FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the month of March 2018 No.2

TOWER SEMICONDUCTOR LTD.
(Translation of registrant's name into English)

Ramat Gavriel Industrial Park
P.O. Box 619, Migdal Haemek, Israel 2310502
(Address of principal executive offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ☒          Form 40-F ☐
 
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes ☐          No ☒

On March 6, 2018, the Registrant announced its financial results for the year ended December 31, 2017. Attached hereto is the following exhibit.

 
This Form 6-K, including all exhibits hereto, is hereby incorporated by reference into all effective registration statements filed by us under the Securities Act of 1933. 
 

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TOWER SEMICONDUCTOR LTD.
 
       
Date: March 6, 2018
By:
/s/ Nati Somekh
 
   
Name:  Nati Somekh
 
   
Title:  Corporate Secretary
 



 


Exhibit 99.1
 
 TOWER SEMICONDUCTOR LTD.
AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017

 
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
   
1
   
2
   
3
   
4
   
5
   
6-7
   
8-60
 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Tower Semiconductor Ltd.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tower Semiconductor Ltd. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member of Deloitte Touche Tohmatsu Limited

Tel Aviv, Israel
March 6, 2018

We have served as the Company's auditor since 1993.
 

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands)
 
   
As of December 31,
 
   
2017
   
2016
 
             
A S S E T S
           
             
CURRENT ASSETS
           
Cash and cash equivalents
 
$
445,961
   
$
355,284
 
Marketable securities
   
113,874
     
--
 
Short term deposits
   
--
     
34,093
 
Trade accounts receivable
   
149,666
     
141,048
 
Inventories
   
143,315
     
137,532
 
Other current assets
   
21,516
     
30,041
 
Total current assets
   
874,332
     
697,998
 
                 
LONG-TERM INVESTMENTS
   
26,073
     
25,624
 
                 
PROPERTY AND EQUIPMENT, NET
   
635,124
     
616,686
 
                 
INTANGIBLE ASSETS, NET
   
19,841
     
28,129
 
                 
GOODWILL
   
7,000
     
7,000
 
                 
DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET
   
111,269
     
4,447
 
                 
TOTAL ASSETS
 
$
1,673,639
   
$
1,379,884
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Current maturities of loans, leases and debentures
 
$
105,958
   
$
48,084
 
Trade accounts payable
   
115,347
     
99,262
 
Deferred revenue and customers' advances
   
14,338
     
26,169
 
Employee related liabilities
   
50,844
     
49,517
 
Other current liabilities
   
15,886
     
24,083
 
Total current liabilities
   
302,373
     
247,115
 
                 
LONG-TERM DEBT
               
Debentures
   
128,368
     
162,981
 
Other long-term debt
   
100,355
     
133,163
 
                 
LONG-TERM CUSTOMERS' ADVANCES
   
31,908
     
41,874
 
                 
EMPLOYEE RELATED LIABILITIES
   
14,662
     
14,176
 
                 
DEFERRED TAX LIABILITY
   
63,924
     
95,233
 
                 
OTHER LONG-TERM LIABILITIES
   
2,343
     
2,728
 
                 
Total liabilities
   
643,933
     
697,270
 
                 
Ordinary shares of NIS 15 par value:
   
391,727
     
369,057
 
150,000 authorized as of December 31, 2017 and 2016
98,544 and 98,458 issued and outstanding, respectively, as of December 31, 2017
93,071 and 92,985 issued and outstanding, respectively, as of December 31, 2016
               
Additional paid-in capital
   
1,347,866
     
1,318,725
 
Capital notes
   
20,758
     
41,264
 
Cumulative stock based compensation
   
80,565
     
68,921
 
Accumulated other comprehensive loss
   
(22,759
)
   
(27,827
)
Accumulated deficit
   
(773,025
)
   
(1,071,036
)
     
1,045,132
     
699,104
 
Treasury stock, at cost - 86 shares
   
(9,072
)
   
(9,072
)
THE COMPANY'S SHAREHOLDERS' EQUITY
   
1,036,060
     
690,032
 
Non controlling interest
   
(6,354
)
   
(7,418
)
TOTAL SHAREHOLDERS' EQUITY
   
1,029,706
     
682,614
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,673,639
   
$
1,379,884
 
 
 
See notes to consolidated financial statements.
                 
