PART I Key Information Outlines primary business, securities, and operational risks, including demand volatility, competition, and Israeli geopolitical instability Risk Factors Identifies business, securities, and operational risks, including production bottlenecks, competition, debt, and cyber threats - Over-demand for foundry services could lead to production bottlenecks, an inability to fulfill customer orders, and the potential loss of customers and revenue36 - The company's growth strategy relies on acquisitions and capacity expansion, which carries risks such as integration difficulties, competition for acquisition targets, and potential financing challenges3740 - The semiconductor foundry business is highly competitive, with rivals potentially having greater manufacturing capacity, financial resources, and better cost structures4445 - In 2020, one customer (NTCJ, formerly PSCS) accounted for 25% of revenues, and five other customers each generated between 4% and 11%, indicating significant customer concentration risk52 - The COVID-19 pandemic presents risks such as raw material shortages, reduced employee attendance, and potential downturns in customer orders54 - As of December 31, 2020, the company had approximately $392 million in consolidated long-term debt, which could limit its ability to fund strategic growth, increase vulnerability to adverse economic conditions, and place it at a competitive disadvantage6567 - A cybersecurity attack in September 2020 caused a temporary, proactive halt in operations at some manufacturing facilities, highlighting the risk of security breaches to operations and reputation97 - Operations in Israel, which include two manufacturing facilities (Fab 1 and Fab 2), are subject to risks from political, economic, and military instability in the region104105 Information on the Company Provides an overview of Tower Semiconductor's history, operations as a specialty foundry, structure, and global assets History and Development of the Company Details Tower Semiconductor's growth since 1993 through strategic acquisitions, expanding its global fab footprint - Tower was founded in 1993 by acquiring National Semiconductor's 150-mm wafer fab (Fab 1) in Migdal Haemek, Israel116 - In 2008, the company merged with Jazz Technologies, acquiring Fab 3 in Newport Beach, California, which specializes in analog and mixed-signal semiconductor devices118 - In 2014, Tower acquired a 51% equity stake in TPSCo from Panasonic, gaining three manufacturing facilities in Japan and expanding its capacity to 300mm wafers119 - In 2016, the company acquired a fabrication facility in San Antonio, Texas (Fab 9) from Maxim, further expanding its US manufacturing footprint120 Business Overview Operates as a specialty foundry, focusing on advanced technologies and expanding through acquisitions amid intense competition - The company specializes in manufacturing semiconductors using technologies like CMOS image sensors, RFCMOS, BiCMOS, SiGe, silicon photonics, and power management114 - Key focused process technologies include RF CMOS, SiGe, CMOS image sensors (CIS), advanced analog CMOS, RFID, BiCMOS, high voltage CMOS, and SOI platforms142143 - The company competes with specialty foundries like GlobalFoundries and Vanguard, as well as large pure-play foundries like TSMC, UMC, and SMIC, and IDMs with foundry operations177 Revenue by Geography (2018-2020) | Region | 2020 (%) | 2019 (%) | 2018 (%) | | :--- | :--- | :--- | :--- | | United States | 44% | 52% | 52% | | Japan | 28% | 29% | 34% | | Asia, excluding Japan | 22% | 15% | 10% | | Europe | 6% | 4% | 4% | | Total | 100% | 100% | 100% | - In 2020, six significant customers each contributed between 4% and 25% of revenues. This compares to six customers contributing 5% to 27% in 2019, and four customers contributing 7% to 33% in 2018172 Organizational Structure Details the company's structure, including its Israeli parent, wholly-owned US subsidiaries, and 51% stake in TPSCo Japan - Tower Semiconductor Ltd. is the parent company, incorporated in Israel, directly operating Fab 1 and Fab 2205206 - US operations (Fab 3 and Fab 9) are managed through wholly-owned US subsidiaries, including Tower US Holdings Inc. and its subsidiaries206208 - The company holds a 51% equity stake in the Japanese entity TPSCo, which operates three fabs. The remaining 