UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
OR
For the fiscal year ended December 31 , 2022
OR
OR
Commission File number: 0-24790
(Exact name of registrant as specified in its charter and translation of registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
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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: 109,954,034 Ordinary Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☐ Accelerated filer
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☐ Non-accelerated filer
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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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
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Other ☐
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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-D.
Risk Factors”.
We
remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors
and involve known and unknown risks that relate to the Merger Agreement (as defined below) or that could cause the actual results, including
revenues from agreements we signed, expansion of our operations, performance, activities, our achievements, to be materially different
from any future results, plans to expand our operations, plans to develop and release new products, future performance, future activities,
or our future achievements expressed or implied by such forward-looking statements. Additional information about potential risks that
relate to the Merger Agreement that could affect our business and financial results is included in the proxy statement on Form 6-K that
we furnished to the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2022 and in this annual report in “Item
3. Key Information - D. 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,” “USD” or “$” are to United States dollars,
all references to “JPY” are to the Japanese Yen and all references to “Shekels” or “NIS” are to New
Israeli Shekels. “U.S. GAAP” means the generally accepted accounting principles of the United States. Unless otherwise stated,
all of our financial information presented in this annual report has been prepared in accordance with U.S. GAAP.
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. 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 was changed to Tower Semiconductor Newport Beach, Inc. (“NPB Co.”) and the name of Jazz US Holdings
was changed to Tower Semiconductor NPB Holdings, Inc. As used in this annual report, “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.
i
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”), holding three manufacturing facilities in Japan.
In June 2014, Panasonic transferred its shares and assigned its rights and obligations in TPSCo to its wholly-owned subsidiary, Panasonic
Semiconductor Solutions Co., Ltd. (“PSCS”). In July 2020, TPSCo changed its name to Tower Partners Semiconductor Co., Ltd.
In September 2020, Panasonic sold its shares in PSCS to Nuvoton Technology Corp. (“Nuvoton”), a Taiwan-based semiconductor
company, which is majority-owned by Winbond Electronics Corporation, a Taiwan-based specialty memory integrated circuits company. Following
the sale, the registered name of PSCS changed to Nuvoton Technology Corporation Japan (“NTCJ”).
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-owned US subsidiary, TowerJazz
Texas Inc., which is fully owned by Tower US Holdings. In March 2020, the company name of TowerJazz Texas Inc. was changed to Tower Semiconductor
San Antonio, Inc. (“Tower SA”).
In
2021, we entered into a definitive agreement with ST Microelectronics S.r.l (“ST”) to share a 300mm manufacturing fabrication
facility in Agrate, Italy under a collaborative arrangement, following which Tower Semiconductor Italy S.r.l. (“TSIT”), a
wholly-owned Italian subsidiary of Tower, was incorporated. The fabrication facility is currently under installation and qualification
by ST. The parties are expected to share the cleanroom space and the facility infrastructure, and TSIT will have the right to use one-third
of the installed capacity for its foundry customers.
On
February 15, 2022, we entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”),
with Intel FS Inc., a Delaware corporation (“Parent”), Steel Titanium 2022 Ltd., a company organized under the laws of the
State of Israel and a wholly‑owned subsidiary of Parent (“Merger Sub”), and Intel Corporation, a Delaware corporation
(“Intel”), pursuant to which Merger Sub will merge with and into the Company (and Merger Sub will cease to exist as a separate
legal entity), and the Company will be the surviving company and will become a wholly‑owned subsidiary of Parent and a subsidiary
of Intel (the “Merger”), subject to the terms and conditions set forth in the Merger Agreement. If the Merger is completed,
the Company will cease to be a publicly traded company and all outstanding ordinary shares, par value NIS 15.00 per share, of the Company
(each a “Company Share”) (except for any Company Shares owned by the Company, Parent, Merger Sub or any of their direct or
indirect subsidiaries or held in the Company’s treasury (which will remain outstanding and no Merger Consideration (as defined below)
or any other consideration will be delivered in exchange therefor)) will be deemed to be transferred to Parent in exchange for the right
to receive $53.00 per Company Share in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”).
Our
board of directors unanimously approved the Merger and the Merger Agreement. On April 25, 2022, we held an extraordinary general meeting
of shareholders (the “EGM”) at which our shareholders approved the Merger Agreement and all other transactions and arrangements
contemplated by the Merger Agreement, including the Merger and the Merger Consideration to be received by the shareholders of the Company
in the Merger. The completion of the Merger is subject to the satisfaction of certain closing conditions specified in the Merger Agreement,
including the receipt of certain regulatory approvals. To date, certain but not all approvals have been obtained. If the closing
conditions are not satisfied or waived and the Merger is not consummated by August 15, 2023 ( as
previously extended, and as may be further extended in accordance with the Merger Agreement, the “Outside
Date”), either we or Intel may, under certain circumstances, choose not to proceed with the Merger. There can be no assurance that
any remaining required approval will be obtained or, in the event any existing approval or waiver expires and we file for such approval
or waiver again, that such approval or waiver will be obtained, and the timing thereof cannot be predicted.
ii
Unless
indicated otherwise by the context, the discussion in this annual report regarding our future business plans and activities does not take
into account the effect of the consummation of the Merger.
For
further information on the Merger Agreement and its conditions as well as on the EGM, see our reports on Form 6-Ks, including our Proxy
Statement on Form 6-K (the “Merger Proxy Statement,” and together, the “Merger-Related Materials”) filed with
or furnished to the SEC on February 16, 2022, February 17, 2022, March 11, 2022 and April 25, 2022.
The
consolidated financial statements included in this annual report include the results and balances of Tower and its following subsidiaries:
(i) its wholly-owned indirect subsidiary Tower NPB, (ii) its majority-owned subsidiary TPSCo (iii) its wholly-owned indirect subsidiary
Tower SA and (iv) its wholly-owned subsidiary TSIT.
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 NPB Co. operates in Newport Beach, California. “Arai E” means the semiconductor fabrication facility TPSCo operated
through July 2022 in Kurihara 4-5-1, Myoko-shi, Niigata, Japan. “Uozu E” 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” means the semiconductor fabrication facility Tower SA operates
in San Antonio, Texas. “Fab 10” means the semiconductor fabrication facility that ST is establishing in Agrate, Italy
in which TSIT is expected to share manufacturing capacity
with ST.
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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, Arai E, Tonami CD and Fab 9 capacity are to 200-mm wafers, and with respect to Uozu E and Fab 10 are to 300-mm
wafers, ranging from 65 nanometers to 1 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 in the U.S. and Japan.
iii
TABLE
OF CONTENTS
iv
PART
I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not
applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM 3.
KEY INFORMATION
A. [RESERVED.]
B. CAPITALIZATION
AND INDEBTEDNESS
Not
applicable.
C. REASONS FOR
THE OFFER AND USE OF PROCEEDS
Not
applicable.
D. RISK FACTORS
Our
business faces many risks. Any of the risks discussed below, including risks related to the Merger, may have an adverse impact on our
business, financial condition and operating results.
RISKS
AFFECTING OUR BUSINESS
Demand
for our foundry services is dependent on the demand in our customers’ end markets, which are typically cyclical and volatile.
Our
customers generally use the semiconductors produced in our fabrication facilities 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 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.
Because
our services may be used in many new applications, it is difficult to accurately forecast demand for all markets. 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.
Reliance
on acquisitions and/or gaining additional capacity for growth involves risks that may adversely affect our future revenues, business and
operating results.
We
may decide to try to attract new customers and expand the existing business with current customers and/or newly-served markets by expanding
our manufacturing footprint and business through acquisitions and joint ventures, as we have done in the past, and/or through obtaining
access to additional manufacturing capacity, with or without third-party collaboration. Our success at such expansion is dependent, in
part, on finding suitable partners and targets for acquisitions of fabs and/ or capacity through capacity arrangements with companies
that already own fabs, successfully negotiating with the seller and/or partner a reasonable price for the acquisition or engagement, successfully
financing and consummating such expansion plans, integrating the acquired facilities into our business efficiently and effectively achieving
desired synergies and anticipated benefits, and loading the facilities in an amount that may at least cover their operating and other
costs. We cannot assure you that we will be successful in executing this business strategy or that we will succeed in increasing our market
presence and attracting new customers and business and/or expanding our business with our current customers through that strategy, in
order to operate any such additional capacity profitably.
1
This
strategy involves many risks, each of which may negatively affect our profitability and financial position, including the following:
| • |
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; |
| • |
We may not be able to obtain the necessary regulatory or other approvals, and as a result, or for other
reasons, we may fail to consummate certain acquisitions; |
| • |
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; |
| • |
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;
|
| • |
We may purchase a company with excessive unknown contingent liabilities and/or a cost structure that
is not as beneficial as anticipated from the preliminary evaluation or that includes high cost that may result in losses incurred by us
if we do not succeed in maintaining high manufacturing levels to cover the cost; |
| • |
We may not be able to obtain sufficient financing which could limit our ability to engage in certain
acquisitions and strategic engagements; and |
| • |
The amount or terms of financing actually required before and after acquisitions considering our current
liquidity and cash position may vary from our expectations, resulting in a need for more funding that may not be available to us in order
to finance acquisitions, the operations of the target acquired and/or the acquisition of additional equipment that may be required to
increase and/or adjust the target’s manufacturing line to address our customer demand and specific technology flows, which may adversely
affect our liquidity and balance sheet position. |
We
may experience difficulty achieving acceptable device yields, product performance and delivery times in the future as a result of manufacturing
problems.
The
process technology for the manufacture of semiconductor 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 production process, defects in the key materials and tools used to manufacture wafers and other
factors can cause wafers to be rejected or individual semiconductors on specific wafers to be non-functional. Although we continuously
enhance our 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 difficulties in upgrading or expanding existing
facilities; unexpected breakdowns in our manufacturing equipment and/or related facility systems; unexpected events, such as an electricity
outage, affecting the manufacturing process; difficulties in changing or upgrading our process technologies; raw material shortages or
impurities; delays in delivery or shortages of spare parts; and difficulties in maintenance and upgrade of our equipment. Should such
problems occur to a material degree, we may suffer loss of income, loss of reputation and/or a loss of customers, any of which may adversely
impact our business, revenues, financial results and financial condition.
2
Over-demand
for our foundry services and/or products may result in bottlenecks in production lines and 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 (i) be unable to fulfill
customer demand in whole or in part, in a timely manner or at all; (ii) be unable to assure production of customers’ next generation
products; (iii) experience bottlenecks in production lines, which may cause the fabrication facility to slow down and/or halt operations;
(iv) be unable to provide additional capacity from any of our worldwide facilities through the transfer of process technologies, successful
implementation and timely qualification; and/or (v) be unable to timely and successfully ramp up the manufacturing capacity in the fabrication
facility being established by ST in Agrate, Italy due to delays in supply of equipment and/or parts by vendors, delays in equipment installation
and qualification schedule, and/or delays in technology transfer and/or new products’ qualifications. As a result, we could lose
one or more of our current and/or potential customers, which may adversely affect our reputation, revenues, profitability and business.
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 rapid technological developments, evolving industry standards, changes
in customer and product end user requirements, frequent new product introductions and enhancements, and 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 produce advanced specialized manufacturing process technologies and purchase the appropriate
equipment. If we are unable to successfully develop and produce these processes 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 and our competitors may have competitive advantages over us.
Many
of our competitors may have one or more of the following competitive advantages over us: greater manufacturing capacity and/or availability
of same; a more diverse and established customer base; greater financial, sales, marketing, distribution and other resources; governmental
funding or support; better cost structure; and/or better operational performance, including cycle time and yields. If we do not compete
successfully, our business and financial results may be adversely affected.
We
compete most directly in specialty segments with certain independent dedicated foundries. We also compete with 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. As our competitors continue to
expand their manufacturing capacity, there could be an increase in specialty semiconductor capacity. As specialty capacity increases,
there may be more competition and pricing pressure on our services, which may result in underutilization of our capacity, decrease of
our profit margins, reduced earnings or increased losses.
3
In
addition, some semiconductor companies have advanced their complementary metal oxide semiconductor (“CMOS”) designs to smaller
than 10 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. 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.
If
we are unable to successfully locate and negotiate with third-party buyers for the sale of any excess and/or unused equipment and/or manufacturing
facility, our financial results may be harmed.
From
time to time, we may decide to stop developing certain product technology lines or wind down or cease manufacturing at a fabrication facility
due to company strategy, low margins, low utilization or low customer demand. This results in unused equipment that no longer supports
our customers’ needs and may be sold 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 and/or manufacturing
facility 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.
Our
financial results may fluctuate from quarter to quarter, making it difficult to forecast our future performance.
Our
revenues, expenses and operating results may fluctuate significantly from quarter to quarter due to a number of factors which may be beyond
our control. These factors include, among others: the cyclical nature of the semiconductor industry and the volatility of the markets
served by our customers; changes in the economic conditions of geographical regions where our customers and their markets are located;
inventory and supply chain management of our customers; the loss of a key customer, not attracting new designs from key customers, postponement
of an order from a key customer or the rescheduling or cancellation of large orders; the occurrence of accounts receivable write-offs,
failure of a key customer to pay accounts receivable in a timely manner, the financial condition of certain of our customers and the regulatory
or other payment difficulties that may be imposed in a region in which customers reside; the occurrence of an unexpected event,
such as environmental events, an epidemic or pandemic (such as COVID-19), industrial accidents such as fire or explosions, electricity
outage, affecting the manufacturing process and shipping quality products without charging our customers significant additional costs;
the timing and volume of orders from customers; our ability to obtain raw materials and equipment on a timely and cost-effective basis;
price erosion in the industry and our ability to negotiate prices with our current and new customers; our susceptibility to intellectual
property rights’ disputes; our dependency on export licenses and other permits required for our operations and the sale of our products;
our ability to maintain existing partners and customers; interest, price index and currency rate fluctuations that were not hedged; and
changes in accounting rules affecting our results.
Due
to these factors and risks, it is difficult to predict our future performance and any difference between future performance and initial
expectations may ultimately negatively affect our operating results and financial position.
4
We
may be required to obtain financing for capacity acquisition related transactions, strategic and/or other growth or M&A opportunities,
which we may not be able to obtain.
In
order to invest in strategic opportunities in support of our acquisition and capacity growth plans and/or business development activities,
or a joint partnership or another large transaction to expand our capacity, including the funding of the equipment for the fabrication
facility being established by ST in Agrate, Italy, acquiring leased assets and/ or acquiring additional fabs and/ or capacity through
other capacity acquisition related transactions, we may use our current cash balance, deposits and/or investments in marketable securities
or may be required to secure additional funds from financing sources, including through public or private offerings of equity and/or debt
and/or re-financing or other financing alternatives. The timing, terms, size and pricing of any future fundraising would be subject to
the then-prevailing capital market conditions and our business and financial situation, as well as the need to obtain certain regulatory
and other consents. Further, inflation and rising interest rates across the global economy have resulted in, and may continue to result
in, significant disruption of global financial markets, which may reduce and/ or prevent the ability to execute fundraising transactions
and may result in less favorable financial terms, such as increased financing costs and/ or higher shareholders’ dilution. 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) for such purposes or that we will obtain the required approvals to execute fundraising activities
and that such fundraising activities will be successful. If approvals are not obtained and/or such fundraising activities are not
successful, our financial position and operations may be adversely affected.
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 2022, 14% of our revenues were generated from NTCJ and 33% of our revenues
were derived from an additional five customers, each of which generated between 4% to 9% of our revenues, and the remaining 53% of our
revenues were derived from many other smaller customers, as compared to 21% of
our revenues derived from NTCJ, and 33% of our revenues derived
from an additional five customers, each of which generated between 4% to 13% of our revenues, and the remaining 46% of our revenues derived
from many other smaller customers for the year ended December 31, 2021. While we renegotiate the terms of our commercial agreements from
time to time with our customers, there is no assurance as to the financial impact of any revised terms between us and our customers or
the volume of orders they may continue to place based on any revised terms. The loss or reduction in volume or sales price to any of our
key customers, whether due to business negotiation, termination or expiration of their signed contract(s), the lack of demand in their
markets, their insolvency or their unwillingness or inability to perform their obligations under their respective relationships with us,
or our inability to renew our engagements with them on commercially reasonable terms, produce their new products, fulfill their demand,
or, alternatively, attract new customers to replace such lost business, may materially negatively impact our overall business, revenues
and profitability.
Risks
relating to Fab 3 lease could harm business, operations and financial results.
NPB
Co. operates our Fab 3 fabrication facility and its offices under a lease contract that was initially in effect until March 2022 and included
an option, at NPB Co.’s sole discretion, to extend the lease for an additional five year period, which it elected to exercise for
the lease to continue through March 2027. A few years ago, the landlord began a construction project adjacent to the fabrication facility,
which may adversely impact the Fab 3 operations, including temporary reductions or interruptions in the supply of utilities to the property,
and a portion or all of the fabrication facility may need to be idled temporarily during development, which may adversely affect the business,
operations and future financial results. In addition, the landlord has made claims that NPB Co.’s noise abatement efforts are not
adequate under the terms of the amended lease, and has requested a judicial declaration that NPB Co. has committed material non-curable
breaches of the lease and that, in accordance with the lease, the landlord would be entitled to terminate the lease. NPB Co. does not
agree and is disputing these claims. Any adverse change to the current lease agreement may adversely impact the business, operations
and future financial results.
5
Certain
effects of the COVID-19 pandemic may hurt our business.
The
full extent to which the COVID-19 pandemic may adversely affect our revenue, business and financial results will depend on future developments
that are highly uncertain. Although the general global conditions surrounding the pandemic have been improving, if conditions should instead
begin to worsen, we may face a shortage of supply of raw materials, equipment tools and services, potential reduced attendance of employees
and service providers to our facilities and offices and potential reductions in customer orders or pricing due to any related or resulting
global economic downturn, which may adversely affect our business and financial results.
Our
financial results may be adversely affected if we are unable to operate our facilities at satisfactory utilization rates necessary to
generate and maintain positive and sustainable gross, operating and net profits.
As
is common in our industry, a large portion of our total costs is comprised of fixed costs, associated mainly with our manufacturing facilities,
while our variable costs are relatively small. Therefore, while during periods when our facilities manufacture at high utilization rates
we are able to cover our costs, at times when the utilization rate is low, the reduced revenues may not cover all of the costs since a
large portion are fixed costs which remain constant, irrespective of the number of wafers manufactured. In addition, our depreciation
costs and capital expenditure investments, as common in our industry, are relatively high. Our financial results, including our gross,
operating and net profits, may be adversely impacted if customer demand for our products is not sufficient to enable us to operate our
facilities consistently at satisfactory utilization rates necessary to generate and maintain revenue levels that would cover all of our
costs.
Our
fabs’ production performance metrics and business could be significantly harmed by natural disasters, particularly earthquakes,
and fires.
Our
fabs in Israel, southern California and Japan are located in areas which are 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. 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.
Also, we use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to risk arising
from fire, which cannot be completely eliminated.
Any
damage resulting from earthquakes, other natural disasters and fires could seriously disrupt production, cause a loss of wafers in production,
deterioration of our fab yield and substantial downtime to reset equipment before resuming production, which could cause a material adverse
effect on our business, revenue and profits. Although we maintain insurance policies to mitigate any potential losses that may be caused
by earthquakes, other natural disasters and fires, including business interruption insurance, our insurance coverage may not compensate
us fully for all of the losses we may incur.
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 prior agreed upon specifications.
Future product returns may have an adverse effect on our business and financial results.
6
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:
| • |
JPY and NIS 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”; |
| • |
the burden and cost of compliance with foreign government regulation, as well as compliance with a variety
of foreign laws, and the 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; |
| • |
general geopolitical risks, such as political and economic instability, international terrorism, potential
hostilities and changes in diplomatic and trade relationships; |
| • |
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;
|
| • |
weak protection of our intellectual property rights in certain foreign countries; |
| • |
delays in product shipments due to local customs restrictions; |
| • |
laws and business practices favoring local companies; |
| • |
difficulties in collecting accounts receivable; and |
| • |
difficulties and costs of staffing and managing foreign operations. |
In
addition, 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 power outages, water leaks, chemical leaks, supply chain or other
issues.
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 production lines that
may adversely affect our cycle time, yield and delivery schedule. A power outage, even of very limited duration, and/or water leaks, chemical
leaks, shortage of parts or other materials which are required for our supply chain or other issues, may result in a loss of wafers in
production, deterioration of our fab yield, cycle time and substantial downtime to reset equipment before resuming production, thereby
potentially causing 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. 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.
7
Our financial
position and operations may be affected as a result of our long-term debt.
As
of December 31, 2022, we had approximately $272 million of consolidated principal amount of debt outstanding, comprised as follows: (1)
Tower had approximately $19 million outstanding principal amount of Series G debentures, which we repaid in full (principal and interest)
on March 31, 2023; (2) TPSCo had loans of approximately $83 million principal amount (the “JP Loan”), carrying a fixed interest
rate of approximately 2% per annum, with principal scheduled to be repaid in seven semiannual payments between 2024 and 2027; (3) Tower
and its affiliates had capital lease agreements outstanding in the amount of approximately $110 million from JA Mitsui Leasing, repayable
between 2023 and 2026; and (4) Tower and its affiliates had other capital and operating leases in the amount of approximately $60 million
repayable between 2023 and 2032. Carrying such an amount of long-term debt may have negative consequences on our business, including:
| • |
limiting our ability to fulfill our debt obligations and other liabilities; |
| • |
requiring the use of a 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; |
| • |
increasing our vulnerability to adverse economic and industry conditions; |
| • |
limiting our ability to obtain additional financing; |
| • |
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; |
| • |
placing us at a competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital
resources; |
| • |
volatility in our non-cash financing expenses due to increases in the fair value of our debt obligations; |
| • |
fluctuations of the payable amounts in USD of the JP Loan, JP leases or other expenses which are denominated
in JPY; and |
| • |
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 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:
| • |
fluctuations in the level of revenues from our operating activities; |
| • |
fluctuations in the collection of receivables; |
| • |
timing and size of payables; |
8
| • |
the timing and size of capital expenditures; |
| • |
the net impact of JPY/ USD fluctuations on our JPY income and JPY cost; |
| • |
the impact of capital market conditions on our marketable securities; |
| • |
the repayment schedules of our debt service obligations; |
| • |
our ability to fulfill our obligations and meet performance milestones under our agreements; |
| • |
fluctuations in the USD to NIS exchange rate; and |
| • |
the inflation rates in Israel, Japan and the United States. |
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, and there
is intense competition for the services of these personnel in the semiconductor industry. Our business could suffer if we lose the services
of some of these senior executives and key personnel due to resignation, medical absence, illness or other reasons, and cannot find, hire
and integrate adequate replacement senior executives and key personnel in a timely manner.
We do not typically operate
with any significant backlog, which makes it difficult for us to forecast our revenues and margins in future periods.
Our
customers generally do not place purchase orders far in advance, partly due to the cyclical nature of the semiconductor industry. 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, 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.
Because
we may manufacture wafers based on forecasted demand, rather than actual orders from customers, we may be left with excess inventory.
We
target manufacturing wafers in an amount matching each customer’s specific purchase order; however, 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, vary substantially and may last
longer than two years, 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.
9
If
we are unable to purchase equipment and/or raw materials and other manufacturing supplies, or there are delays in the delivery thereof,
we may not be able to manufacture our products in a timely fashion. If we must purchase raw materials beyond our needs as required under
committed vendor contracts, we may need to amortize or write such purchases off, which may adversely impact our 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. There may be delays in the delivery of equipment and/or raw materials and other manufacturing supplies to us, which in
turn may harm our capacity increase plans and/ or utilization, qualification and production. In addition, our manufacturing processes
use many raw materials, including silicon wafers, chemicals, gases and various metals as well as other manufacturing supplies and require
large amounts of fresh water and electricity. Shortages in supplies of manufacturing equipment, raw materials and other manufacturing
supplies could occur for various reasons, including an interruption of supply due to a global pandemic or increased industry demand. Any
such shortage or delay in delivery could result in production delays that may result in a loss of existing and/or potential new customers
and/or a halt of the manufacturing lines, which may have a material adverse effect on our business and financial results.
In
addition, although most of the raw materials used in our manufacturing processes are available from multiple suppliers, certain materials
are purchased through sole-sourced vendors under pre-committed volume contracts for specified pre-defined quantities that must be purchased
on a monthly, quarterly or annual basis. If such predefined quantities are not required for production when purchased, this may result
in excess payment and/ or expenses write-off in the financial statements which may adversely impact our financial results.
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. In addition, we have initial activities in Italy related
to a new fabrication facility that is being established by ST in Agrate, Italy. The functional currency of the entities operating the
fabs in the United States, Israel and Italy is the USD. The functional currency of our subsidiary in Japan is the JPY. Our income, costs,
assets and liabilities, 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 JPY
and NIS currencies’ exchange rate fluctuations in Japan and Israel which may have a material effect on our cost and financial results
due to periodic revaluation or evaluation of assets, liabilities, cost and income, in these currencies. As the establishment of
the facility in Italy progresses, we will be further exposed to the Euro exchange rate fluctuations in relation to the USD regarding cost
denominated in Euro.
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. Appreciation of the NIS against the USD 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.
10
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.
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.
We
depend on intellectual property to succeed in our business, including intellectual property owned by us as well as intellectual property
of third parties.
We
depend on intellectual property in order to provide certain foundry services and design support to our customers. The process of applying
for patents to obtain patent protection may take a long time. 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. 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. 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.
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:
| • |
attempting to negotiate cross-license agreements, which we might not succeed in negotiating or consummating;
|
| • |
acquiring licenses to the allegedly infringed patents, which may not be available on commercially reasonable
terms, if at all; |
| • |
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; |
| • |
litigating the matter in court, which may result in substantial legal fees and paying substantial monetary
damages in the event we lose; or |
11
| • |
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. 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.
From
time to time, we are a party to litigation that may require management time and effort.
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 requires a certain amount of management time and effort which may adversely affect
our business by diverting management focus from business needs.
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
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., Japan and Italy relating to the use, discharge
and disposal of toxic or otherwise hazardous materials used in our factories. If we fail to use, discharge or dispose of hazardous materials
appropriately in accordance with applicable environmental laws or regulations, or if such laws change in the future, we may be subject
to substantial liability or may be required to suspend or significantly modify our manufacturing operations, which may adversely impact
our business and revenues.
Our
business strategy is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated
device manufacturers on specialty process technologies, which may change in the future.
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
our assumption does not prove applicable, 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 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 these vendors and providers. Difficulties or delays in these areas may adversely
affect our ability to meet our customers’ needs, thereby potentially harming our business. 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.
12
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 (including
Italian regulations, once our fabrication facility in Italy is established and commences operations) 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, which could increase our manufacturing costs or require extensive modifications to our customers’
products. We may not export products using or incorporating controlled technology without obtaining an export license, which may not always
be granted. 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.
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 potential work stoppages,
strikes or other collective actions which may disrupt the fabs’ production and adversely affect the fabs’ performance and
our operational and financial results.
Significant
portions of the employees at Fab 3 (our Newport Beach, California fab) and at TPSCo’s fabs in Japan are represented by unions and
covered by collective bargaining agreements. We cannot predict the effect that union representation or future organizational activities
will have on these fabs’ manufacturing cost and business. 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, and our operational and financial results. In addition, there have been attempts, including recently,
by the General Federation of Labor in Israel (“Histadrut”) to organize and establish a representative labor union for our
Israeli employees. Under Israeli law, establishing a representative labor union requires that at least one-third of the Israeli employees
join the Histadrut and all employees would be liable to pay its membership fees. While the Histadrut’s attempts have not succeeded
to date, if a representative labor union would be established, we would need to conduct negotiations with the representative labor union
and the Histadrut with regards to the terms of employment and benefits of the employees, which could result in the incurrence of additional
labor costs and/or work stoppages, which in turn could adversely affect our business and Israeli fabs’ operations.
13
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. Scientific examination of, political attention to, and rules and regulations on, issues surrounding the existence
and extent of climate change may result in increased production costs due to increase in the prices of energy and introduction of energy
or carbon tax. A variety of regulatory developments have been introduced that focus on restricting or managing emissions of carbon dioxide,
methane and other greenhouse gases. Enterprises may need to purchase new equipment at higher costs or raw materials with lower carbon
footprints. These developments and further legislation that is likely to be enacted, such as changes in environmental regulations on the
use of per fluorinated compounds, may increase our production costs, which may adversely affect our results of operation and financial
condition.
Compliance
with US rules and regulations concerning conflict minerals may affect our ability or the ability of our suppliers to purchase raw materials
at an effective cost and may adversely affect our business.
Our
industry relies on raw materials that consist of, contain or incorporate certain minerals sourced from the Democratic Republic of Congo
(“DRC”) or adjoining countries that are subject to regulation. These minerals are commonly referred to as conflict minerals.
Conflict minerals that may be used 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 currently subject to the requirements under
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require due diligence and disclosure as to whether our products
contain conflict minerals. It is possible that the SEC under the Biden administration will renew focus on the US conflict minerals
rules and other responsible sourcing measures. Any changes effected by the Biden administration concerning the use of conflict minerals
could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of our products. In addition, we
will likely incur additional costs to comply with any new conflict minerals rules, including costs related to disclosure requirements
and 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, potentially making 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 and/or may lose customers if we determine that certain
of our products contain minerals not determined to be conflict-free and are unable to alter our products, processes or sources of supply
to avoid use of such materials, which may adversely impact our revenue and business.
Security,
cyber and privacy breaches may hurt our business and operations.