- 2 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
 
   
Year ended December 31,
 
   
2017
   
2016
   
2015
 
                   
REVENUES
 
$
1,387,310
   
$
1,249,634
   
$
960,561
 
                         
COST OF REVENUES
   
1,033,005
     
946,534
     
755,196
 
                         
GROSS PROFIT
   
354,305
     
303,100
     
205,365
 
                         
OPERATING COSTS AND EXPENSES:
                       
                         
Research and development
   
67,664
     
63,134
     
61,669
 
Marketing, general and administrative
   
66,799
     
65,439
     
62,793
 
Nishiwaki Fab restructuring and impairment cost (income), net
   
--
     
(627
)
   
(991
)
                         
     
134,463
     
127,946
     
123,471
 
                         
OPERATING PROFIT
   
219,842
     
175,154
     
81,894
 
                         
INTEREST EXPENSE, NET
   
(7,840
)
   
(11,857
)
   
(13,179
)
                         
OTHER FINANCING EXPENSE, NET
   
(7,607
)
   
(12,492
)
   
(109,930
)
                         
GAIN FROM ACQUISITION, NET
   
--
     
50,471
     
--
 
                         
OTHER INCOME (EXPENSE), NET
   
(2,627
)
   
9,322
     
(190
)
                         
PROFIT (LOSS) BEFORE INCOME TAX
   
201,768
     
210,598
     
(41,405
)
                         
INCOME TAX BENEFIT (EXPENSE), NET
   
99,888
     
(1,432
)
   
12,278
 
                         
NET PROFIT (LOSS)
   
301,656
     
209,166
     
(29,127
)
                         
Net income attributable to non controlling interest
   
(3,645
)
   
(5,242
)
   
(520
)
                         
NET PROFIT (LOSS) ATTRIBUTABLE TO THE COMPANY
 
$
298,011
   
$
203,924
   
$
(29,647
)
                         
BASIC EARNINGS (LOSS) PER ORDINARY SHARE:
                       
                         
Earnings (loss) per share
 
$
3.08
   
$
2.33
   
$
(0.40
)
                         
Weighted average number of ordinary shares outstanding
   
96,647
     
87,480
     
74,366
 
                         
DILUTED EARNINGS PER ORDINARY SHARE:
                       
                         
Earnings per share
 
$
2.90
   
$
2.09
         
                         
Net profit used for diluted earnings per share
 
$
306,905
   
$
212,160
         
                         
Weighted average number of ordinary shares outstanding
                       
used for diluted earnings per share
   
105,947
     
101,303
         
 
See notes to consolidated financial statements.
           
 
- 3 -

 
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
 
   
Year ended December 31,
 
   
2017
   
2016
   
2015
 
                   
Net profit (loss)
 
$
301,656
   
$
209,166
   
$
(29,127
)
                         
Other comprehensive income (loss), net of tax:
                       
                         
Foreign currency translation adjustment
   
5,681
     
923
     
(2,485
)
                         
Change in employees plan assets and benefit obligations $171, $184 and
$96 for the years ended December 31, 2017, 2016 and 2015, respectively
   
511
     
(546
)
   
176
 
                         
Unrealized gain (loss) on derivatives
   
1,796
     
266
     
(64
)
                         
Comprehensive income (loss)
   
309,644
     
209,809
     
(31,500
)
                         
Comprehensive (income) loss attributable to non-controlling interest
   
(6,565
)
   
(6,902
)
   
769
 
                         
Comprehensive income (loss) attributable to the Company
 
$
303,079
   
$
202,907
   
$
(30,731
)
 
- 4 -
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(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 (loss)
   
deficit
   
stock
   
income (loss)
   
interest
   
Total
 
                                                                         
BALANCE AS OF JANUARY 1, 2015
   
58,120
   
$
235,117
   
$
1,137,946
   
$
60,704
   
$
50,017
   
$
(376
)
 
$
(25,350
)
 
$
(1,244,007
)
 
$
(9,072
)
       
$
(9,418
)
 
$
195,561
 
                                                                                               
Changes during the period:
                                                                                             
