UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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 January 29, 2023
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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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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☐ | Smaller Reporting Company |
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 62,474,604 shares of
common stock outstanding as of March 2, 2023.
PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
January 29, 2023
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3
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4
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| PART I. | FINANCIAL INFORMATION | 5 |
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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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9
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10
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Item 2.
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24
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Item 3.
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32
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Item 4.
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33
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PART II.
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34 |
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Item 1.
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34
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| Item 1A. |
Risk Factors |
34 |
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Item 2.
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34
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Item 6.
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35
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Definitions of certain terms and acronyms that may appear in this report are provided below.
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AMOLED
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Active-matrix organic light-emitting diode. A technology used in mobile devices.
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Application-specific IC
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An integrated circuit customized for a particular use, rather than intended for general-purpose use
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ASC
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Accounting Standards Codification
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ASP
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Average Selling Price
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ASU
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Accounting Standards Update
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Chip stacking
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Placement of an integrated circuit on top of another integrated circuit, resulting in the reduction of the distance between the chips in a circuit board
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COVID-19
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Covid virus 2019, an infectious disease that was declared a pandemic by the World Health Organization in March 2020
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DNP
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Dai Nippon Printing Co., Ltd.
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EUV
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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
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Quarterly Report on Form 10-Q
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FPDs
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Flat-panel displays, or “displays”
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Generation
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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
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London Inter-Bank Offered Rate
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LTPS
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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
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Master Lease Agreement
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Optical proximity correction
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A photolithography enhancement technique applied to compensate for the limitations of light to maintain the edge placement integrity of an original design, imaged onto a silicon wafer, for further processing
to an etched pattern.
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PDMCX
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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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Pure-play foundry
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A company that does not produce a significant volume of IC products of its own design, but rather operates IC fabrication plants dedicated to producing ICs for other companies
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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
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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
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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)
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January 29,
2023
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October 31,
2022
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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$
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Short-term investments
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||||||||
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Accounts receivable, net of allowance of $
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Inventories
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Other current assets
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Total current assets
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Property, plant and equipment, net
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Deferred income taxes
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Other assets
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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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||||||||
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Current liabilities:
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||||||||
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Current portion of long-term debt
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$
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$
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Accounts payable
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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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Total liabilities
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Commitments and contingencies
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Equity:
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||||||||
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Preferred stock, $
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Common stock, $
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Additional paid-in capital
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Retained earnings
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Accumulated other comprehensive loss
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(
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)
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(
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)
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||||
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Total Photronics, Inc. shareholders’ equity
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||||||
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Noncontrolling interests
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Total equity
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||||||
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Total liabilities and equity
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$
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$
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||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
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Three
Months Ended
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||||||||
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January 29,
2023
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January 30,
2022
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Revenue
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$
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$
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Cost of goods sold
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Gross profit
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Operating expenses:
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Selling, general, and administrative
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Research and development
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Total operating expenses
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Operating income
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Other income (expense):
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Foreign currency transactions impact, net
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(
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)
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Interest income and other income, net
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Interest expense
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(
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)
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(
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)
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Income before income tax provision
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Income tax provision
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Net income
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||||||
