ITEM 3.KEY INFORMATION
Selected Consolidated Financial Data
Our historical consolidated financial statements are prepared in accordance with US GAAP and are presented in US dollars. The selected historical audited consolidated financial information as of December 31, 2019 and 2018 and for each of the three years ended December 31, 2019, 2018 and 2017 has been derived from, and should be read in conjunction with, our audited consolidated financial statements and notes thereto appearing elsewhere in this annual report. The selected financial data as of December 31, 2017, 2016 and 2015 and for each of the years ended December 31, 2016 and 2015 has been derived from our audited consolidated financial statements for those years that are not included in this annual report.
Our audited consolidated financial statements include Tower SA’s results commencing February 1, 2016. Our audited consolidated balance sheets include Tower SA’s balances since December 31, 2016.
Due to the acquisition of Tower SA in February 2016, it may be difficult to perform year-over-year comparisons of our results of operations for the period subsequent to these transactions with prior periods.
The selected historical consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes appearing in this annual report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. Our historical financial information may not be indicative of future performance.
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Year Ended December 31,
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2019
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2018
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2017
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2016
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2015
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(Dollars in thousands, except per share data)
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Consolidated Statement of Operations Data:
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Revenues
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$
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1,234,003
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|
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$
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1,304,034
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|
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$
|
1,387,310
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$
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1,249,634
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|
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$
|
960,561
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Cost of revenues
|
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1,004,332
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|
|
|
1,011,087
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|
|
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1,033,005
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|
|
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946,534
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|
|
|
755,196
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Gross profit
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|
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229,671
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|
|
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292,947
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|
|
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354,305
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|
|
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303,100
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|
|
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205,365
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Research and development
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75,579
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|
|
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73,053
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|
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67,664
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|
|
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63,134
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|
|
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61,669
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Marketing, general and administrative
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67,376
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|
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64,951
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|
|
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66,799
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|
|
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65,439
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|
|
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62,793
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Nishiwaki Fab restructuring and impairment cost (income), net
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--
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|
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--
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--
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(627
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)
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(991
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)
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Operating profit (loss)
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86,716
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154,943
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219,842
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175,154
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|
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81,894
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Financing income (expense), net
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12
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(13,184
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)
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(15,447
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)
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(24,349
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)
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(123,109
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)
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Gain from acquisition, net
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--
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--
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--
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50,471
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--
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Other income (expense), net
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4,293
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(2,442
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)
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(2,627
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)
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9,322
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(190
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)
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Profit (loss) before income tax
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91,021
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139,317
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201,768
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210,598
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(41,405
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)
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Income tax benefit (expense)
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(2,948
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)
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(5,938
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)
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99,888
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(1,432
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)
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12,278
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Net Profit (loss)
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88,073
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133,379
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301,656
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209,166
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(29,127
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)
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Net loss (income) attributable to non-controlling interest
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1,975
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2,200
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(3,645
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)
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(5,242
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)
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(520
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)
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Net Profit (loss) attributable to the Company
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$
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90,048
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$
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135,579
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$
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298,011
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$
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203,924
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|
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$
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(29,647
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)
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|
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Basic earnings (loss) per ordinary share
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$
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0.85
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$
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1.35
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$
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3.08
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$
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2.33
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$
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(0.40
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)
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|
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|
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Diluted earnings per ordinary share
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$
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0.84
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$
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1.32
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$
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2.90
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$
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2.09
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Other Financial Data:
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Depreciation and amortization, including amortization of financing expenses and accretion
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$
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214,474
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$
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214,391
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$
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208,411
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|
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$
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197,756
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|
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$
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256,005
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|
|
|
|
|
|
|
|
|
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Selected Balance Sheet Data:
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Cash, cash equivalents and short-term interest-bearing deposits
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$
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571,170
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$
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505,170
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$
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445,961
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$
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389,377
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$
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205,575
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Working capital
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$
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835,425
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$
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784,238
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$
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571,959
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$
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450,883
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$
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235,608
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Total assets
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$
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1,932,833
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$
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1,789,977
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$
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1,673,639
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$
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1,379,884
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$
|
965,368
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Short-term bank debt and current maturities of loans, leases and debentures
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$
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65,932
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$
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10,814
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$
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105,958
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$
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48,084
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$
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33,259
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Loan from banks, net of current maturities
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$
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101,365
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$
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100,118
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$
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87,533
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$
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133,163
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$
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210,538
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Debentures, net of current maturities
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$
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94,552
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$
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120,170
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$
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128,368
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$
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162,981
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|
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$
|
45,481
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Capital leases, net of current maturities
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$
|
39,207
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|
|
$
|
36,381
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|
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$
|
12,822
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|
|
$
|
--
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|
|
$
|
--
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Shareholders’ equity
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$
|
1,346,723
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|
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$
|
1,236,205
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|
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$
|
1,029,706
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|
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$
|
682,614
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|
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$
|
385,586
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Number of shares outstanding as of December 31 of any year
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106,808
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|
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104,979
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|
|
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98,458
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|
|
|
92,985
|
|
|
|
82,058
|
|
Risk Factors
Our business faces many risks. Any of the risks discussed below may have an adverse impact on our business, financial condition and operating results.
Risks Affecting Our Business
If we experience difficulty in achieving acceptable device yields, product performance and delivery times, as a result of manufacturing problems, our business may be adversely harmed.
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. We may experience difficulty achieving acceptable device yields, product performance and product delivery times in the future as a result of manufacturing problems. Although we continuously enhance our manufacturing capabilities and efficiency, from time to time we have experienced production difficulties that have caused delivery delays and quality control problems. Manufacturing issues we may face include the following:
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difficulties in upgrading or expanding existing facilities;
•
unexpected breakdowns in our manufacturing equipment and/or related facility systems;
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unexpected events, such as an electricity outage, affecting the manufacturing process;
•
difficulties in changing or upgrading our process technologies;
•
raw material shortages or impurities;
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delays in delivery or shortages of spare parts; and
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difficulties in maintenance and upgrade of our equipment.
Should such problems occur to a material degree, we may suffer delays in delivery, 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.
Demand for our foundry services is dependent on the demand in our customers’ end markets, which are typically cyclical and volatile. A material decrease in demand for products that contain semiconductors may decrease the demand for our services and products, and a decrease in the selling prices of our customers’ products may significantly affect our business, financial results and financial position.
Our customers generally use the semiconductors produced in our fabrication facilities (“fabs”) in a wide variety of applications. We derive a significant percentage of our operating revenues from customers who use our manufacturing services to make semiconductors for communication devices, consumer electronics, PCs and other electronic devices. Any significant decrease in the demand for these electronic devices or products may decrease the demand for our services and products. In addition, if the average selling prices of communication devices, consumer electronics, PCs or other electronic devices decline significantly, we may be pressured to reduce our selling prices, which may reduce our revenues and margins significantly. As demonstrated in the past by downturns in demand for high technology products, market conditions can change rapidly, without warning or advance notice. In such instances, our customers may experience inventory buildup and/or difficulties in selling their products and, in turn, may reduce or cancel orders for wafers from us, which may harm our business and profitability. The timing, severity and recovery of these downturns cannot be predicted.
In order for demand for our wafer fabrication services to increase, the markets for the end products utilizing the integrated circuits (“ICs”), that we manufacture must develop and expand. For example, the success of our imaging process technologies will depend, in part, on the growth of markets for certain image sensor product applications. Because our services may be used in many new applications, it is difficult to forecast demand. If demand is lower than expected, we may have excess capacity and our revenue may not be sufficient to cover all our costs and serve all our debt, which may adversely affect our financial results and financial position.
If we do not maintain and develop our technology processes and services, we may lose customers and may be unable to attract new ones.
The semiconductor market is characterized by rapid change, including the following:
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rapid technological developments;
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evolving industry standards;
•
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 introduce to production advanced specialized manufacturing process technologies and purchase the appropriate equipment. If we are unable to successfully develop and introduce these processes to production in a timely manner or at all, or if we are unable to purchase the appropriate equipment required for such processes, we may be unable to maintain our current customer base and may be unable to attract new customers.
The semiconductor foundry business is highly competitive and our competitors may have competitive advantages over us; our financial results may be adversely affected if we do not successfully compete in the industry.
The semiconductor foundry industry is highly competitive. We compete most directly in the specialty segments with certain independent dedicated foundries. We also compete with the pure play advanced technology node driven foundry service providers as they each have some capacity for specialty process technologies, and with integrated device manufacturers, or IDMs, that allocate a portion of their manufacturing capacity to foundry operations. 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.
In addition, some semiconductor companies have advanced their complementary metal oxide semiconductor (“CMOS”) designs to smaller than 14 nanometer process geometries. These smaller process geometries may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies. The smaller process geometries may also be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is then required. Our specialty processes will therefore compete with these more advanced CMOS processes and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller process geometries. If our potential or existing customers choose to design their products in a manner whereby the percentage of digital content in specialty designs increases significantly and requires these advanced CMOS processes, our business may be negatively impacted.
In addition, many of our competitors may have one or more of the following competitive advantages over us:
•
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;
•
a 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.
Our financial results may fluctuate from quarter to quarter, making it difficult to predict our future performance, which may negatively affect our financial position and financial results.
