UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended January 30, 2022
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 61,729,440
shares of common stock outstanding as of March 3, 2022.
PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
January 30, 2022
|
3
|
||
| 4 |
||
|
PART I.
|
FINANCIAL INFORMATION
|
|
|
|
||
|
Item 1.
|
5
|
|
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
9
|
||
|
10
|
||
|
Item 2.
|
25
|
|
|
Item 3.
|
31
|
|
|
Item 4.
|
32
|
|
|
|
||
|
PART II.
|
OTHER INFORMATION
|
|
|
Item 1.
|
32
|
|
|
Item 2.
|
32
|
|
|
Item 6.
|
33
|
Definitions of certain terms and acronyms that may appear in this report are provided below.
|
AMOLED
|
Active-matrix organic light-emitting diode. A technology used in mobile devices.
|
|
ASC
|
Accounting Standards Codification
|
|
ASP
|
Average Selling Price
|
|
ASU
|
Accounting Standards Update
|
|
Chip stacking
|
Placement of a computer chip on top of another computer chip, resulting in the reduction of the distance between the chips in a circuit board
|
|
COVID-19
|
Covid virus 2019, an infectious disease that was declared a pandemic by the World Health Organization in March 2020
|
|
DNP
|
Dai Nippon Printing Co., Ltd.
|
|
EUV
|
A wafer lithography technology using the industry standard extreme ultraviolet (EUV) wavelength. EUV photomasks function by selectively reflecting or blocking light, in contrast to conventional photomasks which function by selectively
transmitting or blocking light
|
|
Exchange Act
|
The Securities Exchange Act of 1934 (as amended)
|
|
FASB
|
Financial Accounting Standards Board
|
|
Form 10-K
|
Annual Report on Form 10-K
|
|
Form 10-Q
|
Quarterly Report on Form 10-Q
|
|
FPDs
|
Flat-panel displays, or “displays”
|
|
Generation
|
In reference to flat panel displays, refers to the size range of the underlying substrate to which a photomask is applied. Higher generation (or “G”) numbers represent larger substrates
|
|
High-end (photomasks)
|
For IC, photomasks that are 28nm or smaller; for FPD, AMOLED, G10.5+, and LTPS photomasks
|
|
ICs
|
Integrated circuits, or semiconductors
|
|
LIBOR
|
London Inter-Bank Offered Rate
|
|
LTM (free cash flow)
|
Last Twelve Months Free Cash Flow
|
|
LTPS
|
Low-Temperature Poly Silicon, a polycrystalline silicon synthesized at relatively low temperatures; polycrystalline silicon in thin-film transistors (TFTs) are used in liquid-crystal display (LCD) flat panels and to drive organic
light-emitting diode (OLED) displays
|
|
MLA
|
Master Lease Agreement
|
|
Optical proximity correction
|
A photolithography enhancement technique applied to compensate for the limitations of light to maintain the edge placement integrity of an original design, after processing, into the etched image on a silicon wafer
|
|
PDMCX
|
Xiamen American Japan Photronics Mask Co., Ltd., a joint venture of Photronics and DNP
|
|
Phase-shift photomasks
|
Photomasks that take advantage of the interference generated by phase differences to improve image resolution in photolithography
|
|
RMB
|
Chinese renminbi
|
|
ROU (assets)
|
Right-of-use asset
|
|
SEC
|
Securities and Exchange Commission
|
|
Securities Act
|
The Securities Act of 1933 (as amended)
|
|
U.S. GAAP
|
Accounting principles generally accepted in the United States of America
|
|
Wafer
|
A wafer, or silicon wafer, is a thin slice of semiconductor material that, in the fabrication of microelectronics, serves as the substrate for microelectronic devices built in and upon the wafer
|
This Form 10-Q contains forward-looking statements, as defined by the 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”, “may”, “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, conferences, or by other means, we may discuss, publish, disseminate, or otherwise make available, forward-looking statements, including statements contained within Part I, 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 us 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 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 Form 10-Q 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 Form 10-K, as well as any
additional risk factors we may provide in our Quarterly Reports on Form 10-Q.
