Tower Semiconductor Ltd. — Interim / Quarterly Report 2014

Aug 12, 2014

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

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

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

BALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF COMPREHANSIVE INCOME (LOSS)STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYSTATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTS	Page
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TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands)

				As of			As of
				June 30,		Dec	ember 31,
							2013
				2014
				(unaudited
					)
	A S S E T SCURRENT ASSETSCash and cash equivalents			$192,220
	Short-term designated interest bearing deposits			--		10000
	Trade accounts receivableOther receivablesInventoriesOther current assetsTotal current assetsLONG-TERM INVESTMENTSPROPERTY AND EQUIPMENT, NETINTANGIBLE ASSETS, NETGOODWILLOTHER ASSETS, NETTOTAL ASSETSLIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESCurrent maturities of loans and debenturesTrade accounts payableDeferred revenue and short-term customers' advancesEmployee related liabilities, inc. Nishiwaki retirement allowanceOther current liabilitiesTotal current liabilitiesLONG-TERM LOANS FROM BANKSDEBENTURESLONG-TERM CUSTOMERS' ADVANCESEMPLOYEE RELATED LIABILITESDEFERRED TAX LIABILITYOTHER LONG-TERM LIABILITIESTotal liabilitiesTOTAL EQUITYTOTAL LIABILITIES AND EQUITY			106,5698,45083,68938,305429,23314,386485,17749,6037,00010,847$996,246$97,128100,4563,75280,42326,548308,307161,131178,3056,57216,406100,13533,925804,781191,465$996,246		,80,31610,94364,80411,480
						290,41414,494350,03932,3937,00011,547
						$705,887
						$36,44166,3583,16625,9577,994
						139,916108,739208,1467,18765,33713,61121,703
						564,639141,248
						$705,887

See notes to consolidated financial statements.

• 1 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except per share data)

REVENUESCOST OF REVENUESGROSS PROFITOPERATING COSTS AND EXPENSESResearch and developmentMarketing, general and administrativeNishiwaki Fab restructuring costs and impairmentAmortization related to a lease agreement early terminationMerger related costsOPERATING LOSSINTEREST EXPENSES, NETOTHER FINANCING EXPENSE, NETGAIN FROM ACQUISITION, NETOTHER INCOME (EXPENSE), NETPROFIT (LOSS) BEFORE INCOME TAXINCOME TAX BENEFITPROFIT (LOSS)Net loss attributable to the non controlling interestNET PROFIT (LOSS) ATTRIBUTABLE TO THE COMPANYBASIC EARNINGS (LOSS) PER ORDINARY SHAREEarnings (loss) per share attributable to the companyWeighted average number of ordinaryshares outstanding - in thousandsDILUTED EARNINGS PER ORDINARY SHAREEarnings per share attributable to the companyNet profit used for diluted earnings per shareWeighted average number of ordinary shares outstanding- in thousands, used for diluted earnings per share	$366,725$237,883355,750223,08610,97514,79721,60516,89127,34320,98775,728----3,7321,229--125,90541,610(114,930)(26,813)(16,931)(16,332)(32,393)(7,227)166,404--203(59)2,353(50,431)14,0204,39316,373(46,038)6,702--$23,075$(46,038)$0.47$(1.44)49,14931,924$0.39$23,07559,81520142013Six months endedJune 30,	Three months endedJune 30,	Three months endedJune 30,
	$366,725355,75010,97521,60527,34375,728--1,229125,905(114,930)(16,931)(32,393)166,4042032,35314,02016,3736,702$23,075$0.4749,149$0.39$23,07559,8152014	$234,072227,3476,72514,16216,5274,269----34,958(28,233)(8,818)(12,276)15,24964(34,014)11,566(22,448)6,702$(15,746)$(0.31)50,1462014	2013
			$125,236113,014
			12,2227,39610,942--1,866--
			20,204
			(7,982)(8,305)(8,213)--201
			(24,299)1,412
			(22,887)--
			$(22,887)
			$(0.59)
			39,073

See notes to consolidated financial statements.