49% is held by NTCJ207 Property, Plants and Equipment Operates seven global fabs supporting diverse process geometries, with increased 2020 capex for capacity expansion - The company manufactures semiconductor wafers at seven facilities: Fab 1 & 2 (Israel), Fab 3 (California, US), Fab 9 (Texas, US), and three TPSCo fabs (Japan)209 Net Capital Expenditures | Year | Net Capex ($M) | | :--- | :--- | | 2020 | 257 | | 2019 | 172 | - The lease for Fab 3 in Newport Beach, California has been extended through March 2027, though there is an ongoing dispute with the landlord regarding noise abatement actions218 - All manufacturing facilities are certified with key international standards, including ISO 9001 (quality), IATF16949 (automotive quality), ISO 14001 (environmental), and OHSAS 45001 (health and safety)222223224 Operating and Financial Review and Prospects Analyzes 2020 financial performance, liquidity, R&D, and industry trends, noting revenue growth and increased capex Operating Results Reports 2020 revenue growth to $1.27 billion, stable operations despite challenges, and a slight net profit decrease Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 ($M) | 2019 ($M) | Change | | :--- | :--- | :--- | :--- | | Revenues | 1,265.7 | 1,234.0 | +$31.7M | | Gross Profit | 233.3 | 229.7 | +$3.6M | | Operating Profit | 91.0 | 86.7 | +$4.3M | | Net Profit Attributable to Company | 82.3 | 90.0 | -$7.7M | - The COVID-19 pandemic did not materially adversely affect 2020 results; a significant revenue increase began in H2 2020, driven by demand for RF products for data centers and cloud computing232234 - A cyber event in September 2020 caused a temporary, proactive halt in some manufacturing facilities but had no material impact on the business due to quick restoration and insurance coverage238 - Capital expenditures increased by nearly 50% to $256.5 million in 2020 from $172.2 million in 2019 to address growing customer demand237 Revenue by Geography (2020 vs. 2019) | Region | 2020 (%) | 2019 (%) | | :--- | :--- | | United States | 44% | 52% | | Japan | 28% | 29% | | Asia (ex-Japan) | 22% | 15% | | Europe | 6% | 4% | Liquidity and Capital Resources Details 2020 liquidity, cash flow, and debt position, noting sufficient resources for operations but potential need for acquisitions Cash and Debt Position (as of Dec 31, 2020) | Item | Amount ($M) | | :--- | :--- | | Cash and cash equivalents | 211.7 | | Short-term deposits | 310.2 | | Marketable securities | 189.0 | | Total Debt (Current + Long-term) | 390.3 | - Major cash activities in 2020 included $276.6 million generated from operations, $313.7 million invested in property and equipment, and $63.7 million used for debt repayment272 - The company has a shelf registration statement in Israel, providing a platform for future fundraising to support strategic opportunities like acquisitions or capacity expansion275 - Key long-term debt includes approximately $104 million in Series G debentures, a $107 million JP Loan for TPSCo, and significant capital lease obligations278279 Research and Development, Patents and Licenses Focuses on R&D activities for process improvement, with expenses steadily increasing to $78.3 million in 2020 Net Research and Development Expenses | Year | R&D Expense ($M) | | :--- | :--- | | 2020 | 78.3 | | 2019 | 75.6 | | 2018 | 73.1 | Trend Information Addresses semiconductor industry trends, focusing on specialty analog technologies and capacity expansion for growth - The company's strategy focuses on differentiated specialty analog technologies to counter pricing pressure on larger geometry products286 - Tower targets high-growth end markets including IoT, mobile applications, wireless communications, consumer electronics, automotive, and industrial markets287 - The company is accelerating plans to expand manufacturing capacity, including its 300mm fab, and is actively evaluating acquisition opportunities to secure additional capacity and technology289291 Directors, Senior Management and Employees Details leadership, compensation, board structure, and global workforce, including unionized employees and compliance Directors and Senior Management Outlines the executive team and board of directors, led by CEO Russell C Ellwanger and Chairman Amir Elstein - Russell C. Ellwanger has served as Chief Executive Officer since May 2005294 - Amir Elstein