WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
TOWER SEMICONDUCTOR LTD.
(Exact name of registrant as specified in its charter and translation of registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
Ramat Gavriel Industrial Park
P.O. Box 619, Migdal Haemek 2310502, Israel
(Address of principal executive offices)
Nati Somekh, +972-4-6506109, natiso@towersemi.com;
Ramat Gavriel Industrial Park P.O. Box 619, Migdal Haemek 2310502, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Ordinary Shares, par value New Israeli Shekels 15.00 per share | TSEM | NASDAQ Global Select Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 98,457,717106,808,072 Ordinary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ Large | Accelerated filer | ☐ Accelerated filer | ☐ Non-accelerated filer |
☐ Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
FORWARD LOOKING STATEMENTS
This annual report on Form 20-F includes certain “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The use of the words “projects,” “expects,” “may,” “plans” or “intends,” or words of similar import, identifies a statement as “forward-looking”. There can be no assurance, however, that actual results will not differ materially from our expectations or projections. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this annual report in “Item 3. Key Information-Risk Factors”.
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EXPLANATORY INFORMATION
In this annual report, “Tower” refers to Tower Semiconductor Ltd., an Israeli company, and “we,” “us,” “our,” and “the Company” and words of similar import, refer collectively to Tower and its then owned and/or consolidated subsidiaries.
All references herein to “dollars”, "US dollars",“US dollars,” “USD” or “$” are to United States dollars, all references to “JPY” is to the Japanese Yen and all references to “Shekels” or “NIS” are to New Israeli Shekels.
In 2008, we completed a merger with Jazz Technologies, Inc. (“Jazz Technologies”) and its wholly-owned subsidiary Jazz Semiconductor, Inc. (“Jazz Semiconductor”), an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices. As a result of this transaction, Jazz Technologies became a wholly-owned subsidiary of Tower Semiconductor Ltd. (“Tower”).Tower. In November 2015, Jazz Technologies (i) was re-named to become Tower US Holdings Inc. (“Tower US Holdings”) and (ii) transferred all of its liabilities and all of its assets, including its ownership of all of the shares of Jazz Semiconductor to Jazz US Holdings Inc. (“Jazz US Holdings”), a company registered under the laws of Delaware and fully owned by Tower US Holdings (the “November 2015 Jazz Restructure”). The November 2015 Jazz Restructure established Jazz US Holdings as an intermediate holding company, holding all of the shares of Jazz Semiconductor. Tower US Holdings remains 100% owned by Tower. In March 2020, the company name of Jazz Semiconductor, Inc. was changed to Tower Semiconductor Newport Beach, Inc. (“NPB Co.”) and the name of Jazz US Holdings Inc. was changed to Tower Semiconductor NPB Holdings, Inc. As used in this annual report, “Jazz”“Tower NPB” refers to Jazz Technologies, including its subsidiaries, for the period preceding November 23, 2015, and to Jazz US Holdings or Tower Semiconductor NPB Holdings, Inc., under its new name, including its subsidiaries, following such date.
In March 2014, we acquired a 51% equity stake in TowerJazz Panasonic Semiconductor Co., Ltd., (“TPSCo”), a company formed by Panasonic Corporation (“Panasonic” or “Panasonic Corporation” or “PSCS”), holding three manufacturing facilities in Japan.
In February 2016, we acquired a fabrication facility in San Antonio, Texas, from Maxim Integrated Products Inc. (“Maxim”). The assets and related business that we acquired from Maxim are held and conducted through an indirect wholly ownedwholly-owned US subsidiary, TowerJazz Texas Inc. ("TJT"(“TJT”). TJT is fully owned by Tower US Holdings.Holdings.In March 2020, the company name of TowerJazz Texas Inc. was changed to Tower Semiconductor San Antonio, Inc. (“Tower SA”).
The consolidated financial statements included in this annual report include the results and balances of Tower and theits following companies from the applicable merger and acquisition dates:subsidiaries: (i) Tower’sits wholly-owned indirect subsidiary Jazz,Tower NPB, (ii) since March 31, 2014, its majority-owned subsidiary TPSCo and (iii) since February 1, 2016, its indirect wholly-owned subsidiary TJT.
As used in this annual report, “Fab 1” means the semiconductor fabrication facility located in Migdal Haemek, Israel that Tower acquired from National Semiconductor, Inc. (“National Semiconductor”) in 1993. “Fab 2” means the semiconductor fabrication facility located in Migdal Haemek, Israel that Tower established in 2003. “Fab 3” means the semiconductor fabrication facility JazzNPB Co. operates in Newport Beach, California. “Fab 4” means the semiconductor fabrication facility TJP operated in Nishiwaki City, Hyogo, Japan until 2014. “Arai“Arai E” means the semiconductor fabrication facility TPSCo operates in Kurihara 4-5-1,4-5-1, Myoko-shi, Niigata, Japan. “Uozu E”“UozuE” means the semiconductor fabrication facility TPSCo operates in Higashiyama 800, Uozu-shi, Toyama, Japan. “Tonami CD” means the semiconductor fabrication facilities TPSCo operates in Higashi-Kaihotsu 271, Tonami-shi, Toyama, Japan. “Fab 9”“Fab 9” means the semiconductor fabrication facility TJTTower SA operates in San Antonio, Texas.
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Manufacturing or production capacity refers to installed equipment capacity in our facilities and is a function of the process technology and product mix being manufactured because certain processes require more processing steps than others. All information herein with respect to the wafer capacity of our manufacturing facilities is based upon our estimate of the effectiveness of the manufacturing equipment and processes in use or expected to be in use during a period and the estimated or expected process technology and product mix for such period. Unless otherwise specifically stated, all references herein to “wafers” with respect to Fab 1 capacity are to 150-mm wafers, with respect to Fab 2, Fab 3, Fab 4, Arai E, Tonami CD and Fab 9 capacity are to 200-mm wafers, and with respect to Uozu E are to 300-mm wafers, ranging from 0.18 micron45 nanometers to 0.81 micron for the manufacture of products using CMOS and analog based technologies.
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TPSCO® and TPSCo ® (and design) are registered trademarks of TPSCo.TPSCo in the U.S. and Japan.
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ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.KEY INFORMATION
Selected Consolidated Financial Data
Our historical consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”)GAAP and are presented in U.S. dollars (“USD”).US dollars. The selected historical audited consolidated financial information as of December 31, 20172019 and 20162018 and for each of the three years ended December 31, 2017, 20162019, 2018 and 20152017 has been derived from, and should be read in conjunction with, our audited consolidated financial statements and notes thereto appearing elsewhere in this annual report. The selected financial data as of December 31, 2015, 20142017, 2016 and 20132015 and for each of the years ended December 31, 20142016 and 20132015 has been derived from our audited consolidated financial statements for those years that are not included in this annual report.
Our audited consolidated financial statements include the results of TowerJazz Japan, Ltd. (“TJP”) commencing June 3, 2011, TPSCo’s results commencing April 1, 2014, and TJT’sTower SA’s results commencing February 1, 2016. In 2011, we acquired a fabrication facility in Nishiwaki City, Hyogo, Japan from Micron Technology, Inc. which we held through a wholly-owned Japanese subsidiary, TJP. Our audited consolidated balance sheets include TJP’sTower SA’s balances since December 31, 2011, TPSCo’s balances since December 31, 2014, and TJT’s balances since December 31, 2016. In 2014, the operations of the facility in Nishiwaki ceased in the course of a restructuring of our activities and business in Japan and it completed its dissolution during 2016.
Due to the acquisition of TPSCo and TJT and the cessation of operations of TJP,Tower SA in February 2016, it may be difficult to compare theperform year-over-year comparisons of our results of operations for the period subsequent to these transactions with prior periods.
The selected historical consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes appearing in this annual report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. Our historical financial information may not be indicative of future performance.
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Consolidated Statement of Operations Data: | ||||||||||||||||||||
Revenues | $ | 1,234,003 | $ | 1,304,034 | $ | 1,387,310 | $ | 1,249,634 | $ | 960,561 | ||||||||||
Cost of revenues | 1,004,332 | 1,011,087 | 1,033,005 | 946,534 | 755,196 | |||||||||||||||
Gross profit | 229,671 | 292,947 | 354,305 | 303,100 | 205,365 | |||||||||||||||
Research and development | 75,579 | 73,053 | 67,664 | 63,134 | 61,669 | |||||||||||||||
Marketing, general and administrative | 67,376 | 64,951 | 66,799 | 65,439 | 62,793 | |||||||||||||||
Nishiwaki Fab restructuring and impairment cost (income), net | -- | -- | -- | (627 | ) | (991 | ) | |||||||||||||
Operating profit (loss) | 86,716 | 154,943 | 219,842 | 175,154 | 81,894 | |||||||||||||||
Financing income (expense), net | 12 | (13,184 | ) | (15,447 | ) | (24,349 | ) | (123,109 | ) | |||||||||||
Gain from acquisition, net | -- | -- | -- | 50,471 | -- | |||||||||||||||
Other income (expense), net | 4,293 | (2,442 | ) | (2,627 | ) | 9,322 | (190 | ) | ||||||||||||
Profit (loss) before income tax | 91,021 | 139,317 | 201,768 | 210,598 | (41,405 | ) | ||||||||||||||
Income tax benefit (expense) | (2,948 | ) | (5,938 | ) | 99,888 | (1,432 | ) | 12,278 | ||||||||||||
Net Profit (loss) | 88,073 | 133,379 | 301,656 | 209,166 | (29,127 | ) | ||||||||||||||
Net loss (income) attributable to non-controlling interest | 1,975 | 2,200 | (3,645 | ) | (5,242 | ) | (520 | ) | ||||||||||||
Net Profit (loss) attributable to the Company | $ | 90,048 | $ | 135,579 | $ | 298,011 | $ | 203,924 | $ | (29,647 | ) | |||||||||
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Basic earnings (loss) per ordinary share | $ | 0.85 | $ | 1.35 | $ | 3.08 | $ | 2.33 | $ | (0.40 | ) | |||||||||
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Diluted earnings per ordinary share | $ | 0.84 | $ | 1.32 | $ | 2.90 | $ | 2.09 | ||||||||||||
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Other Financial Data: | ||||||||||||||||||||
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Depreciation and amortization, including amortization of financing expenses and accretion | $ | 214,474 | $ | 214,391 | $ | 208,411 | $ | 197,756 | $ | 256,005 | ||||||||||
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Selected Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents and short-term interest-bearing deposits | $ | 571,170 | $ | 505,170 | $ | 445,961 | $ | 389,377 | $ | 205,575 | ||||||||||
Working capital | $ | 835,425 | $ | 784,238 | $ | 571,959 | $ | 450,883 | $ | 235,608 | ||||||||||
Total assets | $ | 1,932,833 | $ | 1,789,977 | $ | 1,673,639 | $ | 1,379,884 | $ | 965,368 | ||||||||||
Short-term bank debt and current maturities of loans, leases and debentures | $ | 65,932 | $ | 10,814 | $ | 105,958 | $ | 48,084 | $ | 33,259 | ||||||||||
Loan from banks, net of current maturities | $ | 101,365 | $ | 100,118 | $ | 87,533 | $ | 133,163 | $ | 210,538 | ||||||||||
Debentures, net of current maturities | $ | 94,552 | $ | 120,170 | $ | 128,368 | $ | 162,981 | $ | 45,481 | ||||||||||
Capital leases, net of current maturities | $ | 39,207 | $ | 36,381 | $ | 12,822 | $ | -- | $ | -- | ||||||||||
Shareholders’ equity | $ | 1,346,723 | $ | 1,236,205 | $ | 1,029,706 | $ | 682,614 | $ | 385,586 | ||||||||||
Number of shares outstanding as of December 31 of any year | 106,808 | 104,979 | 98,458 | 92,985 | 82,058 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| Consolidated Statement of Operations Data: | ||||||||||||||||||||
| Revenues | $ | 1,387,310 | $ | 1,249,634 | $ | 960,561 | $ | 828,008 | $ | 505,009 | ||||||||||
| Cost of revenues | 1,033,005 | 946,534 | 755,196 | 764,220 | 476,900 | |||||||||||||||
| Gross profit | 354,305 | 303,100 | 205,365 | 63,788 | 28,109 | |||||||||||||||
| Research and development | 67,664 | 63,134 | 61,669 | 51,841 | 33,064 | |||||||||||||||
| Marketing, general and administrative | 66,799 | 65,439 | 62,793 | 58,783 | 42,916 | |||||||||||||||
| Nishiwaki Fab restructuring and impairment cost (income), net……. | -- | (627 | ) | (991 | ) | 55,500 | -- | |||||||||||||
| Acquisition related costs | -- | -- | -- | 1,229 | -- | |||||||||||||||
| Amortization related to a lease agreement early termination | -- | -- | -- | -- | 7,464 | |||||||||||||||
| Operating profit (loss) | 219,842 | 175,154 | 81,894 | (103,565 | ) | (55,335 | ) | |||||||||||||
| Interest expense, net | (7,840 | ) | (11,857 | ) | (13,179 | ) | (33,409 | ) | (32,971 | ) | ||||||||||
| Other financing expense, net | (7,607 | ) | (12,492 | ) | (109,930 | ) | (55,404 | ) | (27,838 | ) | ||||||||||
| Gain from acquisition, net | -- | 50,471 | -- | 166,404 | -- | |||||||||||||||
| Other income (expense), net | (2,627 | ) | 9,322 | (190 | ) | (140 | ) | (904 | ) | |||||||||||
| Profit (loss) before income tax | 201,768 | 210,598 | (41,405 | ) | (26,114 | ) | (117,048 | ) | ||||||||||||
| Income tax benefit (expense) | 99,888 | (1,432 | ) | 12,278 | 24,742 | 9,388 | ||||||||||||||
| Net Profit (loss) | 301,656 | 209,166 | (29,127 | ) | (1,372 | ) | (107,660 | ) | ||||||||||||
| Net loss (income) attributable to non-controlling interest | (3,645 | ) | (5,242 | ) | (520 | ) | 5,635 | -- | ||||||||||||
| Net Profit (loss) attributable to the Company | $ | 298,011 | $ | 203,924 | $ | (29,647 | ) | $ | 4,263 | $ | (107,660 | ) | ||||||||
| Basic earnings (loss) per ordinary share | $ | 3.08 | $ | 2.33 | $ | (0.40 | ) | $ | 0.08 | $ | (2.72 | ) | ||||||||
| Diluted earnings per ordinary share | $ | 2.90 | $ | 2.09 | $ | 0.07 | ||||||||||||||
| Other Financial Data: | ||||||||||||||||||||
| Depreciation and amortization, including amortization of financing expenses and accretion | $ | 208,411 | $ | 197,756 | $ | 256,005 | $ | 243,362 | $ | 164,824 | ||||||||||
| As of December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| (Dollars and share data in thousands) | ||||||||||||||||||||
| Selected Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents, short-term interest-bearing deposits and designated deposits | $ | 445,961 | $ | 389,377 | $ | 205,575 | $ | 187,167 | $ | 122,871 | ||||||||||
| Working capital | $ | 571,959 | $ | 450,883 | $ | 235,608 | $ | 93,759 | $ | 150,498 | ||||||||||
| Total assets | $ | 1,673,639 | $ | 1,379,884 | $ | 965,368 | $ | 884,146 | $ | 705,887 | ||||||||||
| Short-term bank debt and current maturities of loans, leases and debentures | $ | 105,958 | $ | 48,084 | $ | 33,259 | $ | 119,999 | $ | 36,441 | ||||||||||
| Loan from banks, net of current maturities | $ | 87,533 | $ | 133,163 | $ | 210,538 | $ | 159,776 | $ | 108,739 | ||||||||||
| Debentures, net of current maturities | $ | 128,368 | $ | 162,981 | $ | 45,481 | $ | 107,311 | $ | 208,146 | ||||||||||
| Capital leases, net of current maturities | $ | 12,822 | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
| Shareholders’ equity | $ | 1,029,706 | $ | 682,614 | $ | 385,586 | $ | 195,561 | $ | 141,248 | ||||||||||
| Number of shares outstanding as of December 31 of any year | 98,458 | 92,985 | 82,058 | 58,034 | 47,870 | |||||||||||||||
Risk Factors
Our business faces many risks. Any of the risks discussed below may have an adverse impact on our business, financial condition and operating results.
Risks Affecting Our Business
If we do not maintainexperience difficulty in achieving acceptable device yields, product performance and delivery times, as a result of manufacturing problems, our current customers and/or the margins we make on our products sold to them, and do not attract other customers, our business and profitability may be adversely affected.
The process technology for the manufacture of business from, or decreasessemiconductor wafers is highly complex, requires advanced and costly equipment and is constantly being modified in an effort to improve device yields, product performance and delivery times. Microscopic impurities such as dust and other contaminants, difficulties in the sales volumeproduction process, defects in the key materials and tools used to manufacture wafers and other factors can cause wafers to be rejected or sales pricesindividual semiconductors on specific wafers to be non-functional. We may experience difficulty achieving acceptable device yields, product performance and product delivery times in the future as a result of manufacturing problems. Although we continuously enhance our significant customers,manufacturing capabilities and efficiency, from time to time we have experienced production difficulties that have caused delivery delays and quality control problems. Manufacturing issues we may face include the following:
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difficulties in upgrading or expanding existing facilities;
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unexpected breakdowns in our failuremanufacturing equipment and/or related facility systems;
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unexpected events, such as an electricity outage, affecting the manufacturing process;
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difficulties in changing or upgrading our process technologies;
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raw material shortages or impurities;
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delays in delivery or shortages of spare parts; and
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difficulties in maintenance and upgrade of our equipment.
Should such problems occur to replace lost business with new customers, may seriously harm our financial results, revenues and business.
Demand for our foundry services is dependent on the demand in our customers’ end markets.markets, which are typically cyclical and volatile. A material decrease in demand for products that contain semiconductors may decrease the demand for our services and products, and a decrease in the selling prices of our customers’ products may reducesignificantly affect our profitabilitybusiness, financial results and business.
Our customers generally use the semiconductors produced in our fabsfabrication facilities (“fabs”) in a wide variety of applications. We derive a significant percentage of our operating revenues from customers who use our manufacturing services to make semiconductors for communication devices, consumer electronics, PCs and other electronic devices. Any significant decrease in the demand for these electronic devices or products may decrease the demand for our services and products. In addition, if the average selling prices of communication devices, consumer electronics, PCs or other electronic devices decline significantly, we may be pressured to reduce our selling prices, which may reduce our revenues and margins significantly. As demonstrated in the past by downturns in demand for high technology products, market conditions can change rapidly, without apparent warning or advance notice. In such instances, our customers may experience inventory buildup and/or difficulties in selling their products and, in turn, may reduce or cancel orders for wafers from us, which may harm our business and profitability. The timing, severity and recovery of these downturns cannot be predicted.
In order for demand for our wafer fabrication services to increase, the markets for the end products utilizing the integrated circuits (“ICs”), that we manufacture must develop and expand. For example, the success of our imaging process technologies will depend, in part, on the growth of markets for certain image sensor product applications. Because our services may be used in many new applications, it is difficult to forecast demand. If demand is lower than expected, we may have excess capacity and our revenue may not be sufficient to cover all our costs and serve all our debt, which may adversely affect our financial results and financial position.
If we do not maintain and develop our technology processes and services, we may lose customers and may be unable to attract new ones.
The semiconductor market is characterized by rapid change, including the following:
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rapid technological developments;
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evolving industry standards;
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changes in customer and product end user requirements;
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frequent new product introductions and enhancements; and
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short product life cycles with declining prices as products mature.
Our ability to maintain our current customer base and attract new customers is dependent in part on our ability to continuously develop and introduce to production advanced specialized manufacturing process technologies and purchase the appropriate equipment. If we are unable to successfully develop and introduce these processes to production in a timely manner or at all, or if we are unable to purchase the appropriate equipment required for such processes, we may be unable to maintain our current customer base and may be unable to attract new customers.
The semiconductor foundry business is highly competitive;competitive and our competitors may have competitive advantages over us andus; our financial results may be adversely affected if we do not successfully compete in the industry.
The semiconductor foundry industry is highly competitive. We compete most directly in the specialty segments with certain independent dedicated foundries. We also compete with the pure play advanced technology node driven foundry service providers as they each have some capacity for specialty process technologies, and with integrated device manufacturers, or IDMs, that allocate a portion of their manufacturing capacity to foundry operations.
In addition, some semiconductor companies have advanced their CMOScomplementary metal oxide semiconductor (“CMOS”) designs to smaller than 2214 nanometer process geometries. These smaller process geometries may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies. The smaller process geometries may also be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is then required. Our specialty processes will therefore compete with these more advanced CMOS processes and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller process geometries. If our potential or existing customers choose to design their products in a manner whereby the percentage of digital content in specialty designs increases significantly and requires these advanced CMOS processes, our business may be negatively impacted.
In addition, many of our competitors may have one or more of the following competitive advantages over us:
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greater manufacturing capacity and/or availability of same;
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a more diverse and established customer base;
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greater financial, sales, marketing, distribution and other resources;
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governmental funding or support;
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a better cost structure; and/or
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better operational performance, including cycle time and yields.
If we do not compete successfully, our business and financial results may be adversely affected.
Our financial results may fluctuate from quarter to quarter, making it difficult to predict our future performance, which may negatively affect our financial position and delivery times, as a result of manufacturing problems, our business may be adversely harmed.
Our revenues, expenses and costly equipment and is constantly being modified in an effort to improve device yields, product performance and delivery times. Microscopic impurities such as dust and other contaminants, difficultiesoperating results have varied significantly in the production process, defects in the key materialspast and tools usedmay fluctuate significantly from quarter to manufacture wafers and other factors can cause wafers to be rejected or individual semiconductors on specific wafers to be non-functional. We may experience difficulty achieving acceptable device yields, product performance and product delivery timesquarter in the future asdue to a resultnumber of manufacturing problems. Although we continuously enhancefactors, some of which are beyond our manufacturing capabilitiescontrol. These factors include, among others:
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The cyclical nature of the semiconductor industry and efficiency,the volatility of the markets served by our customers;
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Changes in the economic conditions of geographical regions where our customers and their markets are located;
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Our ability to conclude and materialize business development and acquisition transactions for capacity expansion;
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Inventory and supply chain management of our customers;
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The loss of a key customer, not attracting new designs from timekey customers, postponement of an order from a key customer or the rescheduling or cancellation of large orders;
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The occurrence of accounts receivable write-offs, failure of a key customer to time we have experienced productionpay accounts receivable in a timely manner, the financial condition of certain of our customers and the regulatory or other payment difficulties that have caused delivery delaysmay be imposed in a region in which customers reside;
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The occurrence of an unexpected event, such as environmental events, a global disease, industrial accidents such as fire or explosions, electricity outage, affecting the manufacturing process and our ability to recover the lost or damaged products and provide quality control problems. Manufacturing issues we may face includeand timely production to our customers without charging them significant additional costs;
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Completing capacity expansions and recruitment of personnel in a timely manner to address product demands by our customers;
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Mergers and acquisitions in the following:
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Our ability to satisfy our customers’ demand for quality and timely production;
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The timing and volume of orders relative to our available production capacity;
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Our ability to obtain raw materials and equipment on a timely and cost-effective basis;
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Price erosion in the industry and our ability to negotiate prices with our current and new customers;
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Our susceptibility to intellectual property rights’ disputes;
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Our dependency on export licenses and other permits required for our operations and the sale of our products;
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Our ability to a material degree we may suffer delaysmaintain existing partners and to enter into new partnerships and technology and supply alliances on mutually beneficial terms;
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Interest, price index and currency rate fluctuations that were not hedged;
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Technological changes and short product life cycles;
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Timing for the design and qualification of new products; and
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Changes in delivery, loss of income, loss of reputation and/or a loss of customers, anyaccounting rules affecting our results.
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, it is difficult to predict our future performance and any fluctuations in future performance from expectations may adversely impactultimately negatively affect our business, revenuesoperating results and financial condition.
We may be required to purchase equipment and raw materials, weobtain financing for strategic opportunities, which financing may not be able to manufacture our productsavailable for us in a timely fashion,manner or on favorable terms, and which may result in a loss of existing and potential new customers and may have an adverse effect on our business and financial results.
In order to invest in strategic opportunities in support of our acquisition and capacity growth plans and/or business development activities, we may be required to obtain funds from financing sources, including through debt vehicles and/or re-financing, sale of new securities or other financing alternatives. There is no assurance that we will be able to obtain sufficient funding, if at all, from these financing sources or other sources in a timely manner (or on commercially reasonable terms) in order to allow us to fund our growth plans and/or business development activities, which may adversely affect our financial position and operations, may dilute the holdings of our shareholders and/or require us to incur additional debt.
If we do not maintain our current key customers, and/or do not attract new key customers, our business and profitability may be adversely affected.
Loss or cancellation of business from, or decreases in the sales volume or sales prices to, our significant customers, or our failure to replace lost business with new customers, may seriously harm our financial results, revenues and business. We have relationships with several customers that represent a material portion of our revenues. In 2019, 27% of our revenues were generated from one customer (PSCS), as detailed below, and five additional customers each generated between 5% to 9% of our revenues. The loss or reduction in volume or sales price to any one of these customers, whether due to business negotiation, their insolvency or their unwillingness or inability to perform their obligations under their respective credit facility agreement.
PSCS (Panasonic Semiconductor Solutions), a securities investment portfolio, including interest bearing bondswholly-owned subsidiary of Panasonic Corporation, is the largest customer of TPSCo and notes. An increaseTower on a consolidated basis. TPSCo engaged PSCS under a manufacturing agreement in March 2014 for a five-year period, which was renewed in March 2019 for an additional three years. Due to the reduced selling price per product and services under the renewed March 2019 agreement, revenue from PSCS decreased by approximately $70 million in the interest rates globally andnine-month period ended December 31, 2019. We are making efforts to compensate for such reduction with additional manufacturing volume demand from other market changes may result in a reduced market value of these bonds and notes, thereby creating financing losses for uscustomers into TPSCo fabs; however, if we are unableunsuccessful in such efforts, our consolidated revenue, financial position and results may be adversely effected.
In November 2019, Panasonic announced the sale of its shares in PSCS to mitigate exposure, react to the market changes promptly and adjust our securities investment portfolio componentsNuvoton Technology Corp. (a Taiwan based semiconductor company, majority owned by Winbond Electronics Corporation), in a timely manner.
Risks relating to construction activities adjacent to Fab 3 and our Fab 3 lease could harm our operations and financial results.
Our Fab 3 fabrication facility and its offices are leased under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countriesa contract in effect until 2022, which we marketcan extend until 2027 through the exercise of an option at our services and products will respect our intellectual property rightssole discretion. A few years ago, the landlord began a construction project adjacent to the same extent asfabrication facility, which may adversely impact Fab 3 operations, including temporary reductions or interruptions in the United States. Effective intellectualsupply of utilities to the property, enforcementand a portion or all of the fabrication facility may need to be unavailableidled temporarily during development. If construction activities limit or limited in some countries. We cannot assure you that we will, at all times, enforce our patentsinterrupt the supply of water, gas or electricity to Fab 3 or cause significant vibrations or other intellectual property rights anddisruptions, it may be difficult for us to protect our intellectual property from misusecould limit or infringement by other companies in certain countries. Further, we cannot assure you that courts will uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which may reduce our opportunities to generate revenues. In the event that we are unable to enforce our intellectual property rights, our business may be harmed.
A global recession and/or, unfavorable economic conditions, global disease, credit crisis and/or weakness in the semiconductor industry may adversely affect our results and our ability to fulfill our debt obligations and other liabilities.
The effects of a global recession, unfavorable economic conditions, and/or global disease, such as the recent coronavirus pandemic, credit crisis and/or a weakness in the semiconductor industry may include global decreased demand, downward price pressure, excess inventory, shortage of supplies and materials for manufacturing and unutilized capacity worldwide, any of which may negatively impact consumer and customer demand for our products and the end products of our customers. Such an adverse effect onevent may adversely affect our ability to attract new customers and new business to our fabs as well as maintain current customers. Such an event may also adversely affect our ability to increase the utilization rates in our manufacturing facilities and maintain them at a high level that would suffice to cover our substantial fixed costs, maintain commercial relationships with our customers, suppliers, and creditors, including our lenders, and continue our capacity growth. In addition, such an event may negatively impact our ability to improve our future financial results and position, including our ability to raise funds in the capital markets, fulfill our debt obligations and other liabilities, refinance our debt and other liabilities and/or pay them in a timely manner. There is no assurance that such an event will not occur.
The recent coronavirus outbreak, which was declared a global pandemic by the World Health Organization during March 2020, and its continued progress, may adversely affect our revenue, business and profits.
Our reliance on acquisitions and/or gaining additional capacity for growth involve risks that may adversely affect our future revenues, business and operating results.
We are subjectmay decide to risks related toexpand our international operations.
This strategy involves many risks, each of which may negatively affect our profitability and financial position, including the following risks:
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We may fail to identify acquisitions and/or opportunities to capture additional capacity required for our customers that would enable us to execute our business strategy;
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Other foundries may bid against us to acquire potential targets. This competition may result in decreased availability of, or increased prices for, suitable acquisition candidates;
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We may not be able to sufficiently mitigate allobtain the risks relatednecessary regulatory approvals, or we may not be able to obtain the necessary approvals from our international operations.
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Potential acquisitions and execution of an expansion plan may require the dedication of substantial management effort, time and resources which may divert management from our existing business operations or other strategic opportunities;
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We may fail to integrate acquisitions successfully and materialize our expansion plan in accordance with our business strategy, achieve anticipated benefits depending in part on successfully consolidating functions and integrating operations, procedures and personnel in a timely and efficient manner, expected synergies, attract sufficient business to newly acquired facilities in a timely manner or realize the anticipated growth opportunities from integrating an acquired business into our existing business;
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We may not be able to retain experienced management and skilled employees from the businesses we acquire and, if we cannot retain such personnel, we may not be able to attract new skilled employees and experienced management to replace them;
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We may purchase a company with excessive unknown contingent liabilities;
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We may not be able to obtain sufficient financing which could limit our ability to engage in certain acquisitions and strategic engagements; and
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The amount or terms of financing actually required before and after acquisition may vary from our expectations, resulting in a need for more funding that may not be available to us in order to finance the operations of the target acquisition and to acquire additional machinery and equipment and adjust the target’s manufacturing line to address our customer demand.
Our business could sufferfinancial results may be adversely affected if we are unable to retainoperate our facilities at satisfactory utilization rates necessary to generate and recruit qualified personnel.
As is common in our industry, a large portion of our senior executive officers, senior managers and skilled technical and other personnel. Our business could suffer if we lose the servicestotal costs is comprised of some of these personnel due to resignation, medical absence, illness or other reasons, and cannot find and integrate adequate replacement personnel intofixed costs, associated mainly with our senior management, business and operations in a timely manner. We seek to recruit highly qualified personnel and there is intense competition for the services of these personnel in the semiconductor industry. Competition for personnel may increase significantly in the future as new fabless semiconductor companies as well as new semiconductor manufacturing facilities, while our variable costs are established. Our abilityrelatively small. Therefore, while during periods when our facilities manufacture at high utilization rates we are able to retain existing personnel and attract new personnelcover our costs, at times when the utilization rate is in part dependent onlow, the compensation packages we offer. As demand for qualified personnel increases, wereduced revenues may be forced to increase the compensation levels, including adjustmentnot cover all of the cash, equitycosts since a large portion are fixed costs which remain constant, irrespective of the number of wafers manufactured. In addition, our depreciation costs and other components of compensation we offercapital expenditure investments, as common in our personnel.
Our fabs’ production performance metrics and business could be significantly harmed by natural disasters, particularly earthquakes.
Fab 1 and Fab 2 are located in an area near the Syrian-African rift valley, which is known to have seismic activity. Fab 3 is located in southern California, a region known for seismic activity. TPSCo’s fabs are located in Japan, which is generally susceptible to seismic activity. Due to the complex and delicate nature of our manufacturing processes, our facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. We cannot be certain that precautions that any of our fabs have taken to seismically upgrade the fabs will be adequate to protect our facilities in the event of an earthquake. Earthquakes may lead to fire in the fabs or other material damage, and any resulting damage could seriously disrupt production and result in reduced revenues. Although we maintain insurance policies to mitigate any potential losses that may be caused by earthquakes and other natural disasters, including business interruption insurance, our insurance coverage may not compensate us fully for all of the losses we may incur. If any of our fabs were to be damaged or cease operations, even for a limited duration, as a result thereof, and if our insurance proves to be inadequate, our manufacturing capacity and revenues may be adversely affected, thereby exposing us to third party claims. A power outage, even of very limited duration, caused by an earthquake or other natural disaster may result in a loss of wafers in production, deterioration of our fab yield and substantial downtime to reset equipment before resuming production, thereby potentially causing a material adverse effect on our business, revenue and profits.
Possible product returns could harm our business.
Products manufactured by us may be returned within specified periods if they are defective or otherwise fail to meet customers’ prior agreed upon specifications. Future product returns may have an adverse effect on our business and financial results.
We are subject to risks related to our international operations.
We generate revenues from customers located in the US, Europe and Asia-Pacific. Because of our international operations, we are vulnerable to the following risks:
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JPY fluctuations against the USD -- see the risk factor below entitled: “Our exposure to currency exchange and interest rate fluctuations may impact our costs and financial results”;
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the burden and cost of compliance with foreign government regulation, as well as compliance with a variety of foreign laws;
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impact of potential new legislation under the Trump administration;
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general geopolitical risks, such as political and economic instability, international terrorism, potential hostilities and changes in diplomatic and trade relationships;
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natural disasters and global diseases, affecting the countries in which we manufacture and/or conduct our business;
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imposition of regulatory requirements, tariffs, import and export restrictions and other trade barriers and restrictions, including the timing and availability of export licenses and permits;
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adverse foreign and international tax rules and regulations, such as withholding taxes deducted from amounts due to us and not refunded to us by the tax authorities since we are not entitled to foreign tax credit in Israel;
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weak protection of our intellectual property rights in certain foreign countries;
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delays in product shipments due to local customs restrictions;
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laws and business practices favoring local companies;
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difficulties in collecting accounts receivable; and
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difficulties and costs of staffing and managing foreign operations.
In addition, Israel, the United States, Japan and other foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the import or export of our products, leading to a reduction in sales and profitability in such countries. The geographical distance between Israel, the United States, Japan and the rest of Asia and Europe also creates certain logistical and communication challenges. We cannot assure you that we will be able to sufficiently mitigate all the risks related to our international operations.
The production lines of our fabs may stop for certain periods of time due to bottlenecks, power outages, water leaks, chemical leaks or other issues, which may adversely affect our cycle time, yield, and delivery schedules, potentially causing an immediate loss of revenue and profitability. In addition, affected customers may elect to transfer their product orders to other fabs, which could materially adversely affect our business and financial results.
There are many events that may occur which may adversely affect the manufacturing process in our manufacturing facilities. From time to time, we experience high utilization rates in certain of our manufacturing lines and/or areas, which cause bottlenecks in the lines and/or specific areas and/or specific machines, power outages, water leaks, chemical leaks or other issues that may adversely affect our cycle time, yield and delivery schedules, which may cause an immediate loss of revenue and profitability in a particular period. In addition, affected customers may elect to transfer their product orders to other fabs, which could materially adversely affect our business, revenue, profitability and financial position over the longer term. While we try to mitigate any potential damage caused by such events and have insurance coverage, which may compensate us partially or fully against certain types of damages, we cannot ensure that such events will not have a negative effect on the Company,
Our financial position and operations may be affected as a result of our long-term debt.
As of December 31, 2019, we had approximately $290 million of consolidated principal amount of long-term debt outstanding, comprised as follows: (1) Tower had approximately $135 million outstanding principal amount of Series G debentures, payable in seven semi-annual consecutive equal installments from March 2020 to March 2023; (2) TPSCo had loans of approximately $101 million principal amount (the “JP Loan”), carrying a fixed interest rate of approximately 2% per annum, with principal scheduled to be repaid in nine semiannual payments between the first quarter of 2021 and 2025; and (3) Tower and its affiliates had capital lease agreements outstanding in the amount of approximately $54 million from JA Mitsui Leasing, repayable between 2020 and 2024. Carrying such an amount of long-term debt may have significant negative consequences on our business, including:
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limiting our ability to fulfill our debt obligations and other liabilities;
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requiring the use of a substantial portion of our cash to service our indebtedness rather than investing our cash to fund our strategic growth opportunities and plans, working capital and capital expenditures;
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increasing our vulnerability to adverse economic and industry conditions;
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limiting our ability to obtain additional financing;
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete;
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placing us at a competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources;
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volatility in our non-cash financing expenses due to increases in the fair value of our debt obligations;
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fluctuations of the payable amounts in USD of the JP Loan or other expenses which are denominated in JPY; and
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potential enforcement by the lenders of their liens against our respective assets, as applicable, if an event of default occurs.
In order to service our debt, the applicable interest it carries and other liabilities and obligations and/or improve its terms and conditions and/or to invest in strategic opportunities for growth and/or business development activities, in addition to our cash on hand and expected cash flow generation from operating activities, we may decide to obtain funds from additional sources including debt vehicles and/or re-financing, sale of new securities, sale of intellectual property and/or intellectual property licensing, as well as additional financing alternatives. However, there is no assurance that we will be able to obtain sufficient funding, if at all, from the financing sources detailed above or other sources in a timely manner (or on commercially reasonable terms) in order to allow us to fund our growth plans and/or cover, in a timely manner, all our costs, capital expenditure investments and all of our scheduled debt detailed above, liabilities and obligations, which may adversely affect our financial position and operations.
If we are unable to manage fluctuations in cash flow, our business and financial position may be adversely affected.
Our working capital requirements and cash flows are subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which may lead us to suffer cash flow fluctuations include:
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fluctuations in the level of revenues from our operating activities;
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fluctuations in the collection of receivables;
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timing and size of payables;
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the timing and size of capital expenditures;
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the net impact of JPY/ USD fluctuations on our JPY income and JPY expenses;
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the repayment schedules of our debt service obligations;
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our ability to fulfill our obligations and meet performance milestones under our agreements; and
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fluctuations in the USD to NIS exchange rate.
Over-demand for our foundry services and/or products may result in a loss of customers and revenues, which may adversely affect our profitability and business.
In periods during which demand for our foundry services exceeds our capacity and manufacturing capabilities, we may be (i) unable to fulfill customer demand in whole or in part, in a timely manner or at all; (ii) unable to assure production of customers’ next generation products; and/or (iii) unable to provide additional capacity from any of our geographic facilities through transfer of process technologies, successful implementation and timely qualification. As a result, we could lose one or more of our current and/or potential customers, which may adversely affect our revenues, profitability and business.
Our business could suffer if we are unable to retain and recruit qualified personnel.
We depend on the continued services of our senior executive officers, senior managers and skilled technical and other personnel. Our business could suffer if we lose the services of some of these personnel due to resignation, medical absence, illness or other reasons, and cannot find and integrate adequate replacement personnel into our senior management, business and operations in a timely manner. We seek to recruit highly qualified personnel and there is intense competition for the services of these personnel in the semiconductor industry. Competition for personnel may increase significantly in the future as new fabless semiconductor companies as well as new semiconductor manufacturing facilities are established. Our ability to retain existing personnel and attract new personnel is in part dependent on the compensation packages we offer. As demand for qualified personnel increases, we may be forced to increase the compensation levels, including adjustment of the cash, equity and other components of compensation we offer our personnel.
The lack of a significant backlog resulting from our customers not placing purchase orders far in advance makes it difficult for us to forecast our revenues and margins in future periods and may cause actual revenue and results to fall short of expectations.
Our customers generally do not place purchase orders far in advance, partly due to the cyclical nature of the semiconductor industry. As a result, we do not typically operate with any significant backlog, which makes it difficult for us to forecast our revenues in future periods. Moreover, since our expense levels are based in part on our expectations of future revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls caused by cancellations, rescheduling of orders or lower actual orders than quantities forecasted. Rescheduling may relate to quantities or delivery dates, and sometimes relates to the specifications of the products we are shipping. Consequently, we cannot be certain that orders on backlog will be shipped when expected or at all.
We expect that, in the future, our revenues in any quarter will continue to be substantially dependent upon purchase orders received in the immediately preceding quarter or two. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. For these reasons, our backlog at any given date may not be a reliable indicator of our future revenues and, as a result, revenue and margins’ forecasts, targets and guidance that we provide from time to time, may fall short of expectations.
We may manufacture wafers based on forecasted demand, rather than actual orders from customers. If our forecasted demand exceeds actual demand, we may have obsolete inventory, which may have a negative impact on our financial results.
We target manufacturing wafers in an amount matching each customer’s specific purchase order. On occasion, we may produce wafers in excess of a customer’s orders based on forecasted customer demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped or sold at a significant discount. Significant amounts of obsolete inventory may have a negative impact on our financial results.
Our sales cycles are typically long, and orders ultimately received may not meet our expectations, which may adversely affect our operating results.
Our sales cycles, which we measure from first contact with a customer to first shipment of a product ordered by the customer, vary substantially and may last as long as two years or more, particularly for new technologies. In addition, even after we make initial shipments of prototype products, it may take several more months to reach full production of the product. As a result of these long sales cycles, we may be required to invest substantial time and incur significant expenses before receiving any product orders and related revenue. If orders ultimately received are significantly lower than our expectations, we will have excess capacity that we may not be able to fill within a short period of time, resulting in lower utilization of our facilities. In addition to the revenue loss, we may be unable to adjust our costs in a timely manner to align with the lower revenue, since a large portion of our cost is fixed cost, which remains constant irrespective of the number of wafers actually manufactured, which may adversely affect our operating results and financial condition.
If we are unable to purchase equipment and raw materials, we may not be able to manufacture our products in a timely fashion, which may result in a loss of existing and potential new customers and may have an adverse effect on our business and financial results.
To increase the production capability and maintain the quality of production in our facilities, we must procure additional equipment. In periods of high market demand, the lead times from order to delivery of manufacturing equipment could be as long as 12 to 18 months. We also procure used equipment, which can take a long time to qualify to the manufacturing process, potentially delaying the manufacture of our products. In addition, our manufacturing processes use many raw materials, including silicon wafers, chemicals, gases and various metals, and require large amounts of fresh water and electricity. Manufacturing equipment and raw materials generally are available from several suppliers; however, in several instances, we purchase equipment and raw materials from a single source. Shortages in supplies of manufacturing equipment and raw materials could occur due to an interruption of supply or increased industry demand. Any such shortages could result in production delays that may result in a loss of existing and potential new customers, which may have a material adverse effect on our business and financial results.
We are required to comply with the terms of the Israeli Investment Center approved plan and regulations, the terms of which may subject us to liability for specific payments and/or penalties.
We have received grants under certain Israeli Government programs under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”). In 2011, we received an approval certificate from the Investment Center of the Israeli Ministry of Economy and Industry (“Investment Center”), for an expansion program, pursuant to which we received approximately $36 million in grants for investments made commencing 2006 and through 2012. In 2017, we received approval from the Investment Center for our final performance report in connection with such grant. Eligibility for these approved grants is subject to our satisfying certain conditions stipulated by the Investment Law and the regulations promulgated thereunder, as well as the criteria set forth in the respective certificates of approval for the grants. If we fail to meet these conditions, we may be subjected to significant payment requests and/or penalties by the Investment Center. In addition, in order to secure our obligations in connection with these investment grants, floating liens were registered in favor of the State of Israel on substantially all of our Israeli assets.
We received Israeli government grants for certain of our research and development activities, the terms of which subject us to certain conditions and restrictions.
We received grants from the Government of Israel through the Israel Innovation Authority (“IIA”), of the Ministry of Economy and Industry, for the financing of a portion of our research and development projects pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (the “Innovation Law”). Under the terms of the Innovation Law and the grants that we received, the prior approval of the IIA is required for (among other things) the transfer of IIA-funded technology, intellectual property or know-how to a third party outside of Israel, including by way of license, which we may not receive. Any such approval would typically be subject to payment of a redemption fee, in the amount of up to six times the amount of the grants received (less paid royalties, if any, and depreciation, but no less than the total amount of grants actually received by us) plus accrued interest. The foregoing and other restrictions and requirements for payment under the Innovation Law and related regulations may impair our ability to sell our IIA-funded technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any IIA-funded technology outside of Israel.
Our exposure to currency exchange and interest rate fluctuations may impact our costs and financial results.
We operate our fabs in three different regions: Japan, the United States and Israel. The functional currency of the entities operating the fabs in the United States and Israel is USD. The functional currency of our subsidiary in Japan is the JPY. Our expenses and costs are denominated mainly in USD, JPY and NIS, our revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly in USD, JPY and NIS. We are, therefore, exposed to the risk of currency exchange rate fluctuations in Japan and Israel.
The USD cost of our operations in Israel is influenced by changes in the USD-to-NIS exchange rate with respect to costs that are denominated in NIS. During the year ended December 31, 2019, the USD depreciated against the NIS by 7.8%, as compared to 8.1% appreciation during the year ended December 31, 2018.
The fluctuation of the USD against the NIS can affect our results of operations. Appreciation of the NIS has the effect of increasing the cost of some of our Israeli purchases and NIS-denominated labor costs in USD terms, which may lead to erosion in our profit margins. We use foreign currency transactions to partially hedge a portion, but not all of this currency exposure, to be contained within a pre-defined fixed range. In addition, we executed swap hedging transactions to fully hedge our exposure to the fluctuation of the USD against the NIS as far as it relates to our non-convertible Series G debentures which are denominated in NIS.
The majority of TPSCo’s revenues are denominated in JPY and the majority of the expenses of TPSCo are in JPY, which limits the exposure to fluctuations of the USD / JPY exchange rate on TPSCo’s results of operations as the impact on the revenues is mostly offset by the impact on the expenses. In order to mitigate a portion of the net exposure to the USD / JPY exchange rate over the net profit margins, we have entered into hedging transactions which partially hedge our exposure to the currencies’ fluctuation to be contained within a pre-defined fixed range.
During the year ended December 31, 2019, the USD depreciated against the JPY by 1.2%, as compared to 2.4% depreciation during the year ended December 31, 2018. The net effect of USD depreciation against the JPY on TPSCo’s assets and liabilities denominated in JPY is presented in Cumulative Translation Adjustment as part of Other Comprehensive Income in the balance sheet.
In addition to currency exchange fluctuations, if any of TPSCo’s banks incur increased costs in financing a credit facility due to changes in law or the unavailability of foreign currency, such bank may exercise its right to increase the interest rate on the credit facility or require us to bear such increased cost as provided for in the applicable credit facility agreement.
