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
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For the quarterly period ended July 31, 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___ to ___
Commission file number 0-15451
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code
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(
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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PREFERRED STOCK PURCHASE RIGHTS
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N/A
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N/A
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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):
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☒
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Accelerated Filer
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☐
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Non-Accelerated Filer
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☐
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Smaller Reporting Company
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Emerging growth company
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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 61,689,388 shares of
common stock outstanding as of September 1, 2022.
PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
July 31, 2022
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3
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4
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| PART I. | FINANCIAL INFORMATION | |
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Item 1.
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5
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5
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6
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7
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8
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10
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11
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Item 2.
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28
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Item 3.
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35
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Item 4.
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36
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PART II.
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OTHER INFORMATION
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Item 1.
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37
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Item 2.
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37
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Item 6.
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38
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Definitions of certain terms and acronyms that may appear in this report are provided below.
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AMOLED
|
Active-matrix organic light-emitting diode. A technology used in mobile devices.
|
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ASC
|
Accounting Standards Codification
|
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ASP
|
Average Selling Price
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ASU
|
Accounting Standards Update
|
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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
|
Coronavirus 2019, an infectious disease that was declared a pandemic by the World Health Organization in March 2020
|
|
DNP
|
Dai Nippon Printing Co., Ltd.
|
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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
|
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Exchange Act
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The Securities Exchange Act of 1934 (as amended)
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FASB
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Financial Accounting Standards Board
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Form 10-K
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Annual Report on Form 10-K
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Form 10-Q
|
Quarterly Report on Form 10-Q
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FPDs
|
Flat-panel displays, or “displays”
|
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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
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High-end (photomasks)
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For IC, photomasks that are 28nm or smaller; for FPD, AMOLED, G10.5+, and LTPS photomasks
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ICs
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Integrated circuits, or semiconductors
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LIBOR
|
London Inter-Bank Offered Rate
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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
|
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MLA
|
Master Lease Agreement
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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
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PDMCX
|
Xiamen American Japan Photronics Mask Co., Ltd., a joint venture of Photronics and DNP
|
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Phase-shift photomasks
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Photomasks that take advantage of the interference generated by phase differences to improve image resolution in photolithography
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RMB
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Chinese renminbi
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ROU (assets)
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Right-of-use asset
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SEC
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Securities and Exchange Commission
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Securities Act
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The Securities Act of 1933 (as amended)
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Sputtering
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The bombardment of a material with energetic particles to cause microscopic particles of the material to eject from its surface.
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U.S. GAAP
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Accounting principles generally accepted in the United States of America
|
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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 Part I, Item
1A “Risk Factors” of our Form 10-K, as well as any additional risk factors we may provide in Part II, Item 1A of our Quarterly Reports on Form 10-Q.
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
|
July 31,
2022
|
October 31,
2021
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|||||||
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ASSETS
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||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
|
$
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$
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|
||||
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Accounts receivable, net of allowance of $
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|
|||||||
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Inventories
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||||||
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Other current assets
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||||||
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Total current assets
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||||||
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Property, plant and equipment, net
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||||||
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Deferred income taxes
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||||||
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Other assets
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||||||
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Total assets
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$
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$
|
|
||||
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LIABILITIES AND EQUITY
|
||||||||
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Current liabilities:
|
||||||||
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Current portion of long-term debt
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$
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$
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||||