has served as the Chairman of the Board of Directors since January 2009308 Compensation Details the performance-based compensation policy, including 2020 aggregate pay and shareholding guidelines - An amended and restated compensation policy for executive officers and directors was approved by shareholders on September 17, 2020320 2020 Aggregate Compensation for Directors & Senior Management | Compensation Type | Amount ($M) | | :--- | :--- | | Salaries, Fees, Bonuses | 7.3 | | Social & Other Benefits | 2.0 | - In September 2020, shareholders approved an equity grant to the CEO valued at $5.1 million, comprising 40% time-based RSUs and 60% performance-based PSUs, vesting over three years335341 - The compensation policy includes minimum shareholding guidelines requiring the CEO to own shares valued at 3x his annual base salary by May 2024, and other executives/directors to own 0.5x their annual fee/salary by July 2025343 Board Practices Describes the nine-member Board of Directors, its committees, and compliance with Nasdaq independence rules - The Board of Directors is currently comprised of nine directors345 - The company has elected to exempt itself from the Israeli requirement to appoint external directors and instead complies with Nasdaq listing rules for independent directors and committee composition348349 - The Audit Committee consists of four members, all of whom are determined to be independent and are classified as audit committee financial experts under SEC rules352355 - The Compensation Committee is comprised of three independent directors357359 Employees Reports 5,511 global employees as of 2020, with a majority in manufacturing and a portion unionized Employee Headcount by Year | Year | Total Employees | | :--- | :--- | | 2020 | 5,511 | | 2019 | 5,279 | | 2018 | 5,586 | Employees by Function (as of Dec 31, 2020) | Function | Number of Employees | | :--- | :--- | | Manufacturing and operations | 3,858 | | Process/product engineering, R&D, design | 994 | | Manufacturing support | 386 | | Sales, marketing, finance & admin | 273 | | Total | 5,511 | - As of December 31, 2020, the company had 2,561 employees in Japan, 1,518 in Israel, and 1,416 in the United States367 - A portion of employees in the Newport Beach, CA fab and most employees in the Japan fabs are represented by unions and covered by collective bargaining agreements370372 Major Shareholders and Related Party Transactions Discloses major institutional shareholders as of March 2021 and confirms no material related party transactions Major Shareholders (as of March 31, 2021) | Shareholder | Ownership (%) | | :--- | :--- | | Wellington Management Group LLP | 8.11% | | Senvest Management, LLC | 7.04% | | Phoenix Holdings Ltd. | 6.07% | | Harel Insurance Investments & Financial Services Ltd. | 5.48% | - As of March 31, 2021, no individual director or senior manager beneficially owned 1% or more of the company's outstanding ordinary shares373 - The company has not been a party to any material related party transactions involving directors, executive officers, or major shareholders383 Financial Information References financial statements, notes a Fab 3 lease dispute, and states no anticipated dividends due to growth focus - The company is in a dispute with the landlord of its Fab 3 facility in Newport Beach, CA, regarding noise abatement actions, with the landlord claiming a right to terminate the lease386 - The company does not anticipate paying dividends in the foreseeable future, intending to retain earnings for growth. Dividend payments are also restricted by covenants in its Series G Debentures387 Additional Information Covers corporate and legal information, including articles of association, material contracts, exchange controls, and taxation Material Contracts Highlights the key manufacturing and lease agreements with NTCJ for the three TPSCo fabs in Japan - In March 2019, the manufacturing agreement with PSCS (now NTCJ) for production at the three TPSCo fabs in Japan was extended for an additional three-year period with a revised pricing structure401 - In September 2020, Nuvoton Technology Corp. acquired PSCS from Panasonic, and the new entity, NTCJ, assumed the existing manufacturing and lease agreements with Tower and TPSCo401 Taxation Details Israeli and US tax implications for the company and investors, including 