• 2 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(dollars in thousands)

Profit (loss)Foreign currency translation adjustmentChange in employees plan assets and benefit obligations, net of taxesComprehensive income (loss)Net loss attributable to the non controlling interestComprehensive income (loss) attributable to the company	Six months endedJune 30,	Six months endedJune 30,	Three months endedJune 30,	Three months endedJune 30,
	2014	2013	2014	2013
	$16,3734,117(1,130)	$(46,038)(10,432)(1,531)	$(22,448)3,169(565)	$(22,887)(3,609)(1,064)
	19,3606,702	(58,001)--	(19,844)6,702	(27,560)--
	$26,062	$(58,001)	$(13,142)	$(27,560)

• 3 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars and share data in thousands)

BALANCE AS OF JANUARY 1, 2014Changes during the period:Establishment of a subsidiaryIssuance of shares and warrantEmployee stock-based compensationExercise of optionsCapital notesOther comprehensive income:Profit (loss) for the periodForeign currency translatoin adjustmentsChange in employees plan assets and benefit obligations, net of taxesComprehensive incomeBALANCE AS OF JUNE 30, 2014OUTSTANDING SHARES, NET OF TREASURY STOCK AS OFJUNE 30, 2014					**SHAREHOLDERS' **	EQUITY				Comprehensiveincome	NonControllinginterests	Total
	OrdinarySharesissued	OrdinarySharesAmount	Additionalpaid-incapital	Capitalnotes	unearnedcompensation	Accumulatedothercomprehensiveloss	Foreigncurrencytranslatoinadjustment	Accumulateddeficit	Treasurystock
	47,9568956991,454	$192,7763,8523,0176,276	$1,084,01114,338235,502	$92,549(11,778)	$45,3802,507	$3,484(1,130)	$(19,610)4,117	$(1,248,270)23,075	$(9,072)	$23,0754,117(1,130)	$-7,120(6,702)	$141,2487,12018,1902,5073,040-16,3734,117(1,130)
										$26,062
	51,004	$205,921	$1,103,874	$80,771	$47,887	$2,354	$(15,493)	$(1,225,195)	$(9,072)		$418	$191,465
	50,918

• 4 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

CASH FLOWS - OPERATING ACTIVITIESProfit (loss) for the periodAdjustments to reconcile net profit (loss) for the periodto net cash provided by operating activities:Income and expense items not involving cash flows:Depreciation and amortizationEffect of indexation, translation and fair value measurement on debtLoss from notes exchangeOther expense (income), netNishiwaki Fab restructuring costs and impairmentGain from acquisition, netChanges in assets and liabilities:Trade accounts receivableOther receivables and other current assetsInventoriesTrade accounts payableDeferred revenue and customers' advancesOther current liabilitiesDeferred tax liability, netOther long-term liabilitiesNet cash provided by operating activitiesCASH FLOWS - INVESTING ACTIVITIESInvestments in property and equipment, netInvestments in other assets, intangible assets and othersAcquisition of subsidiary consolidated for the first time (a)Proceeds from interest bearing designated depositsNet cash provided by (used in) investing activitiesCASH FLOWS - FINANCING ACTIVITIESProceeds on account of equity and debt issuancesProceeds from long-term loanLoan repayment to PanasonicDebts repaymentNet cash provided by (used in) financing activitiesEffect of foreign exchange rate changeINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS - BEGINNING OF PERIODCASH AND CASH EQUIVALENTS - END OF PERIOD	June 30,Six months ended	June 30,Six months ended
	$16,373109,5956,7409,817(203)75,728(166,404)(25,406)9,44111,54515,755(43)575(16,031)2,14849,630(25,937)--57,58210,00041,64511,45185,884(85,884)(25,431)(13,980)2,05479,349112,871$192,2202014	2013
		$(46,038)77,258(3,631)--59----(11,064)(6,560)(6,759)7,3111,270(3,631)(2,242)3,179
		9,152(40,755)(327)----
		(41,082)20,042------
		20,042(4,951)
		(16,839)123,398
		$106,559