Any
security breach, including those resulting from a cybersecurity attack (such
as occurred in September 2020), or any unauthorized access, unauthorized usage, virus or similar breach
or disruption could result in the loss of 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, as a result, someone obtains unauthorized access to our, our customers' or any third
party’s confidential information, our reputation may be damaged, we may face potential disruption and loss, especially due to the
possible substantial damage if operations would not be quickly restored and our business may suffer, and we could incur significant liability.
Techniques
used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a
target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived
security breach occurs, the market’s perception of our security measures may be harmed and we could lose sales and customers as
well as incur operational damage to our machines and/or products.
14
Increased
attention to, and evolving expectations for, environmental, social, and governance (“ESG”) initiatives could increase our
costs or otherwise adversely impact our reputation, operations, business and/or financial condition.
Companies
across industries are facing increasing focus from a variety of stakeholders related to their ESG and sustainability practices. Expectations
regarding voluntary ESG initiatives and disclosures and consumer demand for alternative forms of energy may result in increased costs
(including but not limited to increased costs related to compliance, stakeholder engagement, contracting and insurance), changes in demand
for certain products, enhanced compliance or disclosure obligations, or other adverse impacts to our business, financial condition, or
results of operations.
While
we engage in voluntary initiatives (such as disclosures, certifications, or improvement goals, among others) and commitments for improvements
in ESG to increase our company’s contribution to society and our environment, such initiatives or achievements of such commitments
may be costly and may not have the desired effect. Actions that we may take or statements that we may make based on expectations, assumptions,
or third-party information that we currently believe to be reasonable may subsequently be determined to be erroneous or subject to other
interpretations. Our current actions may subsequently be determined to be insufficient by various stakeholders, and we may be requested
to adjust or improve certain ESG initiatives and/or disclosures.
Certain
market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’
ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to negative investor sentiment towards us or
our industry, which could negatively impact our share price as well as our access to and cost of capital. Increasing ESG-related regulation,
such as the SEC’s climate disclosure proposal, may also result in increased compliance costs or scrutiny. To the extent ESG matters
negatively impact our reputation, it may also impede our ability to compete effectively to attract and retain employees or customers,
which may adversely impact our operations, reputation, business and/or financial condition.
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 our equity
and debt traded securities, regardless of our actual operating performance.
In
addition, it is possible that our operating results may differ from the expectations of public market analysts and investors, which may
adversely affect the price of our securities. Adverse impact to the market price of our 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 foreign private issuer and, as a result, the public reporting and disclosure rules to which we are subject, and the corporate governance
practices that we are permitted to follow, may provide less protection to our investors than is accorded to investors under rules applicable
to domestic U.S. issuers.
We
report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as a foreign private issuer, which means
we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including the proxy rules and
the rules requiring the filing with the SEC of quarterly reports on Form 10-Q and current reports on Form 8-K. 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. Foreign private issuers are also exempt from Regulation FD (Fair Disclosure), aimed at preventing issuers from making
selective disclosures of material information. Also, 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.
The public reporting and disclosure rules to which we are subject under the Exchange Act, and the corporate governance practices that
we are permitted to follow, may provide less protection to our investors than is accorded to investors under rules applicable to domestic
U.S. issuers.
15
We
do not expect to pay any dividends in the foreseeable future.
We
currently intend to retain future earnings and our existing cash balance to finance our growth and acquisition strategy, as well as capacity
growth and our ongoing operations, and we do not anticipate paying dividends in the foreseeable future. The Israeli Companies Law, 1999
(the “Companies Law”) imposes restrictions on our ability to declare and pay dividends. In addition, the Merger Agreement
includes restrictions with respect to dividends and other distributions. Therefore, you should not rely on an investment in our
ordinary shares if you require and/or expect dividend income from your investments.
RISKS
RELATED TO OUR OPERATIONS IN ISRAEL
Instability
in Israel may harm our business.
Fab
1 and Fab 2 manufacturing facilities, our design center and certain of our 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 subject to armed conflicts with neighboring countries, as well as terrorist
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. Any hostilities involving Israel or the interruption or curtailment of trade
between Israel and its 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 any such conflicts
result in any serious damage to such 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. Furthermore, several
countries restrict business with the State of Israel and with Israeli companies, which may have an adverse impact on our operating results
and financial condition. In addition, actual or perceived political instability in Israel or any negative changes in the political environment,
may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of
operations and prospects.
In
addition, the Israeli Government recently proposed a broad judicial reform in Israel. In response, individuals, organizations and institutions,
both within and outside of Israel, have voiced concerns that the proposed judicial reform, if adopted, may negatively impact the business
environment in Israel including due to the reluctance of foreign investors to invest or conduct business in Israel, as well as increased
currency fluctuations, downgrades in credit rating, increased interest rates, increased inflation affecting payroll and other NIS based
costs, increased volatility in securities markets, reduced corporate rating by rating agencies to Israeli companies, unfavorable terms
for any fundraising through debt and/ or equity financial vehicles, civil unrest and other changes in macroeconomic conditions. Actual
or perceived political or judicial instability in Israel or any negative changes in the political environment may adversely affect the
Israeli economy and financial condition and, in turn, our business, financial condition, results of operations, growth prospects, the
market price of our shares, our ability to raise additional funds and the terms we will achieve for any such fundraising, if deemed necessary
by our management and board of directors.
16
In
the event of severe unrest or other conflict, Israeli personnel could be required to serve in the military for extended periods of time.
Many male Israeli citizens, including most of our male employees under the age of 40, are subject to compulsory military reserve service
and may be called to active duty under emergency circumstances. 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. 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. In addition, our business license certificate
issued by municipality of Migdal Ha’emek, Israel is required to be renewed periodically. If such 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 and directors or to assert US securities law claims in Israel or serve
process on our non-U.S. resident officers and directors.
Tower
is incorporated in Israel and most of its executive officers and directors are not residents of the United States (excluding the employees
of its U.S. subsidiaries), and a majority of its 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. Service of process upon us and/or our non-U.S. resident directors
and/or officers may be difficult to obtain within the United States. Additionally, a judgment obtained in the United States against Tower
and/or any of our non-U.S. executive officers and/or 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 assert claims under U.S. securities
laws or obtain a judgment based on civil liability provisions under U.S. federal securities laws claimed in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws against us or our non-U.S. officers
or directors because Israel may not be the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees
to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable,
the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.
17
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. 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 our shareholders will be governed by Israeli law which differs in some material respects from
the rights and responsibilities of shareholders of U.S. corporations.
The
rights and responsibilities of the holders of our ordinary shares are governed by our 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 in 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. These provisions may be interpreted to impose additional obligations and liabilities on holders of our
ordinary shares that are not typically imposed on shareholders of U.S. corporations.
RISKS
RELATING TO THE MERGER
The
Merger may not be completed, due to failure to achieve certain closing conditions or otherwise; such a failure could negatively impact
our share price, business, operations, financial condition, results of operations and/or prospects.
The Merger is subject
to the satisfaction or waiver of certain closing conditions described in the Merger Agreement, including, among others, that:
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• |
no governmental authority in any jurisdiction has by any law
or order, restrained, enjoined or otherwise prohibited the consummation of the Merger;
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• |
expiration or termination of the applicable waiting period, or,
where applicable, approvals have been obtained, and all notices to, filings with and consents of the applicable governmental authority
have been made or obtained under the Required Clearances (as defined in the Merger Proxy Statement); and
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• |
no Company Material Adverse Effect (as defined in the Merger
Proxy Statement, excepting any effects that, individually or in the aggregate, would not prevent or materially impair the Company from
consummating the Merger or performing any of its material obligations under the Merger Agreement) shall have occurred since February 15,
2022, and be continuing. |
No
assurance can be given that each of the conditions will be satisfied. In addition, the Merger Agreement may be terminated under the circumstances
described in the Merger Proxy Statement. If the conditions are not satisfied or waived in a timely manner and the Merger is not completed,
the shareholders of the Company will not receive any of the $53 per share Merger Consideration. However, if the Merger is not completed,
in certain circumstances that are specified in the Merger Agreement, Intel shall be obligated to pay the Company a termination fee equal
to $353 million in cash.
18
If
the Merger is not completed (including in the case the Merger Agreement is terminated), our ongoing business operations,
financial position and share price may be adversely affected. Under such a scenario, our directors, senior management and other employees
may have expended extensive time and effort and will have experienced significant distractions from their work, and we will have incurred
significant transaction costs, during the pendency of a failed transaction. In addition, our continuing business relationships with business
partners and employees, and the market’s perceptions of our prospects, could be adversely affected, which could have a material
adverse impact on the trading price of Tower’s ordinary shares and our ability to raise funds through debt or equity vehicles.
In
addition, we also could be subject to litigation related to any failure to complete the Merger. If any one or more of these risks materialize,
our financial condition, results of operations, prospects, share price, business, growth plans and/or operations, as well as our ability
to raise funds, may be materially adversely affected.
Some
of our directors and officers may have interests that may be different from, or in addition to, the interests of our shareholders.
Certain
of Tower’s officers and directors may have interests in the transactions contemplated by the Merger Agreement that may be different
from, or in addition to, those of Tower’s other shareholders, which interests are described in the Merger Proxy Statement. These
interests include, among other things, the rights to accelerated vesting of equity awards, the indemnification and insurance and certain
payments and benefits provisions contained in or permitted by the Merger Agreement.
The
fact that there is a Merger pending could materially harm our business and results of operations.
While
the Merger is pending, we are subject to a number of risks that may harm our business and results of operations, including:
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• |
loss of current customers;
| |
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• |
limitation on the execution of our strategy to expand our business
through mergers, acquisitions and other investments, as well as our ability to raise additional funds through offerings of equity and/or
debt and/or other financial vehicles;
| |
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• |
the diversion of management and employee attention from implementing
our growth strategy in our existing markets or in new markets that we are targeting;
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• |
potential diversion of public attention from our positioning
of our independent brand and products in a manner that appeals to customers;
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• |
the fact that we have incurred and will continue to incur expenses
related to the Merger prior to its closing;
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• |
our potential inability to respond effectively to competitive
pressures, industry developments and future opportunities, in particular, given certain restrictions, limitations and commitments stipulated
in the Merger Agreement;
| |
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• |
we could be subject to costly litigation associated with the
Merger; and
| |
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our current and prospective employees may be uncertain about
their future roles and relationships with the Company following completion of the Merger, which may adversely affect our ability to attract
and retain key personnel. |
19
The
COVID-19 pandemic may delay or prevent the completion of the Merger.
Given
the ongoing and dynamic nature of the COVID-19 crisis, it is difficult to predict the impact of that crisis on the businesses of Tower
and Intel, and there is no guarantee that efforts by Tower or Intel to address the adverse impact of the COVID-19 pandemic will be effective.
The Merger may also be delayed or adversely affected by the COVID-19 pandemic, or become more costly due to Tower policies, Intel policies
or government policies and actions to protect the health and safety of individuals, or government policies or actions to maintain the
functioning of national or global economies and markets could delay or prevent the completion of the Merger. Tower or Intel may also incur
additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition or results of operations.
Our
obligation to pay a termination fee under certain circumstances and the restrictions on our ability to solicit or engage in negotiations
with respect to other potential acquisition proposals may discourage other potential transactions that may be favorable to our shareholders.
Until
the Merger is completed or the Merger Agreement is terminated, with limited exceptions, the Merger Agreement prohibits us from soliciting,
encouraging or engaging in negotiations with respect to acquisition proposals or other business combinations. If the Company terminates
the Merger Agreement in order to immediately enter into a written definitive agreement with respect to a superior proposal, Tower is required
to pay to Parent a termination fee of $206 million. Tower is also required to pay such termination fees under other circumstances described
in the Merger Agreement.
If
the closing conditions are not satisfied or waived and the Merger is not consummated by the Outside Date, either we or Intel may, under
certain circumstances, choose not to proceed with the Merger.
The
Merger is subject to the satisfaction or waiver of certain closing conditions described in the Merger Proxy Statement and set forth in
the Merger Agreement. The fulfillment of certain of these conditions is beyond our control, such as the expiration or termination of the
applicable waiting period, or, where applicable, the receipt of approvals, and the making or receipt of all notices to, filings with and
consents under specified regulatory laws. Certain but not all regulatory approvals have been obtained. There
can be no assurance that any remaining required approval will be obtained or, in the event any existing approval or waiver expires and
we file for such approval or waiver again, that such approval or waiver will be obtained, and the timing thereof cannot be predicted.
If the closing conditions are not satisfied or waived and the Merger is not consummated by the
Outside Date, either we or Intel may, under certain circumstances, choose not to proceed with the Merger. Either the Company or Intel
may terminate the Merger Agreement in accordance with its provisions, notwithstanding the prior receipt of the approval of the Merger
by the Company’s shareholders, except that the right to terminate the Merger Agreement would not be available to a party that is
in material breach of the Merger Agreement or whose actions or omissions, which constitute a breach of the Merger Agreement, are a principal
cause of, or primarily result in, the failure of the Merger to be completed on or before that date. If the Merger is not completed
(including in the case the Merger Agreement is terminated), there may be adverse impact to the Company’s share price, valuation,
business position, including its financial and liquidity position and its ability to approach the capital markets to raise funds
through equity and / or debt vehicles.
20
Our
shareholders could file claims challenging the Merger, which may delay or prevent the closing of the Merger (the “Closing”)
and may cause us to incur substantial defense or settlement costs, or otherwise adversely affect the Company.
As
of the date of this annual report, there are no pending lawsuits challenging the Merger. However, potential plaintiffs may file lawsuits
challenging the Merger. The outcome of any future claim and / or litigation is uncertain. Such litigation, if not resolved, could prevent
or delay completion of the Merger and result in substantial costs to the Company, including any costs associated with the indemnification
of directors and officers. One of the conditions to the Closing is the absence of any provision of applicable law or order by any governmental
entity that has the effect of restraining, enjoining or otherwise prohibiting the consummation of the Merger. Therefore, if a plaintiff
were successful in obtaining an injunction prohibiting the consummation of the Merger on the agreed-upon terms, then such injunction may
prevent the Merger from being completed, or from being completed within the expected timeframe. The defense or settlement of any lawsuit
or claim that remains unresolved at the time the Merger is completed may adversely affect the Company’s business, financial conditions,
results of operations and cash flows.
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 and 0.13 -micron on 200-mm wafers and 65 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, including
sensors on Gallium Nitride, micro-electromechanical systems (MEMS), wireless antenna switch Silicon-on-Insulator (SOI), mixed-signal,
radio frequency CMOS (RFCMOS), bipolar CMOS (BiCMOS), and silicon-germanium BiCMOS (SiGe BiCMOS or SiGe), silicon photonics, high voltage
CMOS, radio frequency identification (RFID) technologies and power management. 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 customers through innovative technological processes,
design and engineering support, competitive manufacturing indices, and dedicated customer service.
Tower
Semiconductor Ltd., an Israeli company, 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. We integrated advanced single Poly NVM into the Fab 1 process flows and developed a GaN technological platform (GaN on Si)
suitable for fabrication of HEMT transistors, and gas and UV sensors.
21
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 Tower NPB, which holds 100% of NPB Co. and operates Fab 3 located in Newport Beach, California, US. Fab
3 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. NPB 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 at
Fab 3 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.
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 three semiconductor factories 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 the three fabs to TPSCo. TPSCo focuses on 65nm
and 180nm geometries for the manufacture of RF, power management and CMOS image senor products/applications. In July 2022, as part of
the TPSCo agreements and at the request of Panasonic (through PSCS; now named NTCJ), the operations
in Japan were reorganized and restructured such that the Uozu and Tonami facilities remain unchanged, while the Arai manufacturing factory,
which manufactured products solely for NTCJ and did not serve Tower’s or TPSCo’s foundry customers, ceased operations effective
July 2022.
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-owned US subsidiaries, 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.
In
2021, we entered into a definitive agreement with ST to share cleanroom space of a 300mm manufacturing fabrication facility in Agrate,
Italy, currently under establishment by ST, under a collaborative arrangement. The parties will share the cleanroom space and the facility
infrastructure, and TSIT will install its own equipment in one-third of the total space, which is expected to be qualified and used to
manufacture products for its foundry customers. Operations at the facility will continue to be managed by ST.
On
February 15, 2022, we entered into the Merger Agreement with Parent, Merger Sub, and Intel, pursuant to which Merger Sub will merge with
and into the Company (and Merger Sub will cease to exist as a separate legal entity), and the Company will be the surviving company and
will become a wholly‑owned subsidiary of Parent and a subsidiary of Intel, subject to the terms and conditions set forth in the
Merger Agreement. If the Merger is completed, the Company will cease to be a publicly traded company, all outstanding Company Shares
(except for any Company Shares owned by the Company, Parent, Merger Sub or any of their direct or indirect subsidiaries or held in the
Company’s treasury (which will remain outstanding and no Merger Consideration or any other consideration will be delivered in exchange
therefor)) will be deemed to be transferred to Parent in exchange for the right to receive the Merger Consideration. The completion
of the Merger is subject to the satisfaction of certain closing conditions specified in the Merger Agreement, including the receipt of
certain regulatory approvals. Certain but not all approvals have been obtained. If the closing conditions are not satisfied
or waived and the Merger is not consummated by the Outside Date, either we or Intel may, under certain circumstances, choose not to proceed
with the Merger. There can be no assurance that any remaining required approvals will be obtained or, in the event any existing
approval or waiver expires and we file for such approval or waiver again, that such approval or waiver will be obtained, and the timing
thereof cannot be predicted.
22
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, Inc. located at 2570 North First Street, Suite 480 San Jose, CA 95131.
The
SEC maintains an internet website that contains reports, proxy and information statements and other information about issuers, like us,
that file electronically with the SEC. Our filings with the SEC are available to the public through the SEC's website (http://www.sec.gov).
For more information about us, go to http://www.towersemi.com. Information on our website 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 resulting decrease in 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 integrated circuits ("IC") in their own
fabrication facilities, which are known as integrated device manufacturers (“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.
23
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. Numerous emerging applications require 3D integration, in particular, high precision wafer bonding. Challenges related
to the enhanced reliability, e.g., of the automotive products, dictate more stringent demands to the fabrication processes. As a result,
analog and mixed-signal semiconductors can be complex to manufacture and typically require sophisticated design expertise, strong application
specific experience and a comprehensive intellectual property portfolio. 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. Low power consumption is demonstrated
in applications related to the systems enabled with Artificial Intelligence (AI) and edge computing using AI which allow for the analysis
and filtering of data closer to the sensors such that only the relevant data is sent to the cloud. The AI edge devices are incorporated
into products with sensors related to Internet of Things (IoT), in particular ASICs with embedded sensors, medical devices and applications
focused on entertainment, infotainment and safety, which combine analog and digital 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), non- imaging sensors of different types, high voltage CMOS, bipolar CMOS (BiCMOS),
silicon germanium BiCMOS (SiGe BiCMOS), bipolar CMOS double-diffused metal oxide semiconductor (BCD), silicon photonics platforms, NVM
technologies and special devices for enabling chips with AI. Due to our extensive and diversified work in specialized process technologies,
we have the required skills to provide quality and flexibility 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.
24
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 our own proprietary or third-party 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-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, decreased footprint of products, competitive performance and cost advantages 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 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 dedicated design enablement capabilities distinguish our IC manufacturing services and attract industry-leading
customers.
We
also offer process transfer services to IDMs 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 for the manufacture of an advanced technology
node that is very costly to build 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) TMR/MTJ (magnetic
tunnel junction) sensors, silicon photonics, SiGe and MEMS, among others.
We
are a trusted, customer-oriented service provider that has built a solid reputation in the foundry industry over more than twenty-nine
years. We have built strong relationships with customers. Our consistent focus on providing high-quality, value-added 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, while increasing the number of new customers and new products for production.
25
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 up of existing facilities owned by third parties, using 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 significant amount of our revenues for the year ended December 31, 2022 from our target specialized markets: RF CMOS, including
SiGe power IC and discrete devices, CMOS image sensors, non-imaging 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 non-imaging sensors on high resistance silicon, 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, MEMS and wafer bonding technologies, as well as technologies for enabling AI, in particular original Y-Flash memristors.
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, video, 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 time of
flight (ToF) three dimensional sensors for entertainment, commercial and industrial applications, as well as image sensors with record
frame rates for registration of ultra-fast processes.
We
gained the market potential using CMOS process technology for a digital camera-on-a-chip, which integrates 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 portfolio, optical characterization
of a CMOS process, an innovative patented stitching manufacturing technology for large sensors, up to a one die per 300mm wafer and prototype
packaging. The CMOS image sensors that we manufacture include 180nm on 200mm wafers and 65nm on 300mm wafers with pixel sizes down to
1.12 micron utilizing dual light pipe technology, delivering outstanding image quality for a broad spectrum of digital imaging applications.
26
Specifically,
our CIS portfolio includes pixels ranging from 1.12 micron up to 150 microns, 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-dimensional sensor 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, 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 ToF 3D sensor market. 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 (intra and extraoral) and other medical X-ray products (such as C-Arm surgery machines, angiography and mammography) as well
as in the industrial NDT (Not Destructive Testing) X-Ray market.
Our
stitching technology, a cornerstone of our X-Ray sensors technology, enables semiconductor exposure tools to manufacture single ultra-high-resolution
CMOS image sensors containing millions of pixels at sensor sizes far larger than the photo exposure tool (scanner) field size.
This
technology is used by us in the manufacturing of large X-Ray sensors (up to one die per wafer) on 8” and 12” wafers as well
as high-end large format photography and industrial sensors with special pixels that we have developed specifically for this market. In
addition, this technology is also being used by us in display backplanes, for large virtual reality (VR) displays.
In
past years, we have completed and qualified our next generation CMOS sensor technology, namely BSI and wafer stacking, which combines
a digital CMOS wafer with an imager wafer that is then thinned for backside illumination (BSI) with billions of electrical Cu-Cu connections
between the two wafers. We now offer both BSI and stacking technologies in 200mm (in cooperation with a third-party that manufactures
the BSI part of the process on our wafers, using our own developed BSI technology) and in 300mm in our own facilities at TPSCo. We continue
to develop this technology with additional deep trenches (DTI) between pixels as well as a unique layer to enhance near infrared response.
We
specially developed our near Infra-Red imaging technology for gesture recognition systems and a series of spectrally sensitive image sensors,
including proximity sensors and sensors sensitive in the UV range. We also announced our iToF (indirect time of flight) technology with
outstanding performance parameters for fast autofocus and face recognition functions in mobile devices, which started production in 2021.
In
addition, we developed SPAD (single photon avalanche diodes) technology for dToF (direct time of flight) LIDAR (light detection and range)
applications in mobile devices, smart automotive advanced driver assistance systems (ADAS) and autonomous driving (AD) vehicles. We also
further developed our stacked technology to support the stacking of a very advanced technology node CMOS wafer with a state of the art
SPAD imager, with pixel level electrical connections between the wafers.
27
MEMS
and Displays
In
the MEMS area, we manufacture a MEMS microphone device for ear buds and other command operated devices. Speech recognition AI is being
used in such devices. For high-fidelity speech recognition, differentiated performance of high-dynamic range and low-noise microphones
are needed.
We
also manufacture MEMS switches technology for fast RF antenna switching and accelerometers for a variety of applications.
The
display market is undergoing a dramatic change from LCD-based screens with LED backlighting into micro LED or micro OLED displays, allowing
substantially higher dynamic range with true black and higher brightness. The display market spans from small displays, such as smartwatch
or VR goggles displays, through smartphone, tablet and laptop displays, to large format TV displays. In today’s technology, all
of these displays are glass based, where the small ones are usually OLED displays while the large ones are LCD based with LED backlight.
The true LED displays, namely, displays where each pixel is a LED, that provide unprecedented performance in illuminance and dynamic range,
are extremely expensive and large. The major change expected in the coming decade is the ability to create these from micro LEDs and place
them on a backplane in a cost effective way, or even have a monolithic array of micro LEDs as a screen for the small screen applications.
Such micro LEDs cannot be performed on glass and the most promising way is to create them on silicon wafers (GaN on silicon). In entering
this new display area, we are working on the silicon part of GaN nano wire based LEDs, both pre and post GaN growth. In addition, we use
our patented stitched technology for the development of CMOS back planes for large die micro-OLED arrays (monolithic approach) and LCOS
displays for the virtual reality market.
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 use 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. These process technologies generally incorporate integrated inductors, high performance variable capacitors
and RF laterally diffused metal oxide semiconductor 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 RFCMOS process built on silicon-on-insulator (SOI) substrates (RFSOI). These RFSOI process technologies include devices optimized
to deliver higher performance and improved isolation relative to devices in our RFCMOS process. We currently have RFSOI 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 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 higher performance applications
such as satellite and global positioning system (GPS) receivers and optical transceivers. These process technologies generally incorporate
high-speed bipolar transistors into an RF CMOS process. The equipment requirements for BiCMOS manufacturing are specialized and assume
enhanced tool capabilities to achieve high yield manufacturing.
28
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, front-end wireless components, optical networking components, automotive radar
components, hard-disk drive pre-amplifiers, power amplifiers and low-noise amplifiers. These integrated circuits generally incorporate
silicon germanium bipolar transistors, which are 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 the BiCMOS process technology. It is also possible to
achieve higher speed using SiGe BiCMOS process technologies equivalent to those demonstrated in standard RF CMOS processes that are two
process generations smaller in line width. 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 RF CMOS process technology.
We developed enhanced tool capabilities in cooperation 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 technologies available.
Silicon
Photonics (SiPho)
Our
industry-leading silicon photonics platform targets optical networking and data center interconnect applications. The SiPho process complements
the Company’s SiGe BiCMOS processes by providing a companion solution able to integrate optical components in the expanding data
communication market. The platform enables integration of photodetectors, optical modulators and other optical components that have in
the past been assembled in optical modules as discrete components and can now be integrated in a single die potentially lowering cost,
reducing footprint and improving performance of advanced optical transceivers.
Power
and Power Management ICs
Our
power technologies are generally divided into a low-voltage BCD offering and a high-voltage offering, including 140V Resurf, 200V SOI
and 700V ultra-high voltage 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 than advanced analog CMOS processes such as 5V,
8V, 12V, 40V and 60V devices, and, in the case of BCD, bipolar devices integrated into an advanced analog CMOS process. We currently have
BCD offerings in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron and 65 nanometer.
Our
higher voltage technologies, which include 140V Resurf, 200V SOI and 700V ultra-high voltage platform, support applications such as gate
drivers for discrete high-power transistors and automotive, industrial, AC adaptor and lighting markets.
In
addition, we have developed a unique NVM solution (Y-Flash) specifically for power and power management applications in our 0.18 micron
platforms. We have developed a series of Y-flash based modules of up to 16kbit, which have been integrated in various power management
products of our customers. We have also introduced high density single Poly 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, using phase-change materials for more advanced
RF switches, scaling the features we offer today to the 65 nanometer process, including the integration of advanced SiGe transistors with
65 nanometer CMOS, and copper metallization.
29
CUSTOMERS,
MARKETING AND SALES
Our
marketing and sales strategy seeks to further solidify our position as the leading foundry of high value analog semiconductor solutions,
by increasing our market share at existing customers and expanding our global customer base. We have marketing, sales, design support
engineers, field application engineers and customer support personnel located in many countries worldwide, who have been hired and assigned
to these roles based on their industry experience, customer relationships and understanding of the semiconductor marketplace.
Our
sales cycle is generally 9 to 24 months or longer for new customers and can be as short as 6 to 12 months for existing customers. The
typical stages in the sales cycle process from initial contact until production are:
| • |
technical evaluation; |
| • |
product design to our specifications, including integration of third party intellectual property;
|
| • |
photomask - design and third-party photomask manufacturing; |
| • |
silicon prototyping; |
| • |
assembly and test; |
| • |
validation and qualification; and |
| • |
production. |
The
primary customers of our foundry and design services are fabless semiconductor companies and IDMs. Our customers include many analog and
mixed-signal industry leaders, serving a variety of end market segments. A portion of our product sales are made pursuant to long-term
contracts with our customers, under which we agree to reserve manufacturing capacity for certain purchasing commitments. During the year
ended December 31, 2022, we had six significant customers that each contributed between 4% to 14% of our revenues. During the year ended
December 31, 2021, we had six significant customers that each contributed between 4% to 21% of our revenues. During the year ended December
31, 2020, we had six significant customers that each contributed between 4% to 25% 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, |
||||||||||||
|
2022 |
2021 |
2020 |
||||||||||
|
United States |
49 |
% |
41 |
% |
44 |
% | ||||||
|
Japan |
16 |
% |
22 |
% |
28 |
% | ||||||
|
Asia, excluding Japan |
26 |
% |
30 |
% |
22 |
% | ||||||
|
Europe |
9 |
% |
7 |
% |
6 |
% | ||||||
|
Total |
100 |
% |
100 |
% |
100 |
% | ||||||
30
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.
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, the 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.
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, medical, security 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, magnetic field and gas and UV sensors.
COMPETITION
The
global semiconductor foundry industry is highly competitive. We compete most directly in the specialty segment with foundries such as
GlobalFoundries (mainly in the RF business), Vanguard Semiconductor, DongBu, X-Fab and Hua Hong Semiconductor. We also compete in some
areas with the pure-play advanced technology node-driven foundry service providers such as Taiwan Semiconductor Manufacturing Corporation
(“TSMC”), United Microelectronics Corporation (“UMC”) and Semiconductor Manufacturing International Corp. (“SMIC”).