                                                                                               
Conversion of debentures and exercise of warrants into share capital
   
20,904
     
79,443
     
126,989
                                                                   
206,432
 
Exercise of options
   
1,620
     
6,261
     
1,730
                                                                   
7,991
 
Capital notes converted into share capital
   
1,500
     
5,751
     
6,400
     
(12,151
)
                                                         
--
 
Employee stock-based compensation
                                   
8,192
                                                   
8,192
 
Stock-based compensation related to the Facility Agreement with the Banks
                   
480
                                                                   
480
 
Dividend to Panasonic
                                                                                 
(1,570
)
   
(1,570
)
Other comprehensive loss:
                                                                                             
Profit (loss)
                                                           
(29,647
)
         
$
(29,647
)
   
520
     
(29,127
)
Foreign currency translation adjustments
                                                   
(1,196
)
                   
(1,196
)
   
(1,289
)
   
(2,485
)
Change in employees plan assets and benefit obligations
                                           
176
                             
176
             
176
 
Unrealized loss on derivatives
                                           
(64
)
                           
(64
)
           
(64
)
Comprehensive loss
                                                                         
$
(30,731
)
               
                                                                                                 
BALANCE AS OF DECEMBER 31, 2015
   
82,144
   
$
326,572
   
$
1,273,545
   
$
48,553
   
$
58,209
   
$
(264
)
 
$
(26,546
)
 
$
(1,273,654
)
 
$
(9,072
)
         
$
(11,757
)
 
$
385,586
 
                                                                                                 
Changes during the period:
                                                                                               
                                                                                                 
Issuance of shares
   
3,297
     
12,504
     
27,496
                                                                     
40,000
 
Conversion of debentures and exercise of warrants into share capital
   
3,080
     
12,069
     
10,223
                                                                     
22,292
 
Exercise of options
   
3,650
     
14,412
     
3,192
                                                                     
17,604
 
Capital notes converted into share capital
   
900
     
3,500
     
3,789
     
(7,289
)
                                                           
--
 
Employee stock-based compensation
                                   
9,406
                                                     
9,406
 
Stock-based compensation related to the Facility Agreement with the Banks
                   
480
                                                                     
480
 
Dividend to Panasonic
                                                                                   
(2,563
)
   
(2,563
)
Accumulated amount due to adoption of ASU No. 2016-09, Compensation -
                                                                                               
  Stock Compensation (Topic 718)
                                   
1,306
                     
(1,306
)
                           
--
 
Other comprehensive income:
                                                                                               
Profit
                                                           
203,924
           
$
203,924
     
5,242
     
209,166
 
Foreign currency translation adjustments
                                                   
(737
)
                   
(737
)
   
1,660
     
923
 
Change in employees plan assets and benefit obligations
                                           
(546
)
                           
(546
)
           
(546
)
Unrealized loss on derivatives
                                           
266
                             
266
             
266
 
Comprehensive income
                                                                         
$
202,907
                 
                                                                                                 
BALANCE AS OF DECEMBER 31, 2016
   
93,071
   
$
369,057
   
$
1,318,725
   
$
41,264
   
$
68,921
   
$
(544
)
 
$
(27,283
)
 
$
(1,071,036
)
 
$
(9,072
)
         
$
(7,418
)
 
$
682,614
 
                                                                                                 
Changes during the period:
                                                                                               
                                                                                                 
Issuance of shares
   
2,914
     
12,128
     
4,247
                                                                     
16,375
 
Exercise of options
   
1,629
     
6,750
     
8,180
                                                                     
14,930
 
Capital notes converted into share capital
   
930
     
3,792
     
16,714
     
(20,506
)
                                                           
--
 
Employee stock-based compensation
                                   
11,644
                                                     
11,644
 
Dividend to Panasonic
                                                                                   
(5,501
)
   
(5,501
)
Other comprehensive income:
                                                                                               
Profit
                                                           
298,011
           
$
298,011
     
3,645
     
301,656
 
Foreign currency translation adjustments
                                                   
2,761
                     
2,761
     
2,920
     
5,681
 
Change in employees plan assets and benefit obligations
                                           
511
                             
511
             
511
 
Unrealized loss on derivatives
                                           
1,796
                             
1,796
             
1,796
 
Comprehensive income
                                                                         
$
303,079
                 
                                                                                                 
BALANCE AS OF DECEMBER 31, 2017
   
98,544
   
$
391,727
   
$
1,347,866
   
$
20,758
   
$
80,565
   
$
1,763
   
$
(24,522
)
 
