UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 29, 201731, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission file number 0-15451
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)
| Connecticut | | 06-0854886 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
15 Secor Road, Brookfield, Connecticut 06804
(Address of principal executive offices)(Zip Code)
(203) 775-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par valueCOMMON | PLAB | NASDAQ Global Select Market |
| PREFERRED STOCK PURCHASE RIGHTS | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Yes ☐ No ☒
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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer”filer,” “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | ☒ | Accelerated Filer☐ | ☐ |
Non-Accelerated Filer☐ | ☐ | Smaller Reporting Company | ☐ |
| Emerging growth company☐ | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act ((§15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ⌧ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Yes ☐ No ☒
As of April 30, 2017,May 3, 2020, which was the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of the registrant’s common stock held by non-affiliates was approximately $777,531,974$727,752,716 (based upon the closing price of $11.50$11.35 per share as reported by the NASDAQ Global Select Market on that date).
As of December 15, 2017, 69,052,58711, 2020, 63,916,262 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
| | |
Proxy Statement for the 20182021 | | |
| Annual Meeting of Shareholders | | Incorporated into Part III |
to be held inon March 22, 201811, 2021 | | of this Form 10-K |
PHOTRONICS, INC.
ANNUAL REPORT ON FORM 10-K
OCTOBER 31, 2020
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Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Photronics, Inc. (“Photronics”, the “Company”, “we”, “our”, or “us”). These statements are based on management’smanagement's beliefs, as well as assumptions made by and information currently available to management. Forward-looking statements may be identified by words like “expect,” “anticipate,” “believe,” “plan,” “project,” “could,” “estimate,” “intend,” “may,” “will”, “in our view” and similar expressions, or the negative of such terms, or other comparable terminology. All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this annual report on Form 10-K or in other documents filed with the Securities and Exchange Commission, in press releases, or in the Company’sCompany's communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of transactions, joint ventures, business combinations, divestitures and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; pandemics affecting our labor force, customers or suppliers; the demand for the Company’sCompany's products; competitive factors in the industries and geographic markets in which the Company competes; the timing of orders received from customers; the gain or loss of significant customers; competition from other manufacturers; changes in accounting standards; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); changes in the jurisdictional mix of our earnings and changes in tax laws and rates;earnings; interest rate and other capital market conditions, including changes in the market price of the Company’sCompany's securities; foreign currency exchange rate fluctuations; changes in technology; technology or intellectual property infringement, including cyber-securitycybersecurity breaches, and other innovation risks; unsuccessful or unproductive research and development or capital expenditures; the timing, impact, and other uncertainties related to transactions and acquisitions, divestitures, business combinations, and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structures, and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; changes in laws and government regulation impacting our operations or our products;products, including laws relating to export controls and import laws, rules and tariffs; the occurrence of regulatory proceedings, claims or litigation; damage or destruction to the Company’sCompany's facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; acts of war, construction of new facilities and acquisition of new equipment; dilutive issuances of the Company’s stock; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary import and export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company’sCompany's expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.
PART I
General
Photronics, Inc. (and its subsidiaries, collectively referred to herein as “Photronics”, the “Company”, “we”, “our”, or “us”) is one of the world’sworld's leading manufacturersmanufacturer of photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panelflat-panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display FPD substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”) and, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally from nineWe have eleven manufacturing facilities; two offacilities, which are located in Taiwan (3), Korea, the United States (3), Europe three(2), and two recently constructed facilities in Taiwan, oneChina. Our FPD Facility in KoreaHefei, China, and threeour IC facility in Xiamen, China, commenced production in the United States. We have announced plans to construct two manufacturing facilities in China, as we expandsecond and third quarters of our global manufacturing footprint. See Note 19 to the consolidated financial statements for additional information.fiscal 2019, respectively.
Photronics is a Connecticut corporation, organized in 1969. Our principal executive offices are located at 15 Secor Road, Brookfield, Connecticut 06804, telephone (203) 775-9000. Our website address is http://www.photronics.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Definitive Proxy Statements on Schedule 14A, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information found on, or incorporated into, our website is not part of this or any other report we file with or furnish to the SEC. These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Photronics.
The Board has adopted a code of ethics, which is posted on the Company’s website at http://www.photronics.com/plab/photronics/. The code of ethics may be found as follows: from the Company’s web address listed above, first click on “Investors” then click on “Corporate Governance”, then on “Photronics, Inc. Code of Ethics”. The Company’s code of ethics applies to the Company’s senior financial officers, including our Chief Executive Officer; Senior Vice President and Chief Financial Officer; Chief Financial Officer, Asia; Vice President and Treasurer; Vice President, Corporate Controller; and Vice President, Tax. We intend to disclose any amendment to, or waiver from, the code of ethics for our senior financial officers, including our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, to the extent disclosure is required by applicable rules of the SEC and NASDAQ Stock Market LLC by posting such information on our website, at the address and location specified above.
Products and Manufacturing Technology
We manufacture photomasks, which are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display FPD substrates. Photomasks are manufactured in accordance withincorporating circuit designs provided to us on a confidential basis by our customers. IC and FPD photomask sets are manufactured in layers, each having a distinct pattern which is etched onto a different photomask. The resulting series of photomasks is then used to image the circuit patterns onto each successive layer of a semiconductor wafer or flat panel display FPD substrate. The typical manufacturing process for a photomask involves the receipt and conversion of circuit design data to manufacturing pattern data. A lithography system then exposes the circuit pattern onto the photomask blank. The exposed areas are developed and etched to produce that pattern on the photomask. The photomask is then inspected for defects and conformity to the customer’scustomer's design data. After any defects are repaired, the photomask is cleaned, any required pellicles (protective translucent cellulose membranes) are applied and, after final inspection, the photomask is shipped to the customer.
We currently support customers across the full spectrum of IC production and FPD technologies by manufacturing photomasks using electron beam or optical (laser-based) systems, which are the predominant technologies used for photomask manufacturing and are capable of producing the finer line resolution, tighter overlay, and larger die size for the larger and more complex circuits currently being designed. Electron beam and laser generatedlaser-generated photomasks can be used to produce the most advanced semiconductors and FPDsFPD photomasks for use in an array of products. However, in the case of IC production, the large majority of higher cost critical layerhigher-cost critical-layer photomasks are fabricated using electron beam technologies, while photomasks produced using laser-based systems are less expensiveused for all FPD photomasks and less precise.critical IC photomasks. End markets served with IC photomasks include devices used for microprocessors, memory, telecommunications, and related applications. We currently own a number of both high-end and mature electron beam and laser-based production systems.
The first several layers of photomasks are sometimes required to be delivered by usto customers within 24 hours from the time we receive customers’customer design data. The ability to manufacture high qualityhigh-quality photomasks within short time periods is dependent upon robust processes, efficient manufacturing methods, high production yield, available manufacturing capacity, and high equipment reliability. We work to meet these requirements by making significant investments in research and development, capital equipment, manufacturing and data processing systems, and by utilizing statistical process control methods to optimize our manufacturing processes and reduce cycle times.
Quality control is an integral part of the photomask manufacturing process. Photomasks are manufactured in temperature, humidity, and particulate-controlled clean rooms because of the high level of precision, quality and manufacturing yield required. Each photomask is inspected several times during the manufacturing process to ensure compliance with customer specifications. We continue to make substantial investments in equipment to produce, inspect and repair photomasks to ensure that customer specifications are met.
State-of-the-art production for semiconductor masks is considered to be 28 nanometer and smaller for ICs and Generation 10.5+, active-matrix organic light-emitting diode (“AMOLED”) and low-temperature polysilicon (“LTPS”) display-based process technologies for FPDs. However, 32 nanometer and above geometries for semiconductors and Generation 8 and below (excluding AMOLED and LTPS) process technologies for displays constitute the majority of IC photomasks produced for the semiconductor industry employ geometries of larger than 45 nanometers.designs currently being fabricated in volume. At these geometries, we can produce full lines of photomasks, and there is no significant technology employed by our competitors that is not also available to us. We expect advanced-generation designs to continue to move to wafer fabrication throughout fiscal 2021, and we believe we are also capablewell positioned to service an increasing volume of producing full linesthis business as a result of photomasks for high-end ICour investments in manufacturing processes and FPD applications. In the case of ICs, this includes photomasks at and below the 45 nanometer technology node and, for FPDs, at and above the Generation 8 technology node and active-matrix organic light-emitting diode (AMOLED) display screens. We hold customer-qualified manufacturing capability and own, or have access to, technology that enables us to compete in the high-end markets that serve IC and FPD applications.regions where our customers are located.
Sales and Marketing
The market for photomasks primarily consists of domestic and non-US semiconductor and FPD manufacturers and designers. Photomasks are manufactured by independent merchant manufacturers like Photronics, and by semiconductor and FPD manufacturers that produce photomasks for their own use (captive manufacturers). In somerare instances, captive manufacturers also sell to other semiconductor or FPD manufacturers. Previously, there was a trend towards the divesture or closing of captive photomask operations by semiconductor manufacturers, and an increase in the share of the market served by independent manufacturers. This trend was driven by the increased complexity and cost of capital equipment used in manufacturing photomasks and the lack of economy of scale for many semiconductor and FPD manufacturers to effectively utilize the equipment. However, more recently, the remaining and largestto reach certain roadmap milestones, some captive mask facilities have startedbeen investing at faster rates than independent manufacturers, to reach certain roadmap milestones, particularly in the foundry logic and memory spaces. Nevertheless, most captive manufacturers maintain business and technology relationships with independent photomask manufacturers for ongoing support.
Generally, Photronics and each of its customers engage in a qualification and correlation process before one becomeswe become an approved supplier. Thereafter, based on the customer’s expectations, we typically negotiate pricing parameters for a customer’s orders.the customer's order. Some prices may remain in effect for an extended period of time. In somemany instances, we enter into sales arrangements with an understanding that, as long as our performance is competitive, we will receive a specified percentage of that customer’scustomer's photomask requirements.
We conduct our sales and marketing activities primarily through a staff of full-time sales personnel and customer service representatives who work closely with the Company’sCompany's management and technical personnel. We support non-USnon-U.S. customers through both our domestic and foreign facilities. Wefacilities and consider our presence in non-USnon-U.S. markets to be an important factor in attracting new customers, as it provides global solutions to our customers, minimizes delivery time, and allows us to serve customers that utilize manufacturing foundries outside of the United States, principally in Asia. See Note 13Notes 8 and 15 to our consolidated financial statements for the amount of revenuesrevenue and long-lived assets attributable to each of our geographic areas of operations.
Customers
We primarily sell our products primarily to leading semiconductor and FPD manufacturers. During fiscal year 2017,2020, we sold our products to approximately 600530 customers. Revenue from United Microelectronics Corp.Corp. Co., Ltd. accounted for approximately 16%, 17%15% and 15% of our total revenues, and sales to Samsung Electronics Co. Ltd. accounted for approximately 16%, 19% and 18% of our total revenues in fiscal years 2017, 20162020, 2019 and 2015,2018, and revenue from Samsung Electronics Co., Ltd. accounted for approximately 14%, 16% and 16% of our total revenues in fiscal years 2020, 2019 and 2018, respectively. Our five largest customers, in the aggregate, accounted for approximately 43%45%, 50%46% and 52%47% of our revenue in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively. A significant decrease in the amount of revenue from any of these customers could have a material adverse effect on our financial performance and business prospects.
Seasonality
Our quarterly revenues can be affected by the seasonal purchasing patterns of our customers. We arebusiness is typically impacted during the first, and sometimes the second, quarter of our first quarterfiscal year by the North American, European, and EuropeanAsian holiday periods, as some customers reduce their effective workdaysdevelopment and ordersbuying activities during this period. Additionally, we can be impacted during our first or second fiscal quarter by the Asian New Year holiday period, which also may reduce customer orders and deliveries.those periods.
Research and Development
We primarily conduct research and development activities for IC photomasks at our U.S. nanoFab, which is located in Boise, Idaho, facility, as well as at Photronics, Cheonan, Ltd. (formerly PK, Ltd. (“PKL”), our subsidiary in Korea and Photronics DNP Mask Corporation (“PDMC”), one of our joint venture subsidiaries in Taiwan. Research and development for FPD photomasks is primarily conducted at PKL.Photronics Cheonan, Ltd. Additionally, we conduct site-specific research and development programs to support strategic customers. These research and development programs and activities are undertaken to advance our competitiveness in technology and manufacturing efficiency. We also conduct application-orientedapplication-oriented research and development including data and services technology activities to support the early adoption of new photomaskphotomasks or supporting data and services technology into our customers’customers' applications. Currently, research and development photomask activities for ICsIC photomasks are primarily focused on 20photomasks with enabling wafer geometrics of 14 nanometer node and below,smaller and, for FPDs, on Generation 8 resolution enhancement, substrates larger than GenerationGenerations 8 and more10.5+ substrate size photomasks process enhancements for new TV technologies, emerging opportunities for micro- and mini-LED, together with photomask technology for complex masks for AMOLED-type displays.FPD photomasks required in the manufacture of advanced mobile displays, such as AMOLED. We believe these core competencies will continue to be a critical part of semiconductor and FPD manufacturing, as wafer and substrate optical lithography scaling continues to scaleenable capabilities onof high-end devices.devices and displays. We incurred research and development expenses of $15.9$17.1 million, $21.7$16.4 million, and $21.9$14.5 million in fiscal years 2017, 2016,2020, 2019 and 2015,2018, respectively. It is our belief that we own, control, or license the proprietary information (including trade secrets and patents) that is necessary for our business, as it is presently conducted. This includes trade secrets as well as patents. We also believe that our intellectual property and trade secret know-how will continue to be important to our maintaining technical leadership in the field of photomasks.
On May 5, 2016, we sold our investment in MP Mask to Micron for $93.1 million and recorded a gain on the sale of $0.1 million, which is included in our 2016 consolidated statements of income in interest income and other income (expense). On that same date, a supply agreement commenced between Photronics and Micron, which provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term, and expired in May 2017. Photronics has unlimited rights to use the technology it acquired under its prior technology license agreement.Intellectual Property Rights
Patents and Trademarks
We have developed and hold ownership interests in approximately 49intellectual property (“IP”) rights, in the forms of patents issued in the U.S., and other trademark and trademark registrations in the U.S. patents. The subject matter of these patents,and other countries. Patents in which are registered in various countries,we hold ownership interests generally relatesrelate to the manufacture of IC photomasks or the use of photomasks to manufacture other products. The expiration dates of these patents range from 2018 to 2034. We also have a number of trademarks and trademark registrations in the United States and in other countries.
While we believe that our intellectual property is,IP rights are, and will continue to be, important to our technical leadership in the field of photomasks, our operations are not dependent on any one individual patent. WeIP right. In addition to patenting, when practicable, we further protect our intellectual propertyIP rights, and our other proprietary processes, by utilizing patents and non-disclosure agreements with employees, customers, and vendors.
Materials, Supplies and Equipment
Raw materials used by Photronics generally include: high precision quartz plates (including large area plates), which are used as photomask blanks and are primarily obtained from Japanese and Korean suppliers; pellicles and electronic grade chemicals, which are used in the manufacturing process; and compacts, which are durable plastic containers in which photomasks are shipped. These materials are generally sourced from several suppliers. We believe that our utilization of a select group of strategic suppliers enables us to access the most technologically advanced materials available. On an ongoing basis, we continue to consider additional supply sources.
We typically enter into annual pricing agreements with our suppliers, some of which include volume-based incentives that have resulted in substantial cost savings; these agreements do not require us to purchase minimum dollar amounts or quantities of their subject materials.
We rely on a limited number of equipment suppliers to develop and supply the equipment used in the photomask manufacturing process. Although, historically, we have been able to obtain equipment on a timely basis, an inability to obtain equipment when required could adversely affect our business and results of operations.
Backlog
The first several layers of a set of photomasks for a circuit pattern are often required to be shipped within 24twenty-four hours of receiving a customer’scustomer's designs. Because of the short period between order and shipment dates (typically from 1one day to 2two weeks) for a significant amount of our revenue, the dollar amount of our current backlog is not considered to be a reliable indicator of future revenue.
International Operations
Revenues from our non-U.S. operationswere approximately 77%83%, 76%81% and 75%79% of our total revenues in fiscal 2017, 20162020, 2019 and 2015,2018, respectively. We believe that our ability to serve non-USnon-U.S. markets is enhanced by our having, among other things, a local presence in the markets that we serve. This requires significant investments in financial, managerial, operational, and other resources.
Operations outside of the United States are subject to inherent risks, including fluctuations in exchange rates, political and economic conditions in various countries, legal compliance and regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable collection cycles, potential restrictions on transfers of funds, and potentially adverse tax consequences. These factors may have a material adverse effect on our ability to generate revenue outside of the United States and to deploy resources where they could otherwise be used to their greatest advantage and, consequently, may adversely affect our financial condition and results of operations. Note 13Notes 8 and 15 of the notes to our consolidated financial statements, presentsrespectively, present revenue and long-lived assets by geographic area.
Competition
The photomask industry is highly competitive, and most of our customers utilize multiple photomask suppliers. Our ability to compete depends primarily upon the consistency of our product quality, timeliness of delivery, as well ascompetitive pricing, technical capability, and service, which we believe are the principal factors considered by customers in selecting their photomask suppliers. An inability to meet these requirements could adversely affect our financial condition, results of operations, and cash flows. We also believe that geographic proximity to customers is an important factor in certain markets where cycle time from order to delivery is critical. While some of our competitors may have greater financial, technical, sales, marketing, or other resources than Photronics, we believe that we are able to compete effectively because of our dedication to customer service, investments in state-of-the-art photomask equipment and facilities, and experienced technical employees.
We estimate that, for the types of photomasks we manufacture (IC and FPD), the size of the total market (captive and merchant) is approximately
$4.1$5.1 billion. Our competitors include Compugraphics International, Ltd., Dai Nippon Printing Co., Ltd (outside of
Taiwan)Taiwan and China), Hoya Corporation,
LG Innotek Co., Ltd., Shenzhen New Way Photomask Making Co., Ltd., Shenzhen Quingyi Photomask, Ltd., SK-Electronics Co.
, Ltd., Taiwan Mask Corporation,
and Toppan Printing
Co., Ltd., Supermask Co. Ltd., and Chengdu NeWay Photomask Making Co., Ltd. We also compete with semiconductor
manufacturers’and FPD manufacturers' captive photomask manufacturing operations that supply photomasks for internal use and, in some instances, also for external customers and foundries. We expect to face continued competition which, in the past, has led to pressure to reduce prices. We believe the pressure to reduce prices, together with the significant investment required in capital equipment to manufacture high-end photomasks, has contributed to the decrease in the number of independent manufacturers, and we expect such pressure to continue in the future.
Employees
As of October
29, 2017,31, 2020 we had
1,475 employees.approximately 1,728 full-time and part-time employees worldwide. Our business results depend in part on our ability to successfully manage our human capital resources, including attracting, identifying, and retaining key talent. Factors that may affect our ability to attract and retain qualified employees include employee morale, our reputation, competition from other employers, and availability of qualified individuals As of October 31, 2020, none of our employees at any of our worldwide facilities was represented by a union. We
believe we offer competitive compensation and other benefits and thatconsider our employee relations
to be good. We believe our commitment to our human capital resources is an important component of our mission to deliver superior photomasks and customer care. We provide all employees with the opportunity to share their opinions in open dialogues with our human resources department and senior management. We provide all employees a wide range of professional development experiences, both formal and informal. Our formal offerings include tuition reimbursement, leadership development experiences and vocational training. The safety of our employees is a paramount value for us. We provide mandatory safety trainings in our production facilities, which are
good.designed to focus on empowering our employees with the knowledge and tools they need to make safe choices and to mitigate risks. Supervisors complete safety management courses as well. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees and which comply with government orders in all the states and countries where we operate. In an effort to keep our employees safe and to maintain operations during the COVID-19 pandemic, we have implemented a number of new health-related measures including, the requirement to wear company provided face-masks at all times while on company property, implemented temperature taking protocols, increased hygiene, cleaning and sanitizing procedures at all locations, implemented social-distancing, implemented restrictions on visitors to our facilities, limiting in-person meetings and other gatherings. Further, the health and wellness of our employees are critical to our success. We provide our employees with access to a variety of innovative, flexible and convenient health and wellness programs. Such programs are designed to support employees' physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors. Additionally, we provide robust compensation and benefits. In addition to salaries, these programs, which vary by country/region, can include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, employee assistance programs, and tuition assistance.
Technology failures or cyber security breaches could have a material adverse effect on our operations.
We rely on information technology systems to process, transmit, store, and protect electronic information. For example, a significant portionSet forth below are discussions of the communications betweenrisk factors we believe can make an investment in our personnel, customers, and suppliers depends on information technology. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. We have technology and information security processes and disaster recovery plans in place to mitigate our risks to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.business speculative or risky.
6Concentration Related Risk Factors
Our dependency on the microelectronics industry, which as a whole is volatile, could create volatility in our demand and have a negative material impact on our business.
We sell substantially all of our photomasks to semiconductor or flat panel displayFPD designers, manufacturers and foundries, as well as to other high performance electronics manufacturers. We believe that the demand for photomasks depends primarily on design activity rather than sales volume from products using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of customized ICs, a reduction in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors or FPDs, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Historically, the semiconductormicroelectronics industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices.prices with a concomitant effect on revenue and profitability.
We depend on a limited number of suppliers for equipment and raw materials and, if those suppliers fail to timely deliver their products to us, we may in the future, incur net losses.
Although we have been profitable since fiscal 2010, we have, in the past, incurred net losses. The net losses experienced in prior years were due, in part,be unable to macroeconomic factors, which resulted in our incurring significant charges for restructurings and impairments of long-lived assets. We cannot provide assurance that we will not incur net losses in the future.
We have a high level of fixed costs; thus we must achieve minimum sales volumes sufficient to cover our fixed costs.
As a consequence of the capital-intensive nature of the photomask manufacturing business, we have a high level of fixed costs and a high degree of operating leverage. Accordingly, should our sales volumes decline as a result of a decrease in design releasesfulfill orders from our customers, or for any other reason, we may have excess or underutilized production capacity which could significantly impactadversely affect our operating margins or result in write-offs from asset impairments.business and results of operations.
Our quarterly operating results fluctuate significantly and may continue to do so in the future.
We have experienced fluctuations in our quarterly operating results,rely on a limited number of photomask equipment manufacturers to develop and supply the equipment we anticipate that such fluctuations will continueuse. These equipment manufacturers usually require lead times of twelve months or longer between the order date and could intensify in the future. Fluctuations in operating results may result in volatility in the pricesdelivery of certain photomask imaging and inspection equipment. The failure of our common stock and financial instruments linkedsuppliers to its value. Operating results may fluctuate asdevelop or deliver such equipment on a result of many factors, including the size and timing of orders and shipments, the loss of significant customers, changes in product mix, the flow of customer design releases, technological change, fluctuations in manufacturing yields, competition and general economic conditions. We operate in a high fixed-cost environment and, should our revenues and asset utilization decrease, our operating margins could be negatively impacted.
Our customers generally order photomasks on an as-neededtimely basis and our revenue in any quarter is dependent on orders received during that quarter. Since we operate with little backlog, and the rate of new orders may vary significantly from quarter-to-quarter, our capital expenditures and, to some extent, expense levels are based primarily on sales forecasts and technological advancements in photomask manufacturing equipment. Consequently, if anticipated revenues in any quarter do not occur when expected, capital expenditures could be higher than needed, resulting in underutilized capacity and disproportionately high expense levels, causing operating results to be adversely affected. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results cannot be relied upon as indicators of future performance. In addition, in future quarters, our operating results could be below guidance we may provide as well as the expectations of public market analysts and investors which, in turn, could have a material adverse effect on our business and results of operations. In addition, the market pricemanufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive, which could similarly affect us.
We use high-precision quartz photomask blanks, pellicles, and electronic grade chemicals in our manufacturing processes. There are a limited number of our common stock.
The photomask industry is subject to rapid technological change,suppliers of these raw materials, and we might fail to remain competitive,do not have long-term contracts with these suppliers. Any delays or quality problems in connection with significant raw materials, particularly photomask blanks, could cause delays in the shipments of photomasks, which could have a material adverse effect on our business and results of operations.
The photomask industry has been,fluctuation of foreign currency exchange rates, with respect to prices of equipment and is expected to continue to be, characterized by technological change and evolving industry standards. In order to remain competitive, we will be required to continually anticipate, respond to and utilize changing technologies of increasing complexityraw materials used in both traditional and emerging markets that we serve. In particular, we believe that, as semiconductor geometries continue to become smaller and FPDs become larger or otherwise more advanced, we will be required to manufacture increasingly complex photomasks. Additionally, the demand for photomasks has been, andmanufacturing, could in the future be, adversely affected by changes in semiconductor and high-performance electronics fabrication methods that affect the type or quantity of photomasks utilized, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs. Furthermore, evidence of the viability and the corresponding market acceptance of alternative methods of transferring IC designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors. As of the end of fiscal 2017, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for high volume semiconductor wafer production. However, should direct-write or any other alternative method of transferring IC or FPD designs without the use of photomasks achieve market acceptance, and if we are unable to anticipate, respond to or utilize these or other technological changes, due to resource, technological or other constraints, our business and results of operations could be materially adversely affected.
Our operations will continue to require substantial capital expenditures, for which we may be unable to obtain funding.
The manufacture of photomasks requires us to make substantial investments in high-end manufacturing capability. We expect that we will be required to continue to make substantial capital expenditures to meet the technological demands of our customers and to position us for future growth. Our capital expenditure payments for fiscal 2018 are expected to be approximately $250 million, of which $3 million was included in accounts payable on our October 29, 2017, consolidated balance sheet. We cannot provide assurance that we will be able to obtain the additional capital required to fund our operations on reasonable terms, if at all, or that any such inability will notalso have a material adverse effect on our business and results of operations.
We have been dependent on sales to a limited number of large customers; the loss of any of these customers or a significant reduction in orders from these customers could have a material adverse effect on our revenues and results of operations.
Historically, we have sold a significant proportion of photomasks to a limited number of IC and FPD manufacturers. During fiscal years 2017, 20162020, 2019 and 20152018, our two largest customers accounted for 32%29%, 36%31% and 33%31%, respectively, of our revenue. Our five largest customers accounted for 43%45%, 50%46% and 52%47% of our revenue in fiscal years 2017, 20162020, 2019 and 20152018, respectively. The loss of a significant customer, or a significant reduction or delay in orders from any significant customer (including reductions or delays due to customer departures from recent buying patterns), or an unfavorable change in competitive conditions in the semiconductor or FPD industries could have a material adverse effect on our financial performance and business prospects. The consolidation of semiconductor manufacturers, or an economic downturn in the semiconductor industry, may increase the likelihood of losing a significant customer and could also have an adverse effect on our financial performance and business prospects.
We depend on a limited number of suppliers for equipment and raw materials, and, if those suppliers do not deliver their products to us, we may be unable to fulfill orders from our customers, which could adversely affect our business and results of operations.
Financing Related Risk FactorsWe rely on a limited number of photomask equipment manufacturers to develop and supply the equipment we use. These equipment manufacturers currently require lead times of up to twelve months or longer between the order and the delivery of certain photomask imaging and inspection equipment. The failure of such manufacturers to develop or deliver such equipment on a timely basis could have a material adverse effect on our business and results of operations. In addition, the manufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive, which could similarly affect us.
We use high precision quartz photomask blanks, pellicles, and electronic grade chemicals in our manufacturing processes. There are a limited number of suppliers of these raw materials and we have no long-term contracts with these suppliers. Any delays or quality problems in connection with significant raw materials, particularly photomask blanks, could cause delays in the shipments of photomasks, which could have a material adverse effect on our business and results of operations. The fluctuation of foreign currency exchange rates, with respect to prices of equipment and raw materials used in manufacturing, could also have a material adverse effect on our business and results of operations.
We face risks associated with the use of sophisticated equipment and complex manufacturing processes and technologies. Our inability to effectively utilize such equipmentand technologies and perform such processes could have a material adverse effect on our business and results of operations.
Our complex manufacturing processes require the use of expensive and technologically sophisticated equipment and materials, and are continually modified in an effort to improve manufacturing yields and product quality. Minute impurities, defects or other difficulties in the manufacturing process can lower manufacturing yields and make products unmarketable. Moreover, the manufacture of leading-edge photomasks is more complex and time consuming than manufacturing less advanced photomasks, and their fabrication may result in delays in the manufacture of all levels of photomasks. We have, on occasion, experienced manufacturing difficulties and capacity limitations that have delayed our ability to deliver products within the time frames contracted for by our customers. We cannot provide assurance that, under such circumstances, we will not experience these or other manufacturing difficulties, or be subject to increased costs or production capacity constraints in the future, any of which could result in a loss of customers or could otherwise have a material adverse effect on our business and results of operations.
We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications.
Our products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications, or has a shorter useful life than warranted, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform, particularly if such products are sold under agreements that contain limited performance and life cycle warrantees. Our customers often require us to represent that our products conform to certain product specifications that they provide. Any failure to comply with such specifications could result in claims or legal action. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.
Our debt agreements limit our ability to obtain additional financing and may obligate us to repay debt before its maturity.
Financial covenants related to our credit facility, which expires in December 2018, include a Total Leverage Ratio, a Minimum Interest Coverage Ratio, and Minimum Unrestricted Cash Balances. Existing covenant restrictions limit our ability to obtain additional debt financing and, should we be unable to meet one or more of these covenants, our lenders may require us to repay any outstanding balance prior to the expiration date of the agreements. Our ability to comply with the financial and other covenants in our debt agreements may be affected by worsening economic or business conditions, or other events. We cannot assure that, under such circumstances, additional sources of financing would be available to pay off any long-term borrowings, so as to avoid default. Should we default on certain of our long-term borrowings, a cross default would occur on other long-term borrowings, unless amended or waived.
Joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations, which may adversely affect our results of operations and may force us to dedicate additional resources to these joint ventures.
The nature of a joint venture requires us to share control in certain areas with unaffiliated third parties. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our results of operations may be adversely affected and we may be required to increase the level of our commitment to the joint venture. Also, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from their business plans, our results of operations could be adversely affected.
We may not be able to consummate future acquisitions or integrate acquisitions into our business, which could result in unanticipated expenses and losses.
As part of our business growth strategy, we have acquired businesses and entered into joint ventures in the past, and we may pursue acquisitions and joint venture opportunities in the future. Our ability to implement this component of our growth strategy will be limited by our ability to identify appropriate acquisition or joint venture candidates and our financial resources, including our available cash and borrowing capacity. The expense incurred in consummating acquisitions or entering into joint ventures, the time it takes to integrate an acquisition, or our failure to integrate businesses successfully, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions or joint ventures.
The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties, and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with the integration of acquisitions include: potential disruption of our ongoing business and distraction of management; unforeseen claims and liabilities, including unexpected environmental exposures; unforeseen adjustments, taxes, charges and write-offs; problems enforcing the indemnification obligations of sellers of businesses or joint venture partners for claims and liabilities; unexpected losses of customers of, or suppliers to, the acquired business; difficulty in conforming the acquired businesses’ standards, processes, procedures and controls with our operations; variability in financial information arising from the implementation of purchase price accounting; inability to coordinate new product and process development; loss of senior managers and other critical personnel and problems with new labor unions; and challenges arising from the increased scope, geographic diversity and complexity of our operations.
Our announced expansions into China entail substantial risks.
During the last two years we have announced plans to expand our manufacturing operations into China, see note 19 to the consolidated financial statements for more information on these expansion plans. These investments are subject to substantial risks which may include, but are not limited to: delays in or the inability to obtain necessary permits that are needed to enable us to construct our facilities or conduct our ongoing business; the inability to protect our intellectual property rights under Chinese law, which may not offer as high of a level of protection as U.S. law; unexpectedly long negotiation periods with Chinese suppliers and customers; quality issues related to materials sourced from local vendors; unexpectedly high labor costs due to a tight labor supply; and difficulty in repatriating funds and selling or transferring assets. Our investments in China also expose us to a significant additional foreign currency exchange risk, which we have not been subject to in recent years. These and other risks may result in our not realizing a return on, or losing some, or all, of our planned investments in China, which would have a material adverse effect on our financial condition and financial performance.
Our cash flows from operations and current holdings of cash may not be adequate for our current and long-term needs.
Our liquidity, as we operate in a high fixed costfixed-cost environment, is highly dependent on our revenue volume and the timing of our capital expenditures, which can vary significantly from period to period. Depending on conditions in the semiconductor and FPD markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments used by us in the past may not be available. Therefore, we cannot provide assurance that additional sources of financing would be available to us on commercially favorable terms, if at all, should our cash requirements exceed our existing cash, operating cash flows, and cash available under our credit facility.agreements.
WeOur credit facility restricts our business activities, limits our ability to obtain additional financing or pay cash dividends, and may incur unforeseen chargesobligate us to repay debt before its maturity.
Financial covenants related to possibleour credit facility, which expires in September 2023, include a total leverage ratio, a minimum interest coverage ratio, and minimum unrestricted cash balances. Our credit facility may also limit our flexibility in planning for, or reacting to, changes in our business and industry, which may place us at a competitive disadvantage compared with our competitors. We are also subject to covenants that limit our operating flexibility, such as a limit on the amount we can spend to repurchase shares of our common stock. Existing covenant restrictions, and noncompliance with covenants or cross default provisions could limit our ability to draw down on current facilities or our ability to obtain additional debt financing, and limit the amount of dividends, distributions, and redemptions we can pay on our common stock to an annual amount of $50 million. Should we be unable to meet one or more of these covenants, our lenders may require us to repay any outstanding balance prior to the expiration date of the agreement. Our ability to comply with the financial and other covenants in our credit agreement may be affected by deteriorating economic or business conditions, or other events. We cannot assure that, under such circumstances, additional sources of financing would be available to fund operating requirements or repay any long-term borrowings, to avoid default. Please also refer to Item 9A for discussion of material weakness.
Our operations will continue to require substantial capital expenditures, for which we may be unable to provide or obtain funding.
The manufacture of leading-edge photomasks requires us to make substantial investments in high-end manufacturing capability. We expect that we will be required to continue to make substantial capital expenditures to meet the technological demands of our customers and to position us for future facility closures or restructurings.
growth. Our capital expenditure payments for fiscal 2021 are expected to be approximately $100 million, of which approximately $15 million was included in Accounts payable on our October 31, 2020 consolidated balance sheet. We cannot provide assurance that there will not be facility closures or restructurings in the near or long-term, nor can we assure that we will not incur significant charges should there be any future facility closures or restructurings.
We operate in a highly competitive environment, and, should we be unable to meet our customers’ requirements for product quality, timeliness of delivery or technical capabilities, our revenue could be adversely affected.
The photomask industry is highly competitive, and most of our customers utilize more than one photomask supplier. Our competitors include Compugraphics International, Ltd., DNP (outside of Taiwan), Hoya Corporation, SK-Electronics Co., Ltd., Taiwan Mask Corporation and Toppan Printing Co., Ltd. We also compete with semiconductor manufacturers’ captive photomask manufacturing operations, some of which market their photomask manufacturing services to outside customers. We expect to face continued competition from these and other suppliers in the future. Some of our competitors have substantially greater financial, technical, sales, marketing or other resources than us. Also, when producing smaller geometry photomasks, some of our competitors may be able to more rapidly develop, produce, and achieve higher manufacturing yields than us. We believeobtain the additional capital required to fund our operations or capital expenditures on reasonable terms, if at all, or that consistency of product quality and timeliness of delivery, as well as price, technical capability, and service are the principal factors considered by customers when selecting their photomask suppliers. Ourany such inability to meet these competitive requirements couldwill not have a material adverse effect on our business and results of operations. In
Servicing our debt requires a significant amount of cash, and we may not generate sufficient cash flows from our operations to pay our indebtedness.
