UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission file number 0-15451
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code |
( |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
PREFERRED STOCK PURCHASE RIGHTS |
N/A |
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
☒ |
Accelerated Filer |
☐ |
Non-Accelerated Filer |
☐ |
|
Smaller Reporting Company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The registrant had 63,384,764 shares of common stock outstanding as of February 22, 2021.
PHOTRONICS, INC.
QUARTERLY REPORT ON FOM 10-Q
JANUARY 31, 2021
3 |
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PART I. |
FINANCIAL INFORMATION |
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Item 1. |
4 |
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4 |
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5 |
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6 |
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7 |
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8 |
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9 |
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Item 2. |
23 |
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Item 3. |
30 |
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Item 4. |
30 |
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PART II. |
OTHER INFORMATION |
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Item 1. |
31 |
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Item 2. |
31 |
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Item 6. |
32 |
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This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements, as defined by the Securities and Exchange Commission (“SEC”). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by us, or on our behalf. Forward-looking statements are statements other than statements of historical fact, including, without limitation, those statements that include such words as “anticipates,” “believes” “estimates,” “expects,” “intends,” “plans,” “predicts”, and similar expressions, and, without limitation, may address our future plans, objectives, goals, strategies, events, or performance, as well as underlying assumptions and other statements that are other than statements of historical facts. On occasion, in other documents filed with the SEC, press releases, phone conferences, or by other means, we may publish, disseminate, or otherwise make available, forward-looking statements of this nature, including statements contained within Item 2 – “Management’s Discussion & Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. Our expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, information contained in our records, and information we’ve obtained from other parties. However, we can offer no assurance that our Company’s expectations, beliefs, or projections will be realized, accomplished or achieved.
Forward-looking statements within this Form 10-Q speak only as of the date of its filing, and we undertake no obligation to update any such statements to reflect changes in events or circumstances that may subsequently occur. Users of this Report are cautioned that various factors may cause actual results to differ materially from those contained in any forward-looking statements found within this Form 10-Q and that they should not place undue reliance on any forward-looking statement. In addition, all forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by the risk factors provided in Item 1A “Risk Factors” of our Annual Report on Form 10-K, as well as any additional risk factors we may provide in our Quarterly Reports on Form 10-Q.
| PART I. | FINANCIAL INFORMATION |
| Item 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
January 31, 2021 |
October 31, 2020 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Accounts receivable, net of allowance for credit losses of $ |
||||||||
Inventories |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Intangible assets, net |
||||||||
Deferred income taxes |
||||||||
Other assets |
||||||||
Total assets |
$ |
$ |
||||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Short-term debt |
$ |
$ |
||||||
Current portion of long-term debt |
||||||||
Accounts payable |
||||||||
Accrued liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt |
||||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
Preferred stock, $ |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Treasury stock, |
( |
) |
||||||
Accumulated other comprehensive income |
||||||||
Total Photronics, Inc. shareholders' equity |
||||||||
Noncontrolling interests |
||||||||
Total equity |
||||||||
Total liabilities and equity |
$ |
$ |
||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
Three Months Ended |
||||||||
January 31, 2021 |
February 2, 2020 |
|||||||
Revenue |
$ |
$ |
||||||
Cost of goods sold |
||||||||
Gross profit |
||||||||
Operating expenses: |
||||||||
Selling, general and administrative |
||||||||
Research and development |
||||||||
Total operating expenses |
||||||||
Operating income |
||||||||
Other income (expense): |
||||||||
Foreign currency transactions impact, net |
||||||||
Interest income and other income, net |
||||||||
Interest expense |
( |
) |
( |
) |
||||
Income before income tax provision |
||||||||
Income tax provision |
||||||||
Net income |
||||||||
Net income attributable to noncontrolling interests |
||||||||
Net income attributable to Photronics, Inc. shareholders |
$ |
$ |
||||||
Earnings per share: |
||||||||
Basic |
$ |
$ |
||||||
Diluted |
$ |
$ |
||||||
Weighted-average number of common shares outstanding: |
