Not applicable.
B. |
CAPITALIZATION AND INDEBTEDNESS
|
Not applicable.
C. |
REASONS FOR THE OFFER AND
USE OF PROCEEDS |
Not applicable.
Our business faces many risks. Any of the risks discussed below,
including the Merger, may have an adverse impact on our business, financial condition and operating results.
RISKS AFFECTING OUR BUSINESS
Over-demand for our foundry services and/or products may result
in bottlenecks in production lines and a loss of customers and revenues, which may adversely affect our profitability and business.
In periods during which demand for our foundry services exceeds
our capacity and manufacturing capabilities, as we currently face, we may (i) be unable to fulfill customer demand in whole or in part,
in a timely manner or at all; (ii) be unable to assure production of customers’ next generation products; (iii) experience bottlenecks
in production lines, which may cause the fabrication facility to slow down and/or halt operations; (iv) be unable to provide additional
capacity from any of our worldwide facilities through transfer of process technologies, successful implementation and timely qualification;
and/or (iv) be unable to ramp timely and successfully the manufacturing capacity in the fab being established by ST in Italy due to delays
in supply of equipment and/ or parts by vendors, delays in technology and/ or new products’ qualifications and/or delays in
equipment installation and qualification schedule. As a result, we could lose one or more of our current and/or potential customers, which
may adversely affect our reputation, revenues, profitability and business.
Reliance on acquisitions and/or gaining additional capacity for
growth involves risks that may adversely affect our future revenues, business and operating results.
We may decide to try to attract new customers and expand the existing
business with current customers and/ or new served markets by expanding our manufacturing footprint and business through acquisitions
and joint ventures, as we have done in the past, and/or through obtaining access to additional manufacturing capacity, with or without
third-party collaboration. Our success at such expansion is dependent, in part, on finding suitable partners and targets for acquisitions,
successfully negotiating with the seller and/ or partner a reasonable price for the acquisition or engagement, successfully financing
and consummating such expansion plans, integrating the acquired facilities into our business efficiently and effectively to achieve desired
synergies and anticipated benefits, and loading the facilities in an amount that may at least cover their operating and other costs. We
cannot assure you that we will be successful in executing this business strategy or that we will succeed to increase our market presence
and attract new customers and business and/or expand business with our current customers through that strategy, in order to operate any
such acquired capacity profitably.
This strategy involves many risks, each of which may negatively
affect our profitability and financial position, including the following:
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Other foundries may bid against us to acquire potential targets. This competition may result in decreased availability of, or increased
prices for, suitable acquisition candidates; |
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We may not be able to obtain the necessary regulatory or other approvals, and as a result, or for other reasons, we may fail to consummate
certain acquisitions; |
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Potential acquisitions and execution of an expansion plan may require the dedication of substantial management effort, time and resources
which may divert management from our existing business operations or other strategic opportunities; |
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We may not be able to retain experienced management and skilled employees from the businesses we acquire and, if we cannot retain
such personnel, we may not be able to attract new skilled employees and experienced management to replace them; |
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We may purchase a company with excessive unknown contingent liabilities and/ or a cost structure that is not as beneficial as anticipated
from the preliminary evaluation or that includes high cost that may result in losses incurred by us if we do not succeed in maintaining
high manufacturing levels to cover its cost; |
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We may not be able to obtain sufficient financing which could limit our ability to engage in certain acquisitions and strategic engagements;
and |
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The amount or terms of financing actually required before and after acquisition may vary from our expectations, resulting in a need
for more funding that may not be available to us in order to finance the acquisition, the operations of the target acquisition and/or
the acquisition of additional equipment that may be required to increase and/or adjust the target’s manufacturing line to address
our customer demand and specific technology flows, which may adversely affect our liquidity and balance sheet position. |
We may experience difficulty achieving acceptable device yields,
product performance and delivery times in the future as a result of manufacturing problems.
The process technology for the manufacture of semiconductor wafers
is highly complex, requires advanced and costly equipment and is constantly being modified in an effort to improve device yields, product
performance and delivery times. Microscopic impurities such as dust and other contaminants, difficulties in the production process, defects
in the key materials and tools used to manufacture wafers and other factors can cause wafers to be rejected or individual semiconductors
on specific wafers to be non-functional. Although we continuously enhance our manufacturing capabilities and efficiency, from time to
time we have experienced production difficulties that have caused delivery delays and quality control problems. Manufacturing issues we
may face include difficulties in upgrading or expanding existing facilities; unexpected breakdowns in our manufacturing equipment and/or
related facility systems; unexpected events, such as an electricity outage, affecting the manufacturing process; difficulties in changing
or upgrading our process technologies; raw material shortages or impurities; delays in delivery or shortages of spare parts; and difficulties
in maintenance and upgrade of our equipment. Should such problems occur to a material degree, we may suffer loss of income, loss of reputation
and/or a loss of customers, any of which may adversely impact our business, revenues, financial results and financial condition.
Demand for our foundry services is dependent on the demand in our
customers’ end markets, which are typically cyclical and volatile.
Our customers generally use the semiconductors produced in our
fabrication facilities in a wide variety of applications. We derive a significant percentage of our operating revenues from customers
who use our manufacturing services to make semiconductors for communication devices, consumer electronics, PCs and other electronic devices.
Any significant decrease in the demand for these electronic devices or products may decrease the demand for our services and products.
In addition, if the average selling prices of communication devices, consumer electronics, PCs or other electronic devices decline significantly,
we may be pressured to reduce our selling prices, which may reduce our revenues and margins significantly. As demonstrated in the past
by downturns in demand for high technology products, market conditions can change rapidly, without warning or advance notice. In such
instances, our customers may experience inventory buildup and/or difficulties in selling their products and, in turn, may reduce or cancel
orders for wafers from us, which may harm our business and profitability. The timing, severity and recovery of these downturns cannot
be predicted.
Because our services may be used in many new applications, it is
difficult to accurately forecast demand for all markets. If demand is lower than expected, we may have excess capacity and our revenue
may not be sufficient to cover all our costs and serve all our debt, which may adversely affect our financial results and financial position.
If we do not maintain and develop our technology processes and services,
we may lose customers and may be unable to attract new ones.
The semiconductor market is characterized by rapid change, including
rapid technological developments, evolving industry standards, changes in customer and product end user requirements, frequent new product
introductions and enhancements, and short product life cycles with declining prices as products mature. Our ability to maintain our current
customer base and attract new customers is dependent in part on our ability to continuously develop and produce advanced specialized manufacturing
process technologies and purchase the appropriate equipment. If we are unable to successfully develop and produce these processes in a
timely manner or at all, or if we are unable to purchase the appropriate equipment required for such processes, we may be unable to maintain
our current customer base and may be unable to attract new customers.
The semiconductor foundry business is highly competitive and our
competitors may have competitive advantages over us.
Many of our competitors may have one or more of the following competitive
advantages over us: greater manufacturing capacity and/or availability of same; a more diverse and established customer base; greater
financial, sales, marketing, distribution and other resources; governmental funding or support; better cost structure; and/or better operational
performance, including cycle time and yields. If we do not compete successfully, our business and financial results may be adversely affected.
We compete most directly in specialty segments with certain independent
dedicated foundries. We also compete with pure play advanced technology node driven foundry service providers, as they each have some
capacity for specialty process technologies, and with integrated device manufacturers, or IDMs, that allocate a portion of their manufacturing
capacity to foundry operations. As our competitors continue to expand their manufacturing capacity, there could be an increase in specialty
semiconductor capacity. As specialty capacity increases, there may be more competition and pricing pressure on our services, which may
result in underutilization of our capacity, decrease of our profit margins, reduced earnings or increased losses.
In addition, some semiconductor companies have advanced their complementary
metal oxide semiconductor (“CMOS”) designs to smaller than 10 nanometer process geometries. These smaller process geometries
may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty
process technologies. The smaller process geometries may also be more cost-effective at higher production volumes for certain applications.
We are not currently capable, and do not currently plan to become capable, of providing CMOS processes at these smaller process geometries.
If our potential or existing customers choose to design their products in a manner whereby the percentage of digital content in specialty
designs increases significantly and requires these advanced CMOS processes, our business may be negatively impacted.
If we are unable to successfully locate and negotiate with third-party
buyers for the sale of any excess and/or unused equipment and/or manufacturing facility, our financial results may be harmed.
From time to time, we may decide to stop developing certain product
technology lines or wind down or cease manufacturing at a fabrication facility due to company strategy, low margins, low utilization or
low customer demand. This results in unused equipment that no longer supports our customers’ needs and may be sold to third-party
buyers. We also have obsolete or unutilized equipment from time to time which we may sell. If we are unable to successfully locate and
negotiate with potential buyers and sell the excess equipment and/ or manufacturing facility in a timely manner for satisfactory consideration,
we may be unable to cover our fixed and other costs associated with such decision, which may have a negative effect on our financial results.
Our financial results may fluctuate from quarter to quarter, making
it difficult to predict our future performance.
Our revenues, expenses and operating results may fluctuate significantly
from quarter to quarter 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, an epidemic or pandemic (such as COVID-19), industrial accidents
such as fire or explosions, electricity outage, affecting the manufacturing process and shipping quality products without charging
our customers significant additional costs; 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 from customers;
our ability to obtain raw materials and equipment on a timely and cost-effective basis; price erosion in the industry and our ability
to negotiate prices with our current and new customers; our susceptibility to intellectual property rights’ disputes; our dependency
on export licenses and other permits required for our operations and the sale of our products; our ability to maintain existing partners
and 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 these factors and risks, 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
and/ or other opportunities, which we may not be able to obtain.
In order to invest in strategic opportunities in support of our
acquisition and capacity growth plans and/or business development activities, or a joint partnership or another large transaction to expand
our capacity, including the funding of the equipment for the fab being established by ST in Agrate, Italy, we may use our current cash
balance, deposits and/or investments in marketable securities or may be required to secure additional funds from financing sources, including
through public or private offerings of equity and/or debt and/or re-financing or other financing alternatives. In May 2020, we filed a
shelf registration statement with the Israel Securities Authority, following the expiration of our previously filed 2016 shelf, which
provides us with a platform for future public fundraisings in Israel, in which case we would publish a supplemental shelf takedown report
containing specific information about the terms of any such transaction. The timing, terms, size and pricing of any future fundraising
would be subject to the then-prevailing capital market conditions and our business and financial situation. There is no assurance that
we will be able to obtain sufficient funding, if at all, from these financing sources or other sources in a timely manner (or on commercially
reasonable terms) for said purposes and there is no assurance we will get the required approvals to execute the fundraising activities
that will result in successful financing, which may adversely affect our financial position and operations.