These three pure-play semiconductor foundries primarily compete against one another and focus on 12-inch deep-submicron CMOS processing,
though they each also have some capacity for specialty process technologies. The rest of the foundry industry, including existing Chinese,
Korean and Malaysian foundries, generally target either industry standard 8-inch CMOS processing or specialty process technologies. Most
of the foundries with which we compete are located in Asia-Pacific that benefit from their close proximity to Asian companies involved
in the design of ICs and the Asian customer base.
The
principal elements of competition in the wafer foundry market are:
| • |
technology offering and future roadmap; |
| • |
product performance; |
| • |
system level technical expertise; |
31
| • |
research and development capabilities; |
| • |
access to intellectual property; |
| • |
customer technical support; |
| • |
design services; |
| • |
product development kits (PDKs); |
| • |
manufacturing operational performance; |
| • |
quality systems; |
| • |
product quality; |
| • |
manufacturing yields; |
| • |
customer support and service; |
| • |
pricing; |
| • |
management expertise; |
| • |
strategic customer relationships; |
| • |
capacity availability; and |
| • |
stability and reliability of supply. |
Some
of our competitors, notably the pure-play advanced technology node-driven foundry service providers, have greater manufacturing capacity,
may have greater scope and/or a greater number of research and development 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, research and development, breadth of process
offering, production quality, technical support, and our design and engineering 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 5-10 nanometer. 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 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, nor do our current plans include, the manufacture of products using CMOS processes at these smaller
geometries.
32
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 define the IC’s 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. IC production begins when a fabless IC company or IDM designs (or engages a third party or us to design) the layout of a device’s
components and designates the interconnections between each component. The result is a pattern of components and connections that defines
the function of the IC. In highly complex circuits, there may be more than 43 layers of electronic patterns. After the IC design is completed,
we provide these companies with IC manufacturing services.
Mask
Making. The design for each layer of a semiconductor wafer is imprinted on a photographic negative, called a reticle or mask. The mask
is the blueprint for each specific layer of the semiconductor wafer. We engage external mask shops for the manufacture of such masks.
IC
Manufacturing. Transistors and other circuit elements comprising an IC are formed by repeating a series of processes in which photosensitive
material is deposited on the wafer and exposed to light through a mask. Advanced IC manufacturing processes consist of hundreds of steps,
including photolithography, oxidation, etching and stripping of different layers and materials, ion implantation, deposition of thin film
layers, chemical mechanical polishing and thermal processing. The final step in the IC manufacturing process is wafer probing, which involves
electronically inspecting each individual IC in order to identify those that are operable for assembly. Our customers often use third
party service providers for the performance of wafer probing although we occasionally provide this service to certain customers.
Assembly
and Test. After IC manufacture, the wafers are transferred to assembly and test facilities. In the assembly process, each wafer is cut
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 us.
RAW
MATERIALS
Our
manufacturing processes use many raw materials, including silicon wafers, chemicals, gases and various types of metal targets. Although
most of our raw materials are available from multiple suppliers, certain materials are purchased through sole-sourced vendors. Our raw
material procurement policy is to select only those vendors who have demonstrated quality control and reliability on delivery time and
to maintain multiple sources for each raw material whenever feasible so that a quality or delivery problem with any one vendor will not
adversely affect our operations. We may have long-term supply agreements with our vendors where necessary or beneficial to Tower.
Our
general inventory policy is to maintain a sufficient stock of each principal raw material for the production and rolling forecasts of
near-term requirements received from customers. In addition, we have agreements with some material suppliers under which they reserve
certain levels of inventory in their warehouses for our use. We typically work with our vendors to plan our raw material requirements
on a monthly basis, with pricing generally set on an annual basis. The actual purchase price is generally determined based on the prevailing
market conditions. In the past, prices of our principal raw materials have not been volatile to a significant degree. Although we have
not experienced any shortage of raw materials that had a material effect on our operations, and current supplies of raw materials we use
are adequate, shortages could occur in various critical materials due to interruption of supply or an increase in industry demand.
The
most important raw material used in our production processes is the silicon wafer, which is the basic raw material from which integrated
circuits are made. We have in the past obtained and believe that we will continue to be able to obtain a sufficient supply of silicon
wafers. We believe that we have close working relationships with our wafer suppliers. Based on such long-term relationships, we believe
that these major suppliers will use their best efforts to accommodate our demand.
33
In
addition, certain materials are purchased through sole-sourced vendors under pre-committed volume contracts for specified pre-defined
quantities that must be purchased on a monthly, quarterly or annual basis. If such predefined quantities are not required for production
when purchased, this may result in excess payment and/or expenses write-off in our financial statements, which may adversely impact our
financial results. See “Item 3. Key Information—D. Risk Factors—Risks Affecting Our Business— “If we are
unable to purchase equipment and/or raw materials, we may not be able to manufacture our products in a timely fashion”.
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
specialty 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 the partial participation of the Government
of the State of Israel through the Israeli Innovation Authority (the “IIA”) (formerly, the Israeli Office of the Chief Scientist),
pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the
Encouragement of Industrial Research and Development Law 5744-1984) (the “Innovation Law”) and related regulations and guidelines.
Under the terms of the Israeli Government participation and the Innovation Law as currently in effect, a royalty of 3% or up to 5% of
the net sales of products and services developed from a project funded by the IIA must generally be paid to the IIA, up to an aggregate
of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of
12-month LIBOR. The Innovation Law imposes significant restrictions on manufacturing of products developed with IIA grants outside Israel
and on the transfer (including by way of license) of IIA-funded technologies to third parties outside Israel. For example, the transfer
or license of IIA-funded technologies to third parties outside Israel requires the prior approval of the IIA, which approval is generally
contingent on payment of a redemption fee, calculated according to a formula under the Innovation Law, which may be in the amount of up
to six times the grant(s) amount (less paid royalties, if any, and depreciation, but no less than the total amount of grants actually
received by us), plus accrued interest.
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.
34
Research
and development expenses for the years ended December 31, 2022, 2021 and 2020 were $83.9 million, $85.4 million and $78.3 million, respectively,
net of government participation of $0.3 million, $0.8 million and $0.9 million, respectively. As of December 31, 2022, we employed 423
professionals in our research and development departments, 48 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 related to 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, 2022, we held 287 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, non-imaging sensors, embedded flash, power management, AI, RF, SiGe, MEMS, mixed-signal and silicon photonics
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
memory 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.
35
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 periodic
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 namely, accurate
device models, rich PDKs, silicon proven ESD (Electro Static Discharge) protection structures for different voltages ranging from 2KV
to 15KV and I/Os, special design rules per application and technical support. 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 and competitive advantage for our customers, for example when
time to market is critical (our design support reduces the number of required runs) or when implementing designs that reach the boundaries
of technology. In addition, our IP and design services can assist to relieve some of our customers' issues, providing the specific skills
and expertise critical for quick and 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 more notable competitive strengths.
JAZZ
SEMICONDUCTOR TRUSTED FOUNDRY
For
purposes of our U.S. aerospace and defense business, Tower and Tower NPB have worked with the Defense Counterintelligence Security Agency
of the United States Department of Defense (“DCSA”) to mitigate concern of foreign ownership, control or influence over the
operations in Fab 3. The protection and prevention of potential unauthorized access of trusted and classified materials and information
was addressed by creating Jazz Semiconductor Trusted Foundry (“JSTF”) as a subsidiary of Newport Fab LLC, which is directly
held by NPB Co., and limiting possession of all trusted and classified information solely to JSTF. JSTF maintains facility security clearance
(which is currently limited but may be remediated) and trusted foundry status.
36
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 Tower Semiconductor NPB Holdings, Inc., which owns all of the
shares of Tower 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 Tower Partners Semiconductor Co., Ltd. (Nuvoton Technology Corporation Japan holds the remaining 49%), which
is incorporated under the laws of Japan and operates two fabs located in Japan, known as Uozo E and Tonami CD. A third facility
in Japan, Arai E, ceased operation in July 2022.
Tower
Semiconductor San Antonio, Inc., which is wholly-owned by Tower US Holdings Inc., operates our Fab 9 facility in San Antonio, Texas, USA.
Tower
Semiconductor Italy S.r.l., Tower’s wholly-owned Italian subsidiary, is expected to share manufacturing capacity with ST in
a 300mm fabrication facility being established in Agrate, Italy.
D. PROPERTY, PLANTS AND
EQUIPMENT
MANUFACTURING
FACILITIES
We
manufacture semiconductor wafers at six manufacturing facilities: Fab 1 and Fab 2 facilities in Israel, Fab 3 in Newport Beach, California
in the U.S., TPSCo’s fabs (Uozo E and Tonami CD) in Japan (Arai E facility ceased operations in July 2022), and Fab 9 in San Antonio,
Texas in the U.S. TSIT is expected to share manufacturing capacity with ST in a 300mm fabrication facility being established by ST in
Agrate, Italy.
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, and the reconfiguration and expansion of existing
clean room areas.
Capital
expenditures in 2022 and 2021 were $214 million and $279 million, respectively, net of proceeds from sale of equipment and fixed assets
of $153 million and $35 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.
37
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 0.13-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 facility, Fab 3, and offices, which we acquired in 2008, are located in Newport Beach, California. Fab 3 supports
geometries ranging from 0.80 to 0.13-micron. The manufacturing facility comprises 320,000 square feet, including 120,000 square feet of
overall clean room area.
NPB
Co. leases its fabrication facility and offices under a lease agreement that was initially in effect until March 2022, and provided NPB
Co. an option, at its sole discretion, to extend the lease for an additional five year period, which NPB Co. elected to exercise for the
lease to continue through March 2027. Under the lease agreement as currently in effect, (i) NPB Co’s rental payments consist of
fixed base rent and fixed management fees and NPB 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; and (ii) the lease agreement includes certain
obligations of the parties, including certain noise abatement actions in relation to the fabrication facility. The landlord has made claims
that NPB Co.’s noise abatement efforts are not adequate under the terms of the amended lease, and has requested a judicial declaration
that NPB Co. has committed material non-curable breaches of the lease and that, in accordance with the lease, the landlord would be entitled
to terminate the lease. NPB Co. does not agree and is disputing these claims. s. See “Item 3. Key Information—D. Risk Factors—Risks
Affecting Our Business— Risks relating to Fab 3 lease could harm business, operations and financial results.”
Uozu
E Tonami CD and Arai E fabs
In
2014, we acquired a 51% equity stake in TPSCo, a company initially formed by Panasonic Corporation to manufacture products for Panasonic
and other third-party customers, using three semiconductor factories located in Hokuriku, 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 65 nanometer.
The fabs’ land and buildings are leased by PSCS (now named NTCJ) to TPSCo. As part of the TPSCo agreements, at the request of Panasonic
(through PSCS; now named NTCJ), the operations in Japan were reorganized and restructured such that the Uozu and Tonami facilities remain
unchanged, while the Arai manufacturing factory, which manufactured products solely for NTCJ and did not serve Tower’s or TPSCo’s
foundry customers, ceased operations effective July 2022.
Fab
9
During
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-owned US subsidiary, 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 the acquisition agreement, until the termination or expiration
of the supply agreement entered into between Maxim and 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.
38
Fab
shared with ST in Italy (Fab 10)
In
2021, we entered into a definitive agreement with ST to share a 300mm manufacturing fabrication facility in Agrate, Italy under a collaborative
arrangement, following which TSIT, a wholly-owned Italian subsidiary of Tower, was incorporated. The fabrication facility is currently
under installation and qualification by ST. The parties will share the cleanroom space and the facility infrastructure, and TSIT will
install equipment in one-third of the total space, which is expected to be qualified and used to manufacture products for its foundry
customers. Operations at the facility will continue to be managed by ST.
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 IATF16949 certified, a 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 that any such potential situations 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 governmental agencies.
For
safety, all of our facilities are OHSAS 45001 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.
Our
goal in implementing OHSAS 45001, ISO 14001, ISO 9001 and IATF16949 systems is to continually improve our environmental, health,
safety and quality management systems.
In
addition, we are committed to an ESG program with a corporate focus on social contribution and sustainability through diverse initiatives
and activities. We have issued a dedicated report on our ESG policies, including our strategy and long-term plan. We engage in voluntary
initiatives (such as disclosures, certifications, or improvement goals, among others) and commitments for improvements in ESG to increase
our company’s contribution to society and our environment.
39
ITEM
4A. UNRESOLVED
STAFF COMMENTS
Not
Applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
information contained in this section should be read in conjunction with our audited consolidated financial statements and the related
notes thereto contained in this annual report. Our financial statements have been prepared in accordance with US GAAP. The following discussion
and analysis may contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected
events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those
set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report. For a discussion
of the year ended December 31, 2021 compared to December 31, 2020, refer to the section contained in our Annual Report on Form 20-F for
the fiscal year ended December 31, 2021, "Item 5: Operating and financial review and prospects."
A. OPERATING RESULTS
OVERVIEW
We
are a pure-play independent specialty foundry dedicated to the manufacturing of semiconductors. As a pure-play foundry, we do not offer
products of our own, but focus on producing ICs, based on the design specifications of our customers. We manufacture semiconductors for
our customers primarily based on their designs or their end customers’ designs or other 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 and 0.13 -micron
on 200-mm wafers and 90 nanometer, 65 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. The technology platforms that we offer are focused on the
mega trends of seamless connectivity, green everything and interactive smart systems.
For
the year ended December 31, 2022, our revenues were derived from customers located around the globe, of which 49% were located in the
United States, 16% in Japan, 26% in Asia (excluding Japan) and 9% in Europe, as compared to 41%, 22%, 30% and 7%, respectively, for the
year ended December 31, 2021.
For
the year ended December 31, 2022, 14% of our revenues were derived from NTCJ, 33% of our revenues were derived from five different customers,
each comprising between 4% to 9% of our revenues, and the remaining 53% of our revenues were derived from many other smaller customers,
as compared to 21%, 33% and 46%, respectively, for the year ended December 31, 2021.
The
primary changes in financial and business conditions that could have impacted our business and financial results in 2022 were as follows:
The
COVID-19 outbreak, which was declared a global pandemic by the World Health Organization during March 2020, did not adversely affect our
revenue, business and financial results for the years ended December 31, 2022 and 2021. While we faced some specific supply chain and
shortage of supply issues due to local restrictions, lockdowns and isolation periods imposed by the governments of vendors, or due to
no or limited international courier delivery services, and while attendance of employees and service providers at our facilities and offices
was reduced due to local restrictions and isolation periods imposed by the local government, customer orders and pricing did not materially
decrease due to the COVID-19 pandemic or any related or resulting global economic downturn. While at the beginning of the COVID-19 outbreak,
customer orders did not increase to the higher levels we had initially planned for, we did not face any material reductions or cancellations
of orders and did not face any halt or stoppages of any of our seven manufacturing lines.
40
In
order to address the growing demand for our products and to attract and retain our customers, in 2022, we increased by 17% our gross investments
in property and equipment from $314 million in 2021 to $367 million in 2022, directed to our fabs in Israel, Italy, the United States
and Japan.
On
February 15, 2022, we entered into the Merger Agreement with Parent, Merger Sub, and Intel, pursuant to which Merger Sub will merge with
and into the Company (and Merger Sub will cease to exist as a separate legal entity), and the Company will be the surviving company and
will become a wholly‑owned subsidiary of Parent and a subsidiary of Intel, subject to the terms and conditions set forth in the
Merger Agreement. If the Merger is completed, the Company will cease to be a publicly traded company, all outstanding Company Shares (except
for any Company Shares owned by the Company, Parent, Merger Sub or any of their direct or indirect subsidiaries or held in the Company’s
treasury (which will remain outstanding and no Merger Consideration or any other consideration will be delivered in exchange therefor))
will be deemed to be transferred to Parent in exchange for the right to receive the Merger Consideration. The completion of Merger is
subject to the satisfaction of certain closing conditions specified in the Merger Agreement, including the receipt of certain regulatory
approvals. Certain but not all approvals have been obtained. If the closing conditions are not satisfied or waived
and the Merger is not consummated by the Outside Date, either we or Intel may, under certain circumstances, choose not to proceed
with the Merger. There can be no assurance that any remaining required approval will be obtained or, in the event any existing approval
or waiver expires and we file for such approval or waiver again, that such approval or waiver will be obtained, and the timing thereof
cannot be predicted.
KEY
FACTORS AFFECTING OUR RESULTS
Excluding
any effect arising from completion or non-completion of the Merger, the following are key factors that impact our results of operations:
Ability
to attract and retain customers.
We
are a trusted, customer-oriented service provider that has built a solid reputation in the foundry industry over more than twenty-five
years. We have built strong relationships with customers. Our consistent focus on providing high-quality, value-add 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, while increasing the number of new customers and new products for production.
We
continuously target to expand our manufacturing footprint, manufacturing capacity and business by addressing current customers’
future needs and 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-up of existing facilities owned by third parties, using 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.
Design
wins with new and existing customers.
We
work with our customers and potential customers to understand their product roadmaps and strategies. We consider design wins to be critical
to our future success. We define a design win as the successful completion of the evaluation stage, where a customer has verified that
our platform process meets its requirements and qualified our libraries and IPs for their products. The revenue that we generate, if any,
from each design win can vary significantly. Our long-term sales expectations are based on forecasts from customers, internal estimates
of customer demand factoring in expected time to market for end-customer products incorporating our products and associated revenue potential
and internal estimates of overall demand based on historical trends.
41
Selling
prices and manufacturing costs.
Our
gross margin has been and will continue to be affected by a variety of factors, including the market demand for semiconductor wafers,
timing of changes in pricing, shipment volumes, new product introductions, changes in product mixes, changes in our purchase price of
raw materials, including silicon starting material wafers, and manufacturing yields. In general, newly introduced products and products
with higher performance and more features tend to be priced higher than older, more mature products. Average selling prices in the semiconductor
industry typically decline as products mature. Consistent with this historical trend, we expect that the average selling prices of our
products will decline as they mature. In the normal course of business, we will seek to offset the effect of declining average selling
prices on existing products by reducing manufacturing costs and introducing new and higher value-add products. If we are unable to maintain
overall average selling prices or offset any declines in average selling prices with realized savings on product costs, our gross margin
will decline.
Investment
in capacity growth.
We
have invested, and intend to continue to invest, in expanding our manufacturing capacity, developing our products to support our
growth and expanding our infrastructure. Specifically, we entered into an agreement with ST in 2021 to share 300mm manufacturing capacity
space in Italy, for which we started purchasing, and will continue purchasing, a significant amount of equipment tools, in addition to
exploring additional capacity opportunities that may require us to use a significant portion of our cash and, to fund other investments
and cash plans, we may want and/or need to raise additional funds by way of debt and/or equity offerings, which funds may not be available
at reasonable terms due to the unfavorable capital market conditions, if at all, and may require consents that may not be provided
to us. We plan to continue to invest in our capacity expansion initiatives and existing and new operational capabilities throughout the
world through significant capital expenditure, and the return on these investments may be lower than we expect and these investments may
significantly reduce our net profit and cash balance, and require us to raise additional funds by way of debt or equity offerings. In
addition, as we invest in expanding our operations into new areas internationally, our business and results will become further subject
to the risks and challenges of operations in those locations, including potentially higher fixed costs and operating expenses, potential
impact of legal and regulatory developments, as well as shareholder dilution and high depreciation on fixed assets that may reduce our
profitability.
New
Accounting Pronouncements
For
recently issued accounting pronouncements see Note 2W and Note 2X to our annual financial statements included herein.
42
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, |
||||||||||||
|
2022 |
2021 |
2020 |
||||||||||
|
Statement of Operations Data: |
||||||||||||
|
Revenues |
100 |
% |
100 |
% |
100 |
% | ||||||
|
Cost of revenues |
72.2 |
78.2 |
81.6 |
|||||||||
|
Gross Profit |
27.8 |
21.8 |
18.4 |
|||||||||
|
Research and development expense |
5.0 |
5.7 |
6.1 |
|||||||||
|
Marketing, general and administrative expense |
4.8 |
5.1 |
5.1 |
|||||||||
|
Restructuring gain from sale of machinery and equipment, net
|
(1.2 |
) |
0.0 |
0.0 |
||||||||
|
Restructuring expense |
0.6 |
0.0 |
0.0 |
|||||||||
|
Operating profit |
18.6 |
11.0 |
7.2 |
|||||||||
|
Financing income (expense), net |
(0.8 |
) |
(0.8 |
) |
0.2 |
|||||||
|
Other income (expense), net |
(0.4 |
) |
0.1 |
(0.4 |
) | |||||||
|
Profit before tax |
17.4 |
10.3 |
7.0 |
|||||||||
|
Income tax expense, net |
(1.5 |
) |
(0.1 |
) |
(0.4 |
) | ||||||
|
Net profit |
15.9 |
10.2 |
6.6 |
|||||||||
|
Net income attributable to non-controlling interest |
(0.1 |
) |
(0.3 |
) |
(0.1 |
) | ||||||
|
Net profit attributable to the Company |
15.8 |
% |
9.9 |
% |
6.5 |
% | ||||||
Year
ended December 31, 2022 compared to year ended December 31, 2021
Revenues.
Revenues for the year ended December 31, 2022 were $1,677.6 million, as compared to $1,508.2 million for the year ended December 31, 2021.
The $169.4 million revenue increase is attributed mainly to an increase in the average selling price per product we experienced in 2022
and an increase in the quantity of products (CMOS silicon wafers) manufactured and shipped to our foundry customers from our factories
during the year ended December 31, 2022 reduced by revenues from the Arai factory, which manufactured products solely for NTCJ and did
not serve the Company’s other customers and ceased operations in July 2022.
Cost
of Revenues. Cost of revenues for the year ended December 31, 2022 amounted to $1,211.3 million as compared to $1,179.0 million for the
year ended December 31, 2021. The $32.3 million increase is mainly due to the increased quantity of wafers manufactured and shipped to
our foundry customers from our factories as described above, which resulted in additional variable and other manufacturing cost.
Gross
Profit. Gross profit for the year ended December 31, 2022 amounted to $466.3 million as compared to $329.1 million for the year ended
December 31, 2021. The $137.2 million increase in gross profit resulted mainly from the $169.4 million revenue increase, net of the $32.3
million increased cost of revenues, as described above.
Research
and Development. Research and development expense for the year ended December 31, 2022 amounted to $83.9 million as compared to $85.4
million in the year ended December 31, 2021.
43
Marketing,
General and Administrative. Marketing, general and administrative expense for the year ended December 31, 2022 amounted to $80.3 million,
reflecting 4.8% of revenues, as compared to $77.2 million for the year ended December 31, 2021, reflecting 5.1% of revenues. Our marketing,
general and administrative expense demonstrates a similar percentage of revenues in 2022 as compared to 2021.
Restructuring
gain from sale of machinery and equipment, net. Restructuring gain from sale of machinery and equipment, net for the year ended December
31, 2022 amounted to $20.2 million, and resulted from the gain on sale of machinery and equipment to third parties following the cessation
of operations of Arai facility in July 2022, which facility manufactured products solely for NTCJ and did not serve the Company’s
other customers.
Restructuring
expense. Restructuring expense for the year ended December 31, 2022 amounted to $10.7 million, resulted from Japan operations reorganization
and restructuring following the cessation of operations of Arai facility in July 2022, which facility manufactured products solely for
NTCJ and did not serve the Company’s other customers.
Operating
Profit. Operating profit for the year ended December 31, 2022 amounted to $311.7 million as compared to $166.5 million for the year ended
December 31, 2021. The $145.2 million increase in operating profit resulted mainly from the $137.2 million increase in gross profit described
above, the $20.2 million restructuring gain from sale of machinery and equipment, net described above, the decrease in research
and development of $1.5 million, offset by the $3.1 million increase in marketing, general and administrative expense described above
and the $10.7 million restructuring costs described above.
Financing
Income (Expense), Net. Financing expense, net for the year ended December 31, 2022 amounted to $12.8 million, similar as compared to financing
expense, net of $12.9 million for the year ended December 31, 2021.
Other
Income (Expense), Net. Other expense, net for the year ended December 31, 2022 amounted to $6.9 million as compared to other income, net
of $1.5 million for the year ended December 31, 2021. Other income (expense), net includes mainly non-recurring items such as gains and
losses from the sale and disposal of certain under-utilized and or unneeded property and equipment items, as well as evaluation or devaluation
results of equity investments in private companies in accordance with ASC 321.
Income
Tax Expense, Net. Income tax expense, net for the year ended December 31, 2022 amounted to $25.5 million as compared to $1.0 million income
tax expense, net in the year ended December 31, 2021. This $24.5 million increase in income tax expense, net is mainly a result of $136.9
million higher profit before tax for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Net
profit. Net profit for the year ended December 31, 2022 amounted to $266.5 million as compared to a net profit of $154.1 million for the
year ended December 31, 2021. The $112.4 million increase in net profit was mainly due to the increase in operating profit described above,
offset by the increase in other expense, net and tax expense, net as described above.
Net
income attributable to the non-controlling interest. Net income attributable to the non-controlling interest for the year ended December
31, 2022 amounted to $1.9 million as compared to $4.1 million for the year ended December 31, 2021, reflecting a decrease in the profitability
of TPSCo, a subsidiary in which we hold 51%.
Net
Profit attributable to the company. Net profit attributable to the company for the year ended December 31, 2022 amounted to $264.6 million
as compared to $150.0 million for the year ended December 31, 2021. The increase in net profit attributable to the company in the amount
of $114.6 million was mainly due to the increase in the net profit of $112.4 million and the decrease in net income attributable to non-controlling
interest of $2.2 million, as described above.
44
For
details with regards to risks associated with the COVID-19 pandemic and/or risks that may result from the pandemic, see our disclosure
under Note 1 to our consolidated financial statements as of December 31, 2022 and “Item 3. Key Information—D. Risk Factors—Risks
Affecting Our Business—Certain effects of the COVID-19 pandemic may hurt our business”.
Impact
of Currency Fluctuations
We
currently operate in three different regions: Japan, the United States and Israel. In addition, we have initial activities in Italy
related to the new fabrication facility that is being established by ST in Agrate, Italy, which facility is expected to be shared with
us. The functional currency of our entities in the United States, Israel and Italy is the USD. The functional currency of our subsidiary
in Japan is the JPY. Our expenses and costs are denominated mainly in USD, JPY and NIS, 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. Therefore, we are exposed
to the risk of currency exchange rate fluctuations in Israel and Japan. As the establishment of the facility in Italy progresses, we will
be further exposed to the Euro exchange rate fluctuations in relation to the USD regarding the cost denominated in Euro.
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, 2022, the USD appreciated against the NIS by 13.2%, as compared to 3.3% depreciation during
the year ended December 31, 2021. The fluctuation of the USD against the NIS can affect our results of 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 the purchases and labor costs
that are denominated in NIS, which may lead to erosion of the profit margins. We use foreign currency cylinder and forward transactions
to hedge a portion of this currency exposure to be contained within a pre-defined, fixed range.
The
majority of TPSCo revenues are denominated in JPY and the majority of TPSCo expenses are denominated in JPY, which limits the exposure
to fluctuations of the USD / JPY exchange rate on TPSCo’s results of operations. In order to mitigate a portion of the net exposure
to the USD / JPY exchange rate, we engage in cylinder hedging transactions to contain the currency’s fluctuation within a pre-defined,
fixed range.
During
the year ended December 31, 2022, the USD appreciated against the JPY by 14.6%, as compared to 11.7% appreciation during the year ended
December 31, 2021. The net effect of the USD appreciation 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, 2022, we had an aggregate amount of $340.8 million in cash and cash equivalents, as compared to $210.9 million as of December
31, 2021. The main cash activities during the year ended December 31, 2022, were: $529.8 million net cash provided by operating activities;
$213.5 million invested in property and equipment, net; $115.9 million invested in short-term deposits, marketable securities and other
assets, net; $78.4 million debt repaid, net; and $11.7 million derived from an investment in a subsidiary.
45
Short-term
and long-term debt presented in the balance sheet as of December 31, 2022 amounted to $62.3 million and $210.1 million, respectively,
and included bank loans, Series G debentures, operating leases and capital leases. As of December 31, 2022, the aggregate principal amount
of outstanding Series G debentures and its carrying amount in the balance sheet was $19.0 million, and was presented as a short-term liability.
On March 31, 2023, we repaid the Series G debentures in full (principal plus interest).
Based
on our current operations and expected short term growth, our cash generated from operations, our current and expected available lease
lines with third -party leasing companies and existing balance of cash, deposits and marketable securities, we have sufficient resources
to meet our cash needs for operating activities, capital expenditures for our existing fabs and debt repayments in the short term and
long term.
If
we execute a merger or acquisition transaction(s) per our company strategy, or a joint partnership or another large transaction to expand
our capacity, including the funding of the equipment for the fabrication facility being established by ST in Agrate, Italy, acquiring
leased assets and/ or acquiring additional fabs and/or capacity through other capacity acquisition related transactions, we may utilize
our current cash balance, deposits and/or investments in marketable securities and/or we may be required to secure additional financing
by way of public or private offerings of equity and/or debt and/or re-financing or other financing alternatives. The timing, terms, size
and pricing of any future fundraising, if any, would be subject to the then-prevailing capital market conditions and our business and
financial situation, as well as the need to obtain certain regulatory and other consents. There is no assurance that we would be able
to obtain the necessary consents and/or funding in a timely manner, in sufficient amount or on favorable terms. See “Item 3. Key
Information—D. Risk Factors—Risks Affecting Our Business— We may be required to obtain financing for capacity acquisition
related transactions, strategic and/or other growth and M&A opportunities, which we may not be able to obtain.”
Recent
Financing Transactions
Capital
Leases
Certain
of our subsidiaries enter into, from time to time, capital lease agreements for certain machinery and equipment operated in some of our
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 rates 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 buys the assets. The obligations
under the capital lease agreements are guaranteed by Tower, except for TPSCo’s obligations under its capital lease agreements.