||||||||
Basic |
||||||||
Diluted |
||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
Three Months Ended |
||||||||
January 31, 2021 |
February 2, 2020 |
|||||||
Net income |
$ |
$ |
||||||
Other comprehensive income (loss), net of tax of $: |
||||||||
Foreign currency translation adjustments |
( |
) |
||||||
Other |
( |
) |
||||||
Net other comprehensive income (loss) |
( |
) |
||||||
Comprehensive income |
||||||||
Less: comprehensive income attributable to noncontrolling interests |
||||||||
Comprehensive income attributable to Photronics, Inc. shareholders |
$ |
$ |
||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
Three Months Ended January 31, 2021 |
||||||||||||||||||||||||||||||||
Photronics, Inc. Shareholders |
||||||||||||||||||||||||||||||||
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income |
Non- controlling Interests |
Total Equity |
|||||||||||||||||||||||||||
Common Stock |
||||||||||||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||||||
Balance at October 31, 2020 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||
Net income |
- |
|||||||||||||||||||||||||||||||
Other comprehensive income |
- |
|||||||||||||||||||||||||||||||
Shares issued under equity plans |
||||||||||||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||||||
Purchase of treasury stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Balance at January 31, 2021 |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||||
Three Months Ended February 2, 2020 |
||||||||||||||||||||||||||||||||
Photronics, Inc. Shareholders |
||||||||||||||||||||||||||||||||
Common Stock |
Additional Paid-in |
Retained |
Treasury |
Accumulated Other Comprehensive |
Non- controlling |
Total |
||||||||||||||||||||||||||
Shares |
Amount |
Capital |
Earnings |
Stock |
Loss |
Interests |
Equity |
|||||||||||||||||||||||||
Balance at October 31, 2019 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||||
Net income |
- |
|||||||||||||||||||||||||||||||
Other comprehensive (loss) income |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Shares issued under equity plans |
||||||||||||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||||||
Purchase of treasury stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||
Repurchase of common stock of subsidiary |
- |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Balance at February 2, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
Three Months Ended |
||||||||
January 31, 2021 |
February 2, 2020 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ |
$ |
||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Share-based compensation |
||||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
( |
) |
( |
) |
||||
Inventories |
( |
) |
||||||
Other current assets |
( |
) |
||||||
Accounts payable, accrued liabilities, and other |
( |
) |
( |
) |
||||
Net cash provided by operating activities |
||||||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
( |
) |
( |
) |
||||
Government incentives |
||||||||
Other |
( |
) |
( |
) |
||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
||||||||
Purchase of treasury stock |
( |
) |
( |
) |
||||
Repayments of debt |
( |
) |
( |
) |
||||
Proceeds from share-based arrangements |
||||||||
Other |
( |
) |
( |
) |
||||
Net cash used in financing activities |
( |
) |
( |
) |
||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
||||||||
Net (decrease) increase in cash, cash equivalents, and restricted cash |
( |
) |
||||||
Cash, cash equivalents, and restricted cash at beginning of period |
||||||||
Cash, cash equivalents, and restricted cash at end of period |
$ |
$ |
||||||
Supplemental disclosure of non-cash information: |
||||||||
Accrual for property, plant and equipment purchased during the period |
$ |
$ |
||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. (“Photronics”, “the Company”, “we”, “our”, or “us”) is one of the world's leading manufacturers of photomasks, which are high-precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat-panel displays (“FPDs” or “displays”), and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”), a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We currently have eleven manufacturing facilities, which are located in Taiwan (3 ), , the United States (3 ), Europe (2 ), and two recently constructed facilities in China. Our FPD facility in Hefei, China, commenced production in the second quarter of fiscal 2019, and our IC facility in Xiamen, China, commenced production in the third quarter of fiscal 2019.
The accompanying unaudited condensed consolidated financial statements (“the financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. The financial statements include the accounts of Photronics, its wholly owned subsidiaries, and the majority-owned subsidiaries which it controls. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in them. Estimates are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available at the time they are made. Subsequent actual results may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.
Reclassified prior period amounts have been made to conform to the current period presentation, including the separation of Foreign currency transaction impact, net, from Interest income and other income, net, on the condensed consolidated statements of income.
Our business is typically impacted during the first, and sometimes the second, quarters of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2021. For further information, refer to the consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended October 31, 2020.