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 2021, 21% of our revenues were generated from NTCJ), 33% of our revenues were derived from an additional five customers each of which
generated between 4% to 13% of our revenues, and the remaining 46% of our revenues were derived from many other smaller customers, as
compared to 25%, 35% and 40%, respectively, for the year ended December 31, 2020. While we are negotiating with NTCJ the terms of our
commercial agreements that are otherwise in effect until June 2022, there is no assurance as to the financial impact of the revised terms
that will be agreed for the period commencing the third quarter of 2022. The loss or reduction in volume or sales price to NTCJ and/ or
to any one of our key customers, whether due to business negotiation, termination or expiration of their signed contract(s), their insolvency
or their unwillingness or inability to perform their obligations under their respective relationships with us, or our inability to renew
our engagements with them on commercially reasonable terms, produce their new products, fulfill their demand, or, alternatively, attract
new customers to replace such lost business, may materially negatively impact our overall business, revenues and profitability.
Risks relating to Fab 3 lease could harm business, operations and
financial results.
NPB Co. operates our Fab 3 fabrication facility and its offices
under a lease contract that was initially in effect until March 2022 and included an option, at NPB Co.’s sole discretion, to extend
the lease for an additional five year period, which it elected to exercise for the lease to continue through March 2027. A few years ago,
the landlord began a construction project adjacent to the fabrication facility, which may adversely impact the Fab 3 operations, including
temporary reductions or interruptions in the supply of utilities to the property, and a portion or all of the fabrication facility may
need to be idled temporarily during development, which may adversely affect the business, operations and future financial results. In
addition, the landlord has made claims that NPB Co.’s noise abatement efforts are not adequate under the terms of the amended lease,
and has requested a judicial declaration that NPB Co. has committed material non-curable breaches of the lease and that, in accordance
with the lease, the landlord would be entitled to terminate the lease. NPB Co. does not agree and is disputing these claims, however any
adverse change to the current lease agreement may adversely impact the business, operations and future financial results.
Certain effects of the COVID-19 pandemic may hurt our business.
The recent COVID-19 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, equipment tools 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, or due to extended
lead time due to the supply chain and courier difficulties and delays, which may adversely affect our ability to secure our supply chain,
continue operating and manufacturing without interruption in one or more of our fabrication facilities and continue to receive equipment
that we ordered to increase our fabs’ capacities and capabilities; (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, as occurred commencing
2020 as a result of the global pandemic, which may adversely affect our ability to continue operating and manufacturing without interruption
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 financial results may be adversely affected if we are unable
to operate our facilities at satisfactory utilization rates necessary to generate and maintain positive and sustainable gross, operating
and net profits.
As is common in our industry, a large portion of our total costs
is comprised of fixed costs, associated mainly with our manufacturing facilities, while our variable costs are relatively small. Therefore,
while during periods when our facilities manufacture at high utilization rates we are able to cover our costs, at times when the utilization
rate is low, the reduced revenues may not cover all of the costs since a large portion are fixed costs which remain constant, irrespective
of the number of wafers manufactured. In addition, our depreciation costs and capital expenditure investments, as common in our industry,
are relatively high. Our financial results, including our gross, operating and net profits, may be adversely impacted if customer demand
for our products is not sufficient to enable us to operate our facilities consistently at satisfactory utilization rates necessary to
generate and maintain revenue levels that would cover all of our costs.
Our fabs’ production performance metrics and business could
be significantly harmed by natural disasters, particularly earthquakes, and fires.
Our fabs in Israel, southern California and Japan are located in
areas which are generally susceptible to seismic activity. Due to the complex and delicate nature of our manufacturing processes, our
facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. We cannot be certain that precautions
that any of our fabs have taken to seismically upgrade the fabs will be adequate to protect our facilities in the event of an earthquake.
Earthquakes may lead to fire in the fabs or other material damage. Also, we use highly flammable materials such as silane and hydrogen
in our manufacturing processes and are therefore subject to risk arising from fire, which cannot be completely eliminated.
Any damage resulting from earthquakes, other natural disasters
and fires could seriously disrupt production, cause a loss of wafers in production, deterioration of our fab yield and substantial downtime
to reset equipment before resuming production, which could cause a material adverse effect on our business, revenue and profits. Although
we maintain insurance policies to mitigate any potential losses that may be caused by earthquakes, other natural disasters and fires,
including business interruption insurance, our insurance coverage may not compensate us fully for all of the losses we may incur.
Possible product returns could harm our business.
Products manufactured by us may be returned within specified periods
if they are defective or otherwise fail to meet prior agreed upon specifications. Future product returns may have an adverse effect on
our business and financial results.
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 and NIS fluctuations against the USD -- see the risk factor below entitled: “Our exposure to currency exchange and interest
rate fluctuations may impact our costs and financial results”; |
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the burden and cost of compliance with foreign government regulation, as well as compliance with a variety of foreign laws, and the
imposition of regulatory requirements, tariffs, import and export restrictions and other trade barriers and restrictions, including the
timing and availability of export licenses and permits; |
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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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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, the geographical distance between Israel, the United
States, Japan and the rest of Asia and Europe also creates certain logistical and communication challenges. We cannot assure you that
we will be able to sufficiently mitigate all the risks related to our international operations.
The production lines of our fabs may stop for certain periods of
time due to power outages, water leaks, chemical leaks, supply chain or other issues.
There are many events that may occur which may adversely affect
the manufacturing process in our manufacturing facilities. From time to time, we experience high utilization rates in certain of our manufacturing
lines and/or areas, which cause bottlenecks in production lines that may adversely affect our cycle time, yield and delivery schedule.
A power outage, even of very limited duration, and/or water leaks, chemical leaks, shortage of parts or other materials which are required
for our supply chain or other issues, may result in a loss of wafers in production, deterioration of our fab yield, cycle time and substantial
downtime to reset equipment before resuming production, thereby potentially causing an immediate loss of revenue and profitability in
a particular period.
In addition, affected customers may elect to transfer their product
orders to other fabs. While we try to mitigate any potential damage caused by such events and have insurance coverage, which may compensate
us partially or fully against certain types of damages, we cannot ensure that such events will not have a negative effect on the Company.
Our financial position and operations may be affected as a
result of our long-term debt.
As of December 31, 2021, we had approximately $315 million of consolidated
principal amount of debt outstanding, comprised as follows: (1) Tower had approximately $64 million outstanding principal amount of Series
G debentures, payable in three semi-annual consecutive equal installments from March 2021 to March 2023; (2) TPSCo had loans of approximately
$96 million principal amount (the “JP Loan”), carrying a fixed interest rate of approximately 2% per annum, with principal
scheduled to be repaid in seven semiannual payments between 2024 and 2027; (3) Tower and its affiliates had capital lease agreements outstanding
in the amount of approximately $87 million from JA Mitsui Leasing, repayable between 2022 and 2025, and (4) Tower and its affiliates had
other capital and operating leases in the amount of approximately $68 million repayable between 2022 and 2032. 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 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 cost; |
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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. |
Our business could suffer if we are unable to retain and recruit
qualified personnel.
We depend on the continued services of our senior executive officers,
senior managers and skilled technical and other personnel, and there is intense competition for the services of these personnel in the
semiconductor industry. Our business could suffer if we lose the services of some of these senior executives and key personnel due to
resignation, medical absence, illness or other reasons, and cannot find, hire and integrate adequate replacement senior executives and
key personnel in a timely manner.
We do not typically operate with any significant backlog, which makes it difficult for us to forecast our
revenues and margins in future periods.
Our customers generally do not place purchase orders far in advance,
partly due to the cyclical nature of the semiconductor industry. Since our expense levels are based in part on our expectations of future
revenues, we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls caused by cancellations, rescheduling
of orders or lower actual orders than quantities forecasted. Rescheduling may relate to quantities or delivery dates, and, sometimes,
to the specifications of the products we are shipping. Consequently, we cannot be certain that orders on backlog will be shipped when
expected or at all.
We expect that, in the future, our revenues in any quarter will
continue to be substantially dependent upon purchase orders received in the immediately preceding quarter or two. We cannot assure you
that any of our customers will continue to place orders with us in the future at the same levels as in prior periods. For these reasons,
our backlog at any given date may not be a reliable indicator of our future revenues and, as a result, revenue and margins’ forecasts,
targets and guidance that we provide from time to time, may fall short of expectations.
Because we may manufacture wafers based on forecasted demand, rather
than actual orders from customers, we may be left with excess inventory.
We target manufacturing wafers in an amount matching each customer’s
specific purchase order; however, on occasion, we may produce wafers in excess of a customer’s orders based on forecasted customer
demand, because we may forecast future excess demand or because of future capacity constraints. If we manufacture more wafers than are
actually ordered by customers, we may be left with excess inventory that may ultimately become obsolete and must be scrapped or sold at
a significant discount. Significant amounts of obsolete inventory may have a negative impact on our financial results.
Our sales cycles are typically long, and orders ultimately received
may not meet our expectations, which may adversely affect our operating results.
Our sales cycles, which we measure from first contact with a customer
to first shipment of a product ordered, vary substantially and may last longer than two years, particularly for new technologies. In addition,
even after we make initial shipments of prototype products, it may take several more months to reach full production of the product. As
a result of these long sales cycles, we may be required to invest substantial time and incur significant expenses before receiving any
product orders and related revenue. If orders ultimately received are significantly lower than our expectations, we will have excess capacity
that we may not be able to fill within a short period of time, resulting in lower utilization of our facilities. In addition to the revenue
loss, we may be unable to adjust our costs in a timely manner to align with the lower revenue, since a large portion of our cost is fixed
cost, which remains constant irrespective of the number of wafers actually manufactured, which may adversely affect our operating results
and financial condition.
If we are unable to purchase equipment and/or raw materials, we
may not be able to manufacture our products in a timely fashion.
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.
Shortages in supplies of manufacturing equipment and raw materials could occur for various reasons, including an interruption of supply
due to a global pandemic or increased industry demand. Any such shortage could result in production delays that may result in a loss of
existing and/or potential new customers and/or a halt of the manufacturing lines , which may have a material adverse effect on our business
and financial results.
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 the USD. The functional
currency of our subsidiary in Japan is the JPY. Our income, costs, assets and liabilities, are denominated mainly in USD, JPY and NIS,
our revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly
in USD, JPY and NIS. We are, therefore, exposed to the risk of JPY and NIS currencies’ exchange rate fluctuations in Japan and Israel
which may have a material effect on our cost and financial results due to periodic revaluation or evaluation of assets, liabilities, cost
and income, in these currencies.
The USD cost of our operations in Israel is influenced by changes
in the USD-to-NIS exchange rate with respect to costs that are denominated in NIS. Appreciation of the NIS against the USD has the effect
of increasing the cost of some of our Israeli purchases and NIS-denominated labor costs in USD terms, which may lead to erosion in our
profit margins. We use foreign currency transactions to partially hedge a portion, but not all of this currency exposure, to be contained
within a pre-defined fixed range. 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.