As
of December 31, 2022 and 2021, the outstanding capital lease liabilities for fixed assets were $158.1 million and $139.0 million, respectively,
of which $39.6 million and $36.3 million, respectively, were included under current maturities of long-term debt. The available lease
lines as of December 31, 2022 were $26 million.
Loan
Agreement from Japanese Financial Institutions
In
December 2021, TPSCo refinanced its then existing loan with a new 11 billion JPY (approximately $96 million) asset-based loan with a consortium
of financial institutions comprised of (i) JA Mitsui Leasing, Ltd., (ii) Mitsubishi HC Capital Inc., (iii) Taishin International Bank
Co., Ltd., Tokyo Branch; and (iv) the JP Loan. The JP Loan carries a fixed interest rate of 1.95% per annum with principal payable in
seven semiannual payments from December 2024 until December 2027. The JP Loan is secured mainly by a lien over the machinery and equipment
of TPSCo located in the Uozu and Tonami manufacturing facilities. The outstanding principal amount of the JP Loan was $83.4 million as
of December 31, 2022.
46
The
JP Loan contains certain financial ratios and covenants, as well as customary events of default and acceleration of the repayment schedule.
TPSCo’s obligations under the JP Loan are not guaranteed by Tower, NTCJ, or any of their affiliates.
As
of December 31, 2022, TPSCo was in compliance with all of the financial ratios and covenants under the JP Loan.
C. RESEARCH AND
DEVELOPMENT, PATENTS AND LICENSES, ETC.
Our
research and development activities are related primarily to our manufacturing process by way of improvements, upgrades and development
for our use in the manufacturing of our customers’ 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, 2022, 2021 and 2020 were $83.9 million,
$85.4 million and $78.3 million, respectively, net of government participation of $0.3 million, $0.8 million and $0.9 million, respectively.
For
a description of our research and development policies and our patents and licenses, see “Item 4. Information on the 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 down to 5-10 nanometers 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.
We currently offer 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, and
0.13 -micron on 200-mm wafers; and (iii) 65 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, 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, medical
and industrial markets. For example, we believe that our specialty SOI, SiGe and phase change materials process technologies can provide
performance and cost advantages over current GaAs solutions in the realization of switches and power amplifiers for wireless handsets.
Our SiGe and silicon photonic technology can provide speed, power and cost advantage over alternative technologies for high-speed optical
transceivers used for data communication in data centers and network infrastructure. Our power management platforms enable the industry’s
analog IC suppliers to differentiate their product offerings in the markets we serve. Our 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 large imagers occupying the whole surface of a 200mm or even a 300mm
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, in particular advanced integrated UV, gas and BioFET sensors. In addition,
we target the display markets utilizing micro OLED and micro LED technologies on silicon, using our well established processes, and in
particular, our stitching technology to create large displays for the AR/VR growing market.
47
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, which expands our customer base, and broadening our
business with existing customers.
During
recent years, we have accelerated our plans to expand manufacturing capacity, including capacity in our 300mm fab. 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 benefit from a competitive edge in the market. Our geographical diversity allows us to perform an internal benchmark among
our acquired facilities to gain knowledge on work processes and methodologies, thereby ensuring that we maintain a high level of operations
across all facilities. Our global foothold also provides our customers with manufacturing flexibility and business continuity in terms
of opportunity for capacity availability.
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
and seek to secure additional manufacturing capacity. 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 strategy to expand our global
footprint, capacity and capabilities. During 2022, we continued to increase our investments in property and equipment to expand the
capacities and capabilities of our existing fabs.
E. CRITICAL ACCOUNTING
ESTIMATES
Our
financial statements are prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures.
We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical
experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would
change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported.
48
The
critical accounting policies used in the preparation of our consolidated financial statements that we believe were most affected by significant
management estimates and judgments are discussed below. See Note 2 to the consolidated financial statements included elsewhere in this
annual report for further information on all significant accounting policies that we used to prepare our consolidated financial statements.
Income
Taxes
Our
provision for income taxes is affected by income taxes in a multinational tax environment. The income tax provision is an estimate determined
based on current enacted tax laws and tax rates at each of our geographic locations with the use of acceptable allocation methodologies
based upon our organizational structure, our operations and business mode of work, and result in applicable local taxable income attributable
to those locations.
For
the year ended December 31, 2022, the consolidated provision for income taxes was $25.5 million comprised of amounts related to Israel,
Italy, Japan and the U.S., as detailed in Note 19 to our financial statements.
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 April 30, 2023:
|
Officer |
Senior Management Name |
Age |
Title(s) |
|
A |
Russell C. Ellwanger |
68 |
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., Tower Semiconductor NPB Holdings, Inc.,
Tower Semiconductor Newport Beach, Inc., Tower Partners Semiconductor Co., Ltd., Tower Semiconductor San Antonio, Inc. and Tower Semiconductor
Italy, S.r.l. |
|
B |
Oren Shirazi |
53 |
Chief Financial Officer, Senior Vice President of Finance
|
|
C |
Rafi Mor |
59 |
Chief Operating Officer |
|
D |
Dr. Marco Racanelli |
56 |
Newport Beach Site Manager and Senior Vice President and General
Manager of Analog Business Unit |
|
E |
Nati Somekh |
48 |
Senior Vice President, Chief Legal Officer and Corporate Secretary
|
|
F |
Yossi Netzer |
59 |
Senior Vice President of Corporate Planning |
|
G |
Dalit Dahan |
54 |
Senior Vice President of Human Resources and IT |
|
H |
Guy Eristoff |
61 |
Chief Strategy Officer and Head of Pathfinder Activities, Site
Manager of Tower Semiconductor San Antonio, Inc. |
|
I |
Dr. Avi Strum |
61 |
Senior Vice President and General Manager of the Sensors and
Displays Business Unit |
|
J |
Dani Ashkenazi |
60 |
Senior Vice President Excellence and Quality |
|
K |
Noit Levy |
39 |
Senior Vice President
of Investor Relations and Corporate Communications |
|
Directors Name(*) |
Age |
Title | |
|
L |
Amir Elstein |
67 |
Chairman of the Board of Directors |
|
M |
Kalman Kaufman |
77 |
Director |
|
N |
Dana Gross |
55 |
Director |
|
O |
Ilan Flato |
66 |
Director |
|
P |
Yoav Z. Chelouche |
69 |
Director |
|
Q |
Iris Avner |
58 |
Director |
|
R |
Michal Vakrat Wolkin |
51 |
Director |
|
S |
Avi Hasson |
52 |
Director |
49
(*)
Russell Ellwanger also serves as a director; his information is included under Senior Management above.
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 previously served as a director between May 2005 and April 2013. Mr. Ellwanger serves as Chairman of the Board of Directors
of our subsidiaries, Tower Semiconductor USA, Inc., Tower US Holdings, Inc., Tower Semiconductor NPB Holdings, Inc., Tower Semiconductor
Newport Beach, Inc., Tower Partners Semiconductor Co., Ltd., Tower Semiconductor San Antonio, Inc. and Tower Semiconductor Italy,
S.r.l. From 1998 to 2005, Mr. Ellwanger served in various executive positions for Applied Materials Corporation, including Group
Vice President, General Manager of the Applied Global Services (AGS), from 2004 to 2005, and Group Vice President, General Manager of
the CMP and Electroplating Business Group, from 2002 to 2004. Mr. Ellwanger also served as Corporate Vice President, General
Manager of the Metrology and Inspection Business Group, from 2000 to 2002, during which time he was based in Israel. From 1998
to 2000, Mr. Ellwanger served as Vice President of Applied Materials’ 300-mm Program Office, USA. Mr. Ellwanger served
as General Manager of Applied Materials’ Metal CVD Division from 1997 to 1998 and from 1996 to 1997, Mr. Ellwanger served as Managing
Director of CVD Business Development, during which time he was based in Singapore. In addition, Mr. Ellwanger held various
managerial positions in Novellus System from 1992 to 1996 and in Philips Semiconductors from 1980 to 1992.
Oren
Shirazi has served as our Chief Financial Officer and Senior VP Finance since November 2004. Mr. Shirazi serves as a board member
of Tower Semiconductor Newport Beach, Inc. Mr. Shirazi joined us in October 1998, serving initially as vice controller and then as controller
commencing in July 2000. Prior to joining us, Mr. Shirazi was employed as an audit manager in the accounting firm of Ratzkovski-Fried
& Co., which merged into Ernst & Young (Israel). Mr. Shirazi is a Certified Public Accountant in Israel (CPA). Mr. Shirazi holds
an MBA degree from the Graduate School of Business of Haifa University with honors and a B.A. degree in economics and accounting from
the Haifa University.
Rafi
Mor has served as Chief Operating Officer of Tower since August 2014. Mr. Mor serves as a board member of Tower Semiconductor Newport
Beach, Inc., Tower Semiconductor NPB Holdings, Inc., Tower Partners Semiconductor Co., Ltd., Tower Semiconductor San Antonio, Inc. and
Tower Semiconductor Italy, S.r.l. Mr. Mor served as Chief Executive Officer of TowerJazz Japan from October 2011 until August 2014,
after serving as Senior Vice President and General Manager of Tower Semiconductor Newport Beach, Inc. from September 2008. In October
2010, Mr. Mor was nominated to be the manager of our Newport Beach Fab, in addition to his General Manager role. Prior thereto, Mr. Mor
served in Tower Semiconductor Ltd. as Vice President of Business Development from April 2007, after serving as Vice President and Fab
2 Manager from August 2005, and as Fab 1 Manager from March 2003. From November 2000 to March 2003, Mr. Mor served as Senior Director
of Process Device & Yield of Fab 1. From 1998 to 2000, Mr. Mor served as Director of Equipment Reliability & Support of Fab 1.
Previously, Mr. Mor was employed by National Semiconductor in various engineering and management capacities. Mr. Mor holds M.A. and B.A.
degrees in chemical engineering from Ben Gurion University.
50
Dr.
Marco Racanelli has served as Senior Vice President and General Manager of the Analog Business Unit since December 2018, as the
Newport Beach Site Manager since April 2014 and serves as a board member of Tower Semiconductor Newport Beach, Inc. Previously, Dr. Racanelli
served as Senior Vice President from June 2012 and General Manager, RF & High Performance Analog Business Group and Aerospace &
Defense Group from September 2008. Prior to that, Dr. Racanelli served as Vice President of Technology & Engineering, and Aerospace
& Defense General Manager for Jazz Semiconductor. Prior to that, Dr. Racanelli held several positions at Conexant Systems and Rockwell
Semiconductor from 1996 in the area of technology development, where he helped establish industry leadership in SiGe and BiCMOS and MEMS
technology and built a strong design support organization. Prior to Rockwell, Dr. Racanelli worked at Motorola, Inc., where he contributed
to bipolar, SiGe and SOI development for its Semiconductor Products Sector. Dr. Racanelli holds a Ph.D. and a M.Sc. degree in Electrical
and Computer Engineering from Carnegie Mellon University, and a B.Sc. degree in Electrical Engineering from Lehigh University. Dr. Racanelli
holds over 35 U.S. patents.
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 has served as Senior Vice President of Human Resources and IT since 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.
Guy
Eristoff has served as Site Manager of Tower Semiconductor San Antonio, Inc. since February 2023 and also serves as Chief Strategy Officer
and Head of Pathfinder Activities since December 2019. Mr. Eristoff 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, 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 holds a B.S. degree in Physics from Rensselaer
Polytechnic Institute, (RPI) Troy New York.
51
Dr.
Avi Strum has served as our Senior Vice President and General Manager of the Sensors and Displays Business Unit since 2018, and also serves
as a member of the board of directors of TPSCo since 2019. Previously, Dr. Strum served as Vice President and General Manager of the Specialty
Business Unit, Vice President of Europe Sales, Head of the Design Center in Netanya and Device and Integration Department Manager. Prior
to joining Tower, Dr. Strum served as the President and COO of TransChip Inc. and from 1996 to 2001, he served in various positions with
Intel Corp., both in Israel and the US. From 1990 to 1996, he was the R&D Manager of SCD and was in charge of all the Infrared Detectors
development in SCD. Dr. Strum received his Ph.D. and B.Sc. degree in Electrical Engineering from the Technion - Israel Institute of Technology.
Dani
Ashkenazi has served as Senior Vice President Excellence and Quality since July 2020. Previously, Mr. Ashkenazi served as Senior Vice
President and General Manager of Transfer, Optimization and Development Process Services Business Unit (TOPS) and Europe Sales from June
2019, and 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 Senior 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 degree from Haifa University in
Israel and a B.A. degree in Social Science and Management from the College of Management Academic Studies.
Amir
Elstein has served as the Chairman of our Board since January 2009. Mr. Elstein serves as a Director of Teva Pharmaceutical
Industries Ltd. and serves as Chairman of the Israel Democracy Institute. During 2010-2013, Mr. Elstein served as Chairman of the
Board of Directors of Israel Corporation. Mr. Elstein was a member of Teva Pharmaceutical Industries senior management team from 2005
to 2008, where he ultimately held the position of the Executive Vice President at the Office of the Chief Executive Officer, overseeing
Global Pharmaceutical Resources. Prior thereto, Mr. Elstein was an executive at Intel Corporation, where he worked for 23 years, eventually
serving as General Manager of Intel Electronics Ltd., an Israeli subsidiary of Intel Corporation. Mr. Elstein received a B.Sc. degree
in physics and mathematics from the Hebrew University of Jerusalem and M.Sc. degree in the Solid State Physics Department of Applied Physics
from the Hebrew University of Jerusalem in 1982. In 1992, Mr. Elstein received his diploma of Senior Business Management from the Hebrew
University of Jerusalem.
Kalman
Kaufman has served as a director since 2005 and as chairman of the Corporate Governance and Nominating Committee since January 2018.
Mr. Kaufman served as Corporate Vice President at Applied Materials from 1994 to 2005. Between 1985 and 1994, Mr. Kaufman served
as President of KLA Instruments Israel, a company he founded, and General Manager of Kulicke and Soffa Israel. Mr. Kaufman is currently
the Chairman of the board of directors of Medasense and Invisia, a director at Trellis Inc, Chair of the general assembly of the Kinneret
Academic College and chairman of the Tzemach Kineret Development Corporation. Mr. Kaufman holds engineering degrees from the Technion
- Israel Institute of Technology.
52
Dana
Gross has served as a director since November 2008, as a member of the Corporate Governance and Nominating Committee since January
2018, as a member of the Compensation Committee since February 2013 and as Chair of the Compensation Committee since November 2020.
In addition, Mrs. Gross has served as a director on the board of Tower Semiconductor Newport Beach, Inc., our wholly-owned subsidiary,
since March 2009. Mrs. Gross is currently the Head of Strategic Initiatives at Fiverr International Ltd. and Chief Strategy Officer
of Prospera Technologies Ltd., a Valmont Company developing AgTech Data solutions. Mrs. Gross was the CFO of eToro, a FinTech company
that developed a Social Investment network from 2014 to 2016, and the CEO of Btendo, a start-up company that developed MEMS-based PICO
projection solutions, until it was acquired by ST Microelectronics in 2012. Mrs. Gross was a Venture Partner at Viola Ventures,
a leading Israeli venture capital firm, from 2018 until 2010. From 2006 to 2008, Mrs. Gross was a Senior VP, Israel Country Manager at
SanDisk Corporation. From 1992 to 2006, Mrs. Gross held various senior positions at M-Systems, including Chief Marketing Officer,
VP World Wide Sales, President of M-Systems Inc. (US subsidiary) and CFO, VP Finance and Administration. In addition, Mrs. Gross
has served on the board of directors of Playtika Holding Corp. since January 2022, and previously served as a director of M-Systems Ltd.,
Audiocodes Ltd. and Power Dsine Ltd. Mrs. Gross holds a B.Sc. degree in industrial engineering from Tel-Aviv University and an M.A.
degree in business administration from San Jose State University.
Ilan
Flato has served as a director since February 2009 (until November 2016 as an external director, within the meaning of the Companies
Law). Mr. Flato served as chairman of the Compensation Committee from February 2013 until October 2019 and since such time continues
to serve as a member of the Compensation Committee. Mr. Flato has served as a member of the Audit Committee since April 2009. Mr.
Flato is classified by the Board of Directors as an audit committee financial expert under applicable SEC rules. Mr. Flato has served
as President of The Association of Publicly Traded Companies on the Tel-Aviv Stock Exchange since January 2012. Since 2011, Mr.
Flato has been a member of the Israel Bar Association. From 2009 until 2018, Mr. Flato served as a director in two Provident
Funds. From 2009 until April 2018, Mr. Flato served as Chairman of the Business Executive of Kibbutz Kfar Blum. From January
2018 until April 2020, Mr. Flato served as Chairman of the Business Executive Kibbutz “NAAN”. Since 2004, Mr. Flato
has functioned as an independent financial adviser. Until 2004, Mr. Flato served as the VP for planning, economics and online banking
in United Mizrahi Bank and as the Chief Economist of the bank. From 1992 until 1996, Mr. Flato served as the Economic Advisor to the Prime
Minister of Israel. Prior to that position, Mr. Flato served in the Treasury Office as the deputy director of the budget department. In
addition, Mr. Flato served as a member of the board of directors of many government-owned companies. Mr. Flato holds a B.A. degree in
economics from Tel-Aviv University, an LL.B. degree from Netanya College, an M.A. degree in law from Bar-Ilan University and an MSIT from
Clark University.
Yoav
Z. Chelouche has served as a director since April 2016, as a member of the Corporate Governance and Nominating Committee since January
2018, and as the Chair 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 its inception
in 2001. Between 1995 and 2001, Mr. Chelouche served as President & CEO of Scitex Corp. Until 2015, Mr. Chelouche was
co-chairman of Israel Advanced Technology Industries. Mr. Chelouche currently serves on the Board of Directors of the following
publicly listed companies: Check Point Software Technologies, Ltd., the Tel-Aviv Stock Exchange, Ltd. and Malam-Team Ltd. Mr. Chelouche
also previously served as Chairman and/or director of several public companies, including Shufersal Ltd. Mr. Chelouche holds a B.A. degree
in economics and statistics from Tel-Aviv University and an MBA degree from INSEAD, Fontainebleau, France.
53
Iris
Avner has served as a director since June 2016 (until November 2016 as an external director, within the meaning of the Companies Law),
and has served as a member of the Audit Committee since June 2016. Ms. Avner served as a member of the Compensation Committee from
June 2016 until October 2019. Ms. Avner is classified by the Board of Directors as an audit committee financial expert under applicable
SEC rules. Ms. Avner serves as Chief Executive Officer of Nika Holdings, Ltd. From 2008 to 2015, Ms. Avner served as Managing Partner
of Mustang Mezzanine Fund, L.P. and served on Mustang’s board of directors from 2014 until 2015. From 1996 until 2008, Ms.
Avner served as Chief Executive Officer of Mizrahi Tefahot Capital Markets Ltd. and from 1996 until 2005, served as Senior Credit Officer
& Deputy CEO of Mizrahi Tefahot Bank. In addition, from 1997 until 2002, Ms. Avner served as Assistant Professor and external lecturer
in the Executive MBA Program at Tel Aviv University. From 1988 until 1996, Ms. Avner held various positions at Israeli Discount
Bank including Senior Credit Officer and Senior Economist. Ms. Avner has served as a member of the board of directors of Israel
Discount Bank since March 2018 and Amir Marketing and Investments in Agriculture since May 2017. Ms. Avner has served as a member
of the board of directors of Rotshtein Real Estate since August 2016. Ms. Avner previously served on several boards and board committees
in Israel and abroad, both as director and chairperson. Ms. Avner holds a B.A. degree in accounting and economics from the Hebrew
University of Jerusalem and an MBA degree from Tel Aviv University.
Michal
Vakrat Wolkin has served as a director since September 2020, and as a member of the Corporate Governance and Nominating Committee since
November 2020. Since January 2023, Ms. Wolkin has served as the Director of Global Battery Investments for General Motors. Ms. Wolkin
has served as a partner at GFT Ventures, a global venture capital firm since 2020 and on the Advisory Board of RACAH Nano Tech Fund of
the Hebrew University of Jerusalem since 2019. Ms. Wolkin served as Managing Director of Lear Innovation Ventures from January 2017
until 2020. During 2014-2016, Ms. Wolkin served as Head of 3M R&D Israel and from 2012 until 2014, she served as Technical Chair
of the Night Rover Challenge of NASA/CleanTech Open. Ms. Wolkin served as Director of Energy Storage Technologies in Better Place
from 2008 until 2012, and from 2004 until 2008, she served as Member of Research Staff II at the Hardware system lab at Xerox PARC.
Ms. Wolkin received her B.Sc. degree in Chemical Engineering from the Technion - Israel Institute of Technology in Israel in 1996 and
Ph.D. degree in Applied Physics and Materials Science from the University of Rochester, NY in 2000. In 2003 until 2004, Ms. Wolkin
did her Post-doctorate at the Electronics Materials Lab at Xerox PARC.
Avi
Hasson has served as a director since September 2020, and as a member of the Audit Committee and Compensation Committee since November
2020. Mr. Hasson is classified by the Board of Directors as an audit committee financial expert under applicable SEC rules. Mr.
Hasson is the chief executive officer of Start-Up Nation Central, an independent non-profit that connects Israeli innovation to global
partners. Mr. Hasson previously served as a partner at Emerge, a leading early stage venture capital firm. Mr. Hasson serves in several
non-profit organizations, including as a director on the board of directors of Sheba Medical Center at Tel Hashomer and SpaceIL.
From January 2011 until July 2017, Mr. Hasson served as the Chief Scientist in the Ministry of Economy and Industry and as Chairman of
the Israel Innovation Authority. From 2000 until 2010, Mr. Hasson served as General Partner at Gemini Israel Funds, a top tier venture
capital fund in Israel. Prior thereto, Mr. Hasson held executive positions in product management, marketing and business development
at various telecommunication technology companies, including ECI Telecom, ECtel and Tadiran Systems. Mr. Hasson received his B.A.
degree in Economics and Middle East studies from Tel-Aviv University in 1997 and M.BA. degree from Tel Aviv University in 2002.
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, as the case may be.
54
B. COMPENSATION
Under the Companies Law,
a public company must have a compensation policy regarding the terms of engagement of office holders, as such term is defined in the Companies
Law. 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 Exhibit 2.1 to this Annual Report 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 September 17, 2020, and amended on
August 12, 2021, serves as the basis for decisions concerning the financial terms of
employment or engagement of our office holders (within the meaning of the Companies Law), including compensation, equity-based awards,
indemnification and insurance, severance and other benefits. Our compensation policy is performance-based and is designed to align our
officers’ and directors’ interests with those of our company and shareholders in order to enhance shareholder value. Our compensation
policy allows us to provide incentives that reflect short-term, mid-term and long-term goals and performance, as well as motivate 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 us 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 terms of employment of an office holder 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; |
55
| • |
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, under the
Companies Law, the compensation policy must also include the following features: (i) with respect to variable components of the compensation
of the chief executive officer, determining the variable compensation components on long term performance and measurable metrics; however,
an immaterial portion of the variable components of the compensation of the chief executive officer, in the amount of up to three monthly
salaries per annum, can be discretion-based awards (i.e., not based on measurable metrics), taking into account the contribution of the
chief executive officer to the company. This requirement applies also to any other office holder (within the meaning of the Companies
Law) who is not subordinate to the chief executive officer, if any (such as directors, including the chairman of the board of directors);
(ii) the ratio of variable components and fixed components and a cap on variable components at the time of their payment, except that
the cap for equity-based compensation is determined at the time of grant; (iii) the conditions under which an office holder would be required
to return compensation paid, in the event that it is later revealed that such amounts were paid on the basis of data that was inaccurate
and was required to be restated in the company’s financial statements; (iv) the minimum holding or vesting periods for equity-based
variable components of compensation, while taking into consideration long term incentives; and (v) maximum limits on grants or benefits
paid upon termination.
Compensation under our
compensation policy may include: base salary; benefits and perquisites, performance-based cash bonuses and other bonuses (such as special
bonuses for substantial achievements and sign-on bonuses); equity-based compensation; and retirement, termination and other arrangements.
Our compensation policy aims to optimize the mix of fixed compensation and variable compensation in order to, among other things, appropriately
incentivize office holders to meet our goals while considering our management of business risks and sets maximum ratios between the two
types of compensation elements.
All compensation arrangements
of officers and directors are required to be approved in the manner prescribed by applicable law (see details in Exhibit 2.1 to this annual
report).
For the year ended December
31, 2022, we paid to all our directors, officers and senior management who served during the period, as a group, an aggregate of $11.6
million in salaries, fees, payments upon termination and bonuses (excluding employer cost, relocation related expenses and equity-based
compensation, which are detailed below). The total 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
$2.1 million for the year ended December 31, 2022.
The following is a summary
of the Company’s cost (including its employer’s cost), including all compensation paid and/ or value awarded and granted in
cash and/or equity vehicles, respectively, to our five most highly compensated officers and/or directors for the year ended December 31,
2022, which consist of the individuals listed in A, D, B, C and I in the table set forth in Item 6A above (collectively referred to herein
as the “Covered Officers”).
The base salary of our
executive officers is individually determined according to past performance, educational background, country of residence, professional
experience, qualifications, specializations, role, business responsibilities, achievements of the officer and prior salary and compensation
arrangements, as well as comparative peer group analyses. Base salary cost gross recorded by the Company for the compensation of Covered
Officers A, D, B, C and I for the year ended December 31, 2022, amounted to $0.88 million, $0.45 million, $0.42 million, $0.36 million
and $0.29 million, respectively. Executive officers are entitled to social and other benefits in accordance with applicable law, our policies
and common practice. The cost of social and other benefits awarded to the Covered Officers A, D, B, C and I for the year ended December 31,
2022, amounted to $0.20 million, $0.16 million, $0.21 million, $0.19 million and $0.16 million, respectively. In addition, relocation
and related reimbursement expenses awarded to Covered Officer A for the year ended December 31, 2022, amounted to $0.28 million.
No relocation related payments or accruals were made to any of Covered Officers D, B, C and I during the year ended December 31,
2022.
56
Our policy is to award
annual cash bonuses to executive officers, subject to the attainment of pre-determined annual measurable objectives, which are set in
the first quarter of each year, and personal performance evaluation. In accordance with our compensation policy, the pre-defined annual
bonus plans include measurable metrics and the weight (in percentage terms) of each metric as a portion of the annual measurable metrics,
as well as a minimum threshold for achievement of corporate measurable metrics below which no portion of the pre-determined corporate
measurable metrics component of the annual bonus will be awarded, and a portion of the annual bonus is based on performance valuation,
in accordance with our compensation policy and subject to applicable law. The bonus cost gross amounts paid by the Company for the compensation
of the Covered Officers A, D, B, C and I during the year ended December 31, 2022, amounted
to $1.97 million, $0.73 million, $0.7 million, $0.56 million and $0.35 million, respectively.
Equity based compensation
for directors and officers is intended to be in the form of restricted stock units (“RSUs”), performance-based stock units
(“PSUs), options and/or other equity forms, in accordance with our equity-based compensation policies and programs in place from
time to time and in accordance with our compensation policy. Equity-based compensation may be granted as an annual grant and/or from time
to time and is individually determined. Generally, equity-awards shall not begin to vest before the end of the first year from the date
of grant. We calculate the fair market value of equity-based compensation for officers and directors at the time of grant according to
the Black-Scholes model, binomial model or any other best practice or commonly accepted equity-based compensation valuation model, when
such award is duly approved in accordance with applicable law and amortize such value in our statements of operations over the applicable
vesting schedule. Total value of equity-based compensation awarded to the Covered Officers A, D, B, C and I and recorded for the
year ended December 31, 2022 (calculated based on the total amortization cost recorded in the Company’s statement of operations
for the year ended December 31, 2022 with respect to all equity-based grants awarded to the applicable Covered Officer), amounted to $6.3
million, $1.48 million, $1.44 million, $1.08 million and $0.79 million, respectively.
Under our compensation
policy, we may grant our executive officers certain termination and retirement payments, including a change of control related compensation,
subject to the termination of employment of such officer or resignation under certain circumstances as specified in such change of control
provision, and subject to receipt of applicable corporate approvals as required by law. In accordance with our compensation policy and
the employment terms of our chief executive officer, upon termination of his employment, including upon a change of control, our chief
executive officer may be eligible for a payment of twelve monthly base salaries, and in the event of termination of his employment upon
a change of control as defined, he may also be entitled to acceleration of all unvested equity. In addition, under our compensation policy,
upon a change of control as specified in the applicable change of control compensation provision, all other executive officers may be
entitled to a payment in the amount of up to six months’ base salary and acceleration of all unvested equity, and the chairman of
the board of directors and other directors may be entitled to acceleration of all or half of their unvested equity, as applicable. No
such payment or accrual was made or earned during the year ended December 31, 2022.
Following approval of
our shareholders 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 our board of directors, whose compensation is detailed
below): (i) an annual fee of $52,500; and (ii) a committee membership fee of up to $6,000 annually and an additional fee of up to $3,000
annually for each committee chairperson; as well as reimbursement for reasonable travel and other expenses in accordance with our policies.