NOTE 2 - CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less, readily convertible to known amounts of cash, and so near to their maturity that they present insignificant risk of changes in value because of changes in interest rates. The carrying values of cash equivalents approximate their fair values, due to the short-term maturities of these instruments.
Restricted cash is included in Other assets on our January 31, 2021 and October 31, 2020, consolidated balance sheets, respectively. The restrictions on these amounts are primarily related to land lease agreements and customs requirements.
The following table presents cash and cash equivalents as reported in our condensed consolidated balance sheets, as well as the sum of cash, cash equivalents and restricted cash as reported on our condensed consolidated statements of cash flows:
January 31, 2021 |
October 31, 2020 |
|||||||
Cash and cash equivalents |
$ |
$ |
||||||
Restricted Cash |
||||||||
$ |
$ |
|||||||
NOTE 3 - INVENTORIES
January 31, 2021 |
October 31, 2020 |
|||||||
Raw materials |
$ |
$ |
||||||
Work in process |
||||||||
Finished goods |
||||||||
$ |
$ |
|||||||
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
January 31, 2021 |
October 31, 2020 |
|||||||
Land |
$ |
$ |
||||||
Buildings and improvements |
||||||||
Machinery and equipment |
||||||||
Leasehold improvements |
||||||||
Furniture, fixtures and office equipment |
||||||||
Construction in progress |
||||||||
Accumulated depreciation and amortization |
( |
) |
( |
) |
||||
$ |
$ |
|||||||
Depreciation and amortization expense for property, plant and equipment was $22.6 million for the three-month period ended January 31, 2021, and $23.5 million for the three-month period ended February 2, 2020, respectively.
Right-of-use assets resulting from finance leases are included in above property, plant and equipment as follows:
January 31, 2021 |
October 31, 2020 |
|||||||
Construction in progress |
$ |
$ |
||||||
Less accumulated amortization |
||||||||
$ |
$ |
|||||||
NOTE 5 - PDMCX JOINT VENTURE
In January 2018, Photronics, through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, “us” or “our”), and Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (“DNP”) entered into a joint venture under which DNP obtained a 49.99 % interest in our IC business in Xiamen, China. The joint venture, known as “Xiamen American Japan Photronics Mask Co., Ltd.” (“PDMCX”), was established to develop and manufacture photomasks for leading-edge and advanced-generation semiconductors. We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China, and to benefit from the additional resources and investment that DNP provides to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the formation of this joint venture.
The total investment per the PDMCX operating agreement (“the Agreement”) is $160 million. As of January 31, 2021, Photronics and DNP had each contributed cash of approximately $65 50 million; thus both parties have fulfilled their initial investment commitments under the Agreement. As discussed in Note 6, liens were granted to the local financing entity on assets with a total carrying value of $95.7 million, as collateral for the loans.
Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. As of the date of issuance of these financial statements, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below for a period of more than consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within business days of obtaining required approvals and clearance.
We recorded net losses from the operations of PDMCX of $0.1 million, and $3.7 million during the three-month periods ended January 31, 2021 and February 2, 2020, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics (other than the net assets of PDMCX), and our maximum exposure to loss from PDMCX at January 31, 2021, was $56.8 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification (“ASC”), we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were the primary beneficiary during the current and prior year reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics. Our conclusion was based on the facts that we held a controlling financial interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance) and had the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year reporting periods were based on our right to appoint the majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX’s management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of PDMCX’s assets. In addition, as a result of the 50.01 % variable interest we held during the current and prior-year periods, we had the obligation to absorb losses, and the right to receive benefits, that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets are presented in the following table, together with our exposure to loss related to these assets and liabilities.
January 31, 2021 |
October 31, 2020 |
|||||||||||||||
Classification |
Carrying Amount |
Photronics Interest |
Carrying Amount |
Photronics Interest |
||||||||||||
Current assets |
$ |
$ |
$ |
$ |
||||||||||||
Non-current assets |
||||||||||||||||
Total assets |
||||||||||||||||
Current liabilities |
||||||||||||||||
Non-current liabilities |
||||||||||||||||
Total liabilities |
||||||||||||||||
Net assets |
$ |
$ |
$ |
$ |
||||||||||||
NOTE 6 - DEBT
Short-term debt was $0.0 million, and $4.7 million as of January 31, 2021 and October 31, 2020, respectively. The weighted-average interest rate on our short-term debt as of October 31, 2020 was 2.02 %.