In addition to currency exchange fluctuations, if any of TPSCo’s
banks incur increased costs in financing a credit facility due to changes in law or the unavailability of foreign currency, such bank
may exercise its right to increase the interest rate on the credit facility or require us to bear such increased cost as provided for
in the applicable credit facility agreement.
We also hold a securities investment portfolio, including interest
bearing bonds and notes. An increase in the interest rates globally and other market changes may result in a reduced market value of these
bonds and notes, thereby creating financing losses for us if we are unable to mitigate exposure, react to the market changes promptly
and adjust our securities investment portfolio components in a timely manner.
We depend on intellectual property to succeed in our business, including
intellectual property owned by us as well as intellectual property of third parties.
We depend on intellectual property in order to provide certain
foundry services and design support to our customers. The process of applying for patents to obtain patent protection may take a long
time. We cannot assure you that patents will be issued for pending or future applications or that, if patents are issued, they will not
be challenged, invalidated or circumvented or that the rights granted under the patents will provide us with meaningful protection or
any commercial advantage. In addition, we cannot assure you that other countries in which we market our services and products will respect
our intellectual property rights to the same extent as the United States. We cannot assure you that we will, at all times, be able to
enforce our patents or other intellectual property rights, and it may be difficult for us to protect our intellectual property from misuse
or infringement by other companies. Further, we cannot assure you that courts will uphold our intellectual property rights or enforce
the contractual arrangements that we have entered into to protect our proprietary technology, which may reduce our opportunities to generate
revenues. In the event that we are unable to enforce our intellectual property rights, our business may be harmed.
We may also be a party to infringement claims in the future. In
the event any third party were to assert infringement claims against us or our customers, we may have to consider alternatives including,
but not limited to:
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attempting to negotiate cross-license agreements, which we might not succeed in negotiating or consummating; |
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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, which may result in 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. If we fail to obtain certain licenses or if we are involved in litigation relating
to alleged patent infringement or other intellectual property matters, it may prevent us from manufacturing particular products or using
particular technologies, which may adversely impact our business and revenues.
From time to time, we are a party to litigation that may require
management time and effort.
From time to time, we are a party to litigation incidental to the
conduct of our ongoing business, including class actions, disputes with customers, suppliers, landlords, or other third parties. Litigation
requires a certain amount of management time and effort which may adversely affect our business by diverting management focus from business
needs.
In addition, our ability to compete successfully depends in part
on our ability to operate without infringing on the proprietary rights of others and defending our intellectual property rights. Because
of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights,
it is often difficult for semiconductor companies to determine infringement. Therefore, the semiconductor industry is characterized by
frequent litigation regarding patent, trade secret and other intellectual property rights. We have been subject to intellectual property
claims from time to time, some of which have been resolved through license agreements, the terms of which have not had a material effect
on our business.
We could be harmed by failure to comply with environmental regulations.
Our business is subject to a variety of laws and governmental regulations
in Israel, the U.S. and Japan relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our factories.
If we fail to use, discharge or dispose of hazardous materials appropriately in accordance with applicable environmental laws or regulations,
or if such laws change in the future, we may be subject to substantial liability or may be required to suspend or significantly modify
our manufacturing operations, which may adversely impact our business and revenues.
Our business strategy is premised on the increasing use of outsourced
foundry services by both fabless semiconductor companies and integrated device manufacturers on specialty process technologies, which
may change in the future.
We operate as an independent semiconductor foundry focused primarily
on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow
and follow the broader trend towards outsourcing foundry operations. If our assumption does not prove applicable, our business and financial
results may be adversely impacted.
If we are unable to collaborate successfully with electronic design
automation vendors and third-party design service companies to meet our customers’ design needs, our business may be harmed.
We have established relationships with electronic design automation
vendors and third-party design service companies to develop complete design kits that our customers can use to meet their design needs
using our process technologies. Our ability to meet our customers’ design needs successfully, including their schedule and budget
requirements, depends in part on the availability and quality of the relevant services, tools and intellectual property provided by these
vendors and providers. Difficulties or delays in these areas may adversely affect our ability to meet our customers’ needs, thereby
potentially harming our business. In addition, with respect to third party intellectual property that is required for the manufacture
of our products, if problems or delays arise with respect to the timely development, quality and provision thereof to us, the design and
production of our customers’ products may be delayed, resulting in underutilization of our capacity. If any of our intellectual
property vendors goes out of business, liquidates, merges with, or is acquired by, another company that discontinues the vendor’s
previous line of business, or if we fail to maintain or acquire licenses to such intellectual property for any other reason, our business
may be adversely affected.
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,
which could increase our manufacturing costs or require extensive modifications to our customers’ products. We may not export products
using or incorporating controlled technology without obtaining an export license, which may not always be granted. These restrictions
may make foreign competitors facing less stringent controls on the export of their products more competitive in the global market. The
relevant government may not approve any pending or future export license requests.
If certain of the integrated circuits we manufacture are defective
and integrated into products, we may be subject to product liability claims or other claims which could damage our reputation and harm
our business.
Our customers integrate our custom integrated circuits into their
products, which they then sell to end users. If these products are defective or malfunction, we may be subject to product liability claims,
as well as possible recalls, safety alerts or advisory notices relating to the product. We cannot assure you that our insurance policies
will compensate us fully for claims that may be made against us. In addition, we may be unable to obtain insurance in the future at satisfactory
rates, with adequate coverage, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome,
may have a material adverse effect on our business, reputation, financial condition and our ability to attract and retain customers.
A workforce that is unionized may have an adverse impact on our
manufacturing costs as well as on our operations by potential work stoppages, strikes or other collective actions which may disrupt the
fabs’ production and adversely affect the fabs’ performance and our operational and financial results.
Significant portions of the employees at Fab 3 (our Newport Beach,
California fab) and at TPSCo’s fabs in Japan are represented by unions and covered by collective bargaining agreements. We cannot
predict the effect that union representation or future organizational activities will have on these fabs’ manufacturing cost and
business. We cannot assure you that our fabs will not experience a material work stoppage, strike or other collective action
in the future, or incur increased costs in connection with the renewal of such bargaining agreements or other potential union activities,
which may disrupt their production and adversely affect our fabs’ manufacturing costs, operational performance metrics, and our
operational and financial results. In addition, there have been attempts, including recently, by the General Federation of Labor in Israel
(“Histadrut”) to organize and establish a representative labor union for our Israeli employees. Under Israeli law, establishing
a representative labor union requires at least one-third of the Israeli employees to join the Histadrut and they would be liable to pay
its membership fees. While the Histadrut’s attempts have not succeeded to date, if a representative labor union would be established,
we would need to conduct negotiations with the representative labor union and the Histadrut with regards to the terms of employment and
benefits of the employees, which could result in the incurrence of additional labor costs and/or work stoppages, which in turn could adversely
affect our business and Israeli fabs’ operations.
Climate change may negatively affect our business.
There is increasing concern regarding climate change and its potential
dramatic effects on human activity if no aggressive remediation steps are taken. Legislative developments with respect to reductions in
greenhouse gas emissions may result in increased energy, transportation and raw material costs. Scientific examination of, political attention
to, and rules and regulations on, issues surrounding the existence and extent of climate change may result in increased production costs
due to increase in the prices of energy and introduction of energy or carbon tax. A variety of regulatory developments have been introduced
that focus on restricting or managing emissions of carbon dioxide, methane and other greenhouse gases. Enterprises may need to purchase
new equipment at higher costs or raw materials with lower carbon footprints. These developments and further legislation that is likely
to be enacted, such as changes in environmental regulations on the use of per fluorinated compounds, may increase our production costs,
which may adversely affect our results of operation and financial condition.
Compliance with US rules and regulations concerning conflict minerals
may affect our ability or the ability of our suppliers to purchase raw materials at an effective cost and may adversely affect our business.
Our industry relies on raw materials that consist of, contain or
incorporate certain minerals sourced from the Democratic Republic of Congo (“DRC”) or adjoining countries that are subject
to regulation. These minerals are commonly referred to as conflict minerals. Conflict minerals that may be used by our suppliers include
Columbite-tantalite (derivative of tantalum [Ta]), Cassiterite (derivative of tin [Sn]), gold [Au], Wolframite (derivative of tungsten
[W]), and Cobalt [Co]. We are currently subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 that require due diligence and disclosure as to whether our products contain conflict minerals. It is expected that the SEC
under the Biden administration will renew focus on the US conflict minerals rules and other responsible sourcing measures. Any changes
effected by the Biden administration concerning the use of conflict minerals could adversely affect the sourcing, availability and pricing
of the materials used in the manufacture of our products. In addition, we will likely incur additional costs to comply with any new conflict
minerals rules, including costs related to disclosure requirements and conducting diligence procedures to determine the sources of conflict
minerals that may be used in, or necessary to the production of, our products and, if applicable, potentially making changes to our
products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational
harm and/or may lose customers if we determine that certain of our products contain minerals not determined to be conflict-free and are
unable to alter our products, processes or sources of supply to avoid use of such materials, which may adversely impact our revenue and
business.
Security, cyber and privacy breaches may hurt our business and operations.
Any security breach, including those resulting from a cybersecurity
attack, such as occurred in September 2020 (see under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Overview”),
or any unauthorized access, unauthorized usage, virus or similar breach or disruption could result in the loss of confidential information,
damage to our fab operations, damage to our reputation, early termination of our contracts, litigation, regulatory investigations or other
liabilities. If our security measures are breached as a result of third‑party action, employee error, malfeasance or otherwise and,
as a result, someone obtains unauthorized access to our, our customers' or any third party’s confidential information, our reputation
may be damaged, we may face potential disruption and loss, especially due to the possible substantial damage if operations would not be
quickly restored and our business may suffer, and we could incur significant liability.
Techniques used to obtain unauthorized access or to sabotage systems
change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market’s perception
of our security measures may be harmed and we could lose sales and customers as well as incur operational damage to our machines and/or
products.
RISKS RELATED TO OUR SECURITIES
Fluctuations in the market price of our traded securities may significantly
affect our ability to raise new capital.
The capital markets, in general, have experienced volatility that
often has been unrelated to the operating performance of the traded companies. The share price of many companies in the semiconductor
industry has experienced wide fluctuations, which has often been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the market price of our equity and debt traded securities, regardless of our actual
operating performance.
In addition, it is possible that our operating results may differ
from the expectations of public market analysts and investors, which may adversely affect the price of our securities. Adverse impact
to the market price of our securities may negatively impact our ability to raise new capital in order to finance our growth plans, obligations
and liabilities and/or re-finance our debt, and/or may cause us to receive less favorable terms than expected to the extent we will decide
to raise any capital.