Our revenues, expenses and operating results have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, some of which are 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;
•
Our ability to conclude and materialize business development and acquisition transactions for capacity expansion;
•
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, a global disease, industrial accidents such as fire or explosions, electricity outage, affecting the manufacturing process and our ability to recover the lost or damaged products and provide quality and timely production to our customers without charging them significant additional costs;
•
Completing capacity expansions and recruitment of personnel in a timely manner to address product demands by our customers;
•
Mergers and acquisitions in the semiconductor industry and their effect on our market share;
•
Our ability to satisfy our customers’ demand for quality and timely production;
•
The timing and volume of orders relative to our available production capacity;
•
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 to enter into new partnerships and technology and supply alliances on mutually beneficial terms;
•
Interest, price index and currency rate fluctuations that were not hedged;
•
Technological changes and short product life cycles;
•
Timing for the design and qualification of new products; and
•
Changes in accounting rules affecting our results.
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, it is difficult to predict our future performance and any fluctuations in future performance from expectations may ultimately negatively affect our operating results and financial position.
We may be required to obtain financing for strategic opportunities, which financing may not be available for us in a timely manner or on favorable terms, and which may dilute the holdings of our shareholders and/or require us to incur additional debt.
In order to invest in strategic opportunities in support of our acquisition and capacity growth plans and/or business development activities, we may be required to obtain funds from financing sources, including through debt vehicles and/or re-financing, sale of new securities or other financing alternatives. There is no assurance that we will be able to obtain sufficient funding, if at all, from these financing sources or other sources in a timely manner (or on commercially reasonable terms) in order to allow us to fund our growth plans and/or business development activities, which may adversely affect our financial position and operations, may dilute the holdings of our shareholders and/or require us to incur additional debt.
If we do not maintain our current key customers, and/or do not attract new key customers, our business and profitability may be adversely affected.
Loss or cancellation of business from, or decreases in the sales volume or sales prices to, our significant customers, or our failure to replace lost business with new customers, may seriously harm our financial results, revenues and business. We have relationships with several customers that represent a material portion of our revenues. In 2019, 27% of our revenues were generated from one customer (PSCS), as detailed below, and five additional customers each generated between 5% to 9% of our revenues. The loss or reduction in volume or sales price to any one of these customers, whether due to business negotiation, their insolvency or their unwillingness or inability to perform their obligations under their respective 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.
PSCS (Panasonic Semiconductor Solutions), a wholly-owned subsidiary of Panasonic Corporation, is the largest customer of TPSCo and Tower on a consolidated basis. TPSCo engaged PSCS under a manufacturing agreement in March 2014 for a five-year period, which was renewed in March 2019 for an additional three years. Due to the reduced selling price per product and services under the renewed March 2019 agreement, revenue from PSCS decreased by approximately $70 million in the nine-month period ended December 31, 2019. We are making efforts to compensate for such reduction with additional manufacturing volume demand from other customers into TPSCo fabs; however, if we are unsuccessful in such efforts, our consolidated revenue, financial position and results may be adversely effected.
In November 2019, Panasonic announced the sale of its shares in PSCS to Nuvoton Technology Corp. (a Taiwan based semiconductor company, majority owned by Winbond Electronics Corporation), in a transaction that is planned to close in June 2020. We cannot assure you that such transaction will not have an impact on our financial results, cash position and profitability.
Risks relating to construction activities adjacent to Fab 3 and our Fab 3 lease could harm our operations and financial results.
Our Fab 3 fabrication facility and its offices are leased under a contract in effect until 2022, which we can extend until 2027 through the exercise of an option at our sole discretion. A few years ago, the landlord began a construction project adjacent to the fabrication facility, which may adversely impact 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. If construction activities limit or interrupt the supply of water, gas or electricity to Fab 3 or cause significant vibrations or other disruptions, it could limit or delay Fab 3’s production, which may adversely affect our business and operating results. In addition, an unplanned power outage caused by construction activities, even of very limited duration, may result in a loss of wafers in production, deterioration in Fab 3’s yield and on-schedule delivery, and may require substantial downtime to reset equipment before resuming production. These may cause customer dissatisfaction and cause customers to transfer their product orders to other fabs, which may adversely affect our financial results. In addition, the landlord has claimed that noise abatement actions that have been implemented according to obligations under the lease are not adequate under the terms of the lease. While we do not agree with, and are disputing, these claims, any adverse change to the current lease agreement may adversely impact our business and future financial results.
A global recession and/or, unfavorable economic conditions, global disease, credit crisis and/or weakness in the semiconductor industry may adversely affect our results and our ability to fulfill our debt obligations and other liabilities.
The effects of a global recession, unfavorable economic conditions, and/or global disease, such as the recent coronavirus pandemic, credit crisis and/or a weakness in the semiconductor industry may include global decreased demand, downward price pressure, excess inventory, shortage of supplies and materials for manufacturing and unutilized capacity worldwide, any of which may negatively impact consumer and customer demand for our products and the end products of our customers. Such an event may adversely affect our ability to attract new customers and new business to our fabs as well as maintain current customers. Such an event may also adversely affect our ability to increase the utilization rates in our manufacturing facilities and maintain them at a high level that would suffice to cover our substantial fixed costs, maintain commercial relationships with our customers, suppliers, and creditors, including our lenders, and continue our capacity growth. In addition, such an event may negatively impact our ability to improve our future financial results and position, including our ability to raise funds in the capital markets, fulfill our debt obligations and other liabilities, refinance our debt and other liabilities and/or pay them in a timely manner. There is no assurance that such an event will not occur.
The recent coronavirus outbreak, which was declared a global pandemic by the World Health Organization during March 2020, and its continued progress, may adversely affect our revenue, business and financial results. We may face (i) a shortage of supply of raw materials, products and services due to local restrictions and possible isolation periods imposed by the governments of vendors, or due to no or limited international courier delivery services, which may adversely affect our ability to secure our supply chain and continue operating and manufacturing in one or more of our fabrication facilities; (ii) potential reduced attendance of employees and service providers to our facilities and offices due to local restrictions and isolation periods imposed on them by the local government, which may adversely affect our ability to continue operating and manufacturing at one or more of our facilities; and (iii) 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 reliance on acquisitions and/or gaining additional capacity for growth involve risks that may adversely affect our future revenues, business and operating results.
We may decide to expand our manufacturing footprint and business by attracting new customers that will utilize our expanded capacity through acquisitions, as we have done in the past, and and/or through capturing and obtaining access to additional manufacturing capacities and/or facilities, with or without third-party collaboration. Our success at such expansion is dependent, in part, on finding suitable partners and targets for acquisitions, successfully financing and consummating such expansion plans, integrating the acquired facilities into our business 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 expanding our business, finding and successfully executing such acquisitions or capacity expansions or that they will achieve the expected synergies. Further, we cannot assure you that we will increase our market presence and attract new customers and business in order to operate any such acquired facilities profitably.
This strategy involves many risks, each of which may negatively affect our profitability and financial position, including the following risks:
•
We may fail to identify acquisitions and/or opportunities to capture additional capacity required for our customers that would enable us to execute our business strategy;
•
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 approvals, or we may not be able to obtain the necessary approvals from our lenders, 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 fail to integrate acquisitions successfully and materialize our expansion plan in accordance with our business strategy, achieve anticipated benefits depending in part on successfully consolidating functions and integrating operations, procedures and personnel in a timely and efficient manner, expected synergies, attract sufficient business to newly acquired facilities in a timely manner or realize the anticipated growth opportunities from integrating an acquired business into our existing business;
•
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;
•
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 acquisition may vary from our expectations, resulting in a need for more funding that may not be available to us in order to finance the operations of the target acquisition and to acquire additional machinery and equipment and adjust the target’s manufacturing line to address our customer demand.
Our 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.
Fab 1 and Fab 2 are located in an area near the Syrian-African rift valley, which is known to have seismic activity. Fab 3 is located in southern California, a region known for seismic activity. TPSCo’s fabs are located in Japan, which is generally susceptible to seismic activity. Due to the complex and delicate nature of our manufacturing processes, our facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. We cannot be certain that precautions that any of our fabs have taken to seismically upgrade the fabs will be adequate to protect our facilities in the event of an earthquake. Earthquakes may lead to fire in the fabs or other material damage, and any resulting damage could seriously disrupt production and result in reduced revenues. Although we maintain insurance policies to mitigate any potential losses that may be caused by earthquakes and other natural disasters, including business interruption insurance, our insurance coverage may not compensate us fully for all of the losses we may incur. If any of our fabs were to be damaged or cease operations, even for a limited duration, as a result thereof, and if our insurance proves to be inadequate, our manufacturing capacity and revenues may be adversely affected, thereby exposing us to third party claims. A power outage, even of very limited duration, caused by an earthquake or other natural disaster may result in a loss of wafers in production, deterioration of our fab yield and substantial downtime to reset equipment before resuming production, thereby potentially causing a material adverse effect on our business, revenue and profits.
Possible product returns could harm our business.
Products manufactured by us may be returned within specified periods if they are defective or otherwise fail to meet customers’ prior agreed upon specifications. Future product returns may have an adverse effect on our business and financial results.
We are subject to risks related to our international operations.
We generate revenues from customers located in the US, Europe and Asia-Pacific. Because of our international operations, we are vulnerable to the following risks:
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JPY fluctuations against the USD -- see the risk factor below entitled: “Our exposure to currency exchange and interest rate fluctuations may impact our costs and financial results”;
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the burden and cost of compliance with foreign government regulation, as well as compliance with a variety of foreign laws;
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impact of potential new legislation under the Trump administration;
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general geopolitical risks, such as political and economic instability, international terrorism, potential hostilities and changes in diplomatic and trade relationships;
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natural disasters and global diseases, affecting the countries in which we manufacture and/or conduct our business;
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imposition of regulatory requirements, tariffs, import and export restrictions and other trade barriers and restrictions, including the timing and availability of export licenses and permits;
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adverse foreign and international tax rules and regulations, such as withholding taxes deducted from amounts due to us and not refunded to us by the tax authorities since we are not entitled to foreign tax credit in Israel;
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weak protection of our intellectual property rights in certain foreign countries;
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delays in product shipments due to local customs restrictions;
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laws and business practices favoring local companies;
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difficulties in collecting accounts receivable; and
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difficulties and costs of staffing and managing foreign operations.