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Net income attributable to noncontrolling interests
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Net income attributable to Photronics, Inc. shareholders
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$
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$
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Earnings per share:
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Basic
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$
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$
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Diluted
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$
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$
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Weighted-average number of common shares outstanding:
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||||||||
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Basic
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||||||
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Diluted
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||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three
Months Ended
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||||||||
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January 29,
2023
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January 30,
2022
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|||||||
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Net income
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$
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$
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||||
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Other comprehensive (loss) income, net of tax of $
|
||||||||
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Foreign currency translation adjustments
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(
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)
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|||||
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Other
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(
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)
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Net other comprehensive (loss) income
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(
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)
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|||||
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Comprehensive income
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||||||
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Less: comprehensive income attributable to noncontrolling interests
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||||||
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Comprehensive income attributable to Photronics, Inc. shareholders
|
$
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$
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|
||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three
Months Ended January 29, 2023
|
||||||||||||||||||||||||||||||||
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Photronics, Inc. Shareholders
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||||||||||||||||||||||||||||||||
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Additional
Paid-in
Capital
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Retained
Earnings
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Treasury
Stock
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Accumulated
Other
Comprehensive
Income (Loss)
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Non-
controlling
Interests
|
Total Equity
|
|||||||||||||||||||||||||||
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Common Stock
|
||||||||||||||||||||||||||||||||
| Shares |
Amount |
|||||||||||||||||||||||||||||||
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Balance at October 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
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$
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(
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)
|
$
|
|
$
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||||||||||||||||
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Net income
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-
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||||||||||||||||||||||||
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Other comprehensive income
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-
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||||||||||||||||||||||||
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Shares issued under equity plans
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(
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)
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(
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)
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||||||||||||||||||||||
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Share-based compensation expense
|
-
|
|
|
|
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|
|
|
||||||||||||||||||||||||
|
Balance at January 29, 2023
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||
|
Three
Months Ended January 30, 2022
|
||||||||||||||||||||||||||||||||
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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 |
|||||||||||||||||||||||||||||||
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Balance at October 31, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
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Net income
|
-
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
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Other comprehensive (loss) income
|
-
|
|
|
|
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(
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)
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(
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)
|
||||||||||||||||||||||
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Shares issued under equity plans
|
|
|
|
|
|
|
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|
||||||||||||||||||||||||
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Share-based compensation expense
|
-
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|
|
|
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|
|
|
||||||||||||||||||||||||
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Contribution from noncontrolling interest
|
- | |||||||||||||||||||||||||||||||
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Purchase of treasury stock
|
|
|
|
|
(
|
)
|
|
|
(
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)
|
||||||||||||||||||||||
|
Retirement of treasury stock
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
|
Balance at January 30, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three Months Ended
|
||||||||
|
January 29,
2023
|
January 30,
2022
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
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Depreciation and amortization
|
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|
||||||
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Share-based compensation
|
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|
||||||
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Changes in assets and liabilities:
|
||||||||
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Accounts receivable
|
(
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)
|
|
|||||
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Inventories
|
|
(
|
)
|
|||||
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Other current assets
|
(
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)
|
(
|
)
|
||||
|
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 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 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 ICs 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, 2022, 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 facts and circumstances 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, 2023.
NOTE 2 – SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. government securities and are classified as
available-for-sale. We classify available-for-sale securities on our consolidated balance sheet as follows:
| - |
Maturing within three months or less from the date of purchase
|
Cash and cash equivalents
|
|
-
|
Maturing, as of the date of purchase, more than three months, but
with remaining maturities of less than one year, from the balance sheet date
|
Short-term investments
|
|
-
|
Maturing one year or more from the balance sheet date |
Long-term marketable investments
|
As of January 29, 2023, all of our available-for-sale securities had, at
their dates of purchase, remaining maturities of more than three months, but less than one year, and have been classified as Short-term investments.
Available-for-sale debt investments are reported at fair value, with unrealized gains
or losses (net of tax) reported in Accumulated other comprehensive income. The fair values of our available-for-sale securities are Level 1 measurements, based on quoted prices from active markets for identical assets. In the event of a sale of an
available-for-sale debt investment, we would determine the cost of the investment sold at the specific individual security level, and would include any gain or loss in Interest income and other income, net, where we also report periodic interest
earned and the amortization (accretion) of discounts (premiums) related to these investments. The table below provides information on our available-for-sale debt securities.
|
January 29,
2023
|
October 31,
2022
|
|||||||||||||||||||||||||||||||
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Carrying Value
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Carrying Value
|
|||||||||||||||||||||||||
|
Government securities
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||||
NOTE 3 - INVENTORIES
|
January 29,
2023
|
October 31,
2022
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work in process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
$
|
|
$
|
|
|||||
NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT, NET
Presented below are the components of Property, plant, and equipment, net at the balance
sheet dates.
|
January 29,
2023
|
October 31,
2022
|
|||||||
|
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.