We are a foreign private issuer and, as a result, the public reporting
and disclosure rules to which we are subject, and the corporate governance practices that we are permitted to follow, may provide less
protection to our investors than is accorded to investors under rules applicable to domestic U.S. issuers.
We report under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) as a foreign private issuer, which means we are exempt from certain provisions of the Exchange Act that
are applicable to U.S. public companies, including the proxy rules and the rules requiring the filing with the SEC of quarterly reports
on Form 10-Q and current reports on Form 8-K. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject
to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as
the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. Foreign private issuers are also exempt
from Regulation FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Also, as
a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required
under the Listing Rules of the Nasdaq Stock Market for domestic U.S. issuers. The public reporting and disclosure rules to which we are
subject under the Exchange Act, and the corporate governance practices that we are permitted to follow, may provide less protection to
our investors than is accorded to investors under rules applicable to domestic U.S. issuers.
We do not expect to pay any dividends in the foreseeable future.
We currently intend to retain future earnings and our existing
cash balance to finance our growth and acquisition strategy, as well as capacity growth and our ongoing operations, and we do not anticipate
paying dividends in the foreseeable future. In addition, (i) the Israeli Companies Law, 1999 (the “Companies Law”) imposes
restrictions on our ability to declare and pay dividends; (ii) under the indenture for our Series G Debentures, a distribution of dividends
is subject to satisfying certain financial ratios and limitations; (iii) the Merger Agreement includes restrictions with respect
to dividends and other distributions. Therefore, you should not rely on an investment in our ordinary shares if you require and/or
expect dividend income from your investments.
RISKS RELATED TO OUR OPERATIONS
IN ISRAEL
Instability in Israel may harm our business.
Fab 1 and Fab 2 manufacturing facilities, our design center and
certain of our corporate and sales offices are located in Israel. In addition, a number of our officers and directors are residents of
Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business.
Since the establishment of the State of Israel in 1948, Israel
has been subject to armed conflicts with neighboring countries, as well as terrorist activities, with varying levels of severity. Parties
with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make
alternative arrangements where necessary. In addition, the political and security situation in Israel may result in parties with whom
we have agreements claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure
provisions. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners may adversely
affect our operations and make it more difficult for us to do business and raise capital. Furthermore, we could experience serious disruption
to our manufacturing in Israel if acts associated with any such conflicts result in any serious damage to such manufacturing facilities.
In addition, there may also be protests against or sanctions imposed on the State of Israel which may adversely impact our business. Our
business interruption insurance may not adequately compensate us for losses that we may incur, and any losses or damages incurred by us
may have a material adverse effect on our business. Furthermore, several countries restrict business with the State of Israel and with
Israeli companies, which may have an adverse impact on our operating results and financial condition. In addition, actual or perceived
political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect
the Israeli economy and, in turn, our business, financial condition, results of operations and prospects.
In the event of severe unrest or other conflict, Israeli personnel
could be required to serve in the military for extended periods of time. Many male Israeli citizens, including most of our male employees
under the age of 40, are subject to compulsory military reserve service and may be called to active duty under emergency circumstances.
In response to increases in terrorist activity, there have been periods of significant call-ups of Israeli military reservists, and it
is possible that there will be additional call-ups in the future. Our operations in Israel could be disrupted by the absence, for a significant
period of time, of one or more of our key employees or a significant number of our other employees due to military service. Such disruption
may harm our operations and our business.
If the exemption allowing us to operate our Israeli manufacturing
facilities seven days a week or our business license is not renewed, our business may be adversely affected.
We operate our Israeli manufacturing facilities seven days a week
pursuant to an exemption (which we need to timely renew) from the law that requires businesses in Israel to be closed from sundown on
Friday through sundown on Saturday. In addition, our business license certificate issued by municipality of Migdal Ha’emek, Israel
is required to be renewed periodically. If such exemption or our business license are not renewed in the future, our financial results
and business may be harmed.
It may be difficult to enforce a US judgment against us, our officers
and directors or to assert US securities law claims in Israel or serve process on our non-U.S. resident officers and directors.
Tower is incorporated in Israel and most of its executive officers
and directors are not residents of the United States (excluding the employees of its U.S. subsidiaries), and a majority of its assets
(excluding its U.S. subsidiaries and their assets) and the assets of its non-U.S. resident directors and officers are located outside
the United States. Service of process upon us and/or our non-U.S. resident directors and/or officers may be difficult to obtain within
the United States. Additionally, a judgment obtained in the United States against Tower and/or any of our non-U.S. executive officers
and/or directors, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in
the United States (except to the extent that it relates to Tower’s US subsidiaries, its assets or employees) and may not be enforced
by an Israeli court. Additionally, it may be difficult to assert claims under U.S. securities laws or obtain a judgment based on civil
liability provisions under U.S. federal securities laws claimed in original actions instituted in Israel. Israeli courts may refuse to
hear a claim based on a violation of U.S. securities laws against us or our non-U.S. officers or directors because Israel may not be the
most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli
law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved
as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There
is little binding case law in Israel addressing the matters described above.
Provisions of Israeli law may delay, prevent or otherwise impede
a merger with, or an acquisition of, our company, which may delay or prevent a change of control, even when the terms of such a transaction
are favorable to us and our shareholders.
Provisions of Israeli law could have the effect of delaying or
preventing a change in control and may make it more difficult for a third-party to acquire us, even if doing so would be considered to
be beneficial by some of our shareholders. For example, Israeli corporate law regulates mergers, requires tender offers for acquisitions
of shares of a public company above specified thresholds, requires special approvals for transactions involving directors, officers or
significant shareholders and regulates other matters that may be relevant to such types of transactions. Furthermore, Israeli tax considerations
may make potential transactions unappealing to Tower or to its shareholders whose country of residence does not have a tax treaty with
Israel exempting such shareholders from Israeli tax. These and other similar provisions may delay, prevent or impede a merger with or
an acquisition of our company, even if such a merger or acquisition would be beneficial to Tower or its shareholders.
The rights
and responsibilities of our shareholders will be governed by Israeli law which differs in some material respects from the rights
and responsibilities of shareholders of U.S. corporations.
The rights and responsibilities of the holders of our ordinary
shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects
from the rights and responsibilities of shareholders in typical U.S. registered corporations. In particular, a shareholder of an Israeli
company has certain duties to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations
towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting
at the general meeting of shareholders on amendments to a company’s articles of association, increases in a company's authorized
share capital, mergers and certain transactions requiring shareholders’ approval under the Companies Law. These provisions may be
interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders
of U.S. corporations.
RISKS RELATING TO THE
MERGER
The Merger may not be completed, due to the failure of the parties
to achieve the closing conditions or otherwise; such a failure could negatively impact our share price, business, financial condition,
results of operations or prospects.
The Merger is subject to the satisfaction or waiver of certain closing conditions described
in the Merger Agreement, including, among others, that:
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no governmental authority in any jurisdiction has by any law or order, restrained,
enjoined or otherwise prohibited the consummation of the Merger; |
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expiration or termination of the applicable waiting period under the Hart Scott Rodino
Antitrust Improvements Act of 1976, as amended (the “HSR Act”); |
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expiration or termination of the applicable waiting period, or, where applicable,
approvals have been obtained, and all notices to, filings with and consents of the applicable governmental authority have been made or
obtained under the Required Clearances (as defined in the Merger Proxy Statement); |
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at least 50 days shall have elapsed after the filing of the Merger Proposal with the
Companies Registrar of the Israeli Corporations Authority and at least 30 days shall have
elapsed after the approval of the Merger Agreement, the Merger and the consummation of the Transactions by the Company’s shareholders
has been received; and |
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no Company Material Adverse Effect (as defined in the Merger Proxy Statement, excepting
any effects that, individually or in the aggregate, would not prevent or materially impair the Company from consummating the Merger or
performing any of its material obligations under the Merger Agreement) shall have occurred since February 15, 2022, and be continuing.
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No assurance can be given that each of the conditions will be satisfied.
In addition, the Merger Agreement may be terminated under the circumstances described in the Merger Proxy Statement. If the conditions
are not satisfied or waived in a timely manner and the merger is delayed, payment of the Merger Consideration will also be delayed.
If the Merger is not completed (including in the case the Merger
Agreement is terminated), our ongoing business may be adversely affected. Under such a scenario, our directors, senior management and
other employees will have expended extensive time and effort and will have experienced significant distractions from their work, and we
will have incurred significant transaction costs, during the pendency of a failed transaction. In addition, our continuing business relationships
with business partners and employees, and the market’s perceptions of our prospects, could be adversely affected, which could have
a material adverse impact on the trading price of Tower’s ordinary shares.
We also could be subject to litigation related to any failure to
complete the Merger. If these risks materialize, our financial condition, results of operations or prospects could be materially adversely
affected.
Some of our directors and officers may have
interests that may be different from, or in addition to, the interests of our shareholders.
Certain of Tower’s officers and directors may have interests
in the transactions contemplated by the Merger Agreement that may be different from, or in addition to, those of Tower’s other shareholders,
which interests are described in the Merger Proxy Statement. These interests include, among other things, the rights to accelerated vesting
of equity awards, the indemnification and insurance and certain payments and benefits provisions contained in or permitted by the Merger
Agreement.
The fact that there is a Merger pending could
materially harm our business and results of operations.
While the Merger is pending, we are subject to a number of risks
that may harm our business and results of operations, including:
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loss of current customers; |
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limitation on the execution of our strategy to expand our business through mergers,
acquisitions and other investments, as well as our ability to raise additional funds through offerings of equity and/or debt and/or other
financial vehicles; |
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the diversion of management and employee attention from implementing our growth strategy
in our existing markets or in new markets that we are targeting; |
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potential diversion of public attention from our positioning of our independent brand
and products in a manner that appeals to customers; |
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the fact that we have incurred and will continue to incur expenses related to the
Merger prior to its closing; |
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our potential inability to respond effectively to competitive pressures, industry
developments and future opportunities, in particular, given certain restrictions, limitations and commitments stipulated in the Merger
Agreement; |
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we could be subject to costly litigation associated with the Merger; and |
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our current and prospective employees may be uncertain about their future roles and
relationships with the Company following completion of the Merger, which may adversely affect our ability to attract and retain key personnel.
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The COVID-19 pandemic may delay or prevent
the completion of the Merger.
Given the ongoing and dynamic nature of the COVID-19 crisis, it
is difficult to predict the impact of that crisis on the businesses of Tower and Intel, and there is no guarantee that efforts by Tower
or Intel to address the adverse impact of the COVID-19 pandemic will be effective. The Merger may also be delayed or adversely affected
by the COVID-19 pandemic, or become more costly due to Tower policies, Intel policies or government policies and actions to protect the
health and safety of individuals, or government policies or actions to maintain the functioning of national or global economies and markets
could delay or prevent the completion of the Merger. Tower or Intel may also incur additional costs to remedy damages caused by such disruptions,
which could adversely affect its financial condition or results of operations.