In addition, Israel, the United States, Japan and other foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the import or export of our products, leading to a reduction in sales and profitability in such countries. The geographical distance between Israel, the United States, Japan and the rest of Asia and Europe also creates certain logistical and communication challenges. We cannot assure you that we will be able to sufficiently mitigate all the risks related to our international operations.
The production lines of our fabs may stop for certain periods of time due to bottlenecks, power outages, water leaks, chemical leaks or other issues, which may adversely affect our cycle time, yield, and delivery schedules, potentially causing an immediate loss of revenue and profitability. In addition, affected customers may elect to transfer their product orders to other fabs, which could materially adversely affect our business and financial results.
There are many events that may occur which may adversely affect the manufacturing process in our manufacturing facilities. From time to time, we experience high utilization rates in certain of our manufacturing lines and/or areas, which cause bottlenecks in the lines and/or specific areas and/or specific machines, power outages, water leaks, chemical leaks or other issues that may adversely affect our cycle time, yield and delivery schedules, which may cause an immediate loss of revenue and profitability in a particular period. In addition, affected customers may elect to transfer their product orders to other fabs, which could materially adversely affect our business, revenue, profitability and financial position over the longer term. While we try to mitigate any potential damage caused by such events and have insurance coverage, which may compensate us partially or fully against certain types of damages, we cannot ensure that such events will not have a negative effect on the Company,
Our financial position and operations may be affected as a result of our long-term debt.
As of December 31, 2019, we had approximately $290 million of consolidated principal amount of long-term debt outstanding, comprised as follows: (1) Tower had approximately $135 million outstanding principal amount of Series G debentures, payable in seven semi-annual consecutive equal installments from March 2020 to March 2023; (2) TPSCo had loans of approximately $101 million principal amount (the “JP Loan”), carrying a fixed interest rate of approximately 2% per annum, with principal scheduled to be repaid in nine semiannual payments between the first quarter of 2021 and 2025; and (3) Tower and its affiliates had capital lease agreements outstanding in the amount of approximately $54 million from JA Mitsui Leasing, repayable between 2020 and 2024. Carrying such an amount of long-term debt may have significant negative consequences on our business, including:
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limiting our ability to fulfill our debt obligations and other liabilities;
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requiring the use of a substantial portion of our cash to service our indebtedness rather than investing our cash to fund our strategic growth opportunities and plans, working capital and capital expenditures;
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increasing our vulnerability to adverse economic and industry conditions;
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limiting our ability to obtain additional financing;
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete;
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placing us at a competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources;
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volatility in our non-cash financing expenses due to increases in the fair value of our debt obligations;
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fluctuations of the payable amounts in USD of the JP Loan or other expenses which are denominated in JPY; and
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potential enforcement by the lenders of their liens against our respective assets, as applicable, if an event of default occurs.
In order to service our debt, the applicable interest it carries and other liabilities and obligations and/or improve its terms and conditions and/or to invest in strategic opportunities for growth and/or business development activities, in addition to our cash on hand and expected cash flow generation from operating activities, we may decide to obtain funds from additional sources including debt vehicles and/or re-financing, sale of new securities, sale of intellectual property and/or intellectual property licensing, as well as additional financing alternatives. However, there is no assurance that we will be able to obtain sufficient funding, if at all, from the financing sources detailed above or other sources in a timely manner (or on commercially reasonable terms) in order to allow us to fund our growth plans and/or cover, in a timely manner, all our costs, capital expenditure investments and all of our scheduled debt detailed above, liabilities and obligations, which may adversely affect our financial position and operations.
If we are unable to manage fluctuations in cash flow, our business and financial position may be adversely affected.
Our working capital requirements and cash flows are subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which may lead us to suffer cash flow fluctuations include:
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fluctuations in the level of revenues from our operating activities;
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fluctuations in the collection of receivables;
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timing and size of payables;
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the timing and size of capital expenditures;
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the net impact of JPY/ USD fluctuations on our JPY income and JPY expenses;
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the repayment schedules of our debt service obligations;
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our ability to fulfill our obligations and meet performance milestones under our agreements; and
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fluctuations in the USD to NIS exchange rate.
Over-demand for our foundry services and/or products may result in a loss of customers and revenues, which may adversely affect our profitability and business.
In periods during which demand for our foundry services exceeds our capacity and manufacturing capabilities, we may be (i) unable to fulfill customer demand in whole or in part, in a timely manner or at all; (ii) unable to assure production of customers’ next generation products; and/or (iii) unable to provide additional capacity from any of our geographic facilities through transfer of process technologies, successful implementation and timely qualification. As a result, we could lose one or more of our current and/or potential customers, which may adversely affect our revenues, profitability and business.
Our business could suffer if we are unable to retain and recruit qualified personnel.
We depend on the continued services of our senior executive officers, senior managers and skilled technical and other personnel. Our business could suffer if we lose the services of some of these personnel due to resignation, medical absence, illness or other reasons, and cannot find and integrate adequate replacement personnel into our senior management, business and operations in a timely manner. We seek to recruit highly qualified personnel and there is intense competition for the services of these personnel in the semiconductor industry. Competition for personnel may increase significantly in the future as new fabless semiconductor companies as well as new semiconductor manufacturing facilities are established. Our ability to retain existing personnel and attract new personnel is in part dependent on the compensation packages we offer. As demand for qualified personnel increases, we may be forced to increase the compensation levels, including adjustment of the cash, equity and other components of compensation we offer our personnel.
The lack of a significant backlog resulting from our customers not placing purchase orders far in advance makes it difficult for us to forecast our revenues and margins in future periods and may cause actual revenue and results to fall short of expectations.
Our customers generally do not place purchase orders far in advance, partly due to the cyclical nature of the semiconductor industry. As a result, we do not typically operate with any significant backlog, which makes it difficult for us to forecast our revenues in future periods. Moreover, since our expense levels are based in part on our expectations of future revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls caused by cancellations, rescheduling of orders or lower actual orders than quantities forecasted. Rescheduling may relate to quantities or delivery dates, and sometimes relates to the specifications of the products we are shipping. Consequently, we cannot be certain that orders on backlog will be shipped when expected or at all.
We expect that, in the future, our revenues in any quarter will continue to be substantially dependent upon purchase orders received in the immediately preceding quarter or two. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. For these reasons, our backlog at any given date may not be a reliable indicator of our future revenues and, as a result, revenue and margins’ forecasts, targets and guidance that we provide from time to time, may fall short of expectations.
We may manufacture wafers based on forecasted demand, rather than actual orders from customers. If our forecasted demand exceeds actual demand, we may have obsolete inventory, which may have a negative impact on our financial results.
We target manufacturing wafers in an amount matching each customer’s specific purchase order. On occasion, we may produce wafers in excess of a customer’s orders based on forecasted customer demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped or sold at a significant discount. Significant amounts of obsolete inventory may have a negative impact on our financial results.
Our sales cycles are typically long, and orders ultimately received may not meet our expectations, which may adversely affect our operating results.
Our sales cycles, which we measure from first contact with a customer to first shipment of a product ordered by the customer, vary substantially and may last as long as two years or more, particularly for new technologies. In addition, even after we make initial shipments of prototype products, it may take several more months to reach full production of the product. As a result of these long sales cycles, we may be required to invest substantial time and incur significant expenses before receiving any product orders and related revenue. If orders ultimately received are significantly lower than our expectations, we will have excess capacity that we may not be able to fill within a short period of time, resulting in lower utilization of our facilities. In addition to the revenue loss, we may be unable to adjust our costs in a timely manner to align with the lower revenue, since a large portion of our cost is fixed cost, which remains constant irrespective of the number of wafers actually manufactured, which may adversely affect our operating results and financial condition.
If we are unable to purchase equipment and raw materials, we may not be able to manufacture our products in a timely fashion, which may result in a loss of existing and potential new customers and may have an adverse effect on our business and financial results.
To increase the production capability and maintain the quality of production in our facilities, we must procure additional equipment. In periods of high market demand, the lead times from order to delivery of manufacturing equipment could be as long as 12 to 18 months. We also procure used equipment, which can take a long time to qualify to the manufacturing process, potentially delaying the manufacture of our products. In addition, our manufacturing processes use many raw materials, including silicon wafers, chemicals, gases and various metals, and require large amounts of fresh water and electricity. Manufacturing equipment and raw materials generally are available from several suppliers; however, in several instances, we purchase equipment and raw materials from a single source. Shortages in supplies of manufacturing equipment and raw materials could occur due to an interruption of supply or increased industry demand. Any such shortages could result in production delays that may result in a loss of existing and potential new customers, which may have a material adverse effect on our business and financial results.
We are required to comply with the terms of the Israeli Investment Center approved plan and regulations, the terms of which may subject us to liability for specific payments and/or penalties.
We have received grants under certain Israeli Government programs under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”). In 2011, we received an approval certificate from the Investment Center of the Israeli Ministry of Economy and Industry (“Investment Center”), for an expansion program, pursuant to which we received approximately $36 million in grants for investments made commencing 2006 and through 2012. In 2017, we received approval from the Investment Center for our final performance report in connection with such grant. Eligibility for these approved grants is subject to our satisfying certain conditions stipulated by the Investment Law and the regulations promulgated thereunder, as well as the criteria set forth in the respective certificates of approval for the grants. If we fail to meet these conditions, we may be subjected to significant payment requests and/or penalties by the Investment Center. In addition, in order to secure our obligations in connection with these investment grants, floating liens were registered in favor of the State of Israel on substantially all of our Israeli assets.
