---

Exhibit 99.1	Registrant’s unaudited condensed interim consolidated financial statements as of June 30, 2018 and for the six and three months periods then ended
Exhibit 99.2	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 TOWER SEMICONDUCTOR LTD.

 AND SUBSIDIARIES

UNAUDITED CONDENSED INTERIM

CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2018

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

INDEX TO UNAUDITED CONDENSED INTERIM

CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2018

 

	Page
BALANCE SHEETS	2
STATEMENTS OF OPERATIONS	3
STATEMENTS OF COMPREHENSIVE INCOME	4
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY	5
STATEMENTS OF CASH FLOWS	6-7
NOTES TO FINANCIAL STATEMENTS	8-12

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

		As of				As of
		June 30,				December 31,
		2018				2017
		(unaudited)
A S S E T S
CURRENT ASSETS
Cash and cash equivalents		$	486,880			$	445,961
Marketable securities			140,140				113,874
Trade accounts receivable			161,017				149,666
Inventories			153,413				143,315
Other current assets			19,089				21,516
Total current assets			960,539				874,332
LONG-TERM INVESTMENTS			28,978				26,073
PROPERTY AND EQUIPMENT, NET			648,413				635,124
INTANGIBLE ASSETS, NET			16,671				19,841
GOODWILL			7,000				7,000
DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET			101,022				111,269
TOTAL ASSETS		$	1,762,623			$	1,673,639
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of loans, leases and debentures		$	100,242			$	105,958
Trade accounts payable			126,135				115,347
Deferred revenue and customers' advances			10,297				14,338
Employee related liabilities			54,627				50,844
Other current liabilities			21,240				15,886
Total current liabilities			312,541				302,373
LONG-TERM DEBT
Debentures			122,571				128,368
Other long-term debt			126,114				100,355
LONG-TERM CUSTOMERS' ADVANCES			29,771				31,908
EMPLOYEE RELATED LIABILITIES			14,616				14,662
DEFERRED TAX LIABILITY			53,991				63,924
OTHER LONG-TERM LIABILITIES			2,344				2,343
TOTAL LIABILITIES			661,948				643,933
THE COMPANY'S SHAREHOLDERS' EQUITY			1,106,453				1,036,060
Non-controlling interest			(5,778	)			(6,354	)
TOTAL EQUITY			1,100,675				1,029,706
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	1,762,623			$	1,673,639

 

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars and shares in thousands, except per share data)

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
		Six months ended								Three months ended
		June 30,								June 30,
		2018				2017				2018				2017
Net profit		$	63,190			$	98,773			$	36,009			$	51,727
Other comprehensive income, net of tax:
Foreign currency translation adjustment			2,301				6,010				(5,689	)			9
Change in employees plan assets and benefit obligations			(435	)			(315	)			(217	)			(157	)
Unrealized gain (loss) on derivatives and marketable securities			(814	)			1,016				117				(18	)
Comprehensive income			64,242				105,484				30,220				51,561
Comprehensive (income) loss attributable to non-controlling interest			(576	)			(6,529	)			4,768				(1,669	)
Comprehensive income attributable to the Company		$	63,666			$	98,955			$	34,988			$	49,892

 

See notes to consolidated financial statements.

 

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

(dollars and share data in thousands)

		THE COMPANY'S SHAREHOLDERS' EQUITY
																						Accumulated				Foreign currency translation adjustments
		Ordinary				Ordinary				Additional												other																				Non
		shares				shares				paid-in				Capital				Unearned				comprehensive								Accumulated				Treasury				Comprehensive				controlling
		issued				amount				capital				notes				compensation				income								deficit				stock				income				interest				Total
BALANCE AS OF JANUARY 1, 2018			98,544			$	391,727			$	1,347,866			$	20,758			$	80,565			$	1,763			$	(24,522	)		$	(773,025	)		$	(9,072	)						$	(6,354	)		$	1,029,706
Changes during the period:
Issuance of shares			372				1,528				(1,528	)																																			--
Exercise of options			287				1,215				(533	)																																			682
Employee stock-based compensation																			6,045																												6,045
Other comprehensive income:
Profit																															63,860							$	63,860				(670	)			63,190
Foreign currency translation adjustments																											1,055												1,055				1,246				2,301
Change in employees plan assets and benefit obligations																							(435	)															(435	)							(435	)
Unrealized loss on derivatives and marketable securities																							(814	)															(814	)							(814	)
Comprehensive income																																						$	63,666
BALANCE AS OF JUNE 30, 2018			99,203			$	394,470			$	1,345,805			$	20,758			$	86,610			$	514			$	(23,467	)		$	(709,165	)		$	(9,072	)						$	(5,778	)		$	1,100,675
OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF JUNE 30, 2018			99,117