Our obligation to pay a termination fee under
certain circumstances and the restrictions on our ability to solicit or engage in negotiations with respect to other potential acquisition
proposals may discourage other potential transactions that may be favorable to our shareholders.
Until the Merger is completed or the Merger Agreement is terminated,
with limited exceptions, the Merger Agreement prohibits us from soliciting, encouraging or engaging in negotiations with respect to acquisition
proposals or other business combinations. If the Company terminates the Merger Agreement in order to immediately enter into a written
definitive agreement with respect to a superior proposal, Tower is required to pay to Parent a termination fee of $206 million. Tower
is also required to pay such termination fees under other circumstances described in the Merger Agreement.
If the Merger is not consummated by February
15, 2023 (as may be extended in accordance with the Merger Agreement, the “Outside Date”), either we or Intel may, under certain
circumstances that may be beyond our control, choose not to proceed with the Merger.
The Merger is subject to the satisfaction or waiver of certain
closing conditions described in the Merger Proxy Statement and set forth in the Merger Agreement. The fulfillment of certain of these
conditions is beyond our control, such as, (1) the expiration or termination of the waiting period under the HSR Act, and (2) the expiration
or termination of the applicable waiting period, or, where applicable, the receipt of approvals, and the making or receipt of all notices
to, filings with and consents under specified regulatory laws in the People’s Republic of China, Germany, Israel and Japan. If the
Merger has not been completed by the Outside Date, either the Company or Parent may generally terminate the Merger Agreement, notwithstanding
the prior receipt of the approval of the Merger by the Company’s shareholders, except that the right to terminate the Merger Agreement
would not be available to a party that is in material breach of the Merger Agreement or whose actions or omissions, which constitute a
breach of the Merger Agreement, are a principal cause of, or primarily result in, the failure of the Merger to be completed on or before
that date.
Our shareholders could file claims challenging
the Merger, which may delay or prevent the closing of the Merger (the “Closing”) and may cause us to incur substantial defense
or settlement costs, or otherwise adversely affect the Company.
As of the date of the Merger Proxy Statement, there are no pending
lawsuits challenging the Merger. However, potential plaintiffs may file lawsuits challenging the Merger. The outcome of any future claim
and / or litigation is uncertain. Such litigation, if not resolved, could prevent or delay completion of the Merger and result in substantial
costs to the Company, including any costs associated with the indemnification of directors and officers. One of the conditions to the
Closing is the absence of any provision of applicable law or order by any governmental entity that has the effect of restraining, enjoining
or otherwise prohibiting the consummation of the Merger. Therefore, if a plaintiff were successful in obtaining an injunction prohibiting
the consummation of the Merger on the agreed-upon terms, then such injunction may prevent the Merger from being completed, or from being
completed with the expected timeframe. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger
is completed may adversely affect the Company’s business, financial conditions, results of operations and cash flows.
ITEM
4. INFORMATION
ON THE COMPANY
A. |
HISTORY AND DEVELOPMENT
OF THE COMPANY |
We are a pure-play independent specialty foundry dedicated to the
manufacture of semiconductors. Typically, pure-play foundries do not offer products of their own, but focus on producing integrated circuits,
or ICs, based on the design specifications of their customers. We manufacture semiconductors for our customers primarily based on third
party designs. We currently offer the process manufacture geometries of 0.35, 0.50, 0.55, 0.60, 0.80-micron and above on 150-mm wafers
and 0.35, 0.18. 0.16, 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, including sensors on Gallium Nitride, micro-electromechanical systems
(MEMS), wireless antenna switch Silicon-on-Insulator (SOI), mixed-signal, radio frequency CMOS (RFCMOS), bipolar CMOS (BiCMOS), and silicon-germanium
BiCMOS (SiGe BiCMOS or SiGe), silicon photonics, high voltage CMOS, radio frequency identification (RFID) technologies and power management.
To better serve our customers, we have developed and are continuously expanding our technology offerings in these fields. Through our
experience and expertise gained during more than twenty-five years of operation, we differentiate ourselves by creating a high level of
value for our customers through innovative technological processes, design and engineering support, competitive manufacturing indices,
and dedicated customer service.
Tower was founded in 1993, with the acquisition of National Semiconductor’s
150-mm wafer fabrication facility located in Migdal Haemek, Israel, and commenced operations as an independent foundry. Since then, we
have significantly upgraded our Fab 1 facility, equipment, capacity and technological capabilities with process geometries ranging from
1.0-micron to 0.35-micron and enhanced our process technologies to include CMOS image sensors, embedded flash, advanced analog, RF (radio
frequency) and mixed-signal technologies. We integrated advanced single Poly NVM into the Fab 1 process flows and developed a GaN technological
platform (GaN on Si) suitable for fabrication of HEMT transistors, and gas and UV sensors.
In 2003, we commenced production in Fab 2, a wafer fabrication
facility we established in Migdal Haemek, Israel. Fab 2 supports geometries ranging from 0.35 to 0.13-micron, using advanced CMOS technology,
including CMOS image sensors, embedded flash, advanced analog, RF (radio frequency), and specifically RF switches on SOI, power platforms
and mixed-signal technologies.
In September 2008, we merged with Tower NPB, which holds 100% of
NPB Co. and operates Fab 3 located in Newport Beach, California, US. Fab 3 focuses on specialty process technologies for the manufacture
of analog and mixed-signal semiconductor devices, and supports geometries ranging from 0.50 to 0.13-micron. NPB Co.’s specialty
process technologies include advanced analog, radio frequency, high voltage, bipolar, SOI and silicon germanium bipolar, complementary
metal oxide (“SiGe”) semiconductor processes. ICs manufactured at Fab 3 are incorporated into a wide range of products, including
cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
In March 2014, we acquired from Panasonic 51% of a newly established
company, TPSCo, that manufactures products for Panasonic and other third party customers, using three semiconductor factories located
in Hokuriku Japan (Uozu E, Tonami CD and Arai E), which factories were established by Panasonic. Pursuant to the transaction, Panasonic
transferred its semiconductor wafer manufacturing process and capacity tools (8 inch and 12 inch) at the three fabs to TPSCo, 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.
We
entered into a definitive agreement with ST effective as of September 14, 2021
to share cleanroom space of a 300mm manufacturing fabrication facility in Agrate, Italy, currently under construction by ST, under a collaborative
arrangement. The parties will share the cleanroom space and the facility infrastructure, and TSIT will install its own equipment in one-third
of the total space, which are expected to be qualified and used to manufacture products for its foundry customers. Operations will
continue to be managed by ST.
On February 15, 2022, we entered into the Merger Agreement with
Parent, Merger Sub, and Intel, pursuant to which Merger Sub will merge with and into the Company (and Merger Sub will cease to exist as
a separate legal entity), and the Company will be the surviving company and will become a wholly‑owned subsidiary of Parent and
a subsidiary of Intel.
As a result of the Merger, the Company will cease to be a publicly
traded company, all outstanding Company Shares (except for any Company Shares owned by the Company, Parent, Merger Sub or any of their
direct or indirect subsidiaries or held in the Company’s treasury (which will remain outstanding and no Merger Consideration or
any other consideration will be delivered in exchange therefor)) will be deemed to be transferred to Parent in exchange for the right
to receive the Merger Consideration.
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 http://www.towersemi.com Information
on our website is not incorporated by reference in this annual report.
Semiconductor devices are responsible for the rapid growth of the
electronics industry over the past fifty years. They are critical components in a variety of applications, from computers, consumer electronics
and communications, to industrial, military, medical and automotive applications. Rapid changes in the semiconductor industry frequently
make recently introduced devices and applications obsolete within a very short period of time. With the increase in their performance
and decrease in their size and resulting decrease in cost, the use of semiconductors and the number of their applications have increased
significantly.
Historically, the semiconductor industry was composed primarily
of companies that designed and manufactured ICs in their own fabrication facilities, which are known as integrated device manufacturers
(“IDM”). In the mid-1980s, fabless IC companies, which focused on IC design and used external manufacturing capacity, began
to emerge. Fabless companies initially outsourced production to IDMs, which filled this need through their excess capacity. As the semiconductor
industry continued to grow, increasing competition forced fabless companies and IDMs to seek reliable and dedicated sources of IC manufacturing
services. Use of external manufacturing capacity allowed IDMs to reduce their investment in their existing and next-generation manufacturing
facilities and process technologies. This need for external manufacturing capacity led to the development of independent companies, known
as foundries, which focus primarily on providing IC manufacturing services to semiconductor suppliers. Foundry services are used by nearly
all major semiconductor companies in the world, including IDMs, as part of a dual-source, risk-diversification and cost effectiveness
strategy.
Semiconductor suppliers face increasing demands for new products
that provide higher performance, greater functionality and smaller form factors at lower prices - all features that require increasingly
complex ICs. The industry has experienced a dramatic increase in the number of applications that incorporate semiconductors. Further,
in order to compete successfully, semiconductor suppliers must minimize the time it takes to bring a product to market. As a result, fabless
companies and IDMs have focused more on their core competencies, design and intellectual property development, and tend to outsource manufacturing
to foundries.
The two basic functional technologies for semiconductor products
are digital and analog. Digital semiconductors provide critical processing power and have helped enable many of the computing and communication
advances of recent years. Analog semiconductors monitor and manipulate real world signals such as sound, light, pressure, motion, temperature,
electrical current and radio waves, for use in a wide variety of electronic products such as digital still cameras, x-ray medical applications,
flat panel displays, personal computers, cellular handsets, telecommunications equipment, consumer electronics, automotive electronics
and industrial electronics. Analog-digital, or mixed-signal, semiconductors combine analog and digital devices on a single chip which
can process both analog and digital signals.
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, strong application
specific experience and a comprehensive intellectual property portfolio. In addition, today’s analog market is driven strongly by
growing sensitivity to environmental requirements, such as the conservation of energy and human well-being. Low power consumption is demonstrated
in applications related to the systems enabled with Artificial Intelligence (AI) and edge computing using AI which allow for the analysis
and filtering of data closer to the sensors such that only the relevant data is sent to the cloud. The AI edge devices are incorporated
into products with sensors related to Internet of Things (IoT), in particular ASICs with embedded sensors, medical devices and applications
focused on entertainment, infotainment and safety, which combine analog and digital technology.
Mixed-signal ICs are an essential part of any front-end electronic
system. Our advanced analog CMOS process technologies have more features than standard analog CMOS process technologies and are well suited
for higher performance or more highly integrated analog and mixed-signal semiconductors, such as high-speed analog-to-digital or digital-to-analog
converters and mixed-signal semiconductors with integrated data converters. These process technologies generally incorporate higher density
passive components, such as capacitors and resistors, as well as improved active components, such as native or low voltage devices, and
improved isolation techniques, into standard analog CMOS process technologies.