We also hold a securities investment portfolio, including interest bearing bonds and notes. An increase in the interest rates globally and other market changes may result in a reduced market value of these bonds and notes, thereby creating financing losses for us if we are unable to mitigate exposure, react to the market changes promptly and adjust our securities investment portfolio components in a timely manner.
Although, as described above, we regularly engage in various hedging strategies to reduce our exposure to these risks and intend to continue to do so in the future, we are likely to remain partially exposed to exchange rate fluctuations (mainly NIS and JPY rates as compared to the US dollar), which may have a material effect on our cost and financial results.
We depend on intellectual property to succeed in our business, including intellectual property owned by us as well as intellectual property of third parties. Failure to enforce our intellectual property rights as well as failure to maintain or acquire licenses to intellectual property of third parties may harm our business.
We depend on intellectual property in order for us to provide certain foundry services and design support to our customers. As of December 31, 2019, we held 259 patents in force. We intend to continue to file patent applications when appropriate. The process of applying for patents to obtain patent protection may take a long time and can be expensive. We cannot assure you that patents will be issued for pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will respect our intellectual property rights to the same extent as the United States. Effective intellectual property enforcement may be unavailable or limited in some countries. We cannot assure you that we will, at all times, be able to enforce our patents or other intellectual property rights and it may be difficult for us to protect our intellectual property from misuse or infringement by other companies in certain countries. Further, we cannot assure you that courts will uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which may reduce our opportunities to generate revenues. In the event that we are unable to enforce our intellectual property rights, our business may be harmed.
In addition, with respect to third party intellectual property that is required for the manufacture of our products, if problems or delays arise with respect to the timely development, quality and provision thereof to us, the design and production of our customers’ products may be delayed, resulting in underutilization of our capacity. If any of our intellectual property vendors goes out of business, liquidates, merges with, or is acquired by, another company that discontinues the vendor’s previous line of business, or if we fail to maintain or acquire licenses to such intellectual property for any other reason, our business may be adversely affected.
From time to time, we are a party to litigation that may require management time and effort and may adversely affect us by harming our business, image and financial results.
From time to time, we are a party to litigation incidental to the conduct of our ongoing business, including class actions, disputes with customers, suppliers, landlords, or other third parties. Litigation usually requires a certain amount of management time and effort which may adversely affect our business by diverting management focus from business needs and development of future strategic opportunities.
In addition, our ability to compete successfully depends in part on our ability to operate without infringing on the proprietary rights of others and defending our intellectual property rights. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often difficult for semiconductor companies to determine infringement. Therefore, the semiconductor industry is characterized by frequent litigation regarding patent, trade secret and other intellectual property rights. We have been subject to intellectual property claims from time to time, some of which have been resolved through license agreements, the terms of which have not had a material effect on our business.
We may also be a party to infringement claims in the future. In the event any third party were to assert infringement claims against us or our customers, we may have to consider alternatives including, but not limited to:
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negotiating cross-license agreements;
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acquiring licenses to the allegedly infringed patents, which may not be available on commercially reasonable terms, if at all;
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discontinuing use of certain process technologies, architectures, or designs, which could cause us to stop manufacturing certain integrated circuits if we are unable to design around the allegedly infringed patents;
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litigating the matter in court, incurring substantial legal fees and paying substantial monetary damages in the event we lose; or
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developing non-infringing technologies, which may not be feasible.
Any one or several of these alternatives may place substantial financial and other burdens on us and hinder our business. Litigation, which may result in substantial costs to us and diversion of our resources, may be necessary to enforce our patents or other intellectual property rights or to defend us or our customers against claimed infringement. If we fail to obtain certain licenses or if we are involved in litigation relating to alleged patent infringement or other intellectual property matters, it may prevent us from manufacturing particular products or using particular technologies, which may adversely impact our business and revenues.
We could be harmed by failure to comply with environmental regulations.
Our business is subject to a variety of laws and governmental regulations in Israel, the U.S. and Japan relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in Tower’s production processes in Israel, Fab 3’s production processes in California, Fab 9’s production processes in Texas and TPSCo’s facilities in Japan. If we fail to use, discharge or dispose of hazardous materials appropriately, or if applicable environmental laws or regulations change in the future, we may be subject to substantial liability or may be required to suspend or significantly modify our manufacturing operations.
We are subject to risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable.
We use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to risk of loss arising from fire. The risk of fire associated with these materials cannot be completely eliminated. Although we maintain insurance policies to mitigate any potential losses that may be caused by fire, including business interruption insurance, our insurance coverage may not compensate us fully for all losses incurred due to a fire. If any of our fabs were to be damaged and/or cease operations for a certain period of time as a result of a fire, and if our insurance proves to be inadequate, our manufacturing capacity and revenues may be adversely affected. In addition, a power outage, even of very limited duration, caused by a fire may result in a loss of wafers in production, deterioration of our fab yield, substantial downtime to reset equipment before resuming production and an adverse effect on our revenue and profits.
Our business strategy is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers. If this trend does not continue to develop in the manner we expect, our business and financial results may be adversely affected.
We operate as an independent semiconductor foundry focused primarily on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow and follow the broader trend towards outsourcing foundry operations. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies that we are focused on, our business and financial results may be adversely impacted.
If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers’ design needs, our business may be harmed.
We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers’ design needs successfully, including their schedule and budget requirements, depends in part on the availability and quality of the relevant services, tools and intellectual property provided by electronic design automation vendors and design service providers. Difficulties or delays in these areas may adversely affect our ability to meet our customers’ needs, thereby potentially harming our business.
If we are unable to successfully locate and negotiate with third-party buyers for the sale of any excess and unused equipment, our financial results may be harmed.
From time to time, we may decide to abandon certain product technology lines or a manufacturing facility due to company strategy, low margins or low customer demand, resulting in unused equipment that no longer supports our customers’ needs and that, therefore, we may decide to sell to third-party buyers. We also have obsolete or unutilized equipment from time to time which we may sell. If we are unable to successfully locate and negotiate with potential buyers and sell the excess equipment in a timely manner for satisfactory consideration, we may be unable to cover our fixed and other costs associated with such decision, which may have a negative effect on our financial results.
Compliance with existing or future governmental regulations may reduce our sales or increase our manufacturing costs.
The export of semiconductors that we manufacture may be subject to U.S., Israeli and/or Japanese export control and other regulations established by other countries. Compliance with existing or evolving U.S., Israeli, Japanese or other applicable governmental regulations or obtaining timely domestic or foreign regulatory approvals or certificates may materially disrupt our business by reducing our sales, requiring extensive modifications to processes that we use in our product manufacturing and thereby increasing our manufacturing costs, or requiring extensive modifications to our customers’ products. We may not export products using or incorporating controlled technology without obtaining an export license. These restrictions may make foreign competitors facing less stringent controls on the export of their products more competitive in the global market. The relevant government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, may be modified from time to time.
If certain of the integrated circuits we manufacture are defective and integrated into products, we may be subject to product liability claims or other claims which could damage our reputation and harm our business.
Our customers integrate our custom integrated circuits into their products, which they then sell to end users. If these products are defective or malfunction, we may be subject to product liability claims, as well as possible recalls, safety alerts or advisory notices relating to the product. We cannot assure you that our insurance policies will compensate us fully for claims that may be made against us. In addition, we may be unable to obtain insurance in the future at satisfactory rates, with adequate coverage, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, may have a material adverse effect on our business, reputation, financial condition and our ability to attract and retain customers.
A workforce that is unionized may have an adverse impact on our manufacturing costs as well as on our operations by work stoppages, strikes or other collective actions which may disrupt the fabs’ production and adversely affect the fabs’ performance, our customers and our operational and financial results.
A significant portion of the employees at the Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement, which was renewed for three additional years, effective as of July 1, 2018. Similarly, a significant portion of TPSCo’s employees at its fabs in Japan are represented by a union and covered by a collective bargaining agreement. In addition, employees at our fabs in Israel, who currently are not members of any union, may wish to join a union in the future. We cannot predict the effect that union representation or future organizational activities will have on these fabs’ manufacturing cost and business. Specifically, under TPSCo’s collective bargaining agreement, the union and TPSCo are required to first negotiate any points of dispute before taking any action such as work stoppages, strikes or other collective actions. We cannot assure you that our fabs will not experience a material work stoppage, strike or other collective action in the future, or incur increased costs in connection with the renewal of such bargaining agreements or other potential union activities, which may disrupt their production and adversely affect our fabs’ manufacturing costs, operational performance metrics, our customers and our operational and financial results.
Climate change may negatively affect our business.
There is increasing concern regarding climate change and its potential dramatic effects on human activity if no aggressive remediation steps are taken. Legislative developments with respect to reductions in greenhouse gas emissions may result in increased energy, transportation and raw material costs.
In addition, more frequent droughts and floods, extreme weather conditions and rising sea levels may occur due to climate change. For example, transportation suspension caused by extreme weather conditions, including snow storms,snowstorms, may harm the distribution of our products. We cannot predict the economic impact, if any, of disasters resulting from climate change.
Compliance with the US Conflict Minerals Requirements Enacted Pursuantconflict minerals requirements enacted pursuant to the Dodd-Frank Act may affect our ability or the ability of our suppliers to purchase raw materials at an effective cost and couldmay adversely affect our business.
Many industries rely on materials which are subject to regulation concerning certain minerals sourced from the Democratic Republic of Congo ("DRC"(“DRC”) or adjoining countries, which include Sudan, Uganda, Rwanda, Burundi, United Republic of Tanzania, Zambia, Angola, Congo, and Central African Republic. These minerals are commonly referred to as conflict minerals. Conflict minerals which may be used in our industry or by our suppliers include Columbite-tantalite (derivative of tantalum [Ta]), Cassiterite (derivative of tin [Sn]), gold [Au], Wolframite (derivative of tungsten [W]), and Cobalt [Co]. We are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that require due diligence and disclosure as to whether our products contain conflict minerals. The Trump administration has indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. In April 2017, the SEC announced suspension of enforcement of portions of the conflict minerals regulations enacted under the Dodd-Frank Act following a ruling by the U.S. Court of Appeals for the District of Columbia Circuit. The potential implementation of these requirements and any changes effected by the Trump administration could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will likely incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our products and, if applicable, potential changes to our products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or may lose customers and adversely impact our revenue and business if we are unable to alter our products, processes or sources of supply to avoid use of such materials. We may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products.
Security, cyber and our Fab 3 lease.
Any security breach, including those resulting from a cybersecurity attack, or any unauthorized access, unauthorized usage, virus or similar breach or disruption could result in athe loss of wafers in production, deterioration in Fab 3’s yield,confidential information, damage to our fab operations, damage to our reputation, early termination of our contracts, litigation, regulatory investigations or other liabilities. If our security measures are breached as a result of third‑party action, employee error, malfeasance or otherwise and, on schedule deliveryas a result, someone obtains unauthorized access to our, our customers' or any third party’s confidential information, our reputation may be damaged, our business may suffer, and substantial downtimewe could incur significant liability.
Techniques used to reset equipment before resuming production. These may cause customer dissatisfactionobtain unauthorized access or to sabotage systems change frequently and cause customers to contemplate transferring their product orders to other fabs, which may adversely affect our revenues and financial results. In addition, the lease amendment sets forth certain obligations of Jazz and the landlord, including certain noise abatement actions at the fabrication facility. The landlord has claimed that our noise abatement effortsgenerally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate underpreventative measures. If an actual or perceived security breach occurs, the termsmarket’s perception of the amended lease. We do not agree with,our security measures may be harmed and are disputing, these claims.
Risks Related to Our Securities
Fluctuations in the market price of our traded securities may significantly affect our ability to raise new capital.
The capital markets, in general, have experienced volatility that often has been unrelated to the operating performance of the traded companies. The share price of many companies in the semiconductor industry has experienced wide fluctuations, which has often been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the market price of Tower’sour equity and debt traded securities, regardless of Tower’sour actual operating performance.
In addition, it is possible that Tower’sour operating results may differ from the expectations of public market analysts and investors, which may adversely affect the price of Tower’sour securities. Adverse impact to the market price of Tower’sour securities may negatively impact our ability to raise new capital in order to finance our growth plans, obligations and liabilities and/or re-finance our debt, and/or may cause us to receive less favorable terms than expected to the extent we will decide to raise any capital.
We are a material portion of securities into shares or issuance of new ordinary shares, or even the perception that any such action may occur, may depress the market price of Tower’s shares, impair our abilityforeign private issuer and, as a result, we are not subject to raise future capital through the financial marketsU.S. proxy rules and may limit our ability to fund our growth plans, debt and other liabilities.
We report assessing the company’s effectiveness of internal control over financial reporting and an attestation thereof by its auditors in its annual report. Our management and/or our auditors may conclude that our internal controls over financial reporting are not effective. Such a conclusion may result in a loss of investor confidence in the reliability of our financial statements, which may negatively impact us and our ability to access the capital markets. In addition, we are required to file reports and other information with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted, to follow, and follow, certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the Nasdaq Stock Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, the director nomination process, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we follow our home country law instead of the Listing Rules of the Nasdaq Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to domestic U.S. issuers.
Similarly, as an Israeli company listed on the Nasdaq Stock Market and the TASE, we are permitted to rely on certain relief granted to foreign listed companies under regulations thereunder applicablepromulgated under the Companies Law. For instance, we adopted the exemption under Israel law permitting a company whose shares are traded on certain stock exchanges outside Israel (including the Nasdaq Global Select Market, such as our company) that does not have a controlling shareholder, from the requirement to appoint external directors under Israeli law and related provisions, including regarding the composition of the audit committee and compensation committee, provided that it complies with the requirements of the laws of the foreign jurisdiction where the company’s shares are listed, as they apply to domestic issuers, with respect to the appointment of independent directors and the composition of the audit committee and compensation committee.
If we lose our status as a foreign private issuer under the SEC’s rules, our compliance costs will increase.
We would lose our foreign private issuer status if more than 50 percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. If we cease to qualify as a foreign private issuer, the regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers. Failure by us
We do not expect to file reportspay any dividends in the foreseeable future.
We do not anticipate paying any dividends in the foreseeable future. We currently intend to retain future earnings to finance our growth and acquisition strategy, as well as capacity growth and our ongoing operations. Our board of directors has sole discretion whether to pay dividends. If our board of directors will decide to pay dividends, the form, frequency and amount will depend upon our future growth and acquisition strategy, as well as our capacity growth plans, future operations and earnings, capital requirements and surplus, general financial condition, contractual and legal restrictions and other information with the SECfactors that our directors may deem relevant. The Companies Law imposes restrictions on our ability to declare and pay dividends. Furthermore, under the Securities Exchange Actindenture for our Series G Debentures, a distribution of 1934dividends is subject to us satisfying certain financial covenants and the regulations thereunder may resultis subject to certain limitations. Therefore, you should not rely on an investment in a deficiency and may negatively impact our financial position.
Risks Related to Our Operations in Israel
Instability in Israel may harm our business.
Fab 1 and Fab 2 manufacturing facilities, Tower’sour design center and certain of Tower’sour corporate and sales offices are located in Israel. In addition, a number of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business.
Since the establishment of the State of Israel in 1948, Israel has been in, and is subject to armed conflictarm conflicts with neighboring states andcountries, as well as terrorist activity,activities, with varying levels of severity. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements where necessary. In addition, the political and security situation in Israel may result in parties with whom we have agreements claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions. We can give no assurance that security and political conditions will not adversely impact our business in the future. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners may adversely affect our operations and make it more difficult for us to do business and raise capital. Furthermore, we could experience serious disruption to our manufacturing in Israel if acts associated with said conflictany such conflicts result in any serious damage to saidsuch manufacturing facilities. In addition, there may also be protests against or sanctions imposed on the State of Israel which may adversely impact our business. Our business interruption insurance may not adequately compensate us for losses that we may incur, and any losses or damages incurred by us may have a material adverse effect on our business.
In the event of severe unrest or other conflict, Israeli personnel could be required to serve in the military for extended periods of time. In response to increases in terrorist activity, there have been periods of significant call-ups of Israeli military reservists, and it is possible that there will be additional call-ups in the future. Many male Israeli citizens, including most of Tower'sour male employees under the age of 40, are subject to compulsory military reserve service and may be called to active duty under emergency circumstances. Our operations in Israel could be disrupted by the absence, for a significant period of time, of one or more of our key employees or a significant number of our other employees due to military service. Such disruption may harm our operations and our business.
If the exemption allowing us to operate our Israeli manufacturing facilities seven days a week or our business license is not renewed, our business may be adversely affected.
We operate our Israeli manufacturing facilities seven days a week pursuant to an exemption (which we need to timely renew) from the law that requires businesses in Israel to be closed from sundown on Friday through sundown on Saturday (“Saturday Exemption”).Saturday. In addition, our business license certificate issued by municipality of Migdal Ha’emek, municipality needsIsraelis required to be renewed annually.periodically. If our Saturday Exemptionsuch exemption or our business license are not renewed in the future, our financial results and business may be harmed.
It may be difficult to enforce a US judgment against us, our officers directors and advisorsdirectors or to assert US securities law claims in Israel.
Tower is incorporated in Israel. MostIsrael and most of Tower’sits executive officers and directors are not residents of the United States (excluding the employees of its U.S. subsidiaries), and a majority of Tower’sits assets (excluding its U.S. subsidiaries and their assets) and the assets of its non-U.S. resident directors and officers are located outside the United States. Therefore,Service of process upon us or our non-U.S. resident directors, officers may be difficult to obtain within the United States. Additionally, a judgment obtained in the United States against Tower or any of our non-U.S. executive officers and directors, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States (except to the extent that it relates to Tower’s US subsidiaries, its assets or employees) and may not be enforced by an Israeli court. Additionally, it may be difficult to enforceassert claims under U.S. securities laws or obtain a judgment based on civil liabilitiesliability provisions under U.S. federal securities laws claimed in original actions instituted in Israel.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which may delay or prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third-party to acquire us, even if doing so would be considered to be beneficial by some of our shareholders. For example, Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares of a public company above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of Tower’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, claim that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter the consideration for the acquisition accordingly, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company published all required information with respect to the tender offer prior to the tender offer’s response date. Furthermore, Israeli tax considerations may make potential transactions unappealing to Tower or to its shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These and other similar provisions may delay, prevent or impede a merger with or an acquisition of our company, even if such a merger or acquisition would be beneficial to Tower or its shareholders.
The rights and responsibilities of Tower'sour shareholders will be governed by Israeli law which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of Tower'sour ordinary shares are governed by itsour articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S. registered corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairnessin a customary manner in exercising his or her rights and fulfilling his or her obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on amendments to a company’s articles of association, increases in a company's authorized share capital, mergers and certain transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. There is limited case law available to assist Tower shareholders in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of Tower'sour ordinary shares that are not typically imposed on shareholders of U.S. corporations.
ITEM 4.INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We are a pure-play independent specialty foundry dedicated to the manufacture of semiconductors. Typically, pure-play foundries do not offer products of their own, but focus on producing integrated circuits, or ICs, based on the design specifications of their customers. We manufacture semiconductors for our customers primarily based on third party designs. We currently offer the process manufacture geometries of 0.35, 0.50, 0.55, 0.60, 0.80-micron and above on 150-mm wafers and 0.35, 0.18. 0.16, 0.13 and 0.11-micron on 200-mm wafers and 65 nanometer and 45 nanometer on 300-mm wafers. We also provide design support and complementary technical services. ICs manufactured by us are incorporated into a wide range of products in diverse markets, including consumer electronics, personal computers, communications, automotive, industrial, aerospace and medical device products.
We are focused on establishing leading market share in high-growth specialized markets by providing our customers with high-value wafer foundry services. We manufacture standard analog complementary metal oxide semiconductor (“CMOS”) process technology, which is a widely used method of producing ICs, and we specialize in specific technologies including CMOS image sensors, non-imaging sensors, wireless antenna switch Silicon-on-Insulator (SOI), mixed-signal, radio frequency CMOS (RFCMOS), bipolar CMOS (BiCMOS), and silicon-germanium BiCMOS (SiGe BiCMOS or SiGe), high voltage CMOS, radio frequency identification (RFID) technologies, MEMS, power management and power management.Gallum Nitride (GaN) devices. To better serve our customers, we have developed and are continuously expanding our technology offerings in these fields. Through our experience and expertise gained during more than twenty five years of operation, we differentiate ourselves by creating a high level of value for our clientscustomers through innovative technological processes, design and engineering support, competitive manufacturing indices, and dedicated customer service.
Tower was founded in 1993, with the acquisition of National Semiconductor’s 150-mm wafer fabrication facility located in Migdal Haemek, Israel, and commenced operations as an independent foundry. Since then, we have significantly upgraded our Fab 1 facility, equipment, capacity and technological capabilities with process geometries ranging from 1.0-micron to 0.35-micron and enhanced our process technologies to include CMOS image sensors, embedded flash, advanced analog, RF (radio frequency) and mixed-signal technologies. Recently, we integrated advanced single Poly NVM into the Fab 1 process flows and are currently in the process of evaluating the development ofdeveloped a GaN technological platform (GaN on Si).
In 2003, we commenced production in Fab 2, a wafer fabrication facility we established in Migdal Haemek, Israel. Fab 2 supports geometries ranging from 0.35 to 0.13-micron, using advanced CMOS technology, including CMOS image sensors, embedded flash, advanced analog, RF (radio frequency), and specifically RF switches on SOI, power platforms and mixed-signal technologies.
In September 2008, we merged with Jazz. JazzTower NPB. NPB Co. focuses on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices, and supports geometries ranging from 0.50 to 0.13-micron. Jazz'sNPB Co.’s specialty process technologies include advanced analog, radio frequency, high voltage, bipolar, SOI and silicon germanium bipolar, complementary metal oxide (“SiGe”) semiconductor processes. ICs manufactured by JazzNPB Co. are incorporated into a wide range of products, including cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems. JazzNPB Co. operates Fab 3 located in Newport Beach, California, US.
In March 2014, we acquired from Panasonic 51% of a newly established company, TPSCo, that manufactures products for Panasonic and other third party customers, using Panasonic's three semiconductor manufacturing facilitiesfactories located in Hokuriku Japan (Uozu E, Tonami CD and Arai E)., which factories were established by Panasonic. Pursuant to the transaction, Panasonic transferred its semiconductor wafer manufacturing process and capacity tools (8 inch and 12 inch) at saidthe three fabs to TPSCo, and entered into a five-year manufacturing agreement for the manufacture of products for Panasonic by TPSCo.
In February 2016, we acquired Fab 9, located in San Antonio, Texas, US, from Maxim. The assets and related business that we acquired from Maxim are held and conducted through one of our wholly ownedwholly-owned US subsidiaries, TJT.Tower SA. Fab 9 supports process geometries ranging from 0.80 to 0.18 for the manufacture of products using CMOS, power management and analog based technologies.
Our executive offices and Israeli manufacturing facilities are located in the Ramat Gavriel
Industrial Park, Shaul Amor Street, Post Office Box 619, Migdal Haemek, 2310502 Israel, and our telephone number is 972-4-650-6611. Our agent for service of process in the United States is Tower Semiconductor USA,For more information about us, go to www.towerjazz.com.www.towersemi.com. Information on our web sitewebsite is not incorporated by reference in this annual report.
B. BUSINESS OVERVIEW
INDUSTRY OVERVIEW
Semiconductor devices are responsible for the rapid growth of the electronics industry over the past fifty years. They are critical components in a variety of applications, from computers, consumer electronics and communications, to industrial, military, medical and automotive applications. Rapid changes in the semiconductor industry frequently make recently introduced devices and applications obsolete within a very short period of time. With the increase in their performance and decrease in their size and cost, the use of semiconductors and the number of their applications have increased significantly.
Historically, the semiconductor industry was composed primarily of companies that designed and manufactured ICs in their own fabrication facilities. These companies, such as Intel and Samsung, are known as integrated device manufacturers or IDMs.(“IDM”). In the mid-1980s, fabless IC companies, which focused on IC design and used external manufacturing capacity, began to emerge. Fabless companies initially outsourced production to IDMs, which filled this need through their excess capacity. As the semiconductor industry continued to grow, increasing competition forced fabless companies and IDMs to seek reliable and dedicated sources of IC manufacturing services. Use of external manufacturing capacity allowed IDMs to reduce their investment in their existing and next-generation manufacturing facilities and process technologies. This need for external manufacturing capacity led to the development of independent companies, known as foundries, which focus primarily on providing IC manufacturing services to semiconductor suppliers. Foundry services are used by nearly all major semiconductor companies in the world, including IDMs, as part of a dual-source, risk-diversification and cost effectiveness strategy.
Semiconductor suppliers face increasing demands for new products that provide higher performance, greater functionality and smaller form factors at lower prices - all features that require increasingly complex ICs. The industry has experienced a dramatic increase in the number of applications that incorporate semiconductors. Further, in order to compete successfully, semiconductor suppliers must minimize the time it takes to bring a product to market. As a result, fabless companies and IDMs have focused more on their core competencies, design and intellectual property development, and tend to outsource manufacturing to foundries.
The two basic functional technologies for semiconductor products are digital and analog. Digital semiconductors provide critical processing power and have helped enable many of the computing and communication advances of recent years. Analog semiconductors monitor and manipulate real world signals such as sound, light, pressure, motion, temperature, electrical current and radio waves, for use in a wide variety of electronic products such as digital still cameras, x-ray medical applications, flat panel displays, personal computers, cellular handsets, telecommunications equipment, consumer electronics, automotive electronics and industrial electronics. Analog-digital, or mixed-signal, semiconductors combine analog and digital devices on a single chip which can process both analog and digital signals.
Integrating analog and digital components on a single, mixed-signal semiconductor enables the development of smaller, more highly integrated, power-efficient, feature-rich and cost-effective semiconductor devices but presents significant design and manufacturing challenges. For example, combining high-speed digital circuits with sensitive analog circuits on a single, mixed-signal semiconductor can increase electromagnetic interference and power consumption, both of which cause a higher amount of heat to be dissipated and decrease the overall performance of the semiconductor. Challenges associated with the design and manufacture of mixed-signal semiconductors increase as the industry moves toward more advanced process geometries. As a result, analog and mixed-signal semiconductors can be complex to manufacture and typically require sophisticated design expertise and strong application specific experience and intellectual property. In addition, today’s analog market is driven strongly by growing sensitivity to environmental requirements such as the conservation of energy, and human well-being. This is seen in applications related to the systems enabled with Artificial Intelligence, products related to Internet of Things (IoT) in particular in productsASICs with embedded sensors, medical devices, applications focused on entertainment, infotainment and safety, all developed using analog technology.
Mixed-signal ICs are an essential part of any front-end electronic system. Our advanced analog CMOS process technologies have more features than standard analog CMOS process technologies and are well suited for higher performance or more highly integrated analog and mixed-signal semiconductors, such as high-speed analog-to-digital or digital-to-analog converters and mixed-signal semiconductors with integrated data converters. These process technologies generally incorporate higher density passive components, such as capacitors and resistors, as well as improved active components, such as native or low voltage devices, and improved isolation techniques, into standard analog CMOS process technologies.
The enormous costs associated with modern fabs, combined with the increasing demand for complex ICs, has created an expanding market for outsourced foundry manufacturing services. Foundries can cost-effectively supply advanced ICs to even the smallest fabless companies by creating economies of scale through pooling the demand of numerous customers. In addition, customers whose IC designs require process technologies other than standard digital CMOS have created a market for independent foundries that focus on providing specialized process technologies. Specialty process technologies enable greater analog content and can reduce the die size of an analog or mixed-signal semiconductor, thereby increasing the number of dies that can be manufactured on a wafer and reducing final die cost. In addition, specialty process technologies can enable increased performance, superior noise reduction and improved power efficiency of analog and mixed-signal semiconductors compared to traditional standard CMOS processes. These specialty process technologies include advanced analog CMOS, specialized RF devices on SOI, radio frequency CMOS (RF CMOS), CMOS image sensors (CIS) and other types of original sensors, high voltage CMOS, bipolar CMOS (BiCMOS), silicon germanium BiCMOS (SiGe BiCMOS), and bipolar CMOS double-diffused metal oxide semiconductor (BCD).We, NVM technologies and special devices for enabling chips with Artificial Intelligence. We have mastered the skills required to work in this technology intensive environment which is rapidly changing. We work closely with our customers to provide them with unique and specialized solutions needed for their business success.
Foundries may also offer customers competitive complementary services through design, testing, and other technical services.
MANUFACTURING PROCESSES AND SPECIALIZED TECHNOLOGIES
We manufacture ICs on silicon wafers, generally using the customer’s proprietary circuit designs. In some cases, we provide our customers with third-party design elements or our own proprietary design elements. The end product of our manufacturing process is a silicon wafer containing multiple identical ICs. In most cases, our customer assumes responsibility for dicing, assembly, packaging and testing.
We provide wafer fabrication services to fabless IC companies and IDMs, as sole source or second source, and enable smooth integration of the semiconductor design and manufacturing processes. By doing so, we enable our customers to bring high-performance, highly integrated ICs to market rapidly and cost effectively. We believe that our technological strengths and emphasis on customer service have allowed us to develop a unique position in large, high-growth specialized markets for CMOS image sensors, RF, power management and high performancehigh-performance mixed signal ICs.
We manufacture using specialty process technologies, mostly based on CMOS process platforms with added features to enable special and unique functionality, improved size,decreased footprint of products, performance and cost characteristicsadvantages for analog and mixed-signal semiconductors. Products made with our specialty process technologies are typically more complex to manufacture than products made using standard process technologies employing similar line widths.technology nodes. Generally, customers that use our specialty process technologies cannot easily transfer designs to another foundry because the analog characteristics of the design are dependent upon the specific process technology used for manufacturing. The specialty process design infrastructure is complex and includes design kits and device models that are specific to the foundry in which the process is implemented and to the process technology itself. In addition, the relatively small engineering community with specialty process expertise and the significant investment required for development or transfer and maintenance of specialty process technologies has limited the number of foundries capable of offering specialty process technologies. We believe that our specialized process technologies combined with design enablement capabilities distinguish our IC manufacturing services and attract industry-leading customers.
We also offer process transfer services to integrated device manufacturers (IDMs) whoIDMs that wish to manufacture products using their own process and do not have sufficient capacity in their own fabs. Our process transfer services are also used by fabless companies that have proprietary process flows that they wish to manufacture at additional manufacturing sites for purposes of geographic diversity or require a newan advanced technology node which is very costly to build independent of other business commitments.themselves. Our process transfer services include development, transfer, and extensive optimization as defined by customer needs.
With our world-class engineering team, well established transfer methodologies, and vast manufacturing experience, we offer state of the art production lines for core bulk CMOS and specialized technologies such as RF SOI, integrated into back-end-of-line (BEOL) magnetic random access memory (MRAM) and TMR/MTJ (magnetic tunnel junction) sensors, SiGe and MEMS, among others. With a combination of well known intellectual property protection and capacity flexibility commitment, we ensure customer confidence and satisfaction for low-risk services and fast time-to-market.
We are a trusted, customer-oriented service provider that has built a solid reputation in the foundry industry over the last twenty fivemore than twenty-five years. We have built strong relationships with customers. Our consistent focus on providing high-quality, value addedadd services, including engineering and design support, has allowed us to attract customers that seek to work with a proven provider of foundry solutions. Our emphasis on working closely with customers and accelerating the time-to-market and performance of their next-generation products has enabled us to maintain a high customer retention rate, whilstwhile increasing the number of new customers and new products for production.
We continuously target to expand our manufacturing footprint and business by attracting new customers that will utilize our existing manufacturing facilities, some of which have recently implemented further capacity expansion projects, as well as by acquiring external capacity through acquisitions of existing or newly established fabs, as we have done in the past, with or without third-party collaboration and/or funding (including cash, equity or in-kind investment). We also offer from time to time a wide range of support services for the establishment of new semiconductor fabrication facilities or the ramp of existing facilities owned by third parties, based on our technological, operational and integration expertise, for which we receive payments based on the achievement of pre-defined milestones and may also be entitled to certain capacity allocation and other rights, all subject to definitive agreements underlying such projects.
We derived a very significant amount of our revenues for the year ended December 31, 20172019 from our target specialized markets: RF CMOS, including SiGe power IC and discrete devices, CMOS image sensors, wireless communication and high performance analog. We are highly experienced in these markets, having been an early entrant and having developed unique proprietary technologies, including through licensing and joint development efforts with our customers and other technology companies.
The specific process technologies that we currently focus on include: radio frequency CMOS (RF CMOS), including SiGe CMOS image sensors (CIS) and integration of other types of sensors, advanced analog CMOS, radio frequency identification (RFID), bipolar CMOS (BiCMOS), silicon germanium (SiGe BiCMOS), high voltage CMOS, silicon-on-insulator (SOI) platforms for power management, RF and sensor applications, LDMOS transistors, power devicessensors based on GaN (gallium nitride) technology, and sensors fabricated on GaN on silicon wafers.
CMOS Image Sensors
CMOS image sensors are ICs used to capture an image in a wide variety of consumer, communications, medical, automotive and industrial market applications, including camera-equipped cell phones, digital still and video cameras, security and surveillance cameras and video game consoles. Our dedicated manufacturing and testing processes assure consistently high electro-optical performance of the integrated sensor through wafer-level characterization. Our CMOS image sensor processes have demonstrated superior optical characteristics, excellent spectral response and high resolution and sensitivity. The ultra-low dark current, high efficiency and accurate spectral response of our photodiode enable faithful color reproduction and acute detail definition.
We are currently actively involved in the high-end sensor and applications specific markets, which include applications such as high end video, high end photography, industrial machine vision, dental x-ray, medical x-ray, automotive sensors, security sensors and ToF (time of flight) three dimensional sensors for entertainment and industrial applications.
We recognized the market potential of using CMOS process technology for a digital camera-on-a-chip, which would integrate a CMOS image sensor, filters and digital circuitry. Upon entering the CMOS image sensor foundry business, we utilized research and development work that had been ongoing since 1993. Our services include a broad range of turnkey solutions and services, including silicon proven pixels services, optical characterization of a CMOS process, innovative patented stitching manufacturing technique and prototype packaging. The CMOS image sensors that we manufacture deliver outstanding image quality for a broad spectrum of digital imaging applications. Following the acquisition of TPSCo we are now offering even more advanced CMOS Image Sensor technology with technologies ofinclude 110nm on 200mm wafers and 65nm on 300mm wafers with pixel sizes down to 1.12 micron utilizing dual light pipe technology.
Specifically, our CIS portfolio includes pixels ranging from 1.12 micron up to 150 micron, all developed by us. We provide both rolling shutter and global shutter pixels. The latter are used mainly in the industrial sensor and in the three dimensionalthree-dimensional sensors markets. Our advanced technology used in CMOS image sensors enables improved optical and electrical performance such as low dark current, low noise, high well capacity, high quantum efficiency and high uniformity of pixels utilizing deep sub-micron process technologies, thus enabling the manufacturing of very sophisticated and high performance camera module solutions. Our state-of-the-art pixels are used in a variety of new markets such as the high-end machine vision cameras and the rapidly growing security camera markets. In addition, our advanced global shutter technology and global shutter pixels, as small as 2.5um, enable excellent performance, especially, very high shutter efficiency.
For the X-ray market, we offer our innovative patented “stitching” technology on 0.18-micron process as well as on 65nm technology on 300mm wafers and a variety of 15 to 150-micron pixels that are optimized for X-ray applications. These pixels are used by our customers in dental and other medical X-ray products as well as in the industrial NDT (Not Destructive Testing) X-Ray market. Our stitching technology enables semiconductor exposure tools to manufacture single ultra high-resolutionultra-high-resolution CMOS image sensors containing millions of pixels at sizes far larger than their existing field. This technology is also used by us in the manufacturing of large sensors (up to one die per wafer) on 8” and 12” wafers and high endhigh-end large format sensors with special pixels that we have developed specifically for this market.
We specially developed our near Infra-Red imaging technology specially developed for gesture recognition systems designed by leading world computer manufacturers and a series of spectrally sensitive image sensors, including proximity sensors and sensors sensitive in the UV range.
Our BSI (Backside Illumination) technology was developed for both 200mm and 300mm wafers. For the 200mm wafers, we announced our cooperationcooperate with YCM (YuanChen Microelectronics) in China that providesmanufactures the BSI part of the process on our wafers, using our own developed BSI technology. For the 300mm wafers, we also provide stacked wafer technology, where two wafers one – a(a CMOS wafer and one - a CIS wafer,wafer) are connected electrically to provide high functionality on a CMOS Image Sensor.
In addition, we developed SPAD (single photon avalanche detectors) for LIDAR (light detection and range) applications in smart automotive advanced driver assistance systems (ADAS) and autonomous driving (AD) vehicles. Our technology allows us to combine CMOS, image sensors and SPADs on the same chip.
RF CMOS
In recent years, more and more designers opt to develop high frequency products based on RF CMOS technologies. The superior cost structure of CMOS technologies enables high volume, low cost production of high frequency products. We used our mixed signal expertise to leverage and develop processes and provide services for customers that utilize CMOS technologies and require high frequency performance.
Our RF CMOS process technologies have more features than advanced analog CMOS process technologies of our competitors and are well suited for wireless electronics, such as highly integrated transceivers, power amplifiers, and television tuners. These process technologies generally incorporate integrated inductors, high performance variable capacitors or varactors, and RF laterally diffused metal oxide semiconductors transistors into an advanced analog CMOS process technology. In addition to the smart process features, our RF offering includes design kits with RF models, device simulation and physical layouts tailored specifically for RF performance. We currently have RF CMOS process technologies in 0.25 micron, 0.18 micron, 0.13 micron and 65 nanometer.
Further, we have versions of our RF CMOSRFCMOS process built on silicon-on-insulator (SOI) substrates (RF SOI)(RFSOI). These RF SOIRFSOI process technologies include devices optimized to deliver higher performance and improved isolation relative to devices in our RF CMOSRFCMOS process. We currently have RF SOIRFSOI process technologies in 0.18 micron,0.13 micron and 65 nanometer lithography nodes and fabricate various devices including antenna switches with record FOM (figure of merit) and front end modules. Corresponding chips can be found in various products, including state-of-the-art smart-phones,smartphones, manufactured by leading manufacturers.
BiCMOS for RF and High Performance Analog
Our BiCMOS process technologies have more features than RF CMOS process technologies and are well suited for RF semiconductors, such as wireless transceivers and television tuners. These process technologies generally incorporate high-speed bipolar transistors into an RF CMOS process. The equipment requirements for BiCMOS manufacturing are specialized and requireassume enhanced tool capabilities to achieve high yield manufacturing.
Our SiGe BiCMOS process technologies have more features than BiCMOS processes and are well suited for more advanced RF and high performance analog semiconductors such as high-speed, low noise, highly integrated multi-band wireless transceivers, optical networking components, television tuners, automotive radar components, hard-disk drive pre-amplifiers, power amplifiers and low-noise amplifiers. These integrated circuits generally incorporate a silicon germanium bipolar transistor,transistors, which isare formed by the deposition of a thin layer of silicon germanium within a bipolar transistor, to achieve higher speed, lower noise, and more efficient power performance than a BiCMOS process technology. It is also possible to achieve higher speed using SiGe BiCMOS process technologies equivalent to those demonstrated in standard CMOS processes that are two process generations smaller in line-width.linewidth. For example, a 0.18 micron SiGe BiCMOS process is able to achieve speeds comparable to a 90 nanometer RF CMOS process. As a result, SiGe BiCMOS makes it possible to create analog products using a larger geometry process technology at a lower cost while achieving similar or superior performance to that achieved using a smaller geometry standard CMOS process technology. We developed enhanced tool capabilities in conjunction with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. We believe this equipment and related process expertise makes us one of the few integrated circuit manufacturers with demonstrated ability to deliver SiGe BiCMOS products. We currently have 0.35 micron, 0.18 micron and 0.13 SiGe BiCMOS micron technologies available.
Power and Power Management ICs
Our power technologies are generally divided into a low-voltage BCD offering and ahigh-voltage offering including 140V Resurf, 200V SOI and 700V ultra-high voltage offering.technologies. Our low-voltage BCD process technologies have more features than advanced analog CMOS processes and are well suited for power and driver semiconductors, such as voltage regulators, battery chargers, power management products and audio amplifiers. These process technologies generally incorporate higher voltage CMOS devices such as 5V, 8V, 12V, 40V and 60V LDMOS devices, and, in the case of BCD, bipolar devices integrated into an advanced analog CMOS process. We currently have high voltage and low Rdson BCD offerings in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron and 0.18 micron.65 nanometer. We offer a cost effective and digital intensive power management platform, based on our 0.18um technology node with advanced isolation options (in particular SOI based), that allow our customers to design high performance products as well as products with the high levelslevel of integration.
Our high voltage technologies, which include 140V Resurf, 200V SOI and 700V ultra-high voltage platform, supports the fast growing LED lighting marketsupport applications such as well as serving the more establishedgate drivers for discrete high-power transistors and automotive, industrial, AC adaptor and motor driverlighting markets.
In addition, we have developed a unique, zero mask adder NVM solution (Y-Flash) specifically for power and power management devices onapplications in our 0.18 micron platforms. We have developed a series of Y-flash based modules with record (for the single Poly embedded MTP technologies) memory densities of up to 16kbit, which have been integrated in various power management products of our customers. We have also introduced high density single PolysiliconPoly silicon memory arrays of other intellectual property vendors into our CMOS process flows.
We continue to invest in technology that improves performance and integration level and reduces the cost of analog and mixed-signal products. This includes improving the density of passive elements such as capacitors and inductors, including development of the new passive elements, improving the analog performance and voltage handling capability of active devices, and integrating additional advanced features in our specialty CMOS processes. Examples of such technologies currently under development include GaN technologies for sensor applications and technologies aimed at integrating micro-electro-mechanical-system (MEMS) devices with CMOS, scaling the features we offer today to the 0.13 micron65 nanometer process, including the integration of advanced SiGe transistors with 0.13 micron65 nanometer CMOS and copper metallization.
CUSTOMERS, MARKETING AND SALES
Our marketing and sales strategy seeks to further solidify our position as the global specialty foundry leader, by increasing our market share at existing customers and aggressively expanding our global customer base. We have marketing, sales, design support engineers, field application engineers and customer support personnel in China, Israel, Japan, Korea, Taiwan and the United States. In selected markets, including China, Europe, South America, Japan and India our global marketing and sales staff is supported by local independent sales representatives, who have been selected based on their industry experience, customer relationships and understanding of the semiconductor marketplace.
Our sales cycle is generally 8 to 26 months or longer for new customers and can be as short as 8 to 12 months for existing customers. The typical stages in the sales cycle process from initial contact until production are:
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technical evaluation;
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product design to our specifications, including integration of third party intellectual property;
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photomask - design and third-party photomask manufacturing;
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silicon prototyping;
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assembly and test;
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validation and qualification; and
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production.
The primary customers of our foundry and design services are fabless semiconductor companies and Integrated Device Manufacturers (IDMs).IDMs. A portion of our product sales are made pursuant to long-term contracts with our customers, under which we agree to reserve manufacturing capacity at our production facilities for such customers. Our customers include many analog and mixed-signal industry leaders, serving a variety of end market segments. During the year ended December 31, 2019, we had six significant customers that each contributed between 5% to 27% of our revenues. During the year ended December 31, 2018, we had four significant customers that each contributed between 7% to 33% of our revenues. During the year ended 2017, we had four significant customers that each contributed between 7% to 30% of our revenues. During the year ended December 31, 2016, we had four significant customers that each contributed between 5% to 35% of our revenues. In 2015, we had three significant customers that each contributed between 6% to 40% of our revenues.
The following table sets forth the geographical distribution, by percentage, of our net revenues for the periods indicated:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
United States | 52 | % | 52 | % | 52 | % | ||||||
Japan | 29 | % | 34 | % | 32 | % | ||||||
Asia, excluding Japan* | 15 | % | 10 | % | 12 | % | ||||||
Europe | 4 | % | 4 | % | 4 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| United States | 52 | % | 49 | % | 44 | % | ||||||
| Japan | 32 | % | 36 | % | 41 | % | ||||||
| Asia, excluding Japan | 12 | % | 12 | % | 11 | % | ||||||
| Europe | 4 | % | 3 | % | 4 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
* Represents revenues from individual countries of less than 10% each.
We price our products on a per wafer basis, taking into account the unique value of our technology and its ability to enable customers to differentiate their products, complexity of the technology, prevailing market conditions, volume forecasts, the strength and history of our relationships with the customer and our current capacity utilization. Most of our customers usually place purchase orders between two to six months before shipment.
To promote our products, technology offering, and services we publish press releases, articles, technology journals, and white papers. In addition, we present and participate in panel sessions at industry conferences, hold a variety of regional and international technology seminars, and exhibit at various industry trade shows. We discuss advances in our process technology portfolio and progress on specific relevant programs with our prospective and existing customers, as well as industry analysts and research analysts, on a regular basis. We publicly release any such information that we deem material or important to disclose and as required by law.
Our customers use our processes to design and market a broad range of analog and mixed-signal semiconductors for diverse end markets, including wired and wireless high-speed communications, consumer electronics, automotive and industrial applications. We manufacture products for a wide range of electronic systems, including but not limited to, high-performance applications, such as antenna switches, transceivers and power management circuits for cellular phones; transceivers and power amplifiers for wireless local area networking products; power management, audio amplifiers and driver integrated circuits for consumer electronics; tuners for digital televisions and set-top boxes; modem chipsets for broadband access devices and gaming devices; serializer/deserializers, or SerDes, for fiber optic transceivers; high end video cameras, dental and medical x-ray vision, industrial cameras, focal plane arrays for imaging applications; infra-red detectors for gesture recognition, controllers for power amplifier and switching chips in cellular phones and wireline interfaces for switches and routers.
COMPETITION
The global semiconductor foundry industry is highly competitive. We compete most directly in the specialty segment with foundries such as Powerchip,Global Foundries (mainly in the RF business), Vanguard Semiconductor, DongBu, X-Fab and HH Semi. We also compete with the pure-play advanced technology node-driven foundry service providers such as Taiwan Semiconductor Manufacturing Corporation (“TSMC”), United Microelectronics Corporation (“UMC”), Global Foundries Inc. and Semiconductor Manufacturing International Corp. (“SMIC”). These fourthree pure-play semiconductor foundries primarily compete against one another and focus on 12 inch12-inch deep-submicron CMOS processing, though they each also have some capacity for specialty process technologies. The rest of the foundry industry generally targets either industry standard 8 inch8-inch CMOS processing or specialty process technologies. This includes existing Chinese, Korean and Malaysian foundries. We also compete with integrated device manufacturersIDMs that have internal semiconductor manufacturing capacity or foundry operations, such as ST, Intel, Samsung, Sony and others that produce ICs for their own use and may allocate a portion of their manufacturing capacity to external foundry customers. Most of the foundries with which we compete are located in Asia-Pacific andthat benefit from their close proximity to companies involved in the design of ICs and to the Asian customer base.