• 5 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

		Six months ended	Six months ended	Six months ended
		June	30,
		2014		2013
NON-CASH ACTIVITIES
Investments in property and equipment	$	10,906	$	8,057
Proceeds receivables related rights offering	$	--	$	1,325
Shareholders' equity increase resulting from Jazz notes exchange transaction	$	9,609	$	--
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest	$	16,413	$	15,586
Cash paid during the period for income taxes	$	103	$	190
(a) ACQUISTION OF SUBSIDIARY CONSOLIDATED FOR THE FIRST TIME, SEE ALSO NOTE				2A:
Assets and liabilities of the subsidiary as of March 31, 2014:
Working capital (excluding cash and cash equivalents)	$	32,406
Fixed assets		245,278
Intangible assets		24,520
Long-term loan		(85,249)
Long-term liabilities		(93,602)
		123,353
Less:
Share capital		14,531
Paid-in capital		166,404
		180,935
	$	57,582

See notes to consolidated financial statements.

• 6 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

(dollars in thousands, except per share data)

NOTE 1 - GENERAL

A. Basis for Presentation

The condensed interim consolidated financial statements of Tower Semiconductor Ltd. (“Tower”) include the financial statements of Tower and (i) its wholly-owned subsidiaries (1) Jazz Technologies, Inc. and its wholly-owned subsidiaries-, including Jazz Semiconductor, Inc., an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices (Jazz Technologies, Inc. and its wholly-owned subsidiaries are collectively referred to herein as “Jazz”), and (2) TowerJazz Japan Ltd. (“TJP”), an independent semiconductor foundry in Nishiwaki, Japan, and (ii) its majority-owned subsidiary, TowerJazz Panasonic Semiconductor Company, Ltd. (“TPSCo”), an independent semiconductor foundry which includes three semiconductor manufacturing facilities located in Uozu, Tonami and Arai, Hokuriku, Japan. Tower and its subsidiaries are collectively referred to as the “Company”.

The interim consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“US GAAP”).

The unaudited condensed interim consolidated financial statements as of June 30, 2014 of the Company should be read in conjunction with the audited consolidated financial statements of the Company as of December 31, 2013 and for the year then ended, including the notes thereto.

The Company’s consolidated financial statements include TPSCo’s balance sheet balances from March 31, 2014 and TPSCo’s results of operations commencing immediately following such date. The Company’s consolidated financial statements are presented after elimination of inter-company transactions and balances.

In the opinion of management, the interim financial statements include all adjustments necessary for a fair presentation of the financial position and results of operations as of the date and 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.

B. Financing Debt Obligations and Other Liabilities

The Company, as an independent semiconductor manufacturer, operates in the semiconductor industry which has historically been highly cyclical and subject to significant and often rapid increases and decreases in product demand and manufacturing facilities’ utilization rates. The overcapacity, underutilization and downward price pressure characteristic of a downturn in the semiconductor market and/or in the global economy, such as experienced several times in the past, may negatively impact consumer and customer demand for the Company’s products, the end products of the Company’s customers and the financial markets, as well as our ability to create positive net cash flow, maintain such level of utilization rate that will cover our fixed costs, re-finance our debt, and/or raise funds and/or engage in debt restructuring activities.

• 7 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

(dollars in thousands, except per share data)

NOTE 1 - GENERAL (cont.)

B. Financing Debt Obligations and Other Liabilities (cont.)

In order to finance Tower’s debt obligations and other liabilities, in addition to cash on hand and expected cash flow generation from operating activities, Tower is exploring opportunities and ventures to re-finance its debt obligations by engaging potential new lenders and existing lenders in order to exchange existing maturities to debt vehicles with longer maturities, and/or obtain funds from additional sources including debt issuance and/or other financing transactions and/or sale of assets and/or fund raising activities, as well as exploring additional financing alternatives.

See also details in Notes 4, 8B, 12B, 13, 17 to the 2013 audited consolidated financial statements and Note 2 below.

NOTE 2 - RECENT DEVELOPMENTS

A. Acquisition of 51% of the shares of TowerJazz Panasonic Semiconductor Co., Ltd.

In March 2014, Panasonic Corporation (“Panasonic”) has formed TowerJazz Panasonic Semiconductor Co., Ltd. (“TPSCo”), a newly established company. Upon TPSCo’s formation, (a) Panasonic transferred its semiconductor wafer manufacturing process and capacity tools of 8 inch and 12 inch at three of its fabs located in Hokuriku Japan (Uozu, Tonami and Arai) to TPSCo; and (b) Tower acquired 51% of the shares of TPSCo for a consideration of $7,411 paid through the issuance of ordinary shares to Panasonic.

