieved GAAP net profit of $1.7 million or $0.01 per share compared to a loss of $8.7 million in the second quarter last year or $0.04 per share.

  • Our non-GAAP net income was $46 million or 33% of revenue, a 40% improvement as compared to $33 million in the second quarter of 2010 and 50% improvement sequentially.

  • In the quarter, we continued to demonstrate good margin with 43% non-GAAP gross margin, 31% non-GAAP operating margin and 33% non-GAAP net margin.

  • While we increased our revenue by $19 million sequentially, our non-GAAP bottom line increased by [$16.5 million] without [thinking] 81% margins on the incremental revenue increase.

  • We ended the quarter with $139 million in cash balance and short-term deposits, $180 million shareholders equity and $972 million in total assets.

  • We achieved an EBITDA of $54 million for the quarter or an EBITDA margin of 39%, an improvement of 30% as compared to the second quarter of 2010.

  • In addition to the above, I would like to discuss some important financial events during the quarter and afterwards.

  • As you know, we acquired the fab in Nishiwaki City, Japan from Micron Technology.

  • The purchase price paid was $63 million and according to our fair market value estimation done by a third-party operated company, the value of the assets we acquired exceed $150 million.

  • As an early result of this transaction, Micron became a strategic shareholder, holding approximately 6% of our ordinary shares with [a lockup scheduled throughout] 2013.

  • I will describe later the effect of the acquisition on our balance sheet and P&L.

  • Another financing transaction we signed recently is the sale of our 10% holdings in HHSL in China which owns 100% of HHNEC, a private company, in an HHSL private transaction for $32 million in cash.

  • HHSL investment is valued in our balance sheet in the amount of $17 million.

  • The transaction is subject to customary closing conditions and is expected to close during this quarter, resulting in gross gain of $15 million as a direct result of this sale and approximately $8 million net gain after taking into account [expected tax] and other payments and fees associated with the transaction.

  • Now I will move to an in-depth analysis of our balance sheet and P&L.

  • In terms of balance sheet metrics, we have increases in most of our balances as a result from the Nishiwaki fab acquisition, with total assets up from $802 million to $972 million and shareholders equity from $118 million to $180 million as of June 30, 2011 as compared to December 31, 2010.

  • I will now analyze the major drivers of the increased amount in the balance sheet.

  • Trade accounts receivable balance increased by $23 million mainly due to Micron's accounts receivable balance for the wafers we shipped to Micron from the Nishiwaki fab.

  • Cash balance including short-term deposits decreased from $198 million to $139 million mainly due to the $40 million cash payment we did to Micron for the acquisition of their Nishiwaki fab.

  • Short-term investment in the amount of $17 million presented in the current assets inside the balance sheet include the book value of our 10% holdings in HHNEC.

  • Following the definitive agreement we signed in July to sell our holdings in HHNEC and since the agreement is expected to be closed in August, we included the holding in HHNEC under current [our debt] while as of December 31, 2010 it was presented under long-term investments.

  • The increase you see of $33 million in other receivables is mainly due to the [investment incentive grant] following the official Israeli Investment Center approval received in February 2011 for grants related to investment in fixed assets and [diver programs].

  • The $29 million increase in inventories is mainly due to the inclusion for the first time of the Nishiwaki fab [with and materials].

  • The $129 million increase you can see in property and equipment as of June 30, 2011 is mainly due to the inclusion for the first time of the real estate building and equipment of the Japan-based Nishiwaki fab capable to manufacture 60,000 wafers per month.

  • Trade accounts payable increase of $57 million is mainly due to vendors and other accounts payable related to the activities of the Nishiwaki fab consolidated for the first time.

  • Other current liabilities increase of $22 million is mainly due to Nishiwaki employees, related short-term liabilities and tax provisions.

  • And lastly, long-term employee related liabilities increase of $71 million is mainly due to the inclusion of the Nishiwaki fab employee liabilities.

  • Moving to the P&L segment, as Russell mentioned, we are happy with the results of our quarter with revenues of almost $140 million, up 11% over last year and 16% quarter over quarter.

  • Following the acquisition of Micron's fab in Japan, the second-quarter results include the results of TowerJazz Japan Ltd.

  • as from June 3, 2011.

  • In terms of gross profit on a non-GAAP basis for the quarter we achieved $59.5 million in the quarter or gross margin of 43% compared to a gross profit of $57 million or gross margin of 45% in the second quarter of last year and compared to a gross profit of [$53 million] in the previous quarter.

  • Non-GAAP operating profit increased to $44 million in the quarter or 31% operating margin compared to $41.5 million in the same quarter last year.

  • Note that in this quarter we had operating expenses related to our acquisition of the Nishiwaki fab of $1.5 million.

  • Net profits for the quarter include approximately $4 million of net dilutive effect from the acquisition of the Nishiwaki fab comprised of an approximately $10 million [gross gain] of the fair market value of the assets -- as estimated by the third-party operators exceeded the purchase price paid -- and B, approximately $6 million of related tax provisions and other expenses associated with this transaction.

  • On a non-GAAP basis, net income was $46 million or 33% of revenue as compared to $33 million or 26% in the same quarter last year.

  • Non-GAAP net income increased by 60% to $46 million or $0.15 a share as compared to $30 million or $0.11 per share in the previous quarter.

  • Taking a look at our results on a GAAP basis, we achieved gross profit of $29 million compared with $22 million in second quarter of 2010.

  • We also achieved an operating profit for the sixth consecutive quarter of $11 million, a significant improvement as compared to $4 million in the same quarter last year.