We received Israeli government grants for certain of our research and development activities, the terms of which subject us to certain conditions and restrictions.
We received grants from the Government of Israel through the Israel Innovation Authority (“IIA”), of the Ministry of Economy and Industry, for the financing of a portion of our research and development projects pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (the “Innovation Law”). Under the terms of the Innovation Law and the grants that we received, the prior approval of the IIA is required for (among other things) the transfer of IIA-funded technology, intellectual property or know-how to a third party outside of Israel, including by way of license, which we may not receive. Any such approval would typically be subject to payment of a redemption fee, in the amount of up to six times the amount of the grants received (less paid royalties, if any, and depreciation, but no less than the total amount of grants actually received by us) plus accrued interest. The foregoing and other restrictions and requirements for payment under the Innovation Law and related regulations may impair our ability to sell our IIA-funded technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any IIA-funded technology outside of Israel.
Our exposure to currency exchange and interest rate fluctuations may impact our costs and financial results.
We operate our fabs in three different regions: Japan, the United States and Israel. The functional currency of the entities operating the fabs in the United States and Israel is USD. The functional currency of our subsidiary in Japan is the JPY. Our expenses and costs are denominated mainly in USD, JPY and NIS, our revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly in USD, JPY and NIS. We are, therefore, exposed to the risk of currency exchange rate fluctuations in Japan and Israel.
The USD cost of our operations in Israel is influenced by changes in the USD-to-NIS exchange rate with respect to costs that are denominated in NIS. During the year ended December 31, 2019, the USD depreciated against the NIS by 7.8%, as compared to 8.1% appreciation during the year ended December 31, 2018.
The fluctuation of the USD against the NIS can affect our results of operations. Appreciation of the NIS has the effect of increasing the cost of some of our Israeli purchases and NIS-denominated labor costs in USD terms, which may lead to erosion in our profit margins. We use foreign currency transactions to partially hedge a portion, but not all of this currency exposure, to be contained within a pre-defined fixed range. In addition, we executed swap hedging transactions to fully hedge our exposure to the fluctuation of the USD against the NIS as far as it relates to our non-convertible Series G debentures which are denominated in NIS.
The majority of TPSCo’s revenues are denominated in JPY and the majority of the expenses of TPSCo are in JPY, which limits the exposure to fluctuations of the USD / JPY exchange rate on TPSCo’s results of operations as the impact on the revenues is mostly offset by the impact on the expenses. In order to mitigate a portion of the net exposure to the USD / JPY exchange rate over the net profit margins, we have entered into hedging transactions which partially hedge our exposure to the currencies’ fluctuation to be contained within a pre-defined fixed range.
During the year ended December 31, 2019, the USD depreciated against the JPY by 1.2%, as compared to 2.4% depreciation during the year ended December 31, 2018. The net effect of USD depreciation against the JPY on TPSCo’s assets and liabilities denominated in JPY is presented in Cumulative Translation Adjustment as part of Other Comprehensive Income in the balance sheet.
In addition to currency exchange fluctuations, if any of TPSCo’s banks incur increased costs in financing a credit facility due to changes in law or the unavailability of foreign currency, such bank may exercise its right to increase the interest rate on the credit facility or require us to bear such increased cost as provided for in the applicable credit facility agreement.
We also hold a securities investment portfolio, including interest bearing bonds and notes. An increase in the interest rates globally and other market changes may result in a reduced market value of these bonds and notes, thereby creating financing losses for us if we are unable to mitigate exposure, react to the market changes promptly and adjust our securities investment portfolio components in a timely manner.
Although, as described above, we regularly engage in various hedging strategies to reduce our exposure to these risks and intend to continue to do so in the future, we are likely to remain partially exposed to exchange rate fluctuations (mainly NIS and JPY rates as compared to the US dollar), which may have a material effect on our cost and financial results.
We depend on intellectual property to succeed in our business, including intellectual property owned by us as well as intellectual property of third parties. Failure to enforce our intellectual property rights as well as failure to maintain or acquire licenses to intellectual property of third parties may harm our business.
We depend on intellectual property in order for us to provide certain foundry services and design support to our customers. As of December 31, 2019, we held 259 patents in force. We intend to continue to file patent applications when appropriate. The process of applying for patents to obtain patent protection may take a long time and can be expensive. We cannot assure you that patents will be issued for pending or future applications or that, if patents are issued, they will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will respect our intellectual property rights to the same extent as the United States. Effective intellectual property enforcement may be unavailable or limited in some countries. We cannot assure you that we will, at all times, be able to enforce our patents or other intellectual property rights and it may be difficult for us to protect our intellectual property from misuse or infringement by other companies in certain countries. Further, we cannot assure you that courts will uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary technology, which may reduce our opportunities to generate revenues. In the event that we are unable to enforce our intellectual property rights, our business may be harmed.
In addition, with respect to third party intellectual property that is required for the manufacture of our products, if problems or delays arise with respect to the timely development, quality and provision thereof to us, the design and production of our customers’ products may be delayed, resulting in underutilization of our capacity. If any of our intellectual property vendors goes out of business, liquidates, merges with, or is acquired by, another company that discontinues the vendor’s previous line of business, or if we fail to maintain or acquire licenses to such intellectual property for any other reason, our business may be adversely affected.
From time to time, we are a party to litigation that may require management time and effort and may adversely affect us by harming our business, image and financial results.
From time to time, we are a party to litigation incidental to the conduct of our ongoing business, including class actions, disputes with customers, suppliers, landlords, or other third parties. Litigation usually requires a certain amount of management time and effort which may adversely affect our business by diverting management focus from business needs and development of future strategic opportunities.
In addition, our ability to compete successfully depends in part on our ability to operate without infringing on the proprietary rights of others and defending our intellectual property rights. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often difficult for semiconductor companies to determine infringement. Therefore, the semiconductor industry is characterized by frequent litigation regarding patent, trade secret and other intellectual property rights. We have been subject to intellectual property claims from time to time, some of which have been resolved through license agreements, the terms of which have not had a material effect on our business.
We may also be a party to infringement claims in the future. In the event any third party were to assert infringement claims against us or our customers, we may have to consider alternatives including, but not limited to:
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negotiating cross-license agreements;
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acquiring licenses to the allegedly infringed patents, which may not be available on commercially reasonable terms, if at all;
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discontinuing use of certain process technologies, architectures, or designs, which could cause us to stop manufacturing certain integrated circuits if we are unable to design around the allegedly infringed patents;
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litigating the matter in court, incurring substantial legal fees and paying substantial monetary damages in the event we lose; or
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developing non-infringing technologies, which may not be feasible.
Any one or several of these alternatives may place substantial financial and other burdens on us and hinder our business. Litigation, which may result in substantial costs to us and diversion of our resources, may be necessary to enforce our patents or other intellectual property rights or to defend us or our customers against claimed infringement. If we fail to obtain certain licenses or if we are involved in litigation relating to alleged patent infringement or other intellectual property matters, it may prevent us from manufacturing particular products or using particular technologies, which may adversely impact our business and revenues.
We could be harmed by failure to comply with environmental regulations.
Our business is subject to a variety of laws and governmental regulations in Israel, the U.S. and Japan relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in Tower’s production processes in Israel, Fab 3’s production processes in California, Fab 9’s production processes in Texas and TPSCo’s facilities in Japan. If we fail to use, discharge or dispose of hazardous materials appropriately, or if applicable environmental laws or regulations change in the future, we may be subject to substantial liability or may be required to suspend or significantly modify our manufacturing operations.
We are subject to risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable.
We use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to risk of loss arising from fire. The risk of fire associated with these materials cannot be completely eliminated. Although we maintain insurance policies to mitigate any potential losses that may be caused by fire, including business interruption insurance, our insurance coverage may not compensate us fully for all losses incurred due to a fire. If any of our fabs were to be damaged and/or cease operations for a certain period of time as a result of a fire, and if our insurance proves to be inadequate, our manufacturing capacity and revenues may be adversely affected. In addition, a power outage, even of very limited duration, caused by a fire may result in a loss of wafers in production, deterioration of our fab yield, substantial downtime to reset equipment before resuming production and an adverse effect on our revenue and profits.
Our business strategy is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers. If this trend does not continue to develop in the manner we expect, our business and financial results may be adversely affected.
We operate as an independent semiconductor foundry focused primarily on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow and follow the broader trend towards outsourcing foundry operations. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies that we are focused on, our business and financial results may be adversely impacted.
If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers’ design needs, our business may be harmed.
We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers’ design needs successfully, including their schedule and budget requirements, depends in part on the availability and quality of the relevant services, tools and intellectual property provided by electronic design automation vendors and design service providers. Difficulties or delays in these areas may adversely affect our ability to meet our customers’ needs, thereby potentially harming our business.
If we are unable to successfully locate and negotiate with third-party buyers for the sale of any excess and unused equipment, our financial results may be harmed.
From time to time, we may decide to abandon certain product technology lines or a manufacturing facility due to company strategy, low margins or low customer demand, resulting in unused equipment that no longer supports our customers’ needs and that, therefore, we may decide to sell to third-party buyers. We also have obsolete or unutilized equipment from time to time which we may sell. If we are unable to successfully locate and negotiate with potential buyers and sell the excess equipment in a timely manner for satisfactory consideration, we may be unable to cover our fixed and other costs associated with such decision, which may have a negative effect on our financial results.
Compliance with existing or future governmental regulations may reduce our sales or increase our manufacturing costs.