The principal elements of competition in the wafer foundry market are:
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technology offering and future roadmap;
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product performance;
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system level technical expertise;
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research and development capabilities;
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access to intellectual property;
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customer technical support;
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design services;
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product development kits (PDKs);
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manufacturing operational performance;
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quality systems;
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product quality;
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manufacturing yields;
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customer support and service;
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pricing;
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management expertise;
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strategic customer relationships;
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capacity availability; and
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stability and reliability of supply.
Some of our competitors, notably the pure-play advanced technology node-driven foundry service providers, have greater manufacturing capacity, superiormay have greater scope and/or a greater number of research and development capability,resources, better cost structure and greater financial, marketing and other resources. As a result, these companies may be able to compete more aggressively over a longer period of time than us.
We seek to compete primarily on the basis of advanced specialty analog/mixed-signal technology, R&D,research and development, breadth of process offering, production quality, technical support, and our design, engineering and manufacturing services. We have a highly differentiated specialty offering and proven track record in analog/mixed-signal markets, which enables us to effectively compete with larger foundry service providers.
Some semiconductor companies have advanced their CMOS designs to 2210-14 nanometer or smaller geometries. These smaller geometries may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Our specialty process technologies will therefore compete with these advanced CMOS processes for customers and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller geometries.
WAFER FABRICATION SERVICES
Wafer fabrication is an intricate process that consists of constructing layers of conducting and insulating materials on raw wafers in intricate patterns that give the IC its function. IC manufacturing requires hundreds of interrelated steps performed on different types of equipment, and each step must be completed with extreme accuracy for finished ICs to work properly. The process can be summarized as follows:
Circuit Design.
Mask Making
IC Manufacturing
Assembly and Test. After IC manufacture, the wafers are transferred to assembly and test facilities. In the assembly process, each wafer is heldcut into dies, or individual semiconductors, and tested. Defective dies are discarded, while good dies are packaged and assembled. Assembly protects the IC, facilitates its integration into electronic systems and enables heat dissipation. Following assembly, the functionality, voltage, current and timing of each IC is tested. After testing, the completed IC is shipped either to our customer or to their customer’s printed circuit board manufacturing facility. Our customers often use third party service providers for the performance of wafer assembly and testing, and to a smaller extent part of such process is performed independently by our vendors at our sites until we actually use it, unless we hold the inventory beyond specified time limits.
RESEARCH AND DEVELOPMENT
Our future success depends, to a large degree, on our ability to continue to successfully develop and introduce to production advanced process technologies that meet our customers’ needs. Our process development strategy relies on CMOS process platforms that we license and transfer from third parties or develop ourselves.
From time to time, at a customer’s request, we develop a specialty process module, which in accordance with the applicable agreement may be used for such customer on an exclusive basis or added to our process offering. Such developments are very common in all of our specialspecialty process technologies noted above.
Our research and development activities have related primarily to our process, device and design development efforts in all specialty areas that were mentioned above, and have been sponsored and funded by us and in certain cases with some participation of the Israeli Innovation Authority or IIA (formerly the OfficeGovernment of the Chief Scientist or OCS). Accordingly, Tower is subject to restrictions set forth in Israeli law, as amended, which may limit the ability of a company to transfer technologies outsideState of Israel if such technologies were developed withthrough the funding ofIIA, pursuant to the OCS or IIA, as set forth below.
In addition to the above, we may be required to obtain export licenses before exporting certain technology or products to any third party and may be required to comply with Israeli, U.S. and other foreign export regulations, as may be applicable.
Our research and development activities seek to upgrade and improve our manufacturing technologies and processes. We maintain a central research and development team primarily responsible for developing cost-effective technologies that can serve the manufacturing needs of our customers. A substantial portion of our research and development activities are undertaken in cooperation with our customers and equipment vendors. Due to the rapid changes in technology that characterize the semiconductor industry, effective research and development is essential to our success. We plan to continue to invest significantly in research and development activities in order to develop advanced process technologies for new applications.
Research and development expenses for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 were $67.7$75.6 million, $63.1$73.1 million and $61.7$67.7 million, respectively, net of government participation of $0.9$0.7 million, $0.5$1.4 million and $0.6$0.9 million, respectively. As of December 31, 2017,2019, we employed 407428 professionals in our research and development departments, 4332 of whom have PhDs. In addition to our research and development departments located at our facilities in Migdal Haemek, Israel, Newport Beach, California, San Antonio, Texas and Hokuriku Japan, we maintain a design center in Netanya, Israel.
PROPRIETARY RIGHTS
Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our production processes. To that end, we have obtained certain patents, acquired patent licenses and intend to continue to seek patents on our intellectual property.
As of December 31, 2017,2019, we held 267259 patents in force. We have entered into various patent and other technology license agreements with technology companies, including Synopsys, ARM, Cadence, Mentor Graphics and others, under which we have obtained rights to additional technologies and intellectual property.
We constantly seek to strengthen our technological expertise through relationships with technology companies. We seek to expand our core strengths in CMOS image sensors, embedded flash, power management, Artificial Intelligence, RF, SiGe, MEMS and mixed-signal technologies by continuous development in these areas. A main component of our process development strategy is to acquire licenses for standard CMOS technologies, cell libraries and specialized IPs (e.g. NVM) from leading providers, such as ARM and Synopsys, and further develop specialized processes through our internal design teams. The licensing of these technologies has significantly reduced our internal development costs.
Our ability to compete depends on our ability to operate without infringing upon the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation over patent and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting that their patents cover certain of our technologies or alleging infringement of intellectual property rights. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and devote significant management resources in defending ourselves from such claims.
DESIGN SERVICES
To better serve our customers’ design needs using advanced CMOS and mixed-signal processes, we have entered into a series of agreements with leading providers of physical design libraries, mixed-signal and non-volatile memory design components. These components are basic design building blocks, such as standard cells, interface input-output (I/O) cells, software compilers for the generation of on-chip embedded memories arrays, mixed-signal and non-volatile memory design blocks. To achieve optimal performance, all of these components must be customized to work with our manufacturing process. These components are used in most of our customers’ chip designs.
We interact closely with customers throughout the design development and prototyping process to assist them in the development of high performance and low power consumption semiconductor designs and to lower their final die, or individual semiconductor, costs through die size reductions and integration. We provide engineering support and services as well as manufacturing support in an effort to accelerate our customers’ design and qualification process so that our customers can achieve faster time to market. We have entered into alliances with Cadence Design Systems, Inc., Synopsys, Inc., Mentor Graphics Corp., and other suppliers of electronic design automation tools, and also licensed standard cells, I\O and memory technologies from ARM, Synopsys, Inc., and other leading providers of physical intellectual property components for the design and manufacture of ICs. Through these relationships, we provide our customers with the ability to simulate the behavior of their design in our processes using standard electronic design automation, or EDA tools.
The applications for which our specialty process technologies are targeted present challenges that require an in-depth set of simulation models. We provide these models as an integral part of our design support. At the initial design stage, our customers’ internal design teams use the proprietary design kits that we have developed to design semiconductors that can be successfully and cost-effectively manufactured using our specialty process technologies. These design kits, which collectively comprise our design library and design platform, allow our customers to quickly simulate the performance of a semiconductor design with our processes, enabling them to refine their product design to ensure alignment to our manufacturing process before actually manufacturing the semiconductor. Our engineers, who have significant experience with analog and mixed-signal semiconductor design and production, work closely with our customers’ design teams to provide design advice and help them optimize their designs for our processes and their performance requirements. After the initial design phase, we provide our customers with a multi-project wafer service to facilitate the early and rapid use of our specialty process technologies, which allows them to gain early access to actual samples of their designs. Under this multi-project wafer service, we schedule a bimonthlyperiodic multi-project wafer run in which we manufacture several customers’ designs in a single mask set, providing our customers with an opportunity to reduce the cost and time required to test their designs. Our design center helps customers accelerate the design-to-silicon process and enhances first-time silicon success by providing them with the required design resources and capabilities. Our design support can assist in all or part of the design flow. Our in-depth knowledge of the fab and processes provide a substantive advantage when implementing designs that reach the boundaries of technology. In addition, our IP and design services can assist and relieve some of our customers' issues, providing the specific skills and expertise critical for successful implementation of our customers’ design on our manufacturing process.
We believe that our circuit design expertise and our ability to accelerate our customers’ design cycle while reducing their design costs represent one of our competitive strengths.
JAZZ SEMICONDUCTOR TRUSTED FOUNDRY
For purposes of our U.S. aerospace and defense business, its facility security clearance and trusted foundry status, Tower and JazzTower NPB have worked with the Defense Security Service of the United States Department of Defense (“DSS”) to mitigate concern of foreign ownership, control or influence over the operations of Jazzin Fab 3, specifically relating to protection of classified information and prevention of potential unauthorized access thereto by creating Jazz Semiconductor Trusted Foundry (“JSTF”) as a subsidiary of JazzNewport Fab LLC, which is directly held by NPB Co., and limiting possession of all classified information solely to JSTF. TowerIn addition, Fab 3 has obtained facility security clearance and Jazz have further agreed to operate JSTF under a special security agreement signed with DSS.
C. ORGANIZATIONAL STRUCTURE
The legal name of our company is Tower Semiconductor Ltd. Tower was incorporated under the laws of the State of Israel in 1993.
Tower directly operates our Fab 1 and Fab 2 facilities in Israel.
Tower’s wholly-owned subsidiary, Tower US Holdings Inc., owns all of the shares of Jazz USTower Semiconductor NPB Holdings, Inc., which owns all of the shares of JazzTower Semiconductor Newport Beach, Inc. (all three companies are incorporated under the laws of the State of Delaware), which operates our Fab 3 facility.
Tower holds a 51% equity stake in TPSCo (and PSCS holds the remaining equity of TPSCo). TPSCo is incorporated under the laws of Japan and operates three fabs Arai E, Uozo E and Tonami CD located in Japan. As of February 2016, TowerJazz Texas,
Tower Semiconductor San Antonio, Inc. (the shares of, which are fully ownedis wholly-owned by Tower US Holdings),Holdings, operates our Fab 9 facility in San Antonio, Texas, USA.
D. PROPERTY, PLANTS AND EQUIPMENT
Manufacturing Facilities
We manufacture semiconductor wafers at seven manufacturing facilities: Fab 1 and Fab 2 facilities in Israel, Fab 3 Jazz’s facility in Newport Beach, California in the U.S., TPSCo’s three fabs (Arai E, Uozo E and Tonami CD) in Japan, and Fab 9 TJT’s facility in San Antonio, Texas, U.S.U.S. The capacity in each of our facilities at any particular time varies and depends on the combination of the processes being used and the product mix being manufactured at such time. Hence, it may be significantly lower at certain times as a result of certain combinations that may require more processing steps than others. We have the ability to rapidly change the mix of production processes in use in order to respond to changing customer needs and to maximize utilization of the fab. In general, our ability to increase our manufacturing capacity has been achieved through the addition of equipment, improvement in equipment utilization, the reconfiguration and expansion of existing clean rooms area.
Capital expenditures in 20172019 and 20162018 were approximately $165$172 million and $210$170 million, respectively, net of proceeds from sale of equipment and fixed assets of approximately $20$19 million and $8$40 million, respectively.
Fab 1
We acquired our Fab 1 facility from National Semiconductor in 1993, which had operated the facility since 1986. The facility is located in Migdal Haemek, Israel. We occupy the facility under a long-term lease from the Israel Lands Authority which expires in 2032.
Due to the sensitivity and complexity of the semiconductor manufacturing process, a semiconductor manufacturing facility requires a special “clean room” in which most of the manufacturing functions are performed. Our Fab 1 facility includes an approximately 51,900 square foot clean room.
Since we commenced manufacturing at Fab 1, we increased its manufacturing capacity and expanded the technologies qualified in the fab, including specialized processes. Fab 1 supports geometries ranging from 1.0 micron to 0.35-micron.
Fab 2
In 2003, we commenced production in our Fab 2, also located in Migdal Haemek, Israel. Fab 2 supports geometries ranging from 0.35 to 0.11-micron, using advanced CMOS technology, including CMOS image sensors, embedded flash, advanced analog, RF SOI, power platforms and mixed-signal technologies. We have invested significantly in the purchase of fixed assets, primarily in connection with the construction of Fab 2, technology advancement and capacity expansion.
The land on which Fab 2 is located is subject to a long-term lease from the Israel Lands Authority that expires in 2049. The overall clean room area in Fab 2 is approximately 100,000 square feet.
Fab 3
NPB Co.’s manufacturing facilitiesfacility, Fab 3, and headquarters, which we refer to as Fab 3,offices are located in Newport Beach, California. Fab 3 supports geometries ranging from 0.80 to 0.13-micron. The0.13-micron.The manufacturing facility comprises 320,000 square feet, including 120,000 square feet of overall clean room area.
NPB Co’s leases its fabrication facility and offices under a lease contracts that Jazzis in effect until 2022, and can extend until 2027. In 2015, Jazz exercised its option to extend the lease term from 2017 to 2022, while maintaininguntil 2027 through the exercise of an option to extendat our sole discretion. Under the lease term at its sole discretion from 2022 to 2027. Under Jazz amended leases, Jazz’sas currently in effect, (i) NPB Co’s rental payments consist of fixed base rent and fixed management fees and Jazz’sNPB Co’s pro rata share of certain expenses incurred by the landlord in the ownership of these buildings, including property taxes, building insurance and common area maintenance. Jazzmaintenance; and the landlord further amended(ii) the lease setting forthincludes certain obligations of Jazz and the landlord,parties, including certain noise abatement actions at the fabrication facility. The landlord has claimed that our noise abatement effortsactions that have been implemented are not adequate under the terms of the amended lease. We do not agree with, these claims and are disputing, them.
Uozu E, Tonami CD and Arai E fabs
In March 2014, we acquired a 51% equity stake in TPSCo, a company formed by Panasonic Corporation, to manufacture products for Panasonic and other third partythird-party customers, using Panasonic's three semiconductor manufacturing facilitiesfactories located in Hokuriku, Japan.Japan, which factories were established by Panasonic. Pursuant to the transaction, Panasonic transferred its semiconductor wafer manufacturing process and capacity tools (8 inch and 12 inch) at its three fabs located in Hokuriku (Uozu E, Tonami CD and Arai E) to TPSCo. The fabs support geometrics ranging down to 45 nanometer.
Fab 9
In February 2016, we acquired Fab 9 in San Antonio Texas, USA from Maxim. The assets and related business that we acquired from Maxim are held and conducted through a wholly ownedwholly-owned US subsidiary, TJT.Tower SA. Fab 9 supports process geometries ranging from 0.18 to 0.8 micron for the manufacture of products using CMOS and analog based technologies. Under the terms of thisthe acquisition agreement, until the termination or expiration of the supply agreement signedentered into between Maxim and TJT,Tower SA, Maxim has a right of first offer to re-purchase Fab 9 in the event Tower or any of its subsidiaries sell, transfer, dispose of, cease the operations of, close, transfer or relocate Fab 9, or if Tower or its operations at Fab 9 become subject to a petition of bankruptcy or liquidation.
Environmental, Safety and Quality Matters and Certifications
We have placed significant emphasis on achieving and maintaining a high standard of manufacturing quality. All our facilities are ISO 9001 certified, an international quality standard that provides guidance to achieve an effective quality management system. In addition, all our facilities are TS16949IATF16949 certified, and are in process of acquiring the new IATF16949 certificates, a more stringent automotive quality standard.
Our operations are subject to a variety of laws and governmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our production processes. Failure to comply with these laws and regulations could subject us to material costs and liabilities, including costs to clean up contamination caused by our operations. All of our facilities are ISO 14001 certified, an international standard that provides management guidance on how to achieve an effective environmental management system. Risks have been evaluated and mitigation plans are in place to prevent and control accidental spills and discharges. Procedures have also been established at all our locations to ensure all accidental spills and discharges are properly addressed. The environmental management system assists in evaluating compliance status with all applicable environmental laws and regulations as well as establishing loss prevention and control measures. In addition, our facilities are subject to strict regulations and periodic monitoring by government agencies. With these systems, we believe we are currently in compliance in all material respects with applicable environmental laws and regulations.
For safety, all of our facilities are OHSAS 18001 certified, an international occupational health and safety standard that provides guidance on how to achieve an effective health and safety management system. The health and safety standard management system assists in evaluating compliance status with all applicable health and safety laws and regulations as well as establishing preventative and control measures. We believe we are currently in compliance with all applicable health and safety laws and regulations.
Our goal in implementing OHSAS 18001, ISO 14001, ISO 9001, TS16949 and9001and IATF16949 systems is to continually improve our environmental, health, safety and quality management systems.
ITEM 4A.UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
The information contained in this section should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 20172019 and 20162018 and related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).
Critical Accounting Policies
Marketable securities
We account for investments in debt securities in accordance with ASC 320, "Investments“Investments - Debt and Equity Securities". The Company’s managementSecurities.” Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Marketable securities are classified as "available-for-sale" measuredare carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss) (“OCI”). Gains and losses are recognized when realized, on a specific identification basis, in the Company'sour consolidated statements of income.
Our securities are reviewed for impairment in accordance with ASC 320-10-35. If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company'sour intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that we intend to sell with an unrealized loss, or in cases that it is more likely than not that we will be required to sell before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings.
For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized in OCI.
If quoted prices for identical instruments are available in an active market, marketable securities are classified within Level 1 of the fair value hierarchy. If quoted prices for identical instruments in active markets are not available, fair values are estimated using quoted prices of similar instruments and are classified within Level 2 of the fair value hierarchy.
Revenue Recognition
ASC Topic 606 “Revenue from Contracts with Customers” (“Topic 606”), supersedes the previous revenue recognition guidance and industry-specific guidance under ASC Topic 605 “Revenue Recognition”. Topic 606 requires an entity to recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018.
Under the modified retrospective method, prior period financial positions and results are not adjusted. There was no transition adjustment to our retained earnings upon adoption.
Our revenues are generated principally from sales of semiconductor wafers and in additionwafers. To a lesser extent, we also derive revenues to a much lesser extent, from design support and other technical and support services which are incidental to the sale of semiconductor wafers. The vast majority of our revenues issales are achieved through the effortseffort of our direct sales force.
Wafer sales are recognized at a point in time, which is upon shipment or upon delivery of the our products whento unaffiliated customers, depending on shipping terms. Accordingly, control of the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the priceproducts transfers to the customer in accordance with the transaction's shipping terms. Sales revenue is fixedrecognized for the amount of consideration that we expect to be entitled to in exchange for our products. Taxes imposed by governmental authorities, such as sales taxes or determinable and (iv) collectionvalue-added taxes, are excluded from net sales. Our contracts typically contain a single performance obligation that is fulfilled on the date of the resulting receivable is reasonably assured. Generally, delivery occurs after products meet all of the customer’s acceptance criteria based on pre-shipment electronic, functional and quality tests.
We provide for sales returns allowance relating to specified yield or quality commitments as a reduction of revenues, based on past experience and specific identification of events necessitating an allowance, which has been in immaterial amounts.
We provide our customers with other services that are less significant in scope and amount and for which recognition is over time when customer receives the services.
Our revenue recognition policy is significant because our revenues are a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenues. Any changes in assumptions for determining the allowance for returns and other factors affecting revenue recognition may affect mainly the timing of our revenue recognition, which may affect our financial position and results of operations.
Depreciation and Amortization of Fixed Assets and Intangible Assets
We are heavily capital oriented, and the amount of depreciation is a significant amount of our yearly expenses. Fixed and intangible assets depreciation and amortization expenses in 20172019 amounted to $194$198 million. We estimate that the expected economic life of our assets is as follows: (i) buildings (including facility infrastructure) –10-10 to 25 years; (ii) machinery and equipment, software and hardware – 3 to 15 years; and (iii) technology and other intangible assets –- 4 to 19 years. The amounts attributed to intangible assets as part of the purchase price allocations for the acquisitions of our subsidiaries are amortized over the expected estimated economic lives of the intangible assets commonly used in the industry. Changes in our estimates regarding the expected economic life of our assets will affect our depreciation and amortization expenses.
Income Taxes.
We account for income taxes using an asset and liability approach as prescribed in ASC 740-10 “Income Taxes” (“ASC 740-10”). This topic prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred taxes are computed based on the tax rates anticipated (under applicable law as of the balance sheet date) to be in effect when the deferred taxes are expected to be paid or realized.
We evaluate how to realizethe potential realization of our deferred tax assets for each jurisdiction in which we operate at each reporting date and establish valuation allowances when it is more likely than not that all or a part of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities and projected future taxable income. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more-likely-than-not realizable, we establish a valuation allowance. Seeallowance, see Note 19E and 19F in19 to our annual financial statements included herein.
ASC 740-10 prescribes a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits. Our policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
Our provision for income taxes is affected by income taxes in Israel, the United States and Japan. The income tax provision is an estimate determined based on management’s understanding of current enacted tax laws and tax rates of each tax jurisdiction and the use of acceptable allocation methodologies (transfer pricing) to allocate taxable income between tax jurisdictions based upon the structure of our operations and customer arrangements. Subsidiaries that are semiconductors fabrications located outside Israel are dependent on the allocation of production orders, managed centrally by the corporate global planning division, which directly affects the generation of income and local taxable income. For Recently Issued Accounting Pronouncements seethe year-ended December 31, 2019, the consolidated provision for income taxes was $2.9 million comprised of amounts related to Israel, Japan and U.S. operations, as detailed in Note 2W in19 to our annual financial statements included herein.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (“Topic 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all operating and capital leases with a term greater than twelve months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs (“ASC 842”).
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method. Results for the reporting period beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with historical accounting under ASC 840, “Leases”. Due to the adoption of ASC 842, as of December 31, 2019, operating lease ROU in the amount of approximately $18 million are recorded as assets and as operating lease liabilities. The aforementioned did not have any impact on the results of operations or cash flows.
For all leases that commenced before the effective date of ASC 842, the permitted “practical expedients” as stipulated in the ASC was elected and accordingly, we did not reassess: (1) whether any expired or existing contracts contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.
The determination regarding whether an arrangement is a lease is to be made at the inception of a lease contract. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Whenever leases do not provide an implicit interest rate, incremental borrowing rate is used based on the information available at commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Certain lease agreements require payments for lease and non-lease components, and we elected to account for these as a single lease component related to other operating facilities. For additional information, see Notes 11D and 11E to our annual financial statements included herein.
For recently issued accounting pronouncements see Note 2W to our annual financial statements included herein.
Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes thereto included in this annual report. The following table sets forth certain statement of operations data as a percentage of total revenues for the years indicated.
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Statement of Operations Data: | ||||||||||||
Revenues | 100 | % | 100 | % | 100 | % | ||||||
Cost of revenues | 81.4 | 77.5 | 74.5 | |||||||||
Gross Profit | 18.6 | 22.5 | 25.5 | |||||||||
Research and development expense | 6.1 | 5.6 | 4.9 | |||||||||
Marketing, general and administrative expense | 5.5 | 5.0 | 4.8 | |||||||||
Operating profit | 7.0 | 11.9 | 15.8 | |||||||||
Financing income (expense), net | 0.0 | (1.0 | ) | (1.1 | ) | |||||||
Other income(expense), net | 0.3 | (0.2 | ) | (0.2 | ) | |||||||
Profit before tax | 7.3 | 10.7 | 14.5 | |||||||||
Income tax benefit (expense) | (0.2 | ) | (0.5 | ) | 7.2 | |||||||
Net profit | 7.1 | 10.2 | 21.7 | |||||||||
Net loss (income) attributable to non-controlling interest | 0.2 | 0.2 | (0.3 | ) | ||||||||
Net profit attributable to the Company | 7.3 | % | 10.4 | % | 21.4 | % | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Statement of Operations Data: | ||||||||||||
| Revenues | 100 | % | 100 | % | 100 | % | ||||||
| Cost of revenues | 74.5 | 75.7 | 78.6 | |||||||||
| Gross Profit | 25.5 | 24.3 | 21.4 | |||||||||
| Research and development expense | 4.9 | 5.1 | 6.4 | |||||||||
| Marketing, general and administrative expense | 4.8 | 5.2 | 6.5 | |||||||||
| Nishiwaki Fab restructuring and impairment cost (income), ne | -- | (0.1 | ) | (0.1 | ) | |||||||
| Operating profit | 15.8 | 14.1 | 8.6 | |||||||||
| Interest expense, net | (0.6 | ) | (0.9 | ) | (1.4 | ) | ||||||
| Other financing expense, net | (0.5 | ) | (1.0 | ) | (11.4 | ) | ||||||
| Gain from acquisition, net | -- | 4.0 | -- | |||||||||
Other income (expense), net | (0.2 | ) | 0.7 | -- | ||||||||
| Profit (loss) before tax | 14.5 | 16.9 | (4.2 | ) | ||||||||
| Income tax benefit (expense) | 7.2 | (0.1 | ) | 1.3 | ||||||||
| Net profit (loss) | 21.7 | 16.8 | (2.9 | ) | ||||||||
| Net income attributable to non-controlling interest | (0.3 | ) | (0.4 | ) | (0.1 | ) | ||||||
| Net profit (loss) attributable to the Company | 21.4 | % | 16.4 | % | (3.0 | )% | ||||||
Year ended December 31, 20172019 compared to year ended December 31, 2016
Revenues. Revenues for the year ended December 31, 2017 increased to $1,387.32019 were $1,234.0 million, as compared to $1,249.6$1,304.0 million for the year ended December 31, 2016.2018. The increase$70.0 million decrease in revenuesrevenue is attributed mainly to a revenue reduction from PSCS, primarily resulting from the terms of $137.7 million is mainly duethree-year contracts entered into in March 2019 between Tower, TPSCo and PSCS, renewing the previously signed 2014-2019 contracts. Under the renewed contracts, among other things, PSCS continues to an increaseutilize TPSCo’s manufacturing facilities in Japan for its semiconductor business under a new pricing structure, which results in lower prices charged to PSCS and therefore, lower annual and quarterly revenue commencing the volumesecond quarter of wafers shipments driven by higher customer demand2019, as compared to our products and higher utilization rates in our fabrication plants.
Cost of Revenues.
Gross Profit
. Gross profit for the year ended December 31,Research and Development
. Research and development expense for the year ended December 31,Marketing, General and Administrative
. Marketing, general and administrative expense for the year ended December 31,Operating Profit
. Operating profit for the year ended December 31,Financing Income (Expense), Net
.Other Income (Expense), Net. Other income, net for the year ended December 31, 2019 amounted to $4.3 million as compared to other expense, net of $2.4 million for the year ended December 31, 2018. The $6.7 million increase in other income, net is mainly due to the measurement of our investments in privately held companies in accordance with ASC 321, as detailed in Notes 2I and the increased level of cash and cash equivalents and short term deposits.
Income Tax Expense, Net.
Net Profit. Net profit for the year ended December 31, 2019 amounted to $90.0 million as compared to a net profit of $135.6 million for the year ended December 31, 2018. The $45.6 million decrease in net profit was mainly due to the 2016decrease of $68.2 million in operating profit, offset in part by a $13.2 million increase in financing income, net, $6.7 million increase in other income, net and $3.0 million decrease in income tax expense, as described above.
Year ended December 31, 2018 compared to year ended December 31, 2017
Revenues. Revenues for the year ended December 31, 2018 were $1,304 million, as compared to $1,387 million for the year ended December 31, 2017. While our average selling price per layer didn’t change in 2018 as compared to 2017, our revenue was 6% lower, mainly due to lower number of layers shipped by the Company during 2018, as compared with 2017.
Cost of Revenues. Cost of revenues for the year ended December 31, 2018 amounted to $1,011 million as compared to $1,033 million for the year ended December 31, 2017. The decrease of $22 million in manufacturing cost relatedis mainly attributed to a lower amount of variable costs required to be spent to manufacture a lower volume of layers ordered, manufactured and shipped by the early repaymentCompany.
Gross Profit. Gross profit for the year ended December 31, 2018 amounted to $293 million as compared to $354 million for the year ended December 31, 2017. The decrease in gross profit resulted directly from the 6% or $83 million revenue reduction described above, partially offset by the $22 million cost reduction described above.
Research and Development. Research and development expense for the year ended December 31, 2018, amounted to $73.1 million as compared to $67.7 million recorded in the year ended December 31, 2017, an 8% increase which reflects our focus on enhancing our mid-term and long-term products’ funnel, technology capabilities and future design wins.
Marketing, General and Administrative. Marketing, general and administrative expense for the year ended December 31, 2018 amounted to $65.0 million, as compared to $66.8 million recorded in the year ended December 31, 2017, both representing 5% of revenues.
Operating Profit. Operating profit for the banks’ loans, which was executed during 2016.
Financing Expense, Net. Financing expense, net for the year ended December 31, 2016,2018 amounted to $13.2 million as compared to financing expense, net of $15.4 million for the year ended December 31, 2017. The main reason for the decrease in financing expense, net was recorded following the acquisitiona higher level of the San Antonio fabrication facilityinterest income we earned from our higher balance of interest-bearing bank deposits and our investment in the amount of $50.5 million, net.
Other Income (Expense),expense, Net.
Income Tax Benefit (Expense), Net
Net Profit
Impact of Inflation and Currency Fluctuations.
We currently operate in three different regions: Japan, the United States and Israel. The functional currency of our entities in the United States and Israel entities is the USD. The functional currency of our subsidiary in Japan is the JPY. Our expenses and costs are denominated mainly in NIS, USD, JPY and JPY, ourNIS, revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly in NIS, USD, JPY and JPY.NIS. Therefore, we are exposed to the risk of currency exchange rate fluctuations in Israel and Japan.
The USD costscost of our operations in Israel areis influenced by changes in the USD to NIS exchange rate, with respect to costs that are denominated in NIS. During the year ended December 31, 2017,2019, the USD depreciated against the NIS by 9.8%7.8%, as compared to 1.5% depreciation8.1% appreciation during the year ended December 31, 2016.2018.
The fluctuation of the USD against the NIS can affect our results of operations.operations as it relates to the entity in Israel. Appreciation of the NIS has the effect of increasing the cost, in USD terms, of some of our Israelithe purchases and labor NIScosts that are denominated costs,in NIS, which may lead to erosion in ourthe profit margins. We useThe Company uses foreign currency cylinder transactions to hedge a portion of this currency exposure to be contained within a pre-defined fixed range. In addition, we executed swap hedgingswap-hedging transactions to fully hedge ourthe exposure to the fluctuation of the USD against the NIS to the extent it relates to our non-convertible Series G debentures, which are denominated in NIS.
The majority of TPSCo'sTPSCo revenues are denominated in JPY and the majority of theTPSCo expenses of TPSCo are in JPY, which limits the exposure to fluctuations of the USD / JPY exchange rate on TPSCo’s results of operations as the impact on the revenues will be mostly offset by the impact on the expenses.operations. In order to mitigate a portion of the net exposure to the USD / JPY exchange rate, over the net profit margins, we haveCompany has engaged in cylinder hedging transactions to contain the currency’s fluctuation within a pre-defined fixed range.
During the year ended December 31, 2017,2019, the USD depreciated against the JPY by 3.8%1.2%, as compared to 2.8%2.4% depreciation during the year ended December 31, 2016.2018. The net effect of USD depreciation against the JPY on TPSCo’s assets and liabilities denominated in JPY is presented in the Cumulative Translation Adjustment (“CTA”) as part of Other Comprehensive Income (“OCI”) in the balance sheet.
B. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2017,2019, we had an aggregate amount of $446.0$355.6 million in cash and cash equivalents, and short term deposits, as compared to $389.4$385.1 million as of December 31, 2016.2018. The main cash activities during the year ended December 31, 2017 included: $355.62019 were: $291.3 million positivenet cash flow generated fromprovided by operating activities; $31.3 million proceeds received from exercise of warrants and options, net; $164.7$172.2 million invested in property and equipment, net of $20.0 million of proceeds received from sales of equipment and $2.9 million Israeli investment grant received; $114.7equipment; $132.9 million invested in short-term deposits, marketable securities and other assets, net; and $50.3$19.4 million debt repaid.
Long-term debt and short-term debt presented on the balance sheet as of December 31, 2019 include bank loans, debentures, operating leases and capital leases, and totaled $245.8 million and $65.9 million, respectively, as of such date. As of December 31, 2017,2019, the outstandingaggregate principal amount of bank loansdebentures was $138.2$135.4 million withand its carrying amount of $137.2 million presented in the balance sheet was $132.3 million, of which $49.6$37.7 million was presented as short term. As of such date, we had an aggregate principal amount of $193.3 million outstanding debentures with $181.7 million carrying amount of debentures presented in our balance sheet, of which $58.3 million were presented as a current maturity.
Recent Financing Transactions- Transactions:
Capital Leases
Certain of the Company’sour subsidiaries enteredenter into, from time to time, capital lease agreements for certain machinery and equipment required at theoperated in some of our fabrication facilities, usually for a period of up to 4four years, with an option to buy each or all of the machinery and equipment after 3a period of between three to four years from the start of the lease period at 40% of their original value.period. The lease agreements contain an annual interest rate of 1.85%up to 1.95% and the principal amount is repayable between 2017 and 2021. The assets under the lease agreements are pledged to JA Mitsuithe lender until the time at which the respective subsidiary will buy the assets. The obligations under the capital lease agreementagreements are guaranteed by Tower, except for TPSCo’s obligations under its capital lease agreements.
As of December 31, 20172019 and 2018, the outstanding capital lease liabilityliabilities for fixed assets was approximately $16$60.2 million and $47.2 million, respectively, of which $3$21.1 million and $10.8 million respectively, were included inunder current maturities.maturities of long-term debt.
Tower Debentures Series G
In June 2016, Tower raised approximately $115 million through the issuance of long-term unsecured non-convertible debentures (“Series G Debentures”)payable in seven semi-annual consecutive equal installments from March 2020 to March 2023 and carrying annual fixed interest rate of 2.79% payable in thirteen semi-annual consecutive equal installments from March 2017 to March 2023. The Series G Debentures aggregate principal amount is NIS 468 million as of December 31, 2017.2019. The principal and interest amounts are denominated in NIS and are not linked to any index or to any other currency. The CompanyWe entered into hedging transactions to mitigate the foreign exchange rate differences on the principal and interest using a cross currency swap, see Note 11B10B to our consolidated financial statements for the year ended December 31, 2017.2019. The Series G Debentures include customary financial and other terms and conditions, including a negative pledge and financial covenants. As of December 31, 2017,2019, Tower was in compliance with the financial covenants thereunder.
NPB Co. / Wells Fargo Asset-Based Revolving Credit Line
In December 2013, JazzNPB Co. entered into an agreement with Wells Fargo Capital Finance, part of Wells Fargo & Company (“Wells Fargo”), for a five-year secured asset-based revolving credit line in the total amount of up to $70 million, maturing in December 2018. In February 2018, NPB Co. and Wells Fargo signed an amendment to the credit line, under which the line was extended by five years, to mature in 2023, and the total amount remained at up to $70 million (the “Jazz“NPB Co. Credit Line Agreement”). Loans underThe applicable interest on the Jazz Credit Line Agreement bear interest at a rate equal to, at lender’s option, either the lender’s prime rate plus a margin ranging from 0.50% to 1.0% or the LIBOR rate plus a margin ranging from 1.75% to 2.25% per annum and starting February 2016, interestloans is at a rate equal to, at lender’s option, either the lender’s prime rate plus a margin ranging from 0.25%0.0% to 0.75%0.5% or the LIBOR rate plus a margin ranging from 1.5%1.25% to 2.0%1.75% per annum.
The outstanding borrowing availability varies from time to time based on the levels of Jazz’sNPB Co.’s eligible accounts receivable, eligible equipment, eligible inventories and other terms and conditions described in the JazzNPB Co. Credit Line Agreement. The obligations of JazzNPB Co. under the JazzNPB Co. Credit Line Agreement are secured by a security interest on all the assets of Jazz and its subsidiaries.NPB Co. The JazzNPB Co. Credit Line Agreement contains customary covenants and other terms, including customary events of default. If any event of default occurs,will occur, Wells Fargo may declare due immediately all borrowings under the facility due immediately and foreclose on the collateral. Furthermore, an event of default under the Jazz Credit Line Agreement would result in an increase in the interest rate on any amounts outstanding. Jazz’s debt and obligations, including itsNPB Co.’s obligations pursuant to the JazzNPB Co. Credit Line Agreement are not guaranteed by Tower or any of its affiliates.
As of December 31, 2017 and the date hereof, there were no loans drawn-down under this credit line.
As of December 31, 2019, borrowing availability under the NPB Co. Credit Line Agreement was approximately $70 million, of which approximately $1 million was utilized through letters of credit.
As of December 31, 2019 and 2018, no loan amounts were outstanding under the NPB Co. Credit Line Agreement.
Long Term Loan Agreement from Japanese Financial Institutions
In December 2015,June 2018, TPSCo andrefinanced its two then outstanding loan facilities with 11 Billion JPY (approximately $100 million) new asset-based loan agreements with a consortia of financial institutions comprised of JA Mitsui Leasing, Ltd., Sumitomo Mitsui Trust Bank, Limited (SMTB), Sumitomo Mitsui Banking Corporation (SMBC) and Showa Leasing Co., Ltd.China trust Commercial Bank Corporation (CTBC) (“JP Banks”Loan”) signed an asset based loan (“ABL”) agreement, according to which, TPSCo entered into. The JP Loan carries a five year term loan agreement with JP Banks under which TPSCo borrowed an amountfixed interest rate of 8.5 billion JPY. As of December 31, 2017 and 2016 the outstanding principal amount was approximately $65 million and $73 million, respectively.
The ABL agreementJP Loan also contains certain financial ratios and covenants, as well as customary definitions of eventevents of defaultsdefault and acceleration of the repayment schedule. TPSCo’s obligations pursuant to the ABLJP Loan are not guaranteed by Tower, Panasonic Corporation, PSCS or any of its affiliates.
As of December 31, 2017,2019, TPSCo was in compliance with all of the financial covenants thereunder.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our research and development activities are related primarily to our manufacturing process by way of improvements, upgrades and development for our use in manufacturing of our customerscustomers’ products and have been sponsored and funded by us with some participation by the Israeli government. Our research and development expenses for the years ended December 31, 2019, 2018 and 2017 2016were $75.6 million, $73.1 million and 2015 were $67.7 million, $63.1 million and $61.7 millionrespectively, net of government participation of $0.4 million, $1.4 million and $0.9 million $0.5 million and $0.6 million respectively.
For a description of our research &and development policies and our patents and licenses, see “Item 4. Information on the Company-4.B.Company– B. Business Overview”.
D. TREND INFORMATION
We operate as a specialty foundry in the semiconductor industry. The semiconductor industry is historically characterized as highly cyclical, both seasonally and over the long term. Over time the market fluctuates, cycling through periods of weak demand, production excess capacity, excess inventory and price pressure, and periods of strong demand, full capacity utilization, and product shortages, commanding higher selling prices.
There is a trend within the semiconductor industry toward ever-smaller features and ever-growing wafer sizes. State-of-the-art digital fabs are currently supporting process geometries of 14-2810-28 nanometers and even below with 300mm wafers. As demand for smaller geometries increases, there is downward pressure on the pricing of larger geometry products, and potential underutilization of fabs that are limited to manufacturing these larger geometry products, which may result in reduced profitability for the associated manufacturers. However, our strategy to focus on differentiated specialty analog technologies, along with our deep applications knowledge, design enablement tools and customer technical support, enable us to achieve higher product selling prices as compared to manufacturers of “commoditized” standard products. The CompanyWe currently offersoffer process geometries of (i) 0.35, 0.50, 0.55, 0.60, 0.80-micron and above on 150-mm wafers; (ii) 0.35, 0.18. 0.16, 0.13 and 0.11-micron on 200-mm wafers; and (iii) 65 nanometer and 45 nanometer on 300-mm wafers. We continue to invest in our portfolio of specialty process technologies and Intellectual Property (IP) to address the key product and system requirements of our customers, thus enabling them to compete in their respective markets.
Another key element of our strategy is to target multiple large, growing and diversified end markets. We target end markets characterized by high growth and high performance, for which we believe our specialty process technologies and design services offer a strong, compelling value proposition to our customers. We focus on markets driven by three industry mega-trends: “Green Everything”, “Wireless Everything”, and “Smart Everything”. Our target markets include the Internet of Things (IoT), machine-to-machine communication devices, ultra-low power mobile applications, wireless and high-speed wireline communications, consumer electronics, automotive, and industrial markets. For example, we believe that our specialty SOI and SiGe process technologies can provide performance and cost advantages over current GaAs solutions in the realization of switches and power amplifiers for wireless handsets. Our Power Management platforms enable the industry’s analog IC suppliers to differentiate their product offerings in the markets we serve. TowerJazzOur specialized CMOS image sensor platforms allow customers to fabricate ultra high sensitivity/low noise CIS products for operation in visible, infra-red, ultra-violet and X-ray spectral ranges, develop both ultra small-size cameras and imagers occupying the whole surface of a 200mm wafer. We also target the rapidly growing non-visual sensor markets by developing specialized sensors some of them based on nanowire elements to be fabricated on silicon (SOI) and GaN technological platforms.platforms, in particular advanced integrated UV and gas sensors. We are also engaged in development of IPs for enabling data processing using artificial intelligence based on our original device approaches by using our patented memristor solutions for emulating synapses in artificial neural networks. Our specialty products and target market strategy allow us to grow and diversify our business by attracting new customers, expanding our customer base, and grow our business at existing customers.
During recent years, we have accelerated our plans to expand manufacturing capacity. We have significantly increased capacity in Fab 1, Fab 2, Fab 3, and acquired in 2014 3 additional fabs: Tonami CD, Japan (for more details see “Our OperationsArai & Uozu fabs located in Japan”).Japan. In February 2016, we completed the acquisition from Maxim of an additional fab, Fab 9, located in San Antonio, Texas to help us meet our customers’ demand. We are focused on successfully integrating all of our fabs globally and increasing the utilization of our fabs, by attracting new customers and opportunities.
We seek to maintain capital efficiency by leveraging our capacity and manufacturing model to ensure cost-effective manufacturing. With a global manufacturing footprint, including seven fabs in three continents, we are focused on sharing and applying best practices across the organization, to provide our customers with high quality solutions, along with the applications knowledge and technical support that allow them to unlock theirbenefit from a competitive edge in the market.
Over the last several years, we have been constantly looking to expand our presence in the global markets, penetrate new geographical areas, increase our served markets and expand our technology offering through business and development ventures. This may also be accomplished through the establishment of new facilities with third party collaboration and/or funding, mergers and acquisitions with potential target fabrication facilities that may include a solid base of customer demand, for the increase of our manufacturing capacity and/or development of technologies that may expand our servable and/ or available market potential, and increase our revenue, customer base and margins. Such transactions, mergers and acquisitions are also beneficial as they provide our customers with manufacturing diversification and opportunity for additional growth through access to increased capacity.We continuously evaluate potential acquisition opportunities. Our current cash balance, deposits and/or investments in marketable securities may be used to enable us to realize and execute on such opportunities, and we may require additional financing through, among other things, debt (including convertible debt, bonds, notes or debentures) and/or equity issuances (including shares and warrants), in order to consummate such opportunities and/ or fund our other operational and capital expenditure cash needs, as well as our M&A strategy to expand our global footprint, capacity and capabilities.
E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements except for the purchase commitments, standby letters of credit and guarantees detailed in section Fthe table set forth under Item 5F, “Tabular Disclosure of Contractual Obligations”, below.
E. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations and commercial commitments as of December 31, 2017:2019:
Payment Due | ||||||||||||||||||||||||||||
Total | Less than 1 year | 2 Years | 3 Years | 4 Years | 5 Years | After 5 years | ||||||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||||||||
Short term liabilities (mainly trade accounts payable) | 170,112 | 170,112 | -- | -- | -- | -- | -- | |||||||||||||||||||||
Loans, related interests and Capital leases | 169,561 | 23,976 | 41,002 | 41,022 | 28,798 | 23,401 | 11,362 | |||||||||||||||||||||
Debentures and related interest | 127,331 | 39,183 | 36,865 | 34,703 | 16,580 | -- | -- | |||||||||||||||||||||
Operating leases (1) | 18,456 | 7,131 | 6,304 | 2,064 | 645 | 645 | 1,667 | |||||||||||||||||||||
Equipment purchase agreements(2) | 100,934 | 100,934 | -- | -- | -- | -- | -- | |||||||||||||||||||||
Other long-term liabilities | 3,963 | -- | -- | -- | -- | -- | 3,963 | |||||||||||||||||||||
Other purchase obligations (3) | 106,081 | 89,548 | 8,883 | 5,504 | 2,146 | -- | -- | |||||||||||||||||||||
Total contractual obligations | 696,438 | 430,884 | 93,054 | 83,293 | 48,169 | 24,046 | 16,992 | |||||||||||||||||||||
| Payment Due | ||||||||||||||||||||||||||||
Total | Less than 1 year | 2 Years | 3 Years | 4 Years | 5 Years | After 5 years | ||||||||||||||||||||||
| (in thousands of dollars) | ||||||||||||||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||||||||||
| Short term liabilities (mainly trade accounts payable) | 175,010 | 175,010 | -- | -- | -- | -- | -- | |||||||||||||||||||||
Loans, related interests and Capital leases | 161,013 | 55,977 | 49,850 | 37,515 | 17,671 | -- | -- | |||||||||||||||||||||
Debentures and related interest | 197,958 | 68,654 | 3,351 | 37,184 | 36,226 | 35,269 | 17,274 | |||||||||||||||||||||
| Operating leases | 12,270 | 3,790 | 3,143 | 2,430 | 2,430 | 477 | -- | |||||||||||||||||||||
Equipment purchase agreements (1) | 30,054 | 30,054 | -- | -- | -- | -- | -- | |||||||||||||||||||||
| Other long-term liabilities | 13,301 | 823 | 923 | 1,006 | 1,072 | 1,135 | 8,342 | |||||||||||||||||||||
Other Purchase obligations (2) | 77,245 | 55,804 | 9,153 | 4,666 | 3,120 | 2,502 | 2,000 | |||||||||||||||||||||
| Total contractual obligations | 666,851 | 390,112 | 66,420 | 82,801 | 60,519 | 39,383 | 27,616 | |||||||||||||||||||||
________________ | |
1. | Operating leases include (i) TPSCo’s building and land lease commitment; (ii) Tower NPB’s building lease commitment through 2022, which may be extended until 2027 upon the exercise of the option provided to Tower NPB (see Note 14D to the consolidated financial statements); and (iii) other company offices and car related operational lease commitments. |
2. | Equipment purchase agreements include amounts related to ordered equipment that has not yet been |
3. | Other |
In addition to thesethe contractual obligations detailed above, we have committed approximately $1$1.5 million in standby letters of credit and guarantees.