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
|
January 30,
2022
|
October 31,
2021
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Accounts receivable, net of allowance of $
|
|
|||||||
|
Inventories
|
|
|
||||||
|
Other current assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Property, plant and equipment, net
|
|
|
||||||
|
Deferred income taxes
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES AND EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
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
|
|
|
||||||
|
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 30,
2022
|
January 31,
2021
|
|||||||
|
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 30,
2022
|
January 31,
2021
|
|||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Other comprehensive (loss) income, net of tax of $
|
||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
|
|||||
|
Other
|
|
(
|
)
|
|||||
|
Net other comprehensive (loss) income
|
(
|
)
|
|
|||||
|
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 30, 2022
|
||||||||||||||||||||||||||||||||
|
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, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Other comprehensive (loss) income
|
-
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Shares issued under equity plans
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
| Contribution from noncontrolling interest |
- | |||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
| Retirement of treasury stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
|
Balance at January 30, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
|
Three
Months Ended January 31, 2021
|
||||||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
|
Retained
|
Treasury
|
Accumulated
Other
Comprehensive
|
Non-
controlling
|
Total
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Stock
|
Income
|
Interests
|
Equity
|
|||||||||||||||||||||||||
|
Balance at October 31, 2020
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Other comprehensive income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Shares issued under equity plans
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Purchase of treasury stock
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
|
Balance at January 31, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three
Months Ended
|
||||||||
|
January 30,
2022
|
January 31,
2021
|
|||||||
|
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:
|
||||||||
|
Repayments of debt
|
(
|
)
|
(
|
)
|
||||
|
Purchases of treasury stock
|
(
|
)
|
(
|
)
|
||||
|
Contribution from noncontrolling interest
|
||||||||
|
Proceeds from debt
|
|
|
||||||
|
Proceeds from share-based arrangements
|
|
|
||||||
|
Net settlements of restricted stock awards
|
(
|
)
|
(
|
)
|
||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
||||
|
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
|
(
|
)
|
|
|||||
|
Net increase (decrease) 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
|
|
|
|
|
||||
| Less: Ending restricted cash | ||||||||
| Cash and cash equivalents at end of period | $ |
$ |
||||||
|
Supplemental disclosure of non-cash information:
|
||||||||
|
Accruals 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 ), , China (2 ), the United States (3 ), and Europe (2 ).
The accompanying unaudited condensed consolidated financial statements (“the financial statements”) have been prepared in
accordance with U.S. GAAP 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 U.S. GAAP 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. These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes
included in our Form 10-K for the fiscal year ended October 31, 2021, where we discuss and provide additional information about our accounting policies and the methods and assumptions used in our estimates.
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that
affect amounts reported in them. Our estimates, including those on the impact of COVID-19, are based on historical experience and on various assumptions that we believe 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.
Our business is typically impacted during the
first quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during this period. Operating results for the interim period are not necessarily
indicative of the results that may be expected for the fiscal year ending October 31, 2022. 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, 2021.
NOTE 2 - INVENTORIES
|
January 30,
2022
|
October 31,
2021
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
|
January 30,
2022
|
October 31,
2021
|
|||||||
|
Land
|
$
|
|
$
|
|
||||
|
Buildings and improvements
|
|
|
||||||
|
Machinery and equipment
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
Furniture, fixtures and office equipment
|
|
|
||||||
|
Construction in progress
|
|
|
||||||
|
|
|
|||||||
|
Accumulated depreciation and amortization
|
(
|
)
|
(
|
)
|
||||
|
$
|
|
$
|
|
|||||
ROU assets resulting from finance leases are included in the table above as follows:
|
|
January 30,
2022
|
October 31,
2021
|
||||||
|
Machinery and equipment
|
$
|
|
$
|
|
||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
||||
|
|
$
|
|
$
|
|
||||
Depreciation and amortization expense for property, plant and equipment (including amortization expense for ROU assets) was $20.7 million and $22.6 million for the
three-month periods ended January 30, 2022, and January 31, 2021.