The purchase price has been allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The estimated fair value of the assets, net amounted to $180,935. As the fair value of the net assets acquired less the non-controlling interest exceeded the purchase price, Tower recognized a gain on the acquisition of $166,404.

The Company believes that the gain realized from the acquisition derived from the following main reasons: (i) Panasonic’s fabs were not fully utilized in recent years and were anticipated to remain so in the coming years, hence any volume manufacturing and revenue resulting from the transaction with Tower, due to Tower customers’ base, contacts, technologies and foundry management and operations expertise will benefit Panasonic and directly increase the value of the transferred assets; and (ii) acquisition prices for used manufacturing equipment and fabs in the industry are very low primarily due to the fact that the used fabs’ technologies and platforms are not leading edge, their machines and manufacturing equipment are used and since the acquisition of used fabs involves material liabilities, contingencies and commitments with respect to employees, rules of production and others.

• 8 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

(dollars in thousands, except per share data)

NOTE 2 - RECENT DEVELOPMENTS (cont.)

A. Acquisition of 51% of the shares of TowerJazz Panasonic Semiconductor Co., Ltd. (cont.)

The consideration and provisional valuation of assets acquired and liabilities assumed are as follows:

follows:
Current assets		As ofMarch 31, 2014$ 91,414
Machinery and equipment		245,278
Intangible assets		24,520
Total assets as of acquisition date		$ 361,212
Current liabilities		$ 1,426
Long-term Loan		85,249
Deferred tax liability		93,602
Total liabilities as of acquisition date		$ 180,277
Total net assets acquired		$ 180,935
The fair value non-controllinginterests in TPSCo		7,120
Tower’s consideration		7,411
Gain on acquisition		$ 166,404

The fair value of the non-controlling interest in the table above was derived based on the purchase price Tower paid to Panasonic for its 51% shares of TPSCo.

The fair values set forth above are based on a preliminary valuation of TPSCo’s assets and liabilities performed by third party professional valuation experts hired by the Company to appraise the fair value of the assets in accordance with SFAS No. 141R, “Business Combinations”. The final valuation of TPSCo’s assets and liabilities may vary significantly.

Tower and Panasonic also agreed to the following, among others: (i) a five-year manufacturing agreement between Panasonic and TPSCo, under which Panasonic will acquire products from TPSCo; (ii) Panasonic will provide TPSCo with various transition services and support; (iii) TPSCo will lease the manufacturing buildings and related facilities infrastructure from Panasonic; and (iv) TPSCo will receive services from Tower including marketing, sales, general and administration services.

B. Nishiwaki fab cessation of operations

The Company is in the process of restructuring its business and activities in Japan. In connection with said restructuring, the Company decided to cease the operations of the Nishiwaki fab and is in the process of terminating of certain agreements, sale of the Nishiwaki fab assets and a comprehensive reduction in the work force. In addition, a concerted effort is being made to move certain current customers and products from the Nishiwaki fab to the Company’s other fabrication facilities. Consequently, the Company recorded restructuring and impairment costs of approximately $76,000 for the six months period ended June 30, 2014, most of which are associated with fixed assets non-cash impairment costs.

• 9 -

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2014

(dollars in thousands, except per share data)

NOTE 2 - RECENT DEVELOPMENTS (cont.)

C. Long term loan agreement with Japanese Banking Institutions

In June 2014, TPSCo entered into a long term loan agreement with JA Mitsui Leasing, Ltd. and Bank of Tokyo (BOT) Lease Co., Ltd, under which it borrowed an amount of approximately $87,000 (8.8 Billion Japanese Yen) (the “Loan Agreement”), to be used for the newly established Japanese company, TPSCo. This loan has been used in order to repay a bridge loan that Panasonic granted to TPSCo in the same amount earlier this year.