The export of semiconductors that we manufacture may be subject to U.S., Israeli and/or Japanese export control and other regulations established by other countries. Compliance with existing or evolving U.S., Israeli, Japanese or other applicable governmental regulations or obtaining timely domestic or foreign regulatory approvals or certificates may materially disrupt our business by reducing our sales, requiring extensive modifications to processes that we use in our product manufacturing and thereby increasing our manufacturing costs, or requiring extensive modifications to our customers’ products. We may not export products using or incorporating controlled technology without obtaining an export license. These restrictions may make foreign competitors facing less stringent controls on the export of their products more competitive in the global market. The relevant government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, may be modified from time to time.
If certain of the integrated circuits we manufacture are defective and integrated into products, we may be subject to product liability claims or other claims which could damage our reputation and harm our business.
Our customers integrate our custom integrated circuits into their products, which they then sell to end users. If these products are defective or malfunction, we may be subject to product liability claims, as well as possible recalls, safety alerts or advisory notices relating to the product. We cannot assure you that our insurance policies will compensate us fully for claims that may be made against us. In addition, we may be unable to obtain insurance in the future at satisfactory rates, with adequate coverage, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, may have a material adverse effect on our business, reputation, financial condition and our ability to attract and retain customers.
A workforce that is unionized may have an adverse impact on our manufacturing costs as well as on our operations by work stoppages, strikes or other collective actions which may disrupt the fabs’ production and adversely affect the fabs’ performance, our customers and our operational and financial results.
A significant portion of the employees at the Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement, which was renewed for three additional years, effective as of July 1, 2018. Similarly, a significant portion of TPSCo’s employees at its fabs in Japan are represented by a union and covered by a collective bargaining agreement. In addition, employees at our fabs in Israel, who currently are not members of any union, may wish to join a union in the future. We cannot predict the effect that union representation or future organizational activities will have on these fabs’ manufacturing cost and business. Specifically, under TPSCo’s collective bargaining agreement, the union and TPSCo are required to first negotiate any points of dispute before taking any action such as work stoppages, strikes or other collective actions. We cannot assure you that our fabs will not experience a material work stoppage, strike or other collective action in the future, or incur increased costs in connection with the renewal of such bargaining agreements or other potential union activities, which may disrupt their production and adversely affect our fabs’ manufacturing costs, operational performance metrics, our customers and our operational and financial results.
Climate change may negatively affect our business.
There is increasing concern regarding climate change and its potential dramatic effects on human activity if no aggressive remediation steps are taken. Legislative developments with respect to reductions in greenhouse gas emissions may result in increased energy, transportation and raw material costs. 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 may adversely affect our operations. Changes in environmental regulations, such as those on the use of per fluorinated compounds, may increase our production costs, which may adversely affect our results of operation and financial condition.
In addition, more frequent droughts and floods, extreme weather conditions and rising sea levels may occur due to climate change. For example, transportation suspension caused by extreme weather conditions, including snowstorms, may harm the distribution of our products. We cannot predict the economic impact, if any, of disasters resulting from climate change.
Compliance with the US conflict minerals requirements enacted pursuant to the Dodd-Frank Act may affect our ability or the ability of our suppliers to purchase raw materials at an effective cost and may adversely affect our business.
Many industries rely on materials which are subject to regulation concerning certain minerals sourced from the Democratic Republic of Congo (“DRC”) or adjoining countries, which include Sudan, Uganda, Rwanda, Burundi, United Republic of Tanzania, Zambia, Angola, Congo, and Central African Republic. These minerals are commonly referred to as conflict minerals. Conflict minerals which may be used in our industry or by our suppliers include Columbite-tantalite (derivative of tantalum [Ta]), Cassiterite (derivative of tin [Sn]), gold [Au], Wolframite (derivative of tungsten [W]), and Cobalt [Co]. We are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that require due diligence and disclosure as to whether our products contain conflict minerals. The Trump administration has indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. In April 2017, the SEC announced suspension of enforcement of portions of the conflict minerals regulations enacted under the Dodd-Frank Act following a ruling by the U.S. Court of Appeals for the District of Columbia Circuit. The potential implementation of these requirements and any changes effected by the Trump administration could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will likely incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our products and, if applicable, potential changes to our products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or may lose customers and adversely impact our revenue and business if we are unable to alter our products, processes or sources of supply to avoid use of such materials. We may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products.
Security, cyber and privacy breaches may hurt our business and operations.
Any security breach, including those resulting from a cybersecurity attack, or any unauthorized access, unauthorized usage, virus or similar breach or disruption could result in 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, 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.
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, we are not subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.
We report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted, to follow, and follow, certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the Nasdaq Stock Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, the director nomination process, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we follow our home country law instead of the Listing Rules of the Nasdaq Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to domestic U.S. issuers.
Similarly, as an Israeli company listed on the Nasdaq Stock Market and the TASE, we are permitted to rely on certain relief granted to foreign listed companies under regulations promulgated under the Companies Law. For instance, we adopted the exemption under Israel law permitting a company whose shares are traded on certain stock exchanges outside Israel (including the Nasdaq Global Select Market, such as our company) that does not have a controlling shareholder, from the requirement to appoint external directors under Israeli law and related provisions, including regarding the composition of the audit committee and compensation committee, provided that it complies with the requirements of the laws of the foreign jurisdiction where the company’s shares are listed, as they apply to domestic issuers, with respect to the appointment of independent directors and the composition of the audit committee and compensation committee.
If we lose our status as a foreign private issuer under the SEC’s rules, our compliance costs will increase.
We would lose our foreign private issuer status if more than 50 percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. If we cease to qualify as a foreign private issuer, the regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
We do not expect to pay any dividends in the foreseeable future.
We do not anticipate paying any dividends in the foreseeable future. We currently intend to retain future earnings to finance our growth and acquisition strategy, as well as capacity growth and our ongoing operations. Our board of directors has sole discretion whether to pay dividends. If our board of directors will decide to pay dividends, the form, frequency and amount will depend upon our future growth and acquisition strategy, as well as our capacity growth plans, future operations and earnings, capital requirements and surplus, general financial condition, contractual and legal restrictions and other factors that our directors may deem relevant. The Companies Law imposes restrictions on our ability to declare and pay dividends. Furthermore, under the indenture for our Series G Debentures, a distribution of dividends is subject to us satisfying certain financial covenants and is subject to certain limitations. 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 arm 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. We can give no assurance that security and political conditions will not adversely impact our business in the future. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners may adversely affect our operations and make it more difficult for us to do business and raise capital. Furthermore, we could experience serious disruption to our manufacturing in Israel if acts associated with 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 the event of severe unrest or other conflict, Israeli personnel could be required to serve in the military for extended periods of time. In response to increases in terrorist activity, there have been periods of significant call-ups of Israeli military reservists, and it is possible that there will be additional call-ups in the future. Many male Israeli citizens, including most of 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. 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, Israelis 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 or our non-U.S. resident directors, officers may be difficult to obtain within the United States. Additionally, a judgment obtained in the United States against Tower or any of our non-U.S. executive officers and directors, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States (except to the extent that it relates to Tower’s US subsidiaries, its assets or employees) and may not be enforced by an Israeli court. Additionally, it may be difficult to 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 and 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.
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. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. There is limited case law available to assist in understanding the implications of these provisions. 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.
ITEM 4.INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We are a pure-play independent specialty foundry dedicated to the manufacture of semiconductors. Typically, pure-play foundries do not offer products of their own, but focus on producing integrated circuits, or ICs, based on the design specifications of their customers. We manufacture semiconductors for our customers primarily based on third party designs. We currently offer the process manufacture geometries of 0.35, 0.50, 0.55, 0.60, 0.80-micron and above on 150-mm wafers and 0.35, 0.18. 0.16, 0.13 and 0.11-micron on 200-mm wafers and 65 nanometer and 45 nanometer on 300-mm wafers. We also provide design support and complementary technical services. ICs manufactured by us are incorporated into a wide range of products in diverse markets, including consumer electronics, personal computers, communications, automotive, industrial, aerospace and medical device products.
We are focused on establishing leading market share in high-growth specialized markets by providing our customers with high-value wafer foundry services. We manufacture standard analog complementary metal oxide semiconductor (“CMOS”) process technology, which is a widely used method of producing ICs, and we specialize in specific technologies including CMOS image sensors, non-imaging sensors, wireless antenna switch Silicon-on-Insulator (SOI), mixed-signal, radio frequency CMOS (RFCMOS), bipolar CMOS (BiCMOS), and silicon-germanium BiCMOS (SiGe BiCMOS or SiGe), high voltage CMOS, radio frequency identification (RFID) technologies, MEMS, power management and Gallum Nitride (GaN) devices. To better serve our customers, we have developed and are continuously expanding our technology offerings in these fields. Through our experience and expertise gained during more than twenty five years of operation, we differentiate ourselves by creating a high level of value for our customers through innovative technological processes, design and engineering support, competitive manufacturing indices, and dedicated customer service.
Tower was founded in 1993, with the acquisition of National Semiconductor’s 150-mm wafer fabrication facility located in Migdal Haemek, Israel, and commenced operations as an independent foundry. Since then, we have significantly upgraded our Fab 1 facility, equipment, capacity and technological capabilities with process geometries ranging from 1.0-micron to 0.35-micron and enhanced our process technologies to include CMOS image sensors, embedded flash, advanced analog, RF (radio frequency) and mixed-signal technologies. Recently, we integrated advanced single Poly NVM into the Fab 1 process flows and developed a GaN technological platform (GaN on Si) suitable for fabrication of HEMT transistors, gas and UV sensors.