Our ability to make scheduled payments of debt principal and interest, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate sufficient cash flows from operations to fund operations, service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness would depend upon the past, competition has led to pressure to reduce prices and the need to invest in advanced manufacturing technology, which, we believe, contributed to the decreaseconditions in the numbercapital markets and our financial condition at such time. We may not be able to engage in any of independent photomask suppliers. These pressures may continuethese activities or engage in the future.
Our substantial non-US operations are subject to additional risks.
Revenues from our non-U.S. operations were approximately 77%, 76% and 75% of our total revenues in fiscal years 2017, 2016 and 2015, respectively. We believe that maintaining significant international operations requires us to have, among other things, a local presence in the geographic markets that we supply. This requires significant investments in financial, managerial, operational, and other resources. Since 1996, we have significantly expanded our operations in international markets by acquiring existing businesses in Europe, acquiring majority equity interests in photomask manufacturing operations in Korea and Taiwan and building a manufacturing facility for FPD photomasks in Taiwan. Additionally, since 2016, we have announced plans to expand our manufacturing operations into China, see Note 19 to the consolidated financial statements for more informationthese activities on these expansion plans. In order to enable us to optimize our investments and other resources, we closely monitor the semiconductor and FPD manufacturing markets for indications of geographic movement and, in conjunction with these efforts, continue to assess the locations of our manufacturing facilities. These assessments may result in the opening or closing of facilities.
Operations outside of the United States are subject to inherent risks, including fluctuations in exchange rates, unstable political and economic conditions in various countries, changes in economic alliances, unexpected changes in regulatory requirements, compliance with a variety of foreign laws and regulations may be burdensome, compliance with anti-bribery and anti-corruption laws (such as the Foreign Corrupt Practices Act) as well as anti-money-laundering laws may be costly, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable payment cycles, foreign countries may adopt other restrictions on foreign trade or investment, including currency exchange controls, trade sanctionsdesirable terms, which could result in losing access to customers and suppliers in those countries, agreements may be difficult to enforce and receivables difficult to collect and potentially adverse tax consequences. These factors may have a material adverse effectdefault on our ability to generate revenues outside of the United Statesdebt obligations.
Industry and consequently, on our business and results of operations.
Competitive Related Risk Factors
Changes in foreign currency exchange rates could have a material adverse effect on our results of operations, financial condition or cash flows.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are reported in U.S. dollars. Our operations have transactions and balances denominated in currencies other than the U.S. dollar, primarily the Korean won, New Taiwan dollar, Japanese yen, euro, Singapore dollar, and the pound sterling. As a result of commencing construction of two new facilities in China, we now also have transactions and balances denominated in the Chinese renminbi. In fiscal year 2017, we recorded a net loss from changes in foreign currency exchange rates of $5.2 million in our statement of income, while our net assets were increased by $19.7 million as a result of the translation of foreign currency financial statements to U.S. dollars. Significant foreign currency fluctuations may adversely affect our results of operations, financial condition or cash flows.
Our business depends on managerial and technical personnel, who are in great demand, and our inability to attract and retain qualified employees could adversely affect our business and results of operations.
Our success depends, in part, upon key managerial and technical personnel, as well as our ability to continue to attract and retain additional qualified personnel. The loss of certain key personnel (i.e. CEO, CTO, etc.) could have a material adverse effect on our business and results of operations. There can be noWe cannot offer assurance that we can retain our key managerial and technical employees, or that we can attract similar additional employees in the future.
The photomask industry is subject to rapid technological change, and we might fail to remain competitive, which could have a material adverse effect on our business and results of operations.
The photomask industry has been, and is expected to continue to be, characterized by technological change and evolving industry standards. In order to remain competitive, we will be required to continually anticipate, respond to, and utilize changing technologies of increasing complexity in both traditional and emerging markets that we serve. In particular, we believe that, as semiconductor geometries continue to become smaller and FPDs become larger or otherwise more advanced, we will be required to manufacture increasingly challenging photomasks. Additionally, the demand for photomasks has been, and could in the future be, adversely affected by changes in semiconductor and high- performance electronics fabrication methods that affect the type or quantity of photomasks utilized, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs. Furthermore, evidence of the viability and the corresponding market acceptance of alternative methods of transferring IC designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors. As of the end of fiscal 2020, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for high-volume semiconductor wafer production. However, should direct-write or any other alternative method of transferring IC or FPD designs without the use of photomasks achieve market acceptance, and if we are unable to anticipate, respond to, or utilize these or other technological changes, due to resource, technological, or other constraints, our business and results of operations could be materially adversely affected.
The risk of loss of our intellectual property, trade secrets or other sensitive business or customer confidential information or disruption of operations due to breaches of cybersecurity could negatively impact our financial results.
Cyberattacks or security breaches could compromise confidential, business-critical information, cause disruptions in our operations, or harm our reputation. We have important assets, including intellectual property, trade secrets, and other sensitive, business-critical and/or confidential information which may be vulnerable to such incidents. While we have a comprehensive cybersecurity program that is continuously reviewed, maintained, and upgraded, a significant cyberattack could result in the loss of vital business or confidential information and/or could negatively impact operations, which could have a negative impact on our financial results.
We may be unable to enforce or defend our ownership and use of proprietary technology, and the utilization of unprotected company developed technology by our competitors could adversely affect our business, results of operations, and financial position.
We believe that the success of our business depends more on proprietary technology, information and processes, and know-how than on our patents or trademarks. Much of our proprietary information and technology related to manufacturing processes is not patented and may not be patentable. We cannot offer assurance that:
· | we will be able to adequately protect our technology; |
· | competitors will not independently develop similar technology; or |
· | international intellectual property laws will adequately protect our intellectual property rights. |
We may become the subject of infringement claims or legal proceedings by third parties with respect to current or future products or processes. Any such claims, with or without merit, or litigation to enforce or protect our intellectual property rights that require us to defend against claimed infringements of the rights of others, could result in substantial costs, diversion of resources, and product shipment delays or could force us to enter into royalty or license agreements, rather than dispute the merits of these claims. Any of the foregoing could have a material adverse effect on our business, results of operations, and financial position.
We operate in a highly competitive environment, and, should we be unable to meet our customers’ requirements for product quality, timeliness of delivery or technical capabilities, our revenue could be adversely affected.
The photomask industry is highly competitive, and most of our customers utilize more than one photomask supplier. Our competitors include Compugraphics International, Ltd., Dai Nippon Printing Co., Ltd (outside of Taiwan and China), Hoya Corporation, LG Innotek Co., Ltd., Shenzhen New Way Photomask Making Co., Ltd., Shenzhen Quingyi Photomask, Ltd., SK-Electronics Co. Ltd., Taiwan Mask Corporation, and Toppan Printing Co., Ltd. We also compete with semiconductor and FPD manufacturers' captive photomask manufacturing operations, some of which market their photomask manufacturing services to outside customers. We expect to face continued competition from these and other suppliers in the future. Some of our competitors have substantially greater financial, technical, sales, marketing, or other resources than we do. Also, when producing smaller geometry photomasks, some of our competitors may be able to more rapidly develop and produce such masks, and achieve higher manufacturing yields than we can. We believe that consistency of product quality, timeliness of delivery, competitive pricing, technical capability and service are the principal factors considered by customers when selecting their photomask suppliers. Our inability to meet these competitive requirements could have a material adverse effect on our business and results of operations. In the past, competition has led to pressure to reduce prices and the need to invest in advanced manufacturing technology, which we believe contributed to the decrease in the number of independent photomask suppliers. These pressures may continue in the future.
Investment Related Risk Factors
Joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations, which may adversely affect our results of operations and compel us to dedicate additional resources to these joint ventures.
The nature of a joint venture requires us to share control in certain areas with unaffiliated third parties. If our joint venture partner does not fulfill its obligations, the affected joint venture may not be able to operate in accordance with its business plan. Under such a scenario, our results of operations may be adversely affected and we may be compelled to increase the level of our resources devoted to the joint venture. Also, differing views among joint venture participants may result in delayed decisions, or failures to agree on major issues. If such differences caused a joint venture to deviate from its business plan, our results of operations could be adversely affected.
Our expansion into China entails substantial risks.
In 2019, we commenced operations at our two newly constructed manufacturing facilities in China. These investments are subject to substantial risks which may include, but are not limited to: the inability to protect our intellectual property rights under Chinese law, which may not offer as high a level of protection as U.S. law; unexpectedly long negotiation periods with Chinese suppliers and customers; quality issues related to materials sourced from local vendors; unexpectedly high labor costs due to a tight labor supply; and difficulty in repatriating funds and selling or transferring assets. Our investments in China also expose us to a significant additional foreign currency exchange risk, which we had not been subject to in recent years. In addition, as tensions have escalated between the U.S. and China, we believe there is an enhanced risk that our substantial investments in China may be subject to unforeseen restrictions, which may include expropriation of the investments by the Chinese government. These and other risks may result in our not realizing a return on, or losing some, or all, of our planned investments in China, which would have a material adverse effect on our financial condition and financial performance.
We may incur unforeseen charges related to possible future facility closures or restructurings.
We cannot provide assurance that there will not be facility closures or restructurings in the near or long term, nor can we assure that we will not incur significant charges should there be any future facility closures or restructurings.
We may not be able to consummate future acquisitions or joint ventures or integrate acquisitions into our business, which could result in unanticipated expenses and losses.
As part of our business growth strategy, we have acquired businesses and entered into joint ventures in the past, and we may pursue acquisitions and joint venture opportunities in the future. Future efforts to grow the Company may include expanding into new or related markets or industries. Our ability to implement this component of our growth strategy may be limited by both our ability to identify appropriate acquisition or joint venture candidates and our financial resources, including our available cash and borrowing capacity. The expense incurred in consummating acquisitions or entering into joint ventures, the time it takes to integrate an acquisition, or our failure to integrate businesses successfully, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions or joint ventures.
The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties, and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with the integration of acquisitions include: potential disruption of our ongoing business and distraction of management; unforeseen claims and liabilities, including unexpected environmental exposures; unforeseen adjustments, taxes, charges and write-offs; problems enforcing the indemnification obligations of sellers of businesses or joint venture partners for claims and liabilities; unexpected losses of customers of, or suppliers to, the acquired business; difficulty in conforming the acquired businesses’ standards, processes, procedures and controls with our operations; variability in financial performance arising from the implementation of purchase price accounting; inability to coordinate new product and process development; loss of senior managers and other critical personnel and problems with new labor unions; and challenges arising from the increased scope, geographic diversity, and complexity of our operations.
Market Related Risk Factors
Changes in foreign currency exchange rates could have a material adverse effect on our results of operations, financial condition, or cash flows.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are reported in U.S. dollars. Our operations have transactions and balances denominated in currencies other than the U.S. dollar; primarily the South Korean won, New Taiwan dollar, Japanese yen, Chinese renminbi, euro, Singapore dollar, and the British pound sterling. In fiscal year 2020, we recorded a net loss from changes in foreign currency exchange rates of $0.5 million in our statement of income, while our net assets increased by $36.4 million as a result of the translation of foreign currency financial statements to U.S. dollars. Significant foreign currency fluctuations may adversely affect our results of operations, financial condition, or cash flows.
Our hedging activity could negatively impact our results of operations and cash flows.
We may enter into derivatives to manage our exposure to interest rate and currency movements. If we do not accurately forecast our results of operations, execute contracts that do not effectively mitigate our economic exposure to interest rates and currency rates, elect to not apply hedge accounting (when doing so would have mitigated our losses), or fail to comply with the complex accounting requirements for hedging transactions, our results of operations and cash flows could be volatile, as well as negatively impacted.
The market price of our common stock is subject to volatility and could fluctuate widely in response to various factors, many of which are beyond our control.
Factors that may influence the price of our common stock include, but are not limited to, the following:
loss of any of our key customers or suppliers;
additions or departures of key personnel;
third party sales of common stock;
our ability to execute our business plan, including but not limited to, our expansion into China;
announcements and consummations of business acquisitions;
operating results that fall below expectations;
issuances or repurchases of our common stock;
intellectual property disputes;
industry developments;
news or disclosures by competitors or customers;
business combinations, divestitures, or bankruptcies by customers, suppliers, or competitors;
economic and other external factors including (but not limited to) recessions, natural disasters, military actions, political instability, or social unrest; and
period to period fluctuations in our financial results.
In addition, securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Such fluctuations may be the result of imbalances between buy and sell offers, or low trading volume which can magnify the effects of a small number of transactions on the price of a stock.
We operate in a global, competitive environment which gives rise to operating and market risk exposure.
We sell our products in a competitive, global environment, and compete worldwide for sales on the basis of product quality, price, technology, and customer service. Sales of our products are also subject to federal, state, local, and foreign taxes, laws and regulations, trade agreements, import and export controls, duties and tariffs. The imposition of additional regulations or controls including export controls, duties, tariffs, or changes to bilateral and regional trade agreements, could negatively impact our results of operations.
Operations Related Risk Factors
Our quarterly operating results fluctuate significantly, and may continue to do so in the future.
We have experienced fluctuations in our quarterly operating results, and we anticipate that such fluctuations will continue and could intensify in the future. Fluctuations in operating results may result in volatility in the prices of our common stock and financial instruments linked to its value. Operating results may fluctuate as a result of many factors, including the size and timing of orders and shipments, the loss of significant customers, changes in product mix, the flow of customer design releases, technological change, fluctuations in manufacturing yields, the actions of our competitors, and general economic conditions. We operate in a high fixed-cost environment and, should our revenues and asset utilization decrease, our operating margins could be negatively impacted.
Our customers generally order photomasks on an as-needed basis; thus our revenue in any quarter is dependent primarily on orders received during that quarter. Since we operate with little backlog, and the rate of new orders may vary significantly from quarter to quarter, our capital expenditures and, to some extent, expense levels are based primarily on sales forecasts and technological advancements in photomask manufacturing equipment. Consequently, if anticipated revenues in any quarter do not occur when expected, our capital investments could result in underutilized capacity and disproportionately high expense levels, causing operating results to be adversely affected. Due to the foregoing factors, we believe that quarter to quarter comparisons of our operating results cannot be relied upon as indicators of future performance. In addition, in future quarters, our operating results could be below guidance we may provide or the expectations of public market analysts and investors, which could have a material adverse effect on the market price of our common stock.
Our substantial non-U.S. operations are subject to additional risks.
Revenuesfrom our non-U.S. operationswere approximately 83%, 81% and 79% of our total revenues in fiscal years 2020, 2019 and 2018, respectively. We believe that maintaining significant international operations requires us to have, among other things, a local presence in the geographic markets that we supply. This requires significant investments in financial, managerial, operational, and other resources. Since 1996, we have significantly expanded our operations in international markets by acquiring existing businesses in Europe and Asia, and building manufacturing facilities in Taiwan and China. In order to enable us to optimize our investments and other resources, we closely monitor the semiconductor and FPD manufacturing markets for indications of geographic movement and, in conjunction with these efforts, continue to assess the locations of our manufacturing facilities. These assessments may result in the opening or closing of facilities.
Operations outside of the United States are subject to inherent risks, including: fluctuations in exchange rates; unstable political and economic conditions in various countries; changes in economic alliances; unexpected changes in regulatory requirements; compliance with a variety of burdensome foreign laws and regulations; compliance with anti-bribery and anti-corruption laws (such as the Foreign Corrupt Practices Act); tariffs and other trade barriers; difficulties in staffing and managing international operations; and longer accounts receivable payment cycles. In addition: foreign countries may enact other restrictions on foreign trade or investment, including currency exchange controls; trade sanctions could result in our losing access to customers and suppliers; legislation may cause agreements to be difficult to enforce; accounts receivable may be difficult to collect, or we may be subject to adverse tax consequences. These factors may have a material adverse effect on our costs or our ability to generate revenues outside of the United States and, consequently, on our business and results of operations.
We could be subject to damages based on claims brought against us by our customers, or lose customers as a result of the failure of our products to meet certain quality specifications.
Our products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications, or has a shorter useful life than warrantied, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform, particularly if such products are sold under agreements that contain limited performance and life cycle warranties. Our customers often require us to guarantee that our products conform to certain product specifications that they provide. Any failure to comply with such specifications could result in claims or legal action. A successful claim, or series of claims, against us could have a material adverse effect on our financial condition and results of operations, and could result in a loss of one or more customers.
We face risks associated with the use of sophisticated equipment and complex manufacturing processes and technologies. Our inability to effectively utilize such equipment and technologies and perform such processes could have a material adverse effect on our business and results of operations.
Our complex manufacturing processes require the use of expensive and technologically sophisticated equipment and materials, and are continually modified in an effort to improve manufacturing yields and product quality. Minute impurities, defects, or other difficulties in the manufacturing process can lower manufacturing yields and render products unmarketable. Moreover, the manufacture of leading-edge photomasks is more complex and time consuming than manufacturing less advanced photomasks, and their fabrication may result in delays in the manufacture of all levels of photomasks. We have, on occasion, experienced manufacturing difficulties and capacity limitations that have delayed our ability to deliver products within the time frames contracted for by our customers. We cannot provide assurance that we will not experience these or other manufacturing difficulties, or be subject to increased costs, which could result in a loss of customers or otherwise have a material adverse effect on our business and results of operations.
We have a high level of fixed costs.
As a consequence of the capital-intensive nature of the photomask manufacturing business, we have a high level of fixed costs and a high degree of operating leverage. Accordingly, should our sales volumes decline as a result of a decrease in design releases from our customers or for any other reason, we may have excess or underutilized production capacity which could significantly impact our operating margins or result in write-offs from asset impairments.
Regulatory Related Risk Factors
Additional taxes could adversely affect our financial results.
Our tax filings are subject to audits by tax authorities in the various jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the taxing authorities or through the courts. Currently, we believe there are no outstanding assessments whose resolution would result in a material adverse financial result. However, we cannot offer assurances that unasserted or potential future assessments would not have a material adverse effect on our financial condition or results of operations.
Our business could suffer as a result of the United Kingdom’s decision to end its membership in the European Union.
The decision of the United Kingdom to exit from the European Union (generally referred to as “BREXIT”) could cause disruptions to, and create uncertainty surrounding, our business, including affecting our relationships with existing and potential customers, suppliers, and employees. The effects of BREXIT will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. The measures could potentially disrupt some of our target markets and jurisdictions in which we operate, and adversely change tax benefits or liabilities in these or other jurisdictions. In addition, BREXIT could lead to legal uncertainty and potentially divergent national laws and regulations, as the United Kingdom determines which European Union laws to replace or replicate. BREXIT also may create global economic uncertainty, which may cause our customers and potential customers to monitor their costs and reduce their budgets for either our products or other products that incorporate our products. Any of these effects of BREXIT, among others, could materially adversely affect our business, business opportunities, results of operations, financial condition, and cash flows. The United Kingdom left the European Union on January 31, 2020, and is currently in a stand-still transition period which is scheduled to end on December 31, 2020.
Our products and technology could be subject to and negatively impacted by the recent expansion of the foreign-produced direct product rule.
In May 2019, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) amended export administration regulations by adding Huawei Technologies Co., Ltd. (“Huawei”) and certain affiliates to the “Entity List” for actions contrary to the national security and foreign policy interests of the United States, imposing significant new restrictions on export, re-export and transfer of U.S. regulated technologies and products to Huawei. On August 17, 2020, BIS issued a final rule adding additional Huawei non-U.S. affiliates to the Entity List, confirming the expiration of a temporary general license applicable to Huawei, and amended the foreign-produced direct product rule in a manner that represents a significant expansion of its application to Huawei.
Expansion of the foreign-produced direct product rule and additional companies being added to the entity list may adversely affect our business in various ways, including by: increasing the cost of regulatory compliance for the export of our products, equipment, services, and technology from the United States and abroad; increasing the time necessary to obtain required authorizations; increasing the risk of monetary fines and other penalties for non-compliance, and negatively impacting our customers who may no longer be able to supply their customers and thereby reducing demand for their or our products. Any of these effects could result in lost revenue, additional product costs, increased lead times and deployment delays that could harm our business and customer relationships.
Our products and technology could be subject to U.S. export control laws and the export control laws of the foreign jurisdictions where we operate.
We are subject to various laws relating to the export of products we manufacture, and the technology related thereto, and our failure to comply with these laws could subject us to substantial fines, penalties, and even injunctions, the imposition of which could have a material adverse effect on the success of our business.
We are subject to the export control laws of the United States and the export control laws of the foreign jurisdictions where we operate. On April 28, 2020, the U.S. administration significantly expanded the reach of U.S. export controls over certain products and certain countries. The U.S. Department of Commerce has, among other things: expanded license requirements to China, Russia and Venezuela; broadened the list of products covered by these expanded license requirements; expanded the definition of “military end use”; created a new “reason for control”; created a new review policy for certain items to certain countries; added substantial electronic export information filing requirements; eliminated the license exception for civil end use for certain countries, including China, Russia and Venezuela; and proposed to remove those same countries from the list of those eligible for additional re-exports license exceptions. The final rules relating to most of these changes were effective June 29, 2020. Application of these laws may adversely affect our business in various ways, including by regulating the export of our products, equipment, services, and technology from the United States and abroad, increasing the time necessary to obtain required authorizations, and the possibility of monetary fines and other penalties for non-compliance.
We may be unprepared for changes to environmental laws and regulations and may incur liabilities arising from environmental matters.
We are subject to numerous environmental laws and regulations that impose various environmental controls on, among other things, the discharge of pollutants into the air and water and the handling, use, storage, disposal, and clean-upcleanup of solid and hazardous wastes. Changes in these laws and regulations may have a material adverse effect on our financial position and results of operations, and inadequate compliance with their requirements could give rise to significant liabilities.
If we violate environmental, health andor safety laws or regulations, in addition to being required to correct such violations, we can be held liable in administrative, civil, or criminal proceedings, and substantial fines and other sanctions could be imposed that could disrupt or limit our operations. Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities may also be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. The nature of our business, including historical operations at our current and former facilities, exposes us to risks of liability under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury if released into the environment. Additional information may arise in the future concerning the nature or extent of our liability with respect to identified sites and additional sites that may be identified, for which we are alleged to be liable.
General Risk Factors
Ineffective internal controls could impact our business and operating results.
Our internal controls over financial reporting may not prevent or detect misstatements because of their inherent limitations in detecting human errors, the circumvention or overriding of controls, or fraud; even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls; otherwise fail to prevent financial reporting misstatements; or if we experience difficulties in implementing internal controls, our business and operating results could be harmed, and we could fail to meet our financial reporting obligations. In our assessment of internal control over financial reporting for the fiscal year ended October 31, 2020, we identified a material weakness. Please refer to Item 9A of this annual report on Form 10-K for further information.
Our business could be adversely impacted by global or regional catastrophic events.
Our business could be adversely affected by terrorist acts, widespread outbreaks of infectious diseases (such as the COVID-19 pandemic), government responses such as shelter-in-place directives to limit the impact of infectious diseases, or the outbreak or escalation of wars, especially in the Asian markets in which we generate a significant portion of our sales and in Japan where we purchase raw materials and capital equipment. Such events in the geographic regions in which we do business, including escalations of political tensions and military conflicts within the Korean Peninsula, or between the People’s Republic of China and the U.S. or the Republic of China (Taiwan), could have material adverse impacts on our revenue, cost and availability of raw materials, results of operations, cash flows, and financial condition.
Our production facilities could be damaged or disrupted by natural disasters or labor strikes, either of which could adversely affect our financial position, results of operations, and cash flows.
A major catastrophe, such as an earthquake or other natural disaster, labor strike, or work stoppage at any of our manufacturing facilities, or a manufacturing facility of our suppliers or customers, could result in a prolonged interruption of our business. A disruption resulting from any one of these events could cause significant delays in shipments of our products and the loss of revenue and customers, which could have a material adverse effect on our financial position, results of operations, and cash flows. Our facilities in Taiwan are located in a seismically activeseismically-active area.
Our sales can be impacted by the health and stability of the general economy, which could adversely affect our results of operations and cash flows.
Unfavorable general economic conditions in the U.S. or other countries in which we or our customers conduct business may have the effect of reducing the demand for photomasks. Economic downturns may lead to a decrease in demand for end products whose manufacturing processes involve the use of photomasks, which may result in a reduction in new product design and development by semiconductor or FPD manufacturers, and adversely affect our results of operations and cash flows.
Additional taxesTechnology failures or cyber security breaches could adversely affect our financial results.
Our tax filings are subject to audits by tax authorities in the various jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the taxing authorities or through the courts. Currently, we believe there are no outstanding assessments whose resolution would result in a material adverse financial result. However, we cannot offer assurances that unasserted or potential future assessments would not have a material adverse effect on our financial condition or results of operations.
Our financial results may be adversely impacted by proposed legislative tax reform.
Various U.S. corporate tax reform billsWe rely on information technology systems to process, transmit, store, and other proposals have been, or are currently, under consideration by Congress and the Executive branch. These proposals include, among other items, corporate income tax rate changes in varying, uncertain or unspecified amounts; the modification or elimination of certain tax incentives and changes to the existing rules and regulations for taxing overseas earnings (including possible modifications to the current rules and regulations for repatriating such earnings); and measures to prevent base erosion and profit splitting (“BEPS”). It is not clear whether these proposals, if enacted, would materially affect the taxation of our domestic and foreign earnings.
In addition to the U.S. tax proposals, corporate tax reform proposals are under consideration in Taiwan and Korea including, among other items, corporate income tax rate changes, the modification or elimination of certain tax incentives, changes in unremitted earnings tax rates and modification of the related rules, and measures to prevent BEPS. Enactment of such changes could materially affect the tax treatment of our foreign subsidiaries’ earnings and their statutory deferred tax assets and liabilities.
Our business could be adversely impacted by global or regional catastrophic events.
Our business could be adversely affected by terrorist acts, major natural disasters, widespread outbreaks of infectious diseases, or the outbreak or escalation of wars, especially in the Asian markets, where we generateprotect electronic information. For example, a significant portion of the communications between our sales,personnel, customers, and in Japan where we purchase raw materials and capital equipment. Such events in the geographic regions in which we do business, including escalations of political tensions and military operations within the Korean Peninsula, where a significant portion of our foreign operations are located, could have material adverse impacts on our revenue, cost and availability of raw materials, results of operations, cash flows and financial condition.
Servicing our debt requires a significant amount of cash, and we may not generate sufficient cash flows from our operations to pay our indebtedness.
Our ability to make scheduled payments of debt principal and interest, or to refinance our indebtedness,suppliers depends on information technology. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our future performance, which is subjectcontrol, including, but not limited to, economic, financial, competitivenatural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other factors beyondsecurity issues. Although we have technology and information security processes and disaster recovery plans in place to mitigate our control. Our business may not continuerisks to generate sufficient cash flows from operations to both service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness would depend upon the conditions in the capital markets and our financial condition at such time. Wethese vulnerabilities, these measures may not be ableadequate to engageensure that our operations will not be disrupted, should such an event occur.
The General Data Protection Regulation (GDPR), which went into effect in anythe European Union (EU) on May 25, 2018, applies to the collection, use, retention, security, processing, and transfer of these activitiespersonally identifiable information of residents of EU countries. The GDPR created a range of new compliance obligations, and imposes significant fines and sanctions for violations. It is possible that the GDPR may be interpreted or engage in these activities on desirable terms, which could resultapplied in a default onmanner that is adverse to, or unforeseen by us, including requirements that are inconsistent with our debt obligations.practices, or that we may otherwise fail to construe its requirements in ways that are satisfactory to the EU authorities.
Our hedging activity could negatively impact our results of operations and cash flows.
We may enter into derivatives to manage our exposure to interest rate and currency movements. If we do not accurately forecast our results of operations, execute contracts that do not effectively mitigate our economic exposure to interest rates and currency rates, elect to not apply hedge accounting,Any failure, or failperceived failure, by us to comply with the complex accountingGDPR, or with any applicable regulatory requirements for hedging,or orders, including but not limited to privacy, data protection, information security, or consumer protection related privacy laws and regulations, in one or more jurisdictions within the EU or elsewhere, could: result in proceedings or actions against us by governmental entities or individuals; subject us to significant fines, penalties, and/or judgments; require us to change our results of operationsbusiness practices; limit access to our products and cash flows could be volatile, as well as negatively impacted.
The market price of the Company’s common stock is subject to volatility and could fluctuate widelyservices in price in response to various factors, many of which are beyond our control.
Factors that may influence the price of the common stock include, without limitation, the following:
| · | loss of any of our key customers or suppliers; |
| · | additions or departures of key personnel; |
| · | our ability to execute our business plan, including but not limited to, our plans to expand into China;
|
| · | announcements and consummations of business acquisitions; |
| · | operating results that fall below expectations; |
| · | additional issuances of common stock; |
| · | intellectual property disputes; |
| · | news or disclosures by competitors; |
| · | business combinations, divestitures or bankruptcies by customers, suppliers or competitors; |
| · | economic and other external factors; and |
| · | period-to-period fluctuations in our financial results. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially andcertain countries, or otherwise adversely affect our business, as we would be at risk to lose both customers and revenue, and incur substantial costs.
We may, in the market price offuture, incur net losses.
Although we have been profitable since fiscal 2010, we have, in the Company’s common stock. One should also be awarepast, incurred net losses. We cannot provide assurance that price volatility might be worse ifwe will not incur net losses in the trading volume of shares of the common stock is low.future.
Ineffective internal controls could impact the Company’s business and operating results.
The Company’s internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company’s business and operating results could be harmed, and the Company could fail to meet its financial reporting obligations.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
The following table presents certain information about the Company’sCompany's photomask manufacturing facilities:
Location | | Type of Interest | |
| | | |
| | | | |
| Allen, Texas | | Owned | |
| Boise, Idaho | | Owned | |
| Brookfield, Connecticut | | Owned | |
| Bridgend, Wales | | Leased | |
| Cheonan, Korea | | Owned | |
| Hefei, China | | Owned | (1) |
| Dresden, Germany | | Leased | |
| Hsinchu, Taiwan | | Owned | (1) |
| Hsinchu, Taiwan | | Leased | |
| Taichung, Taiwan | | Owned | (1) |
| Xiamen, China | | Owned | (1) |
(1) The Company owns its manufacturing facility in Hefei, Taichung, Xiamen, and one of its manufacturing facilities in Hsinchu. However, it leases the related land.
We have announced plans to expand into China and construct two manufacturing facilities. Production at both of these facilities is expected to commence in early 2019.
Please refer to Note 14 within Item 8 of this report for information on legal proceedings involving the Company.
We are subject to various claims that arise in the ordinary course of business. We believe such claims, individually or in the aggregate, will not have a material adverse effect on our business.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Common Stock of the CompanyOur common stock is traded on the NASDAQ Global Select Market (“NASDAQ”("NASDAQ") under the symbol PLAB. The table below shows the range of high and low sale prices per share in each quarter for fiscal years 2017 and 2016, as reported by the NASDAQ Global Select Market.
| | | High | | | Low | |
| Fiscal Year Ended October 29, 2017: | | | | | | |
| | | | | | | |
| Quarter Ended January 29, 2017 | | $ | 12.10 | | | $ | 8.20 | |
| Quarter Ended April 30, 2017 | | | 11.80 | | | | 10.30 | |
| Quarter Ended July 30, 2017 | | | 11.63 | | | | 8.80 | |
| Quarter Ended October 29, 2017 | | | 10.10 | | | | 7.55 | |
| | | | | | | | | |
| Fiscal Year Ended October 30, 2016: | | | | | | | | |
| | | | | | | | | |
| Quarter Ended January 31, 2016 | | $ | 13.05 | | | $ | 9.57 | |
| Quarter Ended May 1, 2016 | | | 12.39 | | | | 9.30 | |
| Quarter Ended July 31, 2016 | | | 10.69 | | | | 8.56 | |
| Quarter Ended October 30, 2016 | | | 10.90 | | | | 8.81 | |
On December 15, 2017,11, 2020, the closing sale price of our Common Stock,common stock, per the NASDAQ Global Select Market, was $8.70.$11.25. Based on available information, we estimate that we have approximately 11,2858,400 shareholders.
To date, we have not paid any cash dividends on PLABPhotronics shares, and, for the foreseeable future, we anticipate that earnings will continue to be retained for use in our business. Further, our credit facility precludes us from payingagreement limits the amount that can be paid as cash dividends.dividends on Photronics stock.
In September 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended) (“the Securities Act”). Share repurchases under the program commenced on September 16, 2020.
In August 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. This repurchase program was terminated on March 20, 2020.
In July 2018 and October 2018, the Company’s board of directors authorized the repurchase of up to $20 million and $25 million, respectively, of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act. The July 2018 repurchase program was completed in October 2018, and the October 2018 repurchase program was terminated on February 1, 2019.
All of the shares purchased under the above repurchase programs in fiscal 2020 were retired prior to the end of the fiscal year. All of the shares purchased under prior year repurchase programs were retired in fiscal year 2019. The tables below present additional information on the above repurchase programs.
| September 2020 Authorization | | Total Number of Shares Purchased (in millions) | | | Average Price Paid Per share | | | Total Number of Shares Purchased as Part of Publicly Announced Program (in millions) | | | Dollar Value of Shares That May Yet Be Purchased (in millions) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Fiscal year 2020 repurchases | | | | | | | | | | | | |
| September 14, 2020 – September 27, 2020 | | | 0.8 | | | $ | 9.93 | | | | 0.8 | | | $ | 92.1 | |
| September 28, 2020 – October 31, 2020 | | | 0.9 | | | $ | 10.27 | | | | 0.9 | | | $ | 82.5 | |
| Total | | | 1.7 | | | $ | 10.11 | | | | 1.7 | | | | | |
| August 2019 Authorization | | Total Number of Shares Purchased (in millions) | | | Average Price Paid Per share | | | Total Number of Shares Purchased as Part of Publicly Announced Program (in millions) | | | Dollar Value of Shares That May Yet Be Purchased (in millions) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Fiscal year 2020 repurchases | | | | | | | | | | | | |
| November 1, 2019 – December 2, 2019 | | | 0.9 | | | $ | 12.01 | | | | 0.9 | | | $ | 78.0 | |
| February 3, 2020 – March 1, 2020 | | | 0.1 | | | $ | 12.37 | | | | 0.1 | | | $ | 77.0 | |
| March 2, 2020 – March 29, 2020 | | | 0.5 | | | $ | 10.48 | | | | 0.5 | | | $ | 0.0 | * |
| Total | | | 1.5 | | | $ | 11.54 | | | | 1.5 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Fiscal year 2019 repurchases | | | | | | | | | | | | | | | | |
| September 23, 2019 – October 31, 2019 | | | 1.0 | | | $ | 11.05 | | | | 1.0 | | | $ | 89.0 | |
| Total | | | 1.0 | | | | | | | | 1.0 | | | | | |
| 2018 Authorizations | | Total Number of Shares Purchased (in millions) | | | Average Price Paid Per share | | | Total Number of Shares Purchased as Part of Publicly Announced Program (in millions) | | | Dollar Value of Shares That May Yet Be Purchased (in millions) | |
| | | | | | | | | | | | | |
| Fiscal year 2019 repurchases | | | | | | | | | | | | |
| November 1, 2018 – November 25, 2018 | | | 0.2 | | | $ | 9.49 | | | | 0.2 | | | $ | 20.1 | |
| November 26, 2018 – December 23, 2018 | | | 0.7 | | | $ | 9.38 | | | | 0.7 | | | $ | 13.4 | |
| December 24, 2018 – January 27, 2019 | | | 0.2 | | | $ | 9.41 | | | | 0.2 | | | $ | 11.2 | ** |
| Total | | | 1.1 | | | $ | 9.40 | | | | 1.1 | | | | | |
| Fiscal year 2018 repurchases | | Total Number of Shares Purchased (in millions) | | | Average Price Paid Per share | | | Total Number of Shares Purchased as Part of Publicly Announced Program (in millions) | | | Dollar Value of Shares That May Yet Be Purchased (in millions) | |
| | | | | | | | | | | | | |
| July 10, 2018 – July 29, 2018 | | | 0.8 | | | $ | 8.72 | | | | 0.8 | | | $ | 13.2 | |
| July 30, 2018 – August 26, 2018 | | | 0.9 | | | $ | 9.05 | | | | 0.9 | | | $ | 5.0 | |
| September 23, 2018 – October 31, 2018 | | | 0.9 | | | $ | 9.46 | | | | 0.9 | | | $ | 21.9 | |
| Total | | | 2.6 | | | $ | 9.04 | | | | 2.6 | | | | | |
* The share repurchase program was terminated on March 20, 2020.