The tables below provide information on our long-term debt.
As of January 31, 2021 |
Xiamen Project Loans |
Xiamen Working Capital Loans |
Hefei Equipment Loan |
Finance Lease |
Total |
|||||||||||||||
Principal due: |
||||||||||||||||||||
Next 12 months |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Months 13 – 24 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Months 25 – 36 |
||||||||||||||||||||
Months 37 – 48 |
||||||||||||||||||||
Months 49 – 60 |
||||||||||||||||||||
Thereafter |
||||||||||||||||||||
Long-term debt |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Interest rate at balance sheet date |
% |
% |
% |
% |
||||||||||||||||
Basis spread on interest rates |
( |
) |
N/A |
|||||||||||||||||
Interest rate reset |
Quarterly |
Monthly/Annually |
Annually |
N/A |
||||||||||||||||
Maturity date |
||||||||||||||||||||
Periodic payment amount |
||||||||||||||||||||
Periodic payment frequency |
||||||||||||||||||||
Loan collateral (carrying amount) |
$ |
N/A |
$ |
$ |
(4) |
|||||||||||||||
(1) First five loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal; last five installments will each be for 12.5 percent of the approved loan principal.
(2) Semiannual repayments commence in March 2022.
(3) See Note 8 for periodic payment amounts.
(4) Amount represents the carrying amount of the related right-of-use asset, in which the lessor has a secured interest.
As of October 31, 2020 |
Xiamen Project Loans |
Xiamen Working Capital Loans |
Total |
|||||||||
Principal due: |
||||||||||||
Next 12 months |
$ |
$ |
$ |
|||||||||
Months 13 – 24 |
$ |
$ |
$ |
|||||||||
Months 25 – 36 |
||||||||||||
Months 37 – 48 |
||||||||||||
Months 49 – 60 |
||||||||||||
Thereafter |
||||||||||||
Long-term debt |
$ |
$ |
$ |
|||||||||
Interest rate at balance sheet date |
% |
% |
||||||||||
Basis spread on interest rates |
||||||||||||
Loan collateral (carrying amount) |
$ |
N/A |
||||||||||
Xiamen Project Loans
In November 2018, PDMCX was approved for credit of 345 million RMB (approximately $53.4 million, at the balance sheet date), subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in RMB, are being used to finance certain capital expenditures for our Xiamen, China facility. PDMCX granted liens on its land use right, building, and certain equipment as collateral for the Project Loans. As of January 31, 2021, PDMCX had outstanding borrowings of 300.0 million RMB ($46.4 million) against this approval. The interest rates on the Project Loans are variable, and based on the RMB Loan Prime Rate of the National Interbank Funding Center. Interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
Xiamen Working Capital Loans
In November 2018, PDMCX was approved for revolving, unsecured credit of the equivalent of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements with varying terms to maturity. Under this credit agreement (the “Working Capital Loans”), PDMCX can borrow up to 140.0 million RMB to pay value-added taxes (“VAT”), and up to 60.0 million RMB to fund operations; combined total borrowings are limited to the equivalent of $25.0 million. As of January 31, 2021, PDMCX had 86.1 million RMB ($13.3 million) outstanding against the approval to pay VAT and no outstanding borrowings against the approval to fund operations. The interest rates on the approval to pay VAT are variable, based on the RMB Loan Prime Rate of the National Interbank Funding Center. Interest incurred on the VAT loans are eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
Hefei Equipment Loan
In October 2020, our Hefei facility was approved to borrow 200 million RMB (approximately $30.9 million, at the balance sheet date) from the China Construction Bank Corporation. Loan proceeds have been, and will be, used to fund the purchases of two lithography tools at our facility in Hefei, China. As of January 31, 2021, we had 41.0 million RMB ($6.3 million) outstanding against this approval. The interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan has covenants and provisions, certain of which relate to the assets pledged as security for the loan, which we were not in compliance with at January 31, 2021. We obtained waivers from the lender for all instances of noncompliance, but are precluded from borrowing additional funds against this facility until our noncompliance with this provision has been cured. In addition, the loan includes covenants for the ratio of total liabilities to total assets and the ratio of current assets to current liabilities.