  • And lastly, net income on a GAAP basis was $1.7 million or $0.01 per share compared with a net loss of $9 million or $0.04 per share in the second quarter of 2010.

  • I would like now to transfer the call back to Noit Levi.

  • Noit?

  • Noit Levi - Director of IR and Public Communications

  • Thank you, Oren.

  • Before we will open up the call to the Q&A session, I would like now to add general and legal statements in regards to the statements made and to be made during this call.

  • Please note that the second-quarter 2011 financial results have been prepared in accordance with US GAAP and the financial table in today's earnings release includes financial information that may be considered non-GAAP financial measures under Regulation G and related results and requirements as established by the Securities and Exchange Commission as they apply to our conference.

  • Namely, this release also presented financial data which is reconciled as indicated by the footnotes below the table on a non-GAAP basis after deducting one, depreciation and amortization; two, [formation] expenses in respect to options, trends, and finance expenses net other than interest accrued such that non-GAAP financial expenses [net include] only interest accrued during the resultant period.

  • Non-GAAP financial measures should be evaluated in conjunction with and are not a substitute for GAAP financial measures.

  • The table also contains the comparable GAAP financial measures to the non-GAAP financial measures as well as the reconciliation between the non-GAAP financial measures and the most comparable GAAP financial measures.

  • EBITDA is presented and defined in our quarterly financial earnings.

  • EBITDA is not a required GAAP financial measure and may not be comparable to a similarly type of measure employed by other companies.

  • EBITDA and the non-GAAP financial information presented herein should not be considered in relation or a substitute for operating income less income or loss; cash flow provided by operating, investing and financing activities; per share data or other income or growth statements that are prepared in accordance with GAAP and is not necessarily consistent with the non-GAAP data presented in previous filings.

  • I would like now to turn the call over to our operator.

  • Operator?

  • Operator

  • (Operator Instructions) Jay Srivatsa, Chardan Capital Markets.

  • Jay Srivatsa - Analyst

  • Thanks for taking my questions.

  • Congratulations on a good quarter.

  • A couple of questions, if I may.

  • Russell, it appears UMC, TSMC, both of them are a little cautious as they look at Q3.

  • And yet you feel pretty strongly about how your Q3 is shaping up.

  • Could you kind of share with us how you see the landscape from your perspective?

  • Russell Ellwanger - CEO

  • Certainly.

  • Firstly, appreciate your acknowledgment of the quarter.

  • It was I think a very good quarter for us.

  • We guided that we would be mid-range of what?

  • $178 million or the Q3 then giving an annual run rate of $712 million.

  • That's quite a nice jump for our Company having come off of 2010 at $509 million.

  • So to -- by the third quarter or within six to nine months of the end of last year to go from a 509 to a 712 run rate, I think that that is very, very substantial.

  • Now, we as well as others will see some segments that have some weakness in it.

  • They're partially due to Japan, partially due to some global economic uncertainties.

  • There's some weakness in consumer markets and it appears to be in the mobile markets maybe more strongly than others.

  • So, I would certainly say that I understand why others are down.

  • We are obviously not down.

  • We did a very smart acquisition as well.

  • And if we continue to grow our market share with our existing customers which I think we have been pretty effective as and grow our market by bringing on new customers -- and if you look at the acquisition of the Nishiwaki factory, in the short term what we really did was we acquired a very big customer, Micron Technologies.

  • So by the fact of having brought on a new customer now that we've entered into a three-year take-or-pay agreement with, we have upended whatever others are seeing as a down trend in Q3 and done it quite strongly.

  • And as has been seen with the growth of 2009 to 2010 and with the growth that we're seeing presently, we are continuing to grow our market share and avoiding some other trends that are hurting others substantially.

  • If you look at specialty foundries, some of them I think right now are down very strong and forecasting Q3 to be very weak.

  • So we are I think holding our own and looking well.

  • If I was to add to that, I would say that from the 178 mid-range guidance that we have for Q3, Q4 at this point looks like we'll have further growth.

  • So, I think our perspective looks strong.

  • I mentioned the trip that I had just come back from in the US, it was a two week trip and I had met with multiple CEOs and executives from leading companies, a multiple of which we're just now starting new projects with, some that we have existing projects and we are increasing our served market doing projects with them and the long-term prospect for us looks very, very strong.

  • So, I think for us, things look good.

  • Jay Srivatsa - Analyst

  • Alright, maybe another way to ask it would be if you look at your Q2 revenues, how much of that was contribution from Micron and how much was organic growth?

  • Russell Ellwanger - CEO

  • I really don't have the liberty to say that at all as Micron is a customer and I cannot disclose their revenue dealings with us.

  • I think I -- well I just don't have the freedom to do that.

  • Secondly, we never break out revenue by operational facility anyway.

  • Jay Srivatsa - Analyst

  • Okay, all right, fair enough.

  • As you look at Q3, given that you're manufacturing product for Micron, would you expect some decline in gross margins as you look through the next three quarters?

  • Oren Shirazi - SVP and CFO

  • Hi, Jay, it's Oren.

  • Basically the Micron acquisition is excellent like I mentioned and one of the other things besides them being [a big shareholder] and all that as I mentioned, we have with them a take-or-pay committed contract.

  • Always when you have a take-or-pay committed contract for a high volume, you have in that contract a lower margin than the standard margin you have.

  • And we have -- we saw it also on the TowerJazz traditional customers that we had with them.