NOTE 4 - PDMCX JOINT VENTURE
In January 2018, Photronics, Inc. through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”,
“Photronics”, “us”, or “our”), and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99 % interest in our IC business in Xiamen, China. The joint venture, which we refer to as “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. In 2020, in combination with local financing obtained by PDMCX, Photronics and DNP fulfilled their investment obligations under the PDMCX
operating agreement (“the Agreement”). As discussed in Note 5, liens were granted to the local financing entity on property, plant and
equipment with a January 30, 2022, total carrying value of $88.4 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 twenty percent 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 income from the operations of PDMCX of $1.9 million during the three-month period ended January 30, 2022, and a loss of $0.1 million during the
three-month period ended January 31, 2021, 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 30, 2022, was $81.3 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 30,
2022
|
October 31,
2021
|
|||||||||||||||
|
Classification
|
Carrying
Amount
|
Photronics
Interest
|
Carrying
Amount
|
Photronics
Interest
|
||||||||||||
|
Current assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Noncurrent assets
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Current liabilities
|
|
|
|
|
||||||||||||
|
Noncurrent liabilities
|
|
|
|
|
||||||||||||
|
Total liabilities
|
|
|
|
|
||||||||||||
|
Net assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
NOTE 5 - DEBT
The tables below provide information on our long-term debt.
|
As of January 30,
2022
|
Xiamen
Project Loans
|
Xiamen
Working
Capital Loans
|
Hefei
Equipment
Loan
|
Finance Leases
|
Total
|
|||||||||||||||
|
Principal due:
|
||||||||||||||||||||
|
Next 12 months
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Months 13 – 24
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
|
Months 25 – 36
|
|
|
|
|
|
|||||||||||||||
|
Months 37 – 48
|
|
|
|
|
|
|||||||||||||||
|
Long-term debt
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||
| Total |
$ | $ | $ | $ | $ | |||||||||||||||
|
|
||||||||||||||||||||
|
Interest rate at balance sheet date
|
|
%
|
|
%
|
|
%
|
(3) | |||||||||||||
|
Basis spread on interest rates
|
|
|
(
|
)
|
N/A
|
|||||||||||||||
|
Interest rate reset
|
Quarterly
|
Monthly/Annually
|
Annually
|
N/A
|
||||||||||||||||
|
Maturity date
|
|
|
|
(3) | ||||||||||||||||
|
Periodic payment amount
|
|
|
|
(3) | ||||||||||||||||
|
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 7 for periodic
payment amounts.
(4) Amount represents the
carrying amount of the related right-of-use asset, in which the lessors have a secured interest.
|
As of October 31,
2021
|
Xiamen
Project Loans
|
Xiamen
Working
Capital
Loans
|
Hefei
Equipment
Loan
|
Finance
Leases
|
Total
|
|||||||||||||||
|
Principal due:
|
||||||||||||||||||||
|
Next 12 months
|
$
|
|
$
|
|
$ |
$ |
$
|
|
||||||||||||
|
Months 13 – 24
|
$
|
|
$
|
|
$ | $ |
$
|
|
||||||||||||
|
Months 25 – 36
|
|
|
|
|||||||||||||||||
|
Months 37 – 48
|
|
|
|
|||||||||||||||||
|
Months 49 – 60
|
|
|
|
|||||||||||||||||
|
Long-term debt
|
$
|
|
$
|
|
$ |
$ |
$
|
|
||||||||||||
| Total |
$ | $ | $ |
$ | $ | |||||||||||||||
|
|
||||||||||||||||||||
|
Interest rate at balance sheet date
|
|
%
|
|
%
|
% | (3) | ||||||||||||||
|
Basis spread on interest rates
|
|
|
( |
) | N/A | |||||||||||||||
| Interest rate reset | Quarterly |
Monthly/Annually |
Annually |
N/A | ||||||||||||||||
| Maturity date |
(3) | |||||||||||||||||||
| Periodic payment amount |
(3) | |||||||||||||||||||
| 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 7 for interest rates on lease liabilities, maturity dates, and periodic payment amounts.