|
|
January 29,
2023
|
October 31,
2022
|
||||||
|
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
|
||||||||
|
January 29,
2023
|
January 30,
2022
|
|||||||
| Depreciation Expense | $ |
$ |
||||||
NOTE 5 - 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 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 6, liens were granted to the local financing entity on property, plant, and equipment with a January 29, 2023, and October 31, 2022, total carrying value of $74.0 million and $70.7 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
|
||||||||
|
|
January 29,
2023
|
January 30,
2022
|
||||||
|
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.
|
January 29,
2023
|
October 31,
2022
|
|||||||||||||||
|
Classification
|
Carrying
Amount
|
Photronics
Interest
|
Carrying
Amount
|
Photronics
Interest
|
||||||||||||
|
Current assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Noncurrent assets
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Current liabilities
|
|
|
|
|
||||||||||||
|
Noncurrent liabilities
|
|
|
|
|
||||||||||||
|
Total liabilities
|
|
|
|
|
||||||||||||
|
Net assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
NOTE 6 - DEBT
The tables below provide information on our long-term debt.
|
As of January 29,
2023
|
Xiamen
Project Loans
|
Finance
Leases
|
Total
|
|||||||||
|
Principal due:
|
||||||||||||
|
Next 12 months
|
$
|
|
$
|
|
$
|
|
||||||
|
Months 13 – 24
|
$
|
|
$
|
|
$
|
|
||||||
|
Months 25 – 36
|
|
|
|
|||||||||
|
Months 37 – 48
|
|
|
|
|||||||||
| Months 49 – 60 |
||||||||||||
|
Long-term debt
|
|
|
|
|||||||||
| Total debt (4) |
$ | $ | $ | |||||||||
|
|
||||||||||||
|
Interest rate at balance sheet date
|
|
%
|
N/A |
|||||||||
|
Basis spread on interest rates
|
|
N/A
|
||||||||||
|
Interest rate reset
|
Quarterly
|
N/A
|
||||||||||
|
Maturity date
|
|
N/A |
||||||||||
|
Periodic payment amount
|
|
|||||||||||
|
Periodic payment frequency
|
|
|
||||||||||
|
Loan collateral (carrying amount)
|
$
|
|
$
|
|
(2) |
|||||||
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
As of October 31,
2022
|
Xiamen
Project Loans
|
Xiamen
Working
Capital Loans
|
Finance
Leases
|
Total
|
||||||||||||
|
Principal due:
|
||||||||||||||||
|
Next 12 months
|
$ | $ | $ | $ | ||||||||||||
|
Months 13 – 24
|
$ | $ | $ | $ | ||||||||||||
|
Months 25 – 36
|
||||||||||||||||
|
Months 37 – 48
|
||||||||||||||||
|
Long-term debt
|
$ | $ | $ |
$
|
|
|||||||||||
|
|
||||||||||||||||
|
Interest rate at balance sheet date
|
% | % | N/A |
|||||||||||||
|
Basis spread on interest rates
|
N/A | |||||||||||||||
| Interest rate reset | Quarterly |
Monthly/Annually |
N/A | |||||||||||||
| Maturity date |
N/A |
|||||||||||||||
| Periodic payment amount |
||||||||||||||||
| Periodic payment frequency |
||||||||||||||||
|
Loan collateral (carrying amount)
|
$
|
|
N/A
|
$ | (2) |
|||||||||||
|
(1)
|
|
|
(2)
|
|
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 29, 2023, 26.4 million RMB ($3.9 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 was 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 as of January 29, 2023. In February 2023, PDMCX repaid the entire outstanding balance of 26.4 million RMB ($3.9 million).
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 extensions, with the most recent
extension set to expire in . In December 2022, we repaid our entire outstanding balance of 25.6 million RMB ($3.6 million). As of
January 29, 2023, PDMCX had no amount 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 related to the amount borrowed was eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provided for such reimbursements up to a prescribed limit and duration.
Finance Leases
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, 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 below, 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.
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 29, 2023), 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 29, 2023. The interest rate on the Credit Agreement (5.52 % at January 29, 2023) is based on our total leverage ratio at one-month LIBOR plus a spread, as defined in the Credit Agreement.