  • We [fueled them] take-or-pay contract we still had.

  • So as long as Micron is the main customer from the Nishiwaki fab, the margins there are somewhat lower than the standard margins we see and this is what you can expect to see.

  • Still the contribution is way above the cash cost and the P&L cost and the -- improving our dollar profitability and EBITDA and everything.

  • Jay Srivatsa - Analyst

  • Okay.

  • Russell, part of the excitement over this Micron was potential access to some new customers as you look ahead.

  • Can you give us a recap on how your discussions are going in that front in terms of garnering new customers in the Asia-Pacific region?

  • Russell Ellwanger - CEO

  • Probably not a recap because I don't think I discussed it yet, but I can give you a flavor for it.

  • So the -- I have been through two rounds of customer meetings.

  • Itzhak Edrei, the head of the business units has also gone through two rounds of business discussions, and the President of TowerJazz Japan, Kenichi Katsumoto, his major role at this point is to build the business, Japan-centric business for Nishiwaki facility.

  • The initial interactions have been extremely positive.

  • We have gotten good traction as far as we are in business discussions that are at this point into the numbers with two specific Japanese IDMs to transfer their flows into the Nishiwaki factory.

  • So I think that's moving very well, if you look within such a short time of closing the agreements to be at this point negotiating numbers that should ultimately lead to a contract with two customers at this point, two potential customers.

  • Does that answer your question, Jay?

  • Jay Srivatsa - Analyst

  • Yes, thank you very much.

  • Last question, just a bookkeeping question.

  • What was the share count in Q2, Oren?

  • Oren Shirazi - SVP and CFO

  • Q2 average for the EPS was 305 million.

  • Jay Srivatsa - Analyst

  • Congratulations again on strong guidance and also on lowering the debt to equity which is coming to very reasonable levels.

  • Operator

  • Ken Nagy, Zacks Investment Research.

  • Ken Nagy - Analyst

  • Congratulations on the strong quarter.

  • It just -- it seems to me there's been recent momentum in silicon germanium.

  • I was just wondering what's behind that?

  • Russell Ellwanger - CEO

  • Good interesting question.

  • There really is very strong momentum.

  • All of the customers that I talk to are within in the multiple tens of millions of dollars of opportunity for each of these opportunities, are within the silicon germanium sector.

  • So a lot of our growth is sitting [with that] at this point or potential growth is sitting within silicon germanium.

  • Some certain amount deals with really the need for very high-end capabilities for FTEs that move up beyond what people are able to do with RFCMOS, there's the light peak standards that we're very engaged in at this time, the whole movement of optical transceivers we're very engaged in.

  • And if you look at the analog side of hard disk drive pre-amps, those are the major end-users that are gaining big traction right now.

  • But quite a bit of activity there and I see the silicon germanium opportunities not at all slowing down, but growing at a greater rate and our capability there increasing.

  • I had mentioned the 0.13 copper backend and that's addressing a very broad market at this point which we've just completed the qualification of the flow here in Migdal HaEmek for the 0.13 silicon germanium process as developed in Newport Beach.

  • So, there's a good strong drive in it and very good richness in the offering and very good depreciation with the customers.

  • Ken Nagy - Analyst

  • Thank you and congratulations to you.

  • Operator

  • Vernon Essi, Needham & Co.

  • Vernon Essi - Analyst

  • I wanted to echo my sentiments; a good quarter there on the operational side of things as well as integrating Nishiwaki.

  • Oren, I was wondering if you could give us a flavor for what the financing expenses would look like into the remainder of the year and sort of how you see that stacking up?

  • Oren Shirazi - SVP and CFO

  • Give me the question again about the financing expenses?

  • Vernon Essi - Analyst

  • Just wondering if you can give us an idea of how that might look into the third and fourth quarter.

  • You produced it nicely sequentially in the June quarter, just wondering sort of how that will look from a forecasting perspective.

  • Oren Shirazi - SVP and CFO

  • You are referring to the P&L financing expenses, right?

  • Vernon Essi - Analyst

  • That is correct.

  • Oren Shirazi - SVP and CFO

  • Yes, so basically this report is exactly for that purpose, so that you can see -- in this report we show that we have $7 million a quarter -- we had in Q2 of this quarter.

  • This is what's in the non-GAAP.

  • The $3 million are all kinds of other stuff which are non-cash interest at all.

  • They are all kinds of accounting registration and such as marking to market bonds and warrants and all kinds of other effects.

  • So to model the future, I think the number of $7 million is a good assured baseline.

  • And on top of that, if you want to be conservative, you can put an additional $2 million to $3 million which are non-cash payments, but some other financing adjustments, or we can do any number between 7 to 10.

  • It really depends on the market movement of tradable debentures and warrants which is of course impossible to forecast.

  • Vernon Essi - Analyst

  • Okay, that's very helpful.

  • Just to recap again, sort of 7 million, 7.5 million in actual cash and the rest of it would be non-cash ranging a couple million dollars?

  • Oren Shirazi - SVP and CFO

  • Yes, exactly.

  • Vernon Essi - Analyst

  • That's helpful.

  • And then you had discussed -- and I noticed on the balance sheet of course the other receivables and I think this goes back to my question last quarter which I appreciate you going over in depth, the investment incentives.

  • Is that basically the bulk of that other receivables that showed up this time?

  • Oren Shirazi - SVP and CFO

  • Yes, exactly.

  • We did do the Investment Center [grand piece] you remember our release from January.

