|TOWER SEMICONDUCTOR LTD filed this Form 20-F on 04/10/2017|
Debentures Series G issued in 2016 (with an outstanding balance of approximately $122 million as of December 31, 2016), bear annual fixed interest and our 2014 Notes (with an outstanding balance of approximately $58 million as of December 31, 2016) issued by Jazz, bear fixed annual interest. Therefore, we are not subject to cash flow exposure and/ or financing expenses to interest rate fluctuations with respect to any of debentures Series G, or Jazz 2014 Notes.
However, in the event that market interest rates for similar debt are decreasing and are lower than the interest rate provided under our debentures or notes, our actual finance costs would have been higher than they otherwise would have been had our debentures or notes provided for interest at a floating interest rate, which would have impacted our financing expense in an immaterial manner.
Tower’s debentures Series D and Series F were fully redeemed on or before January 1, 2017, therefore, in regard to these debentures, we are not exposed to any risk of interest rate fluctuation.
Foreign Exchange Risk
We operate in three different regions: Japan, United States and Israel. The functional currency of the United States and Israel entities is the US dollar (“USD”). The functional currency of our subsidiary in Japan is the Japanese Yen (“JPY”). Our expenses and costs are denominated mainly in New Israeli Shekels (“NIS”), USD, and JPY, our revenues are denominated mainly in USD and JPY and our cash from operations, investing and financing activities are denominated mainly in NIS, USD, and JPY. We are, therefore, exposed to the risk of currency exchange rate fluctuations in some of our entities.
The USD costs of our operations in Israel are influenced by changes in the USD to NIS exchange rate with respect to costs that are denominated in NIS. During the year ended December 31, 2016, the USD depreciated against the NIS by 1.5%, as compared to the year ended December 31, 2015 in which the USD appreciated against the NIS by 0.3%.
Since the fluctuation of USD against the NIS can affect our results of operations, we are executing hedging transactions as detailed herein to mitigate its impact. Appreciation of the NIS has the effect of increasing the cost of some of our Israeli purchases and labor NIS denominated costs in USD terms, which may lead to erosion in our profit margins. We use foreign currency cylinder transactions to hedge a material portion of this currency exposure, to be contained within a pre-defined fixed range.
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 will be mostly offset by the impact on the expenses. In order to mitigate the net profit margins exposure to the USD / JPY exchange rate fluctuations, we are using cylinder hedging transactions which contain currency’s fluctuation within a pre-defined fixed range. During the year ended December 31, 2016, the USD depreciated against the JPY by 2.8%, compared to the year ended December 31, 2015, in which the USD appreciated against the JPY by 0.8%. The effect of USD depreciation on TPSCo’s assets and liabilities is presented in the Cumulative Translation Adjustment (CTA) as part of Other Comprehensive Income.
Since we are exposed to the fluctuation in the USD to NIS exchange rate with respect to Tower's Series G issued in 2016 (principal and interest), we have entered into cash flow hedging transactions to fully mitigate the foreign exchange rate differences on the principal and interest using a cross currency swap transaction. As of December 31, 2016 the outstanding principal amount of Debentures G was approximately $122 million.