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BALANCE SHEETS	F-2
STATEMENTS OF OPERATIONS	F-3
STATEMENTS OF COMPREHENSIVE INCOME	F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	F-5
STATEMENTS OF CASH FLOWS	F-6 - F-7
NOTES TO FINANCIAL STATEMENTS	F-8 - F-9

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

		As of
		June 30,				December 31,
		2023				2022
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	318,195			$	340,759
Short-term deposits			419,528				495,359
Marketable securities (*)			175,872				169,694
Trade accounts receivable			163,293				152,935
Inventories			330,819				302,108
Other current assets			32,396				34,319
Total current assets			1,440,103				1,495,174
LONG-TERM INVESTMENTS			8,829				8,796
PROPERTY AND EQUIPMENT, NET			1,018,636				962,258
GOODWILL AND OTHER INTANGIBLE ASSETS, NET			13,049				14,031
DEFERRED TAX AND OTHER LONG-TERM ASSETS, NET			53,459				67,349
TOTAL ASSETS		$	2,534,076			$	2,547,608
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt		$	41,300			$	62,275
Trade accounts payable			154,507				150,930
Deferred revenue and customers' advances			22,402				38,911
Employee related liabilities			58,399				58,920
Other current liabilities			25,231				76,352
Total current liabilities			301,839				387,388
LONG-TERM DEBT			178,865				210,069
LONG-TERM CUSTOMERS' ADVANCES			31,209				40,893
EMPLOYEE RELATED LIABILITIES			8,349				7,711
DEFERRED TAX AND OTHER LONG-TERM LIABILITIES			2,709				13,006
TOTAL LIABILITIES			522,971				659,067
TOTAL SHAREHOLDERS' EQUITY			2,011,105				1,888,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	2,534,076			$	2,547,608

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

		Six months ended June 30,								Three months ended June 30,
		2023				2022				2023				2022
REVENUES		$	712,802			$	847,300			$	357,191			$	426,168
COST OF REVENUES			530,568				630,229				270,674				313,728
GROSS PROFIT			182,234				217,071				86,517				112,440
OPERATING COSTS AND EXPENSES:
Research and development			38,783				40,799				19,452				20,481
Marketing, general and administrative			36,016				42,538				17,387				21,285
Restructuring gain from sale of machinery and equipment, net			(50,282	)			-				(1,952	)			-
Restructuring expense			17,776				-				1,101				-
			42,293				83,337				35,988				41,766
OPERATING PROFIT			139,941				133,734				50,529				70,674
FINANCING AND OTHER INCOME (EXPENSE), NET			10,921				(10,295	)			3,924				(8,162	)
PROFIT BEFORE INCOME TAX			150,862				123,439				54,453				62,512
INCOME TAX EXPENSE, NET			(20,788	)			(9,492	)			(5,747	)			(4,339	)
NET PROFIT			130,074				113,947				48,706				58,173
Net loss (income) attributable to non-controlling interest			(7,482	)			(1,837	)			2,484				(96	)
NET PROFIT ATTRIBUTABLE TO THE COMPANY		$	122,592			$	112,110			$	51,190			$	58,077
BASIC EARNINGS PER SHARE
Earnings per share		$	1.11			$	1.03			$	0.46			$	0.53
Weighted average number of shares			110,025				109,037				110,088				109,138
DILUTED EARNINGS PER ORDINARY SHARE:
Earnings per share		$	1.10			$	1.01			$	0.46			$	0.53
Net profit used for diluted earnings per share			122,592			$	112,110				51,190			$	58,077
Weighted average number of ordinary shares outstanding
used for diluted earnings per share			111,153				110,561				111,234				110,561

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

		Six months ended June 30,								Three months ended June 30,
		2023				2022				2023				2022
Net profit		$	130,074			$	113,947			$	48,706			$	58,173
Other comprehensive income, net of tax:
Foreign currency translation adjustment			(12,818	)			(25,206	)			(11,904	)			(16,921	)
Change in employees plan assets and benefit obligations, net of taxes			185				(20	)			93				(10	)
Unrealized loss on derivatives			(2,727	)			(14,922	)			(1,964	)			(8,151	)
Comprehensive income			114,714				73,799				34,931				33,091
Comprehensive loss (income) attributable to non-controlling interest			(7,482	)			(1,837	)			2,484				(96	)
Comprehensive income attributable to the Company		$	107,232			$	71,962			$	37,415			$	32,995

See notes to consolidated financial statements.