(3)
(4) Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests.
Xiamen Project Loans
In November 2018, PDMCX obtained approval to borrow 345.0 million RMB from the Industrial and Commercial Bank of China. From November 2018 through July 2020, PDMCX
entered into separate loan agreements (the “Project Loans”) for the entire approved amount and, as of January 30, 2022, 220.3 million RMB ($34.6 million) remained outstanding. The Project Loans were used to finance certain capital expenditures at the PDMCX facility and are collateralized by liens granted on the land use right, building, and
certain equipment located at the facility. The interest rates on the Project Loans are variable (based on the RMB Loan Prime Rate of the National Interbank Funding Center), and 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 and duration. The Project Loans are subject to covenants and provisions, certain of which relate to the
assets pledged as security for the loans, all of which we were in compliance with at January 30, 2022.
Xiamen Working Capital Loans
In November 2018, PDMCX obtained approval 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. This facility is subject to annual reviews and extension. Unless
extended, this facility will expire in . As of January 30, 2022, PDMCX had 28.8 million RMB ($4.5 million) outstanding against the approval. The interest rates are variable, 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 and duration.
In October 2020, our Hefei, China, facility
was approved to borrow 200 million
RMB (approximately $31.4 million,
at the balance sheet date) from the China Construction Bank Corporation. This credit facility is subject to annual reviews and extension, with the most recent extension set to expire in . The loan proceeds were used to fund the purchase of two lithography tools at the Hefei facility. As of January
30, 2022, we had borrowed 135.7 million RMB ($21.3 million) against this approval (all of which was then outstanding), and 64.3 million RMB ($10.1 million) remained available to borrow. 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 is subject to covenants and
provisions, certain of which relate to the assets pledged as security for the loan, including covenants for the ratio of total liabilities to total assets and the ratio of current assets to current liabilities, all of which we were in
compliance with at January 30, 2022.
Finance Leases
In February 2021, we entered into a
five-year $7.2 million
finance lease for a high-end inspection tool and, in December 2020, we entered into a $35.5 million lease for a high-end lithography tool. See Note 7 for additional information on
these leases.
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 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 30, 2022), 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 30, 2022. The interest rate on the Credit Agreement (1.11 % at January 30, 2022) is based on our total leverage ratio at 1-month
LIBOR plus a spread, as defined in the Credit Agreement.
NOTE 6 - 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 are 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 government
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 was 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 $11.8 million are included in Other current assets, and contract liabilities of $19.5 million and $5.2 million are included in Accrued liabilities and Other
liabilities, respectively, in our January 30, 2022, condensed consolidated
balance sheet. Our October 31, 2021, condensed consolidated balance sheet includes contract assets of $9.9 million, included in Other current assets, and contract liabilities of $14.7 million and $5.2 million are included in Accrued liabilities and Other
liabilities, respectively. We did no 4.2 million of revenue from the settlement of contract liabilities that existed at the beginning of the three-month period ended January 30, 2022, and recognized $2.5 million of revenue in the respective prior year period, that related to the settlement of contract liabilities that existed at the beginning of that
period.
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 an allowance for credit losses. In the event that an amount is determined to be uncollectible, we charge the allowance for credit losses and derecognize the related receivable. We did not incur any credit losses on our
accounts receivable during the three-month periods ended January 30, 2022, or January 31, 2021.