** The share repurchase program was terminated on February 1, 2019.
Securities authorized for issuance under equity compensation plans
The information regarding our equity compensation required to be disclosed by Item 201(d) of Regulation S-K is incorporated by reference from the Photronics, Inc. 2018 definitive2021 Definitive Proxy Statement in Item 12 of Part III of this report. The 20182021 Definitive Proxy Statement will be filed within 120 days after our fiscal year ended October 29, 2017.31, 2020.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data (in thousands, except per share amounts)amounts and employees) is derived from our audited consolidated financial statements. The data should be read in conjunction with the audited consolidated financial statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K.
| | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | November 2, 2014 | | | November 3, 2013 | |
| OPERATING DATA: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Revenue | | $ | 450,678 | | | $ | 483,456 | | | $ | 524,206 | | | $ | 455,527 | | | $ | 422,180 | |
| Cost of goods sold | | | (359,363 | ) | | | (364,750 | ) | | | (381,070 | ) | | | (355,181 | ) | | | (322,540 | ) |
| Gross profit | | | 91,315 | | | | 118,706 | | | | 143,136 | | | | 100,346 | | | | 99,640 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | (43,585 | ) | | | (44,577 | ) | | | (48,983 | ) | | | (49,638 | )(d) | | | (48,213 | )(f) |
| Research and development | | | (15,862 | ) | | | (21,654 | ) | | | (21,920 | ) | | | (21,913 | ) | | | (20,758 | ) |
| Operating income | | | 31,868 | | | | 52,475 | | | | 72,233 | | | | 28,795 | | | | 30,669 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | |
| Interest and other income (expense), net | | | (3,068 | ) | | | 2,424 | | | | 2,797 | (c) | | | 3,410 | | | | 3,892 | |
| Interest expense | | | (2,235 | ) | | | (3,365 | ) | | | (4,990 | ) | | | (7,247 | ) | | | (7,756 | ) |
| Gains on sales of investments | | | - | | | | 8,940 | (a) | | | - | | | | - | | | | - | |
| Gain on acquisition | | | - | | | | - | | | | - | | | | 16,372 | (e) | | | - | |
| Income before income tax provision | | | 26,565 | | | | 60,474 | | | | 70,040 | | | | 41,330 | | | | 26,805 | |
| Income tax provision | | | (5,276 | ) | | | (4,798 | )(b) | | | (13,181 | ) | | | (9,295 | ) | | | (7,229 | ) |
| Net income | | | 21,289 | | | | 55,676 | | | | 56,859 | (c) | | | 32,035 | (d)(e) | | | 19,576 | (f) |
| Net income attributable to noncontrolling interests | | | (8,159 | ) | | | (9,476 | ) | | | (12,234 | ) | | | (6,039 | ) | | | (1,610 | ) |
| Net income attributable to Photronics, Inc. shareholders | | $ | 13,130 | | | $ | 46,200 | (a)(b) | | $ | 44,625 | (c) | | $ | 25,996 | (d)(e) | | $ | 17,966 | (f) |
| | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.19 | | | $ | 0.68 | (a)(b) | | $ | 0.67 | (c) | | $ | 0.42 | (d)(e) | | $ | 0.30 | (f) |
| Diluted | | $ | 0.19 | | | $ | 0.64 | (a)(b) | | $ | 0.63 | (c) | | $ | 0.41 | (d)(e) | | $ | 0.29 | (f) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted-average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 68,436 | | | | 67,539 | | | | 66,331 | | | | 61,779 | | | | 60,644 | |
| Diluted | | | 69,288 | | | | 76,354 | | | | 78,383 | | | | 66,679 | | | | 61,599 | |
BALANCE SHEET DATA
| | | As of | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | November 2, 2014 | | | November 3, 2013 | |
| | | | | | | | | | | | | | | | |
| Working capital | | $ | 367,348 | | | $ | 360,269 | | | $ | 168,237 | | | $ | 190,152 | | | $ | 212,837 | |
| Property, plant and equipment, net | | | 535,197 | | | | 506,434 | | | | 547,284 | | | | 550,069 | | | | 422,740 | |
| Total assets | | | 1,020,794 | | | | 987,988 | | | | 1,042,811 | | | | 1,025,564 | | | | 883,040 | |
| Total borrowings | | | 61,976 | | | | 67,288 | | | | 132,219 | | | | 141,011 | | | | 191,596 | |
| Total Photronics, Inc. shareholders’ equity | | | 744,564 | | | | 710,363 | | | | 646,555 | | | | 628,050 | | | | 585,314 | |
| | Year Ended | |
| | | October 31, | | | October 31, | | | October 31, | | | October 29, | | | October 30, | |
| | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| OPERATING DATA: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Revenue | | $ | 609,691 | | | $ | 550,660 | | | $ | 535,276 | | | $ | 450,678 | | | $ | 483,456 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | $ | 134,654 | | | $ | 120,841 | | | $ | 131,503 | | | $ | 91,315 | | | $ | 118,706 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 22.1 | % | | | 21.9 | % | | | 24.6 | % | | | 20.3 | % | | | 24.6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 63,928 | | | $ | 52,121 | | | $ | 65,627 | | | $ | 31,868 | | | $ | 52,475 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating margin | | | 10.5 | % | | | 9.5 | % | | | 12.3 | % | | | 7.1 | % | | | 10.9 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Effective tax rate (a) | | | 34.5 | % | | | 20.1 | % | | | 10.7 | % | | | 19.9 | % | | | 7.9 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (a), (b), (c) | | $ | 40,343 | | | $ | 40,491 | | | $ | 61,236 | | | $ | 21,289 | | | $ | 55,676 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. | | | | | | | | | | | | | | | | | | | | |
| shareholders (a), (b), (c) | | $ | 33,820 | | | $ | 29,793 | | | $ | 42,055 | | | $ | 13,130 | | | $ | 46,200 | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic (a), (b), (c) | | $ | 0.52 | | | $ | 0.45 | | | $ | 0.61 | | | $ | 0.19 | | | $ | 0.68 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted (a), (b), (c) | | $ | 0.52 | | | $ | 0.44 | | | $ | 0.59 | | | $ | 0.19 | | | $ | 0.64 | |
| Weighted-average diluted number of common shares outstanding: | | | 65,470 | | | | 69,155 | | | | 74,821 | | | | 69,288 | | | | 76,354 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 143,046 | | | $ | 68,386 | | | $ | 130,567 | | | $ | 96,833 | | | $ | 122,137 | |
| | | | | | | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | $ | 70,815 | | | $ | 178,375 | | | $ | 92,585 | | | $ | 91,965 | | | $ | 50,147 | |
| | | | | | | | | | | | | | | | | | | | | |
| Purchases of treasury stock | | $ | 34,394 | | | $ | 21,696 | | | $ | 23,111 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Common shares repurchased | | | 3,194 | | | | 2,133 | | | | 2,558 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Employees | | | 1,728 | | | | 1,775 | | | | 1,575 | | | | 1,475 | | | | 1,530 | |
| | | FY 2016 | | | FY 2015 | | | FY 2014 | | | FY 2013 | |
| Working Capital (g): | | | | | | | | | | | | |
| Previously reported | | $ | 360,269 | | | $ | 168,068 | | | $ | 190,152 | | | $ | 212,797 | |
| ASU 2015-03 adjustment | | | - | | | | 169 | | | | - | | | | 40 | |
| Retrospectively adjusted | | $ | 360,269 | | | $ | 168,237 | | | $ | 190,152 | | | $ | 212,837 | |
| Total Assets (g): | | | | | | | | | | | | | | | | |
| Previously reported | | $ | 988,267 | | | $ | 1,043,376 | | | $ | 1,026,739 | | | $ | 885,505 | |
| ASU 2015-03 adjustment | | | (279 | ) | | | (565 | ) | | | (1,175 | ) | | | (2,465 | ) |
| Retrospectively adjusted | | $ | 987,988 | | | $ | 1,042,811 | | | $ | 1,025,564 | | | $ | 883,040 | |
| | | | | | | | | | | | | | | | | |
| Total borrowings (g): | | | | | | | | | | | | | | | | |
| Previously reported | | $ | 67,567 | | | $ | 132,615 | | | $ | 142,186 | | | $ | 194,021 | |
| ASU 2015-03 adjustment | | | (279 | ) | | | (396 | ) | | | (1,175 | ) | | | (2,425 | ) |
| Retrospectively adjusted | | $ | 67,288 | | | $ | 132,219 | | | $ | 141,011 | | | $ | 191,596 | |
| BALANCE SHEET DATA | | | |
| | | As of | |
| | | October 31, | | | October 31, | | | October 31, | | | October 29, | | | October 30, | |
| | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | |
| Working capital | | $ | 357,200 | | | $ | 275,573 | | | $ | 311,655 | | | $ | 367,348 | | | $ | 360,269 | |
| Property, plant and equipment, net | | $ | 631,475 | | | $ | 632,441 | | | $ | 571,781 | | | $ | 535,197 | | | $ | 506,434 | |
| Total assets | | $ | 1,188,182 | | | $ | 1,118,665 | | | $ | 1,110,009 | | | $ | 1,020,794 | | | $ | 987,988 | |
| Long-term debt | | $ | 54,980 | | | $ | 41,887 | | | $ | - | | | $ | 57,337 | | | $ | 61,860 | |
| Total Photronics, Inc. shareholders’ equity | | $ | 804,962 | | | $ | 769,892 | | | $ | 759,671 | | | $ | 744,564 | | | $ | 710,363 | |
| Noncontrolling interests | | $ | 157,304 | | | $ | 141,200 | | | $ | 144,898 | | | $ | 120,731 | | | $ | 115,111 | |
| (a) | IncludesIn 2016, includes tax benefits in Taiwan of $4.8 million primarily related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary. |
| (b) | In 2018, includes $0.6 million gain on sale of assets. |
| (c) | In 2016, includes $8.8 million gain on sale of investment in a foreign entity and $0.2 million gain on the sale of the Company’s 49.99% interest in the MP Mask joint ventureventure. |
| (b) | Includes tax benefits in Taiwan of $4.8 million primarily related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary. |
| (c) | Includes $0.9 million of financing expenses related to the exchange of $57.5 million of 3.25% convertible senior notes. |
| (d) | Includes $2.5 million, net of tax, of expenses related to the acquisition of DPTT. |
| (e) | Includes non-cash gain of $16.4 million, net of tax, on acquisition of DPTT. |
| (f) | Includes $0.8 million, net of tax, of expenses related to the acquisition of DPTT. |
| (g) | Balances reflect the impact of the adoption of a new accounting standard in fiscal year 2016 (ASU 2015-03) related to the balance sheet classification of debt issuance costs. See Note 6 to the consolidated financial statements for additional information. |
| ITEM 7. | MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations for the Years Ended October 29, 2017, October 30, 2016 and November 1, 2015
Overview
We sell substantially all of our photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher performancehigher-performance electronic products such as photonics, micro-electronic mechanical systems, and certain nanotechnology applications. Our selling cycle is tightly interwoven with the development and release of new semiconductor and display designs and flat panel display applications, particularly as they relate to the semiconductor industry’sindustry's migration to more advanced product innovation, design methodologies, and fabrication processes. We believe that theThe demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies. Consequently, an increase in semiconductor or FPDdisplay sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPDdisplay designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, FPDdisplay, and photomask design and semiconductor and FPD production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronic industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices.prices with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of time, sometimes within 24twenty-four hours. This results in our having a minimal level of backlog orders, typically one to two weeks of backlog for IC photomasks and two to three weeks of backlog for FPD photomasks.
The global semiconductormicroelectronics industry is driven by end markets which have been closely tied to consumer drivenconsumer-driven applications of high performance semiconductorhigh-performance devices, including, but not limited to, mobile display devices, mobile communications, and computing solutions. While we cannot predict the timing of the industry’sindustry's transition to volume production of next-generation technology nodes, or the timing of up and down cyclesdown-cycles with precise accuracy, we believe that such transitions and cycles will continue into the future, beneficially and adversely affecting our business, financial condition, and operating results as they occur. We believe our ability to remain successful in these environments is dependent upon the achievement of our goals of being a service and technology leader and efficient solutions supplier, which we believe should enable us to continually reinvest in our global infrastructure.
We are focused on improving our competitiveness by advancing our technology and reducing costs and, in connection therewith, have invested and plan to continue to invest in manufacturing equipment to serve the high-end markets. As we face challenges in the current and near term that require us to make significant improvements in our competitiveness, we continue to evaluate further cost reduction initiatives.
As of December 2017, state-of-the-artState-of-the-art production for semiconductor masks is considered to be 4528 nanometer and lowersmaller for ICs and Generation 8 and above10.5+ and AMOLED display-basedand LTPS display-based process technologies for FPDs. However, 6532 nanometer and above geometries for semiconductors and Generation 78 and below excluding(excluding AMOLED and LTPS) process technologies for FPDsdisplays constitute the majority of designs currently being fabricated in volume. At these geometries,, we can produce full lines of photomasks, and there is no significant technology employed by our competitors that is not available to us. We expect 45 nanometer and belowadvanced-generation designs to continue to move to wafer fabricationproduction throughout fiscal 2018,2021, and we believe we are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.
The photomask industry has been, and is expected to continue to be, characterized by technological change and evolving industry standards. In order to remain competitive, we will be required to continually anticipate, respond to, and utilize changing technologies. In particular, we believe that, as semiconductor geometries continue to become smaller, and FPDdisplay designs become larger or otherwise more advanced, we will be required to manufacture even more complex optically-enhanced reticles, including optical proximity correction and phase-shift photomasks. Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in semiconductor and high performancehigh-performance electronics fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain chip stackingchip-stacking methodologies that lessen the emphasis on conventional lithography technology. Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors. As of the end of fiscal year 2017,2020, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for high volumehigh-volume semiconductor wafer production, and we have not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies. However, should direct-write lithography or any other alternative method of transferring IC designs to semiconductor wafers without the use of photomasks achieve market acceptance, and we do not anticipate, respond to, or utilize these or other changing technologies due to resource, technological, or other constraints, our business and results of operations could be materially adversely affected.
Both our revenues and costs have been affected by the increased demand for high-end technologyhigh-end-technology photomasks that require more advanced manufacturing capabilities, but generally command higher average selling prices (“ASPs”("ASPs"). Our capital expenditure payments aggregated approximately $246$342 million for the three fiscal years ended October 29, 2017,31, 2020, which has significantly contributed to our cost of goods sold. We intend to continue to make the required investments to support the technological demands of our customers that we believe will position usthe Company for future growth. In support of this effort, we expect capital expenditure payments to be approximately $250$100 million in fiscal year 2018.2021.
The manufacture of photomasks for use in fabricating ICs, FPDs, and other related products built using comparable photomask-based process technologies has been, and continues to be, capital intensive. Our employees and our integrated global manufacturing network which currently consists of nine manufacturing sites, represent a significant portion of our fixed operating cost base. Should our revenue decrease as a result of a decrease in design releases from our customers, we may have excess or underutilized production capacity, which could significantly impact our operating margins, or result in write-offs from asset impairments.
Recent Developments
During the fourth quarter of fiscal 2020, we entered into a Master Lease Agreement with a financing entity for the lease of an inspection tool with a maximum value of $10 million. The tool was delivered during the fourth quarter of fiscal year 2020, and the financing entity made a progress payment to the vendor of $6.5 million in the first quarter of fiscal year 2021. The progress payment will accrue interest at 1.56% payable monthly until the final payment for the tool is made, at which time the lease will begin.
In the fourth quarter of fiscal 2020, we were approved to borrow 200 million Chinese renminbi (RMB) (approximately $29.8 million, at the balance sheet date) from the China Construction Bank Corporation. We received initial proceeds of 41 million RMB (approximately $6.2 million) against this approval in November 2020. Loan proceeds have been, and will be, used for the purchase of two lithography tools at our facility in Hefei, China. Interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center less 0.45% (adjusted annually), and is to be repaid semiannually, over five years, commencing on March 5, 2022. The interest rate on the loan was 4.2% at the borrowing date. The first five semiannual loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal; the last five installments will each be for 12.5 percent of the approved loan principal, with the final installment due on September 30, 2026. Semiannual repayments of the initial $6.2 million borrowed will commence on March 5, 2022, with a repayment of $2.3 million; subsequent semiannual repayments will be in the amounts of $2.3 million and $1.6 million. The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment, which had a combined carrying value of $87.8 million as of October 31, 2020.
In the fourth quarter of fiscal 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended) (“the Securities Act”). We repurchased 1.7 million shares at a cost of $17.5 million (an average price of $10.11 per share) under this authorization. All shares repurchased were retired in fiscal 2020.
In the fourth quarter of fiscal 2020, PDMC, the Company’s majority-owned IC subsidiary in Taiwan, paid a dividend of which 49.99%, or approximately $16.2 million, was paid to noncontrolling interests.
In the first quarter of fiscal 2020, we acquired the remaining 0.2% of noncontrolling interests in PK, Ltd. for $0.6 million.
In the first quarter of fiscal 2020, we adopted ASU 2016-02 and all subsequent amendments, collectively codified in Accounting Standards Codification Topic 842 - “Leases” (“Topic 842”). This guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption; we elected to apply the guidance at the beginning of the period of adoption, and recognized right-of-use leased assets of approximately $6.5 million, and corresponding lease liabilities, which were discounted at our incremental borrowing rates, on our November 1, 2019, consolidated balance sheet to reflect our adoption of the guidance. Our adoption of Topic 842 did not affect our cash flows or our ability to comply with covenants under our credit agreements.
In the fourth quarter of fiscal 2017,2019, our board of directors declared a dividend of one preferred stock purchase right (a “Right”), payable on or about October 1, 2019, for each share of common stock, par value $0.01 per share, of the Company outstanding on September 30, 2019, to the stockholders of record on that date. In connection with the distribution of the Rights, we announced that Photronics UK, Ltd.entered into a Section 382 Rights Agreement (the “Rights Agreement”), dated as of September 23, 2019, between the Company and Computershare Trust Company, N.A., a wholly owned subsidiary of ours, signed an investment agreement with Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the termsfederally chartered trust company, as rights agent. The purpose of the agreement, throughRights Agreement is to deter trading of our common stock that would result in a change in control (as defined in Internal Revenue Control Section 382), thereby preserving our future ability to use our historical federal net operating losses and other Tax Attributes (as defined in the Rights Agreement). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, par value $0.01 per share, at a price of $33.63, subject to adjustment. The Rights, which are described in the Company’s Current Report on Form 8-K filed on September 24, 2019, are in all respects subject to and governed by the provisions of the Rights Agreement. The Rights will expire at the earliest to occur of (i) the date on which our board of directors determines, in its sole discretion, that the Rights Agreement is no longer necessary for the preservation of material valuable tax attributes, or the tax attributes have been fully utilized and may no longer be carried forward, and (ii) the close of business on September 22, 2022.
In the fourth quarter of fiscal 2019, PDMC, the Company’s majority-owned IC subsidiary we will investin Taiwan, paid a minimum of $160 million, a portiondividend of which may49.99%, or approximately $18.9 million, was paid to noncontrolling interests.
In the fourth quarter of fiscal 2019, upon our request, a financing entity made an advance payment of $3.5 million to an equipment vendor. We entered into a Master Lease Agreement (“MLA”) with this financing entity, which became effective in July 2019. The MLA enables us to request advance payments or other funds to finance equipment to be fundedleased or purchased in the U.S. In connection with local borrowings,this MLA, we have been approved for financing of $35 million for the purchase of a high-end lithography tool. Interest on this borrowing is variable and payable monthly at thirty-day LIBOR plus 1% (1.15% at October 31, 2020), and will continue to build and operateaccrue until the borrowing is repaid or, as allowed under the MLA, we enter into a research and development and manufacturing facilitylease for high-end and mainstream FPD photomasks. Hefei State Hi-tech Industry Development Zone will provide certain investment incentives and support forthe equipment. During the first quarter of fiscal 2021, this facility, which will have initial capabilityfinancing entity made an additional payment of $28 million to producethe equipment vendor on our behalf.
In the fourth quarter of fiscal 2019, the Company’s board of directors authorized the repurchase of up to G10.5+ large area masks and AMOLED products. Construction began in late 2017 and production is anticipated$100 million of its common stock, pursuant to commence in early 2019.a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). We repurchased 2.5 million shares at a cost of $27.9 million (an average price of $11.34 per share) under this authorization. The repurchase program was terminated on March 20, 2020.
In August 2016, Photronics Singapore Pte, Ltd., a wholly owned subsidiary, signed an investment agreement with the Administrative Committeesecond quarter of Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Underfiscal 2019, we repaid, upon maturity, the termsentire $57.5 million principal amount of the agreement,convertible senior notes we issued in April 2016.
In the first quarter of fiscal 2019, PDMC paid a dividend, of which 49.99%, or approximately $26.1 million, was paid to noncontrolling interests.
In the first quarter of fiscal 2019, PDMCX was approved for credit of 345.0 million RMB (approximately $51.4 million, at the balance sheet date), subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will buildenter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in RMB, are being used to finance certain capital expenditures in China. PDMCX granted liens on its land, building, and operate an IC facility to engage in research and development, manufacture and salecertain equipment as collateral for the Project Loans. As of photomasks, in returnOctober 31, 2020, PDMCX had outstanding 336.0 million RMB ($50.1 million) against this approval. Payments on these borrowings are due semiannually through December 2025. See Note 7 of the consolidated financial statements for which Xiamen Torch will provide certain investment incentives and support. This expansion is also substantially supported by customer commitments for its output. The total investment per the agreement is $160 million to be funded over the next five years in cash, transferred equipment and potential local borrowings. Construction began in 2017 and production is anticipated to start in early 2019.additional information on these loans.
In the first quarter of fiscal 2019, PDMCX received approval for unsecured credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loans”), PDMCX can borrow up to 140.0 million RMB to pay value-added taxes (“VAT”) and up to 60.0 million RMB to fund operations; combined total borrowings are limited to the equivalent of $25.0 million. As of October 31, 2020, PDMCX had outstanding 8.0 million RMB ($1.2 million) to fund operations, with repayments due one year from the borrowing dates of the separate loan agreements. As of October 31, 2020, PDMCX had outstanding 93.2 million RMB ($13.9 million) borrowed to pay VAT. Payments on these borrowings are due semiannually, in increasing amounts, through July 2023. See Note 7 of the consolidated financial statements for additional information on these loans.
In the fourth quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under Rule 10b5-1, on October 22, 2018, and was terminated on February 1, 2019. In total, we repurchased 1.5 million shares at a cost of $13.8 million (an average of $9.41 per share) under this authorization.
In the third quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $20 million of its common stock, which was effectuated in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on July 10, 2018, and ended in October 2018. In total, under this authorization, we repurchased 2.2 million shares at a cost of $20.0 million (an average of $8.97 per share).
In the third quarter of fiscal 2017,2018, PDMC paid a dividend, of which 49.99%, or approximately $8.2 million, was paid to noncontrolling interests.
In the first quarter of fiscal 2018, we announced the successful closing of the China joint venture agreement with Dai Nippon Printing Co., Ltd. (“DNP”), which we had agreed to create a joint venture with DNP to encompassenter into and announced in the Xiamen project.third quarter of fiscal 2017. Under the agreement, our wholly-ownedwholly-owned Singapore subsidiary will ownowns 50.01% of the joint venture, which will beis named Xiamen American Japan Photronics DNP Mask Corporation XiamenCo., Ltd. (PDMCX), and a subsidiary of DNP will ownowns the remaining 49.99%. The financial results of the joint venture, will be includedwhich commenced production in Photronics’ consolidated financial statements.
In the third quarter of fiscal 2017, our majority owned IC facility2019, are included in Taiwan paid a dividendthe Photronics, Inc. consolidated financial statements. See Note 5 of $8.3 million to its noncontrolling interests.
In the third quarter of fiscal 2016, our majority owned IC facility in Taiwan paid a dividend of $11.9 million to its noncontrolling interests.
In the third quarter of fiscal 2016, we sold our investment in MP Mask to Micronconsolidated financial statements for $93.1 million and recorded a gain of $0.1 millionadditional information on the sale. On that same date a supply agreement commenced between Photronics and Micron, which provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term and expired in May 2017. We have unlimited rights to use the technology under our prior technology license agreement.joint venture.
In the second quarter of fiscal 2016, $57.5 million of our senior convertible notes matured. We repaid $50.1 million to noteholders, and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.
In the first quarterTable of fiscal 2015 we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events which are described in the indenture dated January 22, 2015. Note holders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and we are not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date.Contents
Results of Operations
The following table presentstables present selected operating information expressed as a percentage of revenue:
| | | Year Ended | | | Three Months Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | August 2, 2020 | | | October 31, 2019 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods sold | | | (79.7 | ) | | | (75.4 | ) | | | (72.7 | ) | | | 78.6 | | | | 76.1 | | | | 75.6 | |
| | | | | | | | | | | | | | |
| Gross profit | | | 20.3 | | | | 24.6 | | | | 27.3 | | | | 21.4 | | | | 23.9 | | | | 24.4 | |
| Selling, general and administrative expenses | | | (9.7 | ) | | | (9.2 | ) | | | (9.3 | ) | | | 8.6 | | | | 8.4 | | | | 7.8 | |
| Research and development expenses | | | (3.5 | ) | | | (4.5 | ) | | | (4.2 | ) | | | 2.8 | | | | 2.9 | | | | 2.9 | |
| | | | | | | | | | | | | | |
| Operating income | | | 7.1 | | | | 10.9 | | | | 13.8 | | | | 10.0 | | | | 12.6 | | | | 13.7 | |
| Interest income and other income (expense) | | | (0.7 | ) | | | 0.5 | | | | 0.5 | | |
| Interest expense | | | (0.5 | ) | | | (0.7 | ) | | | (1.0 | ) | |
| Gains on sales of investments | | | - | | | | 1.8 | | | | - | | |
| Other income (expense), net | | | | (1.9 | ) | | | (1.3 | ) | | | (3.9 | ) |
| | | | | | | | | | | | | | |
| Income before income tax provision | | | 5.9 | | | | 12.5 | | | | 13.3 | | | | 8.1 | | | | 11.3 | | | | 9.8 | |
| Income tax provision | | | (1.2 | ) | | | (1.0 | ) | | | (2.5 | ) | | | 2.3 | | | | 3.2 | | | | 1.5 | |
| | | | | | | | | | | | | | |
| Net income | | | 4.7 | | | | 11.5 | | | | 10.8 | | | | 5.8 | | | | 8.1 | | | | 8.3 | |
| Net income attributable to noncontrolling interests | | | (1.8 | ) | | | (1.9 | ) | | | (2.3 | ) | | | 1.5 | | | | 1.3 | | | | 2.1 | |
| | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | | 2.9 | % | | | 9.6 | % | | | 8.5 | % | | | 4.3 | % | | | 6.8 | % | | | 6.2 | % |
| | | Year Ended | |
| | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods sold | | | 77.9 | | | | 78.1 | | | | 75.4 | |
| | | | | | | | | | | | | |
| Gross profit | | | 22.1 | | | | 21.9 | | | | 24.6 | |
| Selling, general and administrative expenses | | | 8.8 | | | | 9.5 | | | | 9.6 | |
| Research and development expenses | | | 2.8 | | | | 2.9 | | | | 2.7 | |
| | | | | | | | | | | | | |
| Operating income | | | 10.5 | | | | 9.5 | | | | 12.3 | |
| Other income (expense), net | | | (0.4 | ) | | | (0.3 | ) | | | 0.5 | |
| | | | | | | | | | | | | |
| Income before income tax provision | | | 10.1 | | | | 9.2 | | | | 12.8 | |
| Income tax provision | | | 3.5 | | | | 1.9 | | | | 1.4 | |
| | | | | | | | | | | | | |
| Net income | | | 6.6 | | | | 7.3 | | | | 11.4 | |
| Net income attributable to noncontrolling interests | | | 1.1 | | | | 1.9 | | | | 3.5 | |
| | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | | 5.5 | % | | | 5.4 | % | | | 7.9 | % |
Note:All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2020 (Q4 FY20), August 2, 2020 (Q3 FY20) and October 31, 2019 (Q4 FY19), and for the fiscal years ended October 29, 2017 (2017),31, 2020 (FY20) and October 30, 2016 (2016)31, 2019 (FY19). Please refer to the MD&A in our 2019 Annual Report on Form 10-K for comparative discussion of our fiscal years ended October 31, 2019 and November 1, 2015 (2015), in millionsOctober 31, 2018.
Revenue
| | | | | | | | | | | | Percent Change | |
| | | 2017 | | | 2016 | | | 2015 | | | 2016 to 2017 | | | 2015 to 2016 | |
| | | | | | | | | | | | | | | | |
| IC | | $ | 350.3 | | | $ | 364.6 | | | $ | 420.8 | | | | (3.9 | )% | | | (13.4 | )% |
| FPD | | | 100.4 | | | | 118.9 | | | | 103.4 | | | | (15.6 | )% | | | 15.0 | |
| Total revenue | | $ | 450.7 | | | $ | 483.5 | | | $ | 524.2 | | | | (6.8 | )% | | | (7.8 | )% |
Revenue decreased 6.8% in 2017 to $450.7 million from $483.5 million in 2016. IC photomask revenue decreased $14.3 million, or 3.9%, asOur quarterly revenues can be affected by the seasonal purchasing practices of our customers. As a result, demand for our products is typically reduced during the first, and sometimes the second, quarters of decreased volumeour fiscal year, by the North American, European, and Asian holiday periods, as some of both high-end (4.8%)our customers reduce their development and, mainstream (3.4%) products. Revenue from high-end IC products decreased $23.9 million, or 18.3%, from $130.4 million lastconsequently, their buying activities during those periods.
At the beginning of fiscal year to $106.5 million, primarily as a result2020, we changed the threshold for the definition of decreased ASPs, while revenue from mainstream IC products increased $9.7 million, or 4.1%, from $234.1 million to $243.8 million which resulted from increased ASPs. FPD sales decreased in 2017 by $18.5 million, or 15.6% from 2016. Revenue from high-end FPD, sales fell $18.7 million, or 21.6%, year-over-year, the causes of which were $11.8 million and $6.9 million from decreased ASPs and volume, respectively. FPD mainstream photomask revenue was $32.5 million, essentially flat year-over-year, with a modest increase in volume offsetting a slightly lower decrease in ASPs. High-end photomask applications include mask sets for 45 nanometer and below for IC products, and G8 and above and active matrix organic light-emitting diode (AMOLED) display screen technologies forscreens, to G10.5+, AMOLED, and low-temperature polysilicon (LTPS) display screens, to reflect the overall advancement of technology in the FPD products.industry. Our definition of high-end IC products remains as 28 nanometer or smaller. High-end photomasks typically have higher ASPsselling prices (ASPs) than mainstream products.
We believeThe following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY20 and FY20 from revenue in prior reporting periods. Columns may not total due to rounding.
Quarterly Changes in Revenue by Product Type
| | Q4 FY20 from Q3 FY20 | | | Q4 FY20 from Q4 FY19 | |
| | | Revenue in Q4 FY20 | | | Increase (Decrease) | | | Percent Change | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | |
| IC | | | | | | | | | | | | | | | |
| High-end | | $ | 38.2 | | | $ | (0.5 | ) | | | (1.3 | )% | | $ | (6.8 | ) | | | (15.1 | )% |
| Mainstream | | | 67.8 | | | | (2.2 | ) | | | (3.2 | )% | | | 0.2 | | | | 0.3 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total IC | | $ | 105.9 | | | $ | (2.7 | ) | | | (2.5 | )% | | $ | (6.6 | ) | | | (5.9 | )% |
| | | | | | | | | | | | | | | | | | | | | |
| FPD | | | | | | | | | | | | | | | | | | | | |
| High-end | | $ | 31.3 | | | $ | (5.4 | ) | | | (14.6 | )% | | $ | 5.9 | | | | 23.1 | % |
| Mainstream | | | 12.1 | | | | (0.5 | ) | | | (4.0 | )% | | | (6.2 | ) | | | (34.1 | )% |
| | | | | | | | | | | | | | | | | | | | | |
| Total FPD | | $ | 43.4 | | | $ | (5.9 | ) | | | (11.9 | )% | | $ | (0.4 | ) | | | (0.8 | )% |
| | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 149.3 | | | $ | (8.6 | ) | | | (5.5 | )% | | $ | (7.0 | ) | | | (4.5 | )% |
Quarterly Changes in Revenue by Geographic Origin
| | | Q4 FY20 from Q3 FY20 | | | Q4 FY20 from Q4 FY19 | |
| | | Revenue in Q4 FY20 | | | Increase (Decrease) | | | Percent Change | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | |
| Taiwan | | $ | 56.6 | | | $ | (4.2 | ) | | | (6.9 | )% | | $ | (12.3 | ) | | | (17.8 | )% |
| Korea | | | 36.6 | | | | (2.9 | ) | | | (7.4 | )% | | | (0.8 | ) | | | (2.1 | )% |
| United States | | | 26.7 | | | | (1.7 | ) | | | (5.9 | )% | | | (3.8 | ) | | | (12.5 | )% |
| China | | | 21.0 | | | | 0.0 | | | | 0.1 | % | | | 9.7 | | | | 85.6 | % |
| Europe | | | 7.9 | | | | 0.3 | | | | 3.3 | % | | | 0.1 | | | | 1.0 | % |
| Other | | | 0.5 | | | | (0.1 | ) | | | (13.7 | )% | | | 0.1 | | | | 23.5 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 149.3 | | | $ | (8.6 | ) | | | (5.5 | )% | | $ | (7.0 | ) | | | (4.5 | )% |
Revenue decreased 5.5% in Q4 FY20, compared with Q3 FY20, as FPD demand fell 11.9% due, in significant part, to U.S. trade sanctions placed on Huawei Technologies Co., Ltd. which negatively impacted their ability to release new mobile devices, thereby decreasing demand for new display panels and, ultimately, new FPD photomasks; consequentially, our mobile display panel revenue willdeclined 21% from Q3 FY20. In addition, high prices and unit demand for current products resulted in panel producers extending production runs of current designs and delaying design changes, which led to decreased demand of masks used for production of LCD displays on G10.5+, and smaller substrates. FPD revenue attributable to China decreased 12% from Q3 FY20, while representing 56% of our total FPD revenue in Q4 FY20. IC revenue decreased from the prior quarter by 2.5%, as improvement at some logic foundries in the U.S. and Asia somewhat mitigated weakened demand for memory photomasks. IC revenue attributable to China increased 14% from Q3 FY20, and accounted for a quarter of our IC revenue in the current quarter.