 

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

		Six months ended
		June 30,
		2018				2017
CASH FLOWS - OPERATING ACTIVITIES
Net profit		$	63,190			$	98,773
Adjustments to reconcile net profit for the period
to net cash provided by operating activities:
Income and expense items not involving cash flows:
Depreciation and amortization			107,470				102,087
Effect of indexation, translation and fair value measurement on debt			(6,537	)			11,761
Other income, net			(1,600	)			(653	)
Changes in assets and liabilities:
Trade accounts receivable			(10,262	)			(7,713	)
Other current assets			9,083				(11,746	)
Inventories			(9,405	)			267
Trade accounts payable			3,909				(10,658	)
Deferred revenue and customers' advances			(6,178	)			(13,299	)
Employee related liabilities and other current liabilities			9,136				3,776
Long-term employee related liabilities			(194	)			(491	)
Deferred tax, net			(6,682	)			(5,670	)
Net cash provided by operating activities			151,930				166,434
CASH FLOWS - INVESTING ACTIVITIES
Investments in property and equipment, net			(80,195	)			(81,660	)
Investments in marketable securities and other assets, net			(30,451	)			--
Net cash used in investing activities			(110,646	)			(81,660	)
CASH FLOWS - FINANCING ACTIVITIES
Exercise of warrants and options, net			684				27,010
Proceeds from loans			99,964				--
Loans repayment			(101,314	)			(11,245	)
Principal payments on account of capital lease obligation			(1,497	)			--
Debentures repayment			--				(6,215	)
Dividend paid to Panasonic			--				(4,378	)
Net cash provided by (used in) financing activities			(2,163	)			5,172
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGE			1,798				4,280
INCREASE IN CASH AND CASH EQUIVALENTS			40,919				94,226
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			445,961				389,377
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	486,880			$	483,603

 

 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

		Six months ended
		June 30,
		2018				2017
NON-CASH ACTIVITIES:
Investments in property and equipment		$	33,493			$	25,256
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net		$	2,376			$	6,308
Cash paid during the period for income taxes, net		$	2,139			$	9,814

 

See notes to consolidated financial statements.

NOTE 1        -        GENERAL

 

Basis for Presentation

The unaudited condensed interim consolidated financial statements of Tower Semiconductor Ltd. (“Tower”) as of June 30, 2018 include the financial statements of Tower and (i) its wholly-owned subsidiary Tower US Holdings Inc., the sole owner of: (1) Jazz US Holdings Inc. and its wholly-owned subsidiary, Jazz Semiconductor, Inc. and (2) TowerJazz Texas Inc., and (ii) its 51% owned subsidiary, TowerJazz Panasonic Semiconductor Co., Ltd. Tower and its subsidiaries are collectively referred to as the “Company”.

The Company’s unaudited condensed interim consolidated financial statements are presented after elimination of inter-company transactions and balances and are presented in accordance with U.S. generally accepted accounting principles (“US GAAP”).

The unaudited condensed interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements of the Company as of December 31, 2017 and for the year then ended, including the notes thereto.

In the opinion of the Company's management, the unaudited condensed interim consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial position as of the dates presented and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected on a full-year basis.

 

NOTE 2        -        INITIAL ADOPTION OF NEW STANDARDS

 

In May 2014, the Financial Accounting Standards Board ("FASB") amended the existing accounting standards for revenue recognition in Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers”, which amendment has been further amended several times. This standard is based on the principle that revenue should be recognized to depict the value of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services if sold at the end of the calendar quarter.

 

ASU 2014-09 was effective in January 1, 2018. The amendment may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.

 

The Company’s assessment did not identify a change in revenue recognition timing on most material revenues (mainly wafer production), for which recognition will be at a point in time upon control being transferred to the customers. The Company considered whether control over wafers in production is transferred over time, and reached the conclusion that recognition should be only at a point in time upon completion of production and delivery to customers.