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. NPB Co. focuses on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices, and supports geometries ranging from 0.50 to 0.13-micron. 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 by NPB Co. are incorporated into a wide range of products, including cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems. NPB Co. operates Fab 3 located in Newport Beach, California, US.
In March 2014, we acquired from Panasonic 51% of a newly established company, TPSCo, that manufactures products for Panasonic and other third party customers, using 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, and entered into a five-year manufacturing agreement for the manufacture of products for Panasonic by TPSCo, which was extended in March 2019 for an additional three years, under amended terms, including a revised pricing structure.
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.
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.
For more information about us, go to 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 cost, the use of semiconductors and the number of their applications have increased significantly.
Historically, the semiconductor industry was composed primarily of companies that designed and manufactured ICs in their own fabrication facilities. These companies, such as Intel and Samsung, are known as integrated device manufacturers (“IDM”). In the mid-1980s, fabless IC companies, which focused on IC design and used external manufacturing capacity, began to emerge. Fabless companies initially outsourced production to IDMs, which filled this need through their excess capacity. As the semiconductor industry continued to grow, increasing competition forced fabless companies and IDMs to seek reliable and dedicated sources of IC manufacturing services. Use of external manufacturing capacity allowed IDMs to reduce their investment in their existing and next-generation manufacturing facilities and process technologies. This need for external manufacturing capacity led to the development of independent companies, known as foundries, which focus primarily on providing IC manufacturing services to semiconductor suppliers. Foundry services are used by nearly all major semiconductor companies in the world, including IDMs, as part of a dual-source, risk-diversification and cost effectiveness strategy.
Semiconductor suppliers face increasing demands for new products that provide higher performance, greater functionality and smaller form factors at lower prices - all features that require increasingly complex ICs. The industry has experienced a dramatic increase in the number of applications that incorporate semiconductors. Further, in order to compete successfully, semiconductor suppliers must minimize the time it takes to bring a product to market. As a result, fabless companies and IDMs have focused more on their core competencies, design and intellectual property development, and tend to outsource manufacturing to foundries.
The two basic functional technologies for semiconductor products are digital and analog. Digital semiconductors provide critical processing power and have helped enable many of the computing and communication advances of recent years. Analog semiconductors monitor and manipulate real world signals such as sound, light, pressure, motion, temperature, electrical current and radio waves, for use in a wide variety of electronic products such as digital still cameras, x-ray medical applications, flat panel displays, personal computers, cellular handsets, telecommunications equipment, consumer electronics, automotive electronics and industrial electronics. Analog-digital, or mixed-signal, semiconductors combine analog and digital devices on a single chip which can process both analog and digital signals.
Integrating analog and digital components on a single, mixed-signal semiconductor enables the development of smaller, more highly integrated, power-efficient, feature-rich and cost-effective semiconductor devices but presents significant design and manufacturing challenges. For example, combining high-speed digital circuits with sensitive analog circuits on a single, mixed-signal semiconductor can increase electromagnetic interference and power consumption, both of which cause a higher amount of heat to be dissipated and decrease the overall performance of the semiconductor. Challenges associated with the design and manufacture of mixed-signal semiconductors increase as the industry moves toward more advanced process geometries. As a result, analog and mixed-signal semiconductors can be complex to manufacture and typically require sophisticated design expertise and strong application specific experience and intellectual property. In addition, today’s analog market is driven strongly by growing sensitivity to environmental requirements such as the conservation of energy, and human well-being. This is seen in applications related to the systems enabled with Artificial Intelligence, products related to Internet of Things (IoT) in particular ASICs with embedded sensors, medical devices, applications focused on entertainment, infotainment and safety, all developed using analog technology.
Mixed-signal ICs are an essential part of any front-end electronic system. Our advanced analog CMOS process technologies have more features than standard analog CMOS process technologies and are well suited for higher performance or more highly integrated analog and mixed-signal semiconductors, such as high-speed analog-to-digital or digital-to-analog converters and mixed-signal semiconductors with integrated data converters. These process technologies generally incorporate higher density passive components, such as capacitors and resistors, as well as improved active components, such as native or low voltage devices, and improved isolation techniques, into standard analog CMOS process technologies.
The enormous costs associated with modern fabs, combined with the increasing demand for complex ICs, has created an expanding market for outsourced foundry manufacturing services. Foundries can cost-effectively supply advanced ICs to even the smallest fabless companies by creating economies of scale through pooling the demand of numerous customers. In addition, customers whose IC designs require process technologies other than standard digital CMOS have created a market for independent foundries that focus on providing specialized process technologies. Specialty process technologies enable greater analog content and can reduce the die size of an analog or mixed-signal semiconductor, thereby increasing the number of dies that can be manufactured on a wafer and reducing final die cost. In addition, specialty process technologies can enable increased performance, superior noise reduction and improved power efficiency of analog and mixed-signal semiconductors compared to traditional standard CMOS processes. These specialty process technologies include advanced analog CMOS, specialized RF devices on SOI, radio frequency CMOS (RF CMOS), CMOS image sensors (CIS) and other types of original sensors, high voltage CMOS, bipolar CMOS (BiCMOS), silicon germanium BiCMOS (SiGe BiCMOS), bipolar CMOS double-diffused metal oxide semiconductor (BCD), NVM technologies and special devices for enabling chips with Artificial Intelligence. We have mastered the skills required to work in this technology intensive environment which is rapidly changing. We work closely with our customers to provide them with unique and specialized solutions needed for their business success.
Foundries may also offer customers competitive complementary services through design, testing, and other technical services.
MANUFACTURING PROCESSES AND SPECIALIZED TECHNOLOGIES
We manufacture ICs on silicon wafers, generally using the customer’s proprietary circuit designs. In some cases, we provide our customers with third-party design elements or our own proprietary design elements. The end product of our manufacturing process is a silicon wafer containing multiple identical ICs. In most cases, our customer assumes responsibility for dicing, assembly, packaging and testing.
We provide wafer fabrication services to fabless IC companies and IDMs, as sole source or second source, and enable smooth integration of the semiconductor design and manufacturing processes. By doing so, we enable our customers to bring high-performance, highly integrated ICs to market rapidly and cost effectively. We believe that our technological strengths and emphasis on customer service have allowed us to develop a unique position in large, high-growth specialized markets for CMOS image sensors, RF, power management and high-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, 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 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 require an advanced technology node which 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, 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-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 and business by attracting new customers that will utilize our existing manufacturing facilities, some of which have recently implemented further capacity expansion projects, as well as by acquiring external capacity through acquisitions of existing or newly established fabs, as we have done in the past, with or without third-party collaboration and/or funding (including cash, equity or in-kind investment). We also offer from time to time a wide range of support services for the establishment of new semiconductor fabrication facilities or the ramp of existing facilities owned by third parties, based on our technological, operational and integration expertise, for which we receive payments based on the achievement of pre-defined milestones and may also be entitled to certain capacity allocation and other rights, all subject to definitive agreements underlying such projects.
We derived a very significant amount of our revenues for the year ended December 31, 2019 from our target specialized markets: RF CMOS, including SiGe power IC and discrete devices, CMOS image sensors, wireless communication and high performance analog. We are highly experienced in these markets, having been an early entrant and having developed unique proprietary technologies, including through licensing and joint development efforts with our customers and other technology companies.
The specific process technologies that we currently focus on include: radio frequency CMOS (RF CMOS), including SiGe CMOS image sensors (CIS) and integration of other types of sensors, advanced analog CMOS, radio frequency identification (RFID), bipolar CMOS (BiCMOS), silicon germanium (SiGe BiCMOS), high voltage CMOS, silicon-on-insulator (SOI) platforms for power management, RF and sensor applications, LDMOS transistors, sensors based on GaN (gallium nitride) technology, and technologies for enabling Artificial Intelligence , 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 and video cameras, security and surveillance cameras and video game consoles. Our dedicated manufacturing and testing processes assure consistently high electro-optical performance of the integrated sensor through wafer-level characterization. Our CMOS image sensor processes have demonstrated superior optical characteristics, excellent spectral response and high resolution and sensitivity. The ultra-low dark current, high efficiency and accurate spectral response of our photodiode enable faithful color reproduction and acute detail definition.
We are currently actively involved in the high-end sensor and applications specific markets, which include applications such as high end video, high end photography, industrial machine vision, dental x-ray, medical x-ray, automotive sensors, security sensors and ToF (time of flight) three dimensional sensors for entertainment and industrial applications.
We recognized the market potential of using CMOS process technology for a digital camera-on-a-chip, which would integrate a CMOS image sensor, filters and digital circuitry. Upon entering the CMOS image sensor foundry business, we utilized research and development work that had been ongoing since 1993. Our services include a broad range of turnkey solutions and services, including silicon proven pixels services, optical characterization of a CMOS process, innovative patented stitching manufacturing technique and prototype packaging. The CMOS image sensors that we manufacture include 110nm on 200mm wafers and 65nm on 300mm wafers with pixel sizes down to 1.12 micron utilizing dual light pipe technology and deliver outstanding image quality for a broad spectrum of digital imaging applications.
Specifically, our CIS portfolio includes pixels ranging from 1.12 micron up to 150 micron, all developed by us. We provide both rolling shutter and global shutter pixels. The latter are used mainly in the industrial sensor and in the three-dimensional sensors markets. Our advanced technology used in CMOS image sensors enables improved optical and electrical performance such as low dark current, low noise, high well capacity, high quantum efficiency and high uniformity of pixels utilizing deep sub-micron process technologies, enabling the manufacturing of very sophisticated and high performance camera module solutions. Our state-of-the-art pixels are used in a variety of new markets such as the high-end machine vision cameras and the rapidly growing security camera markets. In addition, our advanced global shutter technology and global shutter pixels, as small as 2.5um, enable excellent performance, especially, very high shutter efficiency.