The enormous costs associated with modern fabs, combined with the
increasing demand for complex ICs, has created an expanding market for outsourced foundry manufacturing services. Foundries can cost-effectively
supply advanced ICs to even the smallest fabless companies by creating economies of scale through pooling the demand of numerous customers.
In addition, customers whose IC designs require process technologies other than standard digital CMOS have created a market for independent
foundries that focus on providing specialized process technologies. Specialty process technologies enable greater analog content and can
reduce the die size of an analog or mixed-signal semiconductor, thereby increasing the number of dies that can be manufactured on a wafer
and reducing final die cost. In addition, specialty process technologies can enable increased performance, superior noise reduction and
improved power efficiency of analog and mixed-signal semiconductors compared to traditional standard CMOS processes. These specialty process
technologies include advanced analog CMOS, specialized RF devices on SOI, radio frequency CMOS (RF CMOS), CMOS image sensors (CIS) 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 AI. 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 our own proprietary or third-party design elements. The end
product of our manufacturing process is a silicon wafer containing multiple identical ICs. In most cases, our customer assumes responsibility
for dicing, assembly, packaging and testing.
We provide wafer fabrication services to fabless IC companies and
IDMs, as sole source or second source, and enable smooth integration of the semiconductor design and manufacturing processes. By doing
so, we enable our customers to bring high-performance, highly integrated ICs to market rapidly and cost effectively. We believe that our
technological strengths and emphasis on customer service have allowed us to develop a unique position in large, high-growth specialized
markets for CMOS image sensors, RF, power management and high-performance mixed signal ICs.
We manufacture using specialty process technologies, mostly based
on CMOS process platforms with added features to enable special and unique functionality, decreased footprint of products, competitive
performance and cost advantages for analog and mixed-signal semiconductors. Products made with our specialty process technologies are
typically more complex to manufacture than products made using standard process technologies employing similar technology nodes. Generally,
customers that use our specialty process technologies cannot easily transfer designs to another foundry because the analog characteristics
of the design are dependent upon the specific process technology used for manufacturing. The specialty process design infrastructure is
complex and includes design kits and device models that are specific to the foundry in which the process is implemented and to the process
technology itself. In addition, the relatively small engineering community with specialty process expertise and the significant investment
required for development or transfer and maintenance of specialty process technologies has limited the number of foundries capable of
offering specialty process technologies. We believe that our specialized process technologies combined with dedicated design enablement
capabilities distinguish our IC manufacturing services and attract industry-leading customers.
We also offer process transfer services to IDMs that wish to manufacture
products using their own process and do not have sufficient capacity in their own fabs. Our process transfer services are also used by
fabless companies that have proprietary process flows that they wish to manufacture at additional manufacturing sites for purposes of
geographic diversity or for the manufacture of an advanced technology node that is very costly to build themselves. Our process transfer
services include development, transfer, and extensive optimization as defined by customer needs.
With our world-class engineering team, well established transfer
methodologies and vast manufacturing experience, we offer state of the art production lines for core bulk CMOS and specialized technologies
such as RF SOI, integrated into back-end-of-line (BEOL) TMR/MTJ (magnetic tunnel junction) sensors, 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-eight years. We have built strong relationships with customers. Our consistent
focus on providing high-quality, value-added services, including engineering and design support, has allowed us to attract customers that
seek to work with a proven provider of foundry solutions. Our emphasis on working closely with customers and accelerating the time-to-market
and performance of their next-generation products has enabled us to maintain a high customer retention rate, while increasing the number
of new customers and new products for production.
We continuously target to expand our manufacturing footprint and
business by attracting new customers that will utilize our existing manufacturing facilities, some of which have recently implemented
further capacity expansion projects, as well as by acquiring external capacity through acquisitions of existing or newly established fabs,
as we have done in the past, with or without third-party collaboration and/or funding (including cash, equity or in-kind investment).
We also offer from time to time a wide range of support services
for the establishment of new semiconductor fabrication facilities or the ramp up of existing facilities owned by third parties, using
our technological, operational and integration expertise, for which we receive payments based on the achievement of pre-defined milestones
and may also be entitled to certain capacity allocation and other rights, all subject to definitive agreements underlying such projects.
We derived a significant amount of our revenues for the year ended
December 31, 2021 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, MEMS and wafer bonding technologies, as well as technologies
for enabling AI, in particular original Y-Flash memristors.
CMOS image sensors are ICs used to capture an image in a wide variety
of consumer, communications, medical, automotive and industrial market applications, including camera-equipped cell phones, digital still,
video, security and surveillance cameras, and video game consoles. Our dedicated manufacturing and testing processes assure consistently
high electro-optical performance of the integrated sensor through wafer-level characterization. Our CMOS image sensor processes have demonstrated
superior optical characteristics, excellent spectral response and high resolution and sensitivity. The ultra-low dark current, high efficiency
and accurate spectral response of our photodiode enable faithful color reproduction and acute detail definition.
We are currently actively involved in the high-end sensor and applications
specific markets, which include applications such as high end video, high end photography, industrial machine vision, dental x-ray, medical
x-ray, automotive sensors, security sensors and time of flight (ToF) three dimensional sensors for entertainment, commercial and industrial
applications, as well as image sensors with record frame rates for registration of ultra-fast processes.
We gained the market potential using CMOS process technology for
a digital camera-on-a-chip, which integrates a CMOS image sensor, filters and digital circuitry. Upon entering the CMOS image sensor foundry
business, we utilized research and development work that had been ongoing since 1993. Our services include a broad range of turnkey solutions
and services, including silicon proven pixel services, optical characterization of a CMOS process, an innovative patented stitching manufacturing
technique and prototype packaging. The CMOS image sensors that we manufacture include 180nm on 200mm wafers and 65nm on 300mm wafers with
pixel sizes down to 1.12 micron utilizing dual light pipe technology, delivering outstanding image quality for a broad spectrum of digital
imaging applications.
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 sensor markets. Our advanced technology used in CMOS image sensors enables improved
optical and electrical performance such as low dark current, low noise, high well capacity, high quantum efficiency and high uniformity
of pixels utilizing deep sub-micron process technologies, enabling the manufacturing of very sophisticated and high performance camera
module solutions. Our state-of-the-art pixels are used in a variety of new markets, such as the high-end machine vision cameras and the
rapidly growing ToF 3D sensor market. In addition, our advanced global shutter technology and global shutter pixels, as small as 2.5um,
enable excellent performance, especially, very high shutter efficiency.
For the X-ray market, we offer our innovative patented “stitching”
technology on 0.18-micron process as well as on 65nm technology on 300mm wafers and a variety of 15 to 150-micron pixels that are optimized
for X-ray applications. These pixels are used by our customers in dental (intra and extraoral) and other medical X-ray products (such
as C-Arm surgery machines, angiography and mammography) as well as in the industrial NDT (Not Destructive Testing) X-Ray market.
Our stitching technology, a cornerstone of our X-Ray sensors technology,
enables semiconductor exposure tools to manufacture single ultra-high-resolution CMOS image sensors containing millions of pixels at sensor
sizes far larger than the photo exposure tool (scanner) field size.
This technology is used by us in the manufacturing of large X-Ray
sensors (up to one die per wafer) on 8” and 12” wafers as well as high-end large format photography and industrial sensors
with special pixels that we have developed specifically for this market. In addition, this technology is also being used by us in display
backplanes, for large virtual reality (VR) displays.
In the past two years, we have completed and qualified our next
generation CMOS sensor technology, namely BSI and wafer stacking, which combines a digital CMOS wafer with an imager wafer that is then
thinned for backside illumination (BSI) with billions of electrical connections between the two wafers. We now offer both BSI and stacking
technologies in 200mm (in cooperation with a third-party that manufactures the BSI part of the process on our wafers, using our own developed
BSI technology) and in 300mm in our own facilities at TPSCo.
We specially developed our near Infra-Red imaging technology for
gesture recognition systems and a series of spectrally sensitive image sensors, including proximity sensors and sensors sensitive in the
UV range. We also announced our iToF (indirect time of flight) technology with outstanding performance parameters for fast autofocus and
face recognition functions in mobile devices, which started production in 2021.
In addition, we developed SPAD (single photon avalanche diodes)
technology for dToF (direct time of flight) LIDAR (light detection and range) applications in mobile devices, smart automotive advanced
driver assistance systems (ADAS) and autonomous driving (AD) vehicles. We also further developed our stacked technology to support the
stacking of a very advanced technology node CMOS wafer with a state of the art SPAD imager, with pixel level electrical connections between
the wafers.
In the MEMS area, we entered the MEMS microphone market. This is
a fast-growing market with microphones being embedded not only in ear buds and cellular phones, but also in many command operated devices.
Speech recognition AI is being used in such devices. For high-fidelity speech recognition, differentiated performance of high-dynamic
range and low-noise microphones are needed. We are in the initial production ramp up and are moving forward on developments for the best-in-industry
signal-to-noise figure of merit.
We also developed MEMS switches technology for fast RF antenna
switching and accelerometers for a variety of applications.
The display market is undergoing a dramatic change from LCD-based
screens with LED backlighting into micro LED or micro OLED displays, allowing substantially higher dynamic range with true black and higher
brightness. The display market spans from small displays, such as smartwatch or VR goggles displays, through smartphone, tablet and laptop
displays, to large format TV displays. In today’s technology, all of these displays are glass based, where the small ones are usually
OLED displays while the large ones are LCD based with LED backlight. The true LED displays, namely, displays where each pixel is a LED,
that provide unprecedented performance in illuminance and dynamic range, are extremely expensive and large. The major change expected
in the coming decade is the ability to create these from micro LEDs and place them on a backplane in a cost effective way, or even have
a monolithic array of micro LEDs as a screen for the small screen applications. Such micro LEDs cannot be performed on glass and the most
promising way is to create them on silicon wafers (GaN on silicon). In entering this new display area, we are working on the silicon part
of GaN nano wire based LEDs, both pre and post GaN growth. In addition, we use our patented stitched technology for the development of
CMOS back plane for large die micro OLED arrays (monolithic approach) and LCOS displays for the virtual reality market.
In recent years, more and more designers opt to develop high frequency
products based on RF CMOS technologies. The superior cost structure of CMOS technologies enables high volume, low cost production of high
frequency products. We use our mixed signal expertise to leverage and develop processes and provide services for customers that utilize
CMOS technologies and require high frequency performance.
Our RF CMOS process technologies have more features than advanced
analog CMOS process technologies of our competitors and are well suited for wireless electronics, 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 semiconductor transistors into an advanced analog CMOS process technology. In addition
to the smart process features, our RF offering includes design kits with RF models, device simulation and physical layouts tailored specifically
for RF performance. We currently have RF CMOS process technologies in 0.25 micron, 0.18 micron, 0.13 micron and 65 nanometer.