In addition, the board of directors may compensate directors for special activities that are performed under special circumstances, in
the amount of up to $2,000 per meeting. With regards to the chairman of our board of directors, at our 2022 annual general meeting of
shareholders, our shareholders approved the payment of an annual cash fee of $300,000 (paid in monthly installments) and the award of
time-based vesting RSUs in the value of $300,000, which vest in three equal installments on each of the three anniversaries of the date
of grant. If the service of the chairman of our board of directors is terminated for any reason other than for cause, including by way
of resignation, prior to the third anniversary from the date of grant, all his unvested RSUs shall be accelerated. Furthermore, at our
2022 annual general meeting of shareholders, 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) of time-based
vesting RSUs in the value of $125,000, 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 other than for cause, including by way
of resignation, prior to the second anniversary of the date of grant, (i) if such director has served on the board of directors for five
years or more, all his/her unvested RSUs shall be accelerated; and (ii) if such director has served on the board of directors for less
than five years, 50% of all his/her unvested RSUs shall be accelerated.
57
We have entered into
exemption and indemnification agreements with each of our officers and directors, pursuant to which, subject to the limitations set forth
in the Companies Law, the Israeli Securities Law, 1968 and our articles of association, they will be exempt from liability for breaches
of the duty of care and we agreed to indemnify them for certain costs, expenses and liabilities with respect to events specified in such
agreements. In addition, our officers and directors are currently covered by a directors’ and officers’ liability insurance
policy.
Equity
Incentive Plans
In 2013, the Company
adopted a share incentive plan for its directors, officers, employees and its subsidiaries’ employees (the “2013 Plan”).
In accordance with our compensation policy, the aggregate amount of outstanding equity-based compensation awarded by the Company at any
time shall not exceed 10% of the fully-diluted share capital of the Company, as calculated at the time of grant (which fully-diluted share
capital will be calculated pro-forma after taking into account the proposed grants and shares underlying all outstanding equity-based
awards).
As of December 31, 2022,
approximately 0.94 million restricted share units (“RSUs”), performance-based-vesting RSUs (“Base PSUs") and upside
PSUs, outstanding under the 2013 Plan were awarded to our directors and senior management, of which approximately 0.39 million were awarded
to our chief executive officer and approximately 0.02 million were awarded to the chairman of our board of directors.
At our 2022 annual general
meeting, our shareholders approved an equity grant to our chief executive officer in the value of $6.77 million, 40% of which is RSUs
and 60% of which is Base PSUs, and an additional equity grant in the value of $0.41 million as upside PSUs, all vesting over a three-
year period (together with the Base PSUs, referred to hereinafter as the “PSUs”). The vesting of the PSUs was subject to the
attainment of certain pre-defined financial performance metrics of net profit and cash from operations for the year ended December 31,
2022, weighted equally, and if such 2022 performance measures are met, the PSUs vest over a three year period, such that one third of
the PSUs vest at the end of each year from the date of grant. Actual net profit for 2022 was $264.6 million and cash from operations
for 2022 was $529.8 million. Since these 2022 actual financial results exceeded the pre-defined financial performance metrics for the
vesting of the PSUs, the chief executive officer is entitled to all of the PSUs, subject to the time-vesting schedule described above.
Under the above referenced approval, we granted to the chief executive officer 58,836 time-vested RSUs and 97,080 PSUs, consisting of
88,255 Base PSUs and 8,825 upside PSUs, subject to the time-vesting schedule as detailed above, for a total compensation value of approximately
$7.18 million.
58
In addition, further
to our shareholders’ approval in July 2022, we granted (i) 6,516 time-based vesting RSUs to the chairman of the board of directors,
for a total compensation value of approximately $0.3 million, and (ii) 2,715 time-based vesting RSUs to each of our seven board members
who served on the board of directors at the time of such shareholder meeting (excluding the chairman and the chief executive officer),
for a total compensation value of approximately $0.87 million. In addition, during 2022, we granted an aggregate of 74,851 time-based
vesting RSUs and 123,502 PSUs, consisting of 112,279 base PSUs and 11,223 upside PSUs, to our
senior management described in Item 6A (excluding the chief executive officer) under the 2013 Plan, vesting over a three-year period,
for a total compensation value of approximately $9.35 million.
Our compensation policy
includes minimum shareholding guidelines pursuant to which: (i) the chief executive officer is required to own ordinary shares in a minimum
value that equals at least three times his annual base salary, commencing May 2024; and (ii) the directors and other executive officers
are required to own ordinary shares in a minimum value that equals at least 50% of their respective annual fee or annual base salary,
as applicable, commencing July 2025. The chief executive officer, other officers and directors have been provided five years from the
date our board of directors approved their respective minimum shareholding guideline to accumulate such minimum holdings until such specified
dates, and during such period they must retain at least 20% of the vested time-based RSUs that may be granted to them from the date the
respective guideline was approved by the board of directors and until the respective minimum holding is met.
For further information
concerning our employee equity plans and outstanding employee equity, see Note 15B to the consolidated financial statements 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. Our Board of Directors
is currently comprised of nine directors. Our directors are 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, 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.
59
External
Directors
The
Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least
two external directors. However, pursuant to the Companies Regulations (Relief for Companies Whose Shares are Registered for Trading Outside
of Israel) – 2000 (the “Relief Regulations”), an Israeli public company whose shares are listed on certain foreign stock
exchanges listed in the Relief Regulations, which include the NASDAQ Global Select Market, may elect to exempt itself from the requirement
to appoint external directors if it meets both of the following conditions:
| • |
The company does not have a controlling shareholder; and |
| • |
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 the 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 Relief Regulations, Israeli public companies that meet the above conditions may elect to comply with the applicable rules in the
foreign jurisdiction governing the appointment of independent directors and composition of audit and compensation committees as applicable
to domestic issuers in the foreign jurisdiction (which with respect to the Company are the Nasdaq Listing Rules and the rules under the
Securities Exchange Act of 1934 (the “Exchange Act”)) instead of complying with the Companies Law provisions relating to (i)
the appointment of external 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 quorum of the audit committee; and (iv) the
composition and meetings of the compensation committee. If a company has elected to avail itself from the requirement to appoint external
directors and at the time a director is appointed all members of the board of directors are of the same gender, a director of the other
gender must be appointed.
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 external directors and the composition of the audit committee and compensation committee under Israeli law.
Director
Independence
In
accordance with the exemption from the Israeli law requirement to have external directors serving on our Board of Directors, we comply
with the director independence requirements and the audit committee and compensation committee composition requirements under U.S. laws
(including applicable Nasdaq Stock Market rules) applicable to U.S. domestic issuers. In addition, the composition of our corporate governance
and nominating committee complies with the requirements of the Nasdaq Listing Rules applicable to U.S. domestic 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).
Our board of directors has made a determination of independence under the Nasdaq Listing Rules with respect to all directors, other than
Mr. Ellwanger, our Chief Executive Officer.
60
Audit
Committee
Our
audit committee currently consists of Mr. Yoav Z. Chelouche, Mr. Ilan Flato, Mr. Avi Hasson and Mrs. Iris Avner. Mr. Yoav Z. Chelouche
serves as the audit committee chairman.
Composition
requirements
The
Companies Law requires public companies to appoint an audit committee; however, following the Company’s determination to follow
the relief provided under the Relief Regulations, as described above, the composition of our audit committee is governed by the rules
set forth in the Nasdaq Listing Rules and the Exchange Act.
Under
Nasdaq Listing Rules, we are required to maintain an audit committee consisting of at least three independent directors (within the meaning
of the Exchange Act and Nasdaq 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 preparation of our or any of our subsidiaries
financial statements at any time during the prior three years.
The
Board 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:
| • |
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; |
| • |
pre-approving of audit and non-audit services and related fees and terms, to be provided by the independent
auditors; |
| • |
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; |
| • |
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); |
| • |
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; |
| • |
overviewing Company risk assessment and reviewing regulatory compliance; |
| • |
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; |
61
| • |
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; |
| • |
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 |
| • |
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. Ilan Flato, Mr. Avi Hasson and Mrs. Dana Gross. Mrs. Dana Gross serves as the compensation
committee chairperson.
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 the Exchange Act.
Under
the Nasdaq Listing Rules, we are required to maintain a compensation committee consisting of at least two directors, each of whom is an
independent director within the meaning of the Nasdaq Listing Rules.
The
Board 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:
| • |
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 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; |
| • |
approving transactions relating to the terms of office and employment of office holders (within the meaning
of the Companies Law), which require the approval of the compensation committee pursuant to the Companies Law; and |
| • |
reviewing and approving equity grants to non-executive employees under our equity-based incentive plans.
|
62
Corporate
Governance and Nominating Committee
Our
corporate governance and nominating committee is comprised of Mr. Kalman Kaufman, Mrs. Dana Gross, Ms. Michal Vakrat Wolkin and Yoav Z.
Chelouche. Mr. Kalman Kaufman serves as the corporate governance and nominating committee chairman.
Our
board of directors has adopted a corporate governance and nominating committee charter setting forth the responsibilities of the corporate
governance and nominating committee, which include:
| • |
overseeing and assisting our board of directors in reviewing and recommending nominees for election as
directors; |
| • |
assessing the performance of the members of our board of directors; |
| • |
reviewing and recommending to our board of directors the structure and members of committees of the board;
|
| • |
assisting our board of directors in carrying out its responsibilities related to chief executive officer
succession planning; |
| • |
reviewing and overseeing our corporate governance practices and communication plans for shareholder meetings
and to promote effective communication for shareholder meetings; and |
| • |
overseeing our commitment to ESG matters and advising our board of directors on such matters. |
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 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 arrangement 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, |
||||||||||||
|
2022 |
2021 |
2020 |
||||||||||
|
Process and product engineering, R&D and design |
1,067 |
1,045 |
994 |
|||||||||
|
Manufacturing and operations |
3,858 |
4,168 |
3,858 |
|||||||||
|
Manufacturing support |
410 |
386 |
386 |
|||||||||
|
Sales and marketing, finance & administration |
278 |
288 |
273 |
|||||||||
|
Total |
5,613 |
5,887 |
5,511 |
|||||||||
63
As
of December 31, 2022, we had 1,649 employees located in Israel, 1,501 employees located in the United States, 2,434 employees located
in Japan and 29 employees located in other countries in the Asia Pacific region and across Europe.
Other
than a special collective agreement relating to our Israeli employees regarding employer payments to pension funds of such employees,
as described below, our employees in Israel are not covered under a collective bargaining 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 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 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 that apply to our employees
principally concern the requirement for length of the workday and workweek, mandatory employer’s payments to employees’ pension
funds, annual recreation allowance, travel expenses payment and other conditions of employment.
There
have been attempts, including recently, by the Histadrut to organize and establish a representative labor union for our Israeli employees.
Under Israeli law, establishing a representative labor union requires at least one-third of the Israeli employees to join the Histadrut
and all employees would be liable to pay its membership fees. While the Histadrut’s attempts have not succeeded to date, if
a representative labor union would be established, we would need to conduct negotiations with the representative labor union and the Histadrut
regarding the terms of employment and benefits of the employees.
Under
the special collective bargaining agreement to which we are party relating to our Israeli employees, we are required to pay funds to an
employee’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. Tower’s Israeli employees pay an amount equal
to 6% of his or her wages to the insurance fund or pension fund, and Tower pays an additional 14.83% to 15.83% of 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 the special collective bargaining agreement, Section 14 to the Israeli Severance Pay Law, 5723-1963
applies to Tower, according to which the employer’s payments to severance pay is in lieu of payment of severance pay upon termination
of employment. Therefore, the monthly payments as mentioned above constitute the entire required payments for severance pay, and we are
not required to pay any additional severance upon termination of employment of our Israeli employees for the period during which Sections
14 applies.
A
portion of the employees at its Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement.
NPB 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-retirement medical plan for certain employees. Certain eligible union employees
who terminate employment are provided with a lump-sum benefit payment.
64
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 pays approximately 9% with employee
average match of 1% from employee base salary to the DC Plan. Such payment releases the employer from further obligation to any payments
upon termination of employment. The payment is remitted either to third party benefit 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, 2023, no individual director or senior manager beneficially owned (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) one percent or more of our ordinary shares and all directors and senior managers in the aggregate beneficially
owned 0.51% of our ordinary shares. As of March 31, 2023, our directors and senior managers held RSUs and PSUs for an aggregate of approximately
0.84 million of our ordinary shares. For information regarding our equity-based incentive plans, see Note 15B to our consolidated financial
statements included in this annual report.
F. DISCLOSURE
OF A REGISTRANT'S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
Not applicable.
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) of our ordinary shares
by any person who is known to us to beneficially own 5% or more of our issued and outstanding ordinary shares as of March 31, 2023 is
set forth below. The percentage of beneficial ownership of our ordinary shares is based on 110,054,848 million ordinary shares issued
and outstanding as of March 31, 2023.
The
voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares.
|
Ordinary Shares Beneficially Owned |
||||||||
|
Name of Beneficial Owner |
Number |
Percent (1) |
||||||
|
Clal Insurance Enterprises Holdings Ltd. (2) |
6,027,252 |
5.48 |
% | |||||
____________
| (1) |
In accordance with the rules of the SEC, assumes (i) the holder’s beneficial ownership of outstanding
ordinary shares and all ordinary shares that the holder has a right to purchase within 60 days of March 31, 2023; and (ii) no other exercisable
or convertible securities held by other holders has been exercised or converted into ordinary shares. |
| (2) |
Based solely upon and qualified in its entirety with reference to, a notice provided to the Company by
Clal Insurance Enterprises Holdings Ltd. as of March 31, 2023. |
As
of April 1, 2023, based on information provided to us by our transfer agent in the United States, there were a total of 12 holders of
record of our ordinary shares, of which 7 were registered with addresses in the United States. Such U.S. record holders were, as of such
date, the holders of record of approximately 70% 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 by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately
70% of our outstanding ordinary shares as of such date, including those held for the benefit of the Tel Aviv Stock Exchange clearing house
as a member of Depository Trust Company).
65
B. RELATED PARTY
TRANSACTIONS
Other
than executive and director compensation, executive officer employment arrangements, indemnification and exculpation arrangements and
directors’ and officers’ liability insurance policy, as discussed elsewhere in this annual report, for the years 2020, 2021
and 2022 and through the date of the filing of this annual report with the SEC, we have not been and are not a party to any transactions
in which any of our directors, executive officers or holders of 5% or more 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, see Note 18 to the consolidated financial statements included herein.
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 – Financial Statements”.
Legal
Proceedings
NPB
Co. leases its fabrication facilities and offices under an operational lease agreement that was initially in effect until March 2022 and
provided NPB Co. an option, at its sole discretion, to extend the lease for an additional five year period, which NPB Co. elected to exercise
for the lease to continue through March 2027. In the amendments to its lease, (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 agreement includes
certain obligations, including certain noise abatement actions in relation to the fabrication facility. The landlord has made claims
that NPB Co.’s noise abatement efforts are not adequate under the terms of the amended lease, and has requested a judicial declaration
that NPB Co. has committed material non-curable breaches of the lease and that, in accordance with the lease, the landlord would be entitled
to terminate the lease. NPB Co. does not agree and is disputing these claims. See “Item 3. Key Information—D. Risk Factors—Risks
Affecting Our Business— Risks relating to Fab 3 lease could harm business, operations and financial results.”
Dividend
Policy
We
currently intend to retain our cash balance, deposits, investments in marketable securities and future earnings to finance our growth
and acquisition strategy, as well as capacity growth and our ongoing operations, and we do not anticipate paying any dividends in the
foreseeable future. The Companies Law imposes restrictions on our ability to declare and pay dividends. In addition, the Merger Agreement
includes provisions with respect to dividends restrictions. If our board of directors will decide in the future 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 factors
that our directors may deem relevant. Payment of dividends may be subject to Israeli withholding taxes. See “Item 10. Taxation—E.
Israeli Taxation” for additional information.
66
B. SIGNIFICANT
CHANGES
No
significant change has occurred since December 31, 2022, 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”. If the Merger is completed, the Company will become a wholly
owned subsidiary of Parent, and the Company Shares will no longer be publicly traded and will be delisted from the NASDAQ Global Select
Market and the TASE.
ITEM 10.
ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not
applicable.
B. MEMORANDUM
AND ARTICLES OF ASSOCIATION
A
copy of our Articles of Association is attached as Exhibit 1.1 to this annual report, as amended by Exhibits 1.2-1.7 to this annual report.
Other than as disclosed below, the information called for by this Item is set forth in Exhibit 2.1 to this annual report and is incorporated
by reference into this annual report.
Registration Number and
Purposes
Our
registration number with the Israeli Companies Registrar is 520041997. Pursuant to Section 4 of our Articles of Association, our objective
is to engage in any lawful activity.
Shareholder
Meetings
Under
Israeli law and our Articles of Association, we are required to hold an annual general meeting of shareholders each year that must be
held no later than 15 months from the last annual meeting, upon at least 21 days’ prior notice to our shareholders.
A
special meeting may be convened by the Board of Directors, at such times as it deems fit, and it is required to convene a special meeting
at the request of (i) any two directors or twenty-five percent of the board members or (ii) one or more shareholders holding at least
5% of our issued share capital and 1% of the voting rights or one or more shareholders holding at least 5% of the voting rights. Shareholders
requesting a special meeting must submit their proposed resolution with their request. Within 21 days of receipt of the request, the Board
of Directors must convene a special meeting and provide notice for the meeting setting forth the date, time and place of the meeting,
which generally shall not be convened more than 35 days after the notice for the meeting. If the special meeting is not convened by the
Board of Directors as set forth above, the person who requested the Board to convene the meeting may convene the meeting, in the same
manner a special meeting is convened by the Board of Directors, provided that such meeting shall not be held after three months have elapsed
from the date the request was submitted.
67
Pursuant
to the Companies Law and our Articles of Association, resolutions regarding the following matters are required to be approved by our shareholders
at a general meeting.
| • |
amendments to our Articles of Association; |
| • |
appointment, terms of engagement and termination of engagement of our independent auditors; |
| • |
appointment and dismissal of our directors; |
| • |
approval of certain related party transactions and certain officer and director compensation; |
| • |
increase or reduction of authorized share capital in accordance with the provisions of the Companies
Law or the rights of shareholders or a class of shareholders; |
| • |
any merger; and |
| • |
the exercise of the Board of Directors’ powers by the general meeting, if the Board of Directors
is unable to exercise its powers and the exercise of any of its powers is essential for Tower’s proper management. |
Subject
to the provisions of the Companies Law and regulations promulgated thereunder, shareholders entitled to participate and vote at general
meetings are the shareholders of record on a date to be decided by the board of directors, which, as a company listed on an exchange outside
Israel, may be between four and 40 days prior to the date of the meeting.
The
Companies Law requires that a notice of any annual general meeting or special general meeting be provided to shareholders at least 21
days prior to the meeting and if the agenda of the meeting includes, among other things, the appointment or removal of directors, the
approval of transactions with office holders or interested or related parties, an approval of a merger or the approval of the compensation
policy, notice must be provided at least 35 days prior to the meeting.
2022 Annual General Meeting
of Shareholders
Each
of the proposals presented for approval at the 2022 Annual General Meeting of Shareholders of the Company held on July 21, 2022 (the “Meeting”)
were approved by the requisite vote of the Company’s shareholders in accordance with the Companies Law and the Company’s articles
of association, as described in the Notice and Proxy Statement for the Meeting that was attached as Exhibit 99.1 to a Report of Foreign
Private Issuer on Form 6-K furnished by the Company to the SEC on June 9, 2022.
Borrowing Powers
Our
Board of Directors may, from time to time, at its discretion, approve the receipt of credit by the Company in any amount and the discharge
thereof, in such manner as it deems fit, as well as the award of collateral to secure any such credit, of whatsoever type. The Board of
Directors may, from time to time, at its discretion, approve the issue of a series of debentures, including capital notes or bonds, and
including debentures, capital notes or bonds convertible or exercisable into shares, and determine the terms thereof, and to charge all
or any of our present or future property by way of a floating or fixed charge. In accordance with our Articles of Association, debentures,
capital notes, bonds or other securities, as aforesaid, may be issued at a discount, with a premium or in any other manner, with deferred
rights, special rights, privileges or other rights, all as determined by the board of directors at its discretion.
However,
for the period commencing on the date of execution of the Merger Agreement on February 15, 2022 and until the closing of the Merger (subject
to the Merger Agreement being in effect), the Company is subject to certain borrowing related limitations, including with respect to the
incurrence, prepayment, and guarantee of indebtedness for borrowed money and the issuance and sale of debt and/or convertible securities,
all as set forth in the Merger Agreement.
68
C. MATERIAL CONTRACTS
For
information regarding material contracts see Notes 10, 11, 12, 13, 14 and 15 to our consolidated financial statements for the year ended
December 31, 2022 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 TPSCo from Panasonic. Panasonic transferred its semiconductor wafer manufacturing process
and 8-inch and 12-inch capacity tools at its three fabs (Uozu E, Tonami CD and Arai E) to TPSCo, and entered into several agreements
with TPSCo for and in relation to the manufacture of products for Panasonic for a period of five years. In June 2014, Panasonic’s
shares in TPSCo were transferred, and its rights and obligations were assigned, to its wholly-owned subsidiary, PSCS. In March 2019, agreements
were signed between Tower, TPSCo and PSCS to extend the aforementioned agreements by an additional three-year period under certain
amended terms. In 2022, the aforementioned agreements were further renewed until March 2027 under certain amended terms. TPSCo
leases its fabrication facility buildings in Japan from NTCJ (formerly named PSCS, see below) under a capital lease contract until at
least March 2032.
In
September 2020, Panasonic sold its shares in PSCS to Nuvoton Technology Corp. (a Taiwan-based semiconductor company, majority-owned by
Winbond Electronics Corporation, a Taiwan-based specialty memory integrated circuits company), which assumed and continues performance
of the agreements previously signed between Tower, Panasonic, PSCS and/or TPSCo. Following the September 2020 sale, the registered name
of PSCS changed to Nuvoton Technology Corporation Japan (“NTCJ”). As part of the TPSCo agreements, at the request of
Panasonic (through PSCS/ NTCJ), the operations in Japan were reorganized and restructured such that the Uozu and Tonami facilities remain
unchanged while the Arai manufacturing factory, which manufactured products solely for NTCJ and did not serve Tower’s or TPSCo’s
foundry customers, ceased operations effective July 2022.
TSIT
Agreements
We
entered into a definitive agreement with ST in September 2021, to share a 300mm manufacturing fabrication facility in Agrate, Italy under
a collaborative arrangement, following which TSIT, a wholly-owned subsidiary of Tower, was incorporated. The fabrication facility is currently
under installation and qualification by ST. The parties will share the cleanroom space and the facility infrastructure, for the manufacture
of products for both ST and TSIT foundry customers.
Intel-Tower
Merger Agreement
On
February 15, 2022, we entered into the Merger Agreement with Parent, Merger Sub, and Intel, pursuant to which Merger Sub will merge with
and into the Company (and Merger Sub will cease to exist as a separate legal entity), and the Company will be the surviving company and
will become a wholly‑owned subsidiary of Parent and a subsidiary of Intel, subject to the terms and conditions set forth in the
Merger Agreement.
If
the Merger is completed, the Company will cease to be a publicly traded company, all outstanding Company Shares (except for any Company
Shares owned by the Company, Parent, Merger Sub or any of their direct or indirect subsidiaries or held in the Company’s treasury
(which will remain outstanding and no Merger Consideration or any other consideration will be delivered in exchange therefor)) will be
deemed to be transferred to Parent in exchange for the right to receive the Merger Consideration.
69
Subject
to the terms and conditions set forth in the Merger Agreement, at the time at which the Merger will become effective (the “Effective
Time”):
• Each
option to purchase Company Shares that is outstanding and unexercised immediately prior to the Effective Time and either (i) has fully
vested as of immediately prior to the Effective Time in accordance with its terms in effect as of the date of the Merger Agreement or
(ii) is held by a non‑employee director of the Company (subject to certain exceptions described in the Merger Proxy Statement) or
otherwise is held by an individual who is not a Continuing Employee (as defined in the Merger Agreement) (whether vested or unvested)
(each, a “Cashed‑Out Company Option”) will be canceled and converted into the right to receive a cash amount equal to
the product of (x) the number of Company Shares subject to such option, multiplied by (y) the excess, if any, of the Merger Consideration
over the applicable per share exercise price for such option. For each option to purchase Company Shares that is unvested and held by
a non-employee director who has served on the Company’s board of directors for less than five years as of the Effective Time, only
50% of such option will constitute a Cashed-Out Company Option, and the remainder of the option will be cancelled without consideration
at the Effective Time.
• Each
option to purchase Company Shares held by a Continuing Employee (as defined in the Merger Agreement) that is outstanding immediately prior
to the Effective Time and is not a Cashed‑Out Company Option (each, an “Assumed Option”), will be assumed by Intel and
converted into a stock option covering common shares of Intel having substantially the same terms and conditions as the Assumed Option,
including the applicable vesting schedule and payment timing, except that each such stock option will cover a number of common shares
of Intel equal to the product of the number of Company Shares that were issuable with respect to the Assumed Option immediately prior
to the Effective Time multiplied by the Exchange Ratio (as defined below), and rounded down to the nearest whole share, with an exercise
price per share equal to the exercise price per share of the Assumed Option immediately prior to the Effective Time, divided by the Exchange
Ratio and rounded up to the nearest whole cent and (ii) all references to the “Company” in the applicable equity plan and
award agreement will be references to Intel. The “Exchange Ratio” means a fraction, the numerator of which is the Merger Consideration
and the denominator of which is the volume weighted average price for a common share of Intel on NASDAQ Global Select Market, calculated
based on the ten consecutive trading days ending on the third complete trading day prior to (and excluding) the closing date of the Merger.
• Each
Company restricted share unit award (each, a “Company RSU”) that is outstanding immediately prior to the Effective Time and
either (i) has fully vested immediately prior to the Effective Time in accordance with its terms as in effect as of the date of the Merger
Agreement but has not yet been settled in Company Shares prior to the Effective Time or (ii) is held by a non‑employee director
of the Company (subject to certain exceptions in the Merger Proxy Statement) (each, a “Cashed‑Out Company RSU”), whether
or not vested, will be canceled and converted into the right to receive a cash amount equal to the product of (x) the number of Company
Shares subject to such Company RSU multiplied by (y) the Merger Consideration. For each Company RSU that is unvested and held by a non-employee
director who has served on the Company’s board of directors for less than five years as of the Effective Time, only 50% of such
Company RSU will constitute a Cashed-Out Company RSU, and the remainder of the Company RSU will be cancelled without consideration at
the Effective Time.
• Each
Company RSU held by a Continuing Employee that is outstanding immediately prior to the Effective Time and is not a Cashed‑Out Company
RSU (each, an “Assumed RSU”), will be assumed by Intel and converted into an Intel restricted stock unit award having substantially
the same terms and conditions as the Assumed RSU, including vesting schedule and payment timing, but covering a number of common shares
of Intel equal to the product of (x) the number of Company Shares that were issuable with regard to the Assumed RSU immediately prior
to the Effective Time multiplied by (y) the Exchange Ratio and rounding such product down to the nearest whole number and (ii) all references
to the “Company” in the applicable equity plan and award agreement will be references to Intel.
70
Immediately
prior to the Effective Time, the level at which the performance goals are satisfied with regard to each Company performance share unit
award (a “Company PSU”) that is outstanding immediately prior to the Effective Time will be determined in good faith and approved
by the Company’s board of directors (or a committee thereof, as applicable), which number shall be determined based on its determination
of the greater of (i) the average performance results for the two most recently completed years prior to the year in which the closing
of the Merger occurs, and (ii) actual performance as of the closing of the Merger (determined in accordance with the applicable Company
PSU award agreement) (such final amount, the “Performance Satisfied PSUs”). The resulting Performance Satisfied PSUs will
be assumed by Intel and automatically converted at the Effective Time into an Intel restricted stock unit award having substantially the
same terms and conditions as the Company PSU, other than the performance goals, but covering a number of common shares of Intel equal
to the product of (x) the number of Company Shares that were issuable with regard to the Performance Satisfied PSUs multiplied by (y)
the Exchange Ratio and rounding such product down to the nearest whole number and (ii) all references to the “Company” in
the applicable equity plan and award agreement will be references to Intel.
For
a more complete description of the treatment of Company equity awards, see the relevant sections in the Merger Proxy Statement.
Each
of the Company, Intel, Parent and Merger Sub have made customary representations, warranties and commitments in the Merger Agreement and
the agreement includes certain agreed principles in relation to the conduct of the Company’s business prior to the Closing, including
with respect to investments, divestitures, financing and human resource related policies and practices.
The
Merger Agreement may be terminated under certain circumstances, including if the Merger is not consummated by the Outside Date. If the
Merger Agreement is terminated under certain circumstances, including a termination by Parent as a result of a material breach of the
Merger Agreement’s no-solicitation obligations by the Company, the Company will be obligated to pay to Parent a termination fee
equal to $206 million in cash. If the Merger Agreement is terminated under certain circumstances involving the failure to obtain certain
regulatory approvals for the Merger, Parent will be obligated to pay the Company a termination fee equal to $353 million in cash.
Consummation
of the Merger is subject to the satisfaction of certain closing conditions, as specified in the Merger Agreement, including the receipt
of certain required regulatory approvals and the approval of Tower’s shareholders at the EGM, which shareholder approval was obtained
at the EGM held on April 25, 2022. Certain but not all approvals have been obtained. If the closing conditions are not
satisfied or waived and the Merger is not consummated by the Outside Date, either we or Intel may, under certain circumstances, choose
not to proceed with the Merger. There can be no assurance that any remaining required approval will be obtained or, in the event
any existing approval or waiver expires and we file for such approval or waiver again, that such approval or waiver will be obtained,
and the timing thereof cannot be predicted.