For the X-ray market, we offer our innovative patented “stitching” technology on 0.18-micron process as well as on 65nm technology on 300mm wafers and a variety of 15 to 150-micron pixels that are optimized for X-ray applications. These pixels are used by our customers in dental and other medical X-ray products as well as in the industrial NDT (Not Destructive Testing) X-Ray market. Our stitching technology enables semiconductor exposure tools to manufacture single ultra-high-resolution CMOS image sensors containing millions of pixels at sizes far larger than their existing field. This technology is also used by us in the manufacturing of large sensors (up to one die per wafer) on 8” and 12” wafers and high-end large format sensors with special pixels that we have developed specifically for this market.
We specially developed our near Infra-Red imaging technology for gesture recognition systems designed by leading world computer manufacturers and a series of spectrally sensitive image sensors, including proximity sensors and sensors sensitive in the UV range.
Our BSI (Backside Illumination) technology was developed for both 200mm and 300mm wafers. For the 200mm wafers, we cooperate with YCM (YuanChen Microelectronics) in China that manufactures the BSI part of the process on our wafers, using our own developed BSI technology. For the 300mm wafers, we provide stacked wafer technology, where two wafers (a CMOS wafer and a CIS wafer) are connected electrically to provide high functionality on a CMOS Image Sensor.
In addition, we developed SPAD (single photon avalanche detectors) for LIDAR (light detection and range) applications in smart automotive advanced driver assistance systems (ADAS) and autonomous driving (AD) vehicles. Our technology allows us to combine CMOS, image sensors and SPADs on the same chip.
RF CMOS
In recent years, more and more designers opt to develop high frequency products based on RF CMOS technologies. The superior cost structure of CMOS technologies enables high volume, low cost production of high frequency products. We used our mixed signal expertise to leverage and develop processes and provide services for customers that utilize CMOS technologies and require high frequency performance.
Our RF CMOS process technologies have more features than advanced analog CMOS process technologies of our competitors and are well suited for wireless electronics, such as highly integrated transceivers, power amplifiers, and television tuners. These process technologies generally incorporate integrated inductors, high performance variable capacitors and RF laterally diffused metal oxide semiconductors transistors into an advanced analog CMOS process technology. In addition to the smart process features, our RF offering includes design kits with RF models, device simulation and physical layouts tailored specifically for RF performance. We currently have RF CMOS process technologies in 0.25 micron, 0.18 micron, 0.13 micron and 65 nanometer.
Further, we have 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 RF semiconductors, such as wireless transceivers and television tuners. These process technologies generally incorporate high-speed bipolar transistors into an RF CMOS process. The equipment requirements for BiCMOS manufacturing are specialized and assume enhanced tool capabilities to achieve high yield manufacturing.
Our SiGe BiCMOS process technologies have more features than BiCMOS processes and are well suited for more advanced RF and high performance analog semiconductors such as high-speed, low noise, highly integrated multi-band wireless transceivers, optical networking components, television tuners, automotive radar components, hard-disk drive pre-amplifiers, power amplifiers and low-noise amplifiers. These integrated circuits generally incorporate 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 a BiCMOS process technology. It is also possible to achieve higher speed using SiGe BiCMOS process technologies equivalent to those demonstrated in standard CMOS processes that are two process generations smaller in linewidth. For example, a 0.18 micron SiGe BiCMOS process is able to achieve speeds comparable to a 90 nanometer RF CMOS process. As a result, SiGe BiCMOS makes it possible to create analog products using a larger geometry process technology at a lower cost while achieving similar or superior performance to that achieved using a smaller geometry standard CMOS process technology. We developed enhanced tool capabilities in conjunction with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. We believe this equipment and related process expertise makes us one of the few integrated circuit manufacturers with demonstrated ability to deliver SiGe BiCMOS products. We currently have 0.35 micron, 0.18 micron and 0.13 SiGe BiCMOS micron technologies available.
Power and Power Management ICs
Our power technologies are generally divided into a low-voltage BCD offering and 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 such as 5V, 8V, 12V, 40V and 60V LDMOS devices, and, in the case of BCD, bipolar devices integrated into an advanced analog CMOS process. We currently have high voltage and low Rdson BCD offerings in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron and 65 nanometer. We offer a cost effective and digital intensive power management platform, based on our 0.18um technology node with advanced isolation options (in particular SOI based), that allow our customers to design high performance products as well as products with the high level of integration. We recently qualified an advanced 65nm BCD platform which is advantageous for a variety of products, such as PMICs, load switches, DC-DC converters, LED drivers, analog, digital controllers, and more. The process includes up to 16V LDMOS transistors with ultra-low Rdson (less than 1mΩ*mm² for the 5V devices) and features very low metal resistance (single or dual 3.3um top thick copper).
Our high 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, zero mask adder 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 with record (for the single Poly embedded MTP technologies) memory densities of up to 16kbit, which have been integrated in various power management products of our customers. We have also introduced high density single 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, 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 and investing in development of Silicon Photonics technology.
CUSTOMERS, MARKETING AND SALES
Our marketing and sales strategy seeks to further solidify our position as the global specialty foundry leader, by increasing our market share at existing customers and aggressively expanding our global customer base. We have marketing, sales, design support engineers, field application engineers and customer support personnel in Israel, Japan, Korea, Taiwan and the United States. In selected markets, including China, Europe, our global marketing and sales staff is supported by local independent sales representatives, who have been selected based on their industry experience, customer relationships and understanding of the semiconductor marketplace.
Our sales cycle is generally 8 to 26 months or longer for new customers and can be as short as 8 to 12 months for existing customers. The typical stages in the sales cycle process from initial contact until production are:
•
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. A portion of our product sales are made pursuant to long-term contracts with our customers, under which we agree to reserve manufacturing capacity at our production facilities for such customers. Our customers include many analog and mixed-signal industry leaders, serving a variety of end market segments. During the year ended December 31, 2019, we had six significant customers that each contributed between 5% to 27% of our revenues. During the year ended December 31, 2018, we had four significant customers that each contributed between 7% to 33% of our revenues. During the year ended 2017, we had four significant customers that each contributed between 7% to 30% of our revenues.
The following table sets forth the geographical distribution, by percentage, of our net revenues for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
|
52
|
%
|
|
|
52
|
%
|
|
|
52
|
%
|
Japan
|
|
|
29
|
%
|
|
|
34
|
%
|
|
|
32
|
%
|
Asia, excluding Japan*
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
12
|
%
|
Europe
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
* Represents revenues from individual countries of less than 10% each.
We price our products on a per wafer basis, taking into account the unique value of our technology and its ability to enable customers to differentiate their products, complexity of the technology, prevailing market conditions, volume forecasts, the strength and history of our relationships with the customer and our current capacity utilization. Most of our customers usually place purchase orders between two to six months before shipment.
To promote our products, technology offering, and services we publish press releases, articles, technology journals, and white papers. In addition, we present and participate in panel sessions at industry conferences, hold a variety of regional and international technology seminars, and exhibit at various industry trade shows. We discuss advances in our process technology portfolio and progress on specific relevant programs with our prospective and existing customers, as well as industry analysts and research analysts, on a regular basis.
Our customers use our processes to design and market a broad range of analog and mixed-signal semiconductors for diverse end markets, including wired and wireless high-speed communications, consumer electronics, automotive and industrial applications. We manufacture products for a wide range of electronic systems, including but not limited to, high-performance applications, such as antenna switches, transceivers and power management circuits for cellular phones; transceivers and power amplifiers for wireless local area networking products; power management, audio amplifiers and driver integrated circuits for consumer electronics; tuners for digital televisions and set-top boxes; modem chipsets for broadband access devices and gaming devices; serializer/deserializers, or SerDes, for fiber optic transceivers; high end video cameras, dental and medical x-ray vision, industrial cameras, focal plane arrays for imaging applications; infra-red detectors for gesture recognition, controllers for power amplifier and switching chips in cellular phones and wireline interfaces for switches and routers, magnetic field , 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 Global Foundries (mainly in the RF business), Vanguard Semiconductor, DongBu, X-Fab and HH Semi. We also compete with the pure-play advanced technology node-driven foundry service providers such as Taiwan Semiconductor Manufacturing Corporation (“TSMC”), United Microelectronics Corporation (“UMC”), 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 generally targets either industry standard 8-inch CMOS processing or specialty process technologies. This includes existing Chinese, Korean and Malaysian foundries. We also compete with IDMs that have internal semiconductor manufacturing capacity or foundry operations, such as ST, Intel, Samsung, Sony and others that produce ICs for their own use and may allocate a portion of their manufacturing capacity to external foundry customers. Most of the foundries with which we compete are located in Asia-Pacific that benefit from their close proximity to companies involved in the design of ICs and the Asian customer base.
The principal elements of competition in the wafer foundry market are:
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technology offering and future roadmap;
•
product performance;
•
system level technical expertise;
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research and development capabilities;
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access to intellectual property;
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customer technical support;
•
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, engineering and manufacturing services. We have a highly differentiated specialty offering and proven track record in analog/mixed-signal markets, which enables us to effectively compete with larger foundry service providers.
Some semiconductor companies have advanced their CMOS designs to 10-14 nanometer or smaller geometries. These smaller geometries may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Our specialty process technologies will therefore compete with these advanced CMOS processes for customers and some of our potential and existing customers could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller geometries.