Further, we have RFCMOS process built on silicon-on-insulator (SOI)
substrates (RFSOI). These RFSOI process technologies include devices optimized to deliver higher performance and improved isolation relative
to devices in our RFCMOS process. We currently have RFSOI process technologies in 0.18 micron, 0.13 micron and 65 nanometer lithography
nodes and fabricate various devices, including antenna switches with record FOM (figure of merit) and front end modules. Corresponding
chips can be found in various products, including state-of-the-art smartphones, manufactured by leading manufacturers.
BiCMOS for RF and High Performance Analog
Our BiCMOS process technologies have more features than RF CMOS
process technologies and are well suited for 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, automotive radar components, hard-disk drive pre-amplifiers, power amplifiers
and low-noise amplifiers. These integrated circuits generally incorporate silicon germanium bipolar transistors, which are formed by the
deposition of a thin layer of silicon germanium within a bipolar transistor, to achieve higher speed, lower noise, and more efficient
power performance than the BiCMOS process technology. It is also possible to achieve higher speed using SiGe BiCMOS process technologies
equivalent to those demonstrated in standard RF CMOS processes that are two process generations smaller in line width. For example, a
0.18 micron SiGe BiCMOS process is able to achieve speeds comparable to a 90 nanometer RF CMOS process. As a result, SiGe BiCMOS makes
it possible to create analog products using a larger geometry process technology at a lower cost while achieving similar or superior performance
to that achieved using a smaller geometry standard RF CMOS process technology. We developed enhanced tool capabilities in cooperation
with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. We believe this equipment and related process expertise
makes us one of the few integrated circuit manufacturers with demonstrated ability to deliver SiGe BiCMOS products. We currently have
0.35 micron, 0.18 micron and 0.13 SiGe BiCMOS technologies available.
Silicon Photonics (SiPho)
Our industry-leading silicon photonics platform targets optical
networking and data center interconnect applications. The SiPho process complements the Company’s SiGe BiCMOS processes by providing
a companion solution able to integrate optical components in the expanding data communication market. The platform enables integration
of photodetectors, optical modulators and other optical components that have in the past been assembled in optical modules as discrete
components and can now be integrated in a single die potentially lowering cost, reducing footprint and improving performance of advanced
optical transceivers.
Power and Power Management ICs
Our power technologies are generally divided into a low-voltage
BCD offering and a high-voltage offering, including 140V Resurf, 200V SOI and 700V ultra-high voltage technologies. Our low-voltage BCD
process technologies have more features than advanced analog CMOS processes and are well suited for power and driver semiconductors, such
as voltage regulators, battery chargers, power management products and audio amplifiers. These process technologies generally incorporate
higher voltage CMOS devices than advanced analog CMOS processes such as 5V, 8V, 12V, 40V and 60V devices, and, in the case of BCD, bipolar
devices integrated into an advanced analog CMOS process. We currently have BCD offerings in 0.5 micron, 0.35 micron, 0.25 micron, 0.18
micron and 65 nanometer.
Our higher voltage technologies, which include 140V Resurf, 200V
SOI and 700V ultra-high voltage platform, support applications such as gate drivers for discrete high-power transistors and automotive,
industrial, AC adaptor and lighting markets.
In addition, we have developed a unique, 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, using phase-change materials for more advanced RF switches, scaling the features we offer today to the 65 nanometer
process, including the integration of advanced SiGe transistors with 65 nanometer CMOS, and copper metallization.
CUSTOMERS, MARKETING AND
SALES
Our marketing and sales strategy seeks to further solidify our
position as the leading foundry of high value analog semiconductor solutions, by increasing our market share at existing customers and
expanding our global customer base. We have marketing, sales, design support engineers, field application engineers and customer support
personnel located in many countries worldwide, who have been hired and assigned to these roles based on their industry experience, customer
relationships and understanding of the semiconductor marketplace.
Our sales cycle is generally 9 to 24 months or longer for new customers
and can be as short as 6 to 12 months for existing customers. The typical stages in the sales cycle process from initial contact until
production are:
technical evaluation;
product design to our specifications, including integration of
third party intellectual property;
photomask - design and third-party photomask manufacturing;
silicon prototyping;
assembly and test;
validation and qualification; and
production.
The primary customers of our foundry and design services are fabless
semiconductor companies and IDMs. Our customers include many analog and mixed-signal industry leaders, serving a variety of end market
segments. A portion of our product sales are made pursuant to long-term contracts with our customers, under which we agree to reserve
manufacturing capacity for certain purchasing commitments. During the year ended December 31, 2021, we had six significant customers that
each contributed between 4% to 21% of our revenues. During the year ended December 31, 2020, we had six significant customers that each
contributed between 5% to 25% of our revenues. During the year ended December 31, 2019, we had six significant customers that each contributed
between 5% to 27% 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, |
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
United States |
|
|
41 |
% |
|
|
44 |
% |
|
|
52 |
% |
Japan |
|
|
22 |
% |
|
|
28 |
% |
|
|
29 |
% |
Asia, excluding Japan |
|
|
30 |
% |
|
|
22 |
% |
|
|
15 |
% |
Europe |
|
|
7 |
% |
|
|
6 |
% |
|
|
4 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
We price our products on a per wafer basis, taking into account
the unique value of our technology and its ability to enable customers to differentiate their products, the complexity of the technology,
prevailing market conditions, volume forecasts, the strength and history of our relationships with the customer and our current capacity
utilization. Most of our customers usually place purchase orders between two to six months before shipment.
To promote our products, technology offering and services, we publish
press releases, articles, technology journals and white papers. In addition, we present and participate in panel sessions at industry
conferences, hold a variety of regional and international technology seminars, and exhibit at various industry trade shows. We discuss
advances in our process technology portfolio and progress on specific relevant programs with our prospective and existing customers, as
well as industry analysts and research analysts, on a regular basis.
Our customers use our processes to design and market a broad range
of analog and mixed-signal semiconductors for diverse end markets, including wired and wireless high-speed communications, consumer electronics,
automotive, medical, security and industrial applications. We manufacture products for a wide range of electronic systems, including but
not limited to, high-performance applications, such as antenna switches, transceivers and power management circuits for cellular phones;
transceivers and power amplifiers for wireless local area networking products; power management, audio amplifiers and driver integrated
circuits for consumer electronics; tuners for digital televisions and set-top boxes; modem chipsets for broadband access devices and gaming
devices; serializer/deserializers, or SerDes, for fiber optic transceivers; high end video cameras, dental and medical x-ray vision, industrial
cameras, focal plane arrays for imaging applications; infra-red detectors for gesture recognition, controllers for power amplifier and
switching chips in cellular phones and wireline interfaces for switches and routers, magnetic field and gas and UV sensors.
The global semiconductor foundry industry is highly competitive.
We compete most directly in the specialty segment with foundries such as GlobalFoundries (mainly in the RF business), Vanguard Semiconductor,
DongBu, X-Fab and Hua Hong Semiconductor. We also compete in some areas with the pure-play advanced technology node-driven foundry service
providers such as Taiwan Semiconductor Manufacturing Corporation (“TSMC”), United Microelectronics Corporation (“UMC”)
and Semiconductor Manufacturing International Corp. (“SMIC”). These three pure-play semiconductor foundries primarily compete
against one another and focus on 12-inch deep-submicron CMOS processing, though they each also have some capacity for specialty process
technologies. The rest of the foundry industry, including existing Chinese, Korean and Malaysian foundries, generally target either industry
standard 8-inch CMOS processing or specialty process technologies. Most of the foundries with which we compete are located in Asia-Pacific
that benefit from their close proximity to Asian companies involved in the design of ICs and the Asian customer base.
The principal elements of competition in the wafer foundry market
are:
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technology offering and future roadmap; |
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system level technical expertise; |
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research and development capabilities; |
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access to intellectual property; |
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customer technical support; |
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product development kits (PDKs); |
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manufacturing operational performance; |
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customer support and service; |
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strategic customer relationships; |
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capacity availability; and |
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stability and reliability of supply. |
Some of our competitors, notably the pure-play advanced technology
node-driven foundry service providers, have greater manufacturing capacity, may have greater scope and/or a greater number of research
and development resources, better cost structure and greater financial, marketing and other resources. As a result, these companies may
be able to compete more aggressively over a longer period of time than us.
We seek to compete primarily on the basis of advanced specialty
analog/mixed-signal technology, research and development, breadth of process offering, production quality, technical support, and our
design and engineering services. We have a highly differentiated specialty offering and proven track record in analog/mixed-signal markets,
which enables us to effectively compete with larger foundry service providers.
Some semiconductor companies have advanced their CMOS designs to
5-10 nanometer. These smaller geometries may provide customers with performance and integration features that may be comparable to, or
exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain
applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required.
Our specialty process technologies will therefore compete with these advanced CMOS processes and some of our potential and existing customers
could elect to design these advanced CMOS processes into their next generation products. We are not currently capable, nor do our current
plans include, the manufacture of products using CMOS processes at these smaller geometries.
WAFER FABRICATION SERVICES
Wafer fabrication is an intricate process that consists of constructing
layers of conducting and insulating materials on raw wafers in intricate patterns that define the IC’s function. IC manufacturing
requires hundreds of interrelated steps performed on different types of equipment, and each step must be completed with extreme accuracy
for finished ICs to work properly. The process can be summarized as follows:
Circuit Design. IC production begins when a fabless IC company
or IDM designs (or engages a third party or us to design) the layout of a device’s components and designates the interconnections
between each component. The result is a pattern of components and connections that defines the function of the IC. In highly complex circuits,
there may be more than 43 layers of electronic patterns. After the IC design is completed, we provide these companies with IC manufacturing
services.
Mask Making. The design for each layer of a semiconductor wafer
is imprinted on a photographic negative, called a reticle or mask. The mask is the blueprint for each specific layer of the semiconductor
wafer. We engage external mask shops for the manufacture of such masks.
IC Manufacturing. Transistors and other circuit elements comprising
an IC are formed by repeating a series of processes in which photosensitive material is deposited on the wafer and exposed to light through
a mask. Advanced IC manufacturing processes consist of hundreds of steps, including photolithography, oxidation, etching and stripping
of different layers and materials, ion implantation, deposition of thin film layers, chemical mechanical polishing and thermal processing.
The final step in the IC manufacturing process is wafer probing, which involves electronically inspecting each individual IC in order
to identify those that are operable for assembly. Our customers often use third party service providers for the performance of wafer probing
although we occasionally provide this service to certain customers.