  • We got an approval certificate [in what's called cave is sure] which is an approval certificate to get up to $40 million even of cash grants against investment [that we did most of them].

  • As of today -- as of June 30, 2011 the situation is the Investment Center of the -- which is an affiliate of the Israeli government which supports investment in CapEx in the North of Israel says -- as I said approved it but this is subject to the Company's filing reports and the Investment Center auditing.

  • So we filed the reports during Q2 and now the Investment Center is in the process of auditing the reports and we should expect to get -- I mean we are expecting to get based on the signed approval certificate approximately a total of $35 million to $40 million of which $20 million to $25 million in the short term meaning in the coming 12 months.

  • Those under US GAAP or [I forget whatever GAAP] under GAAP, these amounts that you forecast to get in the coming 12 months of about $25 million I mentioned should be presented in current assets.

  • And this is the reason for the increase in this balance from -- the main reason for increasing this balance from $5 million in December 31, 2000 to $38 million now.

  • Vernon Essi - Analyst

  • Yes, okay.

  • That's helpful.

  • And then just to move over to another item there right next to it on the inventory side, I think maybe I got this wrong in your prepared comments.

  • You had made a point about wafers that you were moving through the Nishiwaki facility and I just wanted to clarify that.

  • You had given I think a number of how much internal capture you had with Micron -- and maybe I misheard that.

  • If you could just go over that again?

  • Oren Shirazi - SVP and CFO

  • What you can see in the balance sheet, you see an increase of the inventories in the balance sheet from $43 million to $71 million.

  • So you have an increase of $28 million.

  • So what I mentioned is that the major part of this increase is due to the WIP -- the inventory that exists in the Nishiwaki fab which is designated for Micron as a customer.

  • We don't give the exact number like Russell mentioned because we don't want to disclose details about Micron's business.

  • But we can say that most of this balance of $28 million is associated with the WIP in the Nishiwaki fab.

  • Vernon Essi - Analyst

  • And I appreciate -- this is my last question -- the discretion on Micron.

  • If I ask maybe a different way -- not that I can extrapolate too much from this -- but how many days or weeks of the quarter that you just completed in June had contribution from Nishiwaki?

  • Oren Shirazi - SVP and CFO

  • So we wrote in the press release that from June 3 -- so this P&L and balance sheet includes balances and transactions with Micron from June 3, 2011 until the end of the quarter.

  • Vernon Essi - Analyst

  • Okay, June 3.

  • Thank you very much.

  • Operator

  • Sri Nadesan, Lazard Asset Management.

  • Sri Nadesan - Analyst

  • My question relates to your 8% convertible bond that's coming due the end of this year.

  • Oren, we've talked about this in the past; just trying to get an update on where things stand.

  • Can you tell us how much cash was at the Jazz subsidiary at the end of the quarter?

  • I know you guys don't do a call for that company, so perhaps you can tell us the balance at the subsidiary on this call.

  • And also can you -- since you have to fund [that debt] by end of this month or early September, can you tell us if the sale of the HHSL proceeds -- would that be received in time for that funding?

  • Just trying to get a sense for what the timeline is on funding that debt.

  • Thank you.

  • Oren Shirazi - SVP and CFO

  • So for Jazz, February cash balance I can give you the number.

  • We will file a Jazz 10-K, so it will be be public domain anyway.

  • We'll file it within a few days.

  • So the cash balance at the end of June for Jazz was $27 million.

  • The HHNEC proceeds, yes, they are -- HHNEC investment is of course a Jazz [offset] that we acquired Jazz but this is a Jazz Semiconductor or Jazz technologies asset and the proceeds from its sale of $32 million are expected to come into Jazz.

  • So with the $32 million reduced -- the 32 plus the 27, it's $59 million pro forma.

  • Even if you reduce from that the taxes and the fees associated, of course you reach a balance which is nicely above the [one due].

  • So we see it -- I think it answers your question, no?

  • Sri Nadesan - Analyst

  • Right, right.

  • So you expect to receive that stake -- the sale of that stake by that time because you need to fund this, right?

  • By early September?

  • Oren Shirazi - SVP and CFO

  • Yes, if you -- I think we said that we expect the closing to be within the third quarter and there's a process now that was published I think by some newspapers according to the [China Row] the closing should be by August 25.

  • So the plan is that it will be closed by August 25.

  • Sri Nadesan - Analyst

  • Alright, and if there is a slight slippage in the closing date, let's say it slips by two weeks, that cause a problem?

  • Oren Shirazi - SVP and CFO

  • I don't believe it would cause a problem.

  • Don't forget that the real payment date for this bond is December 31.

  • So we have four months.

  • The fact that there is a condition in the [rest powerful] contract is correct but this was just a condition that the bank put many years ago just in order to ensure that on September, we are -- by September -- we are pressing the issue.

  • I'm sure if there will be a problem of a few days, it is not a problem.

  • Sri Nadesan - Analyst

  • Alright, but you intend to address it by let's say early September or mid-September?

  • Oren Shirazi - SVP and CFO

  • What do you mean to address it?

  • Sri Nadesan - Analyst

  • Meaning that you will fund it as required by the bank.

  • Oren Shirazi - SVP and CFO

  • Yes, so maybe I was unclear.

  • There is the demand to -- we need to pay down these bonds on December 31, okay?

  • We don't need to pay to the bank, to Wells Fargo anything before that.

  • What the bank condition was [one of the closes] in the loan agreement is that by September, we will be able to show that we have cash to fund it.

  • It's not that we need to pay down the bond or pay to the bank an amount.