The above table does not include other contractual obligations or commitments we have, such as undertakings pursuant to royalty agreements, commissions and service agreements. We are unable to reasonably estimate the total amounts or the time table for such payments to be paid under the terms of these agreements, as the royalties, commissions and required services are a function of future revenues, the volume of business and hourly-based fees. In addition, the above table does not include our liability with respect to advances received from our customers, which as of December 31, 2017,2019, amounted to approximately $46.0$26.6 million that may be utilized by them against future purchases of products. We are unable to reasonably estimate the total amounts that may be utilized by our customers since we cannot reasonably estimate their future orders in the periods set forth in the above chart.
The table above reflects our commitments and contingencies whichthat are known to us as of December 31, 2017.2019. Any new developments in our business plans, our modification of engagements with supply and service providers as well as changes in our commitments and contingencies following the date hereof and actual payments may vary significantly from those presented above.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below is information regarding our senior management and directors as of March 31, 2018:
Officer | Senior | Age | Title(s) | |||
A | Russell C. Ellwanger | 65 | Chief Executive Officer and Director of Tower, and Chairman of the Board of Directors of its subsidiaries Tower Semiconductor USA, Inc., Tower US Holdings, Inc., | |||
B | Oren Shirazi | 50 | Chief Financial Officer, Senior Vice President of Finance | |||
C | Dr. Itzhak Edrei | 60 | President Emeritus(*) | |||
D | Rafi Mor | 56 | Chief Operating Officer | |||
E | Nati Somekh | 45 | Senior Vice President, Chief Legal Officer and Corporate Secretary | |||
F | Yossi Netzer | 56 | Senior Vice President of Corporate Planning | |||
G | Dalit Dahan | 51 | Senior Vice President of Human Resources and IT | |||
H | ||||||
Dr. Marco Racanelli | 53 | Newport Beach Site Manager and Senior Vice President and General Manager of | ||||
I | Guy Eristoff | 57 | Chief | |||
J | ||||||
Dr. Avi Strum | 58 | Senior Vice President and General Manager of the CMOS Image Sensor Business Unit | ||||
K | Dani Ashkenazi | 57 | Senior Vice President and General Manager of Transfer, Optimization and Development Process Services Business Unit (TOPS) |
L | Noit Levy | 36 | Vice President of Investor Relations and Corporate Communications | |||
Directors Name(**) | Age | Title | ||||
M | Amir Elstein | 64 | Chairman of the Board of Directors | |||
N | Kalman Kaufman | 74 | Director | |||
O | Alex Kornhauser | 73 | Director | |||
P | Dana Gross | 52 | Director | |||
Q | Ilan Flato | 63 | Director | |||
R | Rami Guzman | 81 | Director | |||
S | Yoav Z. Chelouche | 66 | Director | |||
T | ||||||
Iris Avner | 55 | Director |
(*) Dr. Itzhak Edrei served as the Company President until November 2019.
(**) Russell Ellwanger also serves as a director anddirector; his information is included under Senior Management above. All of the directors other than Mr. Ellwanger meet the requirements for independent directors under SEC rules and the Nasdaq Marketplace Rules.
Russell C. Ellwanger
has served as our Chief Executive Officer since May 2005. Mr. Ellwanger has also served as a director since September 2016, and as Chairman of the Board of Directors of our subsidiaries, Tower Semiconductor USA, Inc., Tower US Holdings, Inc.,Oren Shirazi
has served as our Chief Financial Officer and Senior VP Finance since November 2004. Mr. Shirazi serves as a board member ofDr. Itzhak Edrei
. has served asRafi Mor
Nati Somekh has served as Senior Vice President, Chief Legal Officer and Corporate Secretary since February 2010, after serving as Vice President, Chief Legal Officer and Corporate Secretary from September 2008, after serving as Corporate Secretary and General Counsel from March 2005, and as Associate General Counsel from May 2004. From 2001 to 2004, Ms. Somekh was employed by Goldsobel & Kirshen, Adv. Ms. Somekh holds an LL.M. and J.D. degrees from Boston University and a B.A. degree from Johns Hopkins University. Ms. Somekh is a member of the Israel Bar Association and is admitted as an attorney in the State of New York.
Yossi Netzer has served as Senior Vice President of Corporate Planning since July 2012, after serving as VP of Corporate Planning from November 2008, as General Manager of Mixed Signal, RF & Power Management Product Line from 2005 and as Director, FAB 2 Yield & Device Engineering Manager from 2000. From 1995 to 2000, Mr. Netzer served in various engineering management positions within the R&D division dealing with CMOS, Mixed Signal, RF, and NVM Technologies. Prior to joining Tower, Mr. Netzer was employed at National Semiconductor and the Technion – Israel Institute of Technology. Mr. Netzer holds a B.Sc. degree in electrical engineering from the Technion – Israel Institute of Technology
Dalit Dahan serves has served as Senior Vice President of Human Resources and IT after being appointed IT Manager in Januarysince 2008. Prior thereto, Ms. Dahan served as Vice President of Human Resources commencing in April 2004. Ms. Dahan joined us in November 1993 and served as Personnel Manager commencing in April 2000, after having served as Compensation & Benefits Manager and in various other positions in the Human Resources Department. Prior to joining us, Ms. Dahan served as Manager of the North Branch of O.R.S - Manpower Company for three years. Ms. Dahan holds a B.A. degree in social science from Haifa University and an MBA degree from the University of Derby.
Dr. Marco Racanelli
Guy Eristoff has served as Chief Marketing, Strategic Officer and Head of Pathfinder Activities since December 2019, and also serves as a member of the board of directors of TPSCo since April 2014. Previously, Mr. Eristoff served as TPSCo’s Chief Executive Officer from its foundation in April 2014 until December 2019. Previously, Mr. Eristoff served as Vice President, Global Operational Excellence at Tower Semiconductor Ltd. Prior to that, Mr. Eristoff served in various positions in the semiconductor industry such as Director of 200mm Fabs Core Engineering at Global-Foundries (Technology Development, Marketing, Industrial Engineering & Central Engineering) for the 200mm Business Unit, (5 fabs), General Manager, Singapore and Asia Region at Intevac, Thin Films Section Manager, Thin Films Module Manager and Process Integration Deputy Director at Chartered Semiconductor and Process/Hardware Engineer and Field Service Manager at Applied Materials. Mr. Eristoff received his B.S. degree in Physics from Rensselaer Polytechnic Institute, (RPI) Troy New York.
Dr. Avi Strum has served as our Senior Vice President and General Manager of the CMOS Image Sensor Business Unit since 2018, and also serves as a member of the board of directors of TPSCo since 2019. Previously, Dr. Strum served as |
Dani Ashkenazi has served as Senior Vice President and General Manager of Transfer, Optimization and Development Process Services Business Unit (TOPS) and Europe Sales since June 2019. Previously, Mr. Ashkenazi served as Vice President of Worldwide Customer Solutions from 2015. Mr. Ashkenazi served as Vice President of Sales for APAC & Israel from 2008, after serving as General Manager, CMOS Product Line from 2005 and as Director of Customer Support, and Director of Reliability from 2003. Prior to that, Mr. Ashkenazi served as Application Manager at Tower USA in Santa Clara and prior to that Mr. Ashkenazi held engineering management positions within the process, test and product engineering groups. Mr. Ashkenazi holds M.Sc. and B.Sc. degrees in Physics from the Hebrew University of Jerusalem. Noit Levy has served as our Vice President of Investor Relations and Corporate Communications and is heading our investor relations, public relations and marketing communications since 2008, having served as Director of Investor Relations and Public Relations since 2006. From 2001 to 2006 she has served in various other positions within the Company. Ms. Levy holds an MBA from Haifa University in Israel and a B.A. in Social Science and Management from the College of Management Academic Studies. Amir Elstein has served as the |
Kalman Kaufman
has served as a director since 2005 andAlex Kornhauser has served as a director since August 2008 (until November 2016 as an external director, until November 2016, and as a director thereafter.within the meaning of the Companies Law). Previously, Mr. Kornhauser has served as a member of the Compensation Committee sincefrom June 2009. In addition,2009 until October 2019. From 2017, Mr. Kornhauser has servedserves as a board member of the Audit Committee from Augustat Priortech. From 2008 until May 2017 and as chairman of the Audit Committee from January 2011 until May 2017.2010, Mr. Kornhauser served as Senior VP and General Manager of Global Operations at Numonyx Corporation from March 2008 to August 2010.Corporation. From January 1978 to Marchuntil 2008, Mr. Kornhauser held many senior management positions at Intel Corporation from design engineer, project manager, department manager, engineering manager and general manager of certain groups, segments and plants. More specifically, from August 2000 to May 2007, he served as Intel Israel Site GM, from January 2006 until March 2008, he servedserving as General Manager of Intel Israel, General Manager of Intel Electronics, VP of the Flash MemoryTechnology and Manufacturing Group from December 2004 to December 2005, Mr. Kornhauser served as VPand President of TMG NVM Strategic Segment, from January 2001 to November 2004, he served as VP of TMG F18 Plant Manager and from January 1996 to December 2000, he served as F18 General Manager.Intel Israel. Mr. Kornhauser holds a B.S.B.Sc. degree in electronics from Bucharest Polytechnic Institute in Romania.
Dana Gross
has served as a director since November 2008, as a member of the Nomination Committee since January 2018 and as a member of the Compensation Committee since February 2013. In addition,Ilan Flato
has served as a director since February 2009 (until November 2016 as an external director,Rami Guzman
has served as a director since February 2009, as chairman and member of the Compensation Committee since October 2019, as a member of the Nomination Committee since January 2018, and as a member of our Audit Committee since August 2011. Mr. Guzman is classified by the Board of Directors as an audit committee financial expert under applicable SEC rules. Mr. Guzman has held various senior positions at Motorola Inc. and Motorola Israel Ltd. since 1985, including VP of Motorola Inc. and Director of Motorola Israel Ltd. In addition, until July 2004, Mr. Guzman was the CFO of Motorola Israel Ltd. Prior to joining Motorola, Mr. Guzman worked for the Ministry of Finance, first as senior assistant and deputy to the Director of the Budget and then as Government-wide MIS and IT Commissioner. Mr. Guzman is a member of professional committees in the Israel Credit Insurance Company and the Israel Infrastructure Fund, and consultant and advisor toYoav Z. Chelouche has served as a director since April 2016, as a member of the Nomination Committee since January 2018, and as a Chairmanchairman and member of our Audit Committee since May 2017. Mr. Chelouche is classified by the Board of Directors as an audit committee financial expert under applicable SEC rules. Mr. Chelouche serves as Managing Partner of Aviv Ventures since Aviv’s inception in 2001. Between 1995 and 2001, Mr. Chelouche served as President & CEO of Scitex Corp. Until 2015, heMr. Chelouche was co-chairman of Israel Advanced Technology Industries. HeMr. Chelouche currently serves on the Board of Directors of Checkpoint Software Technologies (NASDAQ:CHKP) and the Tel-Aviv Stock Exchange (TASE). HeExchange. Mr. Chelouche is currently a board member of Aviv’s portfolio companies: MGVS, Briefcam, ScaleMP and Optimal Test. Mr. Chelouche also previously served as Chairman of several public companies. HeMr. Chelouche holds a B.A. degree in economics and statistics from Tel-AvivTel Aviv University and an MBA degree from INSEAD, Fontainebleau, France.
Iris Avnerhas served as a director since May 2016. Ms. Ross has served as chairperson of Panorama Software since 2003, after having served as chief executive officer of Panorama Software Systems from 1993 until 2003. From 1988 until 1993, Ms. Ross served as VP of Development of Metalsoft, Inc. and later as chief executive officer of Metalsoft Israel, Ltd. From 1983 to 1986, she served as business development manager of Contahal Ltd. and from 1980 until 1983, she served as computer systems and information technology manager in Kitan Ltd. Ms. Ross previously served on several boards and board committees, including Israel Railways freight subsidiary Isorad, Ltd., Radcom, Fundtech and Clal Electronics Industries. Ms. Ross holds a B.S. in mathematics from Tel-Aviv University, an M.Sc. in computer science from the Weitzman Institute, and an MBA from Tel-Aviv University.
Mr. Jerry Neal, who served as a director from July 2018 and as a member of the year ended December 31, 2017, we paidCompensation Committee from October 2019, ceased to all our directorsserve in such positions as of April 18, 2020.
We are not party to, and are not aware of, any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any director or executive officer was selected as a director or member of senior management, described in Item 6A. above, as a group, an aggregate of $9.1 million, in salaries, fees, payments upon termination and bonuses. The total employer cost for personal vehicle, relocation expenses, amounts set aside or accrued to provide for insurance, severance, retirement, vacation and similar benefits for such persons was approximately $2.1 million in the year ended December 31, 2017.
B. COMPENSATION
Under the Israeli Companies Law, during 2013, Tower adopted a compensationpublic company must have a policy regarding the terms of engagement of office holders, as such term is defined in the Companies Law, to which we refer to as a compensation policy. The compensation policy must be approved at least once every three years, first, by our board of directors, upon recommendation of our compensation committee, and second, by the shareholders by the Special Majority (as defined in Item 6C under “— Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions—Approval of Director and Officer Compensation—Executive Officers other than the Chief Executive Officer”). Under special circumstances, the board of directors may approve the compensation policy despite the objection of the shareholders on the condition that the compensation committee and then the board of directors decide, on the basis of detailed grounds and after discussing again the compensation policy, that approval of the compensation policy, despite the objection of shareholders, is for the benefit of the company.
Our amended and restated Compensation Policy for Executive Officers and Directors, which was approved by our shareholders on June 29, 2017, serves as the basis for decisions concerning the financial terms of employment or engagement of our office holders, and directors, including compensation, equity-based awards, indemnification and insurance, severance and other benefits. This compensation policy was created by the Compensation Committee, recommended for approval by the Board of Directors, which approved it and then approved by the shareholders’ meeting in September 2013. The Israeli Companies Law requires that every compensation policy be reviewed, assessed and approved at least every three years. Accordingly, the compensation policy was reviewed and assessed by the Compensation Committee, which proposed and approved a few amendments thereto and recommended to the Board of Directors to approve it. Thereafter, in June 30, 2016 and June 29, 2017, the amended compensation policy was approved by the shareholders. Since the adoption of the compensation policy in 2013, as later revised in June 30, 2016 and June 29, 2017, the terms of compensation of the Company's officers and directors are based on this policy. Our compensation policy is performance based and is designed to align our officers’ and directors'directors’ interests with those of the Company and its shareholders in order to enhance shareholder value. Its structureOur compensation policy allows Towerus to provide incentives that reflect short-term, mid-term and long-term goals and performance, as well as achieving a positive impact on Companymotivate achievement of company targets, while providing compensation that is competitive in the global marketplace in which we recruit our senior management.
As an Israeli company with a significant global footprint, we aim to adopt compensation policies and procedures that match global companies of similar complexity, including semiconductor companies and other companies which compete with Towerus for similar talent.
Under the Companies Law, a company’s compensation policy must be determined and later reevaluated according to certain factors, including: the advancement of the company’s objectives, business plan and long-term strategy; the creation of appropriate incentives for office holders, while considering, among other things, the company’s risk management policy; the size and the nature of the company’s operations; and with respect to variable compensation, the contribution of the office holder towards the achievement of the company’s long-term goals and the maximization of its profits, all with a long-term objective and according to the position of the office holder. The compensation policy must furthermore consider the following additional factors:
•
the education, skills, expertise and achievements of the relevant office holder;
•
the role and responsibilities of the office holder, and prior compensation arrangements with the office holder;
•
the ratio of the cost of the offered terms to the cost of compensation of the other employees of the company (including any employees employed through manpower companies), specifically to the cost of the average and median salaries of such employees and the impact of the disparities between them upon work relationships in the company;
•
with respect to variable compensation, the possibility of reducing variable compensation at the discretion of the board of directors, and the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and
•
with respect to severance compensation, the period of employment or service of the office holder, the terms of his or her compensation during such period, the company’s performance during such period, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
In addition, the compensation policy must also include the following features: (i) with respect to variable components of the compensation of the chief executive officer or any officer who is designed, among others:
Compensation instruments under our compensation policy may include the following:
All compensation arrangements of office holdersofficers and directors are required to be approved in the manner prescribed by applicable law (including shareholder approval(see details in certain cases – seeExhibit 2.1 to this annual report).
For the year ended December 31, 2019, we paid to all our directors and senior management described in Item 10 Additional Information - "6A above, as a group, an aggregate of $7.1 million in salaries, fees, payments upon termination and bonuses (excluding employer cost and equity-based compensation, which are detailed below). The Companies Law"). In accordance with ourtotal employer cost for personal vehicles, relocation related expenses, amounts set aside or accrued to provide for insurance, severance, retirement, vacation and similar benefits or expenses for such persons was approximately $2.4 million for the year ended December 31, 2019.
The following is a summary of the compensation policy, office holders, including independent directors, may waive their entitlement to their compensation, subject to applicable law.
The base salary varies between the differentof our executive officers and directors, and is individually determined according to the past performance, educational background, placecountry of residence, professional experience, qualifications, specializations, role, business responsibilities, and achievements of the officer or director and the prior salary and compensation arrangements, therewith. Since a competitive base salary is essential to our ability to attract and retain highly skilled professionals, in accordance with the compensation policy, Tower will seek to establish and maintain base salaries that are based on competitive market analyses. Theas well as comparative peer group will include direct competitors, or companies that operate in similar industries, with similar market capitalization, enterprise value, and/or revenues, active in similar geographic locations.analyses. Base salary (gross) paid by the Company to the Covered Officers A, C, B, D, I and G with respect toH for the year ended December 31, 2017,2019, amounted to $0.73$0.78 million, $0.38$0.33 million, $0.30$0.31 million, $0.25$0.23 million and $0.23$0.39 million, respectively. Officers and directorsExecutive officers are entitled to social and other benefits as perin accordance with applicable law, our policies and based on the practice of peer companies, and may also be entitled to additional benefits, taking into consideration their rank, seniority in the territory they reside in, global market and local market practice and applicable law. Such additional benefits, which shall be subject to approval of the Compensation Committee and the Board of Directors, may include, inter alia, annual vacation, sick leave, medical insurance, allocations to pensions, long term disability, contribution to education fund (up to the maximum allowable by law), car expenses, contribution to managers' insurance, cellular phone and laptop computer, as well as taxes and expenses which may be incurred in relation to such benefits being borne by the Company.common practice. The cost to the Company of such social and other benefits paidawarded to the Covered Officers A, C, B, D, I and G with respect toH for the year ended December 31, 2017,2019, amounted to $0.19$0.17 million, $0.20$0.18 million, $0.17 million, $0.15$0.08 million, and $0.15$0.09 million, respectively. In addition, when relevant,relocation and subjectrelated reimbursement expenses awarded to approval of the Compensation Committee, the Board of Directors and the Company's shareholders as may be required under applicable law, Covered Officer A is entitled to relocation related and reimbursement expenses and/or other benefits, including housing costs, family flights and other costs. Such relocation related and reimbursement expenses granted to the Covered Officers A, C, B, D and G with respect tofor the year ended December 31, 2017,2019, amounted to $0.28 millionmillion. Covered Officer I, who served as the Chief Executive Officer of TPSCo in Japan from 2014 to 2019, was entitled to reimbursement expenses in relation to his relocation to Japan, and the Company also made payments to him and for his benefit, including to certain Japanese and other governmental agencies, compensating him for added costs resulting from his relocation. Such relocation related payments, including cost accrual to the Company in respect to Covered Officer AI, for the year ended December 31, 2019, amounted to $0.53 million. No relocation related payments or accruals were made to any of Covered Officers B, D and $0 to the other Covered Officers.
Our policy is to allowaward annual cash bonuses which may be awarded to the office holders uponexecutive officers, subject to the attainment of pre-setpre-determined annual measurable objectives, and personal performance, which are set in the first quarter of theeach year, and include minimum thresholds for performance. Thepersonal performance evaluation. In accordance with our compensation policy, sets forth athe pre-defined mechanism which includes multiple sections with a range of weight (in percentage terms) of each group of component measures, which shall consist ofannual bonus criteria based onplans include measurable components and the weight (in percentage terms) of each measure as a portion of the annual criteria, as well as a minimum threshold below which no annual bonus will be awarded. Office holders may also receiveawarded, and a specialportion of the annual bonus is based on performance valuation, in an amount of upaccordance with our compensation policy and subject to four times the recipient’s monthly base salary, for substantial achievements on certain types of special transactions that are unexpected when determining our annual management by objective plan. It is clarified that this special bonus mechanism will not be awarded as a matter of routine and will be granted only in situations where it is warranted as described below.applicable law. The cash bonus gross amounts grantedpaid by the Company to the Covered Officers A, C, B, D, I and G duringH for the year ended December 31, 2017,2019, amounted to $1.66$0.66 million, $0.48$0.21 million, $0.49$0.19 million, $0.32$0.14 million and $0.29$0.14 million, respectively.
Equity based compensation offered by usfor directors and officers is intended to be in athe form of restricted stock units (“RSUs”), options and/or other equity forms, such as options, in accordance with our equity basedequity-based compensation policies and programs in place from time to time and in accordance with theour compensation policy. The equity basedEquity-based compensation shallmay be granted as either an annual grant and/or from time to time, and beis individually determined and awarded accordingdetermined. Generally, equity-awards shall not begin to the performance, educational background, professional experience, qualifications, specializations, role, personal responsibilities and achievements of the officer or director and the prior salary and compensation arrangements therewith, and subject to legal limitations. As a general policy, options for our officers and directors shall gradually vest per passage of time over a period of one to 3 years (or more) and the RSUs shall be subject to time and/or performance based vesting. There shall be no vesting before the end of the first year from the date of grant. We will calculate the fair market value of the equity basedequity-based compensation for the officers and directors at the time of grant according to the Black and ScholesBlack-Scholes model, binomial model or any other best practice or commonly accepted equity basedequity-based compensation valuation model, when such award is duly approved by the Compensation Committee, Board of Directorsin accordance with applicable law, and shareholders, as applicable, and will amortize such value over the applicable vesting schedule. The equity’s exercise price and expiration date shall be as set forth in Section 14 of the compensation policy. The exercise price of options granted to the office holders shall be equal to the arithmetic average closing price of Tower's shares, as quoted on the NASDAQ market (or if Tower's shares will not be traded on NASDAQ, the Tel-Aviv Stock Exchange or any principal national securities exchange upon which Tower's shares are listed or traded) for the 30 trading days prior to the date of grant. The equity granted may contain a mandatory exercise provision for vested equity which shall provide for an automatic exercise upon reaching a certain share price and may also trigger the sale of the underlying shares. The expiration date of equity options shall be seven years from date of grant and there shall be accelerated vesting of all equity granted to Executive Officers and Directors (including outstanding, current and future equity grants), in the event of their death, allowing the exercise of such vested equity in accordance with the terms of the applicable equity plan governing it. Total value of equity based compensation to the Covered Officers A, C, B, D, I and GH recorded duringfor the year ended December 31, 20172019 (calculated based on the total amortization cost recorded in the Company’s statement of operations for the year ended December 31, 20172019 with respect to all equity-based grants of equity vehicles to saidthe Covered Officers), amounted to $1.94$3.54 million, $0.99$0.81 million, $0.82$0.73 million, $0.66$0.34 million and $0.60$0.56 million, respectively.
Under our discretion, such officers may be requested to remain on our payroll and provide services to us. During this period, such officers shall be paid their base salary and benefits and may be entitled to a partial or full annual bonus, based on their actual period of service or employment within this period, and based on the Company's performance during the period, the contribution of such officer to achieving our targets and profits and the circumstances of the termination. Upon resignation, such officers who are Israeli employees may receive severance pay according to Israeli law. All other employees shall receive severance pay according to the applicable local laws. Upon dismissal, officers who are Israeli employees may receive under the compensation policy, severance pay equal to his/her last monthly base salary multiplied by the number of years employed by us, subject to approvals as may be required. All other employees shall receive severance pay according to their local labor laws. The total amount paid to such officers for the aforementioned severance compensation shall not exceed an amount of twenty-four (24) monthly base salaries, subject however to any amounts which would have to be paid to such officer in accordance with the local labor law. No such payment was made or earned in 2017.
At our 2019 annual general meeting held on June 29, 2017,25 2019, our shareholders approved an equity grant to our CEOChief Executive Officer in athe value of $3$3.9 million, 50% of which was comprised of 70%is time-vested RSUs and 30%50% of which is performance-based RSUs, both vesting over a three-year period; and an additional performance-based RSUs in a value of $1.5 million to bring the value of equity granted to him closer to what is provided to his peers in accordance with a benchmark study, as well as serve as a “bridge” grant to compensate for the previous grant cycle whereby awards vested on annual basis as opposed to the current structure whereby awards vest over a three year term.period. The performance criteria for the performance based RSUs arewere set to be earned by the CEO in proportion to the attainment by the Company of two financial corporate performance metrics, weighted equally: (i) net profit and (ii) cash provided by operating activities, based on the targets set under the Company’s board approved annual operating plan for 2017 (“AOP”). For 2017, the performance based RSUs were fully earned by the CEO since the Company exceeded its targets for both net profit and cash provided by operating activities by attaining actualfrom operations for 2019, weighted equally. Actual net profit of $298.0 millionfor 2019 was $90.0 and cash provided by operating activitiesfrom operations for 2019 was $291.3 million. Since our financial results were lower than these 2019 metrics, the Chief Executive Officer earned a proportional portion of $355.6 million.the performance-based RSUs. For further details, see Tower’sour proxy statement to itsfor the 2019 annual general meeting of shareholders, filed with the SEC on Form 6-K on May 25, 2017.
Following the approval of our shareholders at the 2019 annual general meeting and consistent with our compensation policy, we pay each of our directors (other than our chief executive officer who also serves as a director, whose compensation is detailed above, and the chairman of the board may be entitled to cash and/or equity based remuneration which in the aggregate that shall not exceed $600,000 onour Board of Directors): (i) an annual basis (together withfee of approximately $40,000; and (ii) per meeting fees of approximately $1,000, as well as reimbursement of expenses)for reasonable travel and other expenses in accordance with our Compensation Policy. The members of Tower's board may be entitled to remuneration and refund of expenses accordingpolicies. In addition, our shareholders approved the payment to the provisionsChairman of our Board of Directors of an annual cash fee of $300,000 (paid in monthly installments) and the award of time-vested RSUs in a value of $300,000, which vest in three equal installments on each of the Companies Regulations (Rulesthree anniversaries of the date of grant. Furthermore, our shareholders approved the award to each of our directors (other than our chief executive officer and the chairman of our Board of Directors, whose compensation is detailed above) time-vested RSUs in a value of $75,000, which vest over a two-year period, with 50% vesting at the end of each of the two anniversaries of the date of grant. In the event any such director’s service is terminated for any reason, including by way of resignation, prior to the second anniversary of the date of grant, (i) if such director has served on Remunerationthe board of directors for five years or more, all unvested RSUs shall be accelerated; and Expenses(ii) if such director has served on the board of Outside Directors), 2000, as amended bydirectors for less than five years, 50% of all unvested RSUs shall be accelerated.
We have entered into exemption and indemnification agreements with each of our officers and directors, pursuant to which, subject to the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel), 2000, as such regulations may be amended from time to time.
Equity Incentive Plans
In 2013, the Company adopted a share incentive plan tofor its directors, officers, employees and its subsidiaries’ employees (the "2013 Plan"“2013 Plan”). Options to be granted under this plan will bear an exercise price which equals an average ofIn accordance with our compensation policy, equity-based compensation awarded by the closing price in the thirty trading days immediately prior to the date of grant, vest over up to a three year period and are not exercisable beyond seven years from the grant date. Under the 2013 Plan, employees shall not be liable to pay the nominal price of the shares underlying the RSUs. In addition, the maximum number of equity grants under said Plan shall be equal to an amount of shares thatCompany shall not exceed 10% of the fully dilutedfully-diluted share countcapital of the Company, as calculated at the time of grant (which fully dilutedfully-diluted share countcapital will be calculated pro-forma to includeafter taking into account the proposed grants) minus the amount ofgrants and shares to be issued under theunderlying all outstanding equity grants at the time of the grant.
As of December 31, 2017,2019, approximately 0.731.17 million options and RSUs were outstanding under the 2013 Plan were awarded to our directors and senior management describeddetailed in Item 6A, of which approximately 0.40.49 million RSUs were outstandingawarded to our CEOchief executive officer and approximately 0.03 million RSUs were outstandingawarded to our Chairman. Further grants may be approved in accordance with a decisionthe chairman of the Compensation Committee,our Board of DirectorsDirectors.
In June 2019, pursuant to the approval of the Company and/or shareholders, as applicable. The abovementioned 0.03 million RSUs to our chairman of the board of directors under the 2013 Plan were approved by our shareholders in accordance withat the Company’s approved compensation policy. The RSUs have a three year vesting schedule.
For further information concerning our employee equity plans and outstanding employee equity, see Note 17B15B to the consolidated financial statements for the year ended December 31, 2017 included in this annual report.
C. BOARD PRACTICES
Board of Directors
Our Articles of Association provide that the Board of Directors shall consist of at least five and no more than 11 members. AllOur Board of Directors is currently comprised of ten directors. Our directors except for externalare elected by the general meeting of our shareholders by the vote of a majority of the ordinary shares present, in person or by proxy, and voting at that meeting. Generally, our directors hold office until their successors are elected at the next annual general meeting of shareholders (or until any of their earlier resignation or removal in accordance with the Companies Law). In addition, our Articles of Association allow our board of directors to appoint directors (other than the external directors) to fill vacancies on our board of directors, until the next annual general meeting of shareholders.
Alternate Directors
Our Articles of Association provide that any director may, by written notice to us and subject to the approval of the Board of Directors, appoint another person to serve as an alternate director, and may cancel such appointment, by delivering written notice to the alternate director and to the Company. Any person who is qualified to serve as a director,, and who is not already serving as a director or an alternate director, may act as an alternate director, and the same person may not act as the alternate for more than one director at a time. An alternate director has the same rights and responsibilities as a director, and the appointment of an alternate director does not relieve the appointing director from his/her responsibilities as a director. The term of appointment of an alternate director may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment or until the director who appointed the alternate ceases to serve as a director of the Company.
External Directors
The Israeli Companies Law – 1999 (the “Companies Law”) requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint no less than two external directors. Pursuant to a recently enacted amendmentHowever, pursuant to the Companies Regulations (Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000 (the "Amendment to the Relief Regulations“Relief Regulations”), however, aan Israeli public company may choose notelect to exempt itself from the requirement to appoint external directors if it meets all of the following conditions:
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The company’s shares are listed on certain foreign stock exchanges listed in the Relief Regulations, which include the NASDAQ Global Select Market;
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The company does not have a controlling shareholder; and
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The company complies with the requirements of the securities laws and stock exchange regulations in the foreign jurisdiction where its shares are listed relating to appointment of independent directors and composition of audit and compensation committees as applicable to companies that are incorporated under the laws of such foreign jurisdiction.
Pursuant to the Amendment to the Relief Regulations,, Israeli public companies whichthat meet the above conditions may opt to comply with the applicable rules in the foreign exchange rulesjurisdiction governing the appointment of independent directors and composition of audit and compensation committees as applicable to U.S. domestic issuers in the foreign jurisdiction (which with respect to the Company are the Nasdaq Listing Rules and the rules set forth inunder the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”)) instead of complying with the Companies Law provisions relating to external directors. An external director who was elected to serve as such prior to the date on which the company opted to comply with the applicable foreign exchange rules governing(i) the appointment of independent directorsexternal directors; (ii) certain limitations on the employment or service of an outside director or his or her spouse, children or other relatives, following the cessation of the service as an outside director, by or for the company, its controlling shareholder or an entity controlled by the controlling shareholder; (iii) the composition, meetings and the compositionquorum of the audit committee; and compensation committees as set forth above, may continue to serve out his/her term as a non-external director on(iv) the company's board of directors until the earlier of (i) the end of his/her three year term, or (ii) the second annual general meeting following the company's decision to comply with the said applicable foreign exchange rules, without any further action on the partcomposition and meetings of the Company or its shareholders. Such director may becompensation committee. If a company has elected to the board of directors by the Company's shareholders, but he/she would now be elected as a regular director (not an external director) and his/her election would be no different than the election of any other director.
Following analysis of our qualification to rely on the exemption, in September 2016, our Board of Directors determined to adopt the exemption, effective as of November 1, 2016. If in the future we were to have a controlling shareholder, we would again be required to comply with the requirements relating to the composition of the audit and compensation committees set forth in the Companies Law, and that commencing on November 1, 2016, the Company would follow the exemption provided under the Amendment to the Relief Regulations, such that following such date, the Company would comply with the
Director Independence
In accordance with exemptions from the Israeli law requirements to have external directors serving on our Board of Directors, we comply with the director independence requirements and the audit committee and the compensation committee composition requirements under U.S. laws (including applicable Nasdaq Capital Market rules) applicable to U.S. domestic US issuers, provided that the Company continues to meet the requisite requirements for said relief and unless the Company's board of directors determines otherwise.issuers. Under the Nasdaq Listing Rules, a majority of the board of directors must be comprised of independent directors (as defined in the Nasdaq Listing Rules). TheOur board of directors has made a determination of independence under the Nasdaq Listing Rules with respect to all directors, excludingother than Mr. Ellwanger, our Chief Executive Officer, and Mr. Amir Elstein, the CEO and Chairman.
Audit Committee
Our audit committee currently consists of Mr. Yoav Chelouche, Mr. Ilan Flato, Mr. Alex KornhauserRami Guzman and Ms.Mrs. Iris Avner,Avner. Mr. Yoav Chelouche serves as the Company's external directors prior to the determination to follow the relief provided under the Amendment to the Relief Regulations, continued serving as non-external directors starting from the date of the determination of the Company's board of directors detailed above, and were re-elected as non-external directors at the Company's 2017 annual general meeting, dated June 29, 2017 (the "2017 AGM"), to serve until the next annual general meeting of the Company or until their respective successors are duly elected.
Composition requirements
The Companies Law requires public companies to appoint an audit committee and a compensation committee. Followingcommittee; however, following the Company'sCompany’s determination to follow the relief provided under the Amendment to the Relief Regulations, as described above, the composition of both our audit and compensation committeescommittee is governed by the rules set forth in the Nasdaq Listing Rules and the Exchange Act.
Under the Nasdaq corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors (within the meaning of the Exchange Act and Mr. Yoav Chelouche serves asNasdaq Listing Rules), each of whom must meet certain requirements for financial literacy and one of whom has accounting or related financial management expertise, and none of whom has participated in the audit committee chairman. preparation of our or any of our subsidiaries financial statements at any time during the prior three years.
The boardBoard of Directors has determined that all of the members of the audit committee meet the independence and financial knowledge requirements for audit committee service of the Nasdaq Listing Rules and the Exchange Act, as well as the Nasdaq Listing Rules requirement regarding financial sophistication. In addition, our Board of Directors has determined that each member of our audit committee is an audit committee financial expert pursuant to the applicable SEC rules.
Audit Committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the Companies Law, the SEC rules and the Nasdaq Listing Rules, which include:
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retaining and terminating our independent auditors, subject to the ratification of the board of directors, and in the case of retention, to that of the shareholders, as applicable in accordance with the Companies Law;
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pre-approving of audit and non-audit services and related fees and terms, to be provided by the independent auditors;
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overseeing the accounting and financial reporting processes of our company and audits of our financial statements, the effectiveness of our internal control over financial reporting and making such reports as may be required of an audit committee under the rules and regulations promulgated under the Exchange Act;
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reviewing with management and our independent auditor our annual and quarterly financial statements prior to publication or filing (or submission, as the case may be);
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recommending to the board of directors the retention and termination of the internal auditor, and the internal auditor’s engagement fees and terms, in accordance with the Companies Law as well as approving the yearly or multi-year plan proposed by the internal auditor, and review the results and findings of internal audits;
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overviewing Company risk assessment and reviewing regulatory compliance;
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determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest) and whether any such transaction is extraordinary or material under Companies Law;
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determining whether a competitive process must be implemented for the approval of certain transactions with controlling shareholders or its relative or in which a controlling shareholder has a personal interest (whether or not the transaction is an extraordinary transaction), under the supervision of the audit committee or other party determined by the audit committee and in accordance with standards to be determined by the audit committee, or whether a different process determined by the audit committee should be implemented for the approval of such transactions;
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determining the process for the approval of certain transactions with controlling shareholders or in which a controlling shareholder has a personal interest that the audit committee has determined are not extraordinary transactions but are not immaterial transactions; and
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responsible for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.
Compensation Committee
Our compensation committee is comprised of Mr. Rami Guzman, Mr. Ilan Flato Mr. Alex Kornhauser,and Mrs. Dana GrossGross. Mr. Rami Guzman serves as the compensation committee chairman.
Composition requirements
The Companies Law requires public companies to appoint a compensation committee; however, following the Company’s determination to adopt the relief provided under the Relief Regulations, as described above, the composition of our compensation committee is governed by the rules set forth in the Nasdaq Listing Rules and Mrs. Iris Avner serve on Tower'sthe Exchange Act.
Under the Nasdaq Listing Rules, we are required to maintain a compensation committee. committee consisting of at least two directors, each of whom is an independent director within the meaning of the Nasdaq Listing Rules.
The boardBoard of Directors has determined that all of the members of the compensation committee meet the independence requirements for compensation committee service of the Nasdaq Listing Rules and the Exchange Act.
Compensation Committee role
Our board of directors adopted a compensation committee charter, which sets forth the responsibilities of the compensation committee consistent with the Nasdaq Listing Rules and the requirements for compensation committees under the Companies Law, including the following:
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recommending to the Board of Directors for its approval (i) a compensation policy for officers and directors, (ii) once every three years, whether to extend the compensation policy, subject to receipt of the required corporate approvals approval (either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); and (iii) periodic updates to the compensation policy. In addition, the compensation committee is required to periodically review the implementation of the compensation policy;
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approving transactions relating to terms of office and employment of office holders, which require the approval of the compensation committee pursuant to the Companies Law; and
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reviewing and approving equity grants to non-executive employees under our equity-based incentive plans.
Nomination Committee
Our nomination committee is comprised of Mr. Kalman Kaufman, Mrs. Dana Gross, Mr. Rami Guzman and Yoav Z. Chelouche. Mr. Kalman Kaufman serves as the nomination committee chairman.
Our board of directors has adopted a nomination committee charter setting forth the responsibilities of the nomination committee, which include:
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overseeing and assisting our board of directors in reviewing and recommending nominees for election as directors;
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assessing the performance of the members of our board of directors;
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reviewing and recommending to our board of directors the structure and members of committees of the board; and
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assisting our board of directors in carrying out its responsibilities related to chief executive officer succession planning.
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor, who is recommended by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (within the meaning of the Companies Law) or an interested party (i.e., a person who holds more than 5% of the Company’s outstanding shares or voting rights or who has the power to appoint a director or the general manager of the company) or a relative of an office holder or interested party, and he may not be the company’s independent auditor or its representative. Joseph Ginossar of Fahn Kanne, an affiliate of Grant Thornton International, serves as our internal auditor.
Director Service Contracts
Other than under the employment agreement with Mr. Russell Ellwanger, our Chief Executive Officer and a director, as detailed in “Item 6. Directors, Senior Management and Employees—B. Compensation,” we do not have written agreements with any director providing for benefits upon the termination of his or her services with our Company.
D. EMPLOYEES
The following table sets forth for the last three fiscal years, the number of our employees engaged in the specified activities.
As of December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Process and product engineering, R&D and design | 1,040 | 1,065 | 1,054 | |||||||||
Manufacturing and operations | 3,569 | 3,860 | 3,917 | |||||||||
Manufacturing support | 385 | 394 | 399 | |||||||||
Sales and marketing, finance & administration | 285 | 267 | 271 | |||||||||
Total | 5,279 | 5,586 | 5,641 | |||||||||
| As of December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
| Process and product engineering, R&D and design | 1,054 | 1,015 | 948 | |||||||||
| Manufacturing and operations | 3,917 | 3,895 | 3,118 | |||||||||
| Manufacturing support | 399 | 370 | 317 | |||||||||
| Sales and marketing, finance & administration.. | 271 | 272 | 250 | |||||||||
| Total | 5,641 | 5,552 | 4,633 | |||||||||
As of December 31, 2019, we had 1,533 employees located in Israel, 1,256 employees located in the United States, 2,475 employees located in Japan and 15 employees located in other countries in Asia Pacific.
Other than a special collective agreement relating to our Israeli employees regarding pension contributions, Tower has noas described below, our employees in Israel are not covered under a collective bargaining agreements with any of its Israeli employees.agreement. However, in Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations, by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The labor laws and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work dayworkday and workweek, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment.
Under the special collective bargaining agreement to which we are party in regardrelating to our Israeli employees, we are required to contribute funds to an employee’s “Manager’s Insurance”manager’s insurance fund and/or pension fund. Such funds generally provide a combination of savings plans, insurance and severance pay benefits to the employee, securing his or her right to receive pension or giving the employee a lump sum payment upon retirement, under certain circumstances, if legally entitled, upon termination of employment. ToTower’s Israeli employees contribute an amount equal to 6% of his or her wages to the Manager’s Insurancemanager’s insurance fund or pension fund, Tower employee contributes an amount equal to between 6% to 7% of his/her wages and Tower contributes an additional 14.83% to 16.3%15.83% of his or her wages.the employee’s wages to such funds. Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment by the employer without due cause. Under ourthe special collective bargaining agreement, Section 14 to the Israeli Severance Pay Law, 5723-1963, applies to Tower, according to which the employer'semployer’s contribution to severance pay shall replaceis in lieu of payment of severance pay upon termination of employment. Therefore, the monthly contributions as mentioned above constitute the entire required payment for severance pay, and we are exempt from such severancenot required to pay any additional sum upon termination as long as, andof employment of our Israeli employees for the period during which we contribute on a monthly basis the above mentioned benefits to such employee’s pension fund and/or Manager’s Insurance.
A portion of Jazz’sthe employees at its Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement. JazzNPB Co. maintains a defined benefit pension plan for certain of its employees covered by a collective bargaining agreement that provides for monthly pension payments to eligible employees upon retirement. The pension benefits are based on years of service and specified benefit amounts. In addition, the bargaining agreement includes a post retirementpost-retirement medical plan tofor certain employees. For certainCertain eligible bargaining union employees who terminate employment Jazz providesare provided with a lump-sum benefit payment.
Most of TPSCo’s employees at its Japan fabs are represented by a union and covered by a collective bargaining agreement. TPSCo established a Defined Contribution Retirement Plan (the “DC Plan”) for its employees through which TPSCo contributes approximately 10% with employee average match of 1% from employee base salary to the DC Plan. Such contribution releases the employer from further obligation to any payments upon termination of employment. The contribution is remitted either to third party benefitsbenefit funds that are responsible to invest the funds based on employee preference, or directly, to those employees who elected not to enroll in the DC Plan.
E. SHARE OWNERSHIP
As of March 31, 2018,2020, no individual director or senior manager beneficially owned (determined in accordance with the rules of the SEC) one percent or more of our outstanding ordinary shares. As of March 31,2020, our directors and senior managers held options and RSUsrestricted stock units to purchase an aggregate of 0.751.14 million of our ordinary shares. The options have an average exercise price of $13.29$13.51 per share and the options expire between 20202021 and 2023. No individual director or senior manager beneficially owns 1.00% or more ofFor information regarding our outstanding ordinary shares.
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
Information concerning the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), and ownership on a diluted basis, of our ordinary shares by any person who is known to us to own at least 5% of our issued and outstanding ordinary shares as of March 31, 2020 is set forth below. The percentage of beneficial ownership of our ordinary shares is based on 106.8 million ordinary shares issued and outstanding as of March 31, 2020.
The voting rights of our major shareholdershareholders do not differ from the voting rights of other holders of our ordinary shares.
Name of Beneficial Owner | Ordinary Shares Beneficially Owned | |||||||||||
Number | Percent(1) | Percent (Diluted)(2) | ||||||||||
Senvest Management, LLC (3) | 8,055,305 | 7.54 | % | 7.38 | % | |||||||
Wellington Management Group LLP (4) | 7,571,345 | 7.09 | % | 6.94 | % | |||||||
Phoenix Holdings Ltd. (5) | 7,533,147 | 7.05 | % | 6.90 | % | |||||||
Identity of Person or Group | Percent of Class(1) | Percent of Class (Diluted)(2) | ||||||
Phoenix holdings (3) | 5.11 | % | 4.68 | % | ||||
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(1)In accordance with the rules of the SEC, assumes (i) the holder’s beneficial ownership of all of our outstanding ordinary shares and all ordinary shares that the holder has a right to purchase within 60 days of March 31, 2018,2020; and (ii) no other exercisable or convertible securities held by other holders has been exercised or converted into ordinary shares.
(2)Assumes (i) the holder’s beneficial ownership of all of our outstanding ordinary shares and all ordinary shares that the holder has a right to purchase within 60 days of March 31, 2020; and (ii) all currently outstanding securities to purchase ordinary shares have been exercised by all holders.
(3)Based solely upon, and qualified in its entirety with reference to, a notice provided to the Company by Senvest Management, LLC as of March 31, 2020.
(4)Based solely upon, and qualified in its entirety with reference to, a notice provided to the Company by Wellington Management Group LLP. as of March 31, 2020.
(5)Based solely upon and qualified in its entirety with reference to, a notice provided to the Company by Phoenix Holdings Ltd. as of March 31, 2020.
As of April 20, 2020, based on information provided to us by our transfer agent in the United States there were a total of 1514 holders of record of our ordinary shares, of which 9 were registered with addresses in the United States. Such United StatesU.S. record holders (which include non-US shareholders) were, as of such date, the holders of record of approximately 65.7%68% of our outstanding ordinary shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 65.7%68% of our outstanding ordinary shares as of saidsuch date, including those held for the benefit of the Tel Aviv Stock Exchange clearing house as a member of Depository Trust Company).