$
(773,025
)
 
$
(9,072
)
         
$
(6,354
)
 
$
1,029,706
 
                                                                                                 
OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF DECEMBER 31, 2017
   
98,458 
                                                                                         
 
 
- 5 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
 
 
   
Year ended December 31,   
 
   
2017
   
2016
   
2015
 
                   
CASH FLOWS - OPERATING ACTIVITIES
                 
                   
Net profit (loss)
  $
301,656
   
$
209,166
   
$
(29,127
)
                         
Adjustments to reconcile net profit (loss) for the period
                       
to net cash provided by operating activities:
                       
Income and expense items not involving cash flows:
                       
Depreciation and amortization
   
208,411
     
197,606
     
168,032
 
Financing expense associated with debentures series F
   
--
     
150
     
87,973
 
Effect of indexation, translation and fair value measurement on debt
   
12,865
     
8,292
     
16,078
 
Other expense (income), net
   
2,627
     
(9,322
)
   
190
 
Gain from acquisition, net
   
--
     
(50,471
)
   
--
 
Changes in assets and liabilities:
                       
Trade accounts receivable
   
(6,564
)
   
(30,104
)
   
(11,115
)
Other current assets
   
(8,321
)
   
(265
)
   
(14,978
)
Inventories
   
(4,277
)
   
(22,069
)
   
(17,908
)
Trade accounts payable
   
(8,649
)
   
5,550
     
(26,163
)
Deferred revenue and customers' advances
   
(21,803
)
   
23,581
     
32,725
 
Employee related liabilities and other current liabilities
   
(8,219
)
   
(145
)
   
8,454
 
Long-term employee related liabilities
   
(3,247
)
   
(798
)
   
(2,036
)
Deferred tax, net
   
(108,459
)
   
(4,564
)
   
(4,173
)
Other long-term liabilities
   
(385
)
   
861
     
(12,739
)
Nishiwaki employees retirement related payments in connection with its operation cessation
   
--
     
--
     
(24,907
)
Net cash provided by operating activities
   
355,635
     
327,468
     
170,306
 
                         
CASH FLOWS - INVESTING ACTIVITIES
                       
                         
Investments in property and equipment
   
(187,676
)
   
(217,496
)
   
(172,078
)
Proceeds related to sale and disposal of property and equipment
   
20,038
     
7,872
     
6,589
 
Investment grants received
   
2,921
     
--
     
--
 
Deposits and other investments, including marketable securities, net
   
(80,643
)
   
(17,101
)
   
(30,000
)
Net cash used in investing activities
   
(245,360
)
   
(226,725
)
   
(195,489
)
                         
CASH FLOWS - FINANCING ACTIVITIES
                       
                         
Issuance of debentures, net
   
--
     
113,149
     
--
 
Exercise of warrants and options, net
   
31,315
     
38,803
     
14,424
 
Proceeds from loans
   
--
     
55,960
     
70,592
 
Loans repayment
   
(43,259
)
   
(132,018
)
    (18,200 )
Principal payments on account of capital lease obligation
   
(781
)
   
--
     
--
 
Debentures repayment
   
(6,215
)
   
--
     
(51,489
)
Dividend payment to Panasonic
   
(4,378
)
   
(2,563
)
   
(1,570
)
Net cash provided by (used in) financing activities
   
(23,318
)
   
73,331
     
13,757
 
                         
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGE
   
3,720
     
5,635
     
(166
)
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
90,677
     
179,709
     
(11,592
)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
   
355,284
     
175,575
     
187,167
 
                         
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
445,961
   
$
355,284
   
$
175,575
 
 
- 6 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
   
Year ended December 31,   
 
   
2017
   
2016
   
2015
 
                   
NON-CASH ACTIVITIES:
                 
                   
Investments in property and equipment
   
28,419
   
$
23,747
   
$
18,657
 
Conversion of debentures to share capital
   
--
   
$
611
   
$
195,726
 
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                       
                         
Cash paid during the period for interest
   
10,198
   
$
9,534
   
$
12,371
 
Cash paid during the period for income taxes
   
17,668
   
$
3,485
   
$
3,469
 
 
(a) ACQUISITION OF SUBSIDIARIES CONSOLIDATED FOR THE FIRST TIME, SEE ALSO NOTE 3:
                 