 

The Company provides its customers with other services that are immaterial in scope and/or amount. The Company does not expect any change in the recognition of such services, in accordance with current standards.

 

The standard was adopted in January 1, 2018. The Company elected the modified retrospective approach as the transition method and had no transition adjustment to its retained earnings upon adoption.

 

 

 

NOTE 2        -        INITIAL ADOPTION OF NEW STANDARDS (cont.)

 

In January 2016, the FASB issued ASU 2016-01 to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The provisions under this amendment are effective January 1, 2018, and for interim periods within that year. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements and its financial results.

In October 2016,  the FASB issued ASU 2016-16 to require the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments are effective January 1, 2018, and for interim periods within that year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 to require amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment is effective January 1, 2018, and for interim periods within that year. The adoption of this guidance did not impact the Company’s consolidated statement of cash flows and disclosures.

In May 2017, the FASB issued ASU 2017-09 which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective beginning in the first quarter of fiscal year 2018. The adoption of this guidance had no impact on its consolidated financial statements.

 

NOTE 3        -        RECENT DEVELOPMENTS

 

A.

Wells Fargo Credit Line

 

 

 

NOTE 3        -        RECENT DEVELOPMENTS (Cont.)

 

B.

TPSCo Loans from Japanese Financial Institutions

In June 2018, TPSCo early repaid its outstanding loans due 2018-2020 carrying floating interest rates of TIBOR plus 1.65% to TIBOR plus 2% and refinanced them with 11 Billion JPY (approximately $100,000) new asset-based loan agreements with JA Mitsui Leasing, Ltd., Sumitomo Mitsui Trust Bank, Limited (SMTB) and Sumitomo Mitsui Banking Corporation (SMBC) (“JP Loan”). The JP Loan includes three years grace period with final maturity of seven years and it carries a fixed interest rate of 1.95% per annum. Principal is payable in nine semiannual payments starting June 2021 until June 2025. The JP Loan is secured by a lien over the machinery and equipment of TPSCo located in Uozu and Tonami manufacturing facilities.

The JP Loan also contains certain financial ratios and covenants, as well as customary definitions of events of default and acceleration of the repayment schedule. TPSCo’s obligations pursuant to the JP Loan are not guaranteed by Tower or any of its affiliates. As of June 30, 2018, TPSCo was in compliance with all of the financial ratios and covenants under this JP Loan.

 

C.

Equity Grants to CEO and Directors

On July 3, 2018, the Company's shareholders approved the grant of the following Restricted Stock Units (“RSUs”) to the Company's CEO and members of the Board of Directors under the Company’s 2013 Share Incentive Plan: (i) 107,290 time vested RSUs and 71,527 performance based RSUs to the CEO, which RSUs will vest linearly over a three-year period, 33% at the end of each year of the 3 years following the grant date for a compensation value of $3,900; and, in addition, 50,435 performance based RSUs vesting over three years, with 65% vesting at the first anniversary of the grant, additional 25% at the second anniversary and the remaining at the third anniversary for an additional compensation value of $1,100; (ii) 13,755 time vested RSUs to the chairman of the Board of Directors (“the Chairman”) for a total compensation value of $300, to vest linearly over a three-year period, 33% at the end of each year of the 3 years following the grant date; and (iii) 3,438 time vested RSUs to each of the 8 members of the Board of Directors (other than to the Chairman and the CEO), for an aggregate compensation value of $600, vesting over a two-year period, with 50% vesting at the end of the first anniversary of the date of grant and 50% on the second anniversary of the date of grant.

D.

TJT Bank Loan

 

In July 2018, TJT early repaid JA Mitsui Leasing Capital Corporation its $40,000 asset-based term loan, which carried interest rate of LIBOR+2.0% per annum.

 

 

NOTE 4        -        ADDITIONAL INFORMATION - RECONCILIATION OF US GAAP TO IFRS

 

A.

Introduction

The Company’s financial statements are prepared and presented in accordance with US GAAP.