B. RELATED PARTY TRANSACTIONS
Other than the executive and director compensation, executive officer employment agreements, indemnification and exculpation arrangements and directors’ and officers’ liability insurance policy, as discussed elsewhere in the annual report, for the years 2017, 2018 and 2019 and up to the date of the document, we have not been or are not a party to any transactions in which any of our directors, executive officers or holders of more than 5% of our share capital, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest. For additional information, related to transactions with related parties, see Note 2018 to the consolidated financial statements.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements.
See Item 18.
Legal Proceedings
NPB Co. leases its fabrication facilities under operational lease contracts. In the amendments to time, weits leases, (i) NPB Co. secured various contractual safeguards designed to limit and mitigate any adverse impact of construction activities on its fabrication operations; and (ii) the lease includes certain obligations, including certain noise abatement actions at the fabrication facility. The landlord has claimed that noise abatement actions that have been implemented according obligations under the lease are a partynot adequate under the terms of the lease. NPB Co. does not agree with, and is disputing these claims.
Dividend Policy
We currently intend to various litigation matters incidentalretain future earnings to the conductfinance our growth and acquisition strategy, as well as capacity growth and our ongoing operations. Our board of our business.
B. SIGNIFICANT CHANGES
No significant change has occurred since December 31, 2017,2019, except as disclosed in this annual report.
ITEM 9.THE OFFER AND LISTING
Our ordinary shares are listed and traded on the NASDAQ Stock Market (on the NASDAQ Global Market through March 16, 2012, on the NASDAQ Capital Market from March 17, 2012 through September 6, 2012, and on the NASDAQ Global Select Market since that date) and on the Tel Aviv Stock Exchange (TASE) under the symbol “TSEM”.
NASDAQ Stock Market | Tel Aviv Stock Exchange | |||||||||||||||
High ($) | Low ($) | High (NIS) | Low (NIS) | |||||||||||||
Period | ||||||||||||||||
| March 2018 | 30.39 | 26.52 | 104.90 | 91.60 | ||||||||||||
| February 2018 | 34.56 | 28.95 | 119.90 | 102.30 | ||||||||||||
| January 2018 | 36.08 | 33.01 | 124.00 | 114.10 | ||||||||||||
| December 2017 | 35.65 | 32.70 | 125.50 | 116.10 | ||||||||||||
| November 2017 | 36.69 | 31.11 | 128.00 | 107.80 | ||||||||||||
| October 2017 | 33.30 | 30.40 | 116.80 | 106.40 | ||||||||||||
| First quarter 2018 | 36.08 | 26.52 | 124.00 | 91.60 | ||||||||||||
| Fourth quarter 2017 | 36.69 | 30.40 | 128.00 | 106.40 | ||||||||||||
| Third quarter 2017 | 30.91 | 23.38 | 109.90 | 82.70 | ||||||||||||
| Second quarter 2017 | 25.89 | 20.60 | 92.14 | 76.46 | ||||||||||||
| First quarter 2017 | 23.65 | 19.02 | 86.51 | 73.17 | ||||||||||||
| Fourth quarter 2016 | 20.04 | 15.04 | 76.55 | 57.41 | ||||||||||||
| Third quarter 2016 | 16.13 | 11.74 | 60.30 | 45.68 | ||||||||||||
| Second quarter 2016 | 13.59 | 11.03 | 52.40 | 40.32 | ||||||||||||
| First quarter 2016 | 14.50 | 10.36 | 56.89 | 42.70 | ||||||||||||
| 2017 | 36.69 | 19.02 | 128.00 | 73.17 | ||||||||||||
| 2016 | 20.04 | 10.36 | 76.55 | 40.32 | ||||||||||||
| 2015 | 18.29 | 10.68 | 73.79 | 41.85 | ||||||||||||
| 2014 | 14.26 | 5.44 | 56.00 | 19.20 | ||||||||||||
| 2013 | 8.67 | 3.85 | 32.40 | 13.40 | ||||||||||||
ITEM 10.ADDITIONAL INFORMATION
A. SHARE CAPITAL.
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
A copy of our Articles of Association (“Articles”), Tower’s objective is to engage in any lawful activity.
C. MATERIAL CONTRACTS
For information regarding material contracts see Notes 3,10, 11, 12,13, 14, 15 16 and 1716 to our consolidated financial statements for the year ended December 31, 20172019 and the agreements described under the caption “Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources”.
TPSCo Agreements
In March 2014, we acquired a 51% equity stake in TowerJazz Panasonic Semiconductor Co., Ltd., (“TPSCo”),TPSCo, a company formed by Panasonic Corporation (“Panasonic” or “Panasonic Corporation” or “PSCS”).
D. EXCHANGE CONTROLS
There are currently no Israeli currency control restrictions on remittancesgovernment laws, decrees, regulations or other legislation that restrict or affect our import or export of dividends on our ordinary shares, proceeds fromcapital, including the saleavailability of cash and cash equivalents for use by us, or the shares orremittance of dividends, interest or other payments to holders of our securities that are non-residents of Israel, except under certain circumstances, for shareholders who are subjectsnationals of countries that are, or have been, in a state of war with Israel.
E. TAXATION
The discussion below discussion does not purport to be an official interpretation of the tax law provisions mentioned therein or to be a comprehensive description of all tax law provisions which might apply to the acquisition, ownership and disposition of our securities or to reflect the views of the relevant tax authorities, and it is not meant to replace professional advice in these matters. The discussion below discussion is based on current, applicable tax law, which may be changed by future legislation or reforms. Non-residents should obtain professional tax advice with respect to the tax consequences of acquiring, holding or selling our securities under the laws of their countries of residence of acquiring, holding or selling our securities.
Israeli Taxation
General Corporate Tax
Israeli companies are subject to corporate tax at the rate of 24% for 2017, and 23% commencing 2018. However, the effective corporate tax rate payable by a company which derives income from a "Preferred Enterprise"“Preferred Enterprise” (as further discussed below) may be lower.
Israeli Tax on Capital Gains
An individual is subject to a tax at a rate of 25% on real capital gains derived from the sale of shares, unless such individual claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares and as long as the individual is not a “substantial shareholder” in the company issuing the shares.
A “substantial shareholder” is generally a person who alone, or together with his relative or another person who collaborates with him on a regular basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation, or instruct someone who holds any of the aforesaid rights regarding the manner in which he or she is to exercise such right(s), and all regardless of the source of such right.
An individual who is a substantial shareholder at the time of sale or at any time during the preceding 12-month period, is subject to tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by the company in which he or she is a substantial shareholder. The determination
Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income (up to 47% from 2017).
Under present Israeli tax legislation, the tax rate applicable to real capital gain derived by Israeli resident corporations from the sale of whethershares of an Israeli company is the individual is a substantial shareholder will be made on the date that the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he or she had been a substantial shareholder.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares in an Israeli corporation publicly traded on the TASE and/or on a foreign stock exchange, provided such gains do not derive from a permanent establishment of such shareholders in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
The purchaser of the shares, the stockbrokers who effected the transaction or the financial institution holding the shares through which payment to the seller is made are obligated, subject to the above-referenced exemptions if certain conditions are met, to withhold tax on the real capital gain resulting from a sale of their ordinary shares at the paymentrate of the consideration may be subject to Israeli withholding tax.
Israeli Tax on Interest Income and on Original Issuance Discount
Interest and Original Issuance Discount (OID) on our debentures Series G debentures are, in general, subject to Israeli tax of up to 25%15% (which would be withheld at source) if received by an individual. However, tax at the marginal rate (up to 50%), shall apply, if one of the following applies:
•
if the interest or OID are business income in the hands of the recipient,
•
if the interest is recorded or should be recorded in the individual’s accounting books,
•
if the recipient is a substantial shareholder of ourthe company,
•
if financing expenses related to the purchase of the debentures were deducted by the individual in the calculation of the individual’s Israeli taxable income, or
•
if the individual is an employee, supplier, or service provider of the company or has another special relationship with the company and the tax authorities have not been persuaded that the payment of interest was not affected by the relationship between the parties.
Interest and OID paid on our Series G debentures to Israeli corporations will, in general, be subject to withholding tax at a rate of 24% in 2017 (23%23% from 2018 onwards).
Interest and OID paid on our debentures to non-Israeli residents may be subject to lower withholding tax in an applicable tax treaty. For example, under the US-Israel Tax Treaty, the maximum Israeli tax withheld on interest and OID paid to a US resident (other than a US bank, savings institution or company or with respect to payments attributed to a permanent establishment in Israel) is 17.5%.
Interest, OID or inflation linkage differentials paid to a non-Israeli resident which does not have a permanent establishment in Israel, on debentures issued by an Israeli corporation and which are traded on the TASE, are generally exempt from taxes in Israel. However, this exemption from taxes will not apply (and consequently tax will be withheld at source):
•
if the recipient is a substantial shareholder of the company,
•
if the recipient is an affiliate of the company, or
•
if the individual is an employee, supplier, or service provider of the company and the tax authorities have not been persuaded that the payment was not affected by the relationship between the parties.
Israeli Tax on Dividend Income
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on our ordinary shares.
On distributions of dividends other than bonus shares, or stock dividends, to Israeli and non-Israeli resident individuals and non-Israeli resident corporations we would be required to withhold income tax at the rate of 25% (or 30% if such non-Israeli resident individualshareholder is a “substantial shareholder” at the time receiving the dividend or on any date in the 12 months preceding such date)date and the shares are not held through a nominee company). If the income out of which the dividend is being paid is attributable to a privileged Enterprise or Preferred Enterprise under the Law for the Encouragement of Capital Investments, 1959 ("the Investment Law,"), the rate is generally not more than 20%. A different rate may be provided for in an applicable tax treaty.
Under the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a US resident may not, in general, exceed 25%. Where the recipient is a US corporation owning 10% or more of the voting stock of the paying corporation during the part of the tax year which precedes the date of payment of the dividend and during the entire tax year preceding such year, and the dividend is not paid from the profits of a corporation entitled to the benefits of the Investment Law, the Israeli tax withheld may not exceed 12.5% or 15% in the case of dividends paid out of the profits of a corporation entitled to the benefits of the Investment Law, subject to certain conditions.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, was originally enacted in order to provide certain incentives for capital investments in production facilities (or other eligible assets).
In recent years, the Investment Law has undergone major reforms and several amendments which were intended to provide expanded tax benefits and to simplify the bureaucratic process relating to the approval of investments qualifying under the Investment Law. The different benefits under the Investment Law depend on the specific year in which the enterprise received approval from the Investment Center or the year it was eligible for Approved/Privileged/Preferred Enterprise status under the Investment Law, and the benefits available at that time.
Tax Benefits Prior to the 2005 Amendment
Prior to an amendment to the Investment Law
Tax Benefits Subsequent to the 2005 Amendment
Pursuant to the 2005 Amendment, a company whose facilities meet certain criteria set forth in the 2005 Amendment may claim certain tax benefits offered by the Investment Law (as further described below) directly in its tax returns, without the need to obtain prior approval. In order to receive the tax benefits, a company must make an investment which meets all of the conditions, including exceeding a minimum entitling investment amount, set forth in the Investment Law. Such investment allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years ending at the end of the year in which the company chose to have the tax benefits apply to its Benefited Enterprise, referred to as the “Year of Election.”
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available.
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, plus interest, or other monetary penalties.
Tax Benefits under the 2011 Amendment and thereafter
An amendment to the Investment Law that became effective on January 1, 2011, generally referred to as the 2011 Amendment, made significant changes have been made to the Investment Law, which revamped the tax incentive regime in Israel. The main changes are, inter alia, as follows:
•
Industrial companies meeting the criteria set out by the Investment Law for a “Preferred Income” of a “Preferred Enterprise” (as defined below) will be eligible for flat tax rates of 7.5% or 16% in 2017 and thereafter, with the actual tax rates determined by the location of the enterprise. The location of Tower's fabrication facilities in Israel entitles it to benefit from a tax rate of 7.5%. The tax incentives offered by the Investment Law are no longer dependent neither on minimum qualified investments nor on foreign ownership.
•
A company can enjoy both government grants and tax benefits concurrently. Governmental grants will not necessarily be dependent on the extent of enterprise’s investment in assets and/or equipment. The approval of “Preferred Enterprise” status by either the Israel Tax Authority or the Investment Center will be accepted by the other. Therefore, a Preferred Enterprise may be eligible to receive both tax incentives and government grants, under certain conditions.
•
Under the transition provisions, any tax benefits obtained prior to 2011 shall continue to apply until expired, unless the company elects to apply the provisions of the new provisions to its income.
“Preferred Income” is defined as income from a preferred enterprise,Preferred Enterprise, as specified below, with the condition that the income was produced or arose in the course of the enterprise's ordinary activity in Israel and excludingfrom one of the following (excluding certain income derives from intangible assets which are not attributed to the enterprise's production;production): income from the sale of products of the Preferred Enterprise (including components that were produced by other enterprises); income from the sale of semiconductors produced by other non relatednon-related enterprises which use the Preferred Enterprise’s self-developed know-how; income for providing a right to use the Preferred Enterprise’s know how or software; royalties from the use of the know-how or software which was confirmed by the Head of Thethe Investment Center to be related to the production activity of the Preferred EnterpriseEnterprise; and services with respect to the aforementioned sales. In addition, the definition of “Preferred Income” also includes income from the provision of industrial R&D services to foreign residents to the extent that the services were approved by the Head of Research for the Industrial Development and Administration.
A “Preferred Enterprise” is defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved R&D services to foreign residents and an enterprise which the Chief Scientist confirmed is carrying out R&D in the field of alternative energy)residents), which generally more than 25% of its business income is from export. As mentioned above, the newthese tax incentives no longer depend on minimum qualified investments nor on foreign ownership.
The Investment Law also determines the conditions and limitations applying to the tax benefits offered to a “Special Preferred Enterprise” (as defined below). A “Special Preferred Enterprise” will be able to enjoy corporate income tax rate in a rate of 5% if located in a preferred zone and 8% if not located in a preferred zone.
A “Special Preferred Enterprise” is defined as a Preferred Enterprise which meets all of the following conditions, during the relevant tax year: (a) its Preferred Income is equal to or exceeds NIS 1 billion; (b) the total income of the company which owns the Preferred Enterprise or which operates in the same field of the Preferred Enterprise and which consolidates in its financial reports the company that owns the Preferred Enterprise equals or exceeds NIS 10 billion; and (c) its business plan was approved by the authorities as significantly benefitting the Israeli economy, either by any of the following, and subject to the terms and reliefs stated in the Investment Law: (i) an investment of at least NIS 400 - 800 million in assets; (ii) in each tax year during the benefits period, R&D investment in a preferred zone of at least NIS 100 million more than the average R&D investments' amount during the 3 preceding years to the business plan's approval; (iii) in each tax year during the benefits period, R&D investment in certain R&D's fields of at least NIS150 million more than the average R&D investments' amount during the 3 preceding years to the business plan's approval (or half of these amounts if the average annual R&D is above NIS 500 million); or (iv) the employment of at least 250 to 500 new employees, for preferred zones and regular zones, respectively.
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at a rate of 20% or such lower rate as may be provided in an applicable tax treaty upon a request submitted by the recipient of such dividends. However, if such dividends are paid to an Israeli company no tax will be withheld.
The provisions of the 2011 Amendment do not apply to existing Benefited Enterprises or Approved Enterprises, which will continue to be entitled to the tax benefits under the Investment Law as in effect prior to the 2011 Amendment. Nevertheless, a company owning such enterprises may choose to apply the 2011 Amendment to its existing enterprises while waiving benefits provided under the Investment Law as in effect prior to the 2011 Amendment. Once a company elects to be classified as a Preferred Enterprise under the provisions of the 2011 Amendment, the election cannot be rescinded and such company will no longer enjoy the tax benefits of its Approved/Privileged Enterprises.
As Tower has net operating loss carryforwards for tax purposes, it has not elected to apply Preferred Enterprise status to date; however, as we believe that we qualify as a Preferred Enterprise, we apply the tax rate of 7.5% in determining our Israeli current tax provision, deferred tax assets and liabilities, but there can be no assurance that we will so qualify or that the benefits described above will be imposedavailable to us in the future. If we do not qualify as a Preferred Enterprise, we may be required to amend our Israeli current tax provisions and our net profit may be reduced.
An additional amendment to the Investment Law was enacted as part of the Economic Efficiency Law that was published on high earnersDecember 29, 2016, and became effective as of January 1, 2017, generally referred to as the 2017 Amendment. The benefits under the 2017 Amendment do not currently apply to Tower.
Excess Tax
Subject to the provisions of an applicable tax treaty, individuals whosewho are subject to tax in Israel are also subject to an additional tax at the rate of 3% on the annual taxable income or gain including,(including, but not limited to, dividends, interest and capital gains, exceeds a certain threshold which is linked to the annual changegain) exceeding NIS 649,560 in the 2019 and NIS 651,600 in 2020.
Estate and Gift Tax
Israeli consumer price index. The threshold in 2017 was NIS 640,000, and in 2018 is NIS 641,880.
U.S. Federal Income Tax Considerations
The following discussion is a description of the material U.S. federal income tax considerations applicable to an investment in the ordinary shares by U.S. Holders who acquire our ordinary shares and hold them as capital assets for U.S. federal income tax purposes. As used in this section, the term “U.S. Holder” means a beneficial owner of an ordinary share who is:
•
an individual citizen or resident of the United States;
•
a corporation created or organized in or under the laws of the United States or of any state of the United States or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust if the trust has elected validly to be treated as a United States person for U.S. federal income tax purposes or if a U.S. court is able to exercise primary supervision over the trust’s administration and one or more United States persons have the authority to control all of the trust’s substantial decisions.
The term “Non-U.S. Holder” means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.
This description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, referred to in this discussion as the Code, existing and proposed U.S. Treasury regulations and administrative and judicial interpretations, each as available and in effect as of the date of this annual report. These sources may change, possibly with retroactive effect, and are open to differing interpretations. This description does not discuss all aspects of U.S. federal income taxation that may be applicable to investors in light of their particular circumstances or to investors who are subject to special treatment under U.S. federal income tax law, including:
•
insurance companies;
•
dealers in stocks, securities or currencies;
•
financial institutions and financial services entities;
•
real estate investment trusts;
•
regulated investment companies;
•
persons that receive ordinary shares as compensation for the performance of services;
•
tax-exempt organizations;
•
persons that hold ordinary shares as a position in a straddle or as part of a hedging, conversion or other integrated instrument;
•
individual retirement and other tax-deferred accounts;
•
expatriates of the United States;
•
persons (other than Non-U.S. Holders) having a functional currency other than the U.S. dollar; and
•
direct, indirect or constructive owners of 10% or more, by voting power or value, of us.
This discussion also does not consider the tax treatment of persons or partnerships that hold ordinary shares through a partnership or other pass-through entity or the possible application of United States federal gift or estate tax or alternative minimum tax.
We urge you to consult with your own tax advisor regarding the tax consequences of investing in the ordinary shares, including the effects of federal, state, local, foreign and other tax laws.
Distributions Paid on the Ordinary Shares
Subject to the discussion below under “PFIC Rules,” a U.S. Holder generally will be required to include in gross income as ordinary dividend income the amount of any distributions paid on the ordinary shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Subject to the discussion below under “PFIC Rules” distributions in excess of our earnings and profits will be applied against and will reduce the U.S. Holder’s tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from a sale or exchange of those ordinary shares. Our dividends will not qualify for the dividends-received deduction applicable in some cases to U.S. corporations. Dividends paid in NIS, including the amount of any Israeli taxes withheld, will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date they are included in income by the U.S. Holder, regardless of whether the payment in fact is converted into USD. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date that payment is converted into USD generally will be treated as ordinary income or loss.
A non-corporate U.S. holder’s “qualified dividend income” is subject to tax at reduced rates not exceeding 20 %20% for tax years beginning 2012 (15% for 2011 and prior years) . For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if either:
(a)
the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or
(b)
that corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this purpose.
In addition, under current law a U.S. Holder must generally hold his ordinary shares for more than 60 days during the 121 day period beginning 60 days prior to the ex-dividend date, and meet other holding period requirements for qualified dividend income.
Dividends paid by a foreign corporation will not qualify for the reduced rates, unlessif such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. We do not believe that we will be classified as a “passive foreign investment company” for U.S. federal income tax purposes for our current taxable year. However, see the discussion under “PFIC Rules” below.
Subject to the discussion below under “Information Reporting and Back-up Withholding,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on ordinary shares unless that income is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the United States.
Foreign Tax Credit
Any dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary shares generally will be treated as foreign source income for U.S. foreign tax credit purposes, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if the taxpayer does not satisfy certain minimum holding period requirements. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and the availability of a foreign tax credit depends on numerous factors. Each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that purchaser would be entitled to the credit.
Disposition of Ordinary Shares
Upon the sale or other disposition of ordinary shares, subject to the discussion below under “PFIC Rules” a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S. Holders should consult their own advisors with respect to the tax consequences of the receipt of a currency other than USD upon such sale or other disposition.
In the event there is an Israeli income tax on gain from the disposition of ordinary shares, such tax should generally be the type of tax that is creditable for U.S. tax purposes; however, because it is likely that the source of any such gain would be a U.S. source, a U.S. foreign tax credit may not be available. U.S. shareholders should consult their own tax advisors regarding the ability to claim such credit.
Gain or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. Long-term capital gains realized by non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income, other than qualified dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of income.
Subject to the discussion below under “Information Reporting and Back-up Withholding”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of ordinary shares unless:
•
that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States, or
•
in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange, and other conditions are met.
Information Reporting and Back-up Withholding
Holders generally will be subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares. In addition, Holders will be subject to back-up withholding tax on dividends paid in the United States on ordinary shares unless the holder provides an IRS certification or otherwise establishes an exemption. Holders will be subject to information reporting and back-up withholding tax on proceeds paid within the United States from the disposition of ordinary shares unless the holder provides an IRS certification or otherwise establishes an exemption. Information reporting and back-up withholding may also apply to dividends and proceeds paid outside the United States that are paid by certain “U.S. payors” or “U.S. middlemen,” as defined in the applicable Treasury regulations, including:
(1)
a U.S. person;
(2)
the government of the U.S. or the government of any state or political subdivision of any state (or any agency or instrumentality of any of these governmental units);
(3)
a controlled foreign corporation;
(4)
a foreign partnership that is either engaged in a U.S. trade or business or whose Untied States partners in the aggregate hold more than 50% of the income or capital interests in the partnership;
(5)
a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S.; or
(6)
a U.S. branch of a foreign bank or insurance company.
The back-up withholding tax rate is 28%. Back-up withholding and information reporting will not apply to payments made to Non-U. S. Holders if they have provided the required certification that they are not United States persons.
In the case of payments by a payor or middleman to a foreign simple trust, foreign grantor trust or foreign partnership, other than payments to a holder that qualifies as a withholding foreign trust or a withholding foreign partnership within the meaning of the Treasury regulations and payments that are effectively connected with the conduct of a trade or business in the United States, the beneficiaries of the foreign simple trust, the person treated as the owner of the foreign grantor trust or the partners of the foreign partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements.
The amount of any back-up withholding may be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that required information is furnished to the IRS.
PFIC Rules
A non-US corporation will be classified as a passive foreign investment company, or a PFIC, for US federal income tax purposes if either (i) 75% or more of its gross income for the taxable year is passive income, or (ii) on a quarterly average for the taxable year by value (or, if it is not a publicly traded corporation and so elects, by adjusted basis), 50% or more of its gross assets produce or are held for the production of passive income.
We do not believe that we satisfied either of the tests for PFIC status in 20172019 or in any prior year and we do not expect to be a PFIC for 2018.2020. However, there can be no assurance that we will not be a PFIC in 20182020 or a later year. If, for example, the “passive income” earned by us exceeds 75% or more of our “gross income,” we will be a PFIC under the “income test.” Passive income for PFIC purposes includes, among other things, gross interest, dividends, royalties, rent and annuities. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination of PFIC status.
If we were to be a PFIC at any time during a US holder’s holding period, such US holder would be required to either: (i) pay an interest charge together with tax calculated at maximum ordinary income tax rates on “excess distributions,” which is defined to include gain on a sale or other disposition of ordinary shares, or (ii) so long as the ordinary shares are “regularly traded” on a qualifying exchange, elect to recognize as ordinary income each year the excess in the fair market value, if any, of its ordinary shares at the end of the taxable year over such holder’s adjusted basis in such ordinary shares and, to the extent of prior inclusions of ordinary income, recognize ordinary loss for the decrease in value of such ordinary shares (the “mark to market” election). For this purpose, the NASDAQ Global Select Market is a qualifying exchange. US holders are strongly urged to consult their own tax advisers regarding the possible application and consequences of the PFIC rules.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are required to file reports and other information with the SEC under the Securities Exchange Act of 1934 and the regulations thereunder applicable to foreign private issuers. Reports and other information filed by us with the SEC may be inspected and copied at the SEC’s public reference facilities described below. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies, we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the SEC under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange Act.
You may review and copy our filings with the SEC, including any exhibits and schedules, at the SEC’s public reference room at 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on this public reference room. As a foreign private issuer, all documents which were filed after November 4, 2002 on the SEC’s EDGAR system will be available for retrieval on the SEC’s website at www.sec.gov. These SEC filings are also available to the public on the Israel Securities Authority’s Magna website at www.magna.isa.gov.il, the Tel Aviv Stock Exchange website at http://www.maya.tase.co.il, and from commercial document retrieval services. We also generally make available on our own web site (www.towerjazz.com)(www.towersemi.com) our quarterly and year-end financial statements as well as other information. We do not intend for any information contained on our website to be considered part of this annual report, and we have included our website address in this annual report solely as an inactive textual reference. We will post on our website any materials required to be posted on such website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial data required to be filed with the SEC, and any notices of general meetings of our shareholders.
Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to a registration statement, the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk of Interest Rate Fluctuation
Our cash equivalents, short-term deposits and investments in marketable securities are exposed to market risk due to fluctuation in interest rates on our cash deposits and/ or investments, which may affect our interest income and the fair market value of our investments. We manage this exposure by performing ongoing evaluations of our investments in those deposits/ securities. Due to the short maturities of our investments and available for sale securities, their carrying value approximates their fair value.
Debentures Series G issued in 2016 (with an outstanding balanceprincipal of approximately $135 million as of December 31, 2017)2019), bear annual fixed interest of 2.79%, our 2014 Notesthe JP loan (with an outstanding balanceprincipal of approximately $58$101 million as of December 31, 2017) issued by Jazz, bear2019) bears annual fixed annual interest of 8%1.95%, and approximately $16$54 million of our subsidiaries’ equipment capital leases bear fixed interest rateat rates of 1.85% or 1.95% per annum. Therefore, we are not subject to cash flow exposure and/or financing expenses to interest rate fluctuations with respect to any of debentures Series G, Jazz 2014 NotesJP loan and the capital leases.
However, in the event that market interest rates for similar debt are decreasingdecrease and are lower than the interest rate provided under our debentures, capital leases or notes,loans, our actual financefinancing costs would have been higher than they otherwise would have been had our debentures or notesloans provided for interest at a floating interest rate, which would have impacted our financing expense in an immaterial manner.
Foreign Exchange Risk
We currently operate in three different regions: Japan, the United States and Israel. The functional currency of our entities in the United States and Israel entities is the USD. The functional currency of our subsidiary in Japan is the JPY. Our expenses and costs are denominated mainly in NIS, USD, JPY and JPY, ourNIS, revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly in NIS, USD, JPY and JPY.NIS. Therefore, the Company is exposed to the risk of currency exchange rate fluctuations in Israel and Japan.
The USD costscost of our operations in Israel areis influenced by changes in the USD to NIS exchange rate, with respect to costs that are denominated in NIS. During the year ended December 31, 2017,2019, the USD depreciated against the NIS by 9.8%7.8%, as compared to 1.5% depreciation8.1% appreciation during the year ended December 31, 2016.
The fluctuation of USD against the NIS can affect our results of operations.operations as it relates to our entity in Israel. Appreciation of the NIS has the effect of increasing the cost, in USD terms, of some of our Israeli purchases and labor NIScosts that are denominated costs in USD terms,NIS, which may lead to erosion in ourthe profit margins. We useThe Company uses foreign currency cylinder transactions to hedge a portion of this currency exposure to be contained within a pre-defined fixed range.
The majority of TPSCo'sTPSCo revenues are denominated in JPY and the majority of the expenses of TPSCo are in JPY, which limits the exposure to fluctuations of the USD / JPY exchange rate on TPSCo’s results of operations as the impact on the revenues will be mostly offset by the impact on the expenses.operations. In order to mitigate a portion of the net exposure to the USD / JPY exchange rate, over the net profit margins, the companyCompany has engaged in cylinder hedging transactions to contain the currency’s fluctuation within a pre-defined fixed range. During the year ended December 31, 2017,2019, the USD depreciated against the JPY by 3.8%1.2%, as compared to 2.8%2.4% depreciation during the year ended December 31, 2016.2018. The net effect of USD depreciation against the JPY on TPSCo’s assets and liabilities denominated in JPY is presented in the CTACumulative Translation Adjustment as part of OCIOther Comprehensive Income in the balance sheet.
Assuming a 10% appreciation of the NIS against the US dollarUSD on December 31, 20172019 (from 3.473.46 NIS/$ to 3.15)3.14 NIS/$), the effective impact on our quarterly Israeli expenses denominated in NIS would be higher expenses by approximately $3 million, portionwhich would partially be offset by the net impact of which is hedgedthe hedging executed using the above described cylinder transactions.
Assuming a 10% appreciation of the JPY against the US dollarUSD on December 31, 20172019 (from 113109 JPY/$ to 102)99 JPY/$), the effective impact on our quarterly expenses denominated in JPYstatement of operation’ results would be lower profitability (higher expenses, net of higher expensesrevenue) by approximately $2 million, a significant portionwhich would be partially offset by the net impact of which is hedgedthe hedging using the above described cylinder transactions and our natural hedging.
As of December 31, 2019, we are subject to currency exchange rate fluctuations of the JPY against the USD in connection with the following JPY debt denominated financings: (i) approximately $101 million of TPSCo’s loans bearing a fixed interest rate of 1.95% per annum and (ii) approximately $54 million of equipment capital lease agreements with an annual interest rate of 1.85% or 1.95%. However, as of December 31, 2019, we had approximately $74 million of cash and cash equivalents held in JPY currency accounts and deposits, partially mitigating the above JPY debt exposure. Under current terms of our JPY cash, cash equivalent and debt financing, we have determined that an assumed 10% appreciation of the JPY against the USD rate as of December 31, 2019 (from 109 JPY/$ to 99 JPY/$), would not have a material effect on our balance sheet as of December 31, 2019.
Impact of Inflation
We believe that the rate of inflation in Israel, which is ranging betweenbetween-1% to 1% to 2% over the last 6 years, has had a minor effect on our business to date. However, our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the US dollar.
For risks related to our traded securities, see “Item 3. Key Information—D. Risk Factors—Risks Related to
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of the period covered by this annual report on Form 20-F. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by our company in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.2019.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 20172019 has been audited by Brightman Almagor Zohar & Co., a member firm of Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that all four members of our audit committee, Mr. Ilan Flato, Mr. Rami Guzman, Mr. Yoav Chelouche and Ms. Iris Avner, are audit committee financial experts under applicable SEC rules and are independent as defined by NASDAQ Marketplace Rules.
ITEM 16B.CODE OF ETHICS
We adopted a code of ethics that applies to all of our directors, officers and employees inof our Company and all of our subsidiaries, including our Chief Executive Officer, Chief Financial Officer, controller, and persons performing similar functions. We have posted our code of ethics on our website, www.towerjazz.comwww.towersemi.com under “About Tower”.
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by our independent registered public accounting firm for audit services, audit-related services and tax services:
2019 | 2018 | |||||||
(US dollars in Thousands) | ||||||||
Audit Fees (1) | 805 | 809 | ||||||
Audit Related Fees (2) | 28 | 31 | ||||||
Tax Fees (3) | 8 | 18 | ||||||
841 | 858 | |||||||
2017 | 2016 | |||||||
(US dollars In Thousands) | ||||||||
| Audit Fees (1) | 790 | 761 | ||||||
| Audit Related Fees (2) | 27 | 51 | ||||||
| Tax Fees (3) | 26 | 20 | ||||||
| Other (4) | 26 | 52 | ||||||
869 | 884 | |||||||
(1)Audit Fees consist of fees for professional services rendered for |
(2)Audit-related fees consist of assurance and related services by the auditors including, among others: due diligence services, accounting consultations and audits in connection with acquisitions, attest services related to financial reporting that are not required by statute or regulation and consultation concerning financial accounting, consent letters for receiving specific information on the independent auditor’s proposedour SEC filings and reporting standards and out of pocket expenses reimbursement.
(3)Tax fees consist of fees for tax compliance services and for pre-approving all audit services annually and separately approving any other permitted non-audit relatedtax returns services. All of the non-audit services were pre-approved without reliance on the Waiver Provisions in paragraph (c)(7)(i)(C) of Regulations-X.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not Applicable.
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 16F.CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable
ITEM 16G.CORPORATE GOVERNANCE
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ MarketplaceNasdaq Listing Rules. See Item 10 “AdditionalWe have elected to follow the practices of our home country, rather than the Nasdaq Listing Rules, with respect to the following requirements:
•
Distribution of certain reports to shareholders. As opposed to the Nasdaq Listing Rule 5250(d), which requires listed issuers to make annual reports available to shareholders in one of a number of specific manners, Israeli law does not require that we distribute annual reports, including our financial statements. As such, the generally accepted business practice in Israel is to distribute such reports to shareholders through a public regulated distribution website. In addition to making such reports available on a public regulated distribution website, we plan to make our audited financial statements available to our shareholders at our offices and will only mail such reports to shareholders upon request. As a foreign private issuer, we are generally exempt from the SEC’s proxy solicitation rules.
•
Independent director meetings. Our Board has not adopted a policy of conducting regularly scheduled meetings at which only our independent directors are present, as permitted by Israeli law. We do not follow the requirements of Nasdaq Listing Rule 5605(b)(2).
•
Compensation of officers. We follow Israeli law and practice with respect to the approval of compensation for our chief executive officer and other executive officers. While our compensation committee currently complies with the provisions of the Nasdaq Listing Rules relating to composition requirements and Israeli law generally requires that the compensation of the chief executive officer and all other executive officers be approved, or recommended to the board for approval, by the compensation committee (with respect to the compensation of the chief executive officer and in certain other instances, shareholder approval is also required), Israeli law may differ from the provisions provided for in the Nasdaq Listing Rule 5605(d) (see Exhibit 2.1 to this Annual Report, “Description of Securities”).
•
Director nomination process. While our nominations committee currently complies with the provisions of the Nasdaq Listing Rules relating to composition requirements, the process under which director nominees are selected, or recommended for the Board of Directors selection, may not be in full compliance with the applicable Nasdaq Listing Rule 5605(e). Furthermore, although we have adopted a formal written nominations committee charter, there is no requirement under the Companies Law to do so and the charter as adopted may not be in full compliance with the requirements under Nasdaq Listing Rule 5605(e)(2).
•
Audit Committee Charter. Although we have adopted a formal written audit committee charter, there is no requirement under the Companies Law to do so and the charter as adopted may not specify all the items enumerated in the Nasdaq Listing Rule 5605(c)(1).
•
Compensation Committee Charter. Although we have adopted a formal written compensation committee charter, there is no requirement under the Companies Law to do so and the charter as adopted may not specify all the items enumerated in the Nasdaq Listing Rule 5605(d)(1).
•
Quorum requirements. Under our articles of association and as permitted under the Companies Law, a quorum for any meeting of shareholders shall be the presence of at least two shareholders holding a combined 33% of our outstanding ordinary shares, instead of 33 1/3% of the issued share capital required under Nasdaq Listing Rule 5620(c). If the meeting was adjourned for lack of a quorum, if a quorum is not present at the adjourned meeting within half an hour of the time fixed for the commencement of the adjourned meeting, the shareholders present, in person or by proxy, shall constitute a quorum.
•
Related Party Transactions. We review and approve all related party transactions in accordance with the requirements and procedures for approval of related party acts and transactions set forth in Sections 268 to 275 the Companies Law, which may not fully reflect the requirements of the Nasdaq Listing Rule 5630.
•
Shareholder Approval. We seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Law, rather than seeking approval for corporate actions in accordance with Nasdaq Listing Rule 5635.Under the Companies Law, shareholder approval is required (subject to certain limited exceptions) for, among other things: (a) transactions with directors concerning the terms of their service (including indemnification, exemption, and insurance for their service or for any other position that they may hold at a company), for which approvals of the compensation committee, board of directors, and shareholders are all required (subject to exceptions) (see Exhibit 2.1 to this Annual Report, “Description of Securities”); (b) extraordinary transactions with controlling shareholders of publicly held companies; (c) terms of office and employment or other engagement of a controlling shareholder, if any, or such controlling shareholder’s relative; (d) approval of transactions with the Company’s Chief Executive Officer with respect to his or her compensation, or transactions with officers of the Company not in accordance with the approved compensation policy (see Exhibit 2.1 to this Annual Report, “Description of Securities”); and (e) approval of the compensation policy of the Company for office holders (see “Item 6 Directors, Senior Management and Employees–B. Compensation”). In addition, under the Companies Law, a merger requires approval of the shareholders of each of the merging companies.
We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in Nasdaq Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.
Except as stated above, we currently intend to comply with the rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq Corporate Governance Requirements. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on Nasdaq, may provide less protection than is accorded to investors under Nasdaq listing requirements applicable to domestic issuers. For more information, see “Item 3. “Key Information – NASDAQ Marketplace RulesD.Risk Factors-Risks Related to the Company - As a foreign private issuer, we are permitted, to follow, and Home Country Practices” for a detailed description of the significant ways in which the registrant’sfollow certain home country corporate governance practices differ from those followed byinstead of otherwise applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. companies under the listing standards of the NASDAQ Global Select Market.
ITEM 16H.MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.FINANCIAL STATEMENTS
Not applicable.
ITEM 18.FINANCIAL STATEMENTS
Our consolidated financial statements and related auditors’ report for the year ended December 31, 20172019 are included in this Annual Report beginning on page F-1.
ITEM 19.EXHIBITS
1.1 Articles of Association of the Registrant,Company, approved by shareholders on November 14, 2000, as amended (incorporated by reference to Exhibit 3.1 of the Registrant’sCompany’s Registration Statement on Form F-1, File No. 333-126909, “Form F-1 No. 333-1 26909”)333-126909).
1.2 Amendment to Articles of Association of the RegistrantCompany (approved by shareholders on December 7, 2003) (incorporated by reference to exhibitExhibit 4.2 to the Registration Statement on Form S-8, File No. 333-117565 (“Form S-8 No. 333-117565”)333-117565).
1.3 Amendment to the Articles of Association of the RegistrantCompany (approved by shareholders on September 28, 2006) (incorporated(incorporated by reference to Exhibit 4.2 of the Registrant’sCompany’s Registration Statement on Form S-8, File No. 333-138837 (the “2006 Form S-8”)333-138837).
1.4Amendment to Articles of Association of RegistrantCompany (approved by shareholders on September 24, 2008) (incorporated by reference to Exhibit 3.4 of the Registrant’sCompany’s Registration Statement on Form S-8, File No. 333-153710 (the “2008 Form S-8”)333-153710).
1.5Amendment to Articles of Association of Registrant (approvedCompany(approved by shareholders on August 11, 2011) (incorporated by reference to exhibitExhibit 99.1 of the Form 6-K furnished to the SEC on January 17, 2012).
1.6Amendment to Articles of Association of RegistrantCompany (approved by shareholders on August 2, 2012) (incorporated by reference to proposals 1 and 2 of the proxy statement filed on Form 6-K furnished to the SEC on June 12, 2012, and the Form 6-K furnished to the SECSecurities and Exchange Commission on August 2, 2012)
1.7Amendment to Articles of Association of RegistrantCompany (approved by shareholders on May 23, 2013) (incorporated by reference to Proposal 5 of the proxy statement filedfurnished on Form 6-K furnished to the SECSecurities and Exchange Commission on April 16, 2013).
4.43 The 4.2Amended Compensation Policy of the Company (incorporated by reference to Annex A to Proposal 3 found in Exhibit 99.1 to the Form 6-K furnished to the Securities and Exchange Commission on May 25, 2017).
#12.1Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
#12.2Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
#13.1Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
#13.2Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
#15.1Consent of Brightman Almagor Zohar & Co., Certified Public Accountants, a member of Deloitte Touche Tohmatsu.
#101
The following financial information from Tower Semiconductor Ltd.’s Annual Report on Form 20-F for the year ended December 31,(i)
Consolidated Balance Sheets as of December 31, 2019 and 2018;
(ii)
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017;
(iii)
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017;
(iv)
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; and
(v)
Notes to Consolidated Financial Statements, tagged as blocks of text.
Users of this data are advised, in accordance with Rule 406T of Regulation S-T promulgated by the SEC, that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
#Filed herewith
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report to be signed on its behalf
TOWER SEMICONDUCTOR LTD. | |||
By: | /s/ Russell C. Ellwanger | ||
Russell C. Ellwanger | |||
Chief Executive Officer | |||
April 30, 2018
TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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F-1 - F-2 | |
F-3 | |
F-4 | |
F-5 | |
F-6 | |
F-7 - F-8 | |
F-9 - |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Tower Semiconductor Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tower Semiconductor Ltd. and subsidiaries (the "Company") as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows, for each of the three years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the "consolidated financial"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2018,2, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes — Income Tax Provision — Refer to Note 19 to the financial statements
Critical Audit Matter Description
The Company's provision for income taxes is affected by income taxes in Israel, the United States, and Japan. The income tax provision is an estimate determined based on management’s understanding of current enacted tax laws and tax rates of each tax jurisdiction and the use of acceptable allocation methodologies (transfer pricing) to allocate taxable income between tax jurisdictions based upon the structure of the Company’s operations and customer arrangements. The subsidiaries, which are semiconductors fabrications located outside Israel, are dependent on the allocation of production orders, managed centrally by the corporate global planning division, which directly affects the generation of income and local taxable income. For the year-ended December 31, 2019, the consolidated provision for income taxes was $2.9 million comprised of amounts related to Israel, Japan and U.S. operations, as detailed in Note 19.
We identified management’s determination of the taxable income and its related income tax provision as a critical audit matter because of the significant judgements and estimates management makes related to the taxable income allocation, the consideration of different tax status in each jurisdiction. This required a high degree of auditor judgement and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimate of the income tax provision.
How the Critical Audit Matter was addressed in the Audit
Our audit procedures related to the determination of the taxable income allocation and income tax provision included the following, among others:
•
We obtained the taxable income allocation used in calculating the income tax provision and tested that the taxable income allocation between Israel and corporate operations and the other subsidiaries is appropriate based on the specified services and margins determined in the Company's transfer pricing studies
•
We tested the effectiveness of controls over the Company’s process to allocate its taxable income between the different subsidiaries based on the Company's transfer pricing studies.
•
We read and evaluated management’s documentation, including information obtained by management from outside tax specialists that detailed the basis of the uncertain tax positions.
•
With the assistance of our income tax specialists we evaluated:
•
The appropriateness of the ranges of outcomes utilized and the pricing conclusions reached within the transfer pricing studies conducted by the Company's outside tax specialists.
•
The transfer pricing methodology utilized by management with alternative methodologies and industry benchmarks.
•
The relevant facts by reading the Company’s correspondence with the relevant tax authorities and any third-party advice obtained by the Company.
•
The Company’s measurement of uncertain tax positions related to transfer pricing based on our knowledge of international and local income tax laws, as well as historical settlement activity from income tax authorities
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member ofFirm in The Deloitte Touche Tohmatsu Limited
Tel Aviv, Israel
March 6
We have served as the Company's auditor since 1993.