D. EXCHANGE CONTROLS
There
are currently no Israeli government laws, decrees, regulations or other legislation that restrict or affect our import or export of capital,
including the availability of cash and cash equivalents for use by us, or the remittance of dividends, interest or other payments to holders
of our securities that are non-residents of Israel, except under certain circumstances, for nationals of countries that are, or have been,
in a state of war with Israel.
71
E. TAXATION
The
discussion below 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 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
For
disclosure regarding Israeli and U.S. Federal income tax consequences of the Merger, see “U.S. Federal and Israeli Income Tax Consequences
of the Merger” beginning on page 49 of the Merger Proxy.
General
Corporate Tax
Israeli
companies are subject to corporate tax currently at the rate of 23%. However, the effective corporate tax rate payable by a company which
derives income from a “Preferred Enterprise” (as further discussed below) may be considerably less.
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. In the case of a “Substantial Shareholder”,
the tax rate is 30%.
According
to the definition of the term under the Israeli Income Tax Ordinance [New Version], 5721-1961 (the “Ordinance”), 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: (1) the right to vote, (2) the right to receive profits, (3) the right to nominate a director, an officer or any other
similar positions in the corporation, (4) the right to receive assets upon liquidation, or (5) the right to 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.
Individual
shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income (up to 47% and an additional
excess tax, if applicable, as described below).
Under
present Israeli tax legislation, the tax rate applicable to real capital gain derived by Israeli resident corporations from the sale of
shares of an Israeli company is the general Israeli corporate tax rate at a rate currently 23%.
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. In addition, the sale of the shares may be exempt from Israeli capital gains tax under the provisions
of an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority (“ITA”)
allowing for such an exemption). For example, the Convention between the Government of the United States of America and the Government
of Israel with respect to taxes on income, or the “US-Israel Tax Treaty,” generally exempts U.S. residents from Israeli capital
gains tax in connection with such sale, provided that (i) the U.S. resident owned, directly or indirectly, less than 10% of the Israeli
resident company’s voting power at any time within the 12-month period preceding such sale; (ii) the seller, if an individual, has
been present in Israel for less than 183 days (in the aggregate) during the taxable year; and (iii) the capital gain from the sale was
not generated through a permanent establishment of the U.S. resident in Israel.
72
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 shares at the rate of 25%.
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 shareholder is a “Substantial
Shareholder” at the time receiving the dividend or on any date in the 12 months preceding such 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 Benefited Enterprise or Preferred
Enterprise or Preferred Technology Enterprise under the Investment Law, the tax rate is generally not more than 20%. A different rate
may be provided pursuant to an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for
such reduced tax rate or an exemption).
Under
the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a U.S. resident may not, in general, exceed 25%. Where the recipient
is a U.S. resident 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, 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 enterprise’s geographic location in Israel, the specific year in which the enterprise received
approval from the Investment Center or the year it was eligible for Approved/Benefited/Preferred Enterprise status under the Investment
Law, and the benefits available at that time.
73
Tax
Benefits Prior to the 2005 Amendment
Prior
to an amendment to the Investment Law effective as of April 1, 2005, generally referred to as the 2005 Amendment, a capital investment
in eligible production facilities (or other eligible assets) could, upon application to the Investment Center of the Israeli Ministry
of Economy (formerly named the Ministry of Industry, Trade and Labor), generally referred to as the “Investment Center,” be
designated as an “Approved Enterprise” and accordingly, entitled to certain tax benefits under the Investment Law. Each certificate
of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial
scope of the investment and by the physical characteristics of the facility or the asset.
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 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 reduced and flat corporate tax rates of 7.5% (currently,
following the 2017 Amendment described below) or 16% in 2017 and thereafter, with the actual tax rates determined by the location of the
enterprise in Israel. The location of Tower's fabrication facilities in Israel (also referred to as “Zone A”) entitles it
to benefit from a tax rate of 7.5% on its Preferred Income. According to the 2011 Amendment, 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 ITA 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. |
74
“Preferred
Income” is defined as income from a 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 from one of the following (excluding certain income derives from intangible
assets which are not attributed to the enterprise's production): income from the sale of products of the Preferred Enterprise (including
components that were produced by other enterprises) and excluding certain products that are sourced from Israel’s natural resources);
income from the sale of semiconductors produced by other non-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 the Investment Center to be related to the production activity of the Preferred Enterprise;
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 provides approved
R&D services to foreign residents), which generally more than 25% of its business income is from export. As mentioned above, these
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 development Zone A and 8% if not located in a development Zone A.
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 according to the Investment Law provisions.
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 (although, if such dividends are subsequently distributed to individuals or a non-Israeli
company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply (subject to the
receipt in advance of a valid certificate from the ITA allowing for such reduced tax rate or an exemption)).
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/Benefited Enterprises.
As
Tower’s fabrication facilities located in Israel qualify as a Preferred Enterprise, it is entitled to the 7.5% preferred tax rate
described above with respect to its Preferred Income, and therefore, applies a 7.5% tax rate in determining its Israeli current tax provision,
deferred tax assets and liabilities in connection with its Preferred Income. Tower has not yet notified the Israeli tax authorities of
its election to apply the 7.5% tax rate to its Preferred Income since it is not required to do so while having significant accumulated
net operating losses for tax purposes, which are carried forward with no expiration date.
75
Tax
benefits under the 2017 Amendment
The
2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective as of
January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Preferred Technology Enterprises,” as described
below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The
2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise”
and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined
in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development Zone A. In
addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain
“Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible
Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval
from the Israel Innovation Authority (previously known as the Israeli Office of the Chief Scientist), which we refer to as the IIA.
The
2017 Amendment further provides that a technology company satisfying certain conditions (group turnover of at least NIS 10 billion) will
qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on its “Preferred
Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology
Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible
Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Enterprise
or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA. A Special Preferred
Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible
for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends
distributed to Israeli shareholders by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred
Technology Income, are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders subject
to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate of 20% or such lower rate as may be provided
in an applicable tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although,
if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower
rate as may be provided in an applicable tax treaty, will apply). If such dividends are distributed to a foreign company that holds solely
or together with other foreign companies 90% or more in the Israeli company and other conditions are met, the withholding tax rate will
be 4%.
As
we have accumulated unused tax carry forward losses, we have not examined yet the full impact of the 2017 Amendment and the degree to
which our facilities in Israel will qualify as a Preferred Technology Enterprise, the amount of Preferred Technology Income that we may
have and other benefits that we may receive from the 2017 Amendment. As of December 31, 2022, Tower does not qualify with the threshold
of group turnover of at least NIS 10 billion.
Tax
Benefits under the 2021 Amendment
An
amendment to the Investment Law that became effective on August 15, 2021, generally referred to as the 2021 Amendment, introduced a new
dividend distribution ordering rule to cause the distribution of earnings that were tax-exempt under the historical Approved or Beneficial
Enterprise regimes (Trapped Earnings), to be on a pro-rata basis from any dividend distribution, which is applicable to distributions
starting from August 15, 2021 and onwards. Accordingly, the corporate income tax claw-back will apply to any dividend distribution, as
long as the company has Trapped Earnings. As of December 31, 2022, Tower has no Trapped Earnings.
76
Excess
Tax
Subject
to the provisions of an applicable tax treaty, individuals who are subject to tax in Israel are also subject to an additional tax at the
rate of 3% on the annual taxable income (including, but not limited to, dividends, interest and capital gain) exceeding NIS 663,240 in
2022 and NIS 698,280 in 2023.
Estate
and Gift Tax
Israeli
law presently does not impose estate or gift taxes.
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; |
77
| • |
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
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. 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 % 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 a 121 day period beginning
60 days prior to the ex-dividend date, and meet other holding period requirements for qualified dividend income.
78
Dividends
paid by a foreign corporation will not qualify for the reduced rates, if 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.
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, a U.S. Holder generally will recognize capital gains 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.
79
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 United 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.
F. DIVIDENDS AND
PAYING AGENTS
Not
applicable.
G. STATEMENT BY
EXPERTS
Not
applicable.
80
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. 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.
The
SEC maintains an internet website that contains reports, proxy and information statements and other information about issuers, like us,
that file electronically with the SEC. Our filings with the SEC are available to the public through the SEC's website (http://www.sec.gov).
Our filings with the SEC are also available to the public on the Israel Securities Authority’s Magna website at http://www.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 website (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 this annual report or 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.
I. SUBSIDIARY INFORMATION
Not
applicable.
J.
ANNUAL REPORT TO SECURITY HOLDERS
Not
applicable.
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.
The
JP Loan (with an outstanding principal of approximately $83 million as of December 31, 2022) bears annual fixed interest of 1.95%, and
approximately $110 million of our subsidiaries’ equipment capital leases bear fixed interest at rates of approximately 2%. Therefore,
we are not subject to cash flow exposure, financing expenses or interest rate fluctuations with respect to the JP Loan or capital leases.
81
However,
in the event that market interest rates for similar debt decrease and are lower than the interest rate provided under our capital leases
or loans, our actual financing costs would have been higher than they otherwise would have been had our loans or capital leases provided
for interest at a floating interest rate. Assuming a 10% change in market interest rate, the effective impact on our capital leases and
loans would be immaterial.
Foreign
Exchange Risk
We
currently operate in three different regions: Japan, the United States and Israel. In addition, we have initial activities in Italy related
to the installation of machinery tools at the new fabrication facility that is being established in Agrate, Italy. The functional currency
of our entities in the United States, Israel and Italy is the USD. The functional currency of our subsidiary in Japan is the JPY. Our
expenses and costs are denominated mainly in USD, JPY and NIS, 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. Therefore, we are exposed to the risk of currency exchange
rate fluctuations in Israel and Japan. As the establishment of the facility in Italy progresses, we will be further exposed to the
Euro exchange rate fluctuations in relation to the USD regarding our costs denominated in Euro.
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, 2022, the USD appreciated against the NIS by 13.2%, as compared to 3.3% depreciation during
the year ended December 31, 2021.
The
fluctuation of the USD against the NIS can affect our results of 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 purchases and labor costs that are denominated in NIS, which may
lead to erosion in the profit margins. We use 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 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. In order to mitigate a portion of the net exposure to the USD /
JPY exchange rate, we engage in cylinder hedging transactions to contain the currency’s fluctuation within a pre-defined, fixed
range.
During
the year ended December 31, 2022, the USD appreciated against the JPY by 14.6%, as compared to 11.7% appreciation during the year ended
December 31, 2021. The net effect of USD appreciation 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.
Assuming
a 10% appreciation of the NIS against the USD on December 31, 2022 (from 3.52 NIS/$ to 3.20 NIS/$), the effective impact on our quarterly
Israeli expenses would be higher expenses by approximately $4 million, which would partially be offset by the net impact of the hedging
executed using the above-described cylinder transactions.
Assuming
a 10% appreciation of the JPY against the USD on December 31, 2022 (from 132.0 JPY/$ to 120.0 JPY/$), the effective impact on our quarterly
statement of operating results would be lower profitability (higher expenses, net of higher revenue) by approximately $5 million, which
would be partially offset by the net impact of the hedging using the above-described cylinder transactions and our natural hedging.
82
As
of December 31, 2022, we are subject to currency exchange rate fluctuations of the JPY against the USD in connection with the following
JPY-denominated debt financings: (i) approximately $83 million of TPSCo’s loans bearing a fixed interest rate of 1.95% per annum;
(ii) approximately $94 million of equipment capital lease agreements with an annual interest rate of approximately 1.85%; and (iii)
approximately $16 million of equipment capital lease agreements with an annual interest rate of approximately 1.95%. However, as of December
31, 2022, we had approximately $110 million of cash and cash equivalents and $10 million of short-term deposits, held in JPY currency
accounts and deposits, partially mitigating the above JPY debt exposure. Under the current terms of our JPY cash, cash equivalent and
debt financing, we have determined that an assumed 10% appreciation of the JPY against the USD rate as of December 31, 2022 (from 132.0
JPY/$ to 120.0 JPY/$), would not have a material effect on our balance sheet as of December 31, 2022.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not
applicable.
PART
II
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, 2022.
83
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, 2022 has been audited by Brightman Almagor Zohar
& Co., Certified Public Accountants, a Firm in the Deloitte Global Network, 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
16. [RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our
board of directors has determined that all four members of our audit committee, Mr. Ilan Flato, Mr. Yoav Chelouche, Mr. Avi Hasson 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 directors, officers and employees of our Company and 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.towersemi.com under “About Tower”. The information contained on our website is not incorporated by reference
in this annual report.
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:
|
2022 |
2021 |
|||||||
|
(US dollars in Thousands) |
||||||||
|
Audit Fees (1) |
819 |
835 |
||||||
|
Audit-Related Fees (2) |
58 |
9 |
||||||
|
Tax Fees (3) |
1 |
2 |
||||||
|
All Other Fees |
-- |
-- |
||||||
|
878 |
846 |
|||||||
(1) Audit
Fees consist of fees for professional services rendered for the audit of our financial statements and our subsidiaries financial statements,
services rendered in connection with statutory and regulatory filings and engagements (including audit of our internal control over financial
reporting) and reviews of our interim financial results submitted on Form 6-K.
(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 our SEC filings and reporting standards and out of pocket expenses
reimbursement.
84
(3) Tax
fees consist of fees for tax compliance services and tax returns services.
In
accordance with our audit committee charter, which requires audit committee pre-approval of audit and non-audit services to be provided
by the independent auditors and related fees and terms, all of the services for which audit related fees and tax fees were paid in 2022
and 2021 to our independent auditors were pre-approved by the audit committee.
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 Listing Rules. We 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, our audited financial statements are available to our shareholders at our offices
and will only mail such reports to shareholders upon request. |
| • |
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, 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”). |
85
| • |
Director nomination process. While our corporate governance and nominating 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 corporate governance and nominating 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 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 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 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 chief executive officer with
respect to his or her compensation, or transactions with officers 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 for office holders (within
the meaning of the Companies Law) (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 we will be unable to grant options to our 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 the NASDAQ Global
Select Market. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq
Listing Rules. 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 the Nasdaq Listing Rules applicable to domestic issuers.
For more information, see “Item 3. “Key Information – D. Risk Factors-Risks Related to the Company – “We
are a foreign private issuer and, as a result, the public reporting and disclosure rules to which we are subject, and the corporate governance
practices that we are permitted to follow, may provide less protection to our investors than is accorded to investors under rules applicable
to domestic U.S. issuers”.
86
ITEM
16H. MINE SAFETY DISCLOSURE
Not
applicable.
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not
applicable.
ITEM 16J.
INSIDER TRADING POLICIES
Not
applicable.
PART
III
ITEM 17.
FINANCIAL
STATEMENTS
Not
applicable.
ITEM 18. FINANCIAL
STATEMENTS
Our
consolidated financial statements and related auditors’ report for the year ended December 31, 2022 are included in this annual
report beginning on page F-1.
ITEM 19.
EXHIBITS
| 1.1 |
Articles
of Association of the Company, approved by shareholders on November 14, 2000, as amended (incorporated by reference to Exhibit 3.1 of
the Company’s Registration Statement on Form F-1, File No. 333-126909). |
87
88
| #101 |
The
following financial information from Tower Semiconductor Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2022,
formatted in XBRL (eXtensible Business Reporting Language): |
|
Consolidated Balance Sheets as of December 31, 2022 and
2021; |
|
Consolidated Statements of Operations for the years ended
December 31, 2022, 2021 and 2020; |
|
Consolidated Statements of Changes in Shareholders’
Equity for the years ended December 31, 2022, 2021 and 2020; |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2022, 2021 and 2020; and |
|
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 the Company is not subject to liability under these sections. |
| #104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document)
|
|
#Filed herewith |
89
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 on its behalf.
|
TOWER
SEMICONDUCTOR LTD.
By:
/s/ Russell C. Ellwanger
Russell
C. Ellwanger
Chief
Executive Officer
May
16, 2023 |
|
90
TOWER SEMICONDUCTOR LIMITED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
TOWER SEMICONDUCTOR LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID
|
F-2 - F-5
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
|
|
F-10 - F-11
|
|
|
F-12 - F-54
|
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, 2022 and 2021, 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, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 April 30, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
F - 2
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 a multinational tax environment. The income tax provision is an estimate determined based on current enacted tax laws and tax rates at each of its geographic locations with the use of acceptable allocation methodologies based upon the Company’s organizational structure, the Company’s operations and business mode of work, and result in applicable local taxable income attributable to those locations. For the year-ended December 31, 2022, the consolidated provision for income taxes was $25.5 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 charges between the sites located in different tax jurisdictions, 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 external 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 external 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 Firm in The Deloitte Global Network
Certified Public Accountants
A Firm in The Deloitte Global Network
Tel Aviv, Israel
April 30, 2023
April 30, 2023
We have served as the Company's auditor since 1993.
F - 3
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, 2022, 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, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated April 30, 2023, expressed an unqualified opinion on those consolidated financial statements.
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.
F - 4
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.
Certified Public Accountants
A Firm in The Deloitte Global Network
April 30, 2023
F - 5
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
(dollars and shares in thousands)
|
|
As of
|
||||||||
|
December 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Short-term deposits
|
|
|
||||||
|
Marketable securities (*)
|
|
|
||||||
|
Trade accounts receivable
|
|
|
||||||
|
Inventories
|
|
|
||||||
|
Other current assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
LONG-TERM INVESTMENTS
|
|
|
||||||
|
PROPERTY AND EQUIPMENT, NET
|
|
|
||||||
|
INTANGIBLE ASSETS, NET
|
|
|
||||||
|
GOODWILL
|
|
|
||||||
|
DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET
|
|
|
||||||
|
TOTAL ASSETS
|
$
|
|
$
|
|
||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Current maturities of long-term debt
|
$
|
|
$
|
|
||||
|
Trade accounts payable
|
|
|
||||||
|
Deferred revenue and customers' advances
|
|
|
||||||
|
Employee related liabilities
|
|
|
||||||
|
Other current liabilities
|
|
|
||||||
|
Total current liabilities
|
|
|
||||||
|
LONG-TERM DEBT
|
|
|
||||||
|
LONG-TERM CUSTOMERS' ADVANCES
|
|
|
||||||
|
EMPLOYEE RELATED LIABILITIES
|
|
|
||||||
|
DEFERRED TAX AND OTHER LONG-TERM LIABILITIES
|
|
|
||||||
|
TOTAL LIABILITIES
|
|
|
||||||
|
Ordinary shares of NIS
|
|
|
||||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
Additional paid-in capital
|
|
|
||||||
|
Cumulative stock based compensation
|
|
|
||||||
|
Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Accumulated deficit
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
|
Treasury stock, at cost -
|
(
|
)
|
(
|
)
|
||||
|
THE COMPANY'S SHAREHOLDERS' EQUITY
|
|
|
||||||
|
Non-controlling interest
|
(
|
)
|
(
|
)
|
||||
|
TOTAL SHAREHOLDERS' EQUITY
|
|
|
||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
|
$
|
|
||||
(*) Marketable securities are available-for-sale securities; the amortized cost of such marketable securities of $181,247 and $189,543 as of December 31, 2022 and December 31, 2021, respectively, is presented net of an immaterial allowance for credit losses.
See notes to consolidated financial statements.
F - 6
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(dollars and shares in thousands, except per share data)
|
|
Year ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
REVENUES
|
$
|
|
$
|
|
$
|
|
||||||
|
COST OF REVENUES
|
|
|
|
|||||||||
|
GROSS PROFIT
|
|
|
|
|||||||||
|
OPERATING COSTS AND EXPENSES:
|
||||||||||||
|
Research and development
|
|
|
|
|||||||||
|
Marketing, general and administrative
|
|
|
|
|||||||||
|
Restructuring gain from sale of machinery and equipment, net
|
(
|
)
|
|
|
||||||||
|
Restructuring expense
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
OPERATING PROFIT
|
|
|
|
|||||||||
|
FINANCING INCOME (EXPENSE), NET
|
(
|
)
|
(
|
)
|
|
|||||||
|
OTHER INCOME (EXPENSE), NET
|
(
|
)
|
|
(
|
)
|
|||||||
|
PROFIT BEFORE INCOME TAX
|
|
|
|
|||||||||
|
INCOME TAX EXPENSE, NET
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
NET PROFIT
|
|
|
|
|||||||||
|
Net income attributable to non-controlling interest
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
NET PROFIT ATTRIBUTABLE TO THE COMPANY
|
$
|
|
$
|
|
$
|
|
||||||
|
BASIC EARNINGS PER SHARE
|
||||||||||||
|
Earnings per share
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average number of shares
|
|
|
|
|||||||||
|
DILUTED EARNINGS PER ORDINARY SHARE:
|
||||||||||||
|
Earnings per share
|
$
|
|
$
|
|
$
|
|
||||||
|
Net profit used for diluted earnings per share
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average number of ordinary shares outstanding
|
||||||||||||
|
used for diluted earnings per share
|
|
|
|
|||||||||
|
See notes to consolidated financial statements.
|
F - 7
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
(dollars in thousands)
|
|
Year ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
Net profit
|
$
|
|
$
|
|
$
|
|
||||||
|
Other comprehensive income, net of tax:
|
||||||||||||
|
Foreign currency translation adjustment
|
(
|
)
|
(
|
)
|
|
|||||||
|
Change in employees plan assets and benefit obligations, net of taxes
|
(
|
)
|
|
(
|
)
|
|||||||
|
Unrealized loss on derivatives
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Comprehensive income
|
|
|
|
|||||||||
|
Comprehensive loss (income) attributable to non-controlling interest
|
|
|
(
|
)
|
||||||||
|
Comprehensive income attributable to the Company
|
$
|
|
$
|
|
$
|
|
||||||
|
See notes to consolidated financial statements.
|
F - 8
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
(dollars and share data in thousands)
|
|
THE COMPANY'S SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||||||||||
|
Accumulated
|
Foreign
|
|||||||||||||||||||||||||||||||||||||||||||
|
Ordinary
|
Ordinary
|
Additional
|
other
|
currency
|
Non
|
|||||||||||||||||||||||||||||||||||||||
|
shares
|
shares
|
paid-in
|
Unearned
|
comprehensive
|
translation
|
Accumulated
|
Treasury
|
Comprehensive
|
controlling
|
|||||||||||||||||||||||||||||||||||
|
issued
|
amount
|
capital
|
compensation
|
income (loss)
|
adjustments
|
deficit
|
stock
|
income
|
interest
|
Total
|
||||||||||||||||||||||||||||||||||
|
BALANCE AS OF JANUARY 1, 2020
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||||||||||||||
|
Changes during the year ended December 31, 2020:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Exercise of options and RSUs
|
|
|
(
|
)
|
|
|||||||||||||||||||||||||||||||||||||||
|
Employee stock-based compensation
|
|
|
||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect upon adoption of ASC 326
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Profit
|
|
$
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
|
Change in employees plan assets and benefit obligations
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||
|
Unrealized loss on derivatives
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
$
|
|
||||||||||||||||||||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2020
|
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|||||||||||||||||||||||||||||
|
Changes during the year ended December 31, 2021:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Exercise of options and RSUs
|
|
|
(
|
)
|
|
|||||||||||||||||||||||||||||||||||||||
|
Employee stock-based compensation
|
|
|
||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Profit
|
|
$
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||
|
Change in employees plan assets and benefit obligations
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
|
Unrealized loss on derivatives
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
$
|
|
||||||||||||||||||||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2021
|
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|||||||||||||||||||||||||||||
|
Changes during the year ended December 31, 2022:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Proceeds from an investment in a subsidiary
|
|
|
||||||||||||||||||||||||||||||||||||||||||
|
Exercise of options and RSUs
|
|
|
(
|
)
|
|
|||||||||||||||||||||||||||||||||||||||
|
Employee stock-based compensation
|
|
|
||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Profit
|
|
$
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||
|
Change in employees plan assets and benefit obligations
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||
|
Unrealized loss on derivatives
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
$
|
|
||||||||||||||||||||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||||||||||||||||||
|
OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF DECEMBER 31, 2022
|
|
|||||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
F - 9
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(dollars in thousands)
|
|
Year ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
CASH FLOWS - OPERATING ACTIVITIES
|
||||||||||||
|
Net profit for the period
|
$
|
|
$
|
|
$
|
|
||||||
|
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
|
|
|
|
|||||||||
|
Effect of exchange rate differences and fair value adjustment
|
|
|
|
|||||||||
|
Other expense (income), net
|
|
(
|
)
|
|
||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Trade accounts receivable
|
(
|
)
|
|
(
|
)
|
|||||||
|
Other current assets
|
|
(
|
)
|
(
|
)
|
|||||||
|
Inventories
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Trade accounts payable
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Deferred revenue and customers' advances
|
(
|
)
|
|
(
|
)
|
|||||||
|
Employee related liabilities and other current liabilities
|
|
|
|
|||||||||
|
Long-term employee related liabilities
|
|
(
|
)
|
|
||||||||
|
Deferred tax, net and other long-term liabilities
|
|
(
|
)
|
|
||||||||
|
Net cash provided by operating activities
|
|
|
|
|||||||||
|
CASH FLOWS - INVESTING ACTIVITIES
|
||||||||||||
|
Investments in property and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds related to sale and disposal of property and equipment
|
|
|
|
|||||||||
|
Proceeds from investment realization
|
|
|
|
|||||||||
|
Investments in other assets
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Deposits and marketable securities, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
CASH FLOWS - FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds from an investment in a subsidiary
|
|
|
|
|||||||||
|
Exercise of options, net
|
|
|
|
|||||||||
|
Proceeds from loans
|
|
|
|
|||||||||
|
Loans repayment
|
|
(
|
)
|
|
||||||||
|
Principal payments on account of capital lease obligation
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Debentures repayment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGE
|
(
|
)
|
(
|
)
|
|
|||||||
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(
|
)
|
(
|
)
|
|||||||
|
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
|
|||||||||
|
CASH AND CASH EQUIVALENTS - END OF PERIOD
|
$
|
|
$
|
|
$
|
|
||||||
|
See notes to consolidated financial statements.
|
F - 10
|
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(dollars in thousands)
|
|
Year ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
NON-CASH ACTIVITIES:
|
||||||||||||
|
Investments in property and equipment
|
$
|
|
$
|
|
$
|
|
||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash received during the period from interest
|
$
|
|
$
|
|
$
|
|
||||||
|
Cash paid during the period for interest
|
$
|
|
$
|
|
$
|
|
||||||
|
Cash paid for (received from) income taxes, net during the period
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
See notes to consolidated financial statements.
|
F - 11
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 1: DESCRIPTION OF BUSINESS AND GENERAL
The 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) Tower Semiconductor NPB Holdings, Inc. (formerly named “Jazz US Holdings, Inc.”) and its wholly-owned subsidiary, Tower Semiconductor Newport Beach, Inc. (formerly named “Jazz Semiconductor, Inc.”), an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices (Tower Semiconductor NPB Holdings, Inc. and Tower Semiconductor Newport Beach, Inc. collectively referred to herein as “TSNB”); and (2) Tower Semiconductor San Antonio, Inc. (formerly named “TowerJazz Texas, Inc.”) (“TSSA”); (ii) its 51 % owned subsidiary, Tower Partners Semiconductor Co., Ltd. (formerly named “TowerJazz Panasonic Semiconductor Co. Ltd.”) (“TPSCo”), an independent semiconductor foundry which operated three semiconductor manufacturing facilities located in Tonami, Uozu and Arai (one of which, Arai facility ceased its operations in July 2022, see Note 14B2), in Hokuriku Japan. The other 49 % of TPSCo’s shares are held by Nuvoton Technology Corporation Japan (“NTCJ”), formerly named “Panasonic Semiconductor Systems Co., Ltd.” (“PSCS”). PSCS’ name changed to NTCJ following the purchase of PSCS by Nuvoton Technology Corporation (“Nuvoton”) from Panasonic Corporation in September 2020; and (iii) its wholly-owned subsidiary Tower Semiconductor Italy S.r.l. (“TSIT”), incorporated during 2021 following the collaborative arrangement signed in June 2021 with ST Microelectronics S.r.l (“ST”) to share manufacturing capacity that is planned to be established in a new 300 mm fabrication facility in Agrate, Italy. During 2022, TSIT started installation of certain tools in the Agrate facility and the development of certain processes and technologies that it expects to transfer to the Agrate facility. As of December 31, 2022, the operations in Italy have not commenced (see Note 14E).
On February 15, 2022, Intel Corporation (“Intel”) and Tower announced the signing of a definitive agreement under which Intel will acquire all of Tower’s outstanding Ordinary Shares for cash consideration of $53 per share. The transaction was approved by Tower’s shareholders and is subject to certain regulatory approvals and customary closing conditions.
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 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”) to integrated device manufacturers (“IDMs”) and fabless companies that require capacity. To provide multi-fab sourcing and expanded capacity for its customers, as of December 31, 2022, the Company operates two manufacturing facilities in Israel (150mm and 200mm), two in the U.S. (200mm) and two in Japan through TPSCo (one 200mm and one 300mm).
Tower’s ordinary shares are traded on the NASDAQ Global Select Market and on the Tel-Aviv Stock Exchange (“TASE”) under the symbol TSEM.
In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a global pandemic. Since then, the impact of the COVID-19 pandemic continues to evolve as well as the global responses to curb its spread and to treat its impact, which have caused disruption to certain business sectors globally, resulting in economic and other difficulties in many regions worldwide, including supply chain shortages, absence of workforce due to infected and/or quarantined employees and service providers, as well as extended lead times for ordered equipment and supplies. To date, the COVID-19 pandemic has not had a material adverse effect on the Company's business operations, its financial position or its financial stability.