  • We just need to show that we have the money.

  • So for example, we can have the money, put it in a deposit in whatever bank and pay it down and on time, December 31.

  • Sri Nadesan - Analyst

  • Right.

  • I was under the impression that you had to put the money into an escrow account.

  • So (multiple speakers)

  • Oren Shirazi - SVP and CFO

  • It can be an escrow account but it can also be Jazz bank account as long as the bank is secured and relaxed that it is used for that purpose.

  • Sri Nadesan - Analyst

  • Right, fair enough.

  • But you expect the sale to happen by August 25?

  • Oren Shirazi - SVP and CFO

  • Yes.

  • Sri Nadesan - Analyst

  • Okay, alright.

  • Thank you very much.

  • Operator

  • George Robertson.

  • George Robertson - Analyst

  • My congratulations.

  • Again I think you are making this Company into what we as investors always hoped it would be.

  • The only problem is that as investors, while the Company is growing and quarter after quarter we have rosy reports like this, we as investors are losing out.

  • We are down 25% since the beginning of the year.

  • And when I looked at the Company, the only reason I can see is that the Company is continuing to sell shares of stock to Yorkville, continuing to grant options to its directors and officers, thereby diluting the shares.

  • And also you have this question of the capital notes hanging over you or the bonds.

  • First of all, can you assure the investors that now that you have $128 million in cash on hand you will not be selling additional shares to Yorkville?

  • And secondly, can you give us a breakdown of what there is beyond the amount that you show, the $335 million in long-term debt?

  • What else is out there?

  • We hear talk of capital notes and bonds and warrants and certificates.

  • But can you break that down for us and tell us how many of each and what impact that has on the Company?

  • Oren Shirazi - SVP and CFO

  • The first thing -- the correct number of the cash is $139 million.

  • And on top of that, we expect like I mentioned before $32 million from the HHNEC sale.

  • And on the debt, you mentioned $330 million which is long-term.

  • You also need to know that we have $128 million on the balance sheet on short-term so -- just for the numbers.

  • For the valuation of the stock and all that, I mean we won't speak about why the stock is in this price.

  • Breakdown of bonds [or banks is confusing] our reports.

  • There was not actually any change in our bonds issue -- in our [bond series fast] or in our bank loans since or 20-S filed a few months ago which is annual report and actually no change since the end of last year.

  • So it's available there.

  • We can send you if you'll send us your e-mail.

  • Of course we will be happy to send you an exact detailed breakdown.

  • But it's public domain, so I don't see an issue about it.

  • George Robertson - Analyst

  • Are you contemplating terminating the agreement with Yorkville?

  • You recently sold Yorkville $11 million worth of stock.

  • If you had not done that, you would've still had the $28 million cash on hand.

  • Now that you have completed the transaction for the Japanese plant, do you need additional money?

  • It seems every time that you sell shares to Yorkville, the price of the shares takes a dive.

  • Oren Shirazi - SVP and CFO

  • I don't remember we sold any shares to Yorkville in the last three months.

  • And anyway, nobody can say -- can explain stock behavior and I don't believe -- nobody can say that the terms of the fundraising we did are not favorable to Tower.

  • The term that we raised money lilke you mentioned is very good.

  • It's a discount of 2% only with no warrants coverage which all the companies when they do fundraising -- other companies they do fundraising, they give 5% to 9% discount and up to, and they give in addition to that 15% to 50% warrant coverage.

  • We don't give any warrant coverage.

  • I don't think it's -- anybody can say -- I don't want to talk about other companies in the industry or not in the industry that they're still also not moving or going down 20% to 40% in the last three or four months.

  • George Robertson - Analyst

  • What's the reason for selling shares to Yorkville even if it just creates the perception that -- you are certainly diluting the shares every time you do that and certainly when you have a company with as low a PE as tower has which is enjoying the incredible success that you and Russell have created, there's no reason why the stock should go down 25%.

  • And I don't see -- I hear rosy words from Russell that you're going to do everything to increase the shareholders equity or the benefits that they get from the Company and yet at the same time, I see more and more options being handed out and the sales to Yorkville which frankly I can't understand.

  • Oren Shirazi - SVP and CFO

  • Again, I will tell you that I cannot comment on the stock price.

  • We did not do any transaction with Yorkville in the last three months and I don't remember we issued any warrants in the last few months.

  • So I don't know.

  • The capital notes are from six years ago.

  • There was no movement in that.

  • So I don't know [why these are appealing].

  • Russell Ellwanger - CEO

  • I can certainly understand the frustration and believing in a company and seeing the results of the company and not seeing the stock price move in the direction that you think would be commensurate with the results.

  • And there may be those in the management that would have similar feelings.

  • As far as anything immediate with Yorkville, there's nothing immediate on the table to go further with Yorkville.

  • The Yorkville agreement has I think another $7 million that could be drawn upon and then the agreement itself is over.

  • But there's nothing right now in the works to draw on that last $7 million.

  • I am -- again with Oren, I think the Yorkville agreements -- number one, the cash has been needed to fund growth and to help the Company move along in directions it needed to go and needs to go.

  • I think that the terms of Yorkville are very, very fair terms and I believe have not been detrimental in and of itself.

  • But, I certainly appreciate shareholders who believe in the Company see as far as performance that their belief is correct and are frustrated that they don't see the movement in the share price.

  • I don't have anything in addition to say to that other than I clearly believe that time is a teller of all truth, and as we continue to do what we say we will do, everything should in the end [bear fact to that] and the share price should rise to what the value of the Company is perceived to be by those who believe in it.