Finance Lease
In December 2020, under a Master Lease Agreement which we entered into effective July 2019, we entered into a $35.6 million lease for a high-end lithography tool. Upon entering into the lease, our prior $3.5 million short-term obligation to the lessor became a portion of this lease liability. See Note 8 for additional information on this lease.
Corporate Credit Agreement
In September 2018, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The Credit Agreement is secured by substantially all of our assets located in the United States and common stock we own in certain foreign subsidiaries. The Credit Agreement includes covenants around minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance (all of which we were in compliance with at January 31, 2021), and limits the amount of cash dividends, distributions, and redemptions we can pay on our common stock to an aggregate annual amount of $50 million. We had no outstanding borrowings against the Credit Agreement at January 31, 2021, and $50 million was available for borrowing. The interest rate on the Credit Agreement (1.12 % at January 31, 2021) is based on our total leverage ratio at LIBOR plus a spread, as defined in the Credit Agreement.
NOTE 7 - REVENUE
We recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services. We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks, which are comprised of multiple layers, the predominance of which we invoice as they ship to customers. As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time,” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask. At the end of a reporting period, there will be a number of uncompleted revenue contracts on which we have performed; for any such contracts under which we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract. We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
As stated above, photomasks are manufactured to customer specifications in accordance with their proprietary designs; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities, and Accounts Receivable
We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time. Contract assets reflect our transfer of control of photomasks that are in process or completed but not yet shipped to customers. A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks. Our contract assets primarily consist of a significant amount of our in-process production orders and fully manufactured photomasks which have not yet shipped, for which we have an enforceable right to collect consideration (including a reasonable profit) in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. Contract assets of $6.8 million are included in Other current assets, and contract liabilities of $7.5 million and $5.3 million are included in Accrued liabilities and Other liabilities, respectively, in our January 31, 2021 condensed consolidated balance sheet. Our October 31, 2020 condensed consolidated balance sheet includes contract assets of $6.3 million, included in Other current assets, and contract liabilities of $8.0 million and $5.2 million are included in Accrued liabilities and Other liabilities, respectively. We did no 2.5 million and $1.2 million, respectively, of revenue from the settlement of contract liabilities that existed at the beginning of those three-month periods.
We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed for collectibility during, and at the end of, every reporting period. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and derecognize the related receivable. Credit losses incurred on our accounts receivable during the three-month periods ended January 31, 2021 or February 2, 2020, were immaterial.
Our invoice terms generally range from net to ninety days , depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we modify terms of sale, which may require payment in advance of performance. At the time of adoption, we elected the practical expedient allowed under ASC Topic 606 “Revenue from Contracts with Customers” (“Topic 606”) that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid is one year or less.
In instances when we are paid in advance of our performance, we record a contract liability and, as allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically, advance payments we’ve received from customers have generally not preceded the completion of our performance obligations by more than one year.
Disaggregation of Revenue
The following tables present our revenue for the three-month periods ended January 31, 2021 and February 2, 2020, disaggregated by product type, geographic origin, and timing of recognition.
Three Months Ended |
||||||||
Revenue by Product Type |
January 31, 2021 |
February 2, 2020 |
||||||
IC |
||||||||
High-end |
$ |
$ |
||||||
Mainstream |
||||||||
Total IC |
$ |
$ |
||||||
FPD |
||||||||
High-end |
$ |
$ |
||||||
Mainstream |
||||||||
Total FPD |
$ |
$ |
||||||
$ |
$ |
|||||||
Three Months Ended |
||||||||
Revenue by Geographic Origin |
January 31, 2021 |
February 2, 2020 |
||||||
Taiwan |
$ |
$ |
||||||
Korea |
||||||||
United States |
||||||||
China |
||||||||
Europe |
||||||||
All other Asia |
||||||||
$ |
$ |
|||||||
Three Months Ended |
||||||||
Revenue by Timing of Recognition |
January 31, 2021 |
February 2, 2020 |
||||||
Over time |
$ |
$ |
||||||
At a point in time |
||||||||
$ |
$ |
|||||||
Contract Costs
We pay commissions to third-party sales agents for certain sales that they obtain for us. However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a short time period, our backlog of orders is generally not in excess of to for IC photomasks and to for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.