As many of the Company’s investors and analysts are located in Israel and in Europe and are familiar with and use the International Financial Reporting Standards rules (“IFRS”), the Company is providing on a voluntary basis a reconciliation from US GAAP to IFRS as detailed below (condensed interim consolidated statements of balance sheet, condensed interim consolidated statements of operations and additional information). IFRS differs in certain significant aspects from US GAAP, however the primary differences between US GAAP and IFRS related to the Company are accounting for goodwill, financial instruments, pension plans and termination benefits. The main adjustments and differences between US GAAP and IFRS relating to the Company’s financial statements are described in detail in Note 21 to the Company’s financial statements for the year ended December 31, 2017. In addition, the Company is providing on a voluntary basis its condensed IFRS financial statements as of June 30, 2018 and a reconciliation from US GAAP to IFRS as detailed below.

 

B.

Condensed Interim Consolidated Balance Sheet in Accordance with IFRS:

 

		As of June 30, 2018
		US GAAP				Adjustments				IFRS
ASSETS
Current assets		$	960,539			$	5,311			$	965,850
Property and equipment, net			648,413				--				648,413
Long-term assets			153,671				(7,000	)			146,671
Total assets		$	1,762,623			$	(1,689	)		$	1,760,934
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities		$	312,541			$	5,496			$	318,037
Long-term liabilities			349,407				(1,715	)			347,692
Total liabilities			661,948				3,781				665,729
TOTAL EQUITY			1,100,675				(5,470	)			1,095,205
Total liabilities and shareholders' equity		$	1,762,623			$	(1,689	)		$	1,760,934

 

NOTE 4        -        ADDITIONAL INFORMATION - RECONCILIATION OF US GAAP TO IFRS (Cont.)

 

C.

Condensed Interim Consolidated Statement of Operations in Accordance with IFRS:

 

		Six months ended June 30, 2018
		US GAAP				Adjustments				IFRS
OPERATING PROFIT		$	76,145			$	(365	)		$	75,780
Financing expense, net			(10,822	)			52				(10,770	)
Other income, net			1,600				--				1,600
Profit before income tax			66,923				(313	)			66,610
Income tax expense			(3,733	)			--				(3,733	)
NET PROFIT			63,190				(313	)			62,877
Net income attributable to non-controlling interest			670				--				670
NET PROFIT ATTRIBUTABLE TO THE COMPANY		$	63,860			$	(313	)		$	63,547

 

D.

Reconciliation of Net Profit from US GAAP to IFRS:

 

		Six months ended June 30,
		2018				2017
Net profit in accordance with US GAAP		$	63,860			$	95,526
Financial Instruments			52				52
Pension plans			(743	)			(314	)
Termination Benefits			378				156
Net profit  in accordance with IFRS		$	63,547			$	95,420

 

E.

Reconciliation of Shareholders’ Equity from US GAAP to IFRS:

 

		As of June 30,				As of December 31,
		2018				2017
Shareholders’ equity in accordance with US GAAP		$	1,100,675			$	1,029,706
Financial Instruments			(185	)			(185	)
Termination Benefits			1,715				1,337
Goodwill			(7,000	)			(7,000	)
Shareholders’ equity in accordance with IFRS		$	1,095,205			$	1,023,858

 

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		Six months ended June 30,
		2018				2017
Revenues			100	%			100	%
Cost of revenues			77.7				74.0
Gross profit			22.3				26.0
Research and development expense			5.6				4.8
Marketing, general and administrative expense			5.0				5.0
Operating profit			11.7				16.2
Financing expense, net			(1.7	)			(1.1	)
Other income, net			0.2				0.1
Profit before income tax			10.2				15.2
Income tax expense, net			(0.6	)			(0.7	)
Net profit			9.6				14.5
Net loss (income) attributable to the non-controlling interest			0.1				(0.5	)
Net profit attributable to the company			9.7	%			14.0	%

		Six months ended June 30,
		2018				2017
Revenues		$	647,848			$	675,139
Cost of revenues			503,155				499,310
Gross profit			144,693				175,829
Research and development expense			36,439				32,200
Marketing, general and administrative expense			32,109				33,475
Operating profit			76,145				110,154
Financing expense, net			(10,822	)			(7,352	)
Other income, net			1,600				653
Profit before income tax			66,923				103,455
Income tax expense, net			(3,733	)			(4,682	)
Net profit			63,190				98,773
Net loss (income) attributable to the non-controlling interest			670				(3,247	)
Net profit attributable to the company		$	63,860			$	95,526