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Accounts payable
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||||||
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Accrued liabilities
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Total current liabilities
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Long-term debt
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Other liabilities
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||||||
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Total liabilities
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||||||
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Commitments and contingencies
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||||||||
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Equity:
|
||||||||
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Preferred stock, $
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||||||
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Common stock, $
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||||||
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Additional paid-in capital
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|
||||||
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Retained earnings
|
|
|
||||||
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Accumulated other comprehensive (loss) income
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(
|
)
|
|
|||||
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Total Photronics, Inc. shareholders’ equity
|
|
|
||||||
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Noncontrolling interests
|
|
|
||||||
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Total equity
|
|
|
||||||
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Total liabilities and equity
|
$
|
|
$
|
|
||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
July 31,
2022
|
August 1,
2021
|
July 31,
2022
|
August 1,
2021
|
|||||||||||||
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Revenue
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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Cost of goods sold
|
|
|
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|
||||||||||||
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Gross profit
|
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||||||||||||
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Operating expenses:
|
||||||||||||||||
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Selling, general and administrative
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||||||||||||
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Research and development
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Total operating expenses
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||||||||||||
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Other operating (loss) income, net
|
( |
) | ( |
) | ||||||||||||
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Operating income
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|
||||||||||||
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Non-operating income (expense):
|
||||||||||||||||
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Foreign currency transactions impact, net
|
|
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|
||||||||||||
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Interest expense, net of subsidies
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(
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)
|
(
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)
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(
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)
|
(
|
)
|
||||||||
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Interest income and other income and expense, net
|
|
|
|
|
||||||||||||
|
Income before income tax provision
|
|
|
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|
||||||||||||
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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
|
Nine
Months Ended
|
|||||||||||||||
|
July 31,
2022
|
August 1,
2021
|
July 31,
2022
|
August 1,
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 July 31, 2022
|
||||||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Loss |
Non-
controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
|
Balance at May 1, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Shares issued under equity plans
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Balance at July 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||
|
Three
Months Ended August 1, 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 May 2, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Shares issued under equity plans
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Purchase of treasury stock
|
|
|
|
( |
) | ( |
) | |||||||||||||||||||||||||
|
Retirement of treasury stock
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
|
Balance at August 1, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
|
Nine
Months Ended July 31, 2022
|
||||||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Non-
controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
|
Balance at October 31, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Shares issued under equity plans
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Contribution from noncontrolling interest
|
- | |||||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
|
Retirement of treasury stock
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|
|
|
||||||||||||||||||||
|
Balance at July 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||
|
Nine
Months Ended August 1, 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
|
-
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
|
Retirement of treasury stock
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
|
Balance at August 1, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Nine
Months Ended
|
||||||||
|
July 31,
2022
|
August 1,
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
|
(
|
)
|
(
|
)
|
||||
|
Contributions from noncontrolling interest
|
||||||||
|
Proceeds from share-based arrangements
|
|
|
||||||
|
Proceeds from long-term debt
|
||||||||
|
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 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 disclosures 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 FPDs, and are used as masters to transfer circuit patterns onto
semiconductor wafers and FPD substrates during the fabrication of ICs, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We operate 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 periods are not necessarily indicative of the results
that may be expected for the fiscal year ending October 31, 2022.
NOTE 2 - INVENTORIES
|
July 31,
2022
|
October 31,
2021
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Presented below are the components of Property, plant and equipment, net at the balance
sheet dates.
|
July 31,
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
|
(
|
)
|
(
|
)
|
||||
|
$
|
|
$
|
|
|||||
Information on ROU assets resulting from finance leases, at the balance sheet dates, is presented below.
|
|
July 31,
2022
|
October 31,
2021
|
||||||
|
Machinery and equipment
|
$
|
|
$
|
|
||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
||||
|
|
$
|
|
$
|
|
||||
The
following table presents depreciation expense (including the amortization of ROU assets) related to property, plant and equipment incurred during the reporting periods.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
July 31,
2022
|
August 1,
2021
|
July 31,
2022
|
August 1,
2021
|
|||||||||||||
| Depreciation expense | $ |
$ |
$ |
$ |
||||||||||||
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 July 31, 2022, and October 31, 2021,
total carrying value of $79.2 million and $90.1
million, respectively, 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.
The following table presents net income we recorded from the operations of PDMCX during the reporting periods.
|
Three
Months Ended
|
Nine Months Ended | |||||||||||||||
|
|
July 31,
2022
|
August 1,
2021
|
July 31,
2022
|
August 1,
2021
|
||||||||||||
|
Net income from PDMCX
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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 following table presents the carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance
sheets. General creditors of PDMCX do not have recourse to the assets of Photronics (other than the net assets of PDMCX); therefore, our maximum exposure to loss from PDMCX is our interest in the carrying amount of the net assets of the joint
venture.
|
July 31,
2022
|
October 31,
2021
|
|||||||||||||||
|
Classification
|
Carrying
Amount
|
Photronics
Interest
|
Carrying
Amount
|
Photronics
Interest
|
||||||||||||
|
Current assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Noncurrent assets
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||