Revenue decreased 4.5% in Q4 FY20, compared with Q4 FY19; IC demand declined 5.9%, due to weakened demand for memory photomasks, while FPD demand fell less than 1%, despite the disruptions to the China supply chain discussed above.
Year-over-Year Changes in Revenue by Product Type
| | | FY20 from FY19 | |
| | | Revenue in FY20 | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | |
| IC | | | | | | | | | |
| High-end | | $ | 156.1 | | | $ | (0.3 | ) | | | (0.2 | )% |
| Mainstream | | | 262.3 | | | | 12.5 | | | | 5.0 | % |
| | | | | | | | | | | | | |
| Total IC | | $ | 418.4 | | | $ | 12.2 | | | | 3.0 | % |
| | | | | | | | | | | | | |
| FPD | | | | | | | | | | | | |
| High-end | | $ | 139.6 | | | $ | 53.6 | | | | 62.4 | % |
| Mainstream | | | 51.7 | | | | (6.8 | ) | | | (11.7 | )% |
| | | | | | | | | | | | | |
| Total FPD | | $ | 191.3 | | | $ | 46.8 | | | | 32.4 | % |
| | | | | | | | | | | | | |
| Total Revenue | | $ | 609.7 | | | $ | 59.0 | | | | 10.7 | % |
Year-over-Year Changes in Revenue by Geographic Origin
| | | FY20 from FY19 | |
| | | Revenue in FY20 | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | |
| Taiwan | | $ | 239.1 | | | $ | (5.3 | ) | | | (2.2 | )% |
| Korea | | | 153.1 | | | | 5.3 | | | | 3.6 | % |
| United States | | | 104.9 | | | | (0.1 | ) | | | (0.1 | )% |
| China | | | 79.4 | | | | 60.4 | | | | 317.5 | % |
| Europe | | | 31.5 | | | | (1.1 | ) | | | (3.3 | )% |
| Other | | | 1.7 | | | | (0.2 | ) | | | (10.2 | )% |
| | | | | | | | | | | | | |
| Total Revenue | | $ | 609.7 | | | $ | 59.0 | | | | 10.7 | % |
Revenue increased 10.7% in FY20, compared with FY19, to a record high of $609.7 million, eclipsing our previous record set in FY19. FPD revenue increased 32.4%, on strong demand for high-end products, despite the disruptions to the China FPD supply chain encountered in Q4 FY20. IC revenue increased 3.0%, year-over-year; the increase was driven by higher demand for mainstream logic masks in 2018, as we expect revenues to increaseAsia and the U.S. The outbreak of the COVID 19 pandemic in FY20 tempered revenue growth for both high-end IC and FPD, products. Our projected increaseas supply chains were, at least temporarily, disrupted and travel restrictions were imposed, resulting in high-end IC revenue is based on our expectation that our largest ICdelays to equipment installations and customer will increase its market share at the 28 nanometer node. In addition, we are anticipating growth at the 22 and 14 nanometer node levels. We are expecting increased demand for AMOLED products to lead to revenue growthdesign team projects.
Gross Margin
| | | | | | | | | | | | Percent Change | |
| | | Q4 FY20 | | | Q3 FY20 | | | Q4 FY19 | | | Q4 FY20 from Q3 FY20 | | | Q4 FY20 from Q4 FY19 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Gross profit | | $ | 31.9 | | | $ | 37.7 | | | $ | 38.2 | | | | (15.5 | )% | | | (16.4 | )% |
| Gross margin | | | 21.4 | % | | | 23.9 | % | | | 24.4 | % | | | | | | | | |
Gross margin decreased by 2.5 percentage points in 2018, and plan to support this growth, in part, with a new high-end mask writing tool, which is due for delivery to us in the first half of 2018. Beyond 2018, we are anticipating our IC and FPD facilities under construction in China and expected to commence production in the spring of 2019 to fuel growth.
Net revenue decreased 7.8% in 2016, compared with 2015. IC photomask revenue was downQ4 FY20, from Q3 FY20, primarily as a result of a decline in customer new product launches that require logic masks, as well as some reduction in foundry demand for memory masks. Revenue from high-end IC products decreased $36.5 million from last year to $130.4 million. FPD revenue increased from 2015 primarily due to increased demand for high-end large area masks. Revenue from high-end FPD Masks increased by $15.7 million to $86.6 million in 2016. High-end photomasks typically have higher ASPs than mainstream photomasks.
The following table presents changesthe above mentioned 5.5% decrease in revenue from fiscal years 2016 to 2017 and 2015 to 2016 by geographic area:
| | | 2016 to 2017 | | | 2015 to 2016 | |
| | | Revenue in 2017 | | | Increase (Decrease) | | | Percent Change | | | Revenue in 2016 | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | | | | |
| Taiwan | | $ | 187.8 | | | $ | (5.4 | ) | | | (2.8 | )% | | $ | 193.2 | | | $ | (11.9 | ) | | | (5.8 | )% |
| Korea | | | 122.2 | | | | (18.8 | ) | | | (13.4 | )% | | | 141.0 | | | | (6.9 | ) | | | (4.7 | )% |
| United States | | | 102.0 | | | | (11.7 | ) | | | (10.2 | )% | | | 113.7 | | | | (19.1 | ) | | | (14.4 | )% |
| Europe | | | 36.1 | | | | 2.7 | | | | 8.1 | % | | | 33.4 | | | | (2.4 | ) | | | (6.7 | )% |
| All other Asia | | | 2.6 | | | | 0.4 | | | | 18.7 | % | | | 2.2 | | | | (0.4 | ) | | | 15.3 | % |
| | | $ | 450.7 | | | $ | (32.8 | ) | | | (6.8 | )% | | $ | 483.5 | | | $ | (40.7 | ) | | | (7.8 | )% |
the prior quarter. Gross Profit
| | | | | | | | Percent Change | |
| | 2017 | | 2016 | | 2015 | | 2016 to 2017 | | 2015 to 2016 | |
| | | | | | | | | | | |
| Gross profit | | $ | 91.3 | | | $ | 118.7 | | | $ | 143.1 | | | | (23.1 | )% | | | (17.1 | )% |
| Gross margin | | | 20.3 | % | | | 24.6 | % | | | 27.3 | % | | | | | | | | |
Gross profit and gross marginmargins decreased in 2017, compared with 2016, primarily due to a decrease in overall revenue that resulted from lower ASPsTaiwan, Korea, and to a lesser extent, a reduction in units sold. Gross profit and gross margin decreased in 2016, compared with 2015,the U.S., primarily as a result of decreased revenue; gross margins at our China-based operations increased, overall, primarily due to lower glass blank costs. Total cost of goods sold decreased $2.7 million, or 2.3%, from the prior quarter, primarily due to a 6.1% decrease in material costs, which were essentially flat as a percentage of revenue. Labor costs decreased 1.9%, but were essentially flat as a percentage of revenue, while overhead costs increased $0.5 million, and 2.3 percentage points, as a percentage of high-endrevenue.
Gross margin decreased by 3.0 percentage points in Q4 FY20, from Q4 FY19, primarily as a result of the 4.5% decrease in revenue in the current year quarter. Gross margins at our China-based IC and FPD operations increased as they continue to ramp up to full production. Gross margins decreased in Taiwan, and the U.S., primarily as a lesser extent, mainstreamresult of decreased revenue. Total cost of goods sold decreased $0.7 million, or 0.6%, from the prior year quarter, with $1.9 million of the decrease resulting from lower materials costs, which fell 4.1%, but were essentially flat as a percentage of revenue. Labor costs increased 9.5%, up 1.5 percentage points of revenue, while overhead costs were essentially flat, and up 1.4 percentage points of revenue.
| | | | | | | | | Percent Change | |
| | | FY20 | | | FY19 | | | FY20 from FY19 | |
| | | | | | | | | | |
| Gross profit | | $ | 134.7 | | | $ | 120.8 | | | | 11.4 | % |
| Gross margin | | | 22.1 | % | | | 21.9 | % | | | | |
Gross margin increased by 0.2 percentage points in YTD FY20, from YTD FY19, primarily as a result of the 10.7% increase in revenue from the prior year period. Gross margins at our China-based IC photomasks. The Company operatesand FPD operations increased as these facilities continue to ramp up to full production. Gross margins decreased in Taiwan primarily due to lower revenue, and in the U.S due to overhead costs increasing, while revenue was, essentially, unchanged. Total cost of goods sold increased $45.2 million, or 10.5%, from the prior year period, with $19.6 million of the increase resulting from greater materials costs, which were up 12.0% from YTD FY19, and increased 0.4%, as a percentage of revenue. Labor costs increased 4.9%, but were down 0.6 percentage points against revenue, while overhead costs increased 11.2%, with increased equipment costs (which reflected our expanded installed tool base) comprising the majority of this increase.
As we operate in a high fixed-cost environment, and, to the extent that the Company’sincreases or decreases in our revenues and capacity utilization increase or decrease, gross margin will generally be positively or negatively impacted.impact our gross margin.
Selling, General and Administrative Expenses
| | | | | | | | | | | | Percent Change | |
| | | 2017 | | | 2016 | | | 2015 | | | 2016 to 2017 | | | 2015 to 2016 | |
| | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | $ | 43.6 | | | $ | 44.6 | | | $ | 49.0 | | | | (2.2 | )% | | | (9.0 | )% |
| Percentage of net sales | | | 9.7 | % | | | 9.2 | % | | | 9.3 | % | | | | | | | | |
Selling, general and administrative expenses decreased by $1.0were $12.8 million in 2017,Q4 FY20, compared with 2016,$13.3 million in Q3 FY20, and $12.1 million in Q4 FY19. The decrease from Q3 FY20 was primarily due to reduced bad debt expensethe result of decreased compensation and professional fees,related expenses of $0.8 million, and the increase from the prior year quarter was primarily the result of increased compensation and related expenses of $1.2 million, which were partially offset by increased compensationdecreased travel costs and selling expenses.of $0.6 million. Selling, general and administrative expenses increased $1.3 million, or 2.4%, in YTD FY20, from YTD FY19, primarily as a result of increased compensation and related expenses and professional fees of $2.7 million and $0.8 million, respectively, partially offset by decreased $4.4 million in 2016, compared with 2015, primarily due to reduced compensation, freight, and other expenses.travel expenses of $1.7 million.
Research and Development Expenses
| | | | | | | | | | | | Percent Change | |
| | | 2017 | | | 2016 | | | 2015 | | | 2016 to 2017 | | | 2015 to 2016 | |
| | | | | | | | | | | | | | | | |
| Research & Development expense | | $ | 15.9 | | | $ | 21.7 | | | $ | 21.9 | | | | (26.7 | )% | | | (1.2 | )% |
| Percentage of net sales | | | 3.5 | % | | | 4.5 | % | | | 4.2 | % | | | | | | | | |
Research and development expenses primarily consist of development efforts related to high-end process technologies for 10nmhigh-end IC and below IC nodes, FPD G8 and above, and AMOLED applications.
Research and development expenses decreased by $5.8were $4.1 million in 2017 to $15.9 million, from $21.7Q4 FY20, compared with $4.5 million in 2016 as aboth Q3 FY20 and Q4 FY19. The decrease from Q3 FY20 was primarily the result of lower customer qualification costs for high-end reticlesdecreased development activities in both Asiathe U.S., which were partially offset by increased activities in China, and the U.S.decrease from the prior year quarter was the result of decreased activities in China and Taiwan. Research and development expenses did not change significantlyincreased $0.8 million, or 4.6%, in YTD FY20 from 2015YTD FY19, primarily due to 2016.increased development activities in China, which were partially offset by reduced activities in the U.S. and Taiwan.
Other Income (Expense), net
| | Q4 FY20 | | | Q3 FY20 | | | Q4 FY19 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign currency transactions (losses) gains, net | | $ | (2.2 | ) | | $ | (1.6 | ) | | $ | (6.2 | ) |
| Interest expense | | | (0.8 | ) | | | (0.6 | ) | | | (0.2 | ) |
| Interest income and other income (expense), net | | | 0.1 | | | | - | | | | 0.3 | |
| | | | | | | | | | | | | |
| Total other income (expense) | | $ | (2.9 | ) | | $ | (2.1 | ) | | $ | (6.1 | ) |
| | | 2017 | | | 2016 | | | 2015 | |
| Interest income and other income (expense) | | $ | (3.1 | ) | | $ | 2.4 | | | $ | 2.8 | |
| Interest expense | | | (2.2 | ) | | | (3.3 | ) | | | (5.0 | ) |
| Gains on sales of investments | | | - | | | | 8.9 | | | | - | |
| Total other income (expense), net | | $ | (5.3 | ) | | $ | 8.0 | | | $ | (2.2 | ) |
Interest The unfavorable change in Other income and other income (expense) decreased by $5.5(expense), net of $0.8 million, from a loss of $2.1 million in 2017, compared with 2016,Q3 FY20, to a loss of $2.9 million in Q4 FY20, was primarily as a result ofdue to increased foreign currency transactionexchange losses in 2017. Interestof $0.7 million, and increased interest expense decreased in 2017 compared with 2016 primarily as a resulton our China-based debt. The majority of the maturity of our 3.25% convertible senior notes in April 2016, and lower average outstanding debt balanceinterest on our otherChina-based debt obligations.
Interest expense decreased in 2016 compared with 2015is eligible for reimbursements through subsidies, which we recognize upon receipt. Other income (expense), net increased $3.2 million from Q4 FY19, primarily as a result of the maturity of our 3.25% convertible senior notes in April 2016. Interest income and other income (expense) decreased in 2016, compared with 2015, primarily as a result ofdue to less unfavorable foreign currency transaction results of $4.0 million, which were partially offset by increased interest expense of $0.6 million on our China-based debt; the increased interest expense reflected the higher average debt balance in 2016, compared to favorable results in 2015. the current year quarter.
| | FY20 | | | FY19 | |
| | | | | | | |
| Interest expense | | $ | (2.4 | ) | | $ | (1.4 | ) |
| Interest income and other income (expense), net | | | 0.5 | | | | 1.3 | |
| Foreign currency transactions (losses) gains, net | | | (0.5 | ) | | | (1.3 | ) |
| | | | | | | | | |
| Total other income (expense) | | $ | (2.3 | ) | | $ | (1.4 | ) |
| | | | | | | | | |
The negative impact of the unfavorable year-to-date change in Other income (expense), net of $0.9 million was primarily due to increased interest expense of $1 million on our China-based debt, and decreased interest income of $0.6 million. The effects of these decreases were partially offset by decreased foreign currency results was somewhat mitigated by the favorable settlementexchange losses of a liability related to our 2014 DPTT acquisition, as well as the favorable effect of not incurring financing fees (which were related to the exchange of senior convertible notes) in 2016 that we had incurred in 2015.$0.8 million.
In January 2016, we sold a minority interest investment in a foreign entity and recognized a gain of $8.8 million. In May 2016, we sold our 49.99% interest in the MP Mask joint venture and recognized a gain of $0.1 million.
Income Tax Provision
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Income tax provision | | $ | 5.3 | | | $ | 4.8 | | | $ | 13.2 | |
| Effective income tax rate | | | 19.9 | % | | | 7.9 | % | | | 18.8 | % |
The effective tax rate differs fromCertain provisions of the U.S. statutory rate of 35% inTax Cuts and Jobs Act, which was signed into law on December 22, 2017, were effective for tax years beginning on or after January 1, 2018. As a fiscal years 2017, 2016 and 2015 primarily dueyear U.S. taxpayer, these provisions were applied to earnings being taxed at lower statutory rates in foreign jurisdictions,our fiscal year 2019, including the benefit of various investment credits claimed in a foreign jurisdiction, and valuation allowances in jurisdictions with historical and continuing losses.
The increase in effective income tax rate in 2017 compared with 2016 was primarily due to recognition of $1.0 million of previously unrecognized tax benefits, the result of audit settlements and expirations of assessment period statutes of limitations. Those effects were partially offset by 2016 benefit factors, including: the recognition of $2.5 million of previously unrecognized deferred tax assets, the result of improved performance of our FPD operations; the reversal of previously recognized tax expense of $2.4 million that was eliminated by a distributionelimination of the earningsdomestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions.
| | Q4 FY20 | | | Q3 FY20 | | | Q4 FY19 | |
| | | | | | | | | | |
| Income tax provision | | $ | 3.5 | | | $ | 4.9 | | | $ | 2.3 | |
| Effective income tax rate | | | 28.8 | % | | | 27.7 | % | | | 15.1 | % |
The effective income tax rate decreasedis sensitive to the jurisdictional mix of our earnings, due, in 2016part, to the non-recognition of tax provisions and benefits on losses in jurisdictions with valuation allowances.
The effective income tax rate increased in Q4 FY20, compared with 2015 asQ3 FY20, due to the non-recognition of more tax benefits in Q4 FY20 on losses in the U.S. and in a non-U.S. jurisdiction; non-recognized tax benefits in both quarters were a result of valuation allowances applying to those provisions and benefits. The effective income tax rate increased in Q4 FY20, from Q4 FY19, due to the following major factors: recognitionnon-recognition of tax benefits in 2016a non-U.S. jurisdiction during FY20; the non-recognized tax benefits in both quarters were a result of $4.3valuation allowances applying to those benefits. However, in Q4 FY19, tax benefits not recognized on U.S. quarterly income were somewhat reduced by the benefit of $0.9 million from a tax holiday in Taiwan.
| | FY20 | | | FY19 | |
| | | | | | | |
| Income tax provision | | $ | 21.3 | | | $ | 10.2 | |
| Effective income tax rate | | | 34.5 | % | | | 20.1 | % |
The increase in the effective income tax rate on a full-year basis in FY20, compared with FY19, is primarily due to the net increase in non-recognition of tax benefits in the US and in a non-U.S. jurisdiction during FY20; the non-recognition is the result of valuation allowances applying to those benefits, the $1.5 million post-settlements increase in 2015, of previouslythe provision for unrecognized deferred tax assets, which primarily resulted from the improved performance of our FPD operations; the reversal of previously recognized tax expense of $2.4 million that was eliminated by a distribution of the 2015 earnings of a foreign subsidiary to its foreign parent;benefits, and a higher percentage$1.9 million decrease in the benefit related to the FY20 tax holiday in Taiwan, which expired at the end of income before income taxes, including an $8.8 million gain on the sale of an investment in 2016, generated in jurisdictions where the Company previously incurred losses that, due to valuation allowances, did not result in recognition of tax expense.December 2019.
We consider all available evidence when evaluating the potential future realization of deferred tax assets,, and when, based on the weight of all available evidence, we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance. We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded accruals for such contingencies. Included in the balance of unrecognized tax benefits as of October 29, 2017,31, 2020 and October 30, 2016 and November 1, 2015,31, 2019, are $3.4 million, $4.6$2.0 million and $4.1$1.9 million respectively, recorded in otherOther liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rate.rates.
Net Income Attributable to Noncontrolling Interests
| | Q4 FY20 | | | Q3 FY20 | | | Q4 FY19 | | | FY20 | | | FY19 | |
| Net income attributable to noncontrolling interests | | $ | 2.1 | | | $ | 2.1 | | | $ | 3.3 | | | $ | 6.5 | | | $ | 10.7 | |
Net income attributable to noncontrolling interests was $2.1 million in Q4 FY20, unchanged from Q3 FY20, and was the result of net income realized at our China-based IC facility in Q4 FY20, which realized a net loss in Q3 FY20, and decreased net income at our Taiwan-based IC facility. Net income attributable to noncontrolling interests decreased $1.3 million to $8.2$1.2 million in 2017 compared with $9.5Q4 FY20 from $3.3 million in 2016 due toQ4 FY19; decreased net income at our Taiwan-based IC manufacturing facility exceeded the favorable effect of our China-based IC facility income in Taiwan,the current year quarter, and a net loss in the prior year quarter.
On a year-to-date basis, net income attributable to noncontrolling interests decreased $2.7 million to $9.5 million in 2016 compared with $12.2 million in 2015 as a$4.2 million; the decrease was the result of decreased net income at that sameour Taiwan-based IC facility, the effect of which was somewhat mitigated by a decreased net loss at our China-based IC facility. We hold 50.01% ownership interests in both the China-based and Taiwan-based IC facilities.
Liquidity and Capital Resources
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | |
| | | (in $ millions) | | | (in $ millions) | | | (in $ millions) | | | (in $ millions) | | | (in $ millions) | |
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 308.0 | | | | 314.1 | | | | 205.9 | | | $ | 278.7 | | | $ | 206.5 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 96.8 | | | | 122.1 | | | | 133.2 | | | $ | 143.0 | | | $ | 68.4 | |
| Net cash (used in) provided by investing activities | | | (98.1 | ) | | | 52.3 | | | | (104.3 | ) | |
| Net cash used in investing activities | | | $ | (65.7 | ) | | $ | (151.4 | ) |
| Net cash used in financing activities | | | (10.9 | ) | | | (67.0 | ) | | | (7.1 | ) | | $ | (16.0 | ) | | $ | (42.1 | ) |
We had cash and cash equivalents of $308.0$278.7 million at the end of Q4 FY20, compared with $206.5 million at the end of fiscal 2019. The net increase of $72.2 million was primarily attributable to:
- $143.0 million provided by operating activities;
- $17.6 million contributed to our China-based IC joint venture by noncontrolling interests;
- $5.3 million government incentives received in China;
- $4.2 million received from exercises of employee stock options;
- $20.3 million received from borrowings in China;
- $(70.8) million paid for property, plant, and equipment;
- $(34.4) million used to repurchase our common stock;
- $(16.2) million dividend paid to noncontrolling interest
- $(7.4) million used to repay debt;
- $11.0 million favorable effects of currency exchange rate changes on cash
Our working capital at the end of Q4 FY20 was $357.2 million, compared with $314.1 million as of October 30, 2016. Our working capital increased $7.1 million to $367.3$275.6 million at October 29, 2017, compared with $360.3 million at October 30, 2016. We may use our available cash on hand for operations, capital expenditures, debt repayments, strategic opportunities, stock repurchases or other corporate uses, anythe end of which may be material.fiscal 2019. The increase is primarily attributable to the following increases (decreases) in working capital:
As of October 30, 2016, we had- Increased cash and cash equivalents of $314.1$72.2 million;
- Increased inventories of $9.1 million, compared with $205.9mainly acquired to protect against potential COVID-19 related supply chain disruptions;
- Increased compensation and related expenses accrual of ($2.1) million;
- Increased contract liabilities of $(3.7) million;
- Increased current debt of $(2.8) million;
- Increased current portion of operating leases of $(2.3) million, as of November 1, 2015. Our working capital increased $192.2 million to $360.3 million at October 30, 2016, compared with $168.1 million (as retrospectively adjusted to reflectreflecting our adoption of ASU 2015-17 in the fourth quarter of fiscal year 2016)ASC 842 at November 1, 2015. 2019.
The net cash provided by operating activities of $143.0 million in YTD FY20 was a $74.6 million increase from $68.4 million provided in YTD FY19. The net increase in YTD FY20 was primarily due to:
- Increased non-cash add backs to net income, including depreciation, amortization, share-based compensation, and deferred income taxes of $14.4 million;
- A comparative decrease in accounts receivable of $19.3 million;
- A comparative decrease in the build-up of inventories of $16.2 million, which was primarily the result of our initially supplying our China-based FPD facility in YTD FY19;
- A comparative increase in other current assets of $16.5 million, mostly related to increases in refundable income tax of $4.6 million, contract assets of $8.9 million and recoverable VAT of $2.2 million.
- A comparative increase in accounts payable, accrued liabilities and other of $8.5 million, mostly related to the net of the following comparative changes: an increase in noncurrent recoverable VAT of $28.3 million related to our China facilities, increase in contract liability of $5.3 million, decrease in accounts payable and accruals of $(24.5) million, and a decrease in income tax payable of $(3.2) million.
Net cash andused in investing activities was $65.7 million in YTD FY20, a decrease of $85.7 million from $151.4 million used in YTD FY19. The net decrease in cash equivalents in 2016used was primarily attributable to the saledecreased capital expenditures of our 49.99% interest in the MP Mask joint venture for $93.1 million and proceeds from the sale of an investment in a foreign entity of $8.8 million. The increase in working capital$107.6 million; this was the result of these same factors, as well asa reduction in payments to equip our China-based facilities, which were in the conversionstart-up phase in the first half of $7.4fiscal year 2019. A reduction in investment incentives of $21.7 million in YTD FY20, from YTD FY19, also reduced net cash flows used in investing activities.
Net cash flows from financing activities changed from $42.1 million used in YTD FY19 to $16.0 million used in YTD FY20. Significant components of the $26.0 million net change were:
- Repayments of debt to common stock, reduced accounts payable and accrued expense balances aswere $53.9 million less in YTD FY20 than in YTD FY19; the primary cause of the enddecrease was repayment (upon their maturity) of 2016 compared with the end of 2015, whichour convertible senior notes in YTD FY19;
- Dividends to DNP (related to their 49.99% interest in our IC facility in Taiwan) were caused,$28.9 million less in significant part,YTD FY20;
- $(34.3) million less debt was incurred in YTD FY20 than in YTD FY19;
- $(11.8) million less contributed by lower accruals for capital expenditures and employee compensation.DNP to maintain their proportionate ownership interest in our IC joint venture in China in YTD FY20 than in YTD FY19;
- $(12.7) million more paid in YTD FY20, than in YTD FY19, to acquire our common stock.
As of October 29, 201731, 2020 and October 30, 2016,31, 2019, our total cash and cash equivalents included $190.0 $218.0 million and $141.4$147.2 million, respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to the U.S. may subject these fundsthem to U.S. federalstate income taxes and local country withholding taxes in certain jurisdictions. OurFurthermore, our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD areas.sectors.
Net cash provided by operating activities decreased by $25.3 million to $96.8 million in fiscal 2017, compared with $122.1 million in fiscal 2016, primarily due to the decrease of $34.4 million of net income. Net cash provided by operating activities decreased to $122.1 million in fiscal 2016, compared with $133.2 million in fiscal 2015, primarily due to reduced year-over-year operating income, partially offset by net cash favorable changes in accrual accounts. Net cash provided by operating activities increased to $133.2 million in fiscal 2015, compared with $96.4 million in fiscal 2014, primarily due to increased net income in 2015, excluding the 2014 noncash gain on the acquisition of DPTT.
Cash flows from investing activities decreased from funds provided of $52.3 million in 2016 to $98.1 million used in fiscal year 2017 due to $101.9 million aggregate proceeds received from the sale of our investments in MP Mask and an interest we held in a foreign entity in fiscal 2016, compared to increased capital expenditures of $41.8 million and the acquisition of a business of $5.4 million in fiscal 2017. Cash flows from investing activities increased to $52.3 million provided in fiscal year 2016 from $104.3 used in fiscal year 2015, primarily due to proceeds of $101.9 million received from the sale of our investments in the MP Mask joint venture and an interest we held in a foreign entity, as well as decreased expenditures for capital equipment. Net cash used in investing activities in fiscal 2015 was $104.3 million primarily due to capital expenditure payments. Capital expenditure payments for the 2017, 2016, and 2015 fiscal years were $92.0, $50.1 million, and $104.0 million, respectively. We expect capital expenditure payments in fiscal 2018 to be approximately $250 million.
Net cash used in financing activities was $10.9 million in fiscal 2017, which primarily comprised repayments of long-term borrowings and a dividend paid to the noncontrolling interest in a subsidiary, partially offset by proceeds received from employee share-based arrangements. Net cash used in financing activities was $67.0 million in fiscal 2016, primarily comprised of repayments of long-term borrowings (including $50.1 million to retire our 3.25% convertible senior notes which matured in April 2016) and $11.9 million dividend paid to the noncontrolling interest in a subsidiary, partially offset by proceeds received from employee share-based arrangements. Net cash used in financing activities was $7.1 million in fiscal 2015, primarily comprised of repayments of borrowings, offset, in part, by proceeds from share-based arrangements.
Our liquidity, asSince we operate in a high fixed cost environment, our liquidity is highly dependent on our revenue, cash conversion cycle, and the timing of our capital expenditures (which can vary significantly from period to period). DependingWe believe that our cash on hand, cash generated from operations, and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. However, depending on conditions in the semiconductor and FPDdisplay markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments we have used in the past may not be available to us when required. Althoughrequired. Consequently, we continue to evaluate further cost reduction initiatives, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit facility.agreements (which are discussed in Note 7 to the consolidated financial statements). Please also refer to Financing Related Risk Factors.
As of October 29, 2017,31, 2020, we had outstanding purchasecapital commitments of $168 million, which included $162 million related to capital expenditures.approximately $112 million. We intend to finance our capital expenditures with our working capital, contributions from our joint venture partners, cash generated from operations and, if necessary, with additional borrowings. We have agreedAs of the end of fiscal 2020, we had no unfulfilled commitments to enter into a joint venture that is constructing anfund our IC facility in China with an estimated total investment of $160 million. Our funding commitment for the joint venture is approximately $80 million in the form of a combination of cash and transferred capital over the next several years. We have also entered into an agreement to construct an FPD facility in China in which we will invest $160 million over that same period.China.
Cash Requirements
Our cash requirements in fiscal 20182021 will primarily be primarily to: fundfor funding our operations;operations, capital spending, including the constructionand debt repayments. At our option, should we deem it to be an optimal use of an IC research and development and manufacturing facility in Xiamen, China and an FPD manufacturing facility in Hefei, China; and service our debt. We believe that our cash, on hand, cash generated from operations and amounts available to borrow will be sufficient to meetwe may repurchase some of our cash requirements for the next twelve months.common stock. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our cash requirements exceed our existing cash and cash available under our credit facility.agreements.
Contractual Obligations
The following table presents our contractual obligations as of October 29, 2017:31, 2020:
| | | Payment due by period | | | Payment due by period | |
| Contractual Obligations | | Total | | | Less Than 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | | | Total | | | Less Than 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term borrowings | | $ | 57,500 | | | $ | - | | | $ | 57,500 | | | $ | - | | | $ | - | | |
| Debt | | | $ | 68,658 | | | $ | 13,678 | | | $ | 28,548 | | | $ | 19,221 | | | $ | 7,211 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 4,012 | | | | 1,138 | | | | 1,123 | | | | 751 | | | | 1,000 | | | | 7,535 | | | | 2,275 | | | | 3,362 | | | | 1,374 | | | | 524 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Capital leases | | | 4,639 | | | | 4,639 | | | | - | | | | - | | | | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase obligations | | | 168,219 | | | | 160,534 | | | | 7,685 | | | | - | | | | - | | | | 130,431 | | | | 124,365 | | | | 5,802 | | | | 264 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest | | | 2,987 | | | | 2,053 | | | | 934 | | | | - | | | | - | | | | 7,987 | | | | 2,876 | | | | 3,743 | | | | 1,339 | | | | 29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other noncurrent liabilities | | | 10,897 | | | | - | | | | 2,164 | | | | 1,733 | | | | 7,000 | | | | 15,099 | | | | 674 | | | | 2,110 | | | | 887 | | | | 11,428 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 248,254 | | | $ | 168,364 | | | $ | 69,406 | | | $ | 2,484 | | | $ | 8,000 | | | $ | 229,710 | | | $ | 143,868 | | | $ | 43,565 | | | $ | 23,085 | | | $ | 19,192 | |
As of October 29, 2017,31, 2020, the Company had recorded accruals for uncertain tax positions and related interest and penalties of $3.4 million which$2.7 million; these accruals were not included in the above table due to the high degree of uncertainty regarding the timing of future payments related to such liabilities.
Off-Balance Sheet Arrangements
We ownIn January 2018, Photronics, through its wholly owned Singapore subsidiary, entered into the PDMCX joint venture with DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” under which DNP obtained a 50.01% (controlling interest) of PDMC,49.99% interest in our IC manufacturing facility locatedbusiness in Taiwan.Xiamen, China. The joint venture was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. Under the PDMCjoint venture’s operating agreement,, DNP is afforded, under certain circumstances, the shareholdersright to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCPDMCX that may arise after the initial two-year term of the Agreement that cannot be requestedresolved between the two parties. As of the date of issuance of this report, DNP had not indicated its intention to make additional contributionsexercise this right. In addition, both Photronics and DNP have the option to PDMC. Inpurchase, or put, their interest from, or to, the event that PDMC requests additional capital from its shareholders,other party, should their ownership interest fall below twenty percent for a period of more than six 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 three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, in order to maintain our 50.01% ownership interest, be required to make such contributions to PDMC. The PDMC operating agreement limitsdepending on the amountrelationship of contributions that may be requested both during the first four yearsfair and book value of PDMC and during any individual year within those first four years.PDMCX’s net assets, incur a loss. As of October 29, 2017, we31, 2020, Photronics and DNP each had not been requested to make any additional capital contribution to PDMC.net investments in PDMCX of $54.8 million.
We lease certain office facilities and equipment under operating leases with terms of one year or less that may require us to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms. See Note 79 to the consolidated financial statements for additional information on these operatingshort-term leases. In concurrence with our November 1, 2019, adoption of Accounting Standards Codification Topic 842 – “Leases”, we recognized right-of-use leased assets of approximately $6.5 million and corresponding lease liabilities, which were discounted at our incremental borrowing rates. As a result, most of our lease agreements ceased to be off-balance sheet arrangements on that date.
Business Outlook
A While we, as always, caution that our outlook, due to our short back-log (which typically does not exceed two weeks) is limited, we expect revenue to increase, as a percentage of FY20 revenue, in the high single digits. We are also anticipating operating profit to grow at a rate similar to the 23% increase we experienced in FY20. The bases of our expectations include growth for both IC and FPD in FY2021. IC growth drivers include added capacity across our global operations including the completion of Phase 1 of our China IC facility ramp, growing demand for semiconductor masks in China, and increased demand in the IC memory space. For FPD, mobile displays are once again expected to be a sector of growth with additional demand coming from new large-screen TV technology, such as OLED, which will be supported by the implementation of the next phase of investment at our Asia-based FPD facilities. We are also encouraged by the impending distribution of recently developed coronavirus vaccines, as we think this supports a reasonable expectation that supply chain disruptions and travel restrictions will be eased, thereby reducing the impediments to growth they represented in FY20.
The impact, if any, on our business of changing geopolitical conditions, such as U.S.-China trade relations, tensions between the Republic of South Korea and Japan, and the effects of the United Kingdom exiting the European Union cannot be predicted. However, we believe the impending change in leadership in the U.S. may lead to an improvement in its trade relationship with China, including the possible removal of sanctions on some Chinese enterprises, as well as a reduction in the likelihood of the impositions of additional sanctions.
We believe that a majority of our revenuethe growth is expected to continue toin the IC and FPD markets will come from the AsianAsia region, predominantly in China. In responseWe expect to this expectation, we agreed to enter into a joint venture that will completemeet these demands both through the construction of an IC research and development and manufacturing facility in Xiamen, China, in late 2018. Production is anticipated to begin at this facility in early 2019. In addition, in August 2017, we announced our plan to construct an FPD manufacturing facility in Hefei, China, in which production is also anticipated to begin in early 2019. Please refer to Note 19utilization of our consolidated financial statements for additional information on these undertakings.
facilities in China and by importing photomasks into China from our other facilities. We continue to assessmake continual assessments of our global manufacturing strategy and monitor our sales volumerevenue and related cash flows from operations. ThisThese ongoing assessmentassessments could result in future facility closures, asset redeployments, additional impairments of intangible or long-lived assets, workforce reductions, or the addition of increased manufacturing facilities, all of which would be based on market conditions and customer requirements.
Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties. While various risks and uncertainties, have beensome of which are discussed in Part1, Item 1A of this report; a number of other unforeseenunforeseeable factors could cause actual results to differ materially from our expectations.
Critical Accounting Estimates
Our consolidated financial statements are based on the selection and application of accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some ofto be the more critical areas that require judgment areas in the application ofwhen applying our accounting policies that affect our financial condition and results of operations:policies:
| ·• | Revenue Recognition: Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, the determination of whether revenues related to our revenue contracts should be recognized over time or at a point in time, as these determinations impact the timing and amount of our reported revenues and net income. Other significant judgments include the estimation of the point in the manufacturing process at which we are entitled to receive payment, as well as the progress of the job order to completion in order to determine the amount of arrangement consideration earned for contractual revenue recognized over time. |
| • | Property, Plant and Equipment: Significant judgment and assumptions are employed when we establish estimated useful lives, of our property, plant,depreciation periods and equipment and the timing of when depreciation should begin on such assets as these determinationsthis evaluation can significantly impact our gross margin and research and development expenses; |
| · | the evaluation ofexpenses. Significant judgement is also required when we periodically review property, plant and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other change in circumstances indicate that their carrying amounts may not be recoverable as the recoverability of our long-lived and definite-lived intangible assets, whichassessment requires us to forecast the future cash flows related to these assets, and impactsassets; this evaluation can significantly impact our gross margin and operating expenses;expense. |
| • | Leases: Significant judgement is applied in the determination of whether an arrangement is, or contains, a lease and, in certain instances, whether the lease should be classified as an operating lease or a finance lease, which can impact the timing and classification of lease costs. |
| ·• | Contingencies: We are subject to the estimationpossibility of losses from various contingencies. Significant judgment is necessary to estimate the collectabilityprobability and amount of our accounts receivables, which impacts our gross margina loss, if any, from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and operating expenses;the amount of loss can be reasonably estimated. In accounting for the resolution of contingencies, significant judgment may be necessary to estimate amounts pertaining to periods prior to the resolution that are charged to operations in the period of resolution and amounts related to future periods. |
| ·• | Income Taxes: Our annual tax rate is determined based on our income and the recognitionjurisdictions where it is earned, statutory tax rates, and measurementthe tax impacts of currentitems treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual tax rate are judgments and assumptions regarding the recoverability of certain deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income taxesbalances, and our tax-related assetability to uphold certain tax positions. We are subject to complex tax laws, in the U.S. and liability balances.numerous foreign jurisdictions and the manner in which they apply can be open to interpretation. Realization of deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction in future periods, which involves business plans, planning opportunities, and expectations about future outcomes. Our assessment relies on estimates and assumptions, and may involve a series of complex judgments about future events. |
Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective tax rate.
Please refer to NoteNotes 1, 8, 9, 12, and 14 to our consolidated financial statements for additional information onrelated to these critical accounting estimates and our other significant accounting policies.
Recent Accounting Pronouncements
See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2123 Recent Accounting Pronouncements” for recent accounting pronouncements that may affect our financial reporting.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency Exchange Rate Risk
We conduct business in several major international currencies throughout our worldwide operations, and our financial performance may be affected by fluctuations in the exchange rates of these currencies. Changes in exchange rates can positively or negatively affect our reported revenue, operating income, assets, liabilities, and equity. The functional currencies of our Asian subsidiaries are the South Korean won, the New Taiwan dollar, the Chinese renminbi and the Singapore dollar. The functional currencies of our European subsidiaries are the British pound and the euro. In addition, we haveengage in transactions and balances inhave exposures to the Japanese yen.
We attempt to minimize our risk of foreign currency transaction losses by producing products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing our working capital. There can be no assurance that this approach will continue to be successful, especially in the event of a significant adverse movement in the value of any foreign currency against the U.S. dollar, the New Taiwan dollar, the South Korean won, the Chinese renminbi, the Singapore dollar, the British pound, or the euro. However, in some instances, we sell products in a currency other than the functional currency of the country where it was produced, or purchase products in a currency that differs from the functional currency of the purchasing manufacturing facility.entity. In addition, to the extent practicable, we attempt to reduce our exposure to foreign currency exchange fluctuations by converting cash and cash equivalents into the functional currency of the subsidiary which holds the cash. We may also enter into derivative contracts to mitigate our exposure to foreign currency fluctuations when we have a significant purchase obligation or significant receivable denominated in a currency that differs from the functional currency of the transacting subsidiary. We do not enter into derivatives for speculative purposes. There can be no assurance that these practices will protect us from the need to recognize significant foreign currency transaction gains and losses, especially in the event of a significant adverse movement in the value of any foreign currency in which we conduct business against any of our functional currencies, including the U.S. dollar.
Our primary net foreign currency exposures as of October 29, 2017,31, 2020, included the South Korean won, the Japanese yen, the New Taiwan dollar, the Chinese renminbi, the Singapore dollar, the British pound sterling, and the euro. As of October 29, 2017,31, 2020, a 10% adverse movement in the value of these currencies against the functional currencies of our subsidiaries would have resulted in a net unrealized pre-tax loss of $13.0$31.9 million, which represents an increasea decrease of $3.9$1.2 million from the same movement as of October 30, 2016.31, 2019. The increasedecrease in foreign currency rate change risk is primarily the result of increased exposuresdecreased net exposure of the Chinese renminbi against the U.S. dollar, and the Taiwan dollar against the U.S. dollar and, to a lesser extent, the Japanese yen.dollar. We do not believe that a 10% change in the exchange rates of other non-USnon-U.S. dollar currencies would have had a material effect on our October 29, 201731, 2020 consolidated financial statements.
Interest Rate Risk
At October 29, 2017, we did not have anyA 10% adverse movement in the interest rates on our variable rate borrowings. Therefore, a 10% change in interest ratesborrowings would not have had a material effect on our October 31, 2020, consolidated financial position, resultsstatements.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
| | Page |
| | |
| 2937 |
| | |
| 3040 |
| | |
| 3141 |
| | |
| 3242 |
| | |
| 3343 |
| | |
| 3444 |
| | |
| 3545 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders
of Photronics, Inc.
Brookfield, Connecticut
Opinions on the Financial Statements
We have audited the accompanying consolidated balance sheets of Photronics, Inc. and subsidiaries (the “Company”"Company") as of October 29, 201731, 2020 and October 30, 2016, and31, 2019, the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of equity, and consolidated statements of cash flows for each of the fiscalthree years in the period ended October 29, 2017, October 30, 2016,31, 2020, the related notes and November 1, 2015. We also have audited the Company’s internal control overschedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial reportingstatements present fairly, in all material respects, the financial position of the Company as of October 29, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by31, 2020 and October 31, 2019, and the Committeeresults of Sponsoring Organizationsits operations and its cash flows for each of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, includedthree years in the accompanying Management’s Report on Internal Control over Financial Reportingperiod ended October 31, 2020, in Item 9A. Our responsibility is to express an opinion on these financial statements and an opinion onconformity with accounting principles generally accepted in the Company’s internal control over financial reporting based on our audits.United States of America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 14, 2021, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.
Basis for Opinions
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, and whether effective internal control over financial reporting was maintained in all material respects.due to error or fraud. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.statements. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reportingCritical Audit Matter
The critical audit matter communicated below is a process designed by, or undermatter arising from the supervisioncurrent-period audit of the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesthat was communicated or required to be communicated to the audit committee and procedures that (1) pertainrelates to accounts or disclosures that are material to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Inway our opinion on the consolidated financial statements, referredtaken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to above present fairly, in all material respects,which it relates.
Revenue — Contracts with Customers— Refer to Note 1 to the financial positionstatements
Critical Audit Matter Description
The Company recognizes revenue over time for in-process production orders that have not shipped for contracts with customers for which it has an enforceable right to bill and collect consideration, inclusive of Photronics, Inc.a reasonable profit, in the event the in-process orders are cancelled by the customers. This results in the Company recording a corresponding contract asset as of period end for these contracts. Significant judgment is exercised by the Company in determining the amount of revenue to recognize for these contracts and subsidiariesthe corresponding contract asset, specifically in estimating the point within the production cycle at which the production orders stand in relation to the Company’s enforceable right within the contract. Pursuant to these contracts, revenue recognized over time and the associated contract asset as of October 29, 2017 and October 30, 2016, and31, 2020 was $6.3 million.
We identified the resultsdetermination of their operations and their cash flowsrevenue recognized over time for each of the fiscal years ended October 29, 2017, October 30, 2016, and November 1, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reportingin-process productions orders as of October 29, 2017,31, 2020 a critical auditing matter because of the significant estimates and assumptions management makes in determining the amount of revenue to recognize for these contracts. This required a high degree of audit judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s determination of the progress point of in-process orders and the amount of revenue recognized over time and the corresponding contract asset as of October 31, 2020.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s determination of the progress point of in-process orders and resulting revenue recognized over time and corresponding contract asset as of October 31, 2020 included the following:
- We tested the operating effectiveness of controls over management’s determination of the point in the production process and correlation to stated contractual rights.
- We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements.
- We selected a sample of in-process production orders as of October 31, 2020 and performed the following procedures for each selection:
- Obtained and read the contract.
- Physically observed existence of the in-process production order.
- Tested management’s identification of significant contract terms and resulting revenue recognition for the in-process production order.
- Tested management estimate of the production point for the in-process order and corresponding revenue recognition and contract asset based on the criteria established in Internal Control — Integrated Framework (2013) issued byCompany’s enforceable right within the Committee of Sponsoring Organizations of the Treadway Commission.contract.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
December 20, 2017January 14, 2021
We have served as the Company’s auditor since 1991.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
| | | October 31, 2020 | | | October 31, 2019 | |
| | | October 29, 2017 | | | October 30, 2016 | | | | | | | |
| ASSETS | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 308,021 | | | $ | 314,074 | | | $ | 278,665 | | | $ | 206,530 | |
| Accounts receivable, net of allowance of $2,319 in 2017 and $3,901 in 2016 | | | 105,320 | | | | 92,636 | | |
| Accounts receivable, net of allowance of $1,324 in 2020 | | | | | | | | | |
| and $1,334 in 2019 | | | | 134,470 | | | | 134,454 | |
| Inventories | | | 23,703 | | | | 22,081 | | | | 57,269 | | | | 48,155 | |
| Other current assets | | | 12,080 | | | | 12,795 | | | | 29,735 | | | | 38,388 | |
| | | | | | | | | | |
| Total current assets | | | 449,124 | | | | 441,586 | | | | 500,139 | | | | 427,527 | |
| | | | | | | | | | | | | | | | | |
| Property, plant and equipment, net | | | 535,197 | | | | 506,434 | | | | 631,475 | | | | 632,441 | |
| Intangible assets, net | | | 17,122 | | | | 19,854 | | | | 3,437 | | | | 7,870 | |
| Deferred income taxes | | | 15,481 | | | | 16,322 | | | | 22,070 | | | | 20,779 | |
| Other assets | | | 3,870 | | | | 3,792 | | | | 31,061 | | | | 30,048 | |
| | | | | | | | | | |
| Total assets | | $ | 1,020,794 | | | $ | 987,988 | | | $ | 1,188,182 | | | $ | 1,118,665 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Current portion of long-term borrowings | | $ | 4,639 | | | $ | 5,428 | | |
| Short-term debt | | | $ | 4,708 | | | $ | 8,731 | |
| Current portion of long-term debt | | | | 8,970 | | | | 2,142 | |
| Accounts payable | | | 50,834 | | | | 48,906 | | | | 75,378 | | | | 91,379 | |
| Payables – related parties | | | - | | | | 2,743 | | |
| Accrued liabilities | | | 26,303 | | | | 24,240 | | | | 53,883 | | | | 49,702 | |
| | | | | | | | | | |
| Total current liabilities | | | 81,776 | | | | 81,317 | | | | 142,939 | | | | 151,954 | |
| | | | | | | | | | | | | | | | | |
| Long-term borrowings | | | 57,337 | | | | 61,860 | | |
| Deferred income taxes | | | 2,049 | | | | 1,491 | | |
| Long-term debt | | | | 54,980 | | | | 41,887 | |
| Other liabilities | | | 14,337 | | | | 17,846 | | | | 27,997 | | | | 13,732 | |
| | | | | | | | | | |
| Total liabilities | | | 155,499 | | | | 162,514 | | | | 225,916 | | | | 207,573 | |
| | | | | | | | | | | | | | | | | |
| Commitments and contingencies | | | | | | | | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | | | |
| Equity: | | | | | | | | | | | | | | | | |
| Preferred stock, $0.01 par value, 2,000 shares authorized, none issued and outstanding | | | - | | | | - | | |
| Common stock, $0.01 par value, 150,000 shares authorized, 68,666 shares issued and outstanding at October 29, 2017, 68,080 shares issued and outstanding at October 30, 2016 | | | 687 | | | | 681 | | |
Preferred stock, $0.01 par value, 2,000 shares authorized, NaN issued and outstanding | | | | 0 | | | | 0 | |
| Common stock, $0.01 par value, 150,000 shares authorized, 63,138 shares issued and outstanding at October 31, 2020, and 65,595 shares issued and outstanding at October 31, 2019 | | | | 631 | | | | 656 | |
| Additional paid-in capital | | | 547,596 | | | | 541,093 | | | | 507,336 | | | | 524,319 | |
| Retained earnings | | | 189,390 | | | | 176,260 | | | | 279,037 | | | | 253,922 | |
| Accumulated other comprehensive income (loss) | | | 6,891 | | | | (7,671 | ) | |
| Accumulated other comprehensive (loss) income | | | | 17,958 | | | | (9,005 | ) |
| | | | | | | | | | |
| Total Photronics, Inc. shareholders’ equity | | | 744,564 | | | | 710,363 | | | | 804,962 | | | | 769,892 | |
| Noncontrolling interests | | | 120,731 | | | | 115,111 | | | | 157,304 | | | | 141,200 | |
| | | | | | | | | | |
| Total equity | | | 865,295 | | | | 825,474 | | | | 962,266 | | | | 911,092 | |
| | | | | | | | | | |
| Total liabilities and equity | | $ | 1,020,794 | | | $ | 987,988 | | | $ | 1,188,182 | | | $ | 1,118,665 | |
| | | | | | | | | | |
| See accompanying notes to consolidated financial statements. | | | | | | | | | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
| | | Year Ended | |
| | | | | |
| | | Year Ended | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 450,678 | | | $ | 483,456 | | | $ | 524,206 | | | $ | 609,691 | | | $ | 550,660 | | | $ | 535,276 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold | | | (359,363 | ) | | | (364,750 | ) | | | (381,070 | ) | | | 475,037 | | | | 429,819 | | | | 403,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 91,315 | | | | 118,706 | | | | 143,136 | | | | 134,654 | | | | 120,841 | | | | 131,503 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | (43,585 | ) | | | (44,577 | ) | | | (48,983 | ) | | | 53,582 | | | | 52,326 | | | | 51,395 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | (15,862 | ) | | | (21,654 | ) | | | (21,920 | ) | | | 17,144 | | | | 16,394 | | | | 14,481 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | (59,447 | ) | | | (66,231 | ) | | | (70,903 | ) | | | 70,726 | | | | 68,720 | | | | 65,876 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 31,868 | | | | 52,475 | | | | 72,233 | | | | 63,928 | | | | 52,121 | | | | 65,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income and other income (expense) | | | (3,068 | ) | | | 2,424 | | | | 2,797 | | |
| | | | | | | | | | | | | | |
| Interest expense | | | (2,235 | ) | | | (3,365 | ) | | | (4,990 | ) | | | (2,367 | ) | | | (1,425 | ) | | | (2,262 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains on sales of investments | | | - | | | | 8,940 | | | | - | | |
| Interest income and other income (expense), net | | | | 541 | | | | 1,271 | | | | 4,829 | |
| | | | | | | | | | | | | | |
| Foreign currency transaction (losses) gains, net | | | | (501 | ) | | | (1,266 | ) | | | 377 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income before income tax provision | | | 26,565 | | | | 60,474 | | | | 70,040 | | | | 61,601 | | | | 50,701 | | | | 68,571 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax provision | | | (5,276 | ) | | | (4,798 | ) | | | (13,181 | ) | | | 21,258 | | | | 10,210 | | | | 7,335 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 21,289 | | | | 55,676 | | | | 56,859 | | | | 40,343 | | | | 40,491 | | | | 61,236 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to noncontrolling interests | | | (8,159 | ) | | | (9,476 | ) | | | (12,234 | ) | | | 6,523 | | | | 10,698 | | | | 19,181 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | $ | 13,130 | | | $ | 46,200 | | | $ | 44,625 | | | $ | 33,820 | | | $ | 29,793 | | | $ | 42,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.19 | | | $ | 0.68 | | | $ | 0.67 | | | $ | 0.52 | | | $ | 0.45 | | | $ | 0.61 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.19 | | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.52 | | | $ | 0.44 | | | $ | 0.59 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 68,436 | | | | 67,539 | | | | 66,331 | | | | 64,866 | | | | 66,347 | | | | 68,829 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted | | | 69,288 | | | | 76,354 | | | | 78,383 | | | | 65,470 | | | | 69,155 | | | | 74,821 | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of
Comprehensive Income
(in thousands)
| | | Year Ended | |
| | | Year Ended | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 21,289 | | | $ | 55,676 | | | $ | 56,859 | | | $ | 40,343 | | | $ | 40,491 | | | $ | 61,236 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 19,799 | | | | 6,334 | | | | (40,154 | ) | | | 36,381 | | | | (2,877 | ) | | | (16,672 | ) |
| Amortization of cash flow hedge | | | 129 | | | | 129 | | | | 128 | | | | 0 | | | | 0 | | | | 48 | |
| Other | | | 478 | | | | (589 | ) | | | (381 | ) | | | (390 | ) | | | (74 | ) | | | 101 | |
| | | | | | | | | | | | | | |
| Net other comprehensive income (loss) | | | 20,406 | | | | 5,874 | | | | (40,407 | ) | | | 35,991 | | | | (2,951 | ) | | | (16,523 | ) |
| | | | | | | | | | | | | | |
| Comprehensive income | | | 41,695 | | | | 61,550 | | | | 16,452 | | | | 76,334 | | | | 37,540 | | | | 44,713 | |
| Less: comprehensive income attributable to noncontrolling interests | | | 14,003 | | | | 12,448 | | | | 4,174 | | | | 15,551 | | | | 11,786 | | | | 14,515 | |
| | | | | | | | | | | | | | |
| Comprehensive income attributable to Photronics, Inc. shareholders | | $ | 27,692 | | | $ | 49,102 | | | $ | 12,278 | | | $ | 60,783 | | | $ | 25,754 | | | $ | 30,198 | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of
Equity
Years Ended October 31, 2020, October 31, 2019 and October 29, 2017 October 30, 2016 and November 1, 20152018
(in thousands)
| | Photronics, Inc. Shareholders | | | | | | | |
| | | Common Stock | | | Additional Paid-In | | | Retained | | | Treasury | | | Accumulated Other Comprehensive | | | Non- Controlling | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Stock | | | Income (Loss) | | | Interests | | | Equity | |
| Balance at October 29, 2017 | | | 68,666 | | | $ | 687 | | | $ | 547,596 | | | $ | 189,390 | | | $ | 0 | | | $ | 6,891 | | | $ | 120,731 | | | $ | 865,295 | |
| Net income | | | - | | | | 0 | | | | 0 | | | | 42,055 | | | | 0 | | | | 0 | | | | 19,181 | | | | 61,236 | |
| Other comprehensive loss | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (11,857 | ) | | | (4,666 | ) | | | (16,523 | ) |
| Sales of common stock through employee stock option and purchase plan | | | 870 | | | | 9 | | | | 4,683 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,692 | |
| Restricted stock awards vesting and expense | | | 164 | | | | 1 | | | | 1,747 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,748 | |
| Share-based compensation expense | | | - | | | | 0 | | | | 1,432 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,432 | |
| Contribution from noncontrolling interests | | | - | | | | 0 | | | | 148 | | | | 0 | | | | 0 | | | | 0 | | | | 17,848 | | | | 17,996 | |
| Dividends to noncontrolling interests | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (8,196 | ) | | | (8,196 | ) |
| Purchases of treasury stock | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (23,111 | ) | | | 0 | | | | 0 | | | | (23,111 | ) |
| Balance at October 31, 2018 | | | 69,700 | | | | 697 | | | | 555,606 | | | | 231,445 | | | | (23,111 | ) | | | (4,966 | ) | | | 144,898 | | | | 904,569 | |
| Adoption of ASU 2014-09 | | | - | | | | 0 | | | | 0 | | | | 1,083 | | | | 0 | | | | 0 | | | | 121 | | | | 1,204 | |
| Adoption of ASU 2016-16 | | | - | | | | 0 | | | | 0 | | | | (1,130 | ) | | | 0 | | | | 0 | | | | (3 | ) | | | (1,133 | ) |
| Net income | | | - | | | | 0 | | | | 0 | | | | 29,793 | | | | 0 | | | | 0 | | | | 10,698 | | | | 40,491 | |
| Other comprehensive (loss) income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (4,039 | ) | | | 1,088 | | | | (2,951 | ) |
| Sale of common stock through employee stock option and purchase plans | | | 390 | | | | 4 | | | | 2,524 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2,528 | |
| Restricted stock awards vesting and expense | | | 196 | | | | 2 | | | | 2,497 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2,499 | |
| Share-based compensation expense | | | - | | | | 0 | | | | 1,183 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,183 | |
| Contribution from noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 29,394 | | | | 29,394 | |
| Dividends to noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (44,939 | ) | | | (44,939 | ) |
| Repurchase of common stock of subsidiary | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (57 | ) | | | (57 | ) |
| Purchases of treasury stock | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (21,696 | ) | | | 0 | | | | 0 | | | | (21,696 | ) |
| Retirement of treasury stock | | | (4,691 | ) | | | (47 | ) | | | (37,491 | ) | | | (7,269 | ) | | | 44,807 | | | | 0 | | | | 0 | | | | 0 | |
| Balance at October 31, 2019 | | | 65,595 | | | | 656 | | | | 524,319 | | | | 253,922 | | | | 0 | | | | (9,005 | ) | | | 141,200 | | | | 911,092 | |
| Net income | | | - | | | | 0 | | | | 0 | | | | 33,820 | | | | 0 | | | | 0 | | | | 6,523 | | | | 40,343 | |
| Other comprehensive income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 26,963 | | | | 9,028 | | | | 35,991 | |
| Sale of common stock through employee stock option and purchase plans | | | 482 | | | | 5 | | | | 3,742 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 3,747 | |
| Restricted stock awards vesting and expense | | | 255 | | | | 2 | | | | 3,890 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 3,892 | |
| Share-based compensation expense | | | - | | | | 0 | | | | 787 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 787 | |
| Contribution from noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 17,596 | | | | 17,596 | |
| Dividends to noncontrolling interest | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (16,151 | ) | | | (16,151 | ) |
| Repurchase of common stock of subsidiary | | | - | | | | 0 | | | | 255 | | | | 0 | | | | 0 | | | | 0 | | | | (892 | ) | | | (637 | ) |
| Purchases of treasury stock | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (34,394 | ) | | | 0 | | | | 0 | | | | (34,394 | ) |
| Retirement of treasury stock | | | (3,194 | ) | | | (32 | ) | | | (25,657 | ) | | | (8,705 | ) | | | 34,394 | | | | 0 | | | | 0 | | | | 0 | |
| Balance at October 31, 2020 | | | 63,138 | | | $ | 631 | | | $ | 507,336 | | | $ | 279,037 | | | $ | 0 | | | $ | 17,958 | | | $ | 157,304 | | | $ | 962,266 | |
| | | Common Stock | | | | | | Retained | | | | | | | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | Interests | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance at November 2, 2014 | | | 65,930 | | | $ | 659 | | | $ | 520,182 | | | $ | 85,435 | | | $ | 21,774 | | | $ | 111,444 | | | $ | 739,494 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 44,625 | | | | - | | | | 12,234 | | | | 56,859 | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (32,347 | ) | | | (8,060 | ) | | | (40,407 | ) |
| Sales of common stock through employee stock option and purchase plan | | | 513 | | | | 5 | | | | 2,505 | | | | - | | | | - | | | | - | | | | 2,510 | |
| Restricted stock awards vesting and expense | | | 159 | | | | 2 | | | | 1,064 | | | | - | | | | - | | | | - | | | | 1,066 | |
| Share-based compensation expense | | | - | | | | - | | | | 2,623 | | | | - | | | | - | | | | - | | | | 2,623 | |
| Repurchase of common stock by subsidiary | | | - | | | | - | | | | 28 | | | | - | | | | - | | | | (107 | ) | | | (79 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at November 1, 2015 | | | 66,602 | | | | 666 | | | | 526,402 | | | | 130,060 | | | | (10,573 | ) | | | 115,511 | | | | 762,066 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 46,200 | | | | - | | | | 9,476 | | | | 55,676 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 2,902 | | | | 2,972 | | | | 5,874 | |
| Sales of common stock through employee stock option and purchase plan | | | 618 | | | | 6 | | | | 3,441 | | | | - | | | | - | | | | - | | | | 3,447 | |
| Restricted stock awards vesting and expense | | | 143 | | | | 2 | | | | 1,190 | | | | - | | | | - | | | | - | | | | 1,192 | |
| Share-based compensation expense | | | - | | | | - | | | | 2,637 | | | | - | | | | - | | | | - | | | | 2,637 | |
| Conversion of debt to common stock | | | 717 | | | | 7 | | | | 7,431 | | | | - | | | | - | | | | - | | | | 7,438 | |
| Dividends to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,901 | ) | | | (11,901 | ) |
| Return of capital to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | (955 | ) | | | (955 | ) |
| Repurchase of common stock by subsidiary | | | - | | | | - | | | | (8 | ) | | | - | | | | - | | | | 8 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at October 30, 2016 | | | 68,080 | | | | 681 | | | | 541,093 | | | | 176,260 | | | | (7,671 | ) | | | 115,111 | | | | 825,474 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 13,130 | | | | - | | | | 8,159 | | | | 21,289 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 14,562 | | | | 5,844 | | | | 20,406 | |
| Sales of common stock through employee stock option and purchase plan | | | 459 | | | | 5 | | | | 2,877 | | | | - | | | | - | | | | - | | | | 2,882 | |
| Restricted stock awards vesting and expense | | | 127 | | | | 1 | | | | 1,508 | | | | - | | | | - | | | | - | | | | 1,509 | |
| Share-based compensation expense | | | - | | | | - | | | | 2,118 | | | | - | | | | - | | | | - | | | | 2,118 | |
| Dividends to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,383 | ) | | | (8,383 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at October 29, 2017 | | | 68,666 | | | $ | 687 | | | $ | 547,596 | | | $ | 189,390 | | | $ | 6,891 | | | $ | 120,731 | | | $ | 865,295 | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows(in thousands)
| | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | |
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 21,289 | | | $ | 55,676 | | | $ | 56,859 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of property, plant and equipment | | | 81,699 | | | | 77,613 | | | | 75,684 | |
| Amortization of intangible assets | | | 4,874 | | | | 5,228 | | | | 6,729 | |
| Gains on sales of investments | | | - | | | | (8,940 | ) | | | - | |
| Share-based compensation | | | 3,627 | | | | 3,827 | | | | 3,689 | |
| Deferred income taxes | | | 1,633 | | | | (3,816 | ) | | | 3,401 | |
| Changes in assets, liabilities, and other: | | | | | | | | | | | | |
| Accounts receivable | | | (9,625 | ) | | | 18,807 | | | | (21,815 | ) |
| Inventories | | | (602 | ) | | | 2,268 | | | | (2,893 | ) |
| Other current assets | | | 1,127 | | | | 7,936 | | | | (2,557 | ) |
| Accounts payable, accrued liabilities and other | | | (7,189 | ) | | | (36,462 | ) | | | 14,098 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 96,833 | | | | 122,137 | | | | 133,195 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | | (91,965 | ) | | | (50,147 | ) | | | (104,033 | ) |
| Acquisition of business | | | (5,400 | ) | | | - | | | | - | |
| Proceeds from sales of investments | | | 167 | | | | 101,853 | | | | - | |
| Purchases of intangible assets | | | (834 | ) | | | (13 | ) | | | (771 | ) |
| Other | | | (34 | ) | | | 597 | | | | 499 | |
| | | | | | | | | | | | | |
| Net cash (used in) provided by investing activities | | | (98,066 | ) | | | 52,290 | | | | (104,305 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Repayments of long-term borrowings | | | (5,428 | ) | | | (57,609 | ) | | | (9,571 | ) |
| Dividends paid to noncontrolling interests | | | (8,298 | ) | | | (11,890 | ) | | | - | |
| Proceeds from share-based arrangements | | | 2,830 | | | | 3,463 | | | | 2,651 | |
| Return of capital to noncontrolling interests | | | - | | | | (966 | ) | | | - | |
| Other | | | (32 | ) | | | (20 | ) | | | (179 | ) |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | | (10,928 | ) | | | (67,022 | ) | | | (7,099 | ) |
| | | | | | | | | | | | | |
| Effects of exchange rate changes on cash and cash equivalents | | | 6,108 | | | | 802 | | | | (8,853 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (6,053 | ) | | | 108,207 | | | | 12,938 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 314,074 | | | | 205,867 | | | | 192,929 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 308,021 | | | $ | 314,074 | | | $ | 205,867 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash information: | | | | | | | | | | | | |
| Accrual for property, plant and equipment purchased during year | | $ | 2,767 | | | $ | 7,866 | | | $ | 25,858 | |
| Conversion of debt to common stock | | | - | | | | 7,439 | | | | - | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (in thousands)
| | Year Ended | |
| | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | | $ | 40,343 | | | $ | 40,491 | | | $ | 61,236 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of property, plant and equipment | | | 89,171 | | | | 79,238 | | | | 79,536 | |
| Amortization of intangible assets | | | 4,643 | | | | 4,641 | | | | 4,797 | |
| Share-based compensation | | | 4,927 | | | | 3,680 | | | | 3,180 | |
| Deferred income taxes | | | (445 | ) | | | (3,662 | ) | | | (273 | ) |
| Changes in assets, liabilities, and other: | | | | | | | | | | | | |
| Accounts receivable | | | 6,986 | | | | (12,321 | ) | | | (18,553 | ) |
| Inventories | | | (6,938 | ) | | | (23,088 | ) | | | (6,162 | ) |
| Other current assets | | | 7,849 | | | | (8,631 | ) | | | (11,731 | ) |
| Accounts payable, accrued liabilities and other | | | (3,490 | ) | | | (11,962 | ) | | | 18,537 | |
| Net cash provided by operating activities | | | 143,046 | | | | 68,386 | | | | 130,567 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | | (70,815 | ) | | | (178,375 | ) | | | (92,585 | ) |
| Government incentives | | | 5,263 | | | | 27,003 | | | | 1,005 | |
| Purchases of intangible assets | | | (159 | ) | | | (95 | ) | | | (218 | ) |
| Other | | | 0 | | | | 61 | | | | 929 | |
| Net cash used in investing activities | | | (65,711 | ) | | | (151,406 | ) | | | (90,869 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from debt | | | 20,340 | | | | 54,633 | | | | 0 | |
| Contributions from noncontrolling interests | | | 17,596 | | | | 29,394 | | | | 17,996 | |
| Purchases of treasury stock | | | (34,394 | ) | | | (21,696 | ) | | | (23,111 | ) |
| Dividends paid to noncontrolling interests | | | (16,151 | ) | | | (45,050 | ) | | | (8,166 | ) |
Repayments of debt | | | (7,392 | ) | | | (61,319 | ) | | | (4,639 | ) |
| Proceeds from share-based arrangements | | | 4,239 | | | | 2,071 | | | | 4,634 | |
| Other | | | (248 | ) | | | (92 | ) | | | (519 | ) |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | | (16,010 | ) | | | (42,059 | ) | | | (13,805 | ) |
| | | | | | | | | | | | | |
| Effects of exchange rate changes on cash, cash equivalents, and restricted cash | | | 10,986 | | | | 2,381 | | | | (4,840 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | | 72,311 | | | | (122,698 | ) | | | 21,053 | |
| | | | | | | | | | | | | |
| Cash, cash equivalents, and restricted cash at beginning of year | | | 209,291 | | | | 331,989 | | | | 310,936 | |
| | | | | | | | | | | | | |
| Cash, cash equivalents, and restricted cash at end of year | | $ | 281,602 | | | $ | 209,291 | | | $ | 331,989 | |
| Supplemental disclosure of non-cash information: | | | | | | | | | | | | |
| Accrual for property, plant and equipment purchased during year | | $ | 13,062 | | | $ | 13,671 | | | $ | 29,602 | |
See accompanying notes to consolidated financial statements.
PHOTRONICS, INC.
Notes to Consolidated Financial Statements
Years Ended October 29, 2017,31, 2020, October 30, 201631, 2019 and November 1, 2015October 31, 2018
(in thousands, except share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Photronics, Inc. and its subsidiaries (“Photronics”, the “Company”“the Company”, “we”, “our”, or “us”) is one of the world’s leading manufacturersmanufacturer of photomasks, which are high precisionhigh-precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panelflat-panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display FPD substrates during the fabrication of integrated circuits (“ICs” or semiconductors) and“semiconductors”), a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The CompanyWe currently operates principally from ninehave 11 manufacturing facilities; two offacilities, which are located in Europe, three in Taiwan one in(3), Korea, and three in the United States. We have announced plans to construct two manufacturingStates (3), Europe (2), and 2 recently constructed facilities in China. See Note 19 for additional information.Our FPD facility in Hefei, China, commenced production in the second quarter of fiscal 2019, and our IC facility in Xiamen, China, commenced production in the third quarter of fiscal 2019.
Consolidation
The accompanying consolidated financial statements include the accounts of Photronics, Inc., its wholly owned subsidiaries, and the majority-owned subsidiaries thatwhich it controls. All intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in them. Estimates are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available at the time they are made. ActualSubsequent actual results we report may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.
Fiscal YearReclassifications
Our
During fiscal year ends on the Sunday closest2020, we modified our consolidated statements of income to October thirty-first, and,present foreign currency transaction (losses) gain, net as a result, a 53-week year occurs every 5separate line item. Previously, the results of our foreign currency transactions were included in Interest income and other income (expense), net. In addition, we modified our classifications of certain accrued liabilities presented in Note 6; prior period amounts have been conformed to 6 years. Fiscal years 2017, 2016 and 2015 each included 52 weeks.the current period presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of 3three months or less. less, readily convertible to known amounts of cash, and so near to their maturity that they present insignificant risk of changes in value because of changes in interest rates. The carrying values of cash equivalents approximate their fair values, due to the short-term maturities of these instruments.
Accounts Receivable and Allowance for Doubtful Accounts
We generally record our trade 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 for collectability. When, inperiod. To the judgment of management,extent that we believe a loss on the collection of a customer invoice is probable, we record the amount is charged to expenseloss and credited to credit the allowance for doubtful accounts. Whenaccounts. In the event that an amount is determined to be uncollectible, the amount is charged towe charge the allowance for doubtful accounts and eliminate the related receivable is eliminated.receivable.
On November 1, 2020, we adopted Accounting Standards Update 2016-13 – “Measurement of Credit Losses” (“ASU 2016-13) which replaced the incurred loss model (which was required to be used to measure credit losses under previous accounting guidance) with an expected credit loss model. Our adoption of ASU 2016-13 did not have a material effect on our financial statements.