Product Warranties
Our photomasks are sold under warranties that generally range from to . We warrant that our photomasks conform to customer specifications, and will typically repair, replace, or issue a refund for (at our option) any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranties have been immaterial.
NOTE 8 - LEASES
Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is or contains a lease on the date of the lease agreement or commitment, if earlier. Our evaluation considers whether the arrangement includes an identified asset and whether it affords us the right to control the asset. Our having the right to control the identified asset is determined by whether we are entitled to substantially all of its economic benefits and can direct its use.
We recognize leases on our consolidated balance sheet when a lessor makes an asset underlying a lease having a term in excess of twelve months available for our use. The present value of lease payments over the term of the lease, which is determined using our incremental borrowing rate for collateralized loans at the commencement date of the lease, provides the basis for the initial measurement of right-of-use assets and their related lease liabilities. Variable lease payments, other than those that are dependent on an index or on a rate, are not included in the measurement of right-of-use (ROU) assets and their related lease liabilities. Lease terms will include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise. As allowed under ASC Topic 842 – “Leases” we have elected, for all classes of assets, the practical expedient to not separate lease components of a contract from nonlease components of a contract.
In December 2020, we entered into a five-year $35.6 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increase from $0.04 million after the first three months to $0.6 million for the following nine months, followed by forty-eight monthly payments of $0.5 million. As of the due date for the forty-eighth monthly payment, we may exercise an early buy-out option to purchase the tool at 39.84 % of its original cost. If we do not exercise the early buy-out option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value as determined by the lessor. Since we are reasonably certain that we will exercise the early buy-out option, we have classified the lease as a finance lease. The interest rate of the lease, which is the rate implicit in the lease, is 1.14 %.
In February 2021, we entered into a five-year $7.2 million finance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $0.1 million per month. Upon the payment of the fiftieth monthly payment and prior to payment of the fifty-first monthly payment, we may exercise an early buy-out option to purchase the tool at 33.684638 % of its original cost. If we do not exercise the early buy-out option, then at the end of the five-year lease term, the lease shall continue to renew on a month-to-month basis at the same rental; at our option, after the original term or any renewal periods, we may return the tool, elect to extend the lease, or purchase the tool at its fair market value. Since we are reasonably certain that we will exercise the early buy-out option, we have classified the lease as a finance lease. The interest rate of the lease, which is the rate implicit in the lease, is 1.09 %.
The following table provides information on operating and finance leases included in our consolidated balance sheets.
Classification |
January 31, 2021 |
October 31, 2020 |
||||||
ROU Assets – Operating Leases |
||||||||
$ |
$ |
|||||||
ROU Assets – Finance Leases |
||||||||
$ |
$ |
|||||||
Lease Liabilities – Operating Leases |
||||||||
$ |
$ |
|||||||
$ |
$ |
|||||||
Lease Liabilities – Finance Leases |
||||||||
$ |
$ |
|||||||
$ |
$ |
|||||||
The following table presents future lease payments under noncancelable operating and finance leases as of January 31, 2021. Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.
Operating Leases |
Finance Lease |
|||||||
Remainder of fiscal year 2021 |
$ |
$ |
||||||
2022 |
||||||||
2023 |
||||||||
2024 |
||||||||
2025 |
||||||||
Thereafter |
||||||||
Total lease payments |
||||||||
Imputed interest |
||||||||
Lease liabilities |
$ |
$ |
||||||
The following table presents lease costs for the three-month periods ended January 31, 2021 and February 2, 2020.
Three Months Ended |
||||||||
January 31, 2021 |
February 2, 2020 |
|||||||
Operating lease costs |
$ |
$ |
||||||
Short-term lease costs |
$ |
$ |
||||||
Variable lease costs |
$ |
$ |
||||||
Interest on lease liabilities |
$ |
$ |
||||||
Amortization of ROU assets |
$ |
$ |
||||||
Presented below is other information related to our operating and finance leases.