  • Operator

  • [Ken Weiner], Alpine Capital.

  • Ken Weiner - Analyst

  • I never had the pleasure of speaking to you before, but I have been a long-term stockholder of the Company and I have monitored your progress over the last couple of years.

  • And it's nothing less than exceptional and the acquisition you did was absolutely I think brilliant.

  • What I'm calling about though is to ask you a couple of specific questions.

  • On the sale of that asset for $32 million, I was under the impression it was worth more money.

  • That was the impression I think you gave on the comp score.

  • Am I incorrect?

  • Oren Shirazi - SVP and CFO

  • No, no, we're not -- there's not too much value in the company -- 10% holding in a Chinese private company.

  • Valuations that we were up in the past we gave between $15 million to $25 million and indeed (multiple speakers)

  • Ken Weiner - Analyst

  • Excuse me one second.

  • In other words, you never mentioned a number of $60 million?

  • Oren Shirazi - SVP and CFO

  • $60 million?

  • No.

  • Ken Weiner - Analyst

  • Okay.

  • Oren Shirazi - SVP and CFO

  • We mentioned -- oh, sorry.

  • We mentioned the $60 million -- we said that if we will wait, we said that HHNEC [is planning per] the press release [room ill] and the article in the press release said that HHNEC will grow and merge with [grace] and will IPO and after this IPO and after this merger and after a lockup period that [they will ask from us] we believe that this merged company can be worth more than $600 million and hence our share will be $60 million.

  • But as you can see, the rumors (multiple speakers) the company did not do any IPO and any merger and they are still in their previous position of being [abrupt] and there is no other plan.

  • Ken Weiner - Analyst

  • When you talk about -- and the only reason I'm directing things that the balance sheet and things -- the financial end of it is because operationally you seem to go into finite details into many things while on the balance sheet, many things seem vague to me.

  • For example, on these capital notes, you know, I think part of the reason -- question about the stock -- to the gentleman's question before me -- is that there's confusion about the capital structure of the Company.

  • Now as you have goals in the operational end of the Company, what would a good balance sheet look like?

  • In other words, the way the balance sheet is consisted of right now, I think it's under control, improving, but yet somewhat leveraged.

  • Where did the numbers -- so when you have projections of gross profits and incremental, what is the right numbers to look at?

  • At this point since you made a major acquisition, I would think the -- are the major capital expenditures behind the Company or in front of the Company over the next couple years?

  • And if the cash flow continues, where do you want to bring the numbers to?

  • I mean what are you looking to do?

  • Oren Shirazi - SVP and CFO

  • We believe the current debt level of the Company is okay.

  • I mean net debt of [2.4x] looks to us okay, not too high, not too low.

  • We don't have plans to increase or decrease it dramatically at this point.

  • And in regards to the shareholder equity, I guess it will be stronger and stronger as time goes by from all kinds of transactions.

  • But I don't think there is a reason to assume that there will be a material change in the balance sheet in the debt.

  • The other liabilities that you see are mainly employee related liabilities mainly associated with --

  • Ken Weiner - Analyst

  • I'm not talking about those.

  • Those are long-term liabilities that you took over from Micron, right?

  • Oren Shirazi - SVP and CFO

  • Mainly, yes.

  • Ken Weiner - Analyst

  • Not referring to those.

  • On the capital notes, what is the status of that?

  • Do you have the possibility of buying some of the notes?

  • Is there a lot of dilution on the notes?

  • Because the reality of it is when you come up with your numbers -- I'm not criticizing anything you do.

  • You're doing everything far better than I could ever do.

  • But when you come out with the numbers and you show $200 million to $300 million -- I think people are valuing the Company that there will be dilution, there will be something done with all of these warrants, notes etc.

  • which I'm not all that knowledgeable about and that they are anticipating when they value the Company, they're not valuing the Company on $300 million shares.

  • They're probably valuing it on $500 million or $550 million shares.

  • So there's a disconnect between what the value is and what someone thinks the value is.

  • So I want to know how you answer that question, how you come to make the numbers meet and where we end up.

  • Russell Ellwanger - CEO

  • That's a very honest question and a valid one as well.

  • The banks have capital notes, so does a major shareholder, the usual corporation have capital notes.

  • The capital notes where a vehicle that was created due to the fact that six years ago, the Company was facing $500 million of debt that began to be due in two years and was losing $60 million cash a year, did not have a way to pay the debt.

  • So the debt was restructured into a vehicle that can only be moved into stock.

  • There may be restrictions, may not be restrictions for the banks as to how much they could ever move into stock.

  • But that is how the capital notes came around.

  • Were it not for the capital notes, the Company might not be existing at all.

  • So the capital notes were a very, very good vehicle for the Company at that time in its history.

  • Now the biggest (multiple speakers) So that's why the capital notes exist and how much of the capital notes are taken into the stock price, how much should be taken into the stock price, how much will be, could be, should be converted into equity, that is something that I really can't comment on, I cannot legally comment on.

  • Other actions and activities that the Company's doing to look at trying to come up with solutions that would make the overall shares outstanding versus possible dilution much more transparent to the public, certainly any good CFO and any responsible CEO would have that as a major concern.

  • Any confident Board of Directors would have it as a major concern.

  • So, are there things that are being thought of, talked about?

  • I would think that one could assume that they are.

  • However, the Company does not own the capital notes.

  • So if something does happen to the capital notes, it's nothing that we can commit to or can commit to because it is not in our hands.