                         
Assets and liabilities of the subsidiaries:
                       
           
As of
         
           
February 1, 2016
         
                         
Working capital (excluding cash and cash equivalents)
         
$
10,775
         
Fixed assets
           
106,919
         
Intangible assets
           
2,799
         
Long-term liabilities
           
(28,021
)
       
             
92,472
         
Less:
                       
Share capital
           
40,000
         
Gain from acquisition, net
           
52,472
         
             
92,472
         
                         
Cash from the acquisition of a subsidiaries consolidated for the first time
         
$
--
         
 
See notes to consolidated financial statements.
                       
 
- 7 -

 
TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 1          -      DESCRIPTION OF BUSINESS AND GENERAL
 

The consolidated financial statements of Tower Semiconductor Ltd. (“Tower”) 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., an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices (Jazz US Holdings Inc. and Jazz Semiconductor, Inc. collectively referred to herein as “Jazz”); and (2) since February 2016, Tower US Holdings is also the sole owner of TowerJazz Texas Inc. (“TJT”), as described in Note 3 below; and (ii) its 51% owned subsidiary, TowerJazz Panasonic Semiconductor Co., Ltd. (“TPSCo”), an independent semiconductor foundry which includes three semiconductor manufacturing facilities located in Tonami, Uozu and Arai, in Hokuriku Japan. Tower and its subsidiaries are collectively referred to as the “Company”.

The Company is a global specialty foundry leader manufacturing integrated circuits, offering a broad range of customizable process technologies including: SiGe, BiCMOS, mixed-signal/CMOS, RF CMOS, CMOS image sensor, integrated power management (BCD and 700V) and MEMS. The Company also provides a world-class design enablement platform for a quick and accurate design cycle, as well as Transfer Optimization and development Process Services (TOPS) to integrated device manufacturers (“IDMs”) and fabless companies that require capacity. To provide multi-fab sourcing and expanded capacity for its customers, the Company operates two manufacturing facilities in Israel (150mm and 200mm), two in the U.S. (200mm) and three in Japan through TPSCo (two 200mm and one 300mm), which provide leading edge 45nm CMOS, 65nm RF CMOS and 65nm 1.12um pixel technologies, including advanced image sensor technologies.

The Company operates in the semiconductor industry and competes internationally with dedicated foundry service providers, which in addition to providing leading edge CMOS process technologies also have capacity for some specialty process technologies. The Company also competes with IDMs that have internal semiconductor manufacturing capacity or foundry operations. Several dedicated foundries have specialized operations and compete directly with the Company in certain areas, flows and technology capabilities. There are a number of smaller participants in the specialty process arena with specific analog focus. The Company believes that most of the large dedicated foundry service providers compete primarily in standard CMOS product types, while they also have capacity for specialty process technologies. As a result, the Company’s main industry competitors are smaller participants which focus on the specialty process analog arena.

Tower’s ordinary shares are traded on the NASDAQ Global Select Market and on the Tel-Aviv Stock Exchange (“TASE”) under the symbol TSEM.

The Company’s consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“US GAAP”).
- 8 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.
Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, affect the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

B.
Principles of Consolidation

The Company’s consolidated financial statements include the financial statements of Tower and its subsidiaries. The Company’s consolidated financial statements are presented after elimination of inter-company transactions and balances. The Company’s consolidated financial statements include TJT’s results of operations and balance sheet since February 1, 2016.

C.
Cash and Cash Equivalents, Short-Term Deposits

Cash and cash equivalents consist of cash, bank deposits and short-term investments with original maturities of three months or less. Short-term deposits include bank deposits with original maturities greater than three months and to be matured within 12 months from balance sheet date.

D.
Marketable securities

The Company accounts for investments in debt securities in accordance with ASC 320, "Investments - Debt and Equity Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.

Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss) (“OCI”). Gains and losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of income.

The Company's securities are reviewed for impairment in accordance with ASC 320-10-35. If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings.
- 9 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
 
D.
Marketable securities (cont.)

For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized in OCI.