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

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

		THE COMPANY'S SHAREHOLDERS' EQUITY
																		Accumulated				Foreign
		Ordinary				Ordinary				Additional								other				currency				Accumulated												Non
		shares				shares				paid-in				Unearned				comprehensive				translation				profit				Treasury				Comprehensive				controlling
		issued				amount				capital				compensation				loss				adjustments				(deficit)				stock				income				interest				Total
BALANCE AS OF JANUARY 1, 2023			110,041			$	440,150			$	1,384,398			$	174,121			$	(2,040	)		$	(45,497	)		$	(50,879	)		$	(9,072	)						$	(2,640	)		$	1,888,541
Changes during the period:
Proceeds from an investment in a subsidiary																																							1,960				1,960
Exercise of options and RSUs			169				697				(697	)																															-
Employee stock-based compensation															13,495																												13,495
Other comprehensive income:
Profit																											122,592							$	122,592				7,482				130,074
Foreign currency translation adjustments																							(12,818	)											(12,818	)			(7,605	)			(20,423	)
Change in employees plan assets and benefit obligations																			185																185								185
Unrealized loss on derivatives																			(2,727	)															(2,727	)							(2,727	)
Comprehensive income																																		$	107,232
BALANCE AS OF JUNE 30, 2023			110,210			$	440,847			$	1,383,701			$	187,616			$	(4,582	)		$	(58,315	)		$	71,713			$	(9,072	)						$	(803	)		$	2,011,105
OUTSTANDING SHARES, NET OF TREASURY STOCK AS OF JUNE 30, 2023			110,123

The information contained in this section should be read in conjunction with (1) our unaudited condensed interim consolidated financial statements as of June 30, 2023 and for the six months then ended and related notes included in this report and (2) our audited consolidated financial statements and related notes included in our Annual Report on Form 20-F for the year ended December 31, 2022 and the other information contained in such annual report, particularly the information in Item 5 - “Operating and Financial Review and Prospects”. Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).

 

Results of Operations

 

The following table sets forth certain statement of operations data as a percentage of total revenues for the six months ended June 30, 2023 and 2022:

 

 

The following table sets forth certain statement of operations data for the six months ended June 30, 2023 and 2022 (dollars in thousands):

 

 

Six months ended June 30, 2023 compared to six months ended June 30, 2022

 

Revenues

 

Revenues for the six months ended June 30, 2023 were $712.8 million, as compared to $847.3 million for the six months ended June 30, 2022. The $134.5 million revenue decrease is attributed mainly to a decrease in the quantity of products (CMOS silicon wafers) manufactured and shipped to our foundry customers from our factories during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, as well as  to the reorganization and restructuring of our Japan operations as executed during 2022, that included the cessation of operations of Arai factory in Japan, which resulted in no revenue from Arai factory for the six months ended June 30, 2023.

 

Cost of Revenues

 

Cost of revenues for the six months ended June 30, 2023 amounted to $530.6 million as compared to $630.2 million for the six months ended June 30, 2022. The $99.6 million decrease in manufacturing cost is mainly due to the decreased quantity of wafers manufactured and shipped to our foundry customers from our factories as described above, which resulted in lower variable and other manufacturing cost, as well as having no cost associated with Arai factory in the six months ended June 30, 2023 due to the cessation of operations of Arai factory during 2022 as noted above.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2023 amounted to $182.2 million as compared to $217.1 million for the six months ended June 30, 2022. The $34.9 million decrease in gross profit resulted from the $134.5 million revenue decrease, net of the $99.6 million decrease in cost of revenues, as described above.

 

Research and Development

 

Research and development expense for the six months ended June 30, 2023, amounted to $38.8 million, reflecting a decrease in cost of $2.0 million as compared to $40.8 million in the six months ended June 30, 2022.

 

Marketing, General and Administrative

 

Marketing, general and administrative expense for the six months ended June 30, 2023 amounted to $36.0 million, a decrease of $6.5 million as compared to $42.5 million recorded in the six months ended June 30, 2022, both reflecting approximately 5% of revenues.

 

Restructuring gain from sale of machinery and equipment, net

 

Restructuring gain from sale of machinery and equipment, net for the six months ended June 30, 2023 amounted to $50.3 million, and resulted from the gain on sale of machinery and equipment to third parties following the reorganization and restructuring of our Japan operations executed during 2022, which included the cessation of operations of Arai factory as noted above.

 

Restructuring expense

 

Restructuring expense for the six months ended June 30, 2023 amounted to $17.8 million, resulted from the reorganization and restructuring of our Japan operations executed during 2022, which included  the cessation of operations of Arai factory as noted above.

 

Operating Profit

 

Operating profit for the six months ended June 30, 2023 amounted to $139.9 million as compared to $133.7 million for the six months ended June 30, 2022. The $6.2 million increase in operating profit resulted mainly from the $50.3 million restructuring gain from sale of machinery and equipment, net of the $2.0 million decrease in research and development expense and the $6.5 million decrease in marketing, general and administrative expense, described above; offset by $34.9 million decrease in gross profit and by the $17.8 million restructuring costs described above.