F - 1
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Tower Semiconductor Ltd.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Tower Semiconductor Ltd. and subsidiaries (the “Company”) as of December 31, 2017,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financing Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member ofFirm in The Deloitte Touche Tohmatsu Limited
Tel Aviv, Israel
March 6, 2018
F - 2
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| A S S E T S | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 445,961 | $ | 355,284 | ||||
| Marketable securities | 113,874 | -- | ||||||
| Short term deposits | -- | 34,093 | ||||||
| Trade accounts receivable | 149,666 | 141,048 | ||||||
| Inventories | 143,315 | 137,532 | ||||||
| Other current assets | 21,516 | 30,041 | ||||||
| Total current assets | 874,332 | 697,998 | ||||||
| LONG-TERM INVESTMENTS | 26,073 | 25,624 | ||||||
| PROPERTY AND EQUIPMENT, NET | 635,124 | 616,686 | ||||||
| INTANGIBLE ASSETS, NET | 19,841 | 28,129 | ||||||
| GOODWILL | 7,000 | 7,000 | ||||||
| DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET | 111,269 | 4,447 | ||||||
| TOTAL ASSETS | $ | 1,673,639 | $ | 1,379,884 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current maturities of loans, leases and debentures | $ | 105,958 | $ | 48,084 | ||||
| Trade accounts payable | 115,347 | 99,262 | ||||||
| Deferred revenue and customers' advances | 14,338 | 26,169 | ||||||
| Employee related liabilities | 50,844 | 49,517 | ||||||
| Other current liabilities | 15,886 | 24,083 | ||||||
| Total current liabilities | 302,373 | 247,115 | ||||||
| LONG-TERM DEBT | ||||||||
| Debentures | 128,368 | 162,981 | ||||||
| Other long-term debt | 100,355 | 133,163 | ||||||
| LONG-TERM CUSTOMERS' ADVANCES | 31,908 | 41,874 | ||||||
| EMPLOYEE RELATED LIABILITIES | 14,662 | 14,176 | ||||||
| DEFERRED TAX LIABILITY | 63,924 | 95,233 | ||||||
| OTHER LONG-TERM LIABILITIES | 2,343 | 2,728 | ||||||
| Total liabilities | 643,933 | 697,270 | ||||||
| Ordinary shares of NIS 15 par value: | 391,727 | 369,057 | ||||||
150,000 authorized as of December 31, 2017 and 2016 98,544 and 98,458 issued and outstanding, respectively, as of December 31, 2017 93,071 and 92,985 issued and outstanding, respectively, as of December 31, 2016 | ||||||||
| Additional paid-in capital | 1,347,866 | 1,318,725 | ||||||
| Capital notes | 20,758 | 41,264 | ||||||
| Cumulative stock based compensation | 80,565 | 68,921 | ||||||
| Accumulated other comprehensive loss | (22,759 | ) | (27,827 | ) | ||||
| Accumulated deficit | (773,025 | ) | (1,071,036 | ) | ||||
| 1,045,132 | 699,104 | |||||||
| Treasury stock, at cost - 86 shares | (9,072 | ) | (9,072 | ) | ||||
| THE COMPANY'S SHAREHOLDERS' EQUITY | 1,036,060 | 690,032 | ||||||
| Non controlling interest | (6,354 | ) | (7,418 | ) | ||||
| TOTAL SHAREHOLDERS' EQUITY | 1,029,706 | 682,614 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,673,639 | $ | 1,379,884 | ||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| REVENUES | $ | 1,387,310 | $ | 1,249,634 | $ | 960,561 | ||||||
| COST OF REVENUES | 1,033,005 | 946,534 | 755,196 | |||||||||
| GROSS PROFIT | 354,305 | 303,100 | 205,365 | |||||||||
| OPERATING COSTS AND EXPENSES: | ||||||||||||
| Research and development | 67,664 | 63,134 | 61,669 | |||||||||
| Marketing, general and administrative | 66,799 | 65,439 | 62,793 | |||||||||
| Nishiwaki Fab restructuring and impairment cost (income), net | -- | (627 | ) | (991 | ) | |||||||
| 134,463 | 127,946 | 123,471 | ||||||||||
| OPERATING PROFIT | 219,842 | 175,154 | 81,894 | |||||||||
| INTEREST EXPENSE, NET | (7,840 | ) | (11,857 | ) | (13,179 | ) | ||||||
| OTHER FINANCING EXPENSE, NET | (7,607 | ) | (12,492 | ) | (109,930 | ) | ||||||
| GAIN FROM ACQUISITION, NET | -- | 50,471 | -- | |||||||||
| OTHER INCOME (EXPENSE), NET | (2,627 | ) | 9,322 | (190 | ) | |||||||
| PROFIT (LOSS) BEFORE INCOME TAX | 201,768 | 210,598 | (41,405 | ) | ||||||||
| INCOME TAX BENEFIT (EXPENSE), NET | 99,888 | (1,432 | ) | 12,278 | ||||||||
| NET PROFIT (LOSS) | 301,656 | 209,166 | (29,127 | ) | ||||||||
| Net income attributable to non controlling interest | (3,645 | ) | (5,242 | ) | (520 | ) | ||||||
| NET PROFIT (LOSS) ATTRIBUTABLE TO THE COMPANY | $ | 298,011 | $ | 203,924 | $ | (29,647 | ) | |||||
| BASIC EARNINGS (LOSS) PER ORDINARY SHARE: | ||||||||||||
| Earnings (loss) per share | $ | 3.08 | $ | 2.33 | $ | (0.40 | ) | |||||
| Weighted average number of ordinary shares outstanding | 96,647 | 87,480 | 74,366 | |||||||||
| DILUTED EARNINGS PER ORDINARY SHARE: | ||||||||||||
| Earnings per share | $ | 2.90 | $ | 2.09 | ||||||||
| Net profit used for diluted earnings per share | $ | 306,905 | $ | 212,160 | ||||||||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| used for diluted earnings per share | 105,947 | 101,303 | ||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net profit (loss) | $ | 301,656 | $ | 209,166 | $ | (29,127 | ) | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustment | 5,681 | 923 | (2,485 | ) | ||||||||
Change in employees plan assets and benefit obligations $171, $184 and $96 for the years ended December 31, 2017, 2016 and 2015, respectively | 511 | (546 | ) | 176 | ||||||||
| Unrealized gain (loss) on derivatives | 1,796 | 266 | (64 | ) | ||||||||
| Comprehensive income (loss) | 309,644 | 209,809 | (31,500 | ) | ||||||||
| Comprehensive (income) loss attributable to non-controlling interest | (6,565 | ) | (6,902 | ) | 769 | |||||||
| Comprehensive income (loss) attributable to the Company | $ | 303,079 | $ | 202,907 | $ | (30,731 | ) | |||||
| THE COMPANY'S SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Foreign currency translation adjustments | |||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary | Ordinary | Additional | other | Non | ||||||||||||||||||||||||||||||||||||||||||||
| shares | shares | paid-in | Capital | Unearned | comprehensive | Accumulated | Treasury | Comprehensive | controlling | |||||||||||||||||||||||||||||||||||||||
| issued | amount | capital | notes | compensation | income (loss) | deficit | stock | income (loss) | interest | Total | ||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF JANUARY 1, 2015 | 58,120 | $ | 235,117 | $ | 1,137,946 | $ | 60,704 | $ | 50,017 | $ | (376 | ) | $ | (25,350 | ) | $ | (1,244,007 | ) | $ | (9,072 | ) | $ | (9,418 | ) | $ | 195,561 | ||||||||||||||||||||||
| Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of debentures and exercise of warrants into share capital | 20,904 | 79,443 | 126,989 | 206,432 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | 1,620 | 6,261 | 1,730 | 7,991 | ||||||||||||||||||||||||||||||||||||||||||||
| Capital notes converted into share capital | 1,500 | 5,751 | 6,400 | (12,151 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||
| Employee stock-based compensation | 8,192 | 8,192 | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related to the Facility Agreement with the Banks | 480 | 480 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividend to Panasonic | (1,570 | ) | (1,570 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Profit (loss) | (29,647 | ) | $ | (29,647 | ) | 520 | (29,127 | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (1,196 | ) | (1,196 | ) | (1,289 | ) | (2,485 | ) | ||||||||||||||||||||||||||||||||||||||||
| Change in employees plan assets and benefit obligations | 176 | 176 | 176 | |||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives | (64 | ) | (64 | ) | (64 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | $ | (30,731 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2015 | 82,144 | $ | 326,572 | $ | 1,273,545 | $ | 48,553 | $ | 58,209 | $ | (264 | ) | $ | (26,546 | ) | $ | (1,273,654 | ) | $ | (9,072 | ) | $ | (11,757 | ) | $ | 385,586 | ||||||||||||||||||||||
| Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares | 3,297 | 12,504 | 27,496 | 40,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of debentures and exercise of warrants into share capital | 3,080 | 12,069 | 10,223 | 22,292 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | 3,650 | 14,412 | 3,192 | 17,604 | ||||||||||||||||||||||||||||||||||||||||||||
| Capital notes converted into share capital | 900 | 3,500 | 3,789 | (7,289 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||
| Employee stock-based compensation | 9,406 | 9,406 | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related to the Facility Agreement with the Banks | 480 | 480 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividend to Panasonic | (2,563 | ) | (2,563 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Accumulated amount due to adoption of ASU No. 2016-09, Compensation - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Compensation (Topic 718) | 1,306 | (1,306 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Profit | 203,924 | $ | 203,924 | 5,242 | 209,166 | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (737 | ) | (737 | ) | 1,660 | 923 | ||||||||||||||||||||||||||||||||||||||||||
| Change in employees plan assets and benefit obligations | (546 | ) | (546 | ) | (546 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives | 266 | 266 | 266 | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 202,907 | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2016 | 93,071 | $ | 369,057 | $ | 1,318,725 | $ | 41,264 | $ | 68,921 | $ | (544 | ) | $ | (27,283 | ) | $ | (1,071,036 | ) | $ | (9,072 | ) | $ | (7,418 | ) | $ | 682,614 | ||||||||||||||||||||||
| Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares | 2,914 | 12,128 | 4,247 | 16,375 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | 1,629 | 6,750 | 8,180 | 14,930 | ||||||||||||||||||||||||||||||||||||||||||||
| Capital notes converted into share capital | 930 | 3,792 | 16,714 | (20,506 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||
| Employee stock-based compensation | 11,644 | 11,644 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividend to Panasonic | (5,501 | ) | (5,501 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Profit | 298,011 | $ | 298,011 | 3,645 | 301,656 | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 2,761 | 2,761 | 2,920 | 5,681 | ||||||||||||||||||||||||||||||||||||||||||||
| Change in employees plan assets and benefit obligations | 511 | 511 | 511 | |||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives | 1,796 | 1,796 | 1,796 | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | $ | 303,079 | ||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2017 | 98,544 | $ | 391,727 | $ | 1,347,866 | $ | 20,758 | $ | 80,565 | $ | 1,763 | $ | (24,522 | ) | $ | (773,025 | ) | $ | (9,072 | ) | $ | (6,354 | ) | $ | 1,029,706 | |||||||||||||||||||||||
| OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF DECEMBER 31, 2017 | 98,458 | |||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| CASH FLOWS - OPERATING ACTIVITIES | ||||||||||||
| Net profit (loss) | $ | 301,656 | $ | 209,166 | $ | (29,127 | ) | |||||
| Adjustments to reconcile net profit (loss) for the period | ||||||||||||
| to net cash provided by operating activities: | ||||||||||||
| Income and expense items not involving cash flows: | ||||||||||||
| Depreciation and amortization | 208,411 | 197,606 | 168,032 | |||||||||
| Financing expense associated with debentures series F | -- | 150 | 87,973 | |||||||||
| Effect of indexation, translation and fair value measurement on debt | 12,865 | 8,292 | 16,078 | |||||||||
| Other expense (income), net | 2,627 | (9,322 | ) | 190 | ||||||||
| Gain from acquisition, net | -- | (50,471 | ) | -- | ||||||||
| Changes in assets and liabilities: | ||||||||||||
| Trade accounts receivable | (6,564 | ) | (30,104 | ) | (11,115 | ) | ||||||
| Other current assets | (8,321 | ) | (265 | ) | (14,978 | ) | ||||||
| Inventories | (4,277 | ) | (22,069 | ) | (17,908 | ) | ||||||
| Trade accounts payable | (8,649 | ) | 5,550 | (26,163 | ) | |||||||
| Deferred revenue and customers' advances | (21,803 | ) | 23,581 | 32,725 | ||||||||
| Employee related liabilities and other current liabilities | (8,219 | ) | (145 | ) | 8,454 | |||||||
| Long-term employee related liabilities | (3,247 | ) | (798 | ) | (2,036 | ) | ||||||
| Deferred tax, net | (108,459 | ) | (4,564 | ) | (4,173 | ) | ||||||
| Other long-term liabilities | (385 | ) | 861 | (12,739 | ) | |||||||
| Nishiwaki employees retirement related payments in connection with its operation cessation | -- | -- | (24,907 | ) | ||||||||
| Net cash provided by operating activities | 355,635 | 327,468 | 170,306 | |||||||||
| CASH FLOWS - INVESTING ACTIVITIES | ||||||||||||
| Investments in property and equipment | (187,676 | ) | (217,496 | ) | (172,078 | ) | ||||||
| Proceeds related to sale and disposal of property and equipment | 20,038 | 7,872 | 6,589 | |||||||||
| Investment grants received | 2,921 | -- | -- | |||||||||
| Deposits and other investments, including marketable securities, net | (80,643 | ) | (17,101 | ) | (30,000 | ) | ||||||
| Net cash used in investing activities | (245,360 | ) | (226,725 | ) | (195,489 | ) | ||||||
| CASH FLOWS - FINANCING ACTIVITIES | ||||||||||||
| Issuance of debentures, net | -- | 113,149 | -- | |||||||||
| Exercise of warrants and options, net | 31,315 | 38,803 | 14,424 | |||||||||
| Proceeds from loans | -- | 55,960 | 70,592 | |||||||||
| Loans repayment | (43,259 | ) | (132,018 | ) | (18,200 | ) | ||||||
| Principal payments on account of capital lease obligation | (781 | ) | -- | -- | ||||||||
| Debentures repayment | (6,215 | ) | -- | (51,489 | ) | |||||||
| Dividend payment to Panasonic | (4,378 | ) | (2,563 | ) | (1,570 | ) | ||||||
| Net cash provided by (used in) financing activities | (23,318 | ) | 73,331 | 13,757 | ||||||||
| EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGE | 3,720 | 5,635 | (166 | ) | ||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 90,677 | 179,709 | (11,592 | ) | ||||||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 355,284 | 175,575 | 187,167 | |||||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 445,961 | $ | 355,284 | $ | 175,575 | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| NON-CASH ACTIVITIES: | ||||||||||||
| Investments in property and equipment | 28,419 | $ | 23,747 | $ | 18,657 | |||||||
| Conversion of debentures to share capital | -- | $ | 611 | $ | 195,726 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid during the period for interest | 10,198 | $ | 9,534 | $ | 12,371 | |||||||
| Cash paid during the period for income taxes | 17,668 | $ | 3,485 | $ | 3,469 | |||||||
| (a) ACQUISITION OF SUBSIDIARIES CONSOLIDATED FOR THE FIRST TIME, SEE ALSO NOTE 3: | ||||||||||||
| Assets and liabilities of the subsidiaries: | ||||||||||||
| As of | ||||||||||||
| February 1, 2016 | ||||||||||||
| Working capital (excluding cash and cash equivalents) | $ | 10,775 | ||||||||||
| Fixed assets | 106,919 | |||||||||||
| Intangible assets | 2,799 | |||||||||||
| Long-term liabilities | (28,021 | ) | ||||||||||
| 92,472 | ||||||||||||
| Less: | ||||||||||||
| Share capital | 40,000 | |||||||||||
| Gain from acquisition, net | 52,472 | |||||||||||
| 92,472 | ||||||||||||
| Cash from the acquisition of a subsidiaries consolidated for the first time | $ | -- | ||||||||||
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands)
As of | As of | ||||||||
December 31, | December 31, | ||||||||
2019 | 2018 | ||||||||
| |||||||||
A S S E T S | |||||||||
| |||||||||
CURRENT ASSETS | |||||||||
Cash and cash equivalents | $ | 355,561 | $ | 385,091 | |||||
Short-term interest-bearing deposits | 215,609 | 120,079 | |||||||
Marketable securities | 176,070 | 135,850 | |||||||
Trade accounts receivable | 126,966 | 153,409 | |||||||
Inventories | 192,256 | 170,778 | |||||||
Other current assets | 22,019 | 22,752 | |||||||
Total current assets | 1,088,481 | 987,959 | |||||||
| |||||||||
LONG-TERM INVESTMENTS | 40,085 | 35,945 | |||||||
| |||||||||
PROPERTY AND EQUIPMENT, NET | 681,939 | 657,234 | |||||||
| |||||||||
INTANGIBLE ASSETS, NET | 10,281 | 13,435 | |||||||
| |||||||||
GOODWILL | 7,000 | 7,000 | |||||||
| |||||||||
DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET | 105,047 | 88,404 | |||||||
| |||||||||
TOTAL ASSETS | $ | 1,932,833 | $ | 1,789,977 | |||||
| |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| |||||||||
CURRENT LIABILITIES | |||||||||
Current maturities of long-term debt | $ | 65,932 | $ | 10,814 | |||||
Trade accounts payable | 119,199 | 104,329 | |||||||
Deferred revenue and customers' advances | 10,322 | 20,711 | |||||||
Employee related liabilities | 50,302 | 50,750 | |||||||
Other current liabilities | 7,301 | 17,117 | |||||||
Total current liabilities | 253,056 | 203,721 | |||||||
| |||||||||
LONG-TERM DEBT | |||||||||
Debentures | 94,552 | 120,170 | |||||||
Other long-term debt | 151,269 | 136,499 | |||||||
| |||||||||
LONG-TERM CUSTOMERS' ADVANCES | 28,196 | 28,131 | |||||||
| |||||||||
EMPLOYEE RELATED LIABILITIES | 13,285 | 13,898 | |||||||
| |||||||||
DEFERRED TAX LIABILITY | 45,238 | 50,401 | |||||||
| |||||||||
OTHER LONG-TERM LIABILITIES | 514 | 952 | |||||||
| |||||||||
TOTAL LIABILITIES | 586,110 | 553,772 | |||||||
| |||||||||
Ordinary shares of NIS 15 par value: | 426,111 | 418,492 | |||||||
150,000 authorized as of December 31, 2019 and 2018 | |||||||||
106,895 and 106,808 issued and outstanding, respectively, as of December 31, 2019 | |||||||||
105,066 and 104,979 issued and outstanding, respectively, as of December 31, 2018 | |||||||||
Additional paid-in capital | 1,395,376 | 1,380,396 | |||||||
Capital notes | -- | 20,758 | |||||||
Cumulative stock based compensation | 107,774 | 93,226 | |||||||
Accumulated other comprehensive loss | (18,244 | ) | (23,388 | ) | |||||
Accumulated deficit | (547,398 | ) | (637,446 | ) | |||||
1,363,619 | 1,252,038 | ||||||||
Treasury stock, at cost - 87 shares | (9,072 | ) | (9,072 | ) | |||||
THE COMPANY'S SHAREHOLDERS' EQUITY | 1,354,547 | 1,242,966 | |||||||
Non-controlling interest | (7,824 | ) | (6,761 | ) | |||||
TOTAL SHAREHOLDERS' EQUITY | 1,346,723 | 1,236,205 | |||||||
| |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,932,833 | $ | 1,789,977 | |||||
See notes to consolidated financial statements.
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
Year ended | ||||||||||||
December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
| ||||||||||||
REVENUES | $ | 1,234,003 | $ | 1,304,034 | $ | 1,387,310 | ||||||
| ||||||||||||
COST OF REVENUES | 1,004,332 | 1,011,087 | 1,033,005 | |||||||||
| ||||||||||||
GROSS PROFIT | 229,671 | 292,947 | 354,305 | |||||||||
| ||||||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||
| ||||||||||||
Research and development | 75,579 | 73,053 | 67,664 | |||||||||
Marketing, general and administrative | 67,376 | 64,951 | 66,799 | |||||||||
| ||||||||||||
142,955 | 138,004 | 134,463 | ||||||||||
| ||||||||||||
OPERATING PROFIT | 86,716 | 154,943 | 219,842 | |||||||||
| ||||||||||||
FINANCING INCOME (EXPENSE), NET | 12 | (13,184 | ) | (15,447 | ) | |||||||
| ||||||||||||
OTHER INCOME (EXPENSE), NET | 4,293 | (2,442 | ) | (2,627 | ) | |||||||
| ||||||||||||
PROFIT BEFORE INCOME TAX | 91,021 | 139,317 | 201,768 | |||||||||
| ||||||||||||
INCOME TAX BENEFIT (EXPENSE), NET | (2,948 | ) | (5,938 | ) | 99,888 | |||||||
| ||||||||||||
NET PROFIT | 88,073 | 133,379 | 301,656 | |||||||||
| ||||||||||||
Net loss (income) attributable to non-controlling interest | 1,975 | 2,200 | (3,645 | ) | ||||||||
| ||||||||||||
NET PROFIT ATTRIBUTABLE TO THE COMPANY | $ | 90,048 | $ | 135,579 | $ | 298,011 | ||||||
| ||||||||||||
BASIC EARNINGS PER ORDINARY SHARE: | ||||||||||||
| ||||||||||||
Earnings per share | $ | 0.85 | $ | 1.35 | $ | 3.08 | ||||||
| ||||||||||||
Weighted average number of ordinary shares outstanding | 106,256 | 100,399 | 96,647 | |||||||||
| ||||||||||||
DILUTED EARNINGS PER ORDINARY SHARE: | ||||||||||||
| ||||||||||||
Earnings per share | $ | 0.84 | $ | 1.32 | $ | 2.90 | ||||||
| ||||||||||||
Net profit used for diluted earnings per share | $ | 90,048 | $ | 135,579 | $ | 306,905 | ||||||
| ||||||||||||
Weighted average number of ordinary shares outstanding used for diluted earnings per share | 107,438 | 102,517 | 105,947 | |||||||||
See notes to consolidated financial statements.
F - 4
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Year ended | ||||||||||||
December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
| ||||||||||||
Net profit | $ | 88,073 | $ | 133,379 | $ | 301,656 | ||||||
| ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
| ||||||||||||
Foreign currency translation adjustment | 3,478 | 3,599 | 5,681 | |||||||||
| ||||||||||||
Change in employees plan assets and benefit obligations, net of taxes | (1,118 | ) | 269 | 511 | ||||||||
| ||||||||||||
Unrealized gain (loss) on derivatives | 3,696 | (2,704 | ) | 1,796 | ||||||||
| ||||||||||||
Comprehensive income | 94,129 | 134,543 | 309,644 | |||||||||
| ||||||||||||
Comprehensive loss (income) attributable to non-controlling interest | 1,063 | 407 | (6,565 | ) | ||||||||
| ||||||||||||
Comprehensive income attributable to the Company | $ | 95,192 | $ | 134,950 | $ | 303,079 | ||||||
F - 5
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars and share data in thousands)
THE COMPANY'S SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Ordinary shares issued | Ordinary shares amount | Additional paid-in capital | Capital notes | Unearned compensation | Accumulated other comprehensive income (loss) | Foreign currency translation adjustments | Accumulated deficit | Treasury stock | Comprehensive income | Non controlling interest | Total | |||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE AS OF JANUARY 1, 2017 | 93,071 | $ | 369,057 | $ | 1,318,725 | $ | 41,264 | $ | 68,921 | $ | (544 | ) | $ | (27,283 | ) | $ | (1,071,036 | ) | $ | (9,072 | ) | $ | (7,418 | ) | $ | 682,614 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares | 2,914 | 12,128 | 4,247 | 16,375 | ||||||||||||||||||||||||||||||||||||||||||||
Conversion of debentures and exercise of warrants into share capital | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of options | 1,629 | 6,750 | 8,180 | 14,930 | ||||||||||||||||||||||||||||||||||||||||||||
Capital notes converted into share capital | 930 | 3,792 | 16,714 | (20,506 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation | 11,644 | 11,644 | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation related to the Facility Agreement with the Banks | -- | |||||||||||||||||||||||||||||||||||||||||||||||
Dividend to Panasonic | (5,501 | ) | (5,501 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Profit | 298,011 | $ | 298,011 | 3,645 | 301,656 | |||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 2,761 | 2,761 | 2,920 | 5,681 | ||||||||||||||||||||||||||||||||||||||||||||
Change in employees plan assets and benefit obligations | 511 | 511 | 511 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives | 1,796 | 1,796 | 1,796 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 303,079 | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2017 | 98,544 | $ | 391,727 | $ | 1,347,866 | $ | 20,758 | $ | 80,565 | $ | 1,763 | $ | (24,522 | ) | $ | (773,025 | ) | $ | (9,072 | ) | $ | (6,354 | ) | $ | 1,029,706 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of notes into share capital | 5,790 | 23,722 | 34,864 | 58,586 | ||||||||||||||||||||||||||||||||||||||||||||
Exercise of options and RSUs | 732 | 3,043 | (2,334 | ) | 709 | |||||||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation | 12,661 | 12,661 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Profit | 135,579 | $ | 135,579 | (2,200 | ) | 133,379 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 1,806 | 1,806 | 1,793 | 3,599 | ||||||||||||||||||||||||||||||||||||||||||||
Change in employees plan assets and benefit obligations | 269 | 269 | 269 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives | (2,704 | ) | (2,704 | ) | (2,704 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 134,950 | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2018 | 105,066 | $ | 418,492 | $ | 1,380,396 | $ | 20,758 | $ | 93,226 | $ | (672 | ) | $ | (22,716 | ) | $ | (637,446 | ) | $ | (9,072 | ) | $ | (6,761 | ) | $ | 1,236,205 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Changes during the period: | ||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of options and RSUs | 648 | 2,727 | (886 | ) | 1,841 | |||||||||||||||||||||||||||||||||||||||||||
Capital notes converted into share capital | 1,181 | 4,892 | 15,866 | (20,758 | ) | -- | ||||||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation | 14,548 | 14,548 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Profit | 90,048 | $ | 90,048 | (1,975 | ) | 88,073 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 2,566 | 2,566 | 912 | 3,478 | ||||||||||||||||||||||||||||||||||||||||||||
Change in employees plan assets and benefit obligations | (1,118 | ) | (1,118 | ) | (1,118 | ) | ||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives | 3,696 | 3,696 | 3,696 | |||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 95,192 | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2019 | 106,895 | $ | 426,111 | $ | 1,395,376 | $ | -- | $ | 107,774 | $ | 1,906 | $ | (20,150 | ) | $ | (547,398 | ) | $ | (9,072 | ) | $ | (7,824 | ) | $ | 1,346,723 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||
OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF DECEMBER 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
106,808 | ||||||||||||||||||||||||||||||||||||||||||||||||
F - 6
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year ended | ||||||||||||
December 31, | ||||||||||||
CASH FLOWS - OPERATING ACTIVITIES | 2019 | 2018 | 2017 | |||||||||
| ||||||||||||
Net profit | $ | 88,073 | $ | 133,379 | $ | 301,656 | ||||||
| ||||||||||||
Adjustments to reconcile net profit for the period to net cash provided by operating activities: | ||||||||||||
Income and expense items not involving cash flows: | ||||||||||||
Depreciation and amortization | 214,474 | 214,391 | 208,411 | |||||||||
Effect of exchange rate differences on debentures | 10,294 | (9,791 | ) | 12,865 | ||||||||
Other expense (income), net | (4,293 | ) | 2,442 | 2,627 | ||||||||
Changes in assets and liabilities: | ||||||||||||
Trade accounts receivable | 27,317 | (3,096 | ) | (6,564 | ) | |||||||
Other current assets | (4,600 | ) | 11,260 | (8,321 | ) | |||||||
Inventories | (21,021 | ) | (26,344 | ) | (4,277 | ) | ||||||
Trade accounts payable | (339 | ) | (3,562 | ) | (8,649 | ) | ||||||
Deferred revenue and customers' advances | (10,331 | ) | 2,625 | (21,803 | ) | |||||||
Employee related liabilities and other current liabilities | (9,435 | ) | (867 | ) | (8,219 | ) | ||||||
Long-term employee related liabilities | (310 | ) | (795 | ) | (3,247 | ) | ||||||
Deferred tax, net and other long-term liabilities | 1,491 | (6,745 | ) | (108,844 | ) | |||||||
Net cash provided by operating activities | 291,320 | 312,897 | 355,635 | |||||||||
| ||||||||||||
CASH FLOWS - INVESTING ACTIVITIES | ||||||||||||
| ||||||||||||
Investments in property and equipment | (191,396 | ) | (210,192 | ) | (187,676 | ) | ||||||
Proceeds related to sale and disposal of property and equipment | 19,230 | 40,451 | 20,038 | |||||||||
Investment grants received | -- | 2,921 | ||||||||||
Investments in other assets | (413 | ) | (14,536 | ) | -- | |||||||
Deposits and marketable securities, net | (132,515 | ) | (143,940 | ) | (80,643 | ) | ||||||
Net cash used in investing activities | (305,094 | ) | (328,217 | ) | (245,360 | ) | ||||||
| ||||||||||||
CASH FLOWS - FINANCING ACTIVITIES | ||||||||||||
| ||||||||||||
Exercise of warrants and options, net | 1,842 | 714 | 31,315 | |||||||||
Proceeds from loans | -- | 98,990 | -- | |||||||||
Loans repayment | -- | (142,285 | ) | (43,259 | ) | |||||||
Principal payments on account of capital lease obligation | (19,402 | ) | (5,554 | ) | (781 | ) | ||||||
Debentures repayment | -- | -- | (6,215 | ) | ||||||||
Dividend paid to Panasonic | -- | -- | (4,378 | ) | ||||||||
Net cash used in financing activities | (17,560 | ) | (48,135 | ) | (23,318 | ) | ||||||
| ||||||||||||
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGE | 1,804 | 2,585 | 3,720 | |||||||||
| ||||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (29,530 | ) | (60,870 | ) | 90,677 | |||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 385,091 | 445,961 | 355,284 | |||||||||
| ||||||||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 355,561 | $ | 385,091 | $ | 445,961 | ||||||
F - 7
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year ended | ||||||||||||
December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
| ||||||||||||
NON-CASH ACTIVITIES: | ||||||||||||
| ||||||||||||
Investments in property and equipment | $ | 39,184 | $ | 28,052 | $ | 28,419 | ||||||
Conversion of notes into share capital | $ | 22,600 | $ | 58,586 | $ | -- | ||||||
| ||||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
| ||||||||||||
Cash received during the period from interest | $ | 14,436 | $ | 8,818 | $ | 3,870 | ||||||
Cash paid during the period for interest | $ | 7,456 | $ | 11,835 | $ | 14,068 | ||||||
Cash paid during the period for income taxes, net | $ | 13,026 | $ | 5,768 | $ | 17,668 | ||||||
See notes to consolidated financial statements.
F - 8
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 1
-DESCRIPTION OF BUSINESS AND GENERALThe consolidated financial statements of Tower Semiconductor Ltd. (“Tower”) include the financial statements of Tower, and (i) its wholly-owned subsidiary Tower US Holdings Inc., the sole owner of: (1) Jazz US Holdings Inc. and its wholly-owned subsidiary, Jazz Semiconductor, Inc., an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices (Jazz US Holdings Inc. and Jazz Semiconductor, Inc. collectively referred to herein as “Jazz”); and (2) since February 2016, Tower US Holdings is also the sole owner of TowerJazz Texas Inc. (“TJT”), as described in Note 3 below;; and (ii) its 51% owned subsidiary, TowerJazz Panasonic Semiconductor Co., Ltd. (“TPSCo”), an independent semiconductor foundry which includes three semiconductor manufacturing facilities located in Tonami, Uozu and Arai, in Hokuriku Japan. TPSCo’s other 49% shares are held by Panasonic Semiconductor Solution Co., Ltd (“PSCS”), a fully owned subsidiary of Panasonic Corporation as of December 31, 2019. On November 28, 2019, Panasonic Corportaion announced it will sell PSCS to Nuvoton Technology Corporation, a Taiwan-based semiconductor company, which is an affiliate of Winbond Electronics Corporation, in a transaction that is targeted by Panasonic to close on June 2020 Tower and its subsidiaries are collectively referred to as the “Company”.
The Company is a global specialty foundry leader manufacturing integrated circuits, offering a broad range of customizable process technologies including: SiGe, BiCMOS, mixed-signal/CMOS, RF CMOS, CMOS image sensor, integrated power management (BCD and 700V) and MEMS. The Company also provides a world-class design enablement platform for a quick and accurate design cycle, as well as Transfer Optimization and development Process Services (TOPS)(“TOPS”) to integrated device manufacturers (“IDMs”) and fabless companies that require capacity. To provide multi-fab sourcing and expanded capacity for its customers, the Company operates two manufacturing facilities in Israel (150mm and 200mm), two in the U.S. (200mm) and three in Japan through TPSCo (two 200mm and one 300mm), which provide leading edge 45nm CMOS, 65nm RF CMOS and 65nm 1.12um pixel technologies, including advanced image sensor technologies.
Tower’s ordinary shares are traded on the NASDAQ Global Select Market and on the Tel-Aviv Stock Exchange (“TASE”) under the symbol TSEM.
The Company’s consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“US GAAP”).
NOTE 2 - 9
A.Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, affect the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
F - 9
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
B.Principles of Consolidation
The Company’s consolidated financial statements include the financial statements of Tower and its subsidiaries. The Company’s consolidated financial statements are presented after elimination of inter-company transactions and balances. The Company’s consolidated financial statements include TJT’s results of operations
C.Cash and balance sheet since February 1, 2016.
Cash and cash equivalents consist of cash, bank deposits and short-term investments with original maturities of three months or less.
D.Short-Term Interest-Bearing Deposits
Short-term deposits include bank deposits with original maturities greater than three months and to be matured within 12 months from balance sheet date.
E.Marketable securities
The Company accounts for investments in debt securities in accordance with ASC 320 "Investments“Investments - Debt and Equity Securities"Securities”. Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss) (“OCI”). Gains and losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of income.
The Company's securities are reviewed for impairment in accordance with ASC 320-10-35. If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings.
For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized in OCI.
F - 10
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
E.Marketable securities (Cont.)
If quoted prices for identical instruments are available in an active market, marketable securities are classified within Level 1 of the fair value hierarchy. If quoted prices for identical instruments in active markets are not available, fair values are estimated using quoted prices of similar instruments and are classified within Level 2 of the fair value hierarchy.
F.Trade Accounts Receivables - Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts, is computedbased on specific analysis of the specific identification basis for accounts whose collectability, inaccount receivable’s aging, assessment of its related risk and ability of the Company’s estimation, is uncertain.customer to make the required payment.. As of December 31, 20172019 and 2016, the amounts in2018, the allowance for doubtful accounts was $10,925 and $4,208, respectively, of which $10,000 and $3,000, respectively, relates to a customer located in the Far East region.
G.Accounts Receivable Factoring
From time to time, the Company uses non-recourse factoring arrangements, to sell accounts receivable to third-party financial institutions. The sale of the receivables in these arrangements are immaterial.
H.Inventories
Inventories are stated at the lower of aggregate cost andor net realizable value. Inventories as of December 31, 2016 are stated at lower ofIf inventory costs exceed expected net realizable value, the Company records reserves for the difference between the cost or market. Upon adoption,and the update had no effect on the consolidated financial position, results of operations or cash flows.expected net realizable value. Cost of raw materials is determined mainly on the basis of the weighted average moving price per unit.
I.Investments in Privately-Held Companies
Long-term investments include equity investments in privately-held companies without readily determinable fair values. In accordance with ASC 321 - “Investments - Equity Securities”, Company may elect between fair value and measurement alternative of cost, less impairments, and further adjust up or down, based on observable price changes in orderly transactions for identical or similar investments of the same issuer (“measurement alternative”). The Company elected to use the measurement alternative for each of its investments made through December 31, 2019. Any adjustments resulting from impairments and/or observable price changes are recorded as “other income (expense), net” in the consolidated statements of operations.
J.Property and Equipment
The Company accounts for property and equipment in accordance with Accounting Standards Codification (“ASC”)ASC 360 “Accounting“Accounting for the Property, Plant and Equipment” (“ASC 360”). Property and equipment are presented at cost, including capitalizable costs. Capitalizable costs include only costs that are identifiable with, and related to the property and equipment and are incurred prior to their initial operation. Identifiable incremental direct costs include costs associated with constructing, establishing and installing property and equipment,equipment.
F - 11
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
J.Property and costs which are directly related to pre-production test runs of property and equipment that are necessary for preparing such property and equipment for their intended use.
Maintenance and repairs are charged to expenses as incurred.
Property and equipment are presented net of investment grants received, and less accumulated depreciation.
Depreciation is calculated based on the straight-line method over the Company’s estimated useful lives of the assets, as follows:
Buildings and building improvements, including facility infrastructure | 10-25 years |
Machinery and equipment, software and hardware | 3-15 years |
Impairment charges, if needed, are determined based on the policy outlined in SL below.
Property and corresponding liability is recognized. Each capital lease is recorded as an asset and an obligation at an amount that is equal to the present value of the minimum lease payments over the lease term. Assetsequipment includes also assets under capital leaseleases and are part of property plantdepreciated according to their applicable useful life.
K.Intangible Assets and equipment.
The Company accounts for intangible assets and goodwill in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC 350”). Intangible assets include the values assigned to the intangible assets as part of the purchase price allocation made at the time of acquisition of each of Jazz, TPSCo and TJT.
Intangible assets are amortized over the expected estimated economic life of the intangible assets commonly used in the industry. Goodwill is not amortized and subject to impairment test. Impairment charges on intangibles or goodwill, if needed, are determined based on the policy outlined in SL below.
L.Impairment of Assets
Impairment of Property, Equipment and otherIntangible Assets
The Company reviews long-lived assets net include: (i) deferred tax assetand intangible assets on a periodic basis, as described in Note 19; (ii) fair market value of derivative instrument used in hedging of Debentures Series G, see T below and (iii) prepaid long-term lease payments to the Israel Land Administration (“ILA”) for the land on which the Company’s Israeli fabs are established, net of accumulated amortization over the lease period, see also Note 15C.
Impairment of Goodwill
The Company applies ASC 815-40 “Contract in Entity’s Own Equity” in determining whether an instrumenttests goodwill for impairment by performing a qualitative assessment process, or using a two-step quantitative assessment process. If the Company chooses to perform a qualitative assessment process and determines it is more likely than not (that is, a likelihood of more than 50 percent) that may be settled in Tower’s shares is also considered indexed to a company’s own stock, for the purpose of classificationcarrying value of the instrument as a liability or equity.
F - 12
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2
-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)L.Impairment of Assets (cont.)
Impairment of Goodwill (Cont.)
The first step identifies potential impairment by comparing the fair value of a reporting unit with its carrying amount, including the goodwill. The fair value of the reporting units is determined using a discounted cash flow analysis (income approach). This fair value approach requires significant management judgment and estimations. The determination of fair value using a discounted cash flow analysis requires the use of key judgments, estimates and assumptions including revenue growth rates, projected operating margins, changes in working capital, terminal values, and discount rates. If the fair value exceeds the carrying amount of a reporting unit, goodwill is not considered impaired and the second step of the test is unnecessary. If the carrying amount exceeds the fair value of a reporting unit, the second step measures the impairment loss, if any.
The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The implied fair value of the reporting unit’s goodwill is calculated by creating a hypothetical balance sheet as if the reporting unit had just been acquired. This balance sheet contains all assets and liabilities recorded at fair value (including any intangible assets that may not have any corresponding carrying value in the balance sheet). The implied value of the reporting unit’s goodwill is calculated by subtracting the fair value of the net assets from the fair value of the reporting unit. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
M.Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (“Topic 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all operating and capital leases with a term greater than twelve months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs (“ASC 842”).
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition method. Results for the reporting period beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with historical accounting under ASC 840, “Leases”. Due to the adoption of ASC 842, as of December 31, 2019, operating lease ROU in the amount of approximately $18,000 are recorded as assets and as operating lease liabilities. The aforementioned did not have any impact on the results of operations or cash flows.
F - 13
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
M.Leases (cont.)
For all leases that commenced before the effective date of ASC 842, the permitted “practical expedients” as stipulated in the ASC was elected and accordingly, the Company did not reassess: (1) whether any expired or existing contracts contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.
The determination if an arrangement is a lease is to be made at inception of a lease contract. ROU assets represent Company’s right to use an underlying asset for the lease term and lease liabilities represent Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Whenever leases do not provide an implicit interest rate, incremental borrowing rate is used based on the information available at commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Certain lease agreements require payments for lease and non-lease components and the Company elected to account for these as a single lease component related to other operating facilities. For additional information, please see Notes 11D and 11E.
N.Revenue Recognition
ASC Topic 606 “Revenue from Contracts with Customers” (“Topic 606”), supersedes the previous revenue recognition guidance and industry-specific guidance under ASC Topic 605 “Revenue Recognition”. Topic 606 requires an entity to recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018.
Under the modified retrospective method, prior period financial positions and results are not adjusted. There was no transition adjustment to the company’s retained earnings upon adoption.
The Company’s revenues are generated principally from sales of semiconductor wafers. The Company,, to a much lesser extent, also derives revenues from design support and other technical and support services incidental to the sale of semiconductor wafers. The vast majority of the Company’s sales are achieved through the effort of its direct sales force.
Wafer sales are recognized at a point in time, which is upon shipment or upon delivery of the Company recognizes revenues from saleCompany’s products to unaffiliated customers, depending on shipping terms. Accordingly, control of the products when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the pricetransfers to the customer in accordance with the transaction's shipping terms. Sales revenue is fixedrecognized for the amount of consideration that the Company expects to be entitled to in exchange for its products. Taxes imposed by governmental authorities, such as sales taxes or determinable and (iv) collectionvalue-added taxes, are excluded from net sales. The Company’s contracts typically contain a single performance obligation that is fulfilled on the date of the resulting receivable is reasonably assured. Generally, delivery occurs after products meet all of the customer’s acceptance criteria based on pre-shipment electronic, functional and quality tests.shipping terms stipulated in the contract.
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
N.Revenue Recognition (cont.)
The Company provides for sales returns allowance relating to specified yield or quality commitments as a reduction of revenues, based on past experience and specific identification of events necessitating an allowance,, which has been in immaterial amounts.
The Company provides its customers with other services that are less significant in scope and amount and for which recognition is over time when customer receives the services.
O.Research and Development
Research and development costs are charged to operations as incurred. Amounts received or receivable from the government of Israel and others, as participation in research and development programs, are offset against research and development costs. The accrual for grants receivable is determined based on the terms of the programs, provided that the criteria for entitlement have been met.
P.Income Taxes
The Company accounts for income taxes using an asset and liability approach as prescribed in ASC 740-10 “Income740-10 “Income Taxes” (“ASC 740-10”). This topic prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred taxes are computed based on the tax rates anticipated (under applicable law as of the balance sheet date) to be in effect when the deferred taxes are expected to be paid or realized. In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 simplifies the presentation of deferred income taxes such that deferred tax assets and liabilities, as well as any related valuation allowance, beare classified as noncurrent in a classified statement of financial position. The Company adopted the ASU as of the first quarter of 2017. The Company adopted the ASU prospectively such that previous years balances were not reclassified.
The Company evaluates realizabilitythe potential realization of its deferred tax assets for each jurisdiction in which the Company operates at each reporting date and establishes valuation allowances when it is more likely than not that all or a part of its deferred tax assets will not be realized.
In circumstances where there is sufficient negative evidence indicating that the Company's deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance, see Note 19E and 19F.19.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
P.Income Taxes (cont.)
ASC 740-10 prescribes a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that the Company believes is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in its income tax returns and the amount of tax benefits recognized in its financial statements, represent the Company's unrecognized income tax benefits. The Company's policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
Q.Earnings per Ordinary Share
Basic earnings (loss) per share are calculated in accordance with ASC 260, “Earnings“Earnings Per Share” ("ASC 260") by dividing net profit or loss attributable to ordinary equity holders of Tower (the numerator) by the weighted average number of ordinary shares outstanding during the reported period (the denominator). Diluted earnings per share are calculated, if applicable, by adjusting net profit attributable to ordinary equity holders of Tower, and the weighted average number of ordinary shares, taking into effect all potential dilutive ordinary shares.
R.Comprehensive Income
In accordance with ASC 220 “Comprehensive“Comprehensive Income” ("ASC 220"), comprehensive income (loss) represents the change in shareholders’ equity during a reporting period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a reporting period except those resulting from investments by owners and distributions to owners. Other comprehensive income (loss) (“OCI”) represents gains and losses that are included in comprehensive income but excluded from net income.
S.Functional Currency and Exchange Rate Income (Loss)
The currency of the primary economic environment in which Tower, TJT and Jazz conduct their operations is the U.S. Dollar (“dollar”). Thus, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with ASC 830-10 “Foreign“Foreign Currency Matters”Matters”. All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate. The financial statements of TPSCo, whose functional currency is the Japanese Yen (“JPY”), have been translated into dollars. The assets and liabilities have been translated using the exchange rate in effect as of the balance sheet date.
The statementstatements of operations of TPSCo has been translated using the average exchange rate for the reported period. The resulting translation adjustments are charged or credited to OCI.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
T.Stock-Based Compensation
The Company applies the provisions of ASC Topic 718 “Compensation“Compensation - Stock Compensation”Compensation”, under which employees’ share-based equity awards (mostly restricted stock units and performance unit shares) are accounted for under the fair value method.
Accordingly, stock-based compensation granted to employees and directors is measured at the grant date, based on the fair value of the grant. The Company usescompensation costs are recognized using the straight-linegraded vesting attribution method to recognize stock-based compensation costs overbased on the vesting periodterms of each unit included in the grant, except for grants that involve performance criteria, for whichaward resulting in an accelerated method is used.
U.Fair value of such assets, in accordance with ASC 360-10 “Property, PlantFinancial Instruments and Equipment”.
ASC 820, "Fair"Fair Value Measurements and Disclosures" (“ASC 820”), requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company's financial instruments of cash, bank deposits, marketable securities, account receivable and payables,, accrued liabilities, loans and leases approximate their current fair values because of their nature and respective maturity dates or durations. The Company had no financial assets or liabilities carried and measured on a non-recurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2
-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)V.Derivatives and hedging
Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged.
For derivative instruments designated as cash flow hedges, the effective portion of the gains (losses) on the derivatives is initially reported as a component of OCI and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. Gains (losses) on derivatives are recognized in earnings, representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in the same line of the item economically hedged.
W.Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes” (“Topic 740”). The ASU simplifies the accounting for income taxes by removing certain exceptions to the 2017 presentation.
In May 2014,August 2018, the Financial Accounting Standards Board ("FASB") amendedFASB issued ASU No. 2018-13 “Fair Value Measurement” Disclosure Framework – Changes to the existing accounting standardsDisclosure Requirements for revenue recognition in Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers”
In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation” (“Topic 718”): Improvements to depictNonemployee Share-Based Payment Accounting. This ASU expands the valuescope of Topic 718 to include accounting for share-based payments for acquiring goods orand services to customersfrom non-employees except for specific guidance on assumptions used in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services if sold at the end of the calendar quarter.
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 2
-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)W.Recently Issued Accounting Pronouncements (Cont.)
In January 2016,2017, the FASB issued ASU 2016-01
In June 2016, the FASB issued ASU 2016-13 “Financial“Financial Instruments Credit Losses”.
NOTE 3 - 18
Inventories consist of the following:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Raw materials | $ | 90,605 | $ | 72,144 | ||||
Work in process | 91,537 | 92,047 | ||||||
Finished goods | 10,114 | 6,587 | ||||||
$ | 192,256 | $ | 170,778 | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Raw materials | $ | 48,220 | $ | 26,296 | ||||
| Work in process | 92,764 | 105,564 | ||||||
| Finished goods | 2,331 | 5,672 | ||||||
| $ | 143,315 | $ | 137,532 | |||||
Work in process and finished goods are presented net of aggregate write-downs to net realizable value of $1,352$649 and $1,391$1,206 as of December 31, 20172019 and 2016,2018, respectively.