The loan carry an annual interest of the TIBOR six months rate plus 1.65% per annum, to be paid on a semi-annual basis starting December 2014, with the principal to be repaid in seven semi-annual equal installments starting June 2016 and ending during the first half of 2019. Said loan is secured by an assignment of TPSCo’s right to receive any sums payable to TPSCo under its agreements with Panasonic dated March 31, 2014.

D.

Jazz notes transaction

In March 2014, Jazz, certain of its domestic subsidiaries and Tower entered into an exchange agreement (the “2014 Exchange Agreement”) with certain Jazz noteholders (the “2014 Participating Holders”) according to which Jazz issued unsecured 8% notes due December 2018 (the “2014 Notes”) in exchange for approximately $45,000 in aggregate principal amount of Jazz notes due June 2015 which were issued in 2010 (the “2010 Notes”).

Also in March 2014, Jazz, Tower and certain of the 2014 Participating Holders (the “Purchasers”) entered into a purchase agreement (the “Purchase Agreement”) pursuant to which the Purchasers purchased $10,000 in aggregate principal amount of the 2014 Notes for cash consideration.

Holders of the 2014 Notes may submit a conversion request with Jazz to be settled at Jazz’s discretion through cash from Jazz or ordinary shares from Tower, in which event Tower has to issue ordinary shares based on a conversion price of $10.07 per share. The 2014 Notes are jointly and severally guaranteed on a senior unsecured basis by Jazz’s domestic subsidiaries. The 2014 Notes are not guaranteed by Tower. The Indenture contains certain customary covenants.

As of June 30, 2014, approximately $58,000 principal amount of 2014 Notes was outstanding and approximately $45,000 principal amount of 2010 Notes was outstanding.

• 10 -

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with (1) our unaudited condensed interim consolidated financial statements as of June 30, 2014 and for the six months then ended and related notes included in this report and (2) our consolidated financial statements and related notes included in our Annual Report on Form 20-F for the year ended December 31, 2013 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”).

In March 2014, Panasonic Corporation (“Panasonic”) has formed TowerJazz Panasonic Semiconductor Co., Ltd. (“TPSCo”), a newly established company. Upon TPSCo’s formation, (a) Panasonic transferred its semiconductor wafer manufacturing process and capacity tools of 8 inch and 12 inch at three of its fabs located in Hokuriku Japan (Uozu, Tonami and Arai) to TPSCo; and (b) we acquired 51% of the shares of TPSCo for a consideration of approximately $7.4 million. For additional information regarding the acquisition of TPSCo, see Note 2A to our unaudited condensed interim consolidated financial statements as of June 30, 2014. Our consolidated financial statements include TPSCo’s balance sheet starting March 31, 2014 and TPSCo’s results of operations commencing immediately following such date.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.

Statement of Operations Data:	Six months endedJune 30,20142013
	2014
Revenues ...........................................................................................	100%	100%
Cost of revenues................................................................................	97.0	93.8
Gross Profit .......................................................................................	3.0	6.2
Research and development expenses ................................................	5.9	7.1
Marketing, general and administrative expenses ..............................	7.5	8.8
Nishiwaki fab restructuring costs and impairment ...........................	20.6	--
Merger related costs ..........................................................................	0.3	--
Amortization related to a lease agreement earlytermination ............	--	1.6
Operating loss ...................................................................................	(31.3)	(11.3)
Interest expenses, net ........................................................................	(4.6)	(6.9)
Other financing expense, net.............................................................	(8.8)	(3.0)
Gain from acquisition, net ................................................................	45.4	--
Other income (expense), net .............................................................	0.1	(0.0)
Income tax benefit ............................................................................	3.8	1.8
Profit (Loss) for the period ..............................................................	4.5	(19.4)
Net loss attributable to the non-controlling interest ..........................	1.8	--
	6.3%	(19.4)%
Net profit (loss) for the period attributable to the company ..............