Hefei Equipment Loan
In October
2020, our Hefei, China, facility was approved to borrow 200 million RMB from the China Construction Bank Corporation. In July 2022, we repaid our entire outstanding balance of 120.7 million RMB ($18.0 million). This credit facility was subject to annual reviews and extension; the
most recent extension expired in August 2022 and we did not
apply for an extension. The loan proceeds were used to fund purchases of two lithography tools at the Hefei facility. The interest rate on the loan was variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings were secured by the Hefei
facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan was 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 the time of repayment.
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 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. We did no
The following table provides information about our contract balances at the balance sheet dates.
Classification |
January 29,
2023
|
October 31,
2022
|
||||||
| Contract Assets | ||||||||
|
Other current assets
|
$
|
|
$ |
|
||||
|
Contract Liabilities
|
||||||||
|
Accrued liabilities
|
$ | $ | ||||||
|
Other liabilities
|
||||||||
| $ | $ | |||||||
The
following table presents revenue recognized from contract liabilities that existed at the beginning of the reporting periods.
|
Three Months Ended
|
||||||||
| |
January 29,
2023
|
January 30,
2022
|
||||||
|
Revenue recognized from beginning liability
|
$
|
|
$
|
|
||||
We generally record our accounts receivable at their billed
amounts. All outstanding past due customer invoices are reviewed for collectability 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 29, 2023, or January 30, 2022.
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 collectability 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 29, 2023, and January 30, 2022, disaggregated by product type, geographic origin, and timing of recognition.
|
Three Months Ended
|
||||||||
| |
January 29,
2023
|
January 30,
2022
|
||||||
| Revenue by Product Type |
||||||||
|
IC
|
||||||||
|
High-end
|
$
|
|
$
|
|
||||
|
Mainstream
|
|
|
||||||
|
Total IC
|
$
|
|
$
|
|
||||
|
FPD
|
||||||||
|
High-end
|
$
|
|
$
|
|
||||
|
Mainstream
|
|
|
||||||
|
Total FPD
|
$
|
|
$
|
|
||||
|
$
|
|
$
|
|
|||||
|
Three Months Ended
|
||||||||
| |
January 29,
2023
|
January 30,
2022
|
||||||
| 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
|
||||||||
|
Revenue by Timing of Recognition
|
January 29,
2023
|
January 30,
2022
|
||||||
|
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 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 to three 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 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 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved our current 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. The table below presents information on our share-based compensation expenses for the three-month periods ended January 29, 2023, and January 30, 2022.
| Three Months Ended | ||||||||
|
January 29,
2023
|
January 30,
2022 |
|||||||
|
Expense reported in:
|
||||||||
|
Cost of goods sold
|
$
|
|
$
|
|
||||
|
Selling, general, and administrative
|
|
|
||||||
|
Research and development
|
|
|
||||||
|
Total expense incurred
|
$
|
|
$
|
|
||||
|
Expense by award type:
|
||||||||
|
Restricted stock awards
|
$
|
|
$
|
|
||||
|
Stock options
|
|
|
||||||
|
Employee stock purchase plan
|
|
|
||||||
|
Total expense incurred
|
$
|
|
$
|
|
||||
|
Income tax benefits of share-based compensation
|
$
|
|
$
|
|
||||
|
Share-based compensation cost capitalized
|
$
|
|
$
|
|
||||
Restricted Stock Awards
|
Three Months Ended
|
||||||||
|
January 29,
2023
|
January 30,
2022 |
|||||||
|
Number of shares granted in period
|
|
|
||||||
|
Weighted-average grant-date fair value of awards (in dollars per share)
|
$
|
|
$
|
|
||||
|
Compensation cost not yet recognized
|
$
|
|
$
|
|
||||
|
Weighted-average amortization period for cost not yet recognized (in years)
|
|
|
||||||
|
Shares outstanding at balance sheet date
|
|
|
||||||
Stock Options
|
Three Months Ended
|
||||||||
|
January 29,
2023 |
January 30,
2022 |
|||||||
|
Number of options granted in period
|
|
|
||||||
|
Cash received from option exercised
|
$
|
|
$
|
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Compensation cost not yet recognized
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