'Preferred Enterprise' status - The standard Israeli corporate tax rate is 23%, but Tower's Israeli facilities qualify as a "Preferred Enterprise," entitling them to a reduced tax rate of 7.5% on preferred income404425431 - Non-Israeli residents are generally exempt from Israeli capital gains tax on the sale of shares in a publicly traded Israeli company, provided the gains are not from a permanent establishment in Israel and other conditions are met410 - Dividends distributed to non-resident individuals are subject to a 25% withholding tax (or 30% for a "substantial shareholder"), which may be reduced by an applicable tax treaty. Dividends from a Preferred Enterprise are generally taxed at 20%416 - For U.S. Holders, dividends paid by the company may qualify for reduced tax rates as "qualified dividend income," as the company is eligible for benefits under the U.S.-Israel Tax Treaty and its shares are traded on an established U.S. market447451 Quantitative and Qualitative Disclosures About Market Risk Discusses market risks from interest rate and foreign currency fluctuations, and hedging strategies employed - The company's major debt instruments, including Series G Debentures and the JP Loan, bear fixed interest rates, limiting cash flow exposure to interest rate fluctuations467 - The company is exposed to foreign exchange risk from its operations in Israel (NIS) and Japan (JPY). Appreciation of the NIS increases Israeli labor and purchase costs in USD terms469472 - To mitigate currency risk, the company uses foreign currency cylinder transactions for a portion of its NIS and JPY exposure and has fully hedged its NIS-denominated Series G Debentures with a cross-currency swap472473 - In 2020, the USD depreciated 7.0% against the NIS and 5.0% against the JPY471474 PART II Controls and Procedures Management and auditors concluded disclosure controls and internal financial reporting controls were effective in 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020483 - Based on an evaluation using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020484 - The independent registered public accounting firm, Brightman Almagor Zohar & Co. (Deloitte), audited and issued an unqualified opinion on the effectiveness of the internal control over financial reporting as of December 31, 2020486 Corporate Governance Outlines corporate governance practices as a foreign private issuer, noting Israeli law divergences from Nasdaq rules - As a foreign private issuer, the company follows certain home country (Israeli) corporate governance practices in lieu of specific Nasdaq Listing Rules496 - Exemptions taken include practices related to the distribution of annual reports, meetings of independent directors, officer compensation approval, and quorum requirements for shareholder meetings496 - The company follows Israeli law for shareholder approval of corporate actions, which may not align with all requirements of Nasdaq Listing Rule 5635, particularly regarding equity compensation plans497 PART III Financial Statements Presents audited consolidated financial statements for 2020, with an unqualified auditor's opinion and key notes Consolidated Balance Sheet Highlights (as of Dec 31, 2020) | Metric | Amount ($M) | | :--- | :--- | | Total Assets | 2,094.1 | | Total Current Assets | 1,102.9 | | Property and Equipment, Net | 839.2 | | Total Liabilities | 639.2 | | Total Current Liabilities | 272.9 | | Long-Term Debt | 283.8 | | Total Shareholders' Equity | 1,454.9 | Consolidated Statement of Operations (Year Ended Dec 31, 2020) | Metric | Amount ($M) | | :--- | :--- | | Revenues | 1,265.7 | | Gross Profit | 233.3 | | Operating Profit | 91.0 | | Net Profit | 83.3 | | Net Profit Attributable to Company | 82.3 | | Diluted EPS | $0.76 | Consolidated Statement of Cash Flows (Year Ended Dec 31, 2020) | Metric | Amount ($M) | | :--- | :--- | | Net Cash from Operating Activities | 276.6 | | Net Cash used in Investing Activities | (363.6) | | Net Cash used in Financing Activities | (61.2) | | Decrease in Cash & Cash Equivalents | (143.9) | - The independent auditor, Brightman Almagor Zohar & Co. (Deloitte), identified the determination of the income tax provision in a multinational environment as a critical audit matter due to the significant judgments and estimates involved526527
Tower Semiconductor(TSEM) - 2020 Q4 - Annual Report