The following table sets forth certain statement of operations data for the periods indicated (in thousands):

	thousands):	thousands):
			Six months ended
	Sttt f Oti Dt			June	30,
				2014
					2013
	aemen o peraons aa:
	Revenues ..............................................................................	.............	$	366,725	$ 328,33	2
				355750	3323	2
	Cost of revenues...................................................................	.............		,	,
	Gross Profit ..........................................................................	.............		10,975	7984	8
					,
	Research and development expenses ...................................	.............		21,605	72,3	7
	Marketing general and administrative expenses			27343	3343	8
	, .................	............		,	,
	Nishiwaki Fab restructuring costs and impairment ..............	.............		75,728		--
	Merger related costs			1229		--
	.............................................................	.............		,
	Amortization related to a lease agreement earlytermination	............		--	3,73	2
	Oti L			114930	2681
	perang oss .....................................................................	.............		(,)	(,	)
	Interest expenses, net ...........................................................	.............		(16,931)	(16,33	2)
	Oh fii			32393	722
	ter nancng expense, net................................................	.............		(,)	(,	)
	Gain from acquisition, net ...................................................	.............		166,404		--
	Oh i			203	5
	ter ncome (expense), net ................................................	.............			(	)
	Income tax benefit ...............................................................	.............		14,020	4,39	3
	fi l f h id
	Prot (oss) or te pero ................................................................		16,373		(46,038)
	Net loss attributable to the non-controlling interest ..........................		6,702		--
			$ 23075		$(46038)
	fi l f h id ibbl h
	Net prot (oss) or te pero attrutae to te company ..............		,		,

Six months ended June 30, 2014 compared to the six months ended June 30, 2013

Revenues. Revenues for the six months ended June 30, 2014 increased by 54% to $366.7 million, as compared to $237.9 million for the six months ended June 30, 2013. Such increase in revenues is mainly due to a higher amount of wafers shipped of 42% (mainly due to the inclusion of revenue and shipments from TPSCo for the first time following our acquisition) and a higher average selling price.

Cost of Revenue s. Cost of revenues for the six months ended June 30, 2014 amounted to $355.8 million, compared to $223.1 million for the six months ended June 30, 2013. This increase was mainly due to the manufacturing related costs, including TPSCo’s depreciation and amortization of $26 million, of our newly acquired TPSCo.

Gross Profit . Gross profit for the six months ended June 30, 2014 amounted to $11.0 million compared to $14.8 million for the six months ended June 30, 2013. The decrease in the gross profit margin is due to the first time inclusion of TPSCo’s margins, which are lower as compared to our other business’ margins, and due to TPSCo’s depreciation and amortization of $26 million.

Research and Development . Research and development expenses for the six months ended June 30, 2014, as a percentage of revenues, were reduced to 5.9% in the six months ended June 30, 2014, as compared to 7.1% in the six months ended June 30, 2013, and amounted to $21.6 million and $16.9 million, respectively. The $4.7 million net increase is mainly due to the inclusion of TPSCo’s research and development expenses for the first time.

Marketing, General and Administrative Expenses . Marketing, general and administrative expenses for the six months ended June 30, 2014, as a percentage of revenues, were reduced to 7.5% as compared to 8.8% in the six months ended June 30, 2013, and amounted to $27.3 million and $21.0 million, respectively. This net increase was mainly due to the inclusion of TPSCo’s marketing, general and administrative expenses for the first time.

Nishiwaki Fab Restructuring Costs and Impairment. As part of restructuring our business and activities in Japan, it was decided to cease the operations of the Nishiwaki Fab. The Company recorded restructuring and impairment costs of $75.7 million for the six months ended June 30, 2014, most of which were associated with fixed assets non-cash impairment costs.

Amortization Related to a Lease Agreement Early Termination. Operating expenses for the six months ended June 30, 2013 included $3.7 million in non-cash amortization expenses related to an early termination of an office building lease contract occurred in 2013 on our Newport Beach site in California.

Operating Loss. Operating loss for the six months ended June 30, 2014 amounted to $114.9 million compared to $26.8 million loss for the six months ended June 30, 2013, resulting mainly from the above described Nishiwaki Fab restructuring and impairment costs, net, of $75.7 million.

Interest Expenses, Net . Interest expenses, net for the six months ended June 30, 2014 amounted to $16.9 million compared to interest expenses, net of $16.3 million for the six months ended June 30, 2013.