  • The capital notes are owned by Bank Leumi, [Bank Haholmen] and Mutual Corporation.

  • Are there vehicles and ways that we can work out deals, help to work out deals?

  • There's possibilities and that is really all that I can say at this point that is honest, valid and legal.

  • Ken Weiner - Analyst

  • And I appreciate everything you say.

  • I hope that you both don't misunderstand what I say.

  • I understand that the Company came back from the graveyard and that I don't believe anybody could've done a better job of putting it together than you did.

  • And I also believe that you inherited a number of things.

  • I am not criticizing anything.

  • I'm just trying to get clarity.

  • And I think that is something the Company needs.

  • I'm on your side.

  • The major stockholders of this Company are major people and this is a very important Company and I think inevitably everybody will do the right thing.

  • The last question, I just -- if it capital notes were converted, that would come off the debt, would it not?

  • Russell Ellwanger - CEO

  • I didn't understand the question.

  • One more time please?

  • Ken Weiner - Analyst

  • If the people who own these capital notes converted, then basically the long-term debt would come down dramatically.

  • Is that right?

  • Russell Ellwanger - CEO

  • No.

  • Ken Weiner - Analyst

  • They don't?

  • Oren Shirazi - SVP and CFO

  • It's not presented under the debt piece.

  • It's already inside the equity because it was already -- it's not converted into loans, it's not a loan, it's not redeemable, it's not repayable.

  • Ken Weiner - Analyst

  • I didn't know that, okay.

  • Okay, I just wanted to voice that I'm very appreciative that you're -- obviously you're both too smart not to be aware of it and my personal opinion is that that is what is holding back -- that is really holding back the Company and obviously as Russell said, over time and the Company God willing can continue its performance in the same way, I guess everything comes out in the wash.

  • But when you put out numbers like this when you're obviously outperforming an industry in distress where if I look at 100 electronic companies that are factors in industries, I mean you're in the top 10%, people should want to be rewarded.

  • They deserve to be rewarded.

  • And most importantly, the people in the Company deserve to be rewarded.

  • Whatever money I could make or have lost is irrelevant to me.

  • I want to see the people in this Company rewarded.

  • I want to see the country rewarded, I want -- that's what I want to see.

  • This is not about me trying to make money.

  • This is about me trying to help -- I want to see people who have done a phenomenal job, who have added jobs to the world, who have improved the situation in the country, I want all those people who have done it to be rewarded.

  • That's what I want.

  • And I wish you both the best of luck and God bless both of you.

  • Thank you.

  • Russell Ellwanger - CEO

  • Thank you very much.

  • And no offense was taken from your questions at all.

  • As I said, they were honest, valid questions.

  • Operator

  • Eric Reubel, MTR Securities.

  • Eric Reubel - Analyst

  • Oren, if I can put in a couple here.

  • Revenue was right in line with the preannounced levels that you set out in mid-June but EBITDA margin at 39% was about 400 basis points better than we had modeled.

  • You call that the incremental gross margin of 81%, also very high even for a fab company.

  • How should we be thinking about D&A run rate post-acquisition going forward?

  • Any guidance on an incremental revenue drop-through?

  • Oren Shirazi - SVP and CFO

  • So this relative high number I think I mentioned was also as a result of the acquisition of Nishiwaki and I mentioned that there were about $10 million one-time [growth gain] and then there was a $6 million expenses due to a tax provision and other related acquisition costs.

  • So I think if you'll just exclude that from the Q3 analysis -- the Q2 analysis, you can see the model for Q3.

  • It should be the same margins [excluding] those numbers, those two numbers.

  • Eric Reubel - Analyst

  • Okay, any specific guidance on D&A post acquisition?

  • Oren Shirazi - SVP and CFO

  • No, G&A should not be affected too much and also R&D.

  • We will do most of the drop in the corporate and most of the costs associated with the Nishiwaki operations or are coal related expenses.

  • Eric Reubel - Analyst

  • I'm sorry -- D&A, depreciation and amortization.

  • Oren Shirazi - SVP and CFO

  • Ah, D&A.

  • D&A should increase between [inside the cost] so it should be increase by about -- I mentioned if I'm not mistaken that the fair market value of the assets that we acquired was estimated by third-party appraisers to be about $150 million.

  • So obviously this will be amortized by seven to eight years, so about $20 million a year.

  • Eric Reubel - Analyst

  • So $20 million annually, $5 million on a run rate basis a quarter.

  • You alluded to it there for a second, can you give us some guidance on OpEx run rates post or -- SG&A and marketing post acquisition?

  • Oren Shirazi - SVP and CFO

  • So R&D and M&A should not be affected [or most] will be a little bit higher but will not be affected too much because the R&D and M&A is mainly being done in the corporate.

  • For the G&A of course they have some finance, HR, legal stuff associated with directly with the Nishiwaki fab but it's not a huge amount.

  • I don't want to enter into specific numbers.

  • Eric Reubel - Analyst

  • What was CapEx for the quarter, Oren?

  • Oren Shirazi - SVP and CFO

  • CapEx for the quarter, $25 million I believe.

  • But let me just check.

  • Operator

  • Does that answer your question sir?

  • Eric Reubel - Analyst

  • No, I have a few more questions.

  • Oren Shirazi - SVP and CFO

  • 25 like I mentioned -- $25 million.

  • Eric Reubel - Analyst

  • $25 million and can you remind us what do you expect for second-half 2011?

  • Oren Shirazi - SVP and CFO

  • I don't remember I ever gave a forecast for CapEx.