Inventories
Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or market.net realizable value. Presented below are the components of inventory at the balance sheet dates:
| | | October 29 2017 | | | October 30, 2016 | | | October 31 2020 | | | October 31 2019 | |
| | | | | | | | | | | | | |
| Raw materials | | | $ | 56,389 | | | $ | 46,027 | |
| Work in process | | | | 767 | | | | 2,122 | |
| Finished goods | | $ | 664 | | | $ | 142 | | | | 113 | | | | 6 | |
| Work in process | | | 2,957 | | | | 2,987 | | |
| Raw materials | | | 20,082 | | | | 18,952 | | |
| | | $ | 23,703 | | | $ | 22,081 | | | $ | 57,269 | | | $ | 48,155 | |
Property, Plant and Equipment
Property, plant and equipment, except as explained below under “Impairment of Long-Lived Assets,” is stated at cost less accumulated depreciation and amortization. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to operations as incurred, while those that improve or extend the lives of existing assets are capitalized. Upon sale or other disposition, the cost of the asset and its related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings.
Depreciation and amortization, substantiallyessentially all of which are included in costCost of goods sold in our consolidated statements of income, are computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 1510 to 4039 years, machinery and equipment over 35 to 1015 years,, and furniture, fixtures, and office equipment over 3 to 5 years. Leasehold improvements are amortized over the life of the lease or the estimated useful life of the improvement, whichever is less. We employ judgment and assumptions when we establish estimated useful lives and depreciation periods, as well as when we periodically review property, plant, and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other change in circumstances indicate that their carrying amounts may not be recoverable.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determinations of recoverability are based upon our judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the assets, determined using a market or income approach, compared with the carrying value of the asset. The carrying values of assets determined to be impaired would be reduced to their estimated fair values.
Intangible Assets
Intangible assets consist primarily of a technology license agreement and acquisition-related intangibles. These assets except as explained below, are stated at fair value as of the date acquired,, less accumulated amortization. Amortization is calculated based on the estimated useful lives of the assets, which range from 3 to 15 years, using the straight-line method or another method that more fairly represents the utilization of the assets.
We periodically evaluate the remaining useful lives of our intangible assets to determine whether events or circumstances warrant a revision to the remaining periods of amortization. In the event that the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. If it is determined that an intangible asset has an indefinite useful life, that intangible asset would be subject to impairment testing annually or whenever events or circumstances indicate that its carrying value may not, based on future undiscounted cash flows or market factors, be recoverable; and anrecoverable. An impairment loss, would bethe recorded in the period where the impairment determination is made. The amount of the impairment loss recorded which would be based on the fair value of the intangible asset at the measurement date,. would be recorded in the period in which the impairment determination was made.
Restricted Cash
Restricted cash in the amounts of $2.9 million and $2.8 million are included in Other assets on our October 31, 2020 and October 31, 2019, consolidated balance sheets, respectively. The restrictions on these amounts are primarily related to land lease agreements and customs requirements.
Treasury Stock
We record treasury stock purchases under the cost method, recording the entire cost of the acquired stock as treasury stock. Gains and losses on subsequent reissuances would be credited or charged to additional paid-in capital, and we would employ the average cost method (with average cost being determined separately for each share repurchase program), in the event that we subsequently reissue shares.
Revenue Recognition
We recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services. We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks, which are comprised of multiple layers, the predominance of which we invoice as they ship to customers. As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time,” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask. At the end of a reporting period, there will be a number of uncompleted revenue contracts on which we have performed; for any such contracts under which we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract. We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
As stated above, photomasks are manufactured to customer specifications in accordance with their proprietary designs; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities, and Accounts Receivable
We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time. Contract assets reflect our transfer of control to customers of photomasks that are in process or completed but not yet shipped. A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks. Our contract assets primarily consist of a significant amount of our in-process production orders and fully manufactured photomasks which have not yet shipped, for which we have an enforceable right to collect consideration (including a reasonable profit) in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. Contract assets of $6.3 million are included in Other current assets, and contract liabilities of $8.0 million and $5.2 million are included in Accrued liabilities and Other liabilities, respectively, in our October 31, 2020 consolidated balance sheet. Our October 31, 2019 condensed consolidated balance sheet includes contract assets of $7.6 million, included in Other current assets, and contract liabilities of $11.5 million, included in Accrued liabilities. We did 0t impair any contract assets in fiscal years 2020 or 2019. In fiscal 2020 and 2019, we recognized revenue of $2.8 million and $1.3 million, respectively, from the settlement of contract liabilities that existed at the beginning of those years.
Impairment
Long-lived assets are reviewed for impairment whenever events or changes
Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market in circumstanceswhich 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 carryingcustomer 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 such assets may not be recoverable. Determinationsconsideration to reflect a financing component when the period between when we transfer control of recoverabilitygoods or services to customers and when we are based uponpaid is one year or less.
In instances when we are paid in advance of our judgmentperformance, we record a contract liability and, estimates of undiscounted future cash flows resultingas allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically, advance payments we’ve received from customers have generally not preceded the completion of our performance obligations by more than one year.
Contract Costs
We pay commissions to third-party sales agents for certain sales that they obtain for us. However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a short time period, our backlog of orders is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we 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 Warranty
Our photomasks are sold under warranties that generally range from one to twenty-four months. We warrant that our photomasks conform to customer specifications and we will typically repair, replace, or issue a refund for, at our option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.
Share-Based Compensation
We recognize share-based compensation expense over the service period that the awards are expected to vest. Share-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized in the period of change, and will impact the amount of expense to be recognized in future periods. Determining the appropriate option pricing model, calculating the grant date fair value of share-based awards, and estimating forfeiture rates requires considerable judgment, including estimations of stock price volatility and the expected term of options granted.
We use the Black-Scholes option pricing model to value employee stock options. We estimate stock price volatility based on daily averages of our common stock’s historical volatility over a term approximately equal to the estimated time period the grant will remain outstanding. The expected term of options and forfeiture rate assumptions are derived from historical data.
Research and Development
Research and development costs are expensed as incurred and consist primarily of development efforts related to high-end process technologies for advanced subwavelength reticle solutions for IC and FPD photomask technologies.
Foreign Currency Translation
Our non-U.S. subsidiaries maintain their accounts in their respective local currencies. Assets and liabilities of such subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Foreign currency translation adjustments are accumulated and reported in accumulated other comprehensive income, a component of equity.
Government Grants
We account for funds we receive from government grants by reducing the costs of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets that we expector expenses to hold and use is based on the fair value of the assets determined using a market or income approach compared to the carrying value of the asset. The carrying values of assets determined to be impaired are reduced to their estimated fair values.
Business Combinations
When acquiring other businesses, or participating in mergers or joint ventures in which we are deemedapply the funds. Funds we receive that cannot be attributed to be the acquirer, we generally recognize identifiablespecific assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, separately from any goodwill that may be required to be recognized. Goodwill, when recognizable,or expenses would be measuredrecognized as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquiredother income, and liabilities assumed.
Accounting for such transactions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those we estimated. When required, we will adjust the values of the assets acquired and liabilities assumed against the acquisition gain or goodwill, as initially recorded, for a period of up to one year after the transaction.
Costs incurred to effect a merger or acquisition, such as legal, accounting, valuationincluded in Interest income and other third party costs, as well as internal general and administrative costs incurred are charged to expenseincome (expense), net in the periods incurred. Costs incurred to issue any debt and equity securitiesconsolidated statements of income. Funds we receive from government grants are recognizedclassified in our consolidated statements of cash flows as either cash flows from operating activities or cash flows from investing activities, in accordance with other applicable generally accepted accounting principles.how we expend the funds.
Investments in Joint Ventures
The financial results of investments in joint ventures of which we have a controlling financial interest are included in our consolidated financial statements. Investments in joint ventures over which we have the ability to exercise significant influence and that, in general, are at least 20 percent owned are accounted for under the equity method. An impairment loss would be recognized whenever a decrease in the fair value of such an investment below its carrying amount is determined to be other than temporary. In judging “other than temporary,” we would consider the length of time and the extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and our longer-term intent of retaining our investment in the investee.
Variable Interest Entities
We account for the investments we make in certain legal entities in which equity investors do not have 1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, 2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, 3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity as “variable interest entities”, or “VIEs”.
We would consolidate the results of any such entity in which we determined that we have a controlling financial interest. We would have a “controlling financial interest” in such an entity when we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, we would reassess whether we have a controlling financial interest in any investments we have in these certain legal entities.
We account for investments we make in VIEs in which we have determined that we do not have a controlling financial interest but have a significant influence over, and hold at least a 20 percent ownership interest in, using the equity method. Any such investment not meeting the parameters to be accounted for under the equity method would be accounted for using the cost method, unless the investment had a readily determinable fair value, at which value it would then be reported.
Income Taxes
The income tax provision is computed on the basis of the various tax jurisdictions’ income or loss before income taxes. Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and their amounts used for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards. We use judgment and make assumptions to determine if valuation allowances for deferred income tax assets are required, if their realization is not more likely than not, by considering future market growth, operating forecasts, future taxable income, and the mix of earnings among the tax jurisdictions in which we operate. Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowances.
We consider income taxes in each of the tax jurisdictions in which we operate in order to determine our effective income tax rate. Our current income tax expense is thus identified, and temporary differences resulting from differing treatments of items for tax and financial reporting purposes are assessed. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We account for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in our tax returns. We include any applicable interest and penalties related to uncertain tax positions in our income tax provision.
Earnings Per Share
Basic earnings per share (“EPS”) is based on the weighted-average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if certain share-based payment awards or financial instruments were exercised, earned or converted.
Share-Based Compensation
Variable Interest Entities
We recognize share-based compensation expense overaccount for the service periodinvestments we make in certain legal entities in which equity investors do not have 1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, 2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the awards areentity’s economic performance or, 3) the obligation to absorb the expected losses of the legal entity or the right to vest. Share-based compensation expense includesreceive expected residual returns of the estimated effectslegal entity as “variable interest entities”, or “VIEs”.
We consolidate the results of forfeitures,any such entity in which are adjusted overwe have determined that we have a controlling financial interest. We would have a “controlling financial interest” (and thus be considered the requisite service period“primary beneficiary” of the entity) in such an entity when we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the extent actual forfeitures differ, or are expectedVIE. On a quarterly basis, we reassess whether we have a controlling financial interest in any investments we have in these entities.
We account for investments we make in VIEs in which we have determined that we do not have a controlling financial interest but have a significant influence over, and hold at least a twenty percent ownership interest in, using the equity method. Any such investment not meeting the parameters to differ, from such estimates. Changes in estimated forfeitures are recognized inbe accounted for under the equity method would be accounted for using the cost method, unless the investment had a readily determinable fair value, at which value it would then be reported.
Leases
We adopted ASU 2016-02 - “Leases (Topic 842)” (“ASU 2016-02”) on November 1, 2019. As allowed by the guidance, we elected to adopt ASU 2016-02 using the modified retrospective method at the beginning of the period of change,adoption; our adoption resulted in our recognition of $6.5 million of right-of-use (“ROU”) assets and will impact$6.5 million of lease liabilities on our opening fiscal 2020 balance sheet. At the amounttime of expensetransition, we elected a number of practical expedients offered by the guidance, which are described in Notes 9 and 23. The following discussion is germane to our accounting for leases under Topic 842.
We determine if an arrangement is, or contains a lease, at the inception of the arrangement. An arrangement is determined to be recognizeda lease when it conveys to us the right to control the use of an identified asset for a period of time in future periods. Determiningexchange for consideration. Our determination as to whether we have the appropriate option pricing model, calculatingright to control the grant date fair valueuse of share-based awardsan identified asset centers on whether the arrangement conveys to us the rights to 1) obtain substantially all of the economic benefits of the identified asset and estimating forfeiture rates requires considerable judgment, including estimations2) direct the use of stock price volatilitythe identified asset.
If an arrangement is determined to be, or include, a lease, we then apply the classification criteria in Topic 842 to determine whether the lease is a finance lease or an operating lease. For both types of leases, at their commencement dates (which are the dates on which a lessor makes an underlying asset available for our use), we recognize ROU assets, which represent our use of the underlying assets, and the expected term of options granted.
Welease liabilities which represent our obligation to make payments for our right to use the Black-Scholes option pricing modelrelated assets. The initial measurement of both types of leases are the same and, in most cases, are determined by applying our incremental borrowing rate for collateralized borrowings over terms similar to value employee stock options. We estimate stock price volatility based on daily averagesthe leases terms. The initial measurement of our common stock’s historical volatility overROU assets may require further adjustments for lease prepayments and initial direct costs we incur. As allowed under Topic 842, we elected to not recognize short-term leases, which are defined as leases that have a term approximately equal(at their commencement dates) of twelve months or less and do not include an option to purchase the estimated time periodunderlying asset that we are reasonably certain to exercise.
Operating leases are expensed on a straight-line basis over the grant will remain outstanding. The expected termterms of optionsthe leases, and forfeiture rate assumptions are derived from historical data.
Researchincluded in the consolidated statement of income in Cost of goods sold, Selling, general and Development
administrative, or Research and development costsexpense in accordance with the use of the underlying asset. Finance lease ROU assets are expensed as incurred,amortized over the estimated useful life of the underlying asset; the expense is included in the consolidated statement of income on the line item associated with the underlying asset (similar to operating lease expenses). Finance lease liabilities are subsequently remeasured by increasing the liability to reflect interest accrued during a period and consist primarily of development efforts relateddecreasing the liability to high-end process technologies for advanced sub-wavelength reticle solutions for IC photomask technologies.
Foreign Currency Translation
Our non-US subsidiaries maintain their accounts in their respective local currencies. Assets and liabilities of such subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailingreflect payments made during the year. Foreign currency translation adjustments are accumulated and reported in accumulated other comprehensive income, a component of equity. The effects of changes in exchange ratesperiod. Interest expense incurred on foreign currency transactions, whichfinance leases are included in interest income and other income (expense) were a net gain/(loss)Interest expense on the consolidated statements of $(5.2) million, $(0.3) million and $2.5 million in fiscal years 2017, 2016 and 2015, respectively.income.
Noncontrolling Interests
Noncontrolling interests represents the minority shareholders’ proportionate shareOperating lease ROU assets are included in the equityfiscal year 2020 consolidated balance sheet in Other assets. Operating lease liabilities due within one year are predominantly included in the consolidated balance sheets in Accrued liabilities; noncurrent operating lease liabilities are included in Other liabilities. Finance lease ROU assets are included in the consolidated balance sheets in Property, plant and equipment. Finance lease liabilities are included in the fiscal year 2020 consolidated balance sheet in Current portion of long-term debt or Long-term debt, in accordance with the Company’s two majority-owned subsidiaries, Photronics DNP Mask Corporation (“PDMC”) in Taiwan,timing of which noncontrolling interests owned 49.99% as of October 29, 2017 and October 30, 2016, and PK Ltd. (“PKL”) in Korea of which noncontrolling shareholders owned approximately 0.3% as of October 29, 2017 and October 30, 2016.their related lease payments.
Revenue Recognition
NOTE 2 – OTHER CURRENT ASSETS
We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the sales price
Other current assets consists of the transaction is fixed or determinable, and collectability is reasonably assured. Delivery is determined by the shipping terms of the individual revenue transactions. For transactions with FOB destination or similar shipping terms, delivery occurs when our product reaches its destination and is received by the customer. For transactions with FOB shipping point terms, delivery occurs when our product is received by the common carrier. We use judgment when estimating the effect on revenue of discounts and sales incentives, both of which are accrued when the related revenue is recognized. Our revenue is reported net of any sales taxes billed to customers.following:
| | October 31, 2020 | | | October 31, 2019 | |
| | | | | | | |
| Recoverable value added taxes | | $ | 16,539 | | | $ | 16,494 | |
| Contract assets | | | 6,313 | | | | 7,596 | |
| Prepaid expenses | | | 6,153 | | | | 6,506 | |
| Prepaid and refundable income taxes | | | 122 | | | | 2,642 | |
| Other | | | 608 | | | | 5,150 | |
| | | $ | 29,735 | | | $ | 38,388 | |
Product Warranty
For a 30-day period, we warrant that items sold will conform to customer specifications. However, our liability is limited to the repair or replacement of the photomasks at our sole option. We inspect photomasks for conformity to customer specifications prior to shipment. Accordingly, customer claims related to items under warranty have historically been insignificant. Our warranty policy includes accepting returns of products with defects, or products that have not been produced to precise customer specifications.
NOTE 23 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
| | | October 29, 2017 | | | October 30, 2016 | | | October 31, 2020 | | | October 31, 2019 | |
| | | | | | | | | | | | | |
| Land | | $ | 9,959 | | | $ | 8,036 | | | $ | 12,422 | | | $ | 12,085 | |
| Buildings and improvements | | | 125,290 | | | | 121,873 | | | | 179,162 | | | | 172,340 | |
| Machinery and equipment | | | 1,547,870 | | | | 1,475,755 | | | | 1,812,791 | | | | 1,748,483 | |
| Leasehold improvements | | | 20,050 | | | | 19,224 | | | | 21,157 | | | | 19,921 | |
| Furniture, fixtures and office equipment | | | 12,989 | | | | 12,700 | | | | 15,665 | | | | 14,404 | |
| Construction in progress | | | 72,045 | | | | 23,961 | | | | 70,915 | | | | 28,135 | |
| | | | 1,788,203 | | | | 1,661,549 | | | | 2,112,112 | | | | 1,995,368 | |
| Less: Accumulated depreciation and amortization | | | 1,253,006 | | | | 1,155,115 | | |
| Accumulated depreciation and amortization | | | | (1,480,637 | ) | | | (1,362,927 | ) |
| | | $ | 535,197 | | | $ | 506,434 | | | $ | 631,475 | | | $ | 632,441 | |
Property under capital leases is included in above property, plant and equipment as follows:
| | | October 29, 2017 | | | October 30, 2016 | |
| | | | | | | |
| Machinery and equipment | | $ | 34,917 | | | $ | 34,917 | |
| Less accumulated amortization | | | 13,843 | | | | 10,352 | |
| | | $ | 21,074 | | | $ | 24,565 | |
During the three month period ended January 29, 2017, we acquired a business comprised of manufacturing assets and certain intellectual property that enables us to expand our manufacturing capability, primarily in large area masks for IC, for approximately $5.7 million, including a $0.3 million holdback payable one year from the acquisition date. The transaction was accounted for in accordance with ASC 805, “Business Combinations”, with substantially all of the purchase price being allocated to long-lived assets that are being depreciated over five years.
During the three month period ended January 29, 2017, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with a fair value of approximately $9.0 million in fiscal year 2017.
NOTE 34 - INTANGIBLE ASSETS
Amortization expense of the Company’s finite-livedfinite-lived intangible assets was $4.9$4.6 million, $4.8$4.6 million and $6.0$4.8 million in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively.
Intangible assets consist of:
As of October 29, 2017 | | Gross Amount | | | Accumulated Amortization | | | Net Amount | | |
As of October 31, 2020 | | | Gross Amount | | | Accumulated Amortization | | | Net Amount | |
| Technology license agreement | | $ | 59,616 | | | $ | (45,374 | ) | | $ | 14,242 | | | $ | 59,616 | | | $ | (57,298 | ) | | $ | 2,318 | |
| Customer relationships | | | 9,375 | | | | (7,793 | ) | | | 1,582 | | | | 2,060 | | | | (1,245 | ) | | | 815 | |
| Software and other | | | 8,195 | | | | (6,897 | ) | | | 1,298 | | | | 6,496 | | | | (6,192 | ) | | | 304 | |
| | | $ | 77,186 | | | $ | (60,064 | ) | | $ | 17,122 | | | $ | 68,172 | | | $ | (64,735 | ) | | $ | 3,437 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 30, 2016 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| As of October 31, 2019 | | | | | | | | | | | | | |
| Technology license agreement | | $ | 59,616 | | | $ | (41,400 | ) | | $ | 18,216 | | | $ | 59,616 | | | $ | (53,323 | ) | | $ | 6,293 | |
| Customer relationships | | | 8,657 | | | | (7,522 | ) | | | 1,135 | | | | 9,174 | | | | (8,186 | ) | | | 988 | |
| Software and other | | | 6,444 | | | | (5,941 | ) | | | 503 | | | | 6,537 | | | | (5,948 | ) | | | 589 | |
| | | $ | 74,717 | | | $ | (54,863 | ) | | $ | 19,854 | | | $ | 75,327 | | | $ | (67,457 | ) | | $ | 7,870 | |
The weighted-average amortization periodperiods of intangible assets acquired in fiscal year 2017 was 4.5 years primarily comprised of acquired customer relationships2020 and technology that has an amortization period of five years, and software that has an amortization period of three years. The weighted-average amortization period of intangible assets acquired in fiscal year 2016,2019, which isare comprised of software, is three years.years.
Intangible asset amortization over the next five years and thereafter is estimated to be as follows:
| Fiscal Years: | | | | | | |
| | | | | | | |
| 2018 | | $ | 4,742 | | |
| 2019 | | | 4,564 | | |
| 2020 | | | 4,510 | | |
| 2021 | | | 2,747 | | | $ | 2,839 | |
| 2022 | | | 128 | | | $ | 131 | |
| 2023 | | | $ | 129 | |
| 2024 | | | $ | 128 | |
| 2025 | | | $ | 128 | |
| Thereafter | | | $ | 82 | |
NOTE 4-5 - PDMCX JOINT VENTURE TECHNOLOGY LICENSE AND OTHER AGREEMENTS WITH MICRON TECHNOLOGY, INC.
In May 2006,January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, or “our”), and Micron Technology, Inc. (“Micron”Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note “DNP”) entered into the MP Maska joint venture (“MP Mask”under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, known as “Xiamen American Japan Photronics Mask Co., Ltd.” (hereinafter, “PDMCX”), which developedwas established to develop and producedmanufacture photomasks for leading-edgeleading edge and advanced next generation semiconductors. AtWe entered into this joint venture to enable us to compete more effectively for the time ofmerchant 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.NaN gain or loss was recorded upon the formation of this joint venture.
The total investment per the PDMCX operating agreement (“the Agreement”) is $160 million. As of October 31, 2020, Photronics and DNP had each contributed cash of approximately $65 million, and PDMCX obtained local financing of approximately $50 million; thus both parties have fulfilled and exceeded their initial investment commitments under the Agreement. As discussed in Note 7, liens were granted to the local financing entity on property, plant and equipment with a total carrying value of $94.5 million, as collateral for the loans.
Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. As of the date of issuance of these financial statements, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20percent for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture, we also entered into an agreementventure’s net book value, with closing to license photomask technology developed by Microntake place within three business days of obtaining required approvals and certain supply agreements. In May 2016, we sold our investment in MP Mask to Micron for $93.1clearance.
We recorded net losses from the operations of PDMCX of approximately $4.7 million, $4.9 million and recorded a gain on$0.7 million in fiscal 2020, 2019 and 2018, respectively. General creditors of PDMCX do not have recourse to the saleassets of $0.1 million, which is includedPhotronics (other than the assets of PDMCX), and our maximum exposure to loss respectively from PDMCX at October 31, 2020, was $54.8 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Codification Standards, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our 2016 consolidated statementfinancial statements. The initial step of income in interest income and other income (expense). On that same date a supply agreement commenced between Photronics and Micron, which provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term and expired in May 2017. However, we have the unlimited rightsour evaluation was to use technology under the prior technology license agreement.
This joint venturedetermine whether PDMCX was a variable interest entity (“VIE”) (as that term is defined in ASC 810) because all costs. Due to its lack of the joint venture were passed onsufficient equity at risk to Photronics and Micron through purchase agreements they had entered into with the joint venture, and it was dependent upon Photronics and Micron for anyfinance its activities without additional cash requirements. On a quarterly basis we reassessed whether our interest in MP Mask gave us a controllingsubordinated financial interest in this VIE. The purpose of this quarterly reassessment was to identify the primary beneficiary (which is defined in ASC 810 as the entity that consolidates a VIE) of the VIE. As a result of the reassessments in fiscal year 2016,support, we determined that Micron remainedit is a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, therebyand concluded that we were the primary beneficiary during the current and prior years reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics. Our conclusion was based on the fact that we held a controlling financial interest in PDMCX (which resulted from our having given it the power to direct the activities of MP Mask that most significantly impacted its economic performance) and had both 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 including its decision making authority inof PDMCX during the ordinary course of businesscurrent and its purchase ofprior year periods were based on our right to appoint the majority of products produced byits board of directors, which has, among others, the VIE.
We utilized MP Mask for both high-end IC photomask productionpowers to manage the business (through its rights to appoint and researchevaluate PDMCX’s management), incur indebtedness, enter into agreements and development purposes. MP Mask charged its variable interest holders based on their actual usagecommitments, and acquire and dispose of its facility and charged separately for any research and development activities it engaged in at the requests of its owners.
MP Mask was governed by a Board of Managers appointed by Micron and Photronics. Since MP Mask’s inception, Micron,PDMCX’s assets. In addition, as a result of its majority ownership, hadthe 50.01% variable interest we held majority voting power onduring the Board of Managers. The voting power held by each party was subject to change as ownership interests changed. Under the MP Mask joint venture operating agreement,current and prior year periods, we may have been required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, had the Boardobligation to absorb losses, and the right to receive benefits, that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and we did not make, any contributions to MP Mask in fiscal year 2016, and we did not receive any distributions (other than upon the sale of our investment to Micron in fiscal year 2016) from MP Mask during 2016.
We recorded losses from operations from our investment in MP Mask of $0.1 million in fiscal years 2016 and 2015. Income (loss) from MP Mask isliabilities included in Interest and other income, net, in our consolidated statements of income.
In fiscal 2016, we recorded $0.4 million of commission revenue earned under the supply agreements with Micron and MP Mask, and amortization of $0.1 million of the related supply agreement intangible asset. In 2016, we also recorded cost of goods soldbalance sheets are presented in the amount of $5.7 million for photomasks produced by MP Mask for Photronics customers,following table, together with our maximum exposures to loss related to these assets and incurred expenses of $0.5 million for research and development activities and other goods and services purchased from MP Mask by Photronics.liabilities.
| | October 31, 2020 | | | October 31, 2019 | |
| Classification | | Carrying Amount | | | Photronics Interest | | | Carrying Amount | | | Photronics Interest | |
| Current assets | | $ | 56,095 | | | $ | 28,053 | | | $ | 24,142 | | | $ | 12,074 | |
| Noncurrent assets | | | 141,097 | | | | 70,562 | | | | 114,015 | | | | 57,019 | |
| Total assets | | | 197,192 | | | | 98,615 | | | | 138,157 | | | | 69,093 | |
| Current liabilities | | | 31,922 | | | | 15,964 | | | | 16,889 | | | | 8,446 | |
| Noncurrent liabilities | | | 55,676 | | | | 27,844 | | | | 42,094 | | | | 21,051 | |
| Total liabilities | | | 87,598 | | | | 43,808 | | | | 58,983 | | | | 29,497 | |
| Net assets | | $ | 109,594 | | | $ | 54,807 | | | $ | 79,174 | | | $ | 39,596 | |
In fiscal 2015, we recorded $0.8 million of commission revenue earned under the supply agreements with Micron and MP Mask, and amortization of $0.2 million of the related supply agreement intangible asset. In 2015, we also recorded cost of goods sold in the amount of $4.8 million for photomasks produced by MP Mask for Photronics customers, and incurred expenses of $3.1 million for research and development activities and other goods and services purchased from MP Mask by Photronics.
Summarized financial information of MP Mask is presented below. The financial results of 2016 are through May 5, 2016, the date of the sale of the Joint Venture.
| | | Fiscal Year | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Revenue | | $ | 49,626 | | | $ | 96,068 | |
| Gross profit | | | 2,736 | | | | 1,215 | |
| Net loss | | | - | | | | (151 | ) |
NOTE 56 - ACCRUED LIABILITIES
Accrued liabilities at October 29, 2017 included salaries, wages and related benefits of $10.0 million, unearned revenue of $5.7 million, value added and other taxes of $3.1 million, and other accruals of $7.5 million. At October 30, 2016, accrued liabilities included salaries, wages and related benefits of $8.2 million, income taxes of $6.2 million, and other accruals of $9.8 million.
NOTE 6 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
| | | October 29, 2017 | | | October 30, 2016 | |
| | | | | | | |
| 3.25% convertible senior notes due in April 2019 | | $ | 57,337 | | | $ | 57,221 | |
| | | | | | | | | |
| 2.77% capital lease obligation payable through July 2018 | | | 4,639 | | | | 10,067 | |
| | | | | | | | | |
| | | | 61,976 | | | | 67,288 | |
| Less current portion | | | 4,639 | | | | 5,428 | |
| | | $ | 57,337 | | | $ | 61,860 | |
| | October 31, 2020 | | | October 31, 2019 | |
| Compensation related expenses | | $ | 16,405 | | | $ | 14,011 | |
| Income taxes | | | 11,432 | | | | 13,227 | |
| Contract liabilities | | | 8,024 | | | | 11,542 | |
| Property, plant, and equipment | | | 2,355 | | | | 288 | |
| Operating leases | | | 2,175 | | | | 0 | |
| Value added and other taxes | | | 1,925 | | | | 3,761 | |
| Contract manufacturing | | | 1,275 | | | | 422 | |
| Professional fees | | | 1,254 | | | | 537 | |
| Inventory | | | 1,026 | | | | 224 | |
| Telecommunications and utilities | | | 1,006 | | | | 710 | |
| Other | | | 7,006 | | | | 4,980 | |
| Accrued liabilities | | $ | 53,883 | | | $ | 49,702 | |
Long-term debt consists of the following:
| | | October 31, 2020 | | | October 31, 2019 | |
| | | | | | | |
| Project Loans | | $ | 50,063 | | | $ | 34,490 | |
| Working Capital Loans (value added tax component) | | | 13,887 | | | | 9,539 | |
| | | | | | | | | |
| | | | 63,950 | | | | 44,029 | |
| Current portion of long-term debt | | | (8,970 | ) | | | (2,142 | ) |
| | | | | | | | | |
| Long-term debt | | $ | 54,980 | | | $ | 41,887 | |
At October 31, 2020, maturities of our long-term debt over the next five fiscal years and thereafter were as follows:
| 2021 | | $ | 8,970 | |
| 2022 | | | 15,142 | |
| 2023 | | | 13,406 | |
| 2024 | | | 9,789 | |
| 2025 | | | 9,432 | |
| Thereafter | | | 7,211 | |
| | | $ | 63,950 | |
As of October 31, 2020 and October 31, 2019, the weighted-average interest rates of our short-term debt were 2.02% and 3.84%, respectively. Interest payments, including capitalized interest of $0.1 million in fiscal 2020, were $2.6 million in fiscal 2020 and 2019, and $1.9 million in fiscal 2018.
In April 2016, $57.5November 2018, PDMCX was approved for credit of 345 million RMB (approximately $51.4 million, at the balance sheet date), subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in RMB, are being used to finance certain capital expenditures in China. PDMCX granted liens on its interest in land, building, and certain equipment, which had a combined carrying value of $94.5 million as of October 31, 2020, as collateral for the Project Loans. As of October 31, 2020, PDMCX had outstanding borrowings of 336.0 million RMB ($50.1 million) against this approval. Payments on these borrowings are due semiannually through December 2025; an initial payment of 9.0 million RMB ($1.3 million) was made in June 2020. The table below presents, in U.S. dollars, the timing of future payments against the borrowings.
| | Fiscal Year | |
| | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | |
| Principal payments | | $ | 6,705 | | | $ | 7,334 | | | $ | 9,592 | | | $ | 9,789 | | | $ | 9,432 | | | $ | 7,211 | |
The interest rates on the Project Loans are variable and are based on the RMB Loan Prime Rate of the National Interbank Funding Center (4.9% at October 31, 2020). Interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
The Company has covenants and provisions in its Project loans, certain of which relate to the assets pledged as security for these agreements; the Company was not in compliance with those provisions as of October 31, 2020. The Company obtained waivers for all specified noncompliance.
Hefei Equipment Loan
In October 2020, we were approved to borrow 200 million RMB (approximately $29.8 million) from the China Construction Bank Corporation. We received initial proceeds of 41 million RMB (approximately $6.2 million) against this approval in November 2020. Loan proceeds have been, and will be, used for the purchase of 2 lithography tools at our senior convertible notes matured. Wefacility in Hefei, China. The interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center less 0.45% (adjusted annually), and is to be repaid $50.1semiannually, over five years, commencing on March 5, 2022. The interest rate on the loan was 4.2% at the borrowing date. The first five semiannual loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal; the last five installments will each be for 12.5 percent of the approved loan principal, with the final installment due on September 30, 2026. Semiannual repayments of the initial $6.2 million borrowed will commence on March 5, 2022, with a repayment of $2.3 million; subsequent semiannual repayments will be in the amounts of $2.3 million and $1.6 million. The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment, which had a combined carrying value of $87.8 million as of October 31, 2020.
Xiamen Working Capital Loans
In November 2018, PDMCX received approval for unsecured credit of the equivalent of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loans”), PDMCX can borrow up to 140.0 million RMB to pay value-added taxes (“VAT”), and up to 60.0 million RMB to fund operations; combined total borrowings are limited to the equivalent of $25.0 million. As of October 31, 2020, PDMCX had 93.2 million RMB ($13.9 million) outstanding against the approval to pay VAT. Payments on these borrowings are due semiannually, in increasing amounts, through July 2023. The table below presents, in U.S. dollars, the timing of future payments against these borrowings.
| | Fiscal Year | |
| | | 2021 | | | 2022 | | | 2023 | |
| Principal payments | | $ | 2,265 | | | $ | 7,808 | | | $ | 3,814 | |
As of October 31, 2020, PDMCX had 8.0 million RMB ($1.2 million) outstanding against the approval to fund operations; repayments are due one year from the borrowing dates; as such, we have classified this borrowing as short-term debt.
At October 31, 2020, the interest rate on the borrowing to fund operations is 4.6%, and interest rates on borrowings to pay VAT are approximately 4.53 to 4.61%; both rates are variable and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus spreads that range from 40.00 to 76.00 basis points. Interest incurred on the VAT loans are eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
Effective July 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds to finance equipment to be leased or purchased in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of a high-end lithography tool. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.5 million to noteholdersthe equipment vendor on our behalf. Interest on this borrowing is variable and issued approximately 0.7payable monthly at thirty-day LIBOR plus 1% (1.15% at October 31, 2020), and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. We intend to enter into a lease agreement for the related equipment in fiscal year 2021; as such, we have classified this borrowing as short-term debt. All borrowings under the MLA are secured by the equipment to be leased or purchased. During the first quarter of fiscal 2021, this financing entity made an additional payment of $28 million shares to noteholders that electedthe equipment vendor on our behalf.
In October 2020, we entered into a Master Lease Agreement with a financing entity for the lease of an inspection tool with a maximum value of $10 million. The tool was delivered during the fourth quarter of fiscal year 2020, and the financing entity made a progress payment to convert their notes to common stock.the vendor of $6.5 million in the first quarter of fiscal year 2021. The notes were exchangedprogress payment will accrue interest at 1.56% payable monthly until the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.final payment for the tool is made, at which time the lease will begin.
Corporate Credit Agreement
In January 2015,September 2018, we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes withentered into a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes,five-year amended and restated credit agreement (the “Credit Agreement”), which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated January 22, 2015. Note holders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and we are not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date.