Assembly and Test. After IC manufacture, the wafers are transferred
to assembly and test facilities. In the assembly process, each wafer is cut into dies, or individual semiconductors, and tested. Defective
dies are discarded, while good dies are packaged and assembled. Assembly protects the IC, facilitates its integration into electronic
systems and enables heat dissipation. Following assembly, the functionality, voltage, current and timing of each IC is tested. After testing,
the completed IC is shipped either to our customer or to their customer’s printed circuit board manufacturing facility. Our customers
often use third party service providers for the performance of wafer assembly and testing, and to a smaller extent, part of such process
is performed independently by us.
Our future success depends, to a large degree, on our ability to
continue to successfully develop and introduce to production advanced process technologies that meet our customers’ needs. Our process
development strategy relies on CMOS process platforms that we license and transfer from third parties or develop ourselves.
From time to time, at a customer’s request, we develop a
specialty process module, which in accordance with the applicable agreement, may be used for such customer on an exclusive basis or added
to our process offering. Such developments are very common in all of our specialty process technologies noted above.
Our research and development activities have related primarily
to our process, device and design development efforts in all specialty areas that were mentioned above, and have been sponsored and funded
by us and in certain cases with the partial participation of the Government of the State of Israel through the 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. For example, the transfer or license of IIA-funded technologies to third parties outside Israel requires the prior approval
of the IIA, which approval is generally contingent on payment of a redemption fee, calculated according to a formula under the Innovation
Law, which may be in the amount of up to six times the grant(s) amount (less paid royalties, if any, and depreciation, but no less than
the total amount of grants actually received by us), plus accrued interest.
In addition to the above, we may be required to obtain export licenses
before exporting certain technology or products to any third party and may be required to comply with Israeli, U.S. and other foreign
export regulations, as may be applicable.
Our research and development activities seek to upgrade and improve
our manufacturing technologies and processes. We maintain a central research and development team primarily responsible for developing
cost-effective technologies that can serve the manufacturing needs of our customers. A substantial portion of our research and development
activities are undertaken in cooperation with our customers and equipment vendors. Due to the rapid changes in technology that characterize
the semiconductor industry, effective research and development is essential to our success. We plan to continue to invest significantly
in research and development activities in order to develop advanced process technologies for new applications.
Research and development expenses for the years ended December
31, 2021, 2020 and 2019 were $85.4 million, $78.3 million and $75.6 million, respectively, net of government participation of $0.8 million,
$0.9 million and $0.7 million, respectively. As of December 31, 2021, we employed 429 professionals in our research and development departments,
57 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.
Our success depends in part on our ability to obtain patents, licenses
and other intellectual property rights related to our production processes. To that end, we have obtained certain patents, acquired patent
licenses and intend to continue to seek patents on our intellectual property.
As of December 31, 2021, we held 319 patents in force. We have
entered into various patent and other technology license agreements with technology companies, including Synopsys, ARM, Cadence, Mentor
Graphics and others, under which we have obtained rights to additional technologies and intellectual property.
We constantly seek to strengthen our technological expertise through
relationships with technology companies. We seek to expand our core strengths in CMOS image sensors, non-imaging sensors, embedded flash,
power management, AI, RF, SiGe, MEMS, mixed-signal and silicon photonics technologies by continuous development in these areas. A main
component of our process development strategy is to acquire licenses for standard CMOS technologies, cell libraries and specialized IPs
(e.g., NVM) from leading providers, such as ARM and Synopsys, and further develop specialized processes through our internal design teams.
The licensing of these technologies has significantly reduced our internal development costs.
Our ability to compete depends on our ability to operate without
infringing upon the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation over patent
and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received
communications from third parties asserting that their patents cover certain of our technologies or alleging infringement of intellectual
property rights. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion
of such claims, we could incur significant costs and devote significant management resources in defending ourselves from such claims.
To better serve our customers’ design needs using advanced
CMOS and mixed-signal processes, we have entered into a series of agreements with leading providers of physical design libraries, mixed-signal
and non-volatile memory design components. These components are basic design building blocks, such as standard cells, interface input-output
(I/O) cells, software compilers for the generation of on-chip embedded memory arrays, mixed-signal and non-volatile memory design blocks.
To achieve optimal performance, all of these components must be customized to work with our manufacturing process. These components are
used in most of our customers’ chip designs.
We interact closely with customers throughout the design development
and prototyping process to assist them in the development of high performance and low power consumption semiconductor designs and to lower
their final die, or individual semiconductor, costs through die size reductions and integration. We provide engineering support and services
as well as manufacturing support in an effort to accelerate our customers’ design and qualification process so that our customers
can achieve faster time to market. We have entered into alliances with Cadence Design Systems, Inc., Synopsys, Inc., Mentor Graphics Corp.,
and other suppliers of electronic design automation tools, and also licensed standard cells, 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 namely, accurate device models, rich PDKs, silicon proven ESD (Electro
Static Discharge) protection structures for different voltages ranging from 2KV to 15KV and I/Os, special design rules per application
and technical support. Our design support can assist in all or part of the design flow. Our in-depth knowledge of the fab and processes
provide a substantive and competitive advantage for our customers, for example when time to market is critical (our design support reduces
the number of required runs) or when implementing designs that reach the boundaries of technology. In addition, our IP and design services
can assist to relieve some of our customers' issues, providing the specific skills and expertise critical for quick and successful implementation
of our customers’ design on our manufacturing process.
We believe that our circuit design expertise and our ability to
accelerate our customers’ design cycle while reducing their design costs represent one of our more notable competitive strengths.
JAZZ SEMICONDUCTOR TRUSTED
FOUNDRY
For purposes of our U.S. aerospace and defense business, Tower
and Tower NPB have worked with the Defense 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. JSTF maintains
facility security clearance and trusted foundry status.
C. |
ORGANIZATIONAL STRUCTURE
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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 (NTCJ holds the remaining
49%), which is incorporated under the laws of Japan and operates three fabs located in Japan and known as Arai E, Uozo E and Tonami CD.
Tower Semiconductor San Antonio, Inc., which is wholly-owned by
Tower US Holdings Inc., operates our Fab 9 facility in San Antonio, Texas, USA.
TSIT, Tower’s wholly-owned Italian subsidiary, is expected
to share manufacturing capacity with ST Microelectronics S.r.l. in a 300mm fabrication facility being established in Agrate, Italy.
D. |
PROPERTY, PLANTS AND EQUIPMENT
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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 in the U.S. TSIT is expected to share manufacturing capacity with ST in a 300mm fabrication
facility being established by ST in Agrate, Italy.
The capacity in each of our facilities at any particular time varies
and depends on the combination of the processes being used and the product mix being manufactured at such time. Hence, it may be significantly
lower at certain times as a result of certain combinations that may require more processing steps than others. We have the ability to
rapidly change the mix of production processes in use in order to respond to changing customer needs and to maximize utilization of the
fab. In general, our ability to increase our manufacturing capacity has been achieved through the addition of equipment, improvement in
equipment utilization, and the reconfiguration and expansion of existing clean room areas.
Capital expenditures in 2021 and 2020 were approximately $279 million
and $257 million, respectively, net of proceeds from sale of equipment and fixed assets of approximately $35 million and $57 million,
respectively.
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.
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.
NPB Co.’s manufacturing facility, Fab 3, and offices, which
we acquired in 2008, are located in Newport Beach, California. Fab 3 supports geometries ranging from 0.80 to 0.13-micron. The manufacturing
facility comprises 320,000 square feet, including 120,000 square feet of overall clean room area.
NPB Co. leases its fabrication facility and offices under a lease
agreement that was initially in effect until March 2022, and provided NPB Co. an option, at its sole discretion, to extend the lease for
an additional five year period, which NPB Co. elected to exercise for the lease to continue through March 2027. Under the lease agreement
as currently in effect, (i) NPB Co’s rental payments consist of fixed base rent and fixed management fees and NPB Co.’s pro
rata share of certain expenses incurred by the landlord in the ownership of these buildings, including property taxes, building insurance
and common area maintenance; and (ii) the lease agreement includes certain obligations of the parties, including certain noise abatement
actions in relation to the fabrication facility. The landlord has made claims that NPB Co.’s noise abatement efforts are not adequate
under the terms of the amended lease, and has requested a judicial declaration that NPB Co. has committed material non-curable breaches
of the lease and that, in accordance with the lease, the landlord would be entitled to terminate the lease. NPB Co. does not agree and
is disputing these claims. s. See “Item 3. Key Information—D. Risk Factors—Risks Affecting Our Business— Risks
relating to Fab 3 lease could harm business, operations and financial results.”
Uozu E, Tonami CD and Arai E fabs
In 2014, we acquired a 51% equity stake in TPSCo, a company initially
formed by Panasonic Corporation to manufacture products for Panasonic and other third-party customers, using three semiconductor factories
located in Hokuriku, Japan, which factories were established by Panasonic. Pursuant to the transaction, Panasonic transferred its semiconductor
wafer manufacturing process and capacity tools (8 inch and 12 inch) at its three fabs located in Hokuriku (Uozu E, Tonami CD and Arai
E) to TPSCo. The fabs support geometrics ranging down to 45 nanometer. The fabs’ land and buildings are leased by PSCS (currently
named NTCJ) to TPSCo. As part of the agreements in relation to TPSCo, at the request of Panasonic (through PSCS; currently named NTCJ),
it has been decided to re-organize and re-structure operations in Japan such that the Uozu and Tonami facilities will remain unchanged,
while the Arai manufacturing factory, which is currently manufacturing products solely for NTCJ and is not serving Tower’s or TPSCo’s
foundry customers, will cease operations effective July 1, 2022.
Fab 9
During 2016, we acquired Fab 9 in San Antonio Texas, USA from Maxim.
The assets and related business that we acquired from Maxim are held and conducted through a wholly-owned US subsidiary, Tower SA. Fab
9 supports process geometries ranging from 0.18 to 0.8 micron for the manufacture of products using CMOS and analog based technologies.
Under the terms of the acquisition agreement, until the termination or expiration of the supply agreement entered into between Maxim and
Tower SA, Maxim has a right of first offer to re-purchase Fab 9 in the event Tower or any of its subsidiaries sell, transfer, dispose
of, cease the operations of, close, transfer or relocate Fab 9, or if Tower or its operations at Fab 9 become subject to a petition of
bankruptcy or liquidation.
Fab under construction by ST in Italy
We
entered into a definitive agreement with ST as of September 14, 2021 to
share a 300mm manufacturing fabrication facility in Agrate, Italy under a collaborative arrangement, following which TSIT, a wholly-owned
subsidiary of Tower, was incorporated. The fabrication facility is currently under construction by ST. The parties will share
the cleanroom space and the facility infrastructure, and TSIT will install equipment in one-third of the total space, which are
expected to be qualified and used to manufacture products for its foundry customers. Operations will continue to be managed by ST.