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 5
Other current assets consist of the following:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Tax receivables | $ | 8,156 | $ | 3,997 | ||||
Prepaid expenses | 8,265 | 14,170 | ||||||
Accrued interest on bank deposits and other receivables | 5,598 | 4,585 | ||||||
$ | 22,019 | $ | 22,752 | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Tax authorities receivables | $ | 9,144 | $ | 9,620 | ||||
| Deferred tax asset (see Note 19) | -- | 7,158 | ||||||
| Prepaid expenses | 11,634 | 6,610 | ||||||
| TJT acquisition related receivable (see Note 3) | -- | 5,000 | ||||||
| Others | 738 | 1,653 | ||||||
| $ | 21,516 | $ | 30,041 | |||||
NOTE 6
Long-term investments consist of the following:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Severance-pay funds | $ | 11,860 | $ | 13,615 | ||||
Long-term bank deposit | 12,500 | 12,500 | ||||||
Investments in privately- held companies | 15,725 | 9,830 | ||||||
$ | 40,085 | $ | 35,945 | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Severance-pay funds, net | $ | 13,317 | $ | 9,909 | ||||
| Long-term interest bearing bank deposit | 12,500 | 12,500 | ||||||
| Others | 256 | 3,215 | ||||||
| $ | 26,073 | $ | 25,624 | |||||
NOTE 7
Composition:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Original cost: | ||||||||
Land and Buildings (including facility infrastructure) | $ | 363,133 | $ | 347,798 | ||||
Machinery and equipment (*) | 2,684,980 | 2,482,609 | ||||||
$ | 3,048,113 | $ | 2,830,407 | |||||
Accumulated depreciation: | ||||||||
Buildings (including facility infrastructure) | $ | (239,241 | ) | $ | (224,796 | ) | ||
Machinery and equipment | (2,126,933 | ) | (1,948,377 | ) | ||||
$ | (2,366,174 | ) | $ | (2,173,173 | ) | |||
$ | 681,939 | $ | 657,234 | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Original cost: | ||||||||
| Buildings (including facility infrastructure) | $ | 343,247 | $ | 333,696 | ||||
| Machinery and equipment | 2,282,042 | 2,093,204 | ||||||
| $ | 2,625,289 | $ | 2,426,900 | |||||
| Accumulated depreciation: | ||||||||
| Buildings (including facility infrastructure) | $ | (215,515 | ) | $ | (205,604 | ) | ||
| Machinery and equipment | (1,774,650 | ) | (1,604,610 | ) | ||||
| $ | (1,990,165 | ) | $ | (1,810,214 | ) | |||
| $ | 635,124 | $ | 616,686 | |||||
(*) Original cost of machinery and equipment includes ROU assets under capital lease in the amount of $86,087 and $54,873 as of December 31, 2019 and 2018, respectively. The depreciation expense of such assets amounted to $9,941 and $2,102 for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 20172019 and 2016,2018, the original cost of land, buildings, machinery and equipment was reflected net of investment grants (see B below) in the aggregate amount of $285,930$285,615 and $284,406,$285,636, respectively.
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Original cost - Machinery and equipment | $ | 16,630 | $ | -- | ||||
| Accumulated depreciation - Machinery and equipment | (306 | ) | -- | |||||
| $ | 16,324 | $ | -- | |||||
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 8
Intangible assets consist of the following as of December 31, 2017:2019:
Useful Life (years) | Cost | Accumulated Amortization | Net | ||||||||||||
Technologies | 4;5;9 | $ | 111,108 | $ | (110,730 | ) | $ | 378 | |||||||
Facilities lease | 19 | 33,500 | (24,241 | ) | 9,259 | ||||||||||
Trade name | 9 | 7,702 | (7,702 | ) | -- | ||||||||||
Customer relationships | 15 | 2,600 | (1,956 | ) | 644 | ||||||||||
Total identifiable intangible assets | $ | 154,910 | $ | (144,629 | ) | $ | 10,281 | ||||||||
Useful Life (years) | Cost | Accumulated Amortization | Net | |||||||||||||
Technologies | 4;5;9 | $ | 110,310 | $ | (103,897 | ) | $ | 6,413 | ||||||||
Facilities lease | 19 | 33,500 | (21,665 | ) | 11,835 | |||||||||||
Patents and other core technology rights | 9 | 15,100 | (15,100 | ) | -- | |||||||||||
Trade name | 9 | 7,612 | (7,009 | ) | 603 | |||||||||||
Customer relationships | 15 | 2,600 | (1,610 | ) | 990 | |||||||||||
Others | -- | 1,000 | (1,000 | ) | -- | |||||||||||
Total identifiable intangible assets | $ | 170,122 | $ | (150,281 | ) | $ | 19,841 | |||||||||
Intangible assets consist of the following as of December 31, 2016:2018:
Useful Life (years) | Cost | Accumulated Amortization | Net | ||||||||||||
Technologies | 4;5;9 | $ | 110,835 | $ | (108,888 | ) | $ | 1,947 | |||||||
Facilities lease | 19 | 33,500 | (22,953 | ) | 10,547 | ||||||||||
Trade name | 9 | 7,671 | (7,547 | ) | 124 | ||||||||||
Customer relationships | 15 | 2,600 | (1,783 | ) | 817 | ||||||||||
Total identifiable intangible assets | $ | 154,606 | $ | (141,171 | ) | $ | 13,435 | ||||||||
Useful Life (years) | Cost | Accumulated Amortization | Net | |||||||||||||
Technologies | 4;5;9 | $ | 109,543 | $ | (98,354 | ) | $ | 11,189 | ||||||||
Facilities lease | 19 | 33,500 | (20,377 | ) | 13,123 | |||||||||||
Patents and other core technology rights | 9 | 15,100 | (13,903 | ) | 1,197 | |||||||||||
Trade name | 9 | 7,520 | (6,064 | ) | 1,456 | |||||||||||
Customer relationships | 15 | 2,600 | (1,436 | ) | 1,164 | |||||||||||
Others | -- | 1,000 | (1,000 | ) | -- | |||||||||||
Total identifiable intangible assets | $ | 169,263 | $ | (141,134 | ) | $ | 28,129 | |||||||||
NOTE 9
Deferred tax and other long-term assets, net consist of the following:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax asset (see Note 19) | $ | 66,362 | $ | 73,460 | ||||
Right of use - assets under operating leases | 17,828 | -- | ||||||
Prepaid long-term land lease, net | 3,175 | 3,296 | ||||||
Fair value of cross currency interest rate swap (see Note 12D) | 12,625 | 6,722 | ||||||
Long-term prepaid expenses and others | 5,057 | 4,926 | ||||||
$ | 105,047 | $ | 88,404 | |||||
NOTE 9 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Tax payables | $ | 282 | $ | 12,096 | ||||
Interest payable | 1,057 | 986 | ||||||
Others | 5,962 | 4,035 | ||||||
$ | 7,301 | $ | 17,117 | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax asset ( see Note 19) | $ | 82,852 | $ | -- | ||||
| Prepaid long-term land lease, net (see Note 15C) | 3,417 | 3,537 | ||||||
| Fair value of cross currency interest rate swap (see Note 13D) | 18,005 | -- | ||||||
| Long-term prepaid expenses and others | 6,995 | 910 | ||||||
| $ | 111,269 | $ | 4,447 | |||||
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 10
-A.Composition by Repayment Schedule:
As of December 31, 2019 | ||||||||||||||||||||||||
Interest rate | 2020 | 2021 | 2022 | 2023 | Total | |||||||||||||||||||
Debentures Series G (see B below) | 2.79 | % | $ | 38,690 | $ | 38,690 | $ | 38,690 | $ | 19,347 | $ | 135,417 | ||||||||||||
Accretion of carrying amount to principal amount | (3,134 | ) | ||||||||||||||||||||||
Carrying amount | $ | 132,283 | ||||||||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||
Interest rate | 2019 | 2020 | 2021 | 2022 | 2023 | Total | ||||||||||||||||||||||
Debentures Series G (see B below) | 2.79 | % | $ | -- | $ | 35,676 | $ | 35,676 | $ | 35,676 | $ | 17,839 | $ | 124,867 | ||||||||||||||
Accretion of carrying amount to principal amount | (4,697 | ) | ||||||||||||||||||||||||||
Carrying amount | $ | 120,170 | ||||||||||||||||||||||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Interest payable | $ | 3,160 | $ | 4,683 | ||||
| 2014 Japan Restructuring related payables | -- | 1,793 | ||||||
| Tax authorities payables | 8,567 | 10,342 | ||||||
| Others | 4,159 | 7,265 | ||||||
| $ | 15,886 | $ | 24,083 | |||||
| As of December 31, 2017 | ||||||||||||||||||||||||||||||||
| Interest rate | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 and on | Total | |||||||||||||||||||||||||
| Debentures Series G (see B below) | 2.79% | $ | -- | $ | -- | $ | 38,568 | $ | 38,568 | $ | 38,568 | $ | 19,283 | $ | 134,987 | |||||||||||||||||
| Jazz’s Notes (see C below) | 8% | 58,307 | -- | -- | -- | -- | -- | 58,307 | ||||||||||||||||||||||||
| Total outstanding principal amounts of debentures | $ | 58,307 | $ | -- | $ | 38,568 | $ | 38,568 | $ | 38,568 | $ | 19,283 | $ | 193,294 | ||||||||||||||||||
| Accretion of carrying amount to principal amount | (11,629 | ) | ||||||||||||||||||||||||||||||
| Carrying amount | $ | 181,665 | ||||||||||||||||||||||||||||||
B.Debentures Series D and Series F which had principal outstanding amounts of $5,977 and $238, respectively, as of December 31, 2016.
In June 2016, Tower raised approximately $115,000 through the issuance of long-term unsecured non-convertible debentures (“Series G Debentures”).
The Series G Debentures are payable in seven7 semi-annual consecutive equal installments from March 2020 to March 2023 and carrying an annual interest rate of 2.79%, payable in thirteen semi-annual consecutive equal installments from March 2017 to March 2023.semi-annually. The principal and interest amounts are denominated in NIS and are not linked to any index or to any other currency. The Company entered into hedging transactions to mitigate the foreign exchange rate differences on the principal and interest using a cross currency swap.
As of December 31, 2017,2019 and 2018, the outstanding principal amount of Series G Debentures was NIS 468,000 (approximately $135,000)$135,000 and $125,000 as of December 31, 2019 and December 31, 2018, respectively), with related hedging transactions net asset fair value of $16,455.approximately $16,000 and $5,000, respectively. The changes in the fair value increase of outstanding principal amount of the debentures and in 2017 is mainly the fair value of the hedging transaction, are attributed to the devaluation ofcorresponding changes in the USD againstexchange rates during the NISreported periods (see Note 13D)12D).
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12
A.Composition:
As of December 31, | ||||||||
2019 | 2018 | |||||||
Long-term JPY bank loan - principal amount, see B and C below | $ | 101,365 | $ | 100,118 | ||||
Capital leases - see D below | 60,277 | 47,195 | ||||||
Operating leases – see E below | 17,828 | -- | ||||||
Less - current maturities of long-term debt | (28,201 | ) | (10,814 | ) | ||||
$ | 151,269 | $ | 136,499 | |||||
B.Composition by Repayment Schedule of Loans:
As of December 31, 2019 | ||||||||||||||||||||||||||||
Interest rate | 2020 | 2021 | 2022 | 2023 | 2024 and on | Total | ||||||||||||||||||||||
In JPY | 1.95 | % | $ | -- | $ | 22,526 | $ | 22,526 | $ | 22,526 | $ | 33,787 | $ | 101,365 | ||||||||||||||
Total outstanding principal | $ | -- | $ | 22,526 | $ | 22,526 | $ | 22,526 | $ | 33,787 | $ | 101,365 | ||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||
Interest rate | 2019 | 2020 | 2021 | 2022 | 2023 and on | Total | ||||||||||||||||||||||
In JPY | 1.95 | % | $ | -- | $ | -- | $ | 22,248 | $ | 22,248 | $ | 55,622 | $ | 100,118 | ||||||||||||||
Total outstanding principal | $ | -- | $ | -- | $ | 22,248 | $ | 22,248 | $ | 55,622 | $ | 100,118 | ||||||||||||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| In U.S. Dollars, see also E below | $ | 40,000 | $ | 40,000 | ||||
| In JPY, see also D below | 98,239 | 126,376 | ||||||
| Total long-term loan from banks - principal amount | 138,239 | 166,376 | ||||||
| Deferred issuance costs | (1,077 | ) | (1,344 | ) | ||||
| Total long-term loans from banks | 137,162 | 165,032 | ||||||
| Capital leases - see Note 15C | 15,854 | -- | ||||||
| Current maturities | (52,661 | ) | (31,869 | ) | ||||
| $ | 100,355 | $ | 133,163 | |||||
| Interest rate | 2018 | 2019 | 2020 | 2021 | 2022 and on | Total | |||||||||||||||||||
| In U.S Dollars | Libor + 2.00% | $ | 5,714 | $ | 11,429 | $ | 11,429 | $ | 11,428 | $ | -- | $ | 40,000 | ||||||||||||
| In JPY | Tibor + 1.65%-2.00% | 43,915 | 32,747 | 21,577 | -- | -- | 98,239 | ||||||||||||||||||
| Total outstanding principal amounts of loans | $ | 49,629 | $ | 44,176 | $ | 33,006 | $ | 11,428 | $ | -- | $ | 138,239 | |||||||||||||
C.Loans to TPSCo from Financial Institutions
In June 2018, TPSCo refinanced its two then outstanding loans with 11 Billion JPY (approximately $100,000) new asset-based loan agreements with a consortia of financial institutes comprised of JA Mitsui Leasing, Ltd., Sumitomo Mitsui Trust Bank, Limited (SMTB), Sumitomo Mitsui Banking Corporation (SMBC) and China trust Commercial Bank Corporation (CTBC) (“JP Loan”). The JP Loan carries a fixed interest rate of 1.95% per annum with principal payable in nine semiannual payments from 2021 and until 2025. The JP Loan is secured mainly by a lien over the machinery and equipment of TPSCo located in Uozu and Tonami manufacturing facilities. Outstanding principal amount was approximately $101,000 as of December 31, 2019.
The JP Loan also contains certain financial ratios and covenants, as well as customary definitions of events of default and acceleration of the repayment scheduleschedule. TPSCo’s obligations pursuant to the JP Loan are not guaranteed by Tower, Panasonic Corporation, PSCS, or any of capital lease agreements, see Note 15C.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12
C.Loans to TPSCo from Japanese Financial Institutions (Cont.)
As of December 31, 2019, TPSCo was in compliance with all of the financial ratios and covenants under this JP Loan.
D.Capital Lease Agreements
Certain of the Company’s subsidiaries enter, from time to time, into capital lease agreements for certain machinery and equipment it operates in some of its fabrication facilities, usually for a period of four years, with an option to buy the machinery and equipment after a period of between three to four years from the start of the lease period. The lease agreements contain annual interest rate of up to 1.95% and the assets under the lease agreements are pledged to the lender until the time at which the respective subsidiary will buy the assets, if at all. The obligations under the capital lease agreement are guaranteed by Tower, except for TPSCo’s obligations under its capital lease agreements.
As of December 31, 2019 and 2018, the outstanding capital lease liabilities for fixed assets was $60,277 and $47,195, respectively, of which $21,070 and $10,814 respectively, were included under current maturities of long-term debt.
The following presents the maturity of capital lease liabilities as of December 31, 2019:
Fiscal Year | ||||
2020 | $ | 21,070 | ||
2021 | 16,332 | |||
2022 | 14,386 | |||
2023 | 7,684 | |||
2024 | 805 | |||
Total | $ | 60,277 | ||
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 11 - OTHER LONG-TERM DEBT (Cont.)
E.Operating Leases
In 2019, the Company adopted ASU No. 2016-02, " Leases" (Topic 842). The Company enters from time to time into operating leases for office space, operating facilities and vehicles. Operating lease cost for the years ended December 31, 2019, 2018 and 2017 was $8,045, $8,773 and $8,809, respectively. During 2019, cash paid for operating lease liabilities was $8,113.
The following presents the composition of operating lease:
Classification in Consolidated Balance Sheets | December 31, 2019 | ||||
Right of use - assets under operating leases | Deferred tax and other long-term assets, net | $ | 17,828 | ||
Lease liabilities: | |||||
Current operating leases liabilities | Current maturities of long-term debt | $ | 7,131 | ||
Long-term operating lease liabilities | Other long-term debt | 10,697 | |||
Total operating lease liabilities | $ | 17,828 | |||
| |||||
Weighted average remaining lease term (years) | 4.9 | ||||
Weighted average discount rate | 1.95 | % | |||
The following presents the maturity of operating lease liabilities as of December 31, 2019:
Fiscal Year | ||||
2020 | $ | 7,131 | ||
2021 | 6,304 | |||
2022 | 2,064 | |||
2023 | 645 | |||
2024 | 645 | |||
Thereafter | 1,667 | |||
Total | 18,456 | |||
Less – imputed interest | (628 | ) | ||
Total | $ | 17,828 | ||
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 11 - OTHER LONG-TERM DEBT (Cont.)
F.Wells Fargo Credit Line
In December 2013, Jazz entered into an agreement with Wells Fargo Capital Finance, part of Wells Fargo & Company (“Wells Fargo”), for a five-year secured asset-based revolving credit line in the total amount of up to $70,000, maturing in December 2018.
In February 2018, Jazz and Wells Fargo signed an amendment to the credit line, under which the line is extended by five years, to mature in 2023, and the total amount remained at up to $70,000 (the “Jazz Credit Line Agreement”). The applicable interest on the loans under the Jazz Credit Line Agreement for the period following February 2016 is at a rate equal to, at lender’s option, either the lender’s prime rate plus a margin ranging from 0.25%0.0% to 0.75%0.5% or the LIBOR rate plus a margin ranging from 1.5%1.25% to 2.0%1.75% per annum.
The outstanding borrowing availability varies from time to time based on the levels of Jazz’s eligible accounts receivable, eligible equipment, eligible inventories and other terms and conditions described in the Jazz Credit Line Agreement. The obligations of Jazz under the Jazz Credit Line Agreement are secured by a security interest on all the assets of Jazz. The Jazz Credit Line Agreement contains customary covenants and other terms, including customary events of default. If any event of default will occur, Wells Fargo may declare all borrowings under the facility due immediately and foreclose on the collateral. Furthermore, an event of default under the Credit Line Agreement would result in an increase in the interest rate on any amounts outstanding. Jazz’s obligations pursuant to the Jazz Credit Line Agreement are not guaranteed by Tower or any of its affiliates.
As of December 31, 2017,2019, Jazz was in compliance with all of the covenants under the Jazz Credit Line Agreement.
As of December 31, 2019, borrowing availability under the Jazz Credit Line Agreement was approximately $58,000,$70,000, of which approximately $1,000 was utilized through letters of credit.
As of December 31, 20162019 and 20172018, no loan amounts were outstanding.
NOTE 13
The Company makes certain disclosures as detailed below with regard to financial instruments, including derivatives. These disclosures include, among other matters, the nature and terms of derivative transactions, information about significant concentrations of credit risk and the fair value of financial assets and liabilities.
A.Non-Designated Exchange Rate Transactions
As the functional currency of Tower is the USD and part of Tower's expenses are denominated in NIS, Tower enters from time to time into exchange rate agreements to protect against the volatility of future cash flows caused by changes in foreign exchange rates on NIS denominated expenses.
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Cont.)
A.Non-Designated Exchange Rate Transactions (Cont.)
As of December 31, 2017 and 20162019, the fair value amounts of such exchange rate agreements were approximately $24$167 in an asset position, presented in short-termother current assets and $294with a face value of $48,000. As of December 31, 2018, the fair value amounts of such exchange rate agreements were $379 in a liability position, presented in short-termcurrent liabilities with a face value of $18,000 and $96,000, respectively. $92,000.
Changes in the fair values of such derivatives are presented in cost of revenues in the statements of operations.
As the functional currency of TPSCo is the JPY and part of TPSCo revenues are denominated in USD, TPSCo enters from time to time into exchange rate agreements to protect against the volatility of future cash flows caused by changes in foreign exchange rates on USD denominated amounts. As of December 31, 20172019 and 2016,2018, the fair value amounts of such exchange rate agreements were $169$318 and $682,$16, respectively, in a liability position, presented in short-termother current liabilities with a face value of $48,000$36,000 and $36,000,$42,000, respectively. Changes in the fair value of such derivatives are presented in the statements of operations.
B.Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, marketable securities, derivative, trade receivables and government and other receivables. The Company's cash, deposits, marketable securities and derivative are maintained with large and reputable banks and investment banks, thebanks. The composition and maturities of investments are regularly monitored by the Company. Generally, these securities may be redeemed upon demand and bear minimal risk.
The Company generally does not require collateral for insurance of receivables; however, in certain circumstances, the Company obtains credit insurance or may require advance payments. An allowance for doubtful accounts is determined with respect to those amounts the collection of which their collectionis determined to be doubtful. The Company performs ongoing credit evaluations of its customers.
C.Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments, excluding debentures do not materially differ from their respective carrying amounts as of December 31, 20172019 and 2016.2018. The fair valuesvalue of Tower and Jazz’s debentures, based on quoted market prices or other valuation as of December 31, 20172019 and 2016, were2018, was approximately $345,000$140,000 and $245,000,$127,000, respectively, compared to carrying amounts of approximately $182,000$132,000 and $163,000,$120,000, for the above dates, respectively.
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Cont.)
D.Cash Flow Hedge Gains (Losses)
The Company entered into cash flow hedging transactions to mitigate the foreign exchange rate differences on the principleprincipal and interest using a cross currency swap to mitigate the risk arising from Series G Debentures denomination in NIS.
As of December 31, 20172019, the fair value of the swap was $16,455$15,642 in an asset, net position, of which $1,550$3,017 was presented in short-term liabilitiesother current assets and $18,005$12,625 was presented in long-term assets. As of December 31, 20162018, the fair value of the swap was $67$4,951 in a liabilityan asset, net position, of which $1,771 was presented in short-term liabilities. other current liabilities and $6,722 was presented in long-term assets.
As of December 31, 20172019 and December 31, 2016,2018, the effective portionportions of $2,758$1,504 and $202,$1,329, respectively, were recorded in OCI,, of which a loss of approximately $1,500$719 is expected to be reclassified into earnings during the twelve months endedending December 31, 2018.2020. For the years ended December 31, 20172019 and December 31, 2016,2018, the hedging effect of the hedge on the Company’s results of operations was $11,654$8,816 income and $915 expense,$11,787 loss, respectively, and was recognized as financing expense, net, to offset the effect of the rate difference related to Series G Debentures.
E.Fair Value Measurements
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company’s Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company’s Level 2 and Level 3 assets and liabilities.
Level 1 Measurements
Assets held for sale - securities classified as available for sale are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. Changes in fair value of securities available for sale are recorded in other comprehensive income.
Level 2 Measurements
If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.
NOTE 12 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Cont.)
E.Fair Value Measurements (Cont.)
Level 3 Measurements
For cross currency swap measured under level 2 Measurements
Equity Securities without Readily Determinable Fair Values - Investments in privately-held companies are measured using the measurement alternatives, see Note 2I above. The Company reviews these investments for impairment and observable price changes on a quarterly basis, and adjusts the carrying value accordingly. For the year ended December 31, 2019, the Company recorded an increase of $5,270 in the value of such investments, and for the year ended December 31, 2018, the Company recorded a decrease of $5,000 in the value of such investments, presented in other income (expense), net in the statements of operations. The fair value of these investments represents a Level 3 Measurements
Recurring Fair Value Measurements Usingfair value measurements using the Indicated Inputs:indicated inputs:
December 31, 2019 | Quoted prices in active market for identical liability (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
Cross currency swap - net asset position | $ | 15,642 | $ | -- | $ | 15,642 | $ | -- | ||||||||
Privately-held companies | 15,725 | -- | 15,725 | |||||||||||||
Marketable securities held for sale | 175,305 | 175,305 | -- | -- | ||||||||||||
Foreign exchange forward and cylinders - liability position | (151 | ) | -- | (151 | ) | -- | ||||||||||
$ | 206,521 | $ | 175,305 | $ | 15,491 | $ | 15,725 | |||||||||
December 31, 2018 | Quoted prices in active market for identical liability (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
Cross currency swap - net asset position | $ | 4,951 | $ | -- | $ | 4,951 | $ | -- | ||||||||
Privately-held companies | 9,830 | -- | 9,830 | |||||||||||||
Marketable securities held for sale | 135,227 | 135,227 | -- | -- | ||||||||||||
Foreign exchange forward and cylinders - liability position | (395 | ) | -- | (395 | ) | -- | ||||||||||
$ | 149,613 | $ | 135,227 | $ | 4,556 | $ | 9,830 | |||||||||
December 31, 2017 | Quoted prices in active market for identical liability (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Cross currency swap- asset position | $ | 16,455 | $ | -- | $ | 16,455 | $ | -- | ||||||||
| Marketable securities held for sale | 113,168 | 113,168 | -- | -- | ||||||||||||
| Foreign exchange forward and cylinders - liability position | (169 | ) | -- | (169 | ) | -- | ||||||||||
| Foreign exchange forward and cylinders - asset position | 24 | -- | 24 | -- | ||||||||||||
| $ | 129,478 | $ | 113,168 | $ | 16,310 | $ | -- | |||||||||
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 13
December 31, 2016 | Quoted prices in active market for identical liability (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Cross currency swap- liability position | $ | 67 | $ | -- | $ | 67 | $ | -- | ||||||||
| Foreign exchange forward and cylinders - liability position | 976 | 976 | -- | |||||||||||||
| $ | 1,043 | $ | -- | $ | 1,043 | $ | -- | |||||||||
| Tower’s Israeli Banks Loans (including current maturities) | Others | |||||||
| As of January 1, 2016 - at fair value | $ | 74,955 | $ | -- | ||||
| principal repayment | (82,855 | ) | -- | |||||
| Total changes in fair value recognized in earnings | 7,900 | -- | ||||||
| As of December 31, 2016 - at fair value | $ | -- | $ | -- | ||||
F.Short-Term and Long-Term Deposits and Marketable Securities
Short-term and long-term investments includedeposits and marketable securities as of December 31, 2019 included short term deposits in the amount of $215,609, marketable securities in the amount of $113,874 (including accrued interest)$176,070 and a long-term bank deposit in the amount of $12,500$12,500; as of December 31, 2017; Short-term2018, short-term and long-term investments include short-term bankdeposits and marketable securities included short term deposits in the amount of $34,093$120,079, marketable securities in the amount of $135,850 and a long-term bank deposit in the amount of $12,500 as of December 31, 2016.
The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of available-for-sale marketable securities as of December 31, 2017:2019:
Amortized cost (*) | Gross unrealized Gains | Gross Unrealized losses | Estimated fair value | |||||||||||||
Corporate bonds | $ | 154,167 | $ | 1,273 | $ | (214 | ) | $ | 155,226 | |||||||
U.S government bonds | 1,977 | 26 | -- | 2,003 | ||||||||||||
Non-U.S government bonds | 992 | 11 | -- | 1,003 | ||||||||||||
Municipal bonds | 1,208 | 21 | -- | 1,229 | ||||||||||||
Money market fund | 15,225 | 366 | -- | 15,591 | ||||||||||||
Certificate of deposits | 248 | 5 | -- | 253 | ||||||||||||
$ | 173,817 | $ | 1,702 | $ | (214 | ) | $ | 175,305 | ||||||||
Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | |||||||||||||
| Corporate bonds | $ | 98,998 | $ | 25 | $ | (683 | ) | $ | 98,340 | |||||||
| Non- U.S government bonds | 2,730 | -- | (19 | ) | 2,711 | |||||||||||
| Municipal bonds | 11,950 | 15 | (96 | ) | 11,869 | |||||||||||
| Certificate of deposits | 248 | -- | -- | 248 | ||||||||||||
| $ | 113,926 | $ | 40 | $ | (798 | ) | $ | 113,168 | ||||||||
* Excluding accrued interest of $765.
The scheduled maturities of available-for-sale marketable securities as of December 31, 20172019, were as follows:
Amortized cost | Estimated fair value | |||||||
Due within one year | $ | 37,845 | $ | 37,818 | ||||
Due after one year through five years | 135,972 | 137,487 | ||||||
$ | 173,817 | $ | 175,305 | |||||
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Cont.)
F.Short-Term and Long-Term Deposits and Marketable Securities (Cont.)
The following table summarizes amortized costs, gross unrealized gains and losses and estimated fair values of available-for-sale marketable securities as of December 31, 2018:
| Amortized cost | Estimated fair value | |||||||
| Due within one year | $ | 7,688 | $ | 7,679 | ||||
| Due after one year through five years | 106,238 | 105,489 | ||||||
| $ | 113,926 | $ | 113,168 | |||||
Amortized cost (*) | Gross unrealized gains | Gross Unrealized losses | Estimated fair value | |||||||||||||
Corporate bonds | $ | 111,639 | $ | 29 | $ | (2,029 | ) | $ | 109,639 | |||||||
U.S government bonds | 5,444 | 21 | -- | 5,465 | ||||||||||||
Non-U.S government bonds | 2,456 | -- | (33 | ) | 2,423 | |||||||||||
Municipal bonds | 2,248 | -- | (13 | ) | 2,235 | |||||||||||
Money market fund | 15,225 | -- | -- | 15,225 | ||||||||||||
Certificate of deposits | 248 | -- | (8 | ) | 240 | |||||||||||
$ | 137,260 | $ | 50 | $ | (2,083 | ) | $ | 135,227 | ||||||||
* Excluding accrued interest of $623.
The scheduled maturities of available-for-sale marketable securities as of December 31, 2018, were as follows:
Amortized cost | Estimated fair value | |||||||
Due within one year | $ | 16,686 | $ | 16,661 | ||||
Due after one year through five years | 120,574 | 118,566 | ||||||
$ | 137,260 | $ | 135,227 | |||||
Investments with continuous unrealized losses for less than 12twelve months and 12twelve months or greatermore and their related fair values as of December 31, 20172019 and December 31, 2018, were as indicated in the following tables:
December 31, 2019 | ||||||||||||||||||||||||
Investment with continuous unrealized losses for less than twelve months | Investments with continuous unrealized losses for twelve months or greater | Total Investments with continuous unrealized losses | ||||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
Corporate bonds | $ | 8,562 | $ | (56 | ) | $ | 23,022 | $ | (158 | ) | $ | 31,584 | $ | (214 | ) | |||||||||
Non-U.S government bonds | -- | -- | -- | -- | -- | -- | ||||||||||||||||||
Municipal bonds | -- | -- | -- | -- | -- | -- | ||||||||||||||||||
Certificate of deposits | -- | -- | -- | -- | -- | -- | ||||||||||||||||||
Total | $ | 8,562 | $ | (56 | ) | $ | 23,022 | $ | (158 | ) | $ | 31,584 | $ | (214 | ) | |||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Investment with continuous unrealized losses for less than 12 months | Investments with continuous unrealized losses for 12 months or greater | Total Investments with continuous unrealized losses | ||||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
Corporate debentures | $ | 89,133 | $ | (683 | ) | $ | -- | $ | -- | $ | 89,133 | $ | (683 | ) | ||||||||||
Non- U.S government bonds | 2,711 | (19 | ) | -- | -- | 2,711 | (19 | ) | ||||||||||||||||
Municipal bonds | 8,837 | (96 | ) | -- | -- | 8,837 | (96 | ) | ||||||||||||||||
Total | $ | 100,681 | $ | (798 | ) | $ | -- | $ | -- | $ | 100,681 | $ | (798 | ) | ||||||||||
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 12 - FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Cont.)
F.Short-Term and Long-Term Deposits and Marketable Securities (Cont.)
December 31, 2018 | ||||||||||||||||||||||||
Investment with continuous unrealized losses for less than twelve months | Investments with continuous unrealized losses for twelve months or greater | Total Investments with continuous unrealized losses | ||||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
Corporate bonds | $ | 19,716 | $ | (140 | ) | $ | 79,609 | $ | (1,889 | ) | $ | 99,325 | $ | (2,029 | ) | |||||||||
Non-U.S government bonds | 963 | -- | 1,460 | (33 | ) | 2,423 | (33 | ) | ||||||||||||||||
Municipal bonds | 2,235 | (13 | ) | -- | -- | 2,235 | (13 | ) | ||||||||||||||||
Certificate of deposits | -- | -- | 240 | (8 | ) | 240 | (8 | ) | ||||||||||||||||
Total | $ | 22,914 | $ | (153 | ) | $ | 81,309 | $ | (1,930 | ) | $ | 104,223 | $ | (2,083 | ) | |||||||||
NOTE 14
A.Employee Termination Benefits
Israeli law, labor agreements and corporate policy determine the obligations of Tower to make severance payments to dismissed Israeli employees and to Israeli employees leaving employment under certain circumstances. Generally, the liability for severance pay benefits, as determined by Israeli law, is based upon length of service and the employee’s monthly salary. This liability is primarily covered by regular deposits made each month by Tower into recognized severance and pension funds and by insurance policies maintained by Tower, based on the employee’s salary for the relevant month. The amounts so funded and the liability are included on the balance sheets in long-term investments and employee related liabilities in the amounts of $10,711$9,314 and $12,258,$11,638, respectively, as of December 31, 2017.
Commencing January 1, 2005, Tower implemented a labor agreement with regard to most of its Israeli employees, according to which monthly deposits into recognized severance and pension funds or insurance policies will release it from any additional severance obligation in excess of the balance in such accounts to such Israeli employees and, therefore, Tower incurs no liability or asset with respect to such severance obligations and deposits, since that date. Any net severance amount as of such date will be released on the employee’s termination date. Payments relating to Israeli employee termination benefits were $5,597, $5,158 and $5,059 $4,345for 2019, 2018 and, $3,986 for 2017, 2016 and 2015, respectively.
TPSCo established a Defined Contribution Retirement Plan (the “DC Plan”) for its employees through which TPSCo contributes approximately 10%9% with employee average match of 1% from employee base salary to the DC Plan. Such contribution releases the employer from further obligation to any payments upon termination of employment. The contribution is remitted either to third party benefit funds based on employee preference, or directly, to those employees who elected not to enroll in the DC Plan. Total payments under the DC Plan in 2017, 20162019, 2018 and 20152017 amounted to $6,572, $6,700 and $6,706, $7,015 and $6,823, respectively.
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans
The following information provideprovides the changes in 2017, 20162019, 2018 and 20152017 periodic expenses and benefit obligations due to the bargaining agreement effective December 19, 2009 entered into bysigned between Jazz with its collective bargaining unit employees.
Post-Retirement Medical Plan
The components of the net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for post-retirement medical plan expense are as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net periodic benefit cost: | ||||||||||||
Service cost | $ | 7 | $ | 10 | $ | 9 | ||||||
Interest cost | 72 | 73 | 69 | |||||||||
Amortization of prior service costs | -- | -- | -- | |||||||||
Amortization of net loss (gain) | (298 | ) | (262 | ) | (361 | ) | ||||||
Total net periodic benefit cost | (219 | ) | $ | (179 | ) | $ | (283 | ) | ||||
Other changes in plan assets and benefits obligations recognized in other comprehensive income: | ||||||||||||
Prior service cost for the period | $ | -- | $ | -- | $ | -- | ||||||
Net loss (gain) for the period | (1 | ) | (376 | ) | 317 | |||||||
Amortization of prior service costs | -- | -- | -- | |||||||||
Amortization of net gain (loss) | 298 | 262 | 361 | |||||||||
Total recognized in other comprehensive income (loss) | $ | 297 | $ | (114 | ) | $ | 678 | |||||
Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 78 | $ | (293 | ) | $ | 395 | |||||
Weighted average assumptions used: | ||||||||||||
Discount rate | 4.50 | % | 3.80 | % | 4.50 | % | ||||||
Expected return on plan assets | N/A | N/A | N/A | |||||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Assumed health care cost trend rates: | ||||||||||||
Health care cost trend rate assumed for current year (Pre-65/Post-65 Medicare Advantage) | 6.90%/13.10 | % | 8.30%/11.10 | % | 7.20%/10.00 | % | ||||||
Health care cost trend rate assumed for current year (Pre-65/Post-65 Non Medicare Advantage) | 6.90%/7.90 | % | N/A | N/A | ||||||||
Ultimate rate (Pre-65/Post-65) | 4.50%/4.50 | % | 4.50%/4.50 | % | 4.50%/4.50 | % | ||||||
Year the ultimate rate is reached (Pre-65/Post-65) | 2029/2029 | 2027/2027 | 2025/2025 | |||||||||
Measurement date | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net periodic benefit cost: | ||||||||||||
| Service cost | $ | 9 | $ | 12 | $ | 29 | ||||||
| Interest cost | 69 | 85 | 126 | |||||||||
| Amortization of prior service costs | -- | (12 | ) | (973 | ) | |||||||
| Amortization of net (gain) or loss | (361 | ) | (333 | ) | (115 | ) | ||||||
| Total net periodic benefit cost | $ | (283 | ) | $ | (248 | ) | $ | (933 | ) | |||
Other changes in plan assets and benefits obligations recognized in other comprehensive income: | ||||||||||||
| Prior service cost for the period | $ | -- | $ | -- | $ | -- | ||||||
| Net (gain) or loss for the period | 317 | (316 | ) | (1,333 | ) | |||||||
| Amortization of prior service costs | -- | 12 | 973 | |||||||||
| Amortization of net gain or (loss) | 361 | 333 | 115 | |||||||||
| Total recognized in other comprehensive income (expense) | $ | 678 | $ | 29 | $ | (245 | ) | |||||
| Total recognized in net periodic benefit cost and other comprehensive income | $ | 395 | $ | (219 | ) | $ | (1,178 | ) | ||||
| Weighted average assumptions used: | ||||||||||||
| Discount rate | 4.50 | % | 4.80 | % | 4.30 | % | ||||||
| Expected return on plan assets | N/A | N/A | N/A | |||||||||
| Rate of compensation increases | N/A | N/A | N/A | |||||||||
| Assumed health care cost trend rates: | ||||||||||||
| Health care cost trend rate assumed for current year (Pre-65/Post-65) | 7.20%/10.00 | % | 6.75%/10.00 | % | 7.00%/20.00 | % | ||||||
| Ultimate rate (Pre-65/Post-65) | 4.50%/4.50 | % | 4.50%/5.00 | % | 4.50%/5.00 | % | ||||||
| Year the ultimate rate is reached (Pre-65/Post-65) | 2025/2025 | 2025/2022 | 2025/2022 | |||||||||
| Measurement date | December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans (Cont.)
Post-Retirement Medical Plan (cont.(Cont.)
Impact of one-percentageone-percentage point change in assumed health care cost trend rates as of December 31, 2017:2019:
Increase | Decrease | |||||||
Effect on service cost and interest cost | $ | 2 | $ | (2 | ) | |||
Effect on post-retirement benefit obligation | $ | 33 | $ | (25 | ) | |||
| Increase | Decrease | |||||||
| Effect on service cost and interest cost | $ | 4 | $ | (3 | ) | |||
| Effect on post-retirement benefit obligation | $ | 78 | $ | (61 | ) | |||
The components of the change in benefit obligation, change in plan assets and funded status for post-retirement medical plan are as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Change in medical plan related benefit obligation: | ||||||||||||
Medical plan related benefit obligation at beginning of period | $ | 1,628 | $ | 1,936 | $ | 1,550 | ||||||
Service cost | 7 | 10 | 9 | |||||||||
Interest cost | 72 | 73 | 69 | |||||||||
Benefits paid | (17 | ) | (15 | ) | (9 | ) | ||||||
Change in medical plan provisions | -- | -- | -- | |||||||||
Actuarial loss (gain) | (1 | ) | (376 | ) | 317 | |||||||
Benefit medical plan related obligation end of period | $ | 1,689 | $ | 1,628 | $ | 1,936 | ||||||
Change in plan assets: | ||||||||||||
Fair value of plan assets at beginning of period | $ | -- | $ | -- | $ | -- | ||||||
Employer contribution | 16 | 15 | 9 | |||||||||
Benefits paid | (16 | ) | (15 | ) | (9 | ) | ||||||
Fair value of plan assets at end of period | $ | -- | $ | -- | $ | -- | ||||||
Medical plan related net funding | $ | (1,689 | ) | $ | (1,628 | ) | $ | (1,936 | ) | |||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Change in medical plan related benefit obligation: | ||||||||||||
| Medical plan related benefit obligation at beginning of period | $ | 1,550 | $ | 1,781 | $ | 2,977 | ||||||
| Service cost | 9 | 12 | 29 | |||||||||
| Interest cost | 69 | 85 | 126 | |||||||||
| Benefits paid | (9 | ) | (12 | ) | (18 | ) | ||||||
| Change in medical plan provisions | -- | -- | -- | |||||||||
| Actuarial loss (gain) | 317 | (316 | ) | (1,333 | ) | |||||||
| Benefit medical plan related obligation end of period | $ | 1,936 | $ | 1,550 | $ | 1,781 | ||||||
| Change in plan assets: | ||||||||||||
| Fair value of plan assets at beginning of period | $ | -- | $ | -- | $ | -- | ||||||
| Employer contribution | 9 | 12 | 18 | |||||||||
| Benefits paid | (9 | ) | (12 | ) | (18 | ) | ||||||
| Fair value of plan assets at end of period | $ | -- | $ | -- | $ | -- | ||||||
Medical plan related net funding | $ | (1,936 | ) | $ | (1,550 | ) | $ | (1,781 | ) | |||
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans (cont.(Cont.)
Post-Retirement Medical Plan (cont.(Cont.)
As of December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Amounts recognized in statement of financial position: | ||||||||||||
Current liabilities | $ | (50 | ) | $ | (65 | ) | $ | (58 | ) | |||
Non-current liabilities | (1,639 | ) | (1,563 | ) | (1,878 | ) | ||||||
Net amount recognized | $ | (1,689 | ) | $ | (1,628 | ) | $ | (1,936 | ) | |||
Weighted average assumptions used: | ||||||||||||
Discount rate | 3.40 | % | 4.50 | % | 3.80 | % | ||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Assumed health care cost trend rates: | ||||||||||||
Health care cost trend rate assumed for next year (pre 65/ post 65 Medicare Advantage) | 6.20%/(5.00 | )% | 6.90%/13.10 | % | 8.30%/11.10 | % | ||||||
Health care cost trend rate assumed for next year (pre 65/ post 65 Non Medicare Advantage) | 6.20%/6.10 | % | 6.90%/7.90 | % | 8.30%/11.10 | % | ||||||
Ultimate rate (pre 65/ post 65) | 4.50%/4.50 | % | 4.50%/4.50 | % | 4.50%/4.50 | % | ||||||
Year the ultimate rate is reached (pre 65/ post 65) | 2029/2029 | 2029/2029 | 2027/2027 | |||||||||
| As of December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Amounts recognized in statement of financial position: | ||||||||||||
| Current liabilities | $ | (58 | ) | $ | (37 | ) | $ | (40 | ) | |||
| Non-current liabilities | (1,878 | ) | (1,513 | ) | (1,741 | ) | ||||||
| Net amount recognized | $ | (1,936 | ) | $ | (1,550 | ) | $ | (1,781 | ) | |||
| Weighted average assumptions used: | ||||||||||||
| Discount rate | 3.80 | % | 4.50 | % | 4.80 | % | ||||||
| Rate of compensation increases | N/A | N/A | N/A | |||||||||
| Assumed health care cost trend rates: | ||||||||||||
| Health care cost trend rate assumed for next year (pre 65/ post 65) | 8.30%/11.10 | % | 7.20%/10.00 | % | 6.75%/10.00 | % | ||||||
| Ultimate rate (pre 65/ post 65) | 4.50%/4.50 | % | 4.50%/4.50 | % | 4.50%/5.00 | % | ||||||
| Year the ultimate rate is reached (pre 65/ post 65) | 2027/2027 | 2025/2025 | 2025/2022 | |||||||||
The following benefit payments are expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:
Fiscal Year | Other Benefits | |||
2020 | $ | 50 | ||
2021 | 54 | |||
2022 | 54 | |||
2023 | 55 | |||
2024 | 61 | |||
2025-2029 | $ | 365 | ||
| Fiscal Year | Other Benefits | |||
| 2018 | $ | 59 | ||
| 2019 | 73 | |||
| 2020 | 71 | |||
| 2021 | 74 | |||
| 2022 | 77 | |||
| 2023-2027 | $ | 404 | ||
Jazz Pension Plan
Jazz has a pension plan that provides for monthly pension payments to eligible employees upon retirement. The pension benefits are based on years of service and specified benefit amounts. Jazz uses a December 31 measurement date. JazzJazz’s funding policy is to make contributions that satisfy at least the minimum required contribution for IRS qualified plans.
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans (Cont.)
Jazz Pension Plan (cont.(Cont.)
The components of the change in benefit obligation, the change in plan assets and funded status for Jazz’s pension plan are as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net periodic benefit cost: | ||||||||||||
Interest cost | $ | 817 | $ | 749 | $ | 831 | ||||||
Expected return on plan assets | (930 | ) | (1,427 | ) | (1,236 | ) | ||||||
Expected Administrative Expenses | 100 | -- | -- | |||||||||
Amortization of prior service costs | 3 | 3 | 3 | |||||||||
Amortization of net loss (gain) | -- | -- | 55 | |||||||||
Total net periodic benefit cost | $ | (10 | ) | $ | (675 | ) | $ | (347 | ) | |||
Other changes in plan assets and benefits obligations recognized in other comprehensive income: | ||||||||||||
Prior service cost for the period | $ | -- | $ | -- | $ | -- | ||||||
Net loss (gain) for the period | 1,158 | (231 | ) | (1,303 | ) | |||||||
Amortization of prior service costs | (3 | ) | (3 | ) | (3 | ) | ||||||
Amortization of net gain (loss) | -- | -- | (55 | ) | ||||||||
Total recognized in other comprehensive income (loss) | $ | 1,155 | $ | (234 | ) | $ | (1,361 | ) | ||||
Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 1,145 | $ | (909 | ) | $ | (1,708 | ) | ||||
Weighted average assumptions used: | ||||||||||||
Discount rate | 4.40 | % | 3.70 | % | 4.30 | % | ||||||
Expected return on plan assets | 4.20 | % | 6.20 | % | 6.20 | % | ||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year ending : | ||||||||||||
Prior service cost | $ | 3 | $ | 3 | $ | 3 | ||||||
Net actuarial loss | $ | 27 | $ | -- | $ | -- | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net periodic benefit cost: | ||||||||||||
| Interest cost | $ | 831 | $ | 841 | $ | 798 | ||||||
| Expected return on plan assets | (1,236 | ) | (1,154 | ) | (1,130 | ) | ||||||
| Amortization of prior service costs | 3 | 3 | 3 | |||||||||
| Amortization of net (gain) or loss | 55 | 34 | 31 | |||||||||
| Total net periodic benefit cost | $ | (347 | ) | $ | (276 | ) | $ | (298 | ) | |||
| Other changes in plan assets and benefits obligations recognized in other comprehensive income: | ||||||||||||
| Prior service cost for the period | $ | -- | $ | -- | $ | -- | ||||||
| Net (gain) or loss for the period | (1,303 | ) | 736 | 6 | ||||||||
| Amortization of prior service costs | (3 | ) | (3 | ) | (3 | ) | ||||||
| Amortization of net gain or (loss) | (55 | ) | (34 | ) | (31 | ) | ||||||
| Total recognized in other comprehensive income (expense) | $ | (1,361 | ) | $ | 699 | $ | (28 | ) | ||||
| Total recognized in net periodic benefit cost and other comprehensive income (expense) | $ | (1,708 | ) | $ | 423 | $ | (326 | ) | ||||
| Weighted average assumptions used: | ||||||||||||
| Discount rate | 4.30 | % | 4.60 | % | 4.20 | % | ||||||
| Expected return on plan assets | 6.20 | % | 6.20 | % | 6.20 | % | ||||||
| Rate of compensation increases | N/A | N/A | N/A | |||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year ending : | ||||||||||||
| Prior service cost | 3 | 3 | 3 | |||||||||
| Net actuarial (gain) or loss | $ | 0 | $ | 54 | $ | 33 | ||||||
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans (Cont.)