F - 12
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| A. |
Basis of Presentation
|
The Company’s consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“US GAAP”).
| B. |
Use of Estimates in Preparation of Financial Statements
|
The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
| C. |
Principals 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.
| D. |
Cash and Cash Equivalents
|
Cash and cash equivalents consist of cash, bank deposits, money market funds and short-term investments with insignificant interest rate risk and original maturities of three months or less.
| E. |
Short Term Interest-Bearing Deposits
|
Short-term deposits include bank deposits with original maturities greater than three months and with remaining maturities of less than one year. Such deposits are presented at cost, including accrued interest, which approximates their fair value.
| F. |
Marketable Securities
|
The Company accounts for its investments in grade debt securities in accordance with ASC 320 "Investments - Debt and Equity 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.
F - 13
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company classifies its marketable securities as "available-for-sale", as the Company intends to hold them for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity, mix of the Company’s assets and liabilities, liquidity needs and other similar factors. Securities classified as available for sale are measured at fair value, based on quoted market prices. Gains and losses are recognized on a specific identification basis, in the Company's consolidated statements of operations. Unrealized gains and losses are recorded in (i) other comprehensive income (loss) in the Company’s shareholders’ equity report in periods the Company has no specific need and/ or plan to use cash by selling such securities, or (ii) in the statement of operations as financing expenses (income) in periods the Company has a specific need and/ or plan to use cash by selling such securities.
The Company assessed the available-for-sales debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by expected credit losses in accordance with ASC 326, "Financial Instruments - Credit Losses".
Allowance for credit losses is recognized as a charge in financing income (expense), net, on the consolidated statements of operation, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in shareholders' equity.
The Company concluded that the current expected credit losses on its available-for-sale investment portfolio were immaterial.
| G. |
Trade Accounts Receivable – Allowance for Expected Credit Loss
|
The Company maintains an allowance based on specific analysis of each customer account receivable’s aging, assessment of its related risk and ability of the customer to make the required payment. In addition, in accordance with ASC 326, "Financial Instruments - Credit Losses", an allowance is maintained for such estimated forward-looking losses (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers. Trade accounts receivables are written off using this allowance when it becomes evident that collection will not occur. Credit is extended to customers satisfying pre-defined credit criteria.
The total allowance for expected credit losses was $3,460 and $946 as of December 31, 2022 and 2021, respectively.
| H. |
Inventories
|
Inventories are stated at the lower of aggregate cost or net realizable value. If inventory costs exceed expected net realizable value, the Company writes-down the difference between the cost and the expected net realizable value. Cost of raw materials is determined mainly on the basis of the weighted average moving price per unit. Work in progress is measured at production costs including acquisition costs, processing costs and other costs incurred in bringing the inventories to their present location and condition in the production line.
F - 14
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| 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”, the Company may elect between fair value and a 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. Any adjustments resulting from impairments and/or observable price changes are recorded under “other income (expense), net” in the consolidated statements of operations. See also Note 2L below.
| J. |
Property and Equipment
|
The Company accounts for property and equipment in accordance with Accounting Standards Codification ASC 360 “Accounting for the Property, Plant and Equipment”. 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 facilities and equipment, as well as technology transfer.
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 Note 2L below.
Property and equipment also include assets under capital leases, which are depreciated according to their applicable useful life.
| K. |
Intangible Assets and Goodwill
|
The Company accounts for intangible assets and goodwill in accordance with ASC 350 “Intangibles-Goodwill and Other”. Intangible assets include the values assigned to the intangible assets as part of the purchase price allocation made at the time of acquisition. Intangible assets are amortized over the expected estimated economic life commonly used in the industry. Goodwill is not amortized and subject to impairment testing. Impairment charges on intangibles or goodwill, if needed, are determined based on the policy outlined in Note 2L below.
F - 15
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| L. |
Impairment of Assets
|
Impairment of Property, Equipment and Intangible Assets
The Company reviews long-lived assets and intangible assets on a periodic basis, as well as when such review is required based upon relevant circumstances, to determine whether events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, considering the undiscounted cash flows expected from them. If applicable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10 “Property, Plant and Equipment”. As of December 31, 2022, the Company concluded there was no impairment to its long-lived assets and intangible assets.
Impairment of Goodwill
The Company operates in one reporting unit. The Company performs a qualitative analysis when testing goodwill for impairment. A qualitative goodwill impairment test is performed when the fair value of a reporting unit historically has significantly exceeded the carrying value of its net assets and based on current operations is expected to continue to do so. Otherwise, the Company is required to conduct a quantitative impairment test and estimate the fair value of the reporting unit using a combination of an income approach based on discounted cash flow analysis and a market approach based on market multiples. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference. As of December 31, 2022, the Company performed a qualitative impairment test for its reporting unit and concluded there was no impairment of goodwill.
Impairment of Investment in Privately Held Companies
Investments in privately held companies accounted for using the measurement alternative are subject to periodic impairment reviews. Based on ASC 321-10-35-3, the Company’s impairment analysis considers qualitative factors to evaluate whether the investment is impaired. For the year ended December 31, 2022, the Company recorded an impairment of $6,978 on account of one of its investments which was fully impaired.
| M. |
Leases
|
Effective January 1, 2019, the Company adopted ASC 842 “Leases” using the modified retrospective transition method and recognize a right-of-use asset (“ROU”) and lease liability for all operating and capital leases with a term greater than twelve months upon lease arrangement inception.
F - 16
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the 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. Because most of the Company’s leases do not provide an implicit rate, the Company's incremental borrowing rate is used based on the information available at the 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. For additional information, see Notes 11D and 11E.
| N. |
Revenue Recognition
|
The Company follows ASC 606 “Revenue from Contracts with Customers“ and recognizes revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
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. Most of the Company’s sales are achieved through the effort of its direct sales and business development force.
Wafer sales typically contain a single performance obligation that is fulfilled on the date of delivery and recognized at a point in time, which is upon shipment of the Company’s products to unaffiliated customers, depending on shipping terms stipulated in the contract. Accordingly, control of the products transfers to the customer in accordance with the transaction's shipping terms. Taxes imposed by governmental authorities, such as sales taxes or value-added taxes, are excluded from net sales.
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 occurs over time when customers receive 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, such as participation in research and development programs, are offset from 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.
F - 17
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| P. |
Income Taxes
|
The Company accounts for income taxes using an asset and liability approach as prescribed in ASC 740-10 “Income Taxes”. 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 measured using the enacted tax rates anticipated (under applicable law as of the balance sheet date) to apply when the deferred taxes are expected to be paid or realized. Deferred tax assets and liabilities, as well as any related valuation allowance, are classified as noncurrent items on the balance sheets.
The Company evaluates the 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. 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. The Company considers all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities and deferred tax assets and projected future taxable income.
A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on all available evidence.
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 per share are calculated in accordance with ASC 260, “Earnings Per Share” 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.
F - 18
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| R. |
Comprehensive Income
|
In accordance with ASC 220 “Comprehensive Income”, comprehensive income 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 (“OCI”) represents gains and losses that are included in comprehensive income but excluded from net profit.
| S. |
Functional Currency and Exchange Rate Results
|
The currency of the primary economic environment in which Tower, TSSA, TSNB and TSIT 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 Currency 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 statements of operations of TPSCo have been translated using the average exchange rate for the reported period. The resulting translation adjustments are charged or credited to OCI.
| T. |
Stock-based Compensation
|
The Company applies the provisions of ASC Topic 718 “Compensation - Stock Compensation”, under which employees’ share-based equity awards (mostly restricted stock units and performance unit shares) are recognized based on the grant-date fair values.
The compensation costs are recognized using the graded vesting attribution method based on the vesting terms of each unit included in the award resulting in an accelerated recognition of compensation costs.
F - 19
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| U. |
Fair Value Measurements of Financial Instruments
|
ASC 820, "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 carrying value of the Company’s financial instruments of cash, bank deposits, account receivables, payables and accrued liabilities, approximate their current fair values in accordance with 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 such as marketable securities and investments in privately-held companies.
F - 20
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| V. |
Derivatives and Hedging
|
Effective January 1, 2019, the Company adopted ASU 2017-12, “Derivatives and Hedging (“Topic 815”): Targeted Improvements to Accounting for Hedge Activities”. The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that are designated and qualify as cash flow hedges, the derivative's gain or loss is initially reported as a component of OCI and is subsequently reclassified into earnings when the hedged exposure affects earnings, in the same line item as the underlying hedged item on the consolidated statements of earnings.
Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items.
| W. |
Recently Adopted Accounting Pronouncements
|
(i) In March 2020, the FASB issued ASU No. 2020-04,” Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional guidance to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and London Interbank Offered Rate (“LIBOR”). The guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform - Scope," which clarified the scope and application of the original guidance. This guidance is effective immediately and is only available through December 31, 2022. In December 2022 the FASB issued ASU No. 2022-06,” Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, which defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. This guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
| X. |
Recently Issued Accounting Pronouncements Not Yet Adopted
|
The Company does not expect recently issued accounting standards or interpretations to have a material impact on the Company’s financial position, results of operations, cash flows or financial statement disclosures.
F - 21
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 3: INVENTORIES
Inventories consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
$
|
|
$
|
|
|||||
Work in process and finished goods are presented net of aggregate write-downs to net realizable value of $8,192 and $2,775 as of December 31, 2022 and 2021, respectively.
NOTE 4: OTHER CURRENT ASSETS
Other current assets consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Direct and indirect Tax receivables
|
$
|
|
$
|
|
||||
|
Prepaid expenses
|
|
|
||||||
|
Receivables from Hedging transactions - see Notes 10, 12A and 12D
|
|
|
||||||
|
Other receivables
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 5: LONG-TERM INVESTMENTS
Long-term investments consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Severance-pay funds
|
$
|
|
$
|
|
||||
|
Long-term bank deposits
|
|
|
||||||
|
Investments in privately held companies
|
|
|
||||||
|
$
|
|
$
|
|
|||||
F - 22
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 6: PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Original cost: (*)
|
||||||||
|
Land and Buildings, including facility infrastructure
|
$
|
|
$
|
|
||||
|
Machinery and equipment
|
|
|
||||||
|
$
|
|
$
|
|
|||||
|
Accumulated depreciation:
|
||||||||
|
Buildings, including facility infrastructure
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Machinery and equipment
|
(
|
)
|
(
|
)
|
||||
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
$
|
|
$
|
|
|||||
(*) Original cost includes ROU assets under capital lease in the amount of $223,716 and $211,790 as of December 31, 2022 and 2021, respectively. The depreciation expense of such assets amounted to $14,215 and $14,037 for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022 and 2021, the original cost of land, buildings, machinery and equipment was reflected net of investment grants in the aggregate amount of approximately $285,000
NOTE 7: INTANGIBLE ASSETS, NET
Intangible assets consist of the following as of December 31, 2022:
|
Details
|
Useful life
(years)
|
Cost
|
Accumulated Amortization
|
Net
|
|||||||||||
|
Technologies
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Facilities’ lease
|
|
|
(
|
)
|
|
||||||||||
|
Customer relationships
|
|
|
(
|
)
|
|
||||||||||
|
Total identifiable intangible assets
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
Intangible assets consist of the following as of December 31, 2021:
|
Details
|
Useful life
(years)
|
Cost
|
Accumulated Amortization
|
|
Net |
||||||||||
|
Technologies
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Facilities’ lease
|
|
|
(
|
)
|
|
||||||||||
|
Customer relationships
|
|
|
(
|
)
|
|
||||||||||
|
Total identifiable intangible assets
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
F - 23
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 8: DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET
Deferred tax and other long-term assets, net consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Deferred tax asset (see Note 19)
|
$
|
|
$
|
|
||||
|
ROU - assets under operating leases
|
|
|
||||||
|
Fair value of cross-currency interest rate swap (see Note 12D)
|
|
|
||||||
|
Prepaid long-term land lease, net
|
|
|
||||||
|
Long-term prepaid expenses
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 9: OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Proceeds on account of machinery and equipment to be sold as part of Arai restructuring (see also note 14B)
|
$
|
|
$
|
|
||||
|
Tax payables
|
|
|
||||||
|
Hedging transactions payables
|
|
|
||||||
|
Interest payable on debt
|
|
|
||||||
|
Others
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 10: LONG-TERM DEBT - SERIES G DEBENTURES
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 were payable in seven semi-annual consecutive equal installments from March 2020 to March 2023 and carried an annual interest rate of 2.79 %. The principal and interest amounts were denominated in NIS and were not linked to any index or to any other currency. The Company entered into cash flow hedging transactions to mitigate the foreign exchange rate changes’ impact on the principal and interest using a cross-currency swap.
As of December 31, 2022 and December 31, 2021, the outstanding principal amount of Series G Debentures was NIS 67 million and NIS 201 million, respectively (approximately $19,000 and $64,000 , respectively), with related hedging transactions net asset fair value of approximately $2,000 and $13,000 , respectively. The changes in the fair value of the outstanding principal amount of the debentures and in the fair value of the hedging transactions were attributed to the corresponding changes in the exchange rates during the reported periods (see Note 12D). The Series G Debentures’ indenture included customary financial and other terms and conditions, including a negative pledge and financial covenants. As of December 31, 2022, the Company was in compliance with all of the financial covenants under the indenture. As of March 31, 2023, the Series G Debentures were fully redeemed.
F - 24
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 10: LONG-TERM DEBT - SERIES G DEBENTURES (Continued)
Composition by repayment schedule as of December 31, 2022:
|
Details
|
Interest
Rate
|
2023
|
Total
|
|||||||||
|
Series G Debentures
|
|
%
|
$
|
|
$
|
|
||||||
|
Accretion of carrying amount to principal amount
|
(
|
)
|
||||||||||
|
Carrying amount
|
$
|
|
||||||||||
NOTE 11: LONG-TERM DEBT - OTHERS
| A. |
Composition
|
As of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Long-term JPY loan - principal amount - see Notes 11B and 11C below
|
$
|
|
$
|
|
||||
|
Capital leases and other long-term liabilities - see Note 11D below
|
|
|
||||||
|
Operating leases - see Note 11E below
|
|
|
||||||
|
Less - current maturities
|
(
|
)
|
(
|
)
|
||||
|
$
|
|
$
|
|
|||||
| B. |
Repayment Schedule of Long-term JPY Loan
|
As of December 31, 2022:
|
Details
|
Interest
Rate
|
2023
|
2024
|
2025
|
2026
|
2027
|
Total
|
|||||||||||||||||||||
|
Long-term JPY loan
|
|
%
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||
| C. |
Long-term JPY Loan
|
In December 2021, TPSCo refinanced its then existing loan with an 11 billion JPY (approximately $96,000 ) new asset-based loan with a consortium of financial institutions consisted of (i) JA Mitsui Leasing, Ltd., (ii) Mitsubishi HC Capital Inc., (iii) Taishin International Bank Co., Ltd. Tokyo Branch; and (iv) BOT lease Co. Ltd. (“JP Loan”). The JP Loan carries a fixed interest rate of 1.95 % per annum with principal payable in seven semiannual payments from December 2024 until December 2027. The JP Loan is secured mainly by a lien over the machinery and equipment of TPSCo located in the Uozu and Tonami manufacturing facilities.
The JP Loan also contains certain financial ratios and covenants, as well as customary definitions of events of default and acceleration of the repayment schedule. TPSCo’s obligations pursuant to the JP Loan are not guaranteed by Tower, NTCJ, or any of their affiliates (see also Note 14B).
As of December 31, 2022, TPSCo was in compliance with all of the financial ratios and covenants under the JP Loan.
F - 25
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 11: LONG-TERM DEBT - OTHERS (Continued)
| D. |
Capital Lease Agreements and Other Long-term Liabilities
|
Certain of the Company’s subsidiaries enter into capital lease agreements from time to time for certain machinery and equipment, 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 are denominated in JPY and contain annual interest rates of approximately 2 % and the assets under the lease agreements are pledged to the lender until the time at which the respective subsidiary acquires the assets. The obligations under the capital lease agreements are guaranteed by Tower, except for TPSCo’s obligations under its capital lease agreements (see also Note 14B).
TPSCo leases its fabrication facility buildings in Japan from NTCJ under a long-term capital lease until at least March 2032.
As of December 31, 2022 and 2021, the Company’s total outstanding capital lease liabilities for fixed assets were $158,114 and $139,037 , respectively, of which $39,610 and $36,282 respectively, were included under current maturities of long-term debt.
The following presents the maturity of capital lease and other long-term liabilities as of December 31, 2022:
|
Fiscal Year
|
Amount ($)
|
|||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028 and on
|
|
|||
|
Total
|
|
|||
|
Less - imputed interest
|
(
|
)
|
||
|
Total
|
$
|
|
||
| E. |
Operating Lease Agreements
|
The Company enters into operating leases from time to time for office space, operating facilities and vehicles. Operating lease cost for the years ended December 31, 2022, 2021 and 2020 was $5,867 , $7,535 and $7,627 , respectively. During 2022, cash paid for operating lease liabilities was $5,680 .
F - 26
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 11: LONG-TERM DEBT - OTHERS (Continued)
The following presents the composition of operating leases in the balance sheets:
|
Details
|
Classification in the Consolidated Balance Sheets
|
December 31,
2022
|
December 31,
2021
|
|||||||
|
ROU - assets under operating leases
|
Deferred tax and other long-term assets, net
|
$
|
|
$
|
|
|||||
|
Lease liabilities:
|
||||||||||
|
Current operating lease liabilities
|
Current maturities of long-term debt
|
$
|
|
$
|
|
|||||
|
Long-term operating lease liabilities
|
Long-term debt
|
|
|
|||||||
|
Total operating lease liabilities
|
$
|
|
$
|
|
||||||
|
Weighted average remaining lease term (years)
|
|
|
||||||||
|
Weighted average discount rate
|
|
%
|
|
%
|
||||||
The following presents the maturity presentation of operating lease liabilities as of December 31, 2022:
|
Fiscal Year
|
Amount ($)
|
|||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Total
|
|
|||
|
Less - imputed interest
|
(
|
)
|
||
|
Total
|
$
|
|
||
F - 27
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 11: LONG-TERM DEBT - OTHERS (Continued)
| F. |
Wells Fargo Credit Line
|
TSNB entered into an agreement with Wells Fargo Capital Finance, part of Wells Fargo & Company (“Wells Fargo”), for a secured asset-based revolving credit line in the total amount of up to $70,000 maturing in September 2023 (the “TSNB Credit Line Agreement”). The applicable interest on loans under the TSNB Credit Line Agreement is at a rate equal to, at lender’s option, either the lender’s prime rate plus a margin ranging from 0.0 % to 0.5 % or the SOFR rate plus a margin ranging from 1.25 % to 1.75 % per annum.
The outstanding borrowing availability varies from time to time based on the levels of TSNB’s eligible accounts receivable, eligible equipment, eligible inventories and other terms and conditions described in the TSNB Credit Line Agreement. The obligations of TSNB under the TSNB Credit Line Agreement are secured by a continuing security interest in, and a lien upon, TSNB’s assets as set forth in the TSNB Credit Line Agreement. The TSNB Credit Line Agreement contains customary covenants and other terms, including customary events of default. TSNB’s obligations pursuant to the TSNB Credit Line Agreement are not guaranteed by Tower or any of its affiliates.
As of December 31, 2022, TSNB was in compliance with all of the covenants under the TSNB Credit Line Agreement.
As of December 31, 2022, the borrowing availability under the TSNB Credit Line Agreement was approximately $61,000 , of which approximately $500 was utilized through letters of credit.
As of December 31, 2022, and 2021, no loan amounts were outstanding under the TSNB Credit Line Agreement.
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
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.
The Company formally designates qualifying derivatives as hedge relationships (“hedges”) and applies hedge accounting when considered appropriate. The Company does not use derivative financial instruments for trading or speculative purposes.
| A. |
Exchange Rate Transactions
|
As the functional currency of Tower is the USD and part of Tower’s expenses are denominated in NIS, Tower enters into exchange rate agreements from time to time to partially hedge the volatility of future cash flows caused by changes in foreign exchange rates on NIS-denominated expenses. In 2022, the exchange rate transaction-related derivatives were accounted for as hedge accounting resulting in gain or loss initially reported as a component of OCI and subsequently upon maturity reclassified into the statement of operations at the same time that the hedged item’s exposure results were recorded in the statement of operations.
Gains (losses) reclassified from other comprehensive income into net income (loss) recognized in COGS in the Company’s consolidated statements of operations for the year ended December 31, 2022 were $36,857 .
In 2021 the Company did not apply hedge accounting to its exchange rate transaction-related derivatives and changes in the fair values of such derivatives were charged as incurred to the statements of operations.
As of December 31, 2022, the fair value amounts of such exchange rate agreements were $3,805 in a liability position, presented in other current liabilities with a face value of $157,000 . As of December 31, 2021, the fair value amounts of such exchange rate agreements were $2,134 in an asset position, presented in other current assets with a face value of $67,500 .
F - 28
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
As the functional currency of the Company is the USD and part of TPSCo revenues and expenses are denominated in JPY, the Company enters into exchange rate agreements from time to time to hedge the volatility of future cash flows caused by changes in foreign exchange rates on JPY-denominated amounts. As of December 31, 2022, and 2021, the fair value amounts of such exchange rate agreements were $
In 2022 the related derivatives were accounted for as cash flow hedges resulting in gain or loss initially reported as a component of OCI and subsequently reclassified into the statement of operations at the same time that the hedged item’s exposure results were recorded in the statement of operations.
In 2021 the Company did not apply hedge accounting to its derivatives protecting the volatility of future cash flows caused by changes in foreign exchange rates on JPY-denominated amounts. Exchange rate transaction-related derivatives and changes in the fair values of such derivatives were charged as incurred to 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, derivatives, trade receivables and government and other receivables. The Company’s cash, deposits, marketable securities and derivatives are maintained with large and reputable banks and investment banks. 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 current expected credit losses is maintained with respect to trade accounts receivables and marketable securities. 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, 2022 and 2021. The fair value of debentures, based on quoted market prices as of December 31, 2022 and 2021, was approximately $19,000 and $66,000 , respectively, compared to carrying amounts of approximately $19,000 and $64,000 , for the above dates, respectively.
| D. |
Designated Cash Flow Hedge Transactions
|
The Company entered into designated cash flow hedging transactions using a cross-currency swap to mitigate the foreign exchange rate changes’ impact on principal and interest arising from the Series G Debentures’ denomination in NIS.
As of December 31, 2022, the fair value of the swap was $1,685 in an asset net position and was presented in other current assets. As of December 31, 2021, the fair value of the swap was $12,560 in an asset net position, of which $8,188 was presented in other current assets and $4,372 was presented in long-term assets.
F - 29
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
As of December 31, 2022 and December 31, 2021, the effective portions of $16 loss and $27 income, respectively were recorded in OCI, of which a loss of $16 will be recorded in earnings during the first three months of 2023. For the years ended December 31, 2022 and December 31, 2021, the hedging effect of the swap on the Company’s results of operations was loss of $5,966 and income of $542 , respectively, and was recognized as financing income (loss), to offset the effect of the rate difference related to the 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
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 of similar assets and liabilities 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.
For cross-currency swap and derivatives measured under Level 2, the Company uses the market approach using quotations from banks and other public information.
F - 30
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
Level 3 Measurements
Investments in equity securities of privately-held companies without readily determinable fair values are measured using the Measurement Alternatives (see Note 2I). 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, 2022, the Company recorded a decrease of $6,978 in the value of such investments, and for the year ended December 31, 2021, the Company recorded a decrease of $2,963 in the value of such investments, presented in other income (expense), net in the statements of operations.
Recurring fair value measurements using the indicated inputs:
|
Details
|
December 31, 2022
|
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
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Privately held companies
|
|
|
|
|
||||||||||||
|
Marketable securities held for sale
|
|
|
|
|
||||||||||||
|
Foreign exchange forward and cylinders - net liability position
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
|
Details
|
December 31, 2021
|
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
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Privately held companies
|
|
|
|
|
||||||||||||
|
Marketable securities held for sale
|
|
|
|
|
||||||||||||
|
Foreign exchange forward and cylinders - net liability position
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
F.Short-Term and Long-Term Deposits and Marketable Securities
Deposits and marketable securities as of December 31, 2022 included short-term deposits in the amount of $
F - 31
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
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, 2022:
|
Details |
Amortized Cost (*) |
Gross unrealized gains |
Gross unrealized losses |
Estimated fair value |
||||||||||||
|
Corporate bonds |
$ |
|
$ |
|
$ |
( |
) |
$ |
|
|||||||
|
Government bonds |
|
|
( |
) |
|
|||||||||||
| Municipal bonds |
|
( |
) |
|
||||||||||||
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
||||||||
* Excluding accrued interest of $
The scheduled maturities of available-for-sale marketable securities as of December 31, 2022, were as follows:
|
Details |
Amortized Cost |
Estimated fair value |
||||||
|
Due within one year |
$ |
|
$ |
|
||||
|
Due within 2-5 years |
|
|
||||||
|
Due after 5 years |
|
|
||||||
|
$ |
|
$ |
|
|||||
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, 2021:
|
Details |
Amortized Cost (*) |
Gross unrealized gains |
Gross unrealized losses |
Estimated fair value |
||||||||||||
|
Corporate bonds |
$ |
|
$ |
|
$ |
( |
) |
$ |
|
|||||||
|
Government bonds |
|
|
( |
) |
|
|||||||||||
|
Municipal bonds |
||||||||||||||||
|
Certificate of deposit |
|
|
|
|
||||||||||||
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
||||||||
* Excluding accrued interest of $
F - 32
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (continued)
The scheduled maturities of available-for-sale marketable securities as of December 31, 2021, were as follows:
|
Details |
Amortized Cost |
Estimated fair value |
||||||
|
Due within one year |
$ |
|
$ |
|
||||
|
Due within 2-5 years |
|
|
||||||
|
Due after 5 years |
|
|
||||||
|
$ |
|
$ |
|
|||||
Investments with continuous unrealized losses for less than twelve months and twelve months or more and their related fair values as of December 31, 2022 and December 31, 2021, were as indicated in the following tables:
|
December 31, 2022 |
||||||||||||||||||||||||
|
Investments with continuous unrealized losses for less than twelve months |
Investments with continuous unrealized losses for twelve months or more |
Total investments with continuous unrealized losses |
||||||||||||||||||||||
|
Details |
Fair value |
Unrealized losses |
Fair value |
Unrealized losses |
Fair value |
Unrealized losses |
||||||||||||||||||
|
Corporate bonds |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
|||||||||
|
Government bonds |
|
( |
) |
|
( |
) |
|
( |
) |
|||||||||||||||
|
Municipal bonds |
|
( |
) |
|
( |
) | ||||||||||||||||||
|
Total |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
|||||||||
|
December 31, 2021 |
||||||||||||||||||||||||
|
Investments with continuous unrealized losses for less than twelve months |
Investments with continuous unrealized losses for twelve months or more |
Total investments with continuous unrealized losses |
||||||||||||||||||||||
|
Details |
Fair value |
Unrealized losses |
Fair value |
Unrealized losses |
Fair value |
Unrealized losses |
||||||||||||||||||
|
Corporate bonds |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
|||||||||
|
Government bonds |
|
( |
) |
|
( |
) |
|
( |
) |
|||||||||||||||
|
Total |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
|||||||||
F - 33
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES
| 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.
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 $6,269 , $5,941 and $5,254 for 2022, 2021 and 2020, respectively.
TPSCo established a Defined Contribution Retirement Plan (the “DC Plan”) for its employees through which TPSCo contributes approximately 8.5 % for 2022 and 7.7 % for 2021 with employees’ average match of 0.8 % of the employees’ base salary to the DC Plan. Such contribution releases the employer from further obligation to make any additional 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 2022, 2021 and 2020 amounted to $4,838 , $5,331 and $6,132 , respectively.
F - 34
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
| B. |
TSNB Employee Benefit Plans
|
The following information provides the changes in 2022, 2021 and 2020 periodic expenses and benefit obligations due to the bargaining agreement signed between TSNB and 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 for post-retirement medical plan expense are as follows as of December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Net periodic benefit cost:
|
||||||||||||
|
Service cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Interest cost
|
|
|
|
|||||||||
|
Amortization of prior service costs
|
|
|
|
|||||||||
|
Amortization of net loss (gain)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total net periodic benefit cost
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
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
|
(
|
)
|
(
|
)
|
|
|||||||
|
Amortization of prior service costs
|
|
|
|
|||||||||
|
Amortization of net gain (loss)
|
|
|
|
|||||||||
|
Total recognized in other comprehensive income (loss)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||
|
Total recognized in net periodic benefit cost and other comprehensive income (loss)
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||
|
Weighted average assumptions used:
|
||||||||||||
|
Discount rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Expected return on plan assets
|
|
|
|
|||||||||
|
Rate of compensation increases
|
|
|
|
|||||||||
|
Assumed health care cost trend rates:
|
||||||||||||
|
Health care cost trend rate assumed for current year (pre-65/post-65 Medicare Advantage)
|
|
%
|
|
%
|
|
)%
|
||||||
|
Health care cost trend rate assumed for current year (pre-65/post-65 Non-Medicare Advantage)
|
|
%
|
|
%
|
|
%
|
||||||
|
Ultimate rate (pre-65/post-65)
|
|
%
|
|
%
|
|
%
|
||||||
|
Year the ultimate rate is reached (pre-65/post-65)
|
|
|
|
|||||||||
|
Measurement date
|
|
|
|
|||||||||
F - 35
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
The components of the change in benefit obligation, change in plan assets and funded status for post-retirement medical plan are as follows as of years ended December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Change in medical plan related benefit obligation:
|
||||||||||||
|
Medical plan related benefit obligation at beginning of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Service cost
|
|
|
|
|||||||||
|
Interest cost
|
|
|
|
|||||||||
|
Benefits paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Change in medical plan provisions
|
|
|
|
|||||||||
|
Actuarial loss (gain)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Benefit medical plan related obligation end of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Change in plan assets:
|
||||||||||||
|
Fair value of plan assets at beginning of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Employer contribution
|
|
|
|
|||||||||
|
Benefits paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Fair value of plan assets at end of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Medical plan related net funding
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
F - 36
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
As of December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Amounts recognized in statement of financial position:
|
||||||||||||
|
Current liabilities
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Non-current liabilities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net amount recognized
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Weighted average assumptions used:
|
||||||||||||
|
Discount rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Rate of compensation increases
|
|
|
|
|||||||||
|
Assumed health care cost trend rates:
|
||||||||||||
|
Health care cost trend rate assumed for next year (pre-65/post-65 Medicare Advantage)
|
|
%
|
|
%
|
|
%
|
||||||
|
Health care cost trend rate assumed for next year (pre-65/post-65 Non-Medicare Advantage)
|
|
%
|
|
%
|
|
%
|
||||||
|
Ultimate rate (pre-65/post-65 Medicare Advantage)
|
|
%
|
|
%
|
|
%
|
||||||
|
Ultimate rate (pre-65/post-65 Non-Medicare Advantage)
|
|
%
|
|
%
|
|
%
|
||||||
|
Year the ultimate rate is reached (pre-65/post-65)
|
|
|
|
|||||||||
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
|
|||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028 - 2032
|
$
|
|
||
Description of Significant Gains and Losses in Obligations:
For fiscal year ended December 31, 2022, the benefit obligation experienced a net actuarial gain that was primarily attributable to the discount rate increase compared to the prior year. For fiscal year ended December 31, 2021, the benefit obligation experienced a net actuarial gain that was primarily attributable to the discount rate increase to 3.00 %, compared to 2.80 % in the prior year.