WAFER FABRICATION SERVICES
Wafer fabrication is an intricate process that consists of constructing layers of conducting and insulating materials on raw wafers in intricate patterns that give the IC its function. IC manufacturing requires hundreds of interrelated steps performed on different types of equipment, and each step must be completed with extreme accuracy for finished ICs to work properly. The process can be summarized as follows:
Circuit Design. IC production begins when a fabless IC company or IDM designs (or engages a third party or us) 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 and provision 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 such services 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.
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 some participation of the Government of the State of Israel through the IIA, pursuant to 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. 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 of up to six times the grant amount (less paid royalties, if any, and depreciation, but no less than the total amount of grants actually received by us), plus accrued interest. See “Item 3. Key Information—D. Risk Factors—Risks Affecting Our Business—We received Israeli government grants for certain of our research and development activities, the terms of which subject us to certain conditions and restrictions”.
In addition to the above, we may be required to obtain export licenses before exporting certain technology or products to any third party and may be required to comply with Israeli, U.S. and other foreign export regulations, as may be applicable.
Our research and development activities seek to upgrade and improve our manufacturing technologies and processes. We maintain a central research and development team primarily responsible for developing cost-effective technologies that can serve the manufacturing needs of our customers. A substantial portion of our research and development activities are undertaken in cooperation with our customers and equipment vendors. Due to the rapid changes in technology that characterize the semiconductor industry, effective research and development is essential to our success. We plan to continue to invest significantly in research and development activities in order to develop advanced process technologies for new applications.
Research and development expenses for the years ended December 31, 2019, 2018 and 2017 were $75.6 million, $73.1 million and $67.7 million, respectively, net of government participation of $0.7 million, $1.4 million and $0.9 million, respectively. As of December 31, 2019, we employed 428 professionals in our research and development departments, 32 of whom have PhDs. In addition to our research and development departments located at our facilities in Migdal Haemek, Israel, Newport Beach, California, San Antonio, Texas and Hokuriku Japan, we maintain a design center in Netanya, Israel.
PROPRIETARY RIGHTS
Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our production processes. To that end, we have obtained certain patents, acquired patent licenses and intend to continue to seek patents on our intellectual property.
As of December 31, 2019, we held 259 patents in force. We have entered into various patent and other technology license agreements with technology companies, including Synopsys, ARM, Cadence, Mentor Graphics and others, under which we have obtained rights to additional technologies and intellectual property.
We constantly seek to strengthen our technological expertise through relationships with technology companies. We seek to expand our core strengths in CMOS image sensors, embedded flash, power management, Artificial Intelligence, RF, SiGe, MEMS and mixed-signal technologies by continuous development in these areas. A main component of our process development strategy is to acquire licenses for standard CMOS technologies, cell libraries and specialized IPs (e.g. NVM) from leading providers, such as ARM and Synopsys, and further develop specialized processes through our internal design teams. The licensing of these technologies has significantly reduced our internal development costs.
Our ability to compete depends on our ability to operate without infringing upon the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation over patent and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting that their patents cover certain of our technologies or alleging infringement of intellectual property rights. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and devote significant management resources in defending ourselves from such claims.
DESIGN SERVICES
To better serve our customers’ design needs using advanced CMOS and mixed-signal processes, we have entered into a series of agreements with leading providers of physical design libraries, mixed-signal and non-volatile memory design components. These components are basic design building blocks, such as standard cells, interface input-output (I/O) cells, software compilers for the generation of on-chip embedded memories arrays, mixed-signal and non-volatile memory design blocks. To achieve optimal performance, all of these components must be customized to work with our manufacturing process. These components are used in most of our customers’ chip designs.
We interact closely with customers throughout the design development and prototyping process to assist them in the development of high performance and low power consumption semiconductor designs and to lower their final die, or individual semiconductor, costs through die size reductions and integration. We provide engineering support and services as well as manufacturing support in an effort to accelerate our customers’ design and qualification process so that our customers can achieve faster time to market. We have entered into alliances with Cadence Design Systems, Inc., Synopsys, Inc., Mentor Graphics Corp., and other suppliers of electronic design automation tools, and also licensed standard cells, IO and memory technologies from ARM, Synopsys, Inc., and other leading providers of physical intellectual property components for the design and manufacture of ICs. Through these relationships, we provide our customers with the ability to simulate the behavior of their design in our processes using standard electronic design automation, or EDA tools.
The applications for which our specialty process technologies are targeted present challenges that require an in-depth set of simulation models. We provide these models as an integral part of our design support. At the initial design stage, our customers’ internal design teams use the proprietary design kits that we have developed to design semiconductors that can be successfully and cost-effectively manufactured using our specialty process technologies. These design kits, which collectively comprise our design library and design platform, allow our customers to quickly simulate the performance of a semiconductor design with our processes, enabling them to refine their product design to ensure alignment to our manufacturing process before actually manufacturing the semiconductor. Our engineers, who have significant experience with analog and mixed-signal semiconductor design and production, work closely with our customers’ design teams to provide design advice and help them optimize their designs for our processes and their performance requirements. After the initial design phase, we provide our customers with a multi-project wafer service to facilitate the early and rapid use of our specialty process technologies, which allows them to gain early access to actual samples of their designs. Under this multi-project wafer service, we schedule a 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. Our design support can assist in all or part of the design flow. Our in-depth knowledge of the fab and processes provide a substantive advantage when implementing designs that reach the boundaries of technology. In addition, our IP and design services can assist and relieve some of our customers' issues, providing the specific skills and expertise critical for successful implementation of our customers’ design on our manufacturing process.
We believe that our circuit design expertise and our ability to accelerate our customers’ design cycle while reducing their design costs represent one of our competitive strengths.
JAZZ SEMICONDUCTOR TRUSTED FOUNDRY
For purposes of our U.S. aerospace and defense business, Tower and Tower NPB have worked with the Defense Security Service of the United States Department of Defense (“DSS”) to mitigate concern of foreign ownership, control or influence over the operations in Fab 3, specifically relating to protection of classified information and prevention of potential unauthorized access 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 classified information solely to JSTF. In addition, Fab 3 has obtained facility security clearance and trusted foundry status.
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 TPSCo (and PSCS holds the remaining equity of TPSCo). TPSCo is incorporated under the laws of Japan and operates three fabs Arai E, Uozo E and Tonami CD located in Japan.
Tower Semiconductor San Antonio, Inc., which is wholly-owned by Tower US Holdings, operates our Fab 9 facility in San Antonio, Texas, USA.
D. PROPERTY, PLANTS AND EQUIPMENT
Manufacturing Facilities
We manufacture semiconductor wafers at seven manufacturing facilities: Fab 1 and Fab 2 facilities in Israel, Fab 3 in Newport Beach, California in the U.S., TPSCo’s three fabs (Arai E, Uozo E and Tonami CD) in Japan, and Fab 9 in San Antonio, Texas, U.S. The capacity in each of our facilities at any particular time varies and depends on the combination of the processes being used and the product mix being manufactured at such time. Hence, it may be significantly lower at certain times as a result of certain combinations that may require more processing steps than others. We have the ability to rapidly change the mix of production processes in use in order to respond to changing customer needs and to maximize utilization of the fab. In general, our ability to increase our manufacturing capacity has been achieved through the addition of equipment, improvement in equipment utilization, the reconfiguration and expansion of existing clean rooms area.
Capital expenditures in 2019 and 2018 were approximately $172 million and $170 million, respectively, net of proceeds from sale of equipment and fixed assets of approximately $19 million and $40 million, respectively.
Fab 1
We acquired our Fab 1 facility from National Semiconductor in 1993, which had operated the facility since 1986. The facility is located in Migdal Haemek, Israel. We occupy the facility under a long-term lease from the Israel Lands Authority which expires in 2032.
Due to the sensitivity and complexity of the semiconductor manufacturing process, a semiconductor manufacturing facility requires a special “clean room” in which most of the manufacturing functions are performed. Our Fab 1 facility includes an approximately 51,900 square foot clean room.
Since we commenced manufacturing at Fab 1, we increased its manufacturing capacity and expanded the technologies qualified in the fab, including specialized processes. Fab 1 supports geometries ranging from 1.0 micron to 0.35-micron.
Fab 2
In 2003, we commenced production in our Fab 2, also located in Migdal Haemek, Israel. Fab 2 supports geometries ranging from 0.35 to 0.11-micron, using advanced CMOS technology, including CMOS image sensors, embedded flash, advanced analog, RF SOI, power platforms and mixed-signal technologies. We have invested significantly in the purchase of fixed assets, primarily in connection with the construction of Fab 2, technology advancement and capacity expansion.
The land on which Fab 2 is located is subject to a long-term lease from the Israel Lands Authority that expires in 2049. The overall clean room area in Fab 2 is approximately 100,000 square feet.
Fab 3
NPB Co.’s manufacturing facility, Fab 3, and offices 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’s leases its fabrication facility and offices under a lease that is in effect until 2022, and can extend the lease until 2027 through the exercise of an option at our sole discretion. Under the lease 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 includes certain obligations of the parties, including certain noise abatement actions at the fabrication facility. The landlord has claimed that noise abatement actions that have been implemented are not adequate under the terms of the lease. We do not agree with, and are disputing, these claims. See “Item 3. Key Information—D. Risk Factors—Risks Affecting Our Business— Risks relating to construction activities adjacent to Fab 3 and our Fab 3 lease could harm our operations and financial results.”
Uozu E, Tonami CD and Arai E fabs
In March 2014, we acquired a 51% equity stake in TPSCo, a company formed by Panasonic Corporation, to manufacture products for Panasonic and other third-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 45 nanometer. The fabs’ land and buildings are leased by PSCS to TPSCo.
Fab 9
In February 2016, we acquired Fab 9 in San Antonio Texas, USA from Maxim. The assets and related business that we acquired from Maxim are held and conducted through a wholly-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.