Our credit facility, which expires in December 2018, has a $50 million borrowing limit, with an expansion capacity to $75 million, and$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 of our foreign subsidiaries. The credit facility stipulates that we may not pay cash dividends on Photronics, Inc. stock, and is subject to aCredit Agreement includes covenants around minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance financial covenants, all(all of which we were in compliance with at October 29, 2017.31, 2020), 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 no0 outstanding borrowings against the credit facilityCredit Agreement at October 29, 2017,31, 2020, and $50 million was available for borrowing. The interest rate on the credit facility (2.49%Credit Agreement (1.14% at October 29, 2017)31, 2020) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility. In May 2017, the credit facility was amended to add certain covenants for our planned IC joint venture and FPD manufacturing facility, both of which are in China. See Note 19 for additional discussion of these new investments.Credit Agreement.
423.25% Convertible Senior Notes
In January 2015, we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. In April 2019, the entire $57.5 million principal amount was repaid upon maturity.
In August 2013, a $26.4 million principal amount, five year capital lease commenced to fund the purchase of a high-end lithography tool. Payments
NOTE 8 - REVENUE
We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the capital lease, which bears interest at 2.77%, are $0.5 million per month through July 2018. The lease is subjectmodified retrospective transition method, only with respect to a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated into our credit facility. As of October 29, 2017, the total amount payable through August 2018 (the endcontracts that were not complete as of the lease term) was $4.7 million,date of which $4.6 million represented principaladoption. This approach required prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the adoption. In accordance with the modified retrospective transition method, the results of fiscal 2018 presented have not been adjusted for the effects of Topic 606. Please refer to Note 1 for information on our revenue recognition policies.
Disaggregation of Revenue
The following tables present our revenue for the years ended October 31, 2020 and $0.1 million represented interest.October 31, 2019, disaggregated by product type, geographic origin, and timing of recognition.
| | Year Ended | | | Year Ended | |
| Revenue by Product Type | | October 31, 2020 | | | October 31, 2019 | |
| IC | | | | | | |
| High-end | | $ | 156,129 | | | $ | 156,418 | |
| Mainstream | | | 262,281 | | | | 249,773 | |
| Total IC | | $ | 418,410 | | | $ | 406,191 | |
| | | | | | | | | |
| FPD | | | | | | | | |
| High-end | | $ | 139,558 | | | $ | 98,832 | |
| Mainstream | | | 51,723 | | | | 45,637 | |
| Total FPD | | $ | 191,281 | | | $ | 144,469 | |
| | | $ | 609,691 | | | $ | 550,660 | |
| Revenue by Geographic Origin | | | | | | |
| Taiwan | | $ | 239,101 | | | $ | 244,377 | |
| Korea | | | 153,052 | | | | 147,734 | |
| United States | | | 104,949 | | | | 105,045 | |
| China | | | 79,374 | | | | 19,010 | |
| Europe | | | 31,501 | | | | 32,585 | |
| All other Asia | | | 1,714 | | | | 1,909 | |
| | | $ | 609,691 | | | $ | 550,660 | |
| Revenue by Timing of Recognition | | | | | | |
| Over time | | $ | 535,071 | | | $ | 497,942 | |
| At a point in time | | | 74,620 | | | | 52,718 | |
| | | $ | 609,691 | | | $ | 550,660 | |
Interest payments were $2.1 million, $3.2 million, and $4.4 million in fiscal years 2017, 2016 and 2015.
Adoption of New Accounting Standard
NOTE 9 - LEASES
We adopted Accounting Standards Update (“ASU”) 2015-03 – “Simplifying2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842”), on November 1,2019. The guidance requires modified retrospective adoption, either at the Presentationbeginning of Debt Issuance Costs”the earliest period presented or at the beginning of the period of adoption. We elected to apply the guidance at the beginning of the period of adoption and recorded, as of November 1, 2019, right-of-use (ROU) leased assets of $6.5 million. In conjunction with this, we recorded lease liabilities, which had been discounted at our incremental borrowing rates, of $6.5 million. The impact of our adoption of Topic 842 on our current and deferred income taxes was immaterial.
The guidance allows a number of elections and practical expedients, of which we elected the following:
| - | Election not to recognize short-term leases on the balance sheet. |
| - | Practical expedient to not separate lease and non-lease components in a contract. |
| - | Practical expedient “package” for transitioning to the new guidance: |
| - | Not reassessing whether any expired or existing contracts are, or contain, leases. |
| - | Not reassessing lease classification for any existing or expired leases. |
| - | Not reassessing initial direct costs for any existing leases. |
Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is or contains a lease on the date of the lease agreement or commitment, if earlier. Our evaluation considers whether the arrangement includes an identified asset and whether it affords us the right to control the asset. Our having the right to control the identified asset is determined by whether we are entitled to substantially all of its economic benefits and can direct its use.
We recognize leases on our consolidated balance sheet when a lessor makes an asset underlying a lease having a term in excess of twelve months available for our use. The present value of lease payments over the term of the lease, which is determined using our incremental borrowing rate for collateralized loans at the commencement date of the lease, provides the basis for the initial measurement of ROU assets and their related lease liabilities. Variable lease payments, other than those that are dependent on an index or on a rate, are not included in the first quartermeasurement of fiscalROU assets and their related lease liabilities. Lease terms will include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise. Please refer to Note 1 for additional information on our leases accounting policies.
ROU assets underlying our leases include the land and facilities of some of our operating facilities, other real property, and machinery and equipment. As of October 31, 2020, we had ROU assets under operating leases of $7.7 million, included in Other Assets, and $2.2 million and $5.0 million of lease liabilities, included in Accrued liabilities and Other liabilities, respectively, on the consolidated balance sheet. The following tables present lease payments under non-cancellable leases as of October 31, 2020.
| | | Fiscal Year | | | | | | Total Lease | | | Imputed | | | | |
| | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | | Payments | | | Interest* | | | Total | |
| Lease payments | | $ | 2,275 | | | $ | 2,157 | | | $ | 1,205 | | | $ | 756 | | | $ | 618 | | | $ | 524 | | | $ | 7,535 | | | $ | 352 | | | $ | 7,183 | |
*Imputed interest represents difference between undiscounted cash flows and discounted cash flows.
As of October 31, 2020, we had entered into operating leases, which had not yet commenced, with aggregate underlying ROU assets and corresponding lease liabilities of $0.1 million.
The following table presents lease costs for the year 2017. This ASU requires debt issuance costs ended October 31, 2020.
| | Year Ended | |
| | | October 31, 2020 | |
| | | | |
| Operating lease costs | | $ | 3,076 | |
| Short-term lease costs | | $ | 359 | |
| Variable lease costs | | $ | 378 | |
Presented below is other information related to recognized debt liabilitiesour operating leases.
| Supplemental cash flows information: | | | |
| | | Year Ended | |
| | | October 31, 2020 | |
| | | | |
| Operating cash flows used for operating leases | | $ | 3,584 | |
| ROU assets obtained in exchange for operating lease obligations | | $ | 2,681 | |
| | As of | |
| | October 31, 2020 | |
| | | |
| Weighted-average remaining lease term | | 4.1 years | |
| Weighted-average discount rate | | | 2.37 | % |
Rent expense, as calculated under guidance in effect prior to be presented inour adoption of the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. We adopted this ASU on a retrospective basis, as a result of which our prior year financial statements and related notes have been adjusted, as necessary, to show its effects on those periods. The effect of adopting ASU 2015-03 on the other assets and long-term borrowing line items in the fiscal 2016 balance sheet is presented below.
Classification | | Previously Reported | | | Change Due to Adoption | | | Retrospectively Adjusted | |
| | | | | | | | | | |
| Other assets | | $ | 4,071 | | | $ | (279 | ) | | $ | 3,792 | |
| Long-term borrowings | | | 62,139 | | | | (279 | ) | | | 61,860 | |
NOTE 7 - OPERATING LEASES
We lease various real estate and equipment under non-cancelable operatingnew leases for which rent expenseguidance, was $3.0 million in 2017 and $2.8 million in each of fiscal years 2016 and 2015.
year 2019. At October 29, 2017,31, 2019, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as follows:presented in the table below. The amounts are undiscounted and were calculated in accordance with guidance in effect prior to our adoption of the new leases guidance.
| 2018 | | $ | 1,051 | | |
| 2019 | | | 684 | | |
| 2020 | | | 439 | | | $ | 1,885 | |
| 2021 | | | 380 | | | | 1,613 | |
| 2022 | | | 371 | | | | 1,535 | |
| 2023 | | | | 742 | |
| 2024 | | | | 424 | |
| Thereafter | | | 1,000 | | | | 377 | |
| | | $ | 3,925 | | | $ | 6,576 | |
See Note 6 for disclosures related to capital lease obligations.
NOTE 810 – SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (“the Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four4 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. We incurred total share-based compensation expenses of $3.6$4.9 million, $3.8$3.7 million, and $3.7$3.2 million in fiscal years 2017, 2016,2020, 2019, and 2015,2018, respectively. NoNaN share-based compensation cost was capitalized as part of an asset, and no$0.2 million of related income tax benefits were recorded during the fiscal years presented.
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one to four years. The fair values of the awards are determined on the date of grant, based on the closing stock price of our common stock. There were 538,000, 435,000, and 290,000 restricted stock awards granted during fiscal years, 2020, 2019 and 2018, respectively. The weighted-average grant-date fair values of those awards were $15.08, $9.80 and $8.62. The total fair value of awards for which restrictions lapsed was $3.0 million, $1.9 million and $1.4 million during fiscal years 2020, 2019 and 2018, respectively. As of October 31, 2020, the total compensation cost for restricted stock awards not yet recognized was approximately $6.9 million. That cost is expected to be recognized over a weighted-average amortization period of 2.8 years.
A summary of restricted stock award activity during fiscal year 2020 and the status of our outstanding restricted stock awards as of October 31, 2020, is presented below:
| Restricted Stock | | Shares | | | Weighted-Average Fair Value at Grant Date | |
| | | | | | | |
| Outstanding at October 31, 2019 | | | 640,113 | | | $ | 9.70 | |
| Granted | | | 538,000 | | | $ | 15.08 | |
| Vested | | | (271,347 | ) | | $ | 10.90 | |
| Cancelled | | | (94,450 | ) | | $ | 12.41 | |
| Outstanding at October 31, 2020 | | | 812,316 | | | $ | 12.55 | |
| Expected to vest as of October 31, 2020 | | | 770,778 | | | $ | 12.48 | |
Stock Options
Option awards generally vest in one-to-fourone to four years, and have a ten yearten-year contractual term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant dategrant-date fair values of options are based on the closing priceprices of our common stock on the datedates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of thean option is based on the U.S. Treasury yield curve in effect at the date of grant.
There were 0 stock option awards granted during fiscal year 2020. The weighted-average inputs and risk-free rate of return ranges used to calculate the grant dategrant-date fair valuesvalue of stock options issuedgranted during fiscal years 2017, 20162019 and 20152018 are presented in the following table:
| | | Year Ended | | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | Year Ended |
| | | | | | | | | | | October 31, 2019 | October 31, 2018 |
| Expected volatility | | | 32.2 | % | | | 48.4 | % | | | 53.7 | % | 33.1% | 31.7% |
| | | | | | | | | | | | | | |
| Risk-free rate of return | | | 1.9 – 2.0 | % | | | 1.2 – 1.7 | % | | | 1.3 – 1.6 | % | 2.5 – 2.9% | 2.2 – 2.8% |
| | | | | | | | | | | | | | |
| Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | 0.0% | 0.0% |
| | | | | | | | | | | | | | |
| Expected term | | 5.0 years | | | 5.1 years | | | 4.7 years | | 5.1 years | 5.0 years |
The table below presents a summary of stock options activity during fiscal year 20172020 and information on stock options outstanding at October 29, 2017.31, 2020.
| Options | | Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value | | | Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| | | | | | | | | | | |
| Outstanding at October 31, 2016 | | | 3,535,335 | | | $ | 7.59 | | | | | |
| Outstanding at October 31, 2019 | | | | 2,170,767 | | | $ | 9.00 | | | | | |
| Granted | | | 344,750 | | | | 11.33 | | | | | | | 0 | | | | 0 | | | | | |
| Exercised | | | (401,750 | ) | | | 6.09 | | | | | | | (493,450 | ) | | $ | 7.94 | | | | | |
| Cancelled and forfeited | | | (133,100 | ) | | | 11.17 | | | | | | | (56,200 | ) | | $ | 10.33 | | | | | |
| Outstanding at October 29, 2017 | | | 3,345,235 | | | $ | 8.01 | | 5.8 years | | $ | 7,108 | | |
| Exercisable at October 29, 2017 | | | 2,142,094 | | | $ | 6.60 | | 4.6 years | | $ | 6,661 | | |
| Vested and expected to vest as of October 29, 2017 | | | 3,180,991 | | | $ | 7.87 | | 5.7 years | | $ | 7,052 | | |
| Outstanding at October 31, 2020 | | | | 1,621,117 | | | $ | 9.27 | | 4.6 years | | $ | 1,778 | |
| Exercisable at October 31, 2020 | | | | 1,366,864 | | | $ | 9.21 | | 4.2 years | | $ | 1,651 | |
| Vested and expected to vest as of October 31, 2020 | | | | 246,055 | | | $ | 9.61 | | 7.3 years | | $ | 123 | |
The weighted-average grant date fair value of options granted during fiscal years 2017, 20162019 and 20152018 were $3.59, $4.51and $3.81,$3.31 and $2.76, respectively. The total intrinsic value of options exercised during fiscal years 2017, 20162020, 2019 and 20152018 was $1.9$3.2 million, $3.5$1.3 million and $2.0$2.5 million, respectively.
We received cash from option exercises of $2.4$3.7 million, $3.1$2.1 million and $2.2$4.3 million in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively. As of October 29, 2017,31, 2020, the total unrecognized compensation cost of unvested option awards was approximately $2.8$0.4 million. That cost is expected to be recognized over a weighted-average amortization period of 2.01.7 years.
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one-to-four years. The fair value of the awards are determined and fixed on the grant date based on our stock price. The weighted-average grant date fair values of restricted stock awards issued during fiscal years 2017, 2016 and 2015 were $10.94, $12.13 and $8.28, respectively. The total fair value of awards for which restrictions lapsed was $1.2 million, $1.7 million and $1.4 million during fiscal years 2017, 2016 and 2015, respectively. As of October 29, 2017, the total compensation cost for restricted stock awards not yet recognized was approximately $2.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.9 years.
A summary of restricted stock award activity during fiscal year 2017 and the status of our outstanding restricted stock awards as of October 29, 2017, is presented below:
Restricted Stock | | Shares | | | Weighted-Average Fair Value at Grant Date | |
| Outstanding at October 31, 2016 | | | 162,375 | | | $ | 9.61 | |
| Granted | | | 317,750 | | | | 10.94 | |
| Vested | | | (126,869 | ) | | | 9.78 | |
| Cancelled | | | (14,075 | ) | | | 10.89 | |
| Outstanding at October 29, 2017 | | | 339,181 | | | $ | 10.74 | |
| Vested and expected to vest as of October 29, 2017 | | | 302,898 | | | $ | 10.75 | |
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan (“ESPP”) permits employees to purchase Photronics, Inc. common shares at 85% of the lower of the closing market price at the commencement or ending date of the Plan year (which is approximately one year). We recognize the ESPP expense during that same period. As of October 29, 2017,31, 2020, the maximum number of shares of common stock approved by our shareholders to be purchased under the ESPP was 1.51.85 million shares,; of which approximately 1.41.5 million shares had been issued through October 29, 2017, and approximately 54,00031, 2020. As of October 31, 2020, 0.1 million shares arewere subject to outstanding subscriptions. As of October 29, 2017, the total compensation cost related to the ESPP not yet recognized was $0.1 million, which is expected to be recognized in fiscal 2018.
NOTE 9-11 - EMPLOYEE RETIREMENT PLANS
We maintain a 401(k) Savings and Profit Sharing Plan (“401(k) Plan”) which covers all full and certain part time U.S. employees who have completed three months of service and are 18 years of age or older. Under the terms of the 401(k) Plan, employees may contribute up to 50% of their salary, subject to certain maximum amounts, which will be matched by the Company at 50% of the employee’s contributions that are not in excess of 4% of the employee’s compensation. Employee and employer contributions vest immediately upon contribution. The total employer contributions for all of our defined contribution plans were $0.6$0.7 million, $0.6$0.7 million and $0.7 million in fiscal years 2017, 2016,2020, 2019 and 2015,2018, respectively.
NOTE 1012 - INCOME TAXES
Income before the income tax provisions consists of the following:
| | | Year Ended | | | Year Ended | |
| | | October 29 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | | | | | | | | | | | | | | | | | |
| United States | | $ | (11,544 | ) | | $ | 6,270 | | | $ | 6,646 | | | $ | (10,672 | ) | | $ | (8,379 | ) | | $ | (9,859 | ) |
| Foreign | | | 38,109 | | | | 54,204 | | | | 63,394 | | | | 72,273 | | | | 59,080 | | | | 78,430 | |
| | | $ | 26,565 | | | $ | 60,474 | | | $ | 70,040 | | | $ | 61,601 | | | $ | 50,701 | | | $ | 68,571 | |
The income tax provisions consist of the following:
| | | Year Ended | | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| Current: | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 173 | | | $ | 492 | | | $ | 160 | | | $ | 0 | | | $ | (3,916 | ) | | $ | (30 | ) |
| State | | | (4 | ) | | | (2 | ) | | | (109 | ) | | | 4 | | | | 11 | | | | 0 | |
| Foreign | | | 3,474 | | | | 8,115 | | | | 9,729 | | | | 21,698 | | | | 17,777 | | | | 11,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | - | | | | - | | | | - | | | | 0 | | | | 3,673 | | | | (3,673 | ) |
| State | | | 15 | | | | 10 | | | | 7 | | | | 8 | | | | 10 | | | | (24 | ) |
| Foreign | | | 1,618 | | | | (3,817 | ) | | | 3,394 | | | | (452 | ) | | | (7,345 | ) | | | (522 | ) |
| Total | | $ | 5,276 | | | $ | 4,798 | | | $ | 13,181 | | | $ | 21,258 | | | $ | 10,210 | | | $ | 7,335 | |
The income tax provisions differ from the amount computed by applying the statutory U.S. federal income tax rate to income before income taxes as a result of the following:
| | | Year Ended | | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | | | | | | | | | | | | | | | | | |
| U.S. federal income tax at statutory rate | | $ | 9,298 | | | $ | 21,166 | | | $ | 24,514 | | | $ | 12,936 | | | $ | 10,647 | | | $ | 16,059 | |
| Changes in valuation allowances | | | (3,632 | ) | | | (9,516 | ) | | | (11,471 | ) | | | 6,942 | | | | 2,673 | | | | 4,554 | |
| Distributions from foreign subsidiaries | | | 6,471 | | | | 3,438 | | | | 448 | | |
| Foreign tax rate differentials | | | (5,230 | ) | | | (9,620 | ) | | | (4,356 | ) | | | 1,718 | | | | 218 | | | | (2,078 | ) |
| Tax credits | | | (1,925 | ) | | | (944 | ) | | | (2,729 | ) | | | (1,562 | ) | | | (1,268 | ) | | | (1,530 | ) |
| Uncertain tax positions, including reserves, settlements and resolutions | | | (932 | ) | | | 134 | | | | (175 | ) | | | 1,637 | | | | 134 | | | | (1,791 | ) |
| Employee stock option | | | | 0 | | | | 0 | | | | (1,433 | ) |
| Income tax holiday | | | (743 | ) | | | (507 | ) | | | (869 | ) | | | (318 | ) | | | (2,234 | ) | | | (2,648 | ) |
| Employee stock compensation | | | 512 | | | | 452 | | | | 634 | | |
| Tax reform | | | | 0 | | | | 0 | | | | (3,736 | ) |
| Distributions from foreign subsidiaries | | | | 0 | | | | 0 | | | | 0 | |
| Tax on foreign subsidiary earnings | | | 1,712 | | | | 225 | | | | 6,589 | | | | 0 | | | | 0 | | | | 0 | |
| Other, net | | | (255 | ) | | | (30 | ) | | | 596 | | | | (95 | ) | | | 40 | | | | (62 | ) |
| | | $ | 5,276 | | | $ | 4,798 | | | $ | 13,181 | | | $ | 21,258 | | | $ | 10,210 | | | $ | 7,335 | |
| Effective tax rate | | | | 34.5 | % | | | 20.1 | % | | | 10.7 | % |
The fiscal year 2020 effective tax rates differrate differs from the U.S. statutory rate of 35% in fiscal years 2017, 2016 and 201521% primarily due to loss jurisdiction pre-tax losses not being benefited due to valuation allowances, non-U.S. pre-tax income being taxed at higher statutory rates in the non-U.S. jurisdictions (partially offset by the benefits of a tax holiday), and investment credits in foreign jurisdictions.
The fiscal year 2019 effective tax rate differs from the U.S. statutory rate of 21% due to the recognition of a benefit related to previously unrecognized tax positions, loss jurisdiction pre-tax losses being benefited at higher statutory rates than pre-tax income in income jurisdictions was taxed, changes in deferred tax asset valuation allowance,the benefits of a tax holiday, and investment credits in foreign jurisdictions.
The fiscal year 2018 effective tax rate differs from the U.S. federal blended rate of 23.42%primarily due to the impact of the U.S. Tax Cuts and Jobs Act (discussed below) allowing for the refund of AMT credits that caused a corresponding reversal of the related valuation allowance, the recognition of a benefit related to previously unrecognized tax positions, earnings being taxed at lower statutory rates in foreign jurisdictions, changes in deferredthe benefits of a tax asset valuation allowances, including the reversals noted below, together with the benefit of variousholiday, and investment credits in a foreign jurisdiction. In addition, the lower rate in fiscal year 2016 was partially driven byjurisdictions.
We were granted a benefit that resulted from the reversal of a previously recorded undistributed earnings tax liability in a foreign jurisdiction for which we are no longer liable. Two five-year tax holidaysholiday in Taiwan one that expired in 2017 and the other that expires in 2019,on December 31, 2019. This tax holiday reduced foreign taxes by $0.7$0.1 million, $0.5$2.2 million and $0.2$2.6 million in fiscal years 2017, 20162020, 2019 and 2015, respectively. These tax holidays had no2018, respectively, with an $0.02 and $0.035 cents per share impact in fiscal 2019 and 2018, respectively, and an immaterial per share effect in fiscal 2020.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended. Based on the enactment date, we accounted for the Act in our financial resultsinterim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under Accounting Standards Codification Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018, and finalized its effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes:
The Act repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, 2016 and 2015.provided that existing AMT credit carryforwards are fully refundable. We recognized a $3.9 million benefit on AMT credit carryforwards that we previously determined were not more likely than not going to be realized and reversed the previously recorded valuation allowance.
As of January 1, 2018, the Act reduced the corporate income tax rate from a maximum 35% to a flat 21%, requiring us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our net deferred tax asset is fully offset by a valuation allowance, and the revaluation of the deferred tax assets and liabilities resulted in a net-zero impact for the period.
The Act imposed a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The entire amount of transition tax was fully offset by tax credits (including carryforwards) that resulted in a provisional net-zero impact on the period.
On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17% to 20%, which required us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Accordingly, a net benefit of $0.2 million is reflected in our tax provision in fiscal year 2018.
The net deferred income tax assets consist of the following:
| | | As of | | | As of | |
| | | October 29, 2017 | | | October 30, 2016 | | | October 31, 2020 | | | October 31, 2019 | |
Deferred income tax assets: | | | | | | | | | | | | |
| Net operating losses | | $ | 40,942 | | | $ | 46,158 | | | $ | 34,457 | | | $ | 32,229 | |
| Reserves not currently deductible | | | 4,196 | | | | 5,904 | | | | 6,287 | | | | 5,013 | |
| Alternative minimum tax credits | | | 3,946 | | | | 3,772 | | |
| Tax credit carryforwards | | | 10,037 | | | | 8,814 | | | | 9,481 | | | | 9,164 | |
| Share-based compensation | | | 2,335 | | | | 1,972 | | | | 1,306 | | | | 860 | |
| Property, plant and equipment | | | | 3,887 | | | | 0 | |
| Other | | | 1,503 | | | | 1,719 | | | | 398 | | | | 434 | |
| | | | 62,959 | | | | 68,339 | | | | 55,816 | | | | 47,700 | |
| Valuation allowances | | | (25,590 | ) | | | (29,315 | ) | | | (33,973 | ) | | | (27,032 | ) |
| | | | 37,369 | | | | 39,024 | | | | 21,843 | | | | 20,668 | |
| Deferred income tax liabilities: | | | | | | | | | | | | | | | | |
| Undistributed earnings of foreign subsidiaries | | | (4,335 | ) | | | (3,962 | ) | |
| Property, plant and equipment | | | (19,280 | ) | | | (19,977 | ) | | | 0 | | | | (251 | ) |
| Other | | | (322 | ) | | | (254 | ) | | | 0 | | | | 0 | |
| | | | (23,937 | ) | | | (24,193 | ) | | | 0 | | | | (251 | ) |
| Net deferred income tax assets | | $ | 13,432 | | | $ | 14,831 | | | $ | 21,843 | | | $ | 20,417 | |
| | | | | | | | | | |
| Reported as: | | | | | | | | | | | | | | | | |
| Deferred income tax assets | | $ | 15,481 | | | $ | 16,322 | | | $ | 22,070 | | | $ | 20,779 | |
| Deferred income tax liabilities | | | (2,049 | ) | | | (1,491 | ) | | | (227 | ) | | | (362 | ) |
| | | $ | 13,432 | | | $ | 14,831 | | | $ | 21,843 | | | $ | 20,417 | |
We have established a valuation allowance for a portion of our deferred tax assets because we believe, based on the weight of all available evidence, that it is more likely than not that a portion of our net operating loss carryforwards will expire prior to utilization. DuringIn fiscal years 2016 and 2015, we determined2020 the valuation allowance increased as a result of management’s determination that sufficient positive evidence existedtax benefits on losses incurred in certain foreign jurisdictions that it wasa non-U.S. jurisdiction would not more likely than not that additional deferred tax assets were realizablebe realized and, therefore, we reducedincreased the valuation allowance by $4.3 million and $1.5 million, respectively.to include these net operating losses. In addition,fiscal 2019, the valuation allowance decreased in fiscal years 2017, 2016 and 2015increased as a result of loss utilizations and deferred tax liability changesan increase in fully valued net operating losses.
Due to the Act, as of $3.7 million, $5.2 million and $9.3 million, respectively.
As of October 29, 2017, we have not providedfiscal year end 2018, U.S. deferred taxes were no longer provided on $170.6 million ofthe undistributed earnings of non-U.S. subsidiaries, as it is oursubsidiaries. Our policy to indefinitely reinvest these earnings in non-U.S. operations. During fiscal year 2017, the permanently invested assertion was partially changed due to changes in circumstances within one of our non-U.S. subsidiary entities, and a U.S. tax liability was recognizedoperations remains unchanged for the related undistributed earnings. Shouldpurpose of determining deferred tax liabilities for U.S. state and foreign withholding taxes. Therefore, should we elect in the future to repatriate the remaining foreign earnings deemed to be indefinitely reinvested, we may incur additional incomestate and withholding tax expense on those foreign earnings, the amount of which is not practicable to compute.
The following tables present our available operating loss and credit carryforwards atas of October 29, 2017,31, 2020, and their related expiration periods:
Operating Loss Carryforwards | | Amount | | | Expiration Periods | | | Amount | | | Expiration Periods | |
| | | | | | | | |
| Federal | | $ | 86,358 | | | | 2025-2033 | | | $ | 90,125 | | | 2028-Indefinite | |
| | | | | | | | | | |
| State | | | 214,532 | | | | 2018-2037 | | | | 205,649 | | | | 2020-2040 | |
| | | | | | | | | | |
| Foreign | | | 15,414 | | | | 2019-2023 | | | | 14,895 | | | | 2022-2030 | |
| Tax Credit Carryforwards | | Amount | | | Expiration Period | |
| | | | | | | |
| Federal research and development | | $ | 5,580 | | | | 2019-2037 | |
| | | | | | | | | |
| Federal alternative minimum | | | 3,946 | | | Indefinite | |
| | | | | | | | | |
| State | | | 5,829 | | | | 2018-2031 | |
| | | | | | | | | |
| Foreign | | | 667 | | | | 2022 | |
| Tax Credit Carryforwards | | Amount | | | Expiration Period | |
| Federal research and development | | $ | 4,796 | | | | 2024-2040 | |
| State | | | 5,928 | | | | 2020-2034 | |
In September 2019, we entered into a Section 382 Rights Agreement with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent. The purpose of the Rights Agreement is to deter trading of our common stock that would result in a change in control (as defined in Internal Revenue Control Section 382), thereby preserving our future ability to use our historical federal net operating losses and other Tax Attributes (as defined in the Rights Agreement). In connection with our entry into the Rights Agreement, our board of directors declared a dividend of 1 preferred stock purchase right, for each share of the Company’s common stock, par value $0.01 per share, outstanding on September 30, 2019, to the stockholders of record on that date.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
| | | Year Ended | | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | Year Ended | |
| | | | | | | | | | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| Balance at beginning of year | | $ | 4,606 | | | $ | 4,029 | | | $ | 4,993 | | | $ | 1,758 | | | $ | 1,775 | | | $ | 3,384 | |
| Additions (reductions) for tax positions in prior years | | | 207 | | | | 744 | | | | (212 | ) | | | 227 | | | | (466 | ) | | | (44 | ) |
| Additions based on current year tax positions | | | 323 | | | | 268 | | | | 318 | | | | 1,576 | | | | 1,286 | | | | 498 | |
| Settlements | | | (922 | ) | | | (378 | ) | | | (720 | ) | | | (992 | ) | | | (204 | ) | | | (56 | ) |
| Lapses of statutes of limitations | | | (830 | ) | | | (57 | ) | | | (350 | ) | | | (19 | ) | | | (633 | ) | | | (2,007 | ) |
| Balance at end of year | | $ | 3,384 | | | $ | 4,606 | | | $ | 4,029 | | | $ | 2,550 | | | $ | 1,758 | | | $ | 1,775 | |
As ofAt October 29, 2017,31, 2020, October 30, 201631, 2019 and November 1, 2015, the balance ofOctober 31, 2018, unrecognized tax benefits, includes $3.4which are included in Other liabilities, include $2.0 million $4.6$1.9 million, and $4.1$1.9 million, recorded in other liabilities in the consolidated balance sheetsrespectively, that, if recognized, would impact the effective tax rate.rates. Included in these amounts in each of these amounts were interest and penalties of $0.1 million, $0.2 million, and $0.1 million, at the end of fiscal years 2017, 20162020, 2019, and 2015 were $0.1 million of interest and penalties.2018, respectively. We include any applicable interest and penalties related to uncertain tax positions in our income tax provision. The amounts reflected in the table above for the fiscal years 2017, 2016 and 2015 include settlements of non-U.S. audits.
Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that it is reasonably possible that up to $1.4 millionthe amount of its uncertain tax positions (including accrued interest and penalties, and net of tax benefits) that may be resolved over the next twelve months.months is $0.4 million. Resolution of these uncertain tax positions may result from either or both of the lapses of statutes of limitations andand/or tax settlements. The Company is no longer subject to tax authority examinations in the U.S., major foreign, or state tax jurisdictions for years prior to fiscal year 2013.2015.
Income tax payments were $9.3$23.0 million, $11.4$15.9 million and $4.9$6.1 million in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively. Cash received as refunds of income taxes paid in prior years amounted to $0.1 million, $0.2 million and $0.1$4.3 million in fiscal years 2017, 20162020, $1.1 million in fiscal 2018, and 2015, respectively.
an immaterial amount in fiscal 2019.
48
Currently, Congress is considering various U.S. corporate tax reform bills, which if enacted could have a material impact on various components of the income taxes including but not limited to, valuation allowances, deferred tax assets and liabilities. If the proposed bills are signed into law we expect a reduction in the recorded deferred tax liability related to foreign earnings and an offsetting reduction in deferred tax assets related to U.S. net operating losses. At this time it is not practical to calculate the potential dollar amount of these potential income tax law changes. The Company will continue to evaluate the potential implications as more information becomes available and the changes are enacted.
NOTE 1113 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented as follows:
| | | Year Ended | | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | | | | | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | $ | 13,130 | | | $ | 46,200 | | | $ | 44,625 | | | $ | 33,820 | | | $ | 29,793 | | | $ | 42,055 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense on convertible notes, net of related tax effects | | | - | | | | 2,938 | | | | 4,363 | | |
| Interest expense on convertible notes, net of tax | | | | 0 | | | | 845 | | | | 1,999 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings for diluted earnings per share | | $ | 13,130 | | | $ | 49,138 | | | $ | 48,988 | | |
| Earnings used for diluted earnings per share | | | $ | 33,820 | | | $ | 30,638 | | | $ | 44,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average common shares computations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average common shares used for basic earnings per share | | | 68,436 | | | | 67,539 | | | | 66,331 | | | | 64,866 | | | | 66,347 | | | | 68,829 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Share-based payment awards | | | 852 | | | | 974 | | | | 967 | | | | 604 | | | | 448 | | | | 450 | |
| Convertible notes | | | - | | | | 7,841 | | | | 11,085 | | | | 0 | | | | 2,360 | | | | 5,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Dilutive common shares | | | 852 | | | | 8,815 | | | | 12,052 | | |
| Potentially dilutive common shares | | | | 604 | | | | 2,808 | | | | 5,992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average common shares used for diluted earnings per share | | | 69,288 | | | | 76,354 | | | | 78,383 | | | | 65,470 | | | | 69,155 | | | | 74,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.19 | | | $ | 0.68 | | | $ | 0.67 | | | $ | 0.52 | | | $ | 0.45 | | | $ | 0.61 | |
| Diluted earnings per share | | $ | 0.19 | | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.52 | | | $ | 0.44 | | | $ | 0.59 | |
The table below showsillustrates the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be antidilutive. The table also shows convertible notes that, if converted, would have been antidilutive.
| | | Year Ended | | | Year Ended | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| | | | | | | | | | | | | | | | | | | |
| Convertible notes | | | 5,542 | | | | - | | | | - | | |
| Share based payment awards | | | 1,308 | | | | 1,635 | | | | 1,641 | | | | 795 | | | | 1,250 | | | | 1,627 | |
| | | | | | | | | | | | | | |
| Total potentially dilutive shares excluded | | | 6,850 | | | | 1,635 | | | | 1,641 | | | | 795 | | | | 1,250 | | | | 1,627 | |
Subsequent to October 31, 2020, we repurchased 0.1 million shares of our common stock. See Note 20 for information on our share repurchase programs.