Three Months Ended |
||||||||
Supplemental cash flows information: |
January 31, 2021 |
February 2, 2020 |
||||||
Operating cash flows used for operating leases |
$ |
$ |
||||||
Operating cash flows used for finance leases |
$ |
$ |
||||||
Financing cash flows used for finance leases |
$ |
$ |
||||||
ROU assets obtained in exchange for operating lease obligations |
$ |
$ |
||||||
ROU assets obtained in exchange for finance lease obligations |
$ |
$ |
||||||
As of |
||||||||||||||||
January 31, 2021 |
October 31, 2020 |
|||||||||||||||
Classification |
Weighted-average remaining lease term (in years) |
Weighted-average discount rate |
Weighted-average remaining lease term (in years) |
Weighted-average discount rate |
||||||||||||
Operating leases |
% |
% |
||||||||||||||
Finance lease |
% |
|||||||||||||||
NOTE 9 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. Total share-based compensation costs for the three-month periods ended January 31, 2021 and February 2, 2020, were $1.3 million and $1.4 million, respectively. No no
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of to four years . The fair value of the awards is determined on the date of grant, based on the closing price of our common stock. There were 541,200 restricted stock awards granted during the three-month period ended January 31, 2021, with a weighted-average grant-date fair value of $11.13 per share, and there were 522,000 restricted stock awards granted during the three-month period ended February 2, 2020, with a weighted-average grant-date fair value of $15.26 per share. As of January 31, 2021, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $10.6 million. That cost is expected to be recognized over a weighted-average amortization period of 3.0 years. As of January 31, 2021, there were 1,059,001 shares of restricted stock outstanding.
Stock Options
Option awards generally vest in to four years , and have a ten-year contractual term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant-date fair values of options are based on closing prices of our common stock on the dates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
There were no 0.7 million and $2.8 million for the three-month periods ended January 31, 2021 and February 2, 2020, respectively. As of January 31, 2021, the total unrecognized compensation cost related to unvested option awards was approximately $0.3 million. That cost is expected to be recognized over a weighted-average amortization period of 1.6 years.
Information on outstanding and exercisable option awards as of January 31, 2021, is presented below.
Options |
Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
|||||||
Outstanding at January 31, 2021 |
$ |
$ |
|||||||||
Exercisable at January 31, 2021 |
$ |
$ |
|||||||||
NOTE 10 - INCOME TAXES
We calculate our provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
The effective tax rate of 23.6 % in the three-month period ended January 31, 2021 differs from the U.S. statutory rate of 21 % primarily due to the non-recognition of the tax benefit of losses that, in certain jurisdictions, have been offset by valuation allowances and non-U.S. pre-tax income being taxed at higher statutory rates in the non-U.S. jurisdictions that were partially offset by the benefits of investment credits in a foreign jurisdiction.
The effective tax rate of 45.4 % differs from the U.S. statutory rate of 21.0 % in the three-month period ended February 2, 2020, primarily due to the non-recognition of the tax benefit of losses that, in certain jurisdictions, have been offset by valuation allowances, and the establishment of a valuation allowance for a loss carryforward in a non-U.S. jurisdiction, which were partially offset by the benefit of a tax holiday and investment credits in certain foreign jurisdictions.
Valuation allowances, in jurisdictions with historic losses, eliminate the current tax benefit of losses in these jurisdictions where, based on the weight of information available to us, we determined that it is more likely than not that the tax benefits will not be realized. In the three-month period ended February 2, 2020, as a result of the reassessment of the aforementioned available information, we established a valuation allowance of $2.1 million against a non-U.S. based loss-carryforward deferred tax asset that is not more likely than not to be realized.
Unrecognized tax benefits related to uncertain tax positions were $2.6 million and $2.7 million at January 31, 2021 and October 31, 2020, respectively, of which $1.9 million and $2.0 million, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1
We were granted a five-year tax holiday in Taiwan that expired on December 31, 2019 . This tax holiday reduced foreign taxes by $0.1 million in the three-month period ended February 2, 2020; per share impact was immaterial.
NOTE 11 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
Three Months Ended |
||||||||
January 31, 2021 |
February 2, 2020 |
|||||||
Net income attributable to Photronics, Inc. shareholders |
$ |
$ |
||||||
Effect of dilutive securities |
||||||||