Other Financing Expenses, Net . Other financing expenses, net for the six months ended June 30, 2014 amounted to $32.4 million compared to other financing expenses, net of $7.2 million for the six months ended June 30, 2013. The increase is mainly comprised of the following: (i) fair value measurement on banks’ loans in the amount of approximately $11 million due to a positive effect included in the six months ended June 30, 2013 following a bank agreement signed in the first quarter of 2013, and (ii) non-cash cost recorded in 2014 as a result from the Jazz notes exchange transaction in the amount of approximately $10 million.

Gain from Acquisition, Net . Gain from the acquisition of TPSCo in the amount of $166.4 million is included in the six months ended June 30, 2014. As the fair value of the net assets acquired exceeded the purchase price, we recognized a gain on the acquisition, net, derived from the high value assigned to our stake in TPSCo. See also Note 2A to our unaudited condensed interim consolidated financial statements as of June 30, 2014.

Income Tax Benefit. Income tax benefit for the six months ended June 30, 2014 amounted to $14.0 million compared to $4.4 million in the six months ended June 30, 2013. Tax income for the six months ended June 30, 2014 of $14.0 million resulted mainly from our subsidiaries’ losses before tax, while the tax expenses resulted from the acquisition gain was presented at its net amount, after tax, and not reflected in tax expenses (income) line. For 2013, the entire $4.4 million resulted from our subsidiaries’ losses before tax.

Net Profit (Loss). Profit for the six months ended June 30, 2014 amounted to $23.0 million as compared to a loss of $46.0 million for the six months ended June 30, 2013. Net profit for the six months ended June 30, 2014 included the above described non-cash items of $166.4 million gain from acquisition, net, of TPSCo, offset by the $75.7 million of Nishiwaki Fab restructuring costs and impairment.

Impact of Inflation and Currency Fluctuations

The US Dollar costs of our operations in Israel are influenced by changes in the rate of inflation in Israel and the extent to which such changes are not offset by the change in valuation of the New Israeli Shekel (“NIS”) in relation to the US Dollar. During the six months ended June 30, 2014, the exchange rate of the US Dollar in relation to the NIS decreased by 1.0% and the Israeli Consumer Price Index (“CPI”) did not change (during the six months ended June 30, 2013, the exchange rate of the US Dollar in relation to the NIS decreased by 3.1% and the Israeli CPI increased by 1.3%).

We believe that the rate of inflation in Israel did not have a material effect on our business to date. However, our US Dollar costs will increase if inflation in Israel exceeds the devaluation of the NIS against the US Dollar.

The US Dollar costs of our operations in Japan are influenced by the changes in valuation of the Japanese Yen (“JPY”) in relation to the US Dollar. During the six months ended June 30, 2014, the exchange rate of the US Dollar in relation to the JPY decreased by 3.5% (during the six months ended June 30, 2013, the exchange rate of the US Dollar in relation to the JPY increased by 14.8%).

Nearly all of the cash generated from our operations and from our financing and investing activities is denominated in US Dollars, NIS and JPY. Our expenses and costs are denominated in NIS, US Dollars, JPY and Euros. We are, therefore, exposed to the risk of currency exchange rate fluctuations.

Liquidity and Capital Resources

As of June 30, 2014, we had an aggregate amount of $192.2 million in cash and cash equivalents, an increase of 69.3 million as compared to $122.9 million we had as of December 31, 2013.

During the six months ended June 30, 2014, we generated $66.0 million positive cash from operating activities (or $49.6 million of positive cash including interest payments), included $57.6 million of cash in TPSCo associated with its establishment in March 31, 2014 and received a loan of approximately $87.0 million from JA Mitsui & Bank Of Tokyo (which was used to prepay a bridge loan Panasonic granted to TPSCo in the same amount earlier this year). These liquidity resources mainly financed the capital investments, net that we made during the six months ended June 30, 2014, which aggregated to approximately $23.9 million and repayment of $14.0 million of debts, net.

As of June 30, 2014, loans from banks were presented in our balance sheet in the amount of $211.1 million, out of which $50.0 million were presented as short term. As of such date, we presented an aggregate of $225.4 million of debentures on our balance sheet, of which $47.1 million were presented as short-term.