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
have 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 30, 2022, and January 31, 2021, disaggregated by product type, geographic origin, and timing of recognition.
|
Three Months Ended
|
||||||||
| |
January 30, 2022
|
January 31, 2021
|
||||||
| Revenue by Product Type |
||||||||
|
IC
|
||||||||
|
High-end
|
$
|
|
$
|
|
||||
|
Mainstream
|
|
|
||||||
|
Total IC
|
$
|
|
$
|
|
||||
|
FPD
|
||||||||
|
High-end
|
$
|
|
$
|
|
||||
|
Mainstream
|
|
|
||||||
|
Total FPD
|
$
|
|
$
|
|
||||
|
$
|
|
$
|
|
|||||
|
Three Months Ended
|
||||||||
| |
January 30, 2022
|
January 31, 2021
|
||||||
| Revenue by Geographic Origin* |
||||||||
|
Taiwan
|
$
|
|
$
|
|
||||
|
China
|
|
|
||||||
|
Korea
|
|
|
||||||
|
United States
|
|
|
||||||
|
Europe
|
|
|
||||||
|
Other
|
|
|
||||||
|
$
|
|
$
|
|
|||||
* This table disaggregates revenue by the location in which it was earned.
|
Three Months Ended
|
||||||||
| |
January 30, 2022
|
January 31, 2021
|
||||||
| Revenue by Timing of Recognition |
||||||||
|
Over time
|
$
|
|
$
|
|
||||
|
At a point in time
|
|
|
||||||
|
$
|
|
$
|
|
|||||
Contract Costs
We pay commissions to third-party sales agents for certain sales they procure on our behalf. 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 do 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 contract obtainment costs as assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a short period of time, our backlog of orders has
historically been to
for FPD photomasks and to
of backlog for IC photomasks. However, the demand for some IC photomasks has expanded beyond the industry’s capacity to supply them within the traditional time
period, thus the backlog in some cases can expand to as long as 2 to 3 months . 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 7 - LEASES
Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is or contains a lease
on the earlier of the date of the agreement or the date on which we commit to entering the agreement. Our evaluation considers whether the agreement 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. As allowed under ASC Topic 842 – “Leases” (“Topic 842”), we have elected not to apply the recognition requirements to leases that, at their commencement dates, have lease terms of twelve months or less
and do not include options to purchase their underlying assets that we are reasonably certain to exercise. The present value of lease payments over the term of the lease provides the basis for the initial measurement of ROU assets and their related
lease liabilities. We measure finance lease liabilities using the rates implicit in the leases; operating lease liabilities are measured using our incremental borrowing rates, for collateralized loans, at the commencement date. Variable lease
payments, other than those that are dependent on an index or on a rate, are not included in the measurement of ROU assets and their related lease liabilities. Lease terms include extension periods if the lease agreement includes an option to extend
the lease that we are reasonably certain to exercise. As allowed under Topic 842, 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 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 buyout option to purchase the tool for $2.4 million. If we do not exercise the early buyout 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 terms; 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 buyout option, our lease liability reflects such exercise and we have classified the lease as a
finance lease. The interest rate implicit in the lease is 1.08 %.
In December 2020, we entered into a five-year
$35.5 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from
$0.04 million during the first three months to $0.6 million for the following nine months, to be followed by forty-eight monthly payments of $0.5
million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool for $14.1
million. If we do not exercise the early buyout 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 buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58 %. The lease agreement incorporates the covenants included in our Corporate Credit Agreement, which are detailed in Note 5, and includes a cross-default provision for any agreement or instrument with an
outstanding, committed balance greater than $5.0 million in which we are the indebted party.
The following table provides information on operating and finance leases included in our consolidated balance sheets.
|
Classification
|
January 30,
2022
|
October 31,
2021
|
||||||
|
ROU Assets – Operating Leases
|
||||||||
|
|
$
|
|
$
|
|
||||
|
ROU Assets – Finance Leases
|
||||||||
|
|
$
|
|
$
|
|
||||
|
Lease Liabilities – Operating Leases
|
||||||||
|
|
$
|
|
$
|
|
||||
|
|
|
|
||||||
|
$
|
|
$
|
|
|||||
| < | ||||||||