Jazz Pension Plan (cont.(Cont.)
The components of the change in benefit obligation, change in plan assets and funded status for Jazz’s pension plan are as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation at beginning of period | $ | 18,979 | $ | 20,629 | $ | 19,672 | ||||||
Interest cost | 817 | 749 | 831 | |||||||||
Benefits paid | (688 | ) | (607 | ) | (548 | ) | ||||||
Change in plan provisions | -- | -- | -- | |||||||||
Actuarial loss (gain) | 2,800 | (1,792 | ) | 674 | ||||||||
Benefit obligation end of period | $ | 21,908 | $ | 18,979 | $ | 20,629 | ||||||
Change in plan assets: | ||||||||||||
Fair value of plan assets at beginning of period | $ | 22,669 | $ | 23,235 | $ | 19,871 | ||||||
Actual return on plan assets | 2,544 | (133 | ) | 3,212 | ||||||||
Employer contribution | -- | 175 | 700 | |||||||||
Expenses paid | (71 | ) | -- | -- | ||||||||
Benefits paid | (688 | ) | (607 | ) | (548 | ) | ||||||
Fair value of plan assets at end of period | $ | 24,454 | $ | 22,670 | $ | 23,235 | ||||||
Funded status | $ | 2,546 | $ | 3,691 | $ | 2,606 | ||||||
Amounts recognized in statement of financial position: | ||||||||||||
Non-current assets | $ | 2,546 | $ | 3,691 | $ | 2,606 | ||||||
Non-current liabilities | -- | -- | -- | |||||||||
Net amount recognized | $ | 2,546 | $ | 3,691 | $ | 2,606 | ||||||
Weighted average assumptions used: | ||||||||||||
Discount rate | 3.20% | 4.40% | 3.70% | |||||||||
Rate of compensation increases | N/A | N/A | N/A | |||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Change in benefit obligation: | ||||||||||||
| Benefit obligation at beginning of period | $ | 19,672 | $ | 18,605 | $ | 19,304 | ||||||
| Interest cost | 831 | 841 | 798 | |||||||||
| Benefits paid | (548 | ) | (496 | ) | (451 | ) | ||||||
| Change in plan provisions | -- | -- | -- | |||||||||
| Actuarial loss (gain) | 674 | 722 | (1,046 | ) | ||||||||
| Benefit obligation end of period | $ | 20,629 | $ | 19,672 | $ | 18,605 | ||||||
| Change in plan assets: | ||||||||||||
| Fair value of plan assets at beginning of period | $ | 19,871 | $ | 18,526 | $ | 18,134 | ||||||
| Actual return on plan assets | 3,212 | 1,141 | 78 | |||||||||
| Employer contribution | 700 | 700 | 765 | |||||||||
| Benefits paid | (548 | ) | (496 | ) | (451 | ) | ||||||
| Fair value of plan assets at end of period | $ | 23,235 | $ | 19,871 | $ | 18,526 | ||||||
| Funded status | $ | 2,606 | $ | 199 | $ | (79 | ) | |||||
| Amounts recognized in statement of financial position: | ||||||||||||
| Non-current assets | $ | 2,606 | $ | 199 | $ | -- | ||||||
| Non-current liabilities | -- | -- | (79 | ) | ||||||||
| Net amount recognized | $ | 2,606 | $ | 199 | $ | (79 | ) | |||||
| Weighted average assumptions used: | ||||||||||||
| Discount rate | 3.70 | % | 4.30 | % | 4.60 | % | ||||||
| Rate of compensation increases | N/A | N/A | N/A | |||||||||
The following benefit payments are expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:
Fiscal Year | Other Benefits | |||
2020 | $ | 859 | ||
2021 | 932 | |||
2022 | 1,017 | |||
2023 | 1,085 | |||
2024 | 1,142 | |||
2025-2029 | $ | 6,144 | ||
| ||||
| Fiscal Year | Other Benefits | |||
| 2018 | $ | 764 | ||
| 2019 | 850 | |||
| 2020 | 935 | |||
| 2021 | 998 | |||
| 2022 | 1,058 | |||
| 2023-2027 | $ | 5,865 | ||
F - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 14
B.Jazz Employee Benefit Plans (Cont.)
Jazz Pension Plan (cont.(Cont.)
The plan’s assets measured at fair value on a recurring basis consisted of the following as of December 31, 2017:2019:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments in mutual funds | $ | -- | $ | 24,454 | $ | -- | ||||||
Total plan assets at fair value | $ | -- | $ | 24,454 | $ | -- | ||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Investments in mutual funds | $ | -- | $ | 23,235 | $ | -- | ||||||
| Total plan assets at fair value | $ | -- | $ | 23,235 | $ | -- | ||||||
The plan’s assets measured at fair value on a recurring basis consisted of the following as of as of December 31, 2016:2018:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments in mutual funds | $ | -- | $ | 22,670 | $ | -- | ||||||
Total plan assets at fair value | $ | -- | $ | 22,670 | $ | -- | ||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Investments in mutual funds | $ | - | $ | 19,871 | $ | - | ||||||
| Total plan assets at fair value | $ | - | $ | 19,871 | $ | - | ||||||
Jazz’s pension plan weighted average asset allocations on December 31, 2017,2019, by asset category are as follows:
Asset Category | December 31, 2019 | Target allocation 2020 | ||||||
Equity securities | 23 | % | 20 | % | ||||
Debt securities | 77 | % | 80 | % | ||||
Total | 100 | % | 100 | % | ||||
| Asset Category | December 31, 2017 | Target allocation 2018 | ||||||
| Equity securities | 61 | % | 60 | % | ||||
| Debt securities | 39 | % | 40 | % | ||||
| Total | 100 | % | 100 | % | ||||
Jazz’s primary policy goals regarding the plan’s assets are cost-effective diversification of plan assets, competitive returns on investment and preservation of capital. Plan assets are currently invested in mutual funds with various debt and equity investment objectives. The target asset allocation for the plan assets is 40%80% debt, or fixed income securities, and 60%20% equity securities. Individual funds are evaluated periodically based on comparisons to benchmark indices and peer group funds and investment decisions are made by Jazz in accordance with the policy goals. Actual allocation to each asset category fluctuates and may not be within the target allocation specified above due to changes in market conditions.
The estimated expected return on assets of the plan is based on assumptions derived from, among other things, the historical return on assets of the plan, the current and expected investment allocation of assets held by the plan and the current and expected future rates of return in the debt and equity markets for investments held by the plan. The obligations under the plan could differ from the obligation currently recorded, if management's estimates are not consistent with actual investment performance.
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 15
A.Liens
(1)Loans, Bonds and Capital Leases
For liens relating to Jazz Credit Line Agreement, see Note 12C.11F. For liens under TPSCo 2015 Term2018 JP Loan agreement, see Note 12D. For liens relating to TJT term loan, see Note 12E.11C. For liens under the capital lease agreements, see Note11D. For liens under Bond G indenture, see Note 15C.
(2)Approved Enterprise Program
Floating liens are registered in favor of the State of Israel on substantially all of Tower’s assets under the Investment Center’s approved enterprise status program.
B.Renewed contract in relation to TPSCo
In March 2019, the Company, PSCS and TPSCo, as applicable, signed three-year agreements renewing their previously signed 2014-2019 agreements, to be in effect from April 2019 for an additional 3 year period. Under the renewed agreements, among others, PSCS will continue to utilize TPSCo’s three manufacturing facilities in Japan for its semiconductor business under a new pricing structure, which is resulting in lower annual and quarterly revenue commencing the second quarter of 2019, as compared to previous periods.
C.License Agreements
The Company enters into intellectual property and licensing agreements with third parties from time to time. The effect of each of them on the Company’s total assets and results of operations is immaterial. Certain of these agreements call for royalties to be paid by the Company to these third parties.
D.Lease Agreement
Jazz leases its fabrication facilities under operational lease contracts that may be extended until 2027, through the exercise of an option at Jazz’s sole discretion to extend the lease period through 2027.discretion. In 2015, Jazz exercised its first option to extend the lease term from 2017 to 2022, while maintaining the option to extend the lease term at its sole discretion from 2022 to 2027. In the amendments to its leases, (i) Jazz secured various contractual safeguards designed to limit and mitigate any adverse impact of construction activities on its fabrication operations; and (ii) set forth certain obligations of Jazz and the landlord, including certain noise abatement actions at the fabrication facility. The landlord has made claims that Jazz’s noise abatement efforts are not adequate under the terms of the amended lease. Jazz does not agree and is disputing these claims.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 15
E.Environmental Affairs
The Company’s operations are subject to a variety of laws and state and governmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in the production processes. Operating permits and licenses are required for the operation of the Company’s facilities and these permits and licenses are subject to revocation, modification and renewal. Government authorities have the power to enforce compliance with these regulations, permits and licenses. As of the approval date of the financial statements, the Company is not aware of any noncompliance with the terms of said permits and licenses.
F.An engagement in relation to a new fabrication facility planned to be built in China.
In 2017,prior years, the Company, Nanjing Development Zone, Tacoma Technology Ltd. and Tacoma (Nanjing) Semiconductor Technology Co., Ltd. (collectively known as “Tacoma”), signed a framework agreementagreements regarding a new 8-inch fabrication facility planned to be established in Nanjing, China. The framework agreement includes a binding phase under which the Company should deliver technological licenses and consultation services (mainly training) for a consideration of $18,000, net. This phase came into force upon the receipt by the Company of the $18,000, net, which has been fully received in August 2017. By December 31, 2017 the Company delivered the licenses and completed the related services.
G.Other Agreements
The Company enters from time to 50%time, in the ordinary course of business, into long-term agreements with various entities for the targeted 40,000 wafers per month fab capacity, in order to providejoint development of products and processes utilizing technologies owned separately by either the other entity or the Company, with additional manufacturing capability and capacity.
NOTE 16
A.Description of Ordinary Shares
As of December 31, 2017,2019, Tower had 150 million authorized ordinary shares, par value NIS 15.00 each, of which approximately 98106.8 million were issued and outstanding. Holders of ordinary shares are entitled to participate equally in the payment of cash dividends and bonus share (stock dividend) distributions and, in the event of the liquidation of Tower, in the distribution of assets after satisfaction of liabilities to creditors. Each ordinary share is entitled to one vote on all matters to be voted on by shareholders.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 15 - SHAREHOLDERS’ EQUITY (Cont.)
B.Equity Incentive Plans
(1)General
The Company has granted to its employees and directors options and Restricted Stock Units (“RSUs”) to purchase ordinary shares under several share incentive plans adopted by the Company. The particular provisions of each plan and grant vary as to vesting period, exercise price, exercise period and other terms. Generally, (i) the exercise price of options will not be lower than the nominal value of the shares and will equal either
the closing market price of the ordinary shares immediately prior to the date of grant, or in relation to grants made from September 2013, an average of the closing price during the thirty trading days immediately prior to the date of grant; (ii) vestvesting is over a one to four year period according to variousdefined vesting schedules, and for performance RSUs include financial performance targets; and (iii) options are not exercisable beyond seven or ten years from the grant date.
Except for those share incentive plans described below, as of December 31, 20172019 and December 31, 2016,2018, respectively, there were approximately 57 thousands25 thousand and 640 thousands26 thousand, respectively, options outstanding under the Company’s other share incentive plans (the "Old Plans”). No further options may be granted under the Old Plans.
(2)Tower’s 2013 Share Incentive Plan (the "2013 Plan")
In 2013, the Company adopted a new share incentive plan for directors, officers and employees of the Company.Company which in 2019 was extended to include also third party service providers (“2013 Plan”). Options granted under the 2013 Plan bear an exercise price, which equals an average of the closing price during the thirty trading days immediately prior to the date of grant, vest over up to a three-year period and are not exercisable beyond seven years from the grant date.
Under the 2013 Plan, the Company granted, in 20172019 and 20162018, a total of 819 thousands1.16 million and 568 thousands options and0.98 million, respectively, of RSUs, respectively, to its employees and directors (including the below described grants to the CEO and Chairman), with vesting over up to a three-year period. The Company measures compensation expenses of the RSUs based on the closing market price of the ordinary shares immediately prior to the date of grant and is amortizingamortizes it throughover the applicable vesting period.period taking in consideration compliance with performance criteria, if any.
In June 2019, the Company's shareholders approved the grant of the following RSUs to the Company's CEO and members of the Board of Directors under the 2013 Plan: (i) 129 thousand time vested RSUs and 129 thousand performance based RSUs to the CEO, which RSUs will vest linearly over a three-year period, 33% at the end of each year of the three years following the grant date, for a compensation value of $3,900; (ii) 20 thousand time vested RSUs to the chairman of the Board of Directors (“the Chairman”) for a total compensation value of $300, to vest linearly over a three-year period, 33% at the end of each year of the three years following the grant date; and (iii) 5 thousand time vested RSUs to each of the 8 members of the Board of Directors (other than to the Chairman and the CEO), for an aggregate compensation value of $600, vesting over a two-year period, with 50% vesting at the end of the first anniversary of the date of grant and 50% on the second anniversary of the date of grant.
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 15 - SHAREHOLDERS’ EQUITY (Cont.)
B.Equity Incentive Plans (Cont.)
(2)Tower’s 2013 Share Incentive Plan (the "2013 Plan") (Cont.)
In July 2018, the Company's shareholders approved the grant of the following RSUs to the Company's CEO and members of the Board of Directors under the 2013 Plan: (i) 107 thousand time vested RSUs and 72 thousand performance based RSUs to the CEO, which RSUs will vest linearly over a three-year period, 33% at the end of each year of the three years following the grant date, for a compensation value of $3,900; and, in addition, 50 thousand performance based RSUs vesting over three years, with 65% vesting at the first anniversary of the grant, an additional 25% at the second anniversary and the remaining portion at the third anniversary for an additional compensation value of $1,100; (ii) 14 thousand time vested RSUs to the Chairman for a total compensation value of $300, to vest linearly over a three-year period, 33% at the end of each year of the three years following the grant date; and (iii) 3 thousand time vested RSUs to each of the 8 members of the Board of Directors (other than to the Chairman and the CEO), for an aggregate compensation value of $600, vesting over a two-year period, with 50% vesting at the end of the first anniversary of the date of grant and 50% on the second anniversary of the date of grant.
In June 2017, the Company’s shareholders approved the following equity awards to the Company’s CEO, chairman of the Board and board directors under the 2013 Share Incentive Plan: (i) 85 thousandsthousand time vested RSUs and 97 thousandsthousand performance-based RSUs to the CEO, for a total compensation value of $4,500; (ii) 12 thousandsthousand time vested RSUs to the chairman of the board of directors for a total compensation value of $300$300; and (iii) 3 thousandsthousand time vested RSUs to each of the members of the board of directors (other than to the Chairman and the CEO), for a total compensation value of $600.
As of December 31, 2017,2019, approximately 523 thousands318 thousand options and 1,246 thousandsapproximately 2.0 million RSUs were outstanding under the 2013 Plan. As of December 31,2016,31, 2018, approximately 1,635 thousands483 thousand options and 1,009 thousandsapproximately 1.6 million RSUs were outstanding under the 2013 Plan. Further grants may be approved subject to compensation committee, board of directors and shareholders’ approval, as may be required by law.
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
Number of share options | Weighted average exercise price | Number of share options | Weighted average exercise price | Number of share options | Weighted average exercise price | |||||||||||||||||||
Outstanding as of beginning of year | 2,278,089 | $ | 9.92 | 5,878,270 | $ | 6.84 | 7,537,219 | $ | 6.37 | |||||||||||||||
| Granted | -- | 0.00 | 207,890 | 12.19 | 100,000 | 16.92 | ||||||||||||||||||
| Exercised | (1,611,489 | ) | 9.27 | (3,649,754 | ) | 4.82 | (1,620,056 | ) | 4.94 | |||||||||||||||
| Terminated | (77,292 | ) | 25.89 | (97,063 | ) | 21.34 | (26,777 | ) | 22.28 | |||||||||||||||
| Forfeited | (9,123 | ) | 8.06 | (61,254 | ) | 7.25 | (112,116 | ) | 8.30 | |||||||||||||||
| Outstanding as of end of year | 580,185 | 9.64 | 2,278,089 | 9.92 | 5,878,270 | 6.84 | ||||||||||||||||||
| Options exercisable as of end of year | 459,662 | $ | 8.51 | 1,606,983 | $ | 10.19 | 2,606,704 | $ | 8.93 | |||||||||||||||
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 16
B.Equity Incentive Plans (Cont.)
(3)Summary of the Status of all the Company’s Employees’ and Directors’ Share Incentive Plans
i. Share Options awards:
2019 | 2018 | 2017 | ||||||||||||||||||||||
Number of share options | Weighted average exercise price | Number of share options | Weighted average exercise price | Number of share options | Weighted average exercise price | |||||||||||||||||||
Outstanding as of beginning of year | 508,493 | $ | 9.58 | 580,185 | $ | 9.64 | 2,278,089 | $ | 9.92 | |||||||||||||||
Granted | -- | -- | -- | -- | -- | |||||||||||||||||||
Exercised | (163,375 | ) | 11.28 | (70,271 | ) | 10.19 | (1,611,489 | ) | 9.27 | |||||||||||||||
Terminated | (667 | ) | 9.90 | (921 | ) | 9.82 | (77,292 | ) | 25.89 | |||||||||||||||
Forfeited | (1,000 | ) | 4.42 | (500 | ) | 4.42 | (9,123 | ) | 8.06 | |||||||||||||||
Outstanding as of end of year | 343,451 | 8.79 | 508,493 | 9.58 | 580,185 | 9.64 | ||||||||||||||||||
Options exercisable as of end of year | 343,451 | 8.79 | 485,579 | $ | 9.46 | 459,662 | $ | 8.51 | ||||||||||||||||
ii. RSU awards:
2019 | 2018 | 2017 | ||||||||||||||||||||||
Number of RSU | Weighted Average Fair Value | Number of RSU | Weighted Average Fair Value | Number of RSU | Weighted Average Fair Value | |||||||||||||||||||
Outstanding as of beginning of year | 1,599,296 | $ | 22.27 | 1,245,889 | $ | 21.29 | 1,009,184 | $ | 14.62 | |||||||||||||||
Granted | 1,159,881 | 18.06 | 977,667 | 20.80 | 818,856 | 24.88 | ||||||||||||||||||
Converted | (484,665 | ) | 23.91 | (602,423 | ) | 17.86 | (553,241 | ) | 14.71 | |||||||||||||||
Forfeited | (260,899 | ) | 21.19 | (21,837 | ) | 22.11 | (28,910 | ) | 16.42 | |||||||||||||||
Outstanding as of end of year | 2,013,613 | $ | 19.13 | 1,599,296 | $ | 22.27 | 1,245,889 | $ | 21.29 | |||||||||||||||
F - 43
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
Number of RSU | Weighted Average Fair Value | Number of RSU | Weighted Average Fair Value | Number of RSU | Weighted Average Fair Value | |||||||||||||||||||
| Outstanding as of beginning of year | 1,009,184 | $ | 14.62 | 773,200 | $ | 15.11 | -- | $ | -- | |||||||||||||||
| Granted | 818,856 | 24.88 | 359,643 | 12.83 | 783,700 | 15.11 | ||||||||||||||||||
| Exercised | (553,241 | ) | 14.71 | (86,847 | ) | 11.45 | -- | -- | ||||||||||||||||
| Forfeited | (28,910 | ) | 16.42 | (36,812 | ) | 14.73 | (10,500 | ) | 15.15 | |||||||||||||||
| Outstanding as of end of year | 1,245,889 | 21.29 | 1,009,184 | 14.62 | 773,200 | 15.11 | ||||||||||||||||||
| RSU exercisable as of end of year | -- | $ | -- | -- | $ | -- | -- | $ | -- | |||||||||||||||
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 15 - SHAREHOLDERS’ EQUITY (Cont.)
B.Equity Incentive Plans (Cont.)
(4)Summary of Information about Employees’ Share Incentive Plans
The following table summarizes information about employees’ share options outstanding as of December 31, 2017:2019:
Outstanding | Exercisable | |||||||||||||||||||||
Range of exercise prices | Number outstanding | Weighted average remaining contractual life (in years) | Weighted average exercise price | Number exercisable | Weighted average exercise price | |||||||||||||||||
$ | 4.42 - 17.25 | 343,451 | 1.78 | $ | 8.79 | 343,451 | $ | 8.79 | ||||||||||||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
The intrinsic value of options exercised | $ | 1,824 | $ | 1,416 | $ | 26,031 | ||||||
The original fair value of options exercised | $ | 665 | $ | 302 | $ | 7,202 | ||||||
| Outstanding as of December 31, 2017 | Exercisable as of December 31, 2017 | |||||||||||||||||||||
| Range of exercise prices | Number outstanding | Weighted average remaining contractual life (in years) | Weighted average exercise price | Number exercisable | Weighted average exercise price | |||||||||||||||||
| $ | 4.42-21.30 | 580,185 | 3.79 | $ | 9.64 | 459,662 | $ | 8.51 | ||||||||||||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
The intrinsic value of converted RSUs | $ | 8,207 | $ | 15,840 | $ | 12,996 | ||||||
The original fair value of converted RSUs | $ | 11,588 | $ | 10,761 | $ | 8,138 | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| The intrinsic value of options exercised | $ | 26,031 | $ | 40,314 | $ | 15,374 | ||||||
| The original fair value of options exercised | $ | 7,202 | $ | 16,711 | $ | 3,721 | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| The intrinsic value of RSU's exercised | $ | 12,996 | $ | 1,177 | $ | -- | ||||||
| The original fair value of RSU's exercised | $ | 8,138 | $ | 994 | $ | -- | ||||||
Stock-based compensation expenses were recognized in the Statement of Operations as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cost of goods | $ | 4,529 | $ | 3,141 | $ | 3,084 | ||||||
Research and development, net | 2,900 | 2,533 | 2,555 | |||||||||
Marketing, general and administrative | 7,119 | 6,987 | 6,010 | |||||||||
Total stock-based compensation expense | $ | 14,548 | $ | 12,661 | $ | 11,649 | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cost of goods | $ | 3,084 | $ | 3,920 | $ | 2,214 | ||||||
| Research and development, net | 2,555 | 2,119 | 1,905 | |||||||||
| Marketing, general and administrative | 6,010 | 3,367 | 3,421 | |||||||||
| Total stock-based compensation expense | $ | 11,649 | $ | 9,406 | $ | 7,540 | ||||||
| 2016 | 2015 | |||||||
Risk-free interest rate | 0.9%-1.3% | 1.2%-1.4% | ||||||
Expected life of options | 4.60 years | 4.75 years | ||||||
Expected annual volatility | 47%-48% | 47% | ||||||
Expected dividend yield | none | none | ||||||
F - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 16
C.Israeli Bank’s Capital Notes
During the first quarter of 2019, approximately 1.2 million ordinary shares were issued following the conversion of the last remaining capital notes. As a result, as of December 31, 2017 and 2016, the Israeli Banks held a total of approximately 0.5 million warrants exercisable until December 2018, at various exercise prices ranging between $10.5 and $92.55 per share.
D.Treasury Stock
During 1999 and 1998, the Company funded the purchase by a trustee of an aggregate of 86,667 ofapproximately 87 thousand Tower’s ordinary shares. These shares are classified as treasury shares.
E.Dividend Restriction
Tower is subject to limitations under Series G Debentures indenture, which enables to distributedistribution of dividends subject to satisfying certain financial ratios.
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 17
A.Revenues by Geographic Area - as Percentage of Total Revenue
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
USA | 52 | % | 52 | % | 52 | % | ||||||
Japan | 29 | 34 | 32 | |||||||||
Asia * | 15 | 10 | 12 | |||||||||
Europe | 4 | 4 | 4 | |||||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| USA | 52 | % | 49 | % | 44 | % | ||||||
| Japan | 32 | 36 | 41 | |||||||||
| Asia * | 12 | 12 | 11 | |||||||||
| Europe | 4 | % | 3 | 4 | ||||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
* Represents revenues from individual countries of less than 10% each.
The basis of attributing revenues from external customers to geographic area is based on the headquarter location of the customer issuing the purchase order; actual delivery may be shipped to otheranother geographic area per customer request.
B.Long-Lived Assets by Geographic Area
Substantially all of Tower’s long-lived assets are located in Israel, substantially all of Jazz’s and TJT’s long-lived assets are located in the United States and substantially all of TPSCo’s long-lived assets are located in Japan.
As of December 31, | ||||||||
2019 | 2018 | |||||||
Israel | $ | 219,479 | $ | 215,419 | ||||
United States | 248,453 | 239,462 | ||||||
Japan | 214,007 | 202,353 | ||||||
Total | $ | 681,939 | $ | 657,234 | ||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Israel | $ | 218,810 | $ | 215,511 | ||||
| United States | 214,393 | 203,501 | ||||||
| Japan | 201,921 | 197,674 | ||||||
| Total | $ | 635,124 | $ | 616,686 | ||||
C.Major Customers - as Percentage of Net |
As of December 31, 2019, no customer exceeded 10% of the net accounts receivable from significantbalance. As of December 31, 2018, two customers representingexceeded 10% or more of the net accounts receivable balance asand represented 13% and 10% of December 31, 2017 and 2016, consist of the following customers:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Customer 1 | 13 | % | 23 | % | ||||
| Customer 2 | 9 | % | 15 | % | ||||
F - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 17
D.Major Customers - as Percentage of Total Revenue
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Customer A | 27 | % | 33 | % | 30 | % | ||||||
Customer B | 5 | 7 | 12 | |||||||||
Other customers * | 27 | 16 | 15 | |||||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Customer A | 30 | % | 35 | % | 40 | % | ||||||
| Customer B | 12 | 12 | 13 | |||||||||
| Other customers * | 15 | 14 | 6 | |||||||||
* | Represents |
NOTE 18
Financing expense net, for the years ended December 31, 2017, 2016 and 2015 were $7,840, $11,857 and $13,179, respectively.
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Interest expense | $ | 6,823 | $ | 10,610 | $ | 12,623 | ||||||
Interest income | (12,949 | ) | (10,762 | ) | (4,783 | ) | ||||||
Jazz Notes amortization | -- | 5,010 | 4,230 | |||||||||
Series G Debentures amortization, related rate differences and hedging results | 3,299 | 3,589 | 2,738 | |||||||||
Exchange rate differences | 968 | 1,064 | 6 | |||||||||
Bank fees and others | 1,847 | 3,673 | 633 | |||||||||
$ | (12 | ) | $ | 13,184 | $ | 15,447 | ||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Jazz Notes amortization | $ | 4,230 | $ | 3,571 | $ | 3,015 | ||||||
| Changes in fair value (total level 3 changes in fair value of bank loans) | -- | 7,900 | 16,092 | |||||||||
| Series G Debentures amortization, related rate differences and hedging results | 2,738 | 1,901 | -- | |||||||||
| Debentures Series F accretion and amortization including accelerated accretion | -- | 150 | 87,973 | |||||||||
| Exchange rate differences | 6 | (3,768 | ) | 1,056 | ||||||||
| Others | 633 | 2,738 | 1,794 | |||||||||
| $ | 7,607 | $ | 12,492 | $ | 109,930 | |||||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current tax expense (benefit): | ||||||||||||
| Local | $ | 3,622 | $ | -- | $ | -- | ||||||
| Foreign (*) | 6,070 | 5,948 | (8,473 | ) | ||||||||
| Deferred tax expense (benefit): | ||||||||||||
| Local (see F below) | (82,370 | ) | -- | -- | ||||||||
| Foreign(*) (see E below) | (27,210 | ) | (4,516 | ) | (3,805 | ) | ||||||
| Income tax expense (benefit) | $ | (99,888 | ) | $ | 1,432 | $ | (12,278 | ) | ||||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Profit (loss) before taxes: | ||||||||||||
| Domestic | $ | 198,008 | $ | 168,668 | $ | (59,797 | ) | |||||
| Foreign (*) | 3,760 | 41,930 | 18,392 | |||||||||
| Total profit (loss) before taxes | $ | 201,768 | $ | 210,598 | $ | (41,405 | ) | |||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
Net deferred tax asset - current: (**) | ||||||||
| Net operating loss carryforward | $ | - | $ | 797 | ||||
| Employees benefits and compensation | - | 3,895 | ||||||
| Others | - | 5,480 | ||||||
| - | 10,172 | |||||||
| Valuation allowance, see F below | - | (3,014 | ) | |||||
Total net current deferred tax asset | $ | - | $ | 7,158 | ||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
Deferred tax asset and liability - long-term: (**) | ||||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 103,197 | $ | 306,496 | ||||
| Employees benefits and compensation | 4,895 | 2,405 | ||||||
| Accruals and reserves | 2,415 | - | ||||||
| Research and development | 1,707 | 1,940 | ||||||
| Others | 6,129 | 3,403 | ||||||
| 118,343 | 314,244 | |||||||
| Valuation allowance, see F below | (5,807 | ) | (279,898 | ) | ||||
| Deferred tax assets | $ | 112,536 | $ | 34,346 | ||||
Deferred tax liabilities: | ||||||||
| Depreciation and amortization | (77,092 | ) | (96,242 | ) | ||||
Gain on TPSCo acquisition | (15,957 | ) | (30,653 | ) | ||||
| Others | (559 | ) | (2,684 | ) | ||||
Deferred tax liabilities | $ | (93,608 | ) | $ | (129,579 | ) | ||
| Presented in long term deferred tax assets | $ | 82,852 | $ | -- | ||||
| Presented in long term deferred tax liabilities | $ | (63,924 | ) | $ | (95,233 | ) | ||
| Unrecognized tax benefits | ||||
| Balance at January 1, 2017 | $ | 8,969 | ||
| Additions for tax positions | 8,753 | |||
| Reduction of prior years’ provision | (2,436 | ) | ||
| Balance at December 31, 2017 | $ | 15,286 | ||
| Unrecognized tax benefits | ||||
| Balance at January 1, 2016 | $ | 13,538 | ||
| Additions for tax positions of current year | 157 | |||
| Expiration of prior years’ provision due to TJP closure | (6,472 | ) | ||
| Additions for tax positions of prior years | 779 | |||
| Translation differences | 967 | |||
| Balance at December 31, 2016 | $ | 8,969 | ||
| Unrecognized tax benefits | ||||
| Balance at January 1, 2015 | $ | 24,961 | ||
Reduction in tax positions of current year | (623 | ) | ||
Reduction due to statute of limitation of prior years | (10,758 | ) | ||
| Translation differences | (42 | ) | ||
| Balance at December 31, 2015 | $ | 13,538 | ||
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Tax expense (benefit) computed at statutory rates, see (*) below | $ | 48,433 | $ | 52,650 | $ | (10,972 | ) | |||||
Effect of tax rate change on deferred tax liabilities, net(**) | (16,078 | ) | -- | -- | ||||||||
Effect of different tax rates in different jurisdictions and Preferred Enterprise Benefit | (33,298 | ) | (4,772 | ) | 6,108 | |||||||
| Gain on acquisition | -- | (10,450 | ) | -- | ||||||||
Tax benefits for which deferred taxes were not recorded, see F below | (15,103 | ) | (23,489 | ) | 11,687 | |||||||
Change in Valuation allowance, see F below | (82,772 | ) | (6,212 | ) | (11,153 | ) | ||||||
| Permanent differences and other, net | (1,070 | ) | (6,295 | ) | (7,948 | ) | ||||||
| Income tax expense (benefit) | $ | (99,888 | ) | $ | 1,432 | $ | (12,278 | ) | ||||
NOTE 20
A.Balance:
The nature of the relationship involved | As of December 31, | |||||||||
2019 | 2018 | |||||||||
Long-term investment | Equity investment in a limited partnership | $ | 55 | $ | 110 | |||||
B.Transactions:
Description of the transactions | Year ended December 31, | |||||||||||||
2019 | 2018 | 2017 | ||||||||||||
General and Administrative expense | Directors’ fees and reimbursement to directors | $ | 783 | $ | 736 | $ | 719 | |||||||
Other income (expense), net | Non-controlling interest income (loss) from a limited Partnership | $ | (55 | ) | $ | 44 | $ | 29 | ||||||
The nature of the relationships involved | As of December 31, | ||||||||
| 2017 | 2016 | ||||||||
| Long-term investment | Equity investment in a limited partnership | $ | 66 | $ | 37 | ||||
Description of the transactions | Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | |||||||||||
| Cost of revenues | Purchase of services and goods from affiliates of a related party. | $ | -- | $ | -- | $ | 13,970 | ||||||
| General and Administrative expenses | Directors’ fees and reimbursement to directors | $ | 719 | $ | 639 | $ | 234 | ||||||
| Other expense (income), net | Equity loss (profit) in a limited partnership | $ | (29 | ) | $ | 13 | $ | (6 | ) | ||||
F - 57
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 21
A.Tower Approved Enterprise Status and Statutory Income Rates
Substantially all of a subsidiary acquiredTower’s existing facilities and other capital investments made through 2012 have been granted approved enterprise status, as provided by the Law for the Encouragement of Capital Investment (“Investments Law”).
Tower, as an industrial company located in 2008.
Income not eligible for Preferred Enterprise benefits is taxed at the transaction announcement date. Under IFRS, the consideration was measured accordingregular corporate tax rate of 23% for 2019, 23% for 2018 and 24% for 2017.
The Company operates in a multinational tax environment and is subject to Tower's share price at closing date. Accordingly, a lower purchase consideration was measured under IFRS than the purchase consideration measured under US GAAP. Consequently, no purchase price was allocated to goodwill under IFRS.
B.Income Tax Provision
The Company’s income tax provision is as of such date. Under ASC 815follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Current tax expense: | ||||||||||||
Local | -- | $ | 2,164 | $ | 3,622 | |||||||
Foreign (*) | 1,013 | 9,273 | 6,070 | |||||||||
Deferred tax expense (benefit): | ||||||||||||
Local (see F below) | 7,098 | 9,316 | (82,370 | ) | ||||||||
Foreign(*) (see E below) | (5,163 | ) | (14,815 | ) | (27,210 | ) | ||||||
Income tax expense (benefit) | $ | 2,948 | $ | 5,938 | $ | (99,888 | ) | |||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Profit (loss) before taxes: | ||||||||||||
Domestic | $ | 103,432 | $ | 142,831 | $ | 198,008 | ||||||
Foreign (*) | (12,411 | ) | (3,514 | ) | 3,760 | |||||||
Total profit before taxes | $ | 91,021 | $ | 139,317 | $ | 201,768 | ||||||
(*) Foreign are amounts related to Tower’s Japanese and ASC 470-20, the related conversion feature was measured in the third quarter of 2012 based on its intrinsic value and recorded to equity, with a corresponding discount on the debt instrument. Under IAS 39, such conversion feature was bifurcated from its host contract at the date of issuance and measured as a liability at fair value at each cut-off date until the date of determination of the related conversion ratio, at which date such conversion feature was classified to equity.
F - 58
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 21
C.Components of Deferred Tax Asset/Liability
The following is a summary of the components of the deferred tax assets and liabilities reflected in the balance sheets as of the respective dates (*)
As of December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax asset and liability - long-term: | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carryforward | $ | 78,783 | $ | 87,325 | ||||
Employees benefits and compensation | 4,819 | 4,914 | ||||||
Accruals and reserves | 3,341 | 4,738 | ||||||
Research and development | 15,276 | 12,292 | ||||||
Others | 5,068 | 3,615 | ||||||
107,287 | 112,884 | |||||||
Valuation allowance, see F below | (7,266 | ) | (5,834 | ) | ||||
Deferred tax assets | $ | 100,021 | $ | 107,050 | ||||
Deferred tax liabilities- long-term: | ||||||||
Depreciation and amortization | (77,966 | ) | (82,001 | ) | ||||
Gain on TPSCo acquisition | -- | (1,240 | ) | |||||
Others | (931 | ) | (750 | ) | ||||
Deferred tax liabilities | $ | (78,897 | ) | $ | (83,991 | ) | ||
| ||||||||
Presented in long term deferred tax assets | $ | 66,362 | $ | 73,460 | ||||
Presented in long term deferred tax liabilities | $ | (45,238 | ) | $ | (50,401 | ) | ||
(*) Deferred tax assets and liabilities relating to Tower for the years 2019 and 2018 are computed based on the Israeli preferred enterprise tax rate of 7.5%.
| As of December 31, 2017 | ||||||||||||
| US GAAP | Adjustments | IFRS | ||||||||||
| ASSETS | ||||||||||||
| Current assets | $ | 874,332 | $ | -- | $ | 874,332 | ||||||
| Property and equipment, net | 635,124 | -- | 635,124 | |||||||||
| Long-term assets | 164,183 | (7,000 | ) | 157,183 | ||||||||
| Total assets | $ | 1, 673,639 | $ | (7,000 | ) | $ | 1, 666,639 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
| Current liabilities | $ | 302,373 | $ | -- | $ | 302,373 | ||||||
| Long-term liabilities | 341,560 | (1,152 | ) | 340,408 | ||||||||
| Total liabilities | 643,933 | (1,152 | ) | 642,781 | ||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 1,029,706 | (5,848 | ) | 1,023,858 | ||||||||
| Total liabilities and shareholders' equity | $ | 1, 673,639 | $ | (7,000 | ) | $ | 1, 666,639 | |||||
| Year ended December 31, 2017 | ||||||||||||
| US GAAP | Adjustments | IFRS | ||||||||||
OPERATING PROFIT | $ | 219,842 | $ | (531 | ) | $ | 219,311 | |||||
| Interest expenses, net | (7,840 | ) | -- | (7,840 | ) | |||||||
| Other financing expense, net | (7,607 | ) | 52 | (7,555 | ) | |||||||
Other expense, net | (2,627 | ) | -- | (2,627 | ) | |||||||
| Profit before income tax | 201,768 | (479 | ) | 201,289 | ||||||||
| Income tax benefit | 99,888 | -- | 99,888 | |||||||||
NET PROFIT | 301,656 | (479 | ) | 301,177 | ||||||||
Net income attributable to non-controlling interest | (3,645 | ) | -- | (3,645 | ) | |||||||
NET PROFIT ATTRIBUTABLE TO THE COMPANY | $ | 298,011 | $ | (479 | ) | $ | 297,532 | |||||
F - 59
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 21
D.Unrecognized Tax Benefit
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits | ||||
Balance at January 1, 2019 | $ | 14,783 | ||
Additions for tax positions of current year | 778 | |||
Reduction due to statute of limitation of prior years | (448 | ) | ||
Balance at December 31, 2019 | $ | 15,113 | ||
Unrecognized tax benefits | ||||
Balance at January 1, 2018 | $ | 15,286 | ||
Additions for tax positions of current year | 716 | |||
Reduction due to statute of limitation of prior years | (1,219 | ) | ||
Balance at December 31, 2018 | $ | 14,783 | ||
Unrecognized tax benefits | ||||
Balance at January 1, 2017 | $ | 8,969 | ||
Additions for tax positions | 8,753 | |||
Reduction of prior years’ provision | (2,436 | ) | ||
Balance at December 31, 2017 | $ | 15,286 | ||
E.Effective Income Tax Rates
In December 2017, the Tax Cut and Jobs Act (the “Act”) was signed into law, which enacts significant changes to U.S. federal corporate tax and related laws. Some of the provisions of the Act affecting corporations include, but are not limited to: (i) a reduction of the U.S. Federal corporate income tax rate from 35% to 21%; (ii) limiting the interest expense deduction; (iii) expensing of cost of acquired qualified property; (iv) elimination of the domestic production activities deduction; (v) elimination of Alternative Minimum Tax (“AMT”) and (vi) refund ability of AMT credits, which were generated prior to the Act, in 2018 and thereafter.
Tower US GAAP TO IFRS (cont.)
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net profit (loss) in accordance with US GAAP | $ | 298,011 | $ | 203,924 | $ | (29,647 | ) | |||||
| Financial instruments | 52 | 143 | 73,770 | |||||||||
| Pension plans | (308 | ) | (206 | ) | (705 | ) | ||||||
| Termination benefits | (223 | ) | 13 | (45 | ) | |||||||
| Net profit in accordance with IFRS | $ | 297,532 | $ | 203,874 | $ | 43,373 | ||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Shareholders’ equity in accordance with US GAAP | $ | 1,029,706 | $ | 682,614 | ||||
| Financial instruments | (185 | ) | (237 | ) | ||||
| Termination benefits | 1,337 | 1,560 | ||||||
| Goodwill | (7,000 | ) | (7,000 | ) | ||||
| Shareholders’ equity in accordance with IFRS | $ | 1,023,858 | $ | 676,937 | ||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Goodwill in accordance with US GAAP | $ | 7,000 | $ | 7,000 | ||||
| Goodwill | (7,000 | ) | (7,000 | ) | ||||
| Goodwill in accordance with IFRS | $ | -- | $ | -- | ||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current maturities of loans, leases and debentures in accordance with US GAAP | $ | 105,958 | $ | 48,084 | ||||
| Financial instruments | 185 | -- | ||||||
| Current maturities of loans, leases and debentures in accordance with IFRS | $ | 106,143 | $ | 48,084 | ||||
F - 60
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 21
E.Effective Income Tax Rates (Cont.)
The reconciliation of the statutory tax rate to the effective tax rate is as follows:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Tax expense computed at statutory rates, see (*) below | $ | 20,935 | $ | 32,044 | $ | 48,433 | ||||||
Effect of tax rate change on deferred tax liabilities, net (**) | 314 | (478 | ) | (16,078 | ) | |||||||
Effect of different tax rates in different jurisdictions and Preferred Enterprise Benefit | (16,396 | ) | (23,150 | ) | (33,298 | ) | ||||||
Change in Valuation allowance, see F below | (962 | ) | (82,772 | ) | ||||||||
Tax benefits for which deferred taxes were not recorded, see F below | -- | -- | (15,103 | ) | ||||||||
Permanent differences and other, net | (1,905 | ) | (1,516 | ) | (1,070 | ) | ||||||
Income tax expense (benefit) | $ | 2,948 | $ | 5,938 | $ | (99,888 | ) | |||||
(*) The tax expense (benefit) was computed based on Tower’s regular corporate tax rate of 23% for 2019, 23% for 2018 and 24% for 2017.
(**) Reduction in tax rates due to the U.S. Tax Reform and reduction in income tax rates in Japan.
F.Net Operating Loss Carryforward
As of December 31, 2019, Tower had net operating loss carryforward for tax purposes of approximately $1,000,000 which may be carried forward indefinitely. For the year ended December 31, 2016, Tower recorded a valuation allowance for deferred tax assets as it was unable to conclude that it is more-likely-than-not that such deferred tax assets would be realized. As of December 31, 2017, Tower concluded that realization of net deferred assets is more likely than not as required by ASC 740-10-30-5(e). Tower considered both positive and negative factors. Positive factors include the Israeli accumulated profit before tax for 2017 and recent years, projections for taxable income in Israel in the near term and the unlimited time for the utilization of the losses carryforward. The negative factors considered include Tower’s history of operating losses, the uncertainty in estimating the future generation of sufficient taxable income in Israel to utilize the loss carryforward in the amount noted above taking into account that it operates in the cyclical industry of semiconductors and other trends affecting Tower’s ability to sustain its current level of income. Weighing all the above, Tower concluded in 2017 that it is more likely than not that taxable income will be generated and released entirely the valuation allowance related to the Israeli accumulated losses.
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Long-term debentures in accordance with US GAAP | $ | 128,368 | $ | 162,981 | ||||
| Financial instruments | -- | 237 | ||||||
| Long-term debentures in accordance with IFRS | $ | 128,368 | $ | 163,218 | ||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Long-term employee related liabilities in accordance with US GAAP | $ | 14,662 | $ | 14,176 | ||||
| Termination benefits | (1,337 | ) | (1,560 | ) | ||||
| Long-term employee related liabilities in accordance with IFRS | $ | 13,325 | $ | 12,616 | ||||
F - 61
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
(dollars in thousands, except per share data)
NOTE 19 - INCOME TAXES (Cont.)
F.Net Operating Loss Carryforward (Cont.)
The future utilization of Tower US Holdings’ federal net operating loss carryforward to offset future federal taxable income is subject to an annual limitation as a result of ownership changes that have occurred. Additional limitations could apply if ownership changes occur in the future. Jazz has had two “change in ownership” events that limit the utilization of net operating loss carryforward. The first “change in ownership” event occurred in February 2007 upon Jazz Technologies’ acquisition of Jazz Semiconductor. The second “change in ownership” event occurred in September 2008, upon Tower’s acquisition of Jazz. Jazz concluded that the net operating loss limitation for the change in ownership which occurred in September 2008 will be an annual utilization of approximately $ 2,100 in its tax return.
As of December 31, 2019, Tower US Holdings had federal net operating loss carryforward of approximately $31,000, of which approximately $5,000 do not expire and is subject to taxable income limitation of 80% due to the Act, and the remaining federal tax loss carryforwards of $26,000 will begin to expire in 2022, unless previously utilized.
As of December 31, 2019, Tower US Holdings had California state net operating loss carryforward of approximately $11,000. The state tax loss carry forward begin to expire in 2028, unless previously utilized.
As of December 31, 2019 and 2018, TPSCo had no net operating loss carryforward.
G.Final Tax Assessments
Tower possesses final tax assessments through the year 1998. In addition, the tax assessments for the years 1999-2014 are deemed final.
Tower US Holdings is filing the consolidated tax return including Jazz and TJT. Tower US Holdings and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple states.
With few exceptions, Tower US Holdings is no longer subject to U.S. federal income tax examinations before 2016 and state and local income tax examinations before 2015. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount.
TPSCo possesses final tax assessments through the year 2016.
F - 52