  • Eric Reubel - Analyst

  • Can you provide us with CapEx guidance for the back half of -- for the second half of 2011?

  • Oren Shirazi - SVP and CFO

  • Usually we only give revenue guidance for the upcoming quarter.

  • We don't give too much else.

  • But you can assume that if it was $25 million this quarter, there's no reason it will be higher.

  • We didn't announce on any specific ramp-up of internal capacity apart from I said that we're ramping up the Nishiwaki fab.

  • So it should not be higher than 25, should not be too much lower.

  • Eric Reubel - Analyst

  • Oren, you called out a lot of working capital changes, the AR advance for the Israeli government payment, bunch of inventory that came -- $28 million of inventory that came in from the WIP.

  • How should I be thinking about working capital for third quarter?

  • Is it -- do you expect it to be a source or use of capital?

  • Oren Shirazi - SVP and CFO

  • (multiple speakers) no, you should not think that there will be any ramp-up needs or working capital, specific needs [from a cash flow point].

  • Eric Reubel - Analyst

  • Okay, and with the assumption of the Japan liability for the Japan workforce, are there any cash outflows required for 2011 or 2012 to fund those pension requirements?

  • Oren Shirazi - SVP and CFO

  • No, those are pension requirements, so obviously you can think about the $70 million that will be paid during the coming 35 years.

  • So average these $2 million a year, which is anyway covered in the operating model.

  • So, it should not affect any cash on top of (multiple speakers)

  • Eric Reubel - Analyst

  • Do you expect any other cash charges to complete the integration?

  • Oren Shirazi - SVP and CFO

  • There will be cash costs as we said.

  • We want to bring and qualify and ramp up Nishiwaki fab with technologies that we manufactured in Newport Beach and in Migdal HaEmek.

  • There will be costs to that of course.

  • It's a project and it's CapEx cost.

  • That will be [done there] and you are saying to be completed.

  • It's not as if we are in the final stages.

  • We are in the very early stages of -- we just purchased let's say one month ago, two months ago.

  • Eric Reubel - Analyst

  • Okay.

  • In general, guys, just a very good quarter.

  • Russell, if I could give one unto you, you guys put out a lot of press releases typically.

  • Recently you had one on sort of a tape-out for some type of product for space exploration and you mentioned in the release an estimated TAM for that segment at $400 million to $500 million worldwide.

  • What is your kind of exposure to that market currently?

  • I don't know that you've typically talked about this as an end-market in the past.

  • Are there design wins here?

  • What do you think this segment could be and how much is it currently?

  • Russell Ellwanger - CEO

  • It's actually a market that we typically don't press release and you are correct, because the deal is with aerospace and defense.

  • In Newport Beach, we have a specific group that works with aerospace and defense.

  • And there we relate things still to the name Jazz as we talked about the Jazz DARPA deal, as it's very [high power restricted].

  • How much do we have within that area?

  • We have multiple rad-hard devices.

  • Do we have a major portion of the $400 million to $500 million?

  • No, we don't.

  • But it's an area of technology we have in Newport Beach and not at all through transfers, but through development of the technology type that we also have in Migdal HaEmek.

  • But it predominantly is for aerospace and defense application.

  • Eric Reubel - Analyst

  • Alright, guys.

  • Congratulations on a good quarter.

  • Operator

  • There are no further questions at this time.

  • Mr.

  • Ellwanger, would you like to make your concluding statement?

  • Russell Ellwanger - CEO

  • I would, I would.

  • Just need to find my concluding remarks.

  • So again it really was a very good quarter.

  • Very thrilled to guide Q3 to the range that in of itself would be above a $700 million run rate.

  • And I think I stated it in the answers to one of the questions, we see Q4 continuing growth after Q3 from present indicators from customers.

  • So we are very optimistic.

  • For 2012 things looks strong as we look at what is going on in Migdal HaEmek, in Newport Beach and now in Nishiwaki.

  • I think we would be looking at a very nice growth year for 2012 against 2011 which at this point looks like it will be very nice growth against 2010.

  • So for the next years, things look very positive for us on topline and at that topline growth is also good incremental bottomline growth.

  • The big value that we see in the Company is what we add to our customers through growing in what we have as a logo which is we build more than wafers, we built trust.

  • And we work very, very diligently with our customers to provide trust.

  • I've enjoyed very much the questions on this call.

  • I think that they got into areas that haven't been brought up before within the Q&A and they were valid.

  • So really want to encourage the calls and individual calls and one-on-ones; bring up issues, bring up things that are on your mind.

  • And our motto is to be transparent and to the degree that we can, to allow all to know what's going on within the Company to enable customers to build trust with us but as well to enable shareholders and the market as a whole to have trust and faith in the Company.

  • That being said, we would like to invite all of you to attend our presentation at the Oppenheimer conference on August 9.

  • We will be presenting at 9 AM there in Boston.

  • Those of you who might not be able to physically attend, if you would wish to join the webcast, I think you'll find it exciting.

  • We'll talk more about some of the strategic directions of the Company, talk a little bit more about some of the philosophies within the Company.

  • I'll have a section of the presentation directed at community services and our model in community service and how we think that that is quite critical to the Company's growth as that's the moral fiber of the Company, has an awful lot to do with what you project to customers and to the Street.

  • So that being said, thank you all for joining this call.

  • Thank you for your participation in the Company as shareholders, as analysts over the past years and we look very forward to continuing to update you over the years to come.

  • Thank you.