E.
Trade Accounts Receivables - Allowance for Doubtful Accounts

The allowance for doubtful accounts is computed on the specific identification basis for accounts whose collectability, in the Company’s estimation, is uncertain. As of December 31, 2017 and 2016, the amounts in the allowance for doubtful accounts are immaterial.

F.
Inventories

The Company applies Accounting Standards Update (ASU) No. 2015-11 as of January 1, 2017, by which inventories are stated at the lower of cost and net realizable value. Inventories as of December 31, 2016 are stated at lower of cost or market. Upon adoption, the update had no effect on the consolidated financial position, results of operations or cash flows. Cost of raw materials is determined mainly on the basis of the weighted average moving price per unit.
 
G.
Property and Equipment

The Company accounts for property and equipment in accordance with Accounting Standards Codification (“ASC”) 360 “Accounting for the Property, Plant and Equipment” (“ASC 360”). Property and equipment are presented at cost, including capitalizable costs. Capitalizable costs include only costs that are identifiable with, and related to, the property and equipment and are incurred prior to their initial operation. Identifiable incremental direct costs include costs associated with constructing, establishing and installing property and equipment, and costs which are directly related to pre-production test runs of property and equipment that are necessary for preparing such property and equipment for their intended use.

Maintenance and repairs are charged to expenses as incurred.

Property and equipment are presented net of investment grants received, and less accumulated depreciation.

Depreciation is calculated based on the straight-line method over the Company’s estimated useful lives of the assets, as follows:

Buildings and building improvements, including facility infrastructure
10-25 years
Machinery and equipment, software and hardware
3-15 years
 
Impairment charges, if needed, are determined based on the policy outlined in S below.
 
For Equipment under lease see H below.
- 10 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

H.
Equipment Lease

The Company determines lease classification based on the criteria established in ASC 840. When the Company determines, based on the criteria, that a lease should be classified as capital lease, an asset and corresponding liability is recognized. Each capital lease is recorded as an asset and an obligation at an amount that is equal to the present value of the minimum lease payments over the lease term. Assets under capital lease are part of property plant and equipment.

I.
Intangible Assets and Goodwill

The Company accounts for intangible assets and goodwill in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC 350”). Intangible assets include the values assigned to the intangible assets as part of the purchase price allocation made at the time of acquisition of each of Jazz, TPSCo and TJT.

Intangible assets are amortized over the expected estimated economic life of the intangible assets commonly used in the industry. Goodwill is not amortized and subject to impairment test. Impairment charges on intangibles or goodwill, if needed, are determined based on the policy outlined in S below.

J.
Deferred Tax Asset and Other Long-Term Assets, Net
 
Deferred tax asset and other assets, net include: (i) deferred tax asset as described in Note 19; (ii) fair market value of derivative instrument used in hedging of Debentures Series G, see T below and (iii) prepaid long-term lease payments to the Israel Land Administration (“ILA”) for the land on which the Company’s Israeli fabs are established, net of accumulated amortization over the lease period, see also Note 15C.
 
K.
Debentures - Classification of Liabilities and Equity of Convertible Debentures

Convertible debentures are evaluated to determine whether they include conversion features or other embedded derivatives that warrant bifurcation. The Company applies ASC 815-40 “Contract in Entity’s Own Equity” in determining whether an instrument that may be settled in Tower’s shares is also considered indexed to a company’s own stock, for the purpose of classification of the instrument as a liability or equity.
- 11 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

L.
Revenue Recognition
 
The Company’s revenues are generated principally from sales of semiconductor wafers. The Company, to much lesser extent, also derives revenues from design support and other technical and support services incidental to the sale of semiconductor wafers. The vast majority of the Company’s sales are achieved through the effort of its direct sales force.
 
In accordance with ASC Topic 605 “Revenue Recognition”, the Company recognizes revenues from sale of products when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Generally, delivery occurs after products meet all of the customer’s acceptance criteria based on pre-shipment electronic, functional and quality tests.

The Company provides for sales returns allowance relating to specified yield or quality commitments as a reduction of revenues, based on past experience and specific identification of events necessitating an allowance, which has been in immaterial amounts.