F - 37
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
TSNB Pension Plan
TSNB 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. TSNB uses a December 31 measurement date each year. TSNB’s funding policy is to make contributions that satisfy at least the minimum required contribution for IRS qualified plans.
The components of the change in benefit obligation, the change in plan assets and funded status for TSNB’s pension plan for the years ended December 31, 2022, 2021 and 2020 are as follows:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Net periodic benefit cost:
|
||||||||||||
|
Interest cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Expected return on plan assets
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Expected administrative expenses
|
|
|
|
|||||||||
|
Amortization of prior service costs
|
|
|
|
|||||||||
|
Amortization of net loss
|
-
|
|
|
|||||||||
|
Total net periodic benefit cost
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
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
|
|
(
|
)
|
|
||||||||
|
Amortization of prior service costs
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Amortization of net gain
|
|
(
|
)
|
(
|
)
|
|||||||
|
Total recognized loss (gain) in other comprehensive income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Total recognized in net periodic benefit cost (gain) and other comprehensive income (loss)
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Weighted average assumptions used:
|
||||||||||||
|
Discount rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Expected return on plan assets
|
|
%
|
|
%
|
|
%
|
||||||
|
Rate of compensation increases
|
|
|
|
|||||||||
F - 38
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
The components of the change in benefit obligation, change in plan assets and funded status for TSNB’s pension plan for the years ended December 31, 2022, 2021 and 2020 are as follows:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Change in benefit obligation:
|
||||||||||||
|
Benefit obligation at beginning of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Interest cost
|
|
|
|
|||||||||
|
Benefits paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Change in plan provisions
|
|
|
|
|||||||||
|
Actuarial loss (gain)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Benefit obligation end of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Change in plan assets:
|
||||||||||||
|
Fair value of plan assets at beginning of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Actual return on plan assets
|
(
|
)
|
|
|
||||||||
|
Employer contribution
|
|
|
|
|||||||||
|
Expenses paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Benefits paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Fair value of plan assets at end of period
|
$
|
|
$
|
|
$
|
|
||||||
|
Funded Status
|
$
|
|
$
|
|
$
|
|
||||||
|
Amounts recognized in statement of financial position:
|
||||||||||||
|
Non-current assets
|
$
|
|
$
|
|
$
|
|
||||||
|
Non-current liabilities
|
|
|
|
|||||||||
|
Net amount recognized
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average assumptions used:
|
||||||||||||
|
Discount rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Rate of compensation increases
|
|
|
|
|||||||||
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
|
|||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028 - 2032
|
$
|
|
||
F - 39
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
Description of Significant Gains and Losses in Obligations:
For fiscal year ended December 31, 2022, the benefit obligation experienced a net actuarial gain that was primarily attributable to the discount rate increase to 5.10 %, compared to 2.90 % in the prior year. For fiscal year ended December 31, 2021, the benefit obligation experienced a net actuarial gain that was primarily attributable to the discount rate increase to 2.90 %, compared to 2.50 % in the prior year.
The plan’s assets measured at fair value on a recurring basis consisted of the following as of December 31, 2022:
|
Details
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
|
Investments in commingled funds
|
$
|
|
$
|
|
$
|
|
||||||
|
Total plan assets at fair value
|
$
|
-
|
$
|
|
$
|
|
||||||
The plan’s assets measured at fair value on a recurring basis consisted of the following as of December 31, 2021:
|
Details
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
|
Investments in commingled funds
|
$
|
|
$
|
|
$
|
|
||||||
|
Total plan assets at fair value
|
$
|
|
$
|
|
$
|
|
||||||
TSNB’s pension plan weighted average asset allocations on December 31, 2022, by asset category are as follows:
|
Asset Category
|
December 31,
2022
|
Target
allocation
2023
|
||||||
|
Equity securities
|
|
%
|
|
%
|
||||
|
Debt securities
|
|
%
|
|
%
|
||||
|
Total
|
|
%
|
|
%
|
||||
TSNB’s primary policy goals regarding the plan’s assets are to (1) provide liquidity to meet the Plan benefit payments and expenses payable from the Plan, (2) offer a reasonable probability of achieving a growth of assets that will assist in closing the Plan’s funding gap, and (3) manage the Plan’s assets in a liability framework. Plan assets are currently invested in commingled funds with various debt and equity investment objectives. The target asset allocation for the plan assets is 90% debt, or fixed income securities, and 10% equity securities. Individual funds are evaluated periodically based on comparisons to benchmark indices and peer group funds and investment decisions are made by TSNB 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.
F - 40
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 13: EMPLOYEE RELATED LIABILITIES (Continued)
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.
NOTE 14: COMMITMENTS AND CONTINGENCIES
A. Liens
Loans, Bonds and Capital Leases
For liens relating to the TSNB Credit Line Agreement, see Note 11F. For liens under TPSCo’s JP Loan, see Note 11C. For liens under the capital lease agreements, see Note 11D. For negative pledge under the Series G Debentures’ indenture, see Note 10.
B. TPSCo
1. Renewed Contracts
In August 2022, agreements were signed between Tower, TPSCo and NTCJ to extend the business relationship of these three companies through March 2027 under certain amended terms, including changes to the commercial pricing for the manufacturing and other services provided by TPSCo and enhanced financial support from Tower and NTCJ to TPSCo.
2. Japanese Facility Operations Restructuring
As part of agreements signed in 2019, as amended thereafter, between the Company, NTCJ and TPSCo, it has been decided to re-organize and re-structure operations in Japan such that, while operations at the Uozu and Tonami facilities will remain unchanged, the Arai manufacturing factory, which was manufacturing products solely for NTCJ and was not serving the Company’s customers, will cease operations. This cessation of operations of Arai factory occurred in June 2022 and during 2022 TPSCo initiated the process of transferring part of the machinery and equipment from the Arai factory to the Tonami factory for operations there-at. The rest of the machinery and equipment were sold to third parties. The restructuring process, including the transfer and installation of machinery and equipment in the Tonami factory and the sale of the other equipment, is expected to be completed during 2023. For the year ended December 31, 2022, the Company recorded restructuring gain from sale of machinery and equipment, net of $
F - 41
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 14: COMMITMENTS AND CONTINGENCIES (Continued)
Changes in accruals related to Arai factory cessation for the year ended December 31, 2022 were as follows:
|
Details
|
Asset disposal accrual
|
Other Restructuring costs accrual
|
||||||
|
Accrued balance as of January 1, 2022
|
$
|
|
$
|
|
||||
|
Expenses accrued
|
|
|
||||||
|
Accruals related to assets
|
|
|
||||||
|
Cash payments
|
(
|
)
|
(
|
)
|
||||
|
Accrued balance as of December 31, 2022
|
$
|
|
$
|
|
||||
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. TSNB Lease Agreement
TSNB leases its fabrication facilities under an operational lease contract that is due to expire in 2027. In amendments to its lease, (i) TSNB secured various contractual safeguards designed to limit and mitigate any adverse impact of construction activities on its fabrication operations; and (ii) certain obligations of TSNB and the landlord are specified, including certain noise abatement actions at the fabrication facility. The landlord has made claims that TSNB’s noise abatement efforts are not adequate under the terms of the amended lease, and has requested a judicial declaration that TSNB has committed material non-curable breaches of the lease and that, in accordance with the lease, the landlord would be entitled to terminate the lease. TSNB does not agree and is disputing these claims.
E. Definitive Agreement with ST Microelectronics
In 2021, TSIT, Tower’s wholly-owned Italian subsidiary, entered into a definitive agreement with ST Microelectronics (“ST”) to share under collaborative arrangement a 300mm manufacturing fabrication facility that is planned to be established in Agrate Italy. The fab is currently under construction by ST. The parties are planning to share the cleanroom space and the facility infrastructure that shall be built, with the Company installing its own equipment in one-third of the total space. TSIT and ST will invest in their respective process equipment, and work to accelerate the process flows transfer to the fab, product development, qualification and subsequent ramp-up. Operations will continue to be managed by ST. During 2022, TSIT started installation of certain tools in the Agrate facility and the development of certain processes and technologies that it expects to transfer to the Agrate facility. As of December 31, 2022, the operations in Italy have not commenced.
F - 42
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 14: COMMITMENTS AND CONTINGENCIES (Continued)
F. Other Agreements
From time to time, in the ordinary course of business, the Company enters into long-term agreements with various entities for the joint development of products IPs and processes. The developed IPs may be owned separately by either the other entity or the Company, or owned jointly by both parties, as applicable.
NOTE 15: SHAREHOLDERS’ EQUITY
| A. |
Description of Ordinary Shares
|
As of December 31, 2022, Tower had 150 million authorized ordinary shares, par value NIS 15 .00 each, of which approximately 110 million were 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.
| B. |
Equity Incentive Plans
|
(1) Tower’s 2013 Share Incentive Plan (the “2013 Plan”)
In 2013, the Company adopted a share incentive plan for directors, officers and employees of the Company, which in 2019 was extended to enable grants to third party service providers (“2013 Plan”). Options granted under the 2013 Plan bear an exercise price equal to the average 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 2022 and 2021, a total of 0.61 million restricted stock units (“RSUs”) and 1.0 million 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
During 2022, the Company's CEO and members of the Board of Directors were awarded the following RSUs under the Company’s 2013 Plan:
(i) 59 thousand time-vested RSUs and 97 thousand performance RSUs (“PSUs”) subject also to time-vesting, to the CEO, with 33 3 years 7,200 . As was approved by shareholders in 2019, the grant also includes a provision requiring the CEO to own, commencing May 2024, ordinary shares of the Company at a minimum value that equals at least three times his annual base salary as of May 2024 (the “Minimum Holding”). The CEO has until May 2024 to accumulate the Minimum Holding (whether by conversion of RSUs to ordinary shares or by purchase of ordinary shares), and during such period, until he accumulates the Minimum Holding, he must retain at least 20 % of the vested time-based RSUs granted to him on or after May 2019;
F - 43
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 15: SHAREHOLDERS’ EQUITY (Continued)
(ii) 6.5 thousand time-vested RSUs to the chairman of the Board of Directors (“the Chairman”) for a total compensation value of $300 , to vest 33 % at the end of each year following the grant date; and
(iii) 2.7 thousand time-vested RSUs to each of the seven members of the Board of Directors then serving (other than to the Chairman and the CEO), for an aggregate compensation value of $875 , vesting over a two-year period, with 50 % vesting at the first anniversary of the date of grant and 50 % on the second anniversary of the date of grant.
As was approved by shareholders in 2020, the Chairman and the members of the Board will have to own, commencing July 2025, ordinary shares of the Company at a minimum value that equals at least 50% of their annual cash compensation (the “BOD Minimum Holding”). The Chairman and the members of the Board have until July 2025 to accumulate the BOD Minimum Holding (whether by conversion of RSUs to ordinary shares or by purchase of ordinary shares), and during such period, until they accumulate the BOD Minimum Holding, they must retain at least 20 % of the vested time-based RSUs granted to them on or after July 2020.
During 2021, the Company's CEO and members of the Board of Directors were awarded the following RSUs under the Company’s 2013 Plan:
(i) 80 thousand time-vested RSUs and 132 thousand performance RSUs (“PSUs”) subject also to time-vesting, consisting of 120 thousand base PSUs and 12 thousand upside PSUs to the CEO, with 33 % of such RSUs and PSUs to vest at the end of each year for 3 years following the grant date. Total compensation value of the RSUs granted was approximately $6,000 . In addition, the Company's CEO was awarded 31 thousand PSUs that would vest upon attainment of certain performance conditions and not before one year from the date of grant, with a compensation value of approximately $1,000 . As was approved by shareholders in 2019, the grant also includes a Minimum Holding requirement;
(ii) 10.3 thousand time-vested RSUs to the chairman of the Board of Directors (“the Chairman”) for a total compensation value of $300 , to vest 33 % at the end of each year following the grant date; and
(iii) 4.3 thousand time-vested RSUs to each of the seven members of the Board of Directors then serving (other than to the Chairman and the CEO), for an aggregate compensation value of $875 , vesting over a two-year period, with 50 % vesting at the first anniversary of the date of grant and 50 % on the second anniversary of the date of grant.
As was approved by shareholders in 2020, the grants to the Chairman and the members of the Board include a BOD Minimum Holding requirement.
F - 44
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 15: SHAREHOLDERS’ EQUITY (Continued)
During 2020, the Company's CEO and members of the Board of Directors were awarded the following RSUs under the 2013 Plan: (i) 109 thousand time-vested RSUs and 163 thousand PSUs to the CEO (subject also to time-vesting, under which 33 % of the RSUs and PSUs will vest at the end of each year for 3 years following the grant date), with a compensation value of approximately $5,000 ; (ii) 16 thousand time vested RSUs to the Chairman for a total compensation value of $300 , to vest 33 % at the end of each year following the grant date; and (iii) 5 thousand time vested RSUs to each of the nine members of the Board of Directors serving then (other than to the Chairman and the CEO), for an aggregate compensation value of $900 , vesting over a two-year period, with 50 % vesting at the first anniversary of the date of grant and 50 % on the second anniversary of the date of grant.
Under the compensation plan of the Company, and as approved by the Company’s shareholders in September 2013, all of the awards to the CEO shall be accelerated upon the occurrence of a change of control event (as defined therein), subject to termination of his employment (or resignation due to diminution of responsibilities, as defined therein).
With respect to the members of the Board of Directors, including the Chairman, in the event of termination, such as termination due to a change of control event, each Director who served less than 5 years on the Board of Directors would be entitled to acceleration of 50 % of all of his/her unvested equity and each Director who served 5 years or more on the Board of Directors would be entitled to acceleration of all of his/her unvested equity.
Further grants may be approved subject to Compensation Committee, Board of Directors and shareholders’ approval, as may be required by law.
F - 45
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 15: SHAREHOLDERS’ EQUITY (Continued)
(2) i. Share Options awards:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||
|
Details
|
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
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
|
Granted
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
|
Exercised
|
(
|
)
|
$
|
|
(
|
)
|
$
|
|
(
|
)
|
$
|
|
||||||||||||
|
Terminated
|
|
$
|
|
|
$
|
|
(
|
)
|
$
|
|
||||||||||||||
|
Forfeited
|
|
$
|
|
|
$
|
|
(
|
)
|
$
|
|
||||||||||||||
|
Outstanding as of end of year
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
|
Options exercisable as of end of year
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
ii. RSUs awards:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||
|
Details
|
Number of RSUs
|
Weighted average fair value
|
Number of RSUs
|
Weighted average fair value
|
Number of RSUs
|
Weighted average fair value
|
||||||||||||||||||
|
Outstanding as of beginning of year
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
|
Granted
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
|
Converted
|
(
|
) |
$
|
|
(
|
)
|
$
|
|
(
|
)
|
$
|
|
||||||||||||
|
Forfeited
|
(
|
)
|
$
|
|
(
|
)
|
$
|
|
(
|
)
|
$
|
|
||||||||||||
|
Outstanding as of end of year
|
|
$
|
|
|
$
|
|
|
$
|
|
|||||||||||||||
F - 46
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 15: SHAREHOLDERS’ EQUITY (Continued)
(3) Summary of Information about Employees’ Share Incentive Plans
No options were outstanding as of December 31, 2022
|
Details for the year ended December 31
|
2022
|
2021
|
2020
|
|||||||||
|
The intrinsic value of options exercised
|
$
|
|
$
|
|
$
|
|
||||||
|
The original fair value of options exercised
|
$
|
|
$
|
|
$
|
|
||||||
|
Details for the year ended December 31
|
2022
|
2021
|
2020
|
|||||||||
|
The intrinsic value of converted RSUs
|
$
|
|
$
|
|
$
|
|
||||||
|
The original fair value of converted RSUs
|
$
|
|
$
|
|
$
|
|
||||||
Stock-based compensation expenses were recognized in the Statement of Operations for the years ended December 31, 2022, 2021 and 2020 as follows:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Cost of goods
|
$
|
|
$
|
|
$
|
|
||||||
|
Research and development, net
|
|
|
|
|||||||||
|
Marketing, general and administrative
|
|
|
|
|||||||||
|
Total stock-based compensation expense
|
$
|
|
$
|
|
$
|
|
||||||
| C. |
Treasury Stock
|
During 1999 and 1998, the Company funded the purchase by a trustee of an aggregate of approximately 87
| D. |
Dividend Restriction
|
Tower is subject to certain limitations on dividend distribution under the Series G Debentures indenture that allows for distribution of dividends subject to satisfying certain financial ratios.
F - 47
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 16: INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
| A. |
Revenues by Geographic Area - as Percentage of Total Revenue
|
Years ended December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
USA
|
|
%
|
|
%
|
|
%
|
||||||
|
Japan
|
|
|
|
|||||||||
|
Asia (other than Japan)
|
|
|
|
|||||||||
|
Europe
|
|
|
|
|||||||||
|
Total
|
|
%
|
|
%
|
|
%
|
||||||
The basis of attributing revenues from external customers to geographic area is based on the headquarters location of the customer issuing the purchase order; actual delivery may be shipped to another 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 TSNB’s and TSSA’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, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Israel
|
$
|
|
$
|
|
||||
|
United States
|
|
|
||||||
|
Europe
|
|
|
||||||
|
Japan
|
|
|
||||||
|
$
|
|
$
|
|
|||||
| C. |
Major Customers - as Percentage of Net Accounts Receivable Balance
|
As of December 31, 2022, no customer exceeded 10% of the net accounts receivable balance. As of December 31, 2021, one customer exceeded 10% of the net accounts receivable balance and represented 14 % of such balance.
F - 48
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 16: INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (Continued)
| D. |
Major Customers - as Percentage of Total Revenue
|
Years ended December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Customer A
|
|
%
|
|
%
|
|
%
|
||||||
|
Customer B
|
|
|
|
|||||||||
|
Other customers *
|
|
|
|
|||||||||
| * |
Represents aggregated revenue to four customers that accounted for between
|
NOTE 17: FINANCING INCOME (EXPENSE), NET
Financing income (expense), net consists of the following for the years ended December 31, 2022, 2021 and 2020:
|
Details
|
2022
|
2021
|
2020
|
|||||||||
|
Interest expense
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Interest income
|
|
|
|
|||||||||
|
Series G Debentures amortization, related exchange rate and related hedging results
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Exchange rate and related hedging results
|
(
|
)
|
(
|
)
|
|
|||||||
|
Marketable securities fair value adjustments
|
(
|
)
|
|
|
||||||||
|
Bank fees and others
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||
F - 49
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 18: RELATED PARTIES BALANCES AND TRANSACTIONS
| A. |
Balance
|
The nature of the relationship involved as of December 31, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||||
|
Long-term investment
|
Equity investment in a limited partnership
|
$
|
|
$
|
|
|||||
| B. |
Transactions
|
Description of the transactions for the years ended December 31, 2022, 2021 and 2020:
|
Details
|
Description of the transactions
|
2022
|
2021
|
2020
|
||||||||||
|
General and administrative expense
|
Directors’ fees and reimbursement to directors
|
$
|
|
$
|
|
$
|
|
|||||||
F - 50
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 19: INCOME TAXES
A.Tower Statutory Income Rates
Substantially all of Tower’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 in Israel (“Investments Law”).
Tower, as an Israeli industrial company located in Migdal Ha’emek, may elect the Preferred Enterprise regime to apply to it under the Investment Law. The election is irrevocable.
Under the Preferred Enterprise regime, Tower’s entire preferred income is subject to a tax rate of
B. Income Tax Provision
The Company's provision for income taxes is affected by income taxes in a multinational tax environment. The income tax provision is an estimate determined based on current enacted tax laws and tax rates at each of its geographic locations, with the use of acceptable allocation methodologies based upon the Company’s organizational structure, operations and business mode of work, and result in applicable local taxable income attributable to those locations.
The Company’s income tax provision consists of the following for the years ended December 31, 2022, 2021 and 2020:
|
Details |
2022 |
2021 |
2020 |
|||||||||
|
Current tax expense: |
||||||||||||
|
Foreign |
$ |
|
$ |
|
$ |
|
||||||
|
Deferred tax expense (benefit): |
||||||||||||
|
Local |
|
|
|
|||||||||
|
Foreign |
( |
) |
( |
) |
( |
) |
||||||
|
Income tax expense |
$ |
|
$ |
|
$ |
|
||||||
|
Details |
2022 |
2021 |
2020 |
|||||||||
|
Profit before taxes: |
||||||||||||
|
Local |
$ |
|
$ |
|
$ |
|
||||||
|
Foreign |
( |
) |
( |
) |
( |
) |
||||||
|
Total profit before taxes |
$ |
|
$ |
|
$ |
|
||||||
F - 51
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 19: INCOME TAXES (Continued)
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, 2022 and 2021:
|
Details
|
2022
|
2021
|
||||||
|
Deferred tax asset and liability - long-term:
|
||||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carryforward
|
$
|
|
$
|
|
||||
|
Employees compensation
|
|
|
||||||
|
Accruals and allowances
|
|
|
||||||
|
Research and development credit
|
|
|
||||||
|
Research and development - Section 174
|
|
|
||||||
|
Others
|
|
|
||||||
|
|
|
|||||||
|
Valuation allowance, see Note 19F below
|
(
|
)
|
(
|
)
|
||||
|
Deferred tax assets
|
$
|
|
$
|
|
||||
|
Deferred tax liabilities - long-term:
|
||||||||
|
Depreciation and amortization
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Others
|
|
(
|
)
|
|||||
|
Deferred tax liabilities
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Presented in long term deferred tax assets
|
$
|
|
$
|
|
||||
|
Presented in long term deferred tax liabilities
|
$
|
(
|
)
|
$
|
(
|
)
|
||
(*) Deferred tax assets and liabilities relating to Tower for the years 2022 and 2021 are computed based on the Israeli Preferred Enterprise tax rate of 7.5 %.
D. Unrecognized Tax Benefit
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
Details |
Unrecognized tax benefits |
|||
|
Balance as of January 1, 2022 |
$ |
|
||
|
Additions for tax positions of current year |
|
|||
|
Reduction due to statute of limitations of prior years |
|
|||
|
Balance as of December 31, 2022 |
$ |
|
||
F - 52
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 19: INCOME TAXES (Continued)
|
Details |
Unrecognized tax benefits |
|||
|
Balance as of January 1, 2021 |
$ |
|
||
|
Additions for tax positions of current year |
|
|||
|
Reduction due to statute of limitations of prior years |
( |
) |
||
|
Balance as of December 31, 2021 |
$ |
|
||
|
Details |
Unrecognized tax benefits |
|||
|
Balance as of January 1, 2020 |
$ |
|
||
|
Additions for tax positions of current year |
|
|||
|
Reduction due to statute of limitations of prior years |
( |
) |
||
|
Balance as of December 31, 2020 |
$ |
|
||
E. Effective Income Tax
The reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2022, 2021 and 2020:
|
Details |
2022 |
2021 |
2020 |
|||||||||
|
Tax expense computed at statutory rates, see (*) below |
$ |
|
$ |
|
$ |
|
||||||
|
Effect of different tax rates in different jurisdictions and Preferred Enterprise Benefit |
( |
) |
( |
) |
( |
) |
||||||
|
Change in valuation allowance, see Note 19F below |
|
|
|
|||||||||
|
Permanent differences and other, net |
( |
) |
( |
) |
( |
) |
||||||
|
Income tax expense |
$ |
|
$ |
|
$ |
|
||||||
(*) The tax expense was computed based on the regular Israeli corporate tax rate of
F. Net Operating Loss Carryforward
As of December 31, 2022, Tower had net operating loss carryforward for tax purposes of approximately $
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.
TSNB 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 TSNB. The second “change in ownership” event occurred in September 2008, upon Tower’s acquisition of TSNB. TSNB concluded that the net operating loss limitation for the change in ownership which occurred in September 2008 will be an annual utilization of approximately $
F - 53
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
(dollars in thousands, except per share data)
NOTE 19: INCOME TAXES (Continued)
As of December 31, 2022, Tower US Holdings has federal net operating loss carryforwards of approximately $
As of December 31, 2022, Tower US Holdings had California state net operating loss carryforward of approximately $
Tower US Holdings recorded a valuation allowance thereby reducing the deferred tax asset balances of the federal and state net operating loss carryforward.
As of December 31, 2022, and 2021, 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 1999-2017 are deemed final. During 2023, the Israeli tax authority commenced a tax assessment on Tower for the tax years 2018 to 2021. As of the date of issuance of this annual report, the tax assessment is in initial stages.
Tower US Holdings files a consolidated tax return including TSNB and TSSA. Tower US Holdings and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple states.
In general, Tower US Holdings is no longer subject to U.S. federal income tax examinations on years before 2019 and state and other U.S local income tax examinations on years before 2018. 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 2020.
F - 54
Exhibit 8.1
SUBSIDIARIES
The following is a list of our significant subsidiaries, including the name, country/jurisdiction of incorporation
and the proportion of our ownership interest.
|
Subsidiary
|
Jurisdiction
|
Ownership
|
|
Tower US Holdings Inc.
|
Delaware
|
100% directly
|
|
Tower Semiconductor NPB Holdings Inc.
|
Delaware
|
100% indirectly through Tower US Holdings Inc.
|
|
Tower Semiconductor Newport Beach, Inc.
|
Delaware
|
100% indirectly through Tower Semiconductor NPB Holdings Inc.
|
|
Newport Fab LLC
|
Delaware
|
100% indirectly through Tower Semiconductor Newport Beach Inc.
|
|
Tower Semiconductor San Antonio Inc.
|
Delaware
|
100% indirectly through Tower US Holdings Inc.
|
|
Tower Partners Semiconductor Co., Ltd.
|
Japan
|
51% directly
|
|
Tower Semiconductor Italy S.r.l.
|
Italy
|
100% directly
|
Exhibit 12.1
CERTIFICATION
I, Russell C. Ellwanger, certify that:
1. I have reviewed this annual report on Form 20-F of Tower Semiconductor Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of,
and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect,
the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
May 16, 2023
/s/ Russell C. Ellwanger
Russell C. Ellwanger
Chief Executive Officer
Tower Semiconductor Ltd.
Russell C. Ellwanger
Chief Executive Officer
Tower Semiconductor Ltd.
Exhibit 12.2
CERTIFICATION
I, Oren Shirazi, certify that:
1. I have reviewed this annual report on Form 20-F of Tower Semiconductor Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of,
and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect,
the company’s internal control over financial reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
May 16, 2023
/s/ Oren Shirazi
Oren Shirazi
Chief Financial Officer
Tower Semiconductor Ltd.
Oren Shirazi
Chief Financial Officer
Tower Semiconductor Ltd.
Exhibit 13.1
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Tower Semiconductor Ltd. (the “Registrant”) on Form 20-F for the year ended
December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Russell C. Ellwanger, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ Russell C. Ellwanger
Russell C. Ellwanger
Chief Executive Officer
Russell C. Ellwanger
Chief Executive Officer
May 16, 2023
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be
retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 13.2
CERTIFICATION PURSUANT TO
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 USC SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Tower Semiconductor Ltd. (the “Registrant”) on Form 20-F for the year ended
December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Oren Shirazi, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ Oren Shirazi
Oren Shirazi
Chief Financial Officer
May 16, 2023
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be
retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 15.1
We consent to the incorporation by reference in Registration Statement No. 333-204173 on Form S-8 of our reports
dated April 30, 2023, relating to the consolidated financial statements of Tower Semiconductor Ltd. (the “Company”) and the effectiveness of the Company’s internal control over financial reporting, appearing in the Company’s Annual Report on Form
20-F for the year ended December 31, 2022.
/s/ Brightman Almagor Zohar &Co
Brightman Almagor Zohar &Co.
Certified Public Accountants
A Firm in The Deloitte Network
Tel Aviv, Israel
May 16, 2023