 

Financing and other income (expense), net

 

Financing and other income (expense), net for the six months ended June 30, 2023 amounted to $10.9 million income as compared to $10.3 million expense for the six months ended June 30, 2022. The $21.2 million increase in financing and other income, net resulted mainly from higher interest gained from bank deposits, marketable securities and other financing income.

 

Income Tax Expense, net

 

Income tax expense, net for the six months ended June 30, 2023 amounted to $20.8 million as compared to $9.5 million income tax expense, net for the six months ended June 30, 2022. This $11.3 million increase in income tax expense, net is mainly a result of $27.4 million higher profit before tax for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 resulting mainly from the higher operating profit and higher financing and other income as described above.

 

Net Profit

 

Net profit for the six months ended June 30, 2023 amounted to $130.1 million as compared to a net profit of $113.9 million for the six months ended June 30, 2022. The increase in net profit in the amount of $16.2 million was mainly due to the increase in operating profit and the increase in financing and other income, net, offset by the increase in tax expense, net, as described above.

 

Net Income Attributable to Non-Controlling Interest

 

Net income attributable to non-controlling interest for the six months ended June 30, 2023 amounted to $7.5 million as compared to $1.8 million for the six months ended June 30, 2022.

 

Net Profit Attributable to the Company

 

Net profit attributable to the company for the six months ended June 30, 2023 amounted to $122.6 million as compared to $112.1 million for the six months ended June 30, 2022. The increase in net profit attributable to the company in the amount of $10.5 million was mainly due to the increase in the net profit of $16.2 million offset by the increase in net income attributable to non-controlling interest, of $5.7 million, as described above.

 

Impact of Currency Fluctuations

 

The Company currently operates in three different regions: The United States, Japan and Israel. In addition, the Company has initial activities in Italy related to the new fabrication facility that is being established by ST in Agrate, Italy. The functional currency of our entities in the United States, Israel and Italy is the US dollar (“USD”). The functional currency of our operations in Japan is the Japanese Yen (“JPY”). Our expenses and costs are denominated mainly in USD, JPY and New Israeli Shekels (“NIS”), 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. Therefore, the Company is exposed to the risk of currency exchange rate fluctuations in Israel and Japan. As the establishment of the facility in Italy progresses, the Company may be further exposed to the Euro exchange rate fluctuations in relation to the USD regarding any costs denominated in Euro.

 

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. During the six months ended June 30, 2023, the USD appreciated against the NIS by 4.9%, as compared to 12.5% appreciation during the six months ended June 30, 2022.

 

The fluctuation of the USD against the NIS may affect our results of operations as it relates to the entity in Israel. Appreciation of the NIS may have the effect of increasing the cost, in USD terms, of some of the purchases and labor costs that are denominated in NIS, which may lead to erosion of the profit margins. The Company uses foreign currency cylinder and forward transactions to hedge a portion of this currency exposure to be contained within a pre-defined fixed range.

 

The majority of TPSCo revenues are denominated in JPY and the majority of TPSCo expenses are in JPY, which limits the exposure to fluctuations of the USD/JPY exchange rate on TPSCo’s results of operations. In order to mitigate a portion of the net exposure to the USD/JPY exchange rate, the Company has engaged in cylinder hedging transactions to contain the currency’s fluctuation within a pre-defined, fixed range.

 

During the six months ended June 30, 2023, the USD appreciated against the JPY by 9.3%, as compared to 18.5% appreciation during the six months ended June 30, 2022. The net effect of USD appreciation against the JPY on TPSCo’s assets and liabilities denominated in JPY is presented in the Cumulative Translation Adjustment (“CTA”) as part of Other Comprehensive Income (“OCI”) in the balance sheet.

 

Liquidity and Capital Resources

 

As of June 30, 2023, the Company had an aggregate amount of $318.2 million in cash and cash equivalents, as compared to $340.8 million as of December 31, 2022. The main cash activities during the six months ended June 30, 2023 were as follows: $148.2 million net cash provided by operating activities; $194.7 million invested in property and equipment, net; $66.9 million provided by investments in short-term deposits, marketable securities and other assets, net; and $37.0 million debt repaid, net.

 

Short-term and long-term debt presented in the balance sheet as of June 30, 2023 amounted to $41.3 million and $178.9 million, respectively, and included loans, operating leases and capital leases. On March 31, 2023, we repaid the Series G debentures in full (principal and interest) and have no outstanding debentures or bonds as of June 30, 2023.

 

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