M.
Research and Development

Research and development costs are charged to operations as incurred. Amounts received or receivable from the government of Israel and others, as participation in research and development programs, are offset against research and development costs. The accrual for grants receivable is determined based on the terms of the programs, provided that the criteria for entitlement have been met.

N.
Income Taxes
 
The Company accounts for income taxes using an asset and liability approach as prescribed in ASC 740-10 “Income Taxes” (“ASC 740-10”). This topic prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred taxes are computed based on the tax rates anticipated (under applicable law as of the balance sheet date) to be in effect when the deferred taxes are expected to be paid or realized. In November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 simplifies the presentation of deferred income taxes such that deferred tax assets and liabilities, as well as any related valuation allowance, be classified as noncurrent in a classified statement of financial position. The Company adopted the ASU as of the first quarter of 2017. The Company adopted the ASU prospectively such that previous years balances were not reclassified.
 
The Company evaluates realizability of its deferred tax assets for each jurisdiction in which the Company operates at each reporting date and establishes valuation allowances when it is more likely than not that all or a part of its deferred tax assets will not be realized.
 
- 12 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

N.
Income Taxes (cont.)

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. The Company considers all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities and projected future taxable income. In circumstances where there is sufficient negative evidence indicating that the Company's deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance, see Note 19E and 19F.

ASC 740-10 prescribes a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that the Company believes is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in its income tax returns and the amount of tax benefits recognized in its financial statements, represent the Company's unrecognized income tax benefits. The Company's policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.

O.
Earnings (Loss) Per Ordinary Share

Basic earnings (loss) per share are calculated in accordance with ASC  260, “Earnings Per Share” ("ASC 260") by dividing profit or loss attributable to ordinary equity holders of Tower (the numerator) by the weighted average number of ordinary shares outstanding during the reported period (the denominator). Diluted earnings per share are calculated, if applicable, by adjusting profit attributable to ordinary equity holders of Tower, and the weighted average number of ordinary shares, taking into effect all potential dilutive ordinary shares.

P.
Comprehensive Income (Loss)

In accordance with ASC 220 “Comprehensive Income” ("ASC 220"), comprehensive income (loss) represents the change in shareholders’ equity during a reporting period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a reporting period except those resulting from investments by owners and distributions to owners. Other comprehensive income (loss) (“OCI”) represents gains and losses that are included in comprehensive income but excluded from net income.
- 13 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
 
Q.
Functional Currency and Exchange Rate Income (Loss)

The currency of the primary economic environment in which Tower, TJT and Jazz conduct their operations is the U.S. Dollar (“dollar”). Thus, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with ASC 830-10 “Foreign Currency Matters”. All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate. The financial statements of TPSCo, whose functional currency is the Japanese Yen (“JPY”), have been translated into dollars. The assets and liabilities have been translated using the exchange rate in effect as of the balance sheet date. The statement of operations of TPSCo has been translated using the average exchange rate for the reported period. The resulting translation adjustments are charged or credited to OCI.

R.
Stock-Based Compensation

The Company applies the provisions of ASC Topic 718 “Compensation - Stock Compensation”, under which employees’ share-based equity awards are accounted for under the fair value method. Accordingly, stock-based compensation granted to employees and directors is measured at the grant date, based on the fair value of the grant. The Company uses the straight-line attribution method to recognize stock-based compensation costs over the vesting period of the grant, except for grants that involve performance criteria, for which an accelerated method is used.

S.
Impairment of Assets

Impairment of Property, Equipment and Intangible Assets
The Company reviews long-lived assets and intangible assets on a periodic basis, as well as when such a review is required based upon relevant circumstances, to determine whether events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, considering the undiscounted cash flows expected from it. If applicable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10 “Property, Plant and Equipment”.

Impairment of Goodwill
The Company evaluates goodwill qualitatively for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the Company determines that a quantitative analysis is necessary, the impairment test for goodwill is currently a two-step process. Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison.

Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.
- 14 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
 
NOTE 2          -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

S.
Impairment of Assets (cont.)

The Company uses the income approach methodology of valuation that includes discounted cash flows to determine the fair value of the unit. Significant management judgment is required in the forecasts of future operating results used for this methodology.

T.
Fair value of Financial Instruments and Fair Value Measurements

ASC 820, "Fair Value Measurements and Disclosures", requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value o