NOTE 1214 - COMMITMENTS AND CONTINGENCIES
At
As of October 29, 2017,31, 2020, we had outstanding purchase commitments of $168$130 million, $112 million of which included $162 million related towas for capital expenditures, andequipment. As of October 31, 2020, we had recorded liabilities for the purchase of equipment of $3$15 million. See Notes 7
The Company’s wholly owned subsidiary in South Korea has been involved in litigation regarding a 2016 informational tax filing for its non-South Korean bank accounts that was not timely made under a then recently issued presidential decree. A fine (based solely on the amount in such accounts) in the amount of $2.2 million was assessed against our subsidiary. Our subsidiary appealed the fine on the grounds that it was not required to make the tax filing, and 19, respectively,such appeal was pursued up to the Supreme Court in South Korea. Under South Korean law, the tax authorities were entitled to pursue the matter in both civil and criminal courts simultaneously, with the proviso that any criminal fine imposed would act to dismiss any civil fine. The prosecutor recommended a fine of $0.03 million. The civil matter has subsequently been dismissed. Photronics was notified on March 12, 2020, that the Supreme Court rendered a decision against our subsidiary on the issue of whether our subsidiary was required to make the tax filing and remanded the case to the appellate court for informationdetermination of the fine. We are awaiting a trial date from the appellate court. Prior to the Supreme Court decision, our assessment was that the possibility of a fine was deemed remote, based on advice of local counsel and the subsequent judgments in the lower courts having been in our favor. Our estimate of the possible range of loss is $0.03 million to $2.2 million with the most likely amount being $0.03 million (based on the prosecutor’s recommendation). Accordingly, during the three-month period ended May 3, 2020, we accrued a contingent loss of $0.03 million with a charge to Selling, general and administrative expense in the consolidated statements of income. It is reasonably possible that the estimated loss will change in the near term. Our maximum exposure to loss in excess of amounts accrued is $2.17 million. The imposition of the fine will not have a material impact on our operating lease commitments and our plans to construct two facilities in China.financial position or financial performance.
We are subject to various claims that arise in the ordinary course of business. We believe such claims, individually and in the aggregate, will not have a material effect on our consolidated financial statements.
NOTE 1315 - GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We operate as a single operating segment as a manufacturer of photomasks, which are high precision quartz or glass plates containing microscopic images of electronic circuits for use in the fabrication of IC’s and FPDs. Geographic revenues (shown below) are based primarily on where our manufacturing facility is located.
Our 2017, 2016fiscal 2020, 2019 and 20152018 revenue by geographic areaorigin and by IC and FPD products are presented below.
| | Year Ended | |
| | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2018 | |
| Net revenue | | | | | | | | | |
| Taiwan | | $ | 239,101 | | | $ | 244,377 | | | $ | 237,039 | |
| Korea | | | 153,052 | | | | 147,734 | | | | 147,066 | |
| United States | | | 104,949 | | | | 105,045 | | | | 112,648 | |
| China | | | 79,374 | | | | 19,010 | | | | 1,157 | |
| Europe | | | 31,501 | | | | 32,585 | | | | 35,540 | |
| All other Asia | | | 1,714 | | | | 1,909 | | | | 1,826 | |
| | | | | | | | | | | | | |
| | | $ | 609,691 | | | $ | 550,660 | | | $ | 535,276 | |
| | | | | | | | | | | | | |
| IC | | $ | 418,410 | | | $ | 406,191 | | | $ | 416,064 | |
| FPD | | | 191,281 | | | | 144,469 | | | | 119,212 | |
| | | | | | | | | | | | | |
| | | $ | 609,691 | | | $ | 550,660 | | | $ | 535,276 | |
Our 2020 and 2019 long-lived assets by geographic area were as follows:are presented below.
| | | Year Ended | | | As of | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | | | October 31, 2020 | | | October 31, 2019 | |
| Net revenue | | | | | | | | | | |
| Long-lived assets | | | | | | | |
| China | | | $ | 262,800 | | | $ | 232,394 | |
| Taiwan | | $ | 187,818 | | | $ | 193,216 | | | $ | 205,141 | | | | 123,979 | | | | 146,467 | |
| United States | | | | 130,164 | | | | 130,935 | |
| Korea | | | 122,165 | | | | 141,017 | | | | 147,921 | | | | 110,815 | | | | 117,755 | |
| United States | | | 102,040 | | | | 113,670 | | | | 132,792 | | |
| Europe | | | 36,081 | | | | 33,384 | | | | 35,792 | | | | 3,717 | | | | 4,890 | |
| All other Asia | | | 2,574 | | | | 2,169 | | | | 2,560 | | |
| | | $ | 450,678 | | | $ | 483,456 | | | $ | 524,206 | | | | | | | | | |
| | | | | | | | | | | | | | | $ | 631,475 | | | $ | 632,441 | |
| IC | | $ | 350,260 | | | $ | 364,531 | | | $ | 420,833 | | |
| FPD | | | 100,418 | | | | 118,925 | | | | 103,373 | | |
| | | $ | 450,678 | | | $ | 483,456 | | | $ | 524,206 | | |
| | | As of | |
| | | October 29, 2017 | | | October 30, 2016 | | | November 1, 2015 | |
| Long-lived assets | | | | | | | | | | | | |
| Taiwan | | $ | 186,192 | | | $ | 176,644 | | | $ | 185,087 | |
| United States | | | 180,095 | | | | 173,658 | | | | 184,282 | |
| Korea | | | 147,265 | | | | 146,515 | | | | 167,618 | |
| Europe | | | 13,372 | | | | 9,617 | | | | 10,287 | |
| All other Asia | | | 8,273 | | | | - | | | | 10 | |
| | | $ | 535,197 | | | $ | 506,434 | | | $ | 547,284 | |
One customer accounted for 16%, 19% and 18% of our revenue in fiscal years 2017, 2016 and 2015, respectively, and another customer accounted for 16%, 17%15%, and 15% of our revenue in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively, and another customer accounted for 14%, 16% and 16% of our revenue in fiscal years 2020, 2019 and 2018, respectively.
NOTE 1416 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth the changes in our accumulated other comprehensive income by component (net of tax of $0) for the years ended October 29, 201731, 2020 and October 30, 2016:31, 2019:
| | | Year Ended October 29, 2017 | |
| | | Foreign Currency Translation Adjustments | | | Amortization of Cash Flow Hedge | | | Other | | | Total | |
| | | | | | | | | | | | | |
| Balance at October 31, 2016 | | $ | (6,567 | ) | | $ | (177 | ) | | $ | (927 | ) | | $ | (7,671 | ) |
| Other comprehensive income before reclassifications | | | 19,799 | | | | - | | | | 478 | | | | 20,277 | |
| Amounts reclassified from other accumulated comprehensive income | | | - | | | | 129 | | | | - | | | | 129 | |
| Net current period other comprehensive income | | | 19,799 | | | | 129 | | | | 478 | | | | 20,406 | |
| Less: other comprehensive income attributable to noncontrolling interests | | | (5,605 | ) | | | - | | | | (239 | ) | | | (5,844 | ) |
| Balance at October 29, 2017 | | $ | 7,627 | | | $ | (48 | ) | | $ | (688 | ) | | $ | 6,891 | |
| | Year Ended October 31, 2020 | |
| | | Foreign Currency Translation Adjustments | | | Other | | | Total | |
| | | | | | | | | | |
| Balance at October 31, 2019 | | $ | (8,331 | ) | | $ | (674 | ) | | $ | (9,005 | ) |
| Other comprehensive income (loss) | | | 36,381 | | | | (390 | ) | | | 35,991 | |
| Less: other comprehensive income (loss) attributable to noncontrolling interests | | | 9,222 | | | | (194 | ) | | | 9,028 | |
| | | | | | | | | | | | | |
| Balance at October 31, 2020 | | $ | 18,828 | | | $ | (870 | ) | | $ | 17,958 | |
| | | Year Ended October 30, 2016 | |
| | | Foreign Currency Translation Adjustments | | | Amortization of Cash Flow Hedge | | | Other | | | Total | |
| | | | | | | | | | | | | |
| Balance at November 1, 2015 | | $ | (9,634 | ) | | $ | (306 | ) | | $ | (633 | ) | | $ | (10,573 | ) |
| Other comprehensive income (loss) before reclassifications | | | 6,334 | | | | - | | | | (589 | ) | | | 5,745 | |
| Amounts reclassified from other accumulated comprehensive income | | | - | | | | 129 | | | | - | | | | 129 | |
| Net current period other comprehensive income (loss) | | | 6,334 | | | | 129 | | | | (589 | ) | | | 5,874 | |
| Less: other comprehensive (income) loss attributable to noncontrolling interests | | | (3,267 | ) | | | - | | | | 295 | | | | (2,972 | ) |
| Balance at October 30, 2016 | | $ | (6,567 | ) | | $ | (177 | ) | | $ | (927 | ) | | $ | (7,671 | ) |
| | Year Ended October 31, 2019 | |
| | | Foreign Currency Translation Adjustments | | | Other | | | Total | |
| | | | | | | | | | |
| Balance at October 31, 2018 | | $ | (4,328 | ) | | $ | (638 | ) | | $ | (4,966 | ) |
| Other comprehensive loss | | | (2,877 | ) | | | (74 | ) | | | (2,951 | ) |
| Less: other comprehensive income (loss) attributable to noncontrolling interests | | | 1,126 | | | | (38 | ) | | | 1,088 | |
| | | | | | | | | | | | | |
| Balance at October 31, 2019 | | $ | (8,331 | ) | | $ | (674 | ) | | $ | (9,005 | ) |
Amortization of the cash flow hedge is included in cost of goods sold in the consolidated statements of income in all periods presented.
NOTE 1517 – CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to credit risk principally consist of trade accounts receivablesreceivable and short-term cash investments. We sell our products primarily to semiconductor and FPD manufacturers in Asia, North America, and Europe. We believe that the concentration of credit risk in our trade receivables is substantially mitigated by our ongoing credit evaluation process and relatively short collection terms. We do not generally require collateral from customers. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Our cash and cash equivalents are deposited in several financial institutions, including institutions located within all of the countries in which we manufacture photomasks. Portions of deposits in some of these institutions may exceed the amount of insurance available for such deposits at these institutions. As these deposits are generally redeemable upon demand and are held by high quality, reputable institutions, we consider them to bear minimal credit risk. We further mitigate credit risks related to our cash and cash equivalents by spreading such risk among a number of institutions.
As of October 31, 2020 and October 31, 2019, 1 of our customers accounted for 24% and 17% of our net accounts receivable, respectively.
NOTE 1618 - RELATED PARTY TRANSACTIONS
Our executive chairman On January 20, 2018, we entered into a four-year consulting agreement with DEMA Associates, LLC, of which the board of directors is also a director of an entity that provided secure managed information technology services to Photronics in fiscal years 2016 and 2015. Another memberchairman of our board of directors was the chief executive officer and chairman of the board of this entity.is a member, for $0.4 million per year. We had contracted withincurred expenses for services provided by this entity since 2002 for services it provided to all of our facilities. In$0.4 million and $0.3 million in fiscal years 20162019 and 2015,2018, respectively. Effective March 9, 2020, the agreement was amended to reduce the consideration under the contract to $0.1 million per year for its remaining term; in fiscal 2020, we incurred expenses for services provided by this entity of $0.2 million and $1.0 million, respectively.$0.2 million.
An officer of one of our foreign subsidiariescompany is related to an individual in a position of authority at one of our largest customers. We recorded revenue from this customer of $73.6$96.4 million, $80.5$87.0 million and $77.8$78.4 million, in fiscal years 2017, 20162020, 2019 and 2015,2018, respectively. AtAs of October 29, 201731, 2020 and October 30, 2016,31, 2019, we had accounts receivable of $24.3$32.7 million and $23.2$22.2 million, respectively, from this customer.
In July 2016, we entered into a contract for information technology services with a parent entity for which a member of our board of directors serves as the executive chairman of the board and director of a wholly owned subsidiary of that entity. During fiscal years 2017 and 2016, we incurred expenses of $0.5 million and $0.3 million, respectively with the parent entity, and had payables outstanding to the parent entity of $0.2 million at October 30, 2016.
We purchase photomask blanks from an entity of which a former officer of ours is a significant shareholder. The Company purchased $4.5 million of photomask blanks from this entity during the period in 2017 when the former officer was employed by us, and $16.3 million and $20.2 million in 2016 and 2015, respectively, for which the amount owed to this entity was $2.7 million at October 30, 2016 (the last reported date at which this entity was a related party to Photronics).
We believe that the terms of our transactions with the related parties described above were negotiated at arm’s length and were no less favorable to us than terms we could have obtained from unrelated third parties. See Note 4 for additional related party transactions.
NOTE 1719 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers, as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at October 29, 2017 or October 30, 2016.
Fair Value of Other Financial Instruments
The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying valuevalues due to their short-term maturities. The fair valuevalues of our convertible senior notes isvariable rate debt instruments are a Level 2 measurement as it was determined using inputs that were either observable market dataand approximate their carrying values due to the variable nature of the underlying interest rates. We did 0t have any assets or could be derived fromliabilities measured at fair value, on a recurring or corroborated with observable market data. These inputs included oura nonrecurring basis, at October 31, 2020 or October 31, 2019.
NOTE 20 – SHARE REPURCHASE PROGRAMS
In September 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, price and interest rates offeredpursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended) (“the Securities Act”). Repurchases under the program commenced on debt issued by entities with credit ratings similar to ours.September 16, 2020.
In August 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. The table below presentsshare repurchase program commenced on September 25, 2019, and was terminated on March 20, 2020.
In October 2018, the fairCompany’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act. The share repurchase program commenced on October 22, 2018, and carrying valueswas terminated on February 1, 2019.
In July 2018, the Company’s Board of our convertible senior notes at Directors authorized the repurchase of up to $20 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act. The share repurchase program commenced on July 10, 2018, and was completed in October 29, 2017 and October 30, 2016.2018, when the authorized amount was exhausted.
| | | October 29, 2017 | | | October 30, 2016 | |
| | | Fair Value | | | Carrying Value | | | Fair Value | | | Carrying Value | |
| | | | | | | | | | | | | |
| 3.25% convertible senior notes due 2019 | | $ | 67,396 | | | $ | 57,337 | | | $ | 68,230 | | | $ | 57,221 | |
NOTE 18 – GAINS ON SALE OF INVESTMENTS
We had a minority interestAll of the shares purchased under the above repurchase programs in a foreign entity. In fiscal 2020 were retired prior to the end of the fiscal year. All of the shares purchased under prior year 2016, we sold this investment and recognized a gain of $8.8 million. In addition, as discussed in Note 4, we sold our investment in the MP Mask joint venturerepurchase programs were retired in fiscal year 2016.2019. The Table below presents information on the repurchase programs.
| | Fiscal Year 2020 Purchases | | | Fiscal Year 2019 Purchases | | | Fiscal Year 2018 Purchases | | | Total Purchases Under Programs | |
| | | | | | | | | | | | | |
| Number of shares repurchased | | | 3,194 | | | | 2,133 | | | | 2,558 | | | | 7,885 | |
| | | | | | | | | | | | | | | | | |
| Cost of shares repurchased | | $ | 34,394 | | | $ | 21,696 | | | $ | 23,111 | | | $ | 79,201 | |
| | | | | | | | | | | | | | | | | |
| Average price paid per share | | $ | 10.77 | | | $ | 10.17 | | | $ | 9.04 | | | $ | 10.04 | |
NOTE 19 – EXPANSION INTO CHINA
Expansion of IC Manufacturing into China
NOTE 21 – SUBSIDIARY DIVIDEND
In August 2016, Photronics Singapore Pte, Ltd., a whollyfiscal years 2020, 2019 and 2018, PDMC, the Company’s majority owned subsidiary signed an investment agreement with the Administrative Committee of Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement, we will build and operate an IC facility to engage in research and development, manufacture and sale of photomasks, in return for which Xiamen Torch will provide certain investment incentives and support. This expansion is also substantially supported by customer commitments for its output. The total investment per the agreement is $160 million to be funded over the next five years in cash, transferred equipment and potential local borrowings. Construction began in 2017 and production is anticipated to start in early 2019.
In the third quarter of fiscal 2017, we agreed to create a joint venture with DNP to encompass the Xiamen project. Under the agreement, our wholly-owned Singapore subsidiary will own 50.01% of the joint venture, which will be named Photronics DNP Mask Corporation Xiamen (PDMCX), and a subsidiary of DNP will own the remaining 49.99%. The financial results of the joint venture will be included in Photronics’ consolidated financial statements.
Expansion of FPD Manufacturing into China
In August 2017, we announced that Photronics UK, Ltd., a wholly-owned subsidiary, signed an investment agreement with Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we will invest a minimum of $160 million, a portionTaiwan, paid dividends of which may be funded with local borrowings,49.99%, or approximately $16.2 million, $45.1 million and $8.2 million, respectively, were paid to build and operate a research and development and manufacturing facility for high-end and mainstream FPD photomasks. Hefei State Hi-tech Industry Development Zone will provide certain investment incentives and support for this facility, which will have initial capability to produce up to G10.5 large area masks and AMOLED products. Construction began in late 2017 and production is anticipated to commence in early 2019.
noncontrolling interests.
NOTE 2022 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data:
| | | First | | | Second | | | Third | | | Fourth | | | Year | | | First | | | Second | | | Third | | | Fourth | | | Year | |
| Fiscal 2017: | | | | | | | | | | | | | | | | |
| Fiscal 2020: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 109,831 | | | $ | 108,297 | | | $ | 111,579 | | | $ | 120,971 | | | $ | 450,678 | | |
| Revenue | | | $ | 159,736 | | | $ | 142,774 | | | $ | 157,895 | | | $ | 149,286 | | | $ | 609,691 | |
| Gross profit | | | 22,999 | | | | 20,157 | | | | 21,717 | | | | 26,442 | | | | 91,315 | | | | 34,602 | | | | 30,433 | | | | 37,734 | | | | 31,885 | | | | 134,654 | |
| Net income | | | 4,510 | | | | 1,484 | | | | 4,799 | | | | 10,496 | | | | 21,289 | | | | 10,928 | | | | 7,972 | | | | 12,864 | | | | 8,579 | | | | 40,343 | |
| Net income attributable to Photronics, Inc. shareholders | | | 1,946 | | | | 1,797 | | | | 4,001 | | | | 5,386 | | | | 13,130 | | | | 10,300 | | | | 6,284 | | | | 10,776 | | | | 6,460 | | | | 33,820 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.06 | | | $ | 0.08 | | | $ | 0.19 | | | $ | 0.16 | | | $ | 0.10 | | | $ | 0.17 | | | $ | 0.10 | | | $ | 0.52 | |
| Diluted | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.06 | | | $ | 0.08 | | | $ | 0.19 | | | $ | 0.16 | | | $ | 0.10 | | | $ | 0.17 | | | $ | 0.10 | | | $ | 0.52 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2016: | | | | | | | | | | | | | | | | | | | | | |
| | | | (a) | | | | (b) | | | | | | | | (c) | | | | (a)(d) | | | First | | | Second | | | Third | | | Fourth | | | Year | |
| Net sales | | $ | 129,956 | | | $ | 122,923 | | | $ | 123,209 | | | $ | 107,368 | | | $ | 483,456 | | |
| Fiscal 2019: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | | $ | 124,712 | | | $ | 131,580 | | | $ | 138,112 | | | $ | 156,256 | | | $ | 550,660 | |
| Gross profit | | | 35,436 | | | | 31,287 | | | | 31,450 | | | | 20,533 | | | | 118,706 | | | | 26,102 | | | | 26,010 | | | | 30,570 | | | | 38,159 | | | | 120,841 | |
| Net income | | | 23,501 | | | | 14,153 | | | | 11,453 | | | | 6,569 | | | | 55,676 | | | | 7,768 | | | | 9,852 | | | | 9,834 | | | | 13,037 | | | | 40,491 | |
| Net income attributable to Photronics, Inc. shareholders | | | 21,002 | | | | 11,854 | | | | 8,088 | | | | 5,256 | | | | 46,200 | | | | 5,267 | | | | 8,479 | | | | 6,347 | | | | 9,700 | | | | 29,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.31 | | | $ | 0.18 | | | $ | 0.12 | | | $ | 0.08 | | | $ | 0.68 | | | $ | 0.08 | | | $ | 0.13 | | | $ | 0.10 | | | $ | 0.15 | | | $ | 0.45 | |
| Diluted | | $ | 0.28 | | | $ | 0.16 | | | $ | 0.12 | | | $ | 0.08 | | | $ | 0.64 | | | $ | 0.08 | | | $ | 0.13 | | | $ | 0.10 | | | $ | 0.15 | | | $ | 0.44 | |
(a) | Includes $8.8 million gain on sale of investment in a foreign entity. |
(b) | Includes a tax benefit in Taiwan of $1.8 million related to prior years. |
(c) | Includes a tax benefit in Taiwan of $3.0 million related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary. |
(d) | Includes tax benefits in Taiwan of $4.8 million primarily related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary. |
NOTE 2123 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Updates Implemented
We adopted ASU 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842”), on November 1, 2019. The guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption. We elected to apply the guidance at the beginning of the period of adoption and recorded, as of November 1, 2019, right-of-use (ROU) leased assets of $6.5 million. In conjunction with this, we recorded lease liabilities, which had been discounted at our incremental borrowing rates, of $6.5 million. Our adoption of Topic 842 did not affect our cash flows or our ability to comply with covenants under our credit agreement. Please see Note 9 for our leases disclosure.
Accounting Standards Updates to be Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 of the goodwill impairment test and requires entities to perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, in the event the reporting unit fails the qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for us in the first quarter of our fiscal year 2021, and will be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions that we may make.
In January 2017,March 2020, the FASB issued ASU 2017-01 “Clarifying2020-04, “Reference Rate Reform (Topic 848): Facilitation of the DefinitionEffects of a Business”Reference Rate Reform on Financial Reporting”, withwhich provides optional expedients and exceptions to applying the objective of adding guidance on contract modifications, hedge accounting, and other transactions, to assist entities with evaluating whether transactions shouldsimplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01discontinued, to alternative reference rates. The guidance in this Update was effective upon its issuance; if elected, it is effective for Photronics in our first quarter of fiscal year 2019, and willto be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions or dispositions that we may make.
In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This Update is effective for us in the first quarter of our fiscal year 2019, and will be applied on a retrospective transition basis. Early adoption is permitted, including adoption in an interim period as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance.prospectively through December 31, 2022. We are currently evaluating the effect the potential adoption of this ASU will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, deferred income taxes for intra-entity asset transfers other than inventory. This Update is effective for us in the first quarter of our fiscal year 2019, and will be applied on a modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. We are currently evaluating the effect this ASU will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. This Update is effective for us in the first quarter of our fiscal year 2019, and will be applied using a retrospective transition approach. We are currently evaluating the effect this ASU will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss impairment methodology, found in current GAAP, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to measure expectedinform credit losses.loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. This Update isASU 2016-13 was effective for usPhotronics in the first quarter of our fiscal year 2021, with early adoption permitted beginning in theits first quarter of fiscal year 2019.2021. We are currently evaluatingadopted ASU 2016-13 on November 1, 2020; the effect this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016 – 09 “Improvements to Employee Share-Based Payment Accounting”, which simplifies the accounting for share-based payment transactions including their income tax consequences, classification as either equity or liability awards, classification on the statement of cash flows, and other areas. The method of adoption varies with the different aspects of the Update. The Update is effective for us the first quarter ofadoption was immaterial, and did not warrant our fiscal year 2018. We do not expect this ASU to haverecording a material impact on our consolidated financial statements.cumulative-effect adjustment.
In February 2016, the FASB issued ASU 2016 – 02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. The Update is to be adopted using a modified retrospective approach, which includes a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. The ASU is effective for us in the first quarter of our fiscal year 2020, with early application permitted, and we are currently evaluating the effect this ASU will have on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include, equity investments, financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. The ASU also changes certain presentation and disclosure requirements for financial instruments. The Update is to be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This ASU is effective for us in the first quarter of our fiscal year 2019. We are currently evaluating the effect this ASU will have on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. We adopted this ASU, and applied it on a retrospective basis, in the first quarter of our 2017 fiscal year. See Note 6 for the effects of adoption on our October 30, 2016, consolidated balance sheet.71
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which will supersede nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year and allows entities to early adopt, but no earlier than the original effective date. ASU 2014-09 will now be effective for us in the first quarter of our fiscal year 2019. This update allows for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amends guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 are the same as those for ASU 2014-09. We anticipate that the adoption of this ASU will result in the acceleration of revenue as, upon adoption of this Update, amounts in our work-in process inventory will be considered to represent promised goods transferred to our customers, requiring us to recognize consideration for those transferred goods in amounts we expect to be entitled to receive in exchange for them. However, we cannot currently quantify with reasonable certainty the effect this anticipated acceleration of revenue will have on our consolidated financial statements. We expect to adopt this Update using the modified retrospective approach.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2020. We have established and currently maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation Based on an evaluation of our disclosure controls and procedures as of the endOctober 31, 2020, and due to a material weakness in our internal control (see discussion below), our Chief Executive Officer and Chief Financial Officer concluded that, as of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded thatsuch date, our disclosure controls and procedures were effective at a reasonable assurance level asnot effective.
Notwithstanding this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the endperiods presented in accordance with accounting principles generally accepted in the United States of the period covered by this report.America.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’sManagement's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the internal control over financial reporting based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of October 31, 2020, based on the criteria set forth by the COSO. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was not effective as of October 31, 2020, due to the material weakness in our internal control over financial reporting relating to the accuracy and completeness of information used in the monitoring compliance with covenants stipulated by the Company’s debt agreements. The Company has instituted new processes to ensure compliance with covenants in all material agreements.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectiveness of the Company's internal control over financial reporting as of October 31, 2020, as stated in their report on page 72 of this Form 10-K.
Changes in Internal Control over Financial Reporting
Other than the material weakness discussed above, there have been no other changes in our internal control over financial reporting during the fiscal quarter ended October 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Photronics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Photronics, Inc. and subsidiaries (the “Company”) as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended October 31, 2020, of the Company and our report dated January 14, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of our A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of October 29, 2017, basedfinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the criteria set forth by the Committeefinancial statements.
Because of Sponsoring Organizations of the Treadway Commission in its “Internal Control - Integrated Framework” (2013). Management, under the supervision and with the participation of our chief executive officer and chief financial officer, concluded that ourinherent limitations, internal control over financial reporting was effective asmay not prevent or detect misstatements. Also, projections of October 29, 2017.any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectivenessA material weakness is a deficiency, or a combination of the Company’sdeficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: the Company did not properly design and operate adequate internal control over accuracy and completeness of information used in the monitoring compliance with covenants stipulated by the Company’s debt agreements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended October 29, 2017, as stated in their31, 2020, of the Company, and this report does not affect our report on page 29 of this Form 10-K.such financial statements.
December 20, 2017/s/ Deloitte & Touche LLP
Hartford, Connecticut
January 14, 2021
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information as to Directors required by Items 401, 405 and 407(c)(3)(d)(4) and (d)(5) of Regulation S-K is set forth in our 2018 definitive2021 Definitive Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120 days after the end of the fiscal year covered by this Form 10-K under the caption “PROPOSAL"PROPOSAL 1 - ELECTION OF DIRECTORS,” “SECTION" "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE”COMPLIANCE" and in the third paragraph under the caption “MEETINGS"MEETINGS AND COMMITTEES OF THE BOARD,”" and is incorporated in this report by reference. The information as to Executive Officers is included in our 2018 definitive2021 Definitive Proxy Statement under the caption “EXECUTIVE OFFICERS”"EXECUTIVE OFFICERS" and is incorporated in this report by reference.
We have adopted a code of ethics that applies to our principal executive officer, chief financial officer or principal financial officer and principal accounting officer or chief financial officer. A copy of the code of ethics may be obtained, free of charge, by writing to the executive vice president, general counsel of Photronics, Inc. at 15 Secor Road, Brookfield, Connecticut 06804.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 402 of Regulation S-K and paragraph (e)(4) and (e)(5) of Item 407 is set forth in our 2018 definitive2021 Definitive Proxy Statement under the captions “EXECUTIVE COMPENSATION”"EXECUTIVE COMPENSATION", “CERTAIN AGREEMENTS”"CERTAIN AGREEMENTS", “DIRECTORS’ COMPENSATION”"DIRECTORS' COMPENSATION", “COMPENSATION"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION”PARTICIPATION" and “COMPENSATION"COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION”COMPENSATION", respectively, and is incorporated in this report by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 201(d) of Regulation S-K is set forth in our 2018 definitive2021 Definitive Proxy Statement under the caption “EQUITY COMPENSATION PLAN INFORMATION”, and is incorporated in this report by reference. The information required by Item 403 of Regulation S-K is set forth in our 2018 definitive2021 Definitive Proxy Statement under the caption “OWNERSHIP"OWNERSHIP OF COMMON STOCK BY DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS”OWNERS", and is incorporated in this report by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Items 404 and Item 407(a) of Regulation S-K is set forth in our 2018 definitive2021 Definitive Proxy Statement under the captions “MEETINGS"MEETINGS AND COMMITTEES OF THE BOARD”BOARD" and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS”"RELATED PARTY TRANSACTIONS", respectively, and is incorporated in this report by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 9(e) of Rule 14a-101 of the Exchange Act is set forth in our 2018 definitive2021 Definitive Proxy Statement under the captions “Fees Paid to the Independent"Independent Registered Public Accounting Firm”Firm Fees" and “AUDIT"AUDIT COMMITTEE REPORT”REPORT", and is incorporated in this report by reference.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this report:
| | | | | Page |
| | | Page No. | | | | No. |
| | | | | | | |
| 1. | Financial Statements: See “INDEX TO CONSOLIDATED FINANCIAL STATEMENTS” in Part II, Item 8 of this Form 10-K. | 28 | | | | 36 |
| | | | | | | |
| 2. | Financial Statement Schedule: | | | Financial Statement Schedule: | | |
| | | | | | | |
| | Report of Independent Registered Public Accounting Firm on financial statement schedule | 59 | | | | 76 |
| | | | | | | |
| | Schedule II - Valuation and Qualifying Accounts for the years ended October 29, 2017, October 30, 2016 and November 1, 2015 | 59 | | All other schedules are omitted because they are not applicable. | | |
| | | | | | | |
| | All other schedules are omitted because they are not applicable. | | |
| | | | |
| 3. | Exhibits | 59 | | | | 77 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders75
Photronics, Inc.
Brookfield, Connecticut
We have audited the consolidated financial statements of Photronics, Inc. and subsidiaries (the “Company”) as of October 29, 2017 and October 30, 2016 and for each of the fiscal years ended October 29, 2017, October 30, 2016, and November 1, 2015, and have issued our report thereon dated December 20, 2017, which contained an unqualified opinion on those consolidated financial statements. The financial statement schedule in Item 15 has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The financial statement schedule is the responsibility of the Company’s management. Our audit procedures included determining whether the financial statement schedule reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the financial statement schedule. In our opinion, such schedule is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
December 20, 2017
| | | Valuation and Qualifying Accounts for the Years Ended October 29, 2017, October 30, 2016 and November 1, 2015 (in $ thousands) | |
| | | Balance at Beginning of Year | | | Charged to Costs and Expenses | | | | Deductions | | | | Balance at End of Year | |
| Allowance for Doubtful Accounts | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Year-ended October 29, 2017 | | | 3,901 | | | | (1,600 | ) | (b) | | | 18 | | (a) | | | 2,319 | |
| Year ended October 30, 2016 | | | 3,301 | | | | 642 | | | | | (42 | ) | (a) | | | 3,901 | |
| Year ended November 1, 2015 | | | 3,078 | | | | 730 | | | | | (507 | ) | (a) | | | 3,301 | |
| | | | | | | | | | | | | | | | | | | |
| Deferred Tax Asset Valuation Allowance | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Year-ended October 29, 2017 | | | 29,315 | | | | - | | | | | (3,725 | ) | (c) | | | 25,590 | |
| Year ended October 30, 2016 | | | 38,763 | | | | (4,262 | ) | (b) | | | (5,186 | ) | (c) | | | 29,315 | |
| Year ended November 1, 2015 | | | 49,548 | | | | (2,364 | ) | (b) | | | (8,421 | ) | (c) | | | 38,763 | |
Schedule II
Valuation and Qualifying Accounts
for the Years Ended October 31, 2020, October 31, 2019
and October 31, 2018
(in $ thousands)
| | Balance at Beginning of Year | | | Charged to Costs and Expenses | | | Deductions | | | Balance at End of Year | |
| Allowance for Doubtful Accounts | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Year-ended October 31, 2020 | | $ | 1,334 | | | $ | (22 | ) | | $ | 12 | (a) | | $ | 1,324 | |
| Year-ended October 31, 2019 | | $ | 1,526 | | | $ | (18 | ) | | $ | (174 | )(a) | | $ | 1,334 | |
| Year ended October 31, 2018 | | $ | 2,319 | | | $ | (809 | ) | | $ | 16 | (a) | | $ | 1,526 | |
_________________
| (a) | Uncollectible accounts written off, net, and impact of foreign currency translation. |
(b)ITEM 16. | Reversal of valuation allowance.FORM 10-K SUMMARY |
(c) | Increase in deferred tax liability and utilization of net operating losses. |
Not applicable.
| | | | | Incorporated by Reference | | Filed or Furnished Herewith |
Exhibit Number | | Description | | Form | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| | Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15, 2002 and June 20, 2005. | | 10-K | | 3.1 | | 12/20/2019 | | |
| | | | | | | | | | | |
| | Amended and Restated By-laws of the Company dated as of September 7, 2016. | | 8-K | | 3.2 | | 9/13/2016 | | |
| | | | | | | | | | | |
| | Description of Securities of the Company | | 10-K | | 4.1 | | 12/20/2019 | | |
| | | | | | | | | | | |
| | Certificate of Amendment with Respect to Series A Preferred Stock, dated September 24, 2019 | | 8-K | | 3.1 | | 9/24/2019 | | |
| | | | | | | | | | | |
| | Indenture dated January 22, 2015, by and between the Company and the Bank of New York Mellon Trust Company, N.A., as trustee. | | 8-K | | 4.2 | | 1/28/2015 | | |
| | | | | | | | | | | |
| | The Company’s 1992 Employee Stock Purchase Plan | | 10-K | | 10.1 | | 12/20/2017 | | |
| | | | | | | | | | | |
| | Amendment to the Employee Stock Purchase Plan as of March 24, 2004.+ | | 10-K | | 10.2 | | 1/6/2017 | | |
| | | | | | | | | | | |
| | Amendment to the Employee Stock Purchase Plan as of April 8, 2010.+ | | 10-K | | 10.4 | | 1/7/2016 | | |
| | | | | | | | | | | |
| | Amendment to the Employee Stock Purchase Plan as of March 28, 2012.+ | | 10-K | | 10.4 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Amendment to the Employee Stock Plan as of December 18, 2019* | | 10-K | | 10.5 | | 12/23/2019 | | |
| | | | | | | | | | | |
| | 2016 Equity Incentive Compensation Plan.+ | | DEF 14A | | | | 2/29/2016 | | |
| | | | | | | | | | | |
| | The Company’s 2007 Long-Term Equity Incentive Plan.+ | | DEF 14A | | | | 2/23/2007 | | |
| | Amendment to the 2007 Long-Term Equity Incentive Plan as of April 8, 2010.+ | | 10-K | | 10.7 | | 1/7/2016 | | |
| | | | | | | | | | | |
| | Amendment to the 2007 Long Term Equity Incentive Plan as of April 11, 2014.+ | | 10-K | | 10.7 | | 12/23/2019 | | |
| | | | | | | | | | | |
| | 2011 Executive Incentive Compensation Plan effective as of November 1, 2010.+ | | 10-K | | 10.9 | | 1/6/2015 | | |
| | | | | | | | | | | |
| | Joint Venture Framework Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd.# | | 10-K/A | | 10.19 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | Joint Venture Operating Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd.# | | 10-K/A | | 10.20 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | Outsourcing Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation.# | | 10-K/A | | 10.21 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | License Agreement dated November 20, 2013, between the Company and Photronics Semiconductor Mask Corporation.# | | 10-K/A | | 10.22 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | License Agreement dated November 20, 2013, between Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation.# | | 10-K/A | | 10.23 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | Margin Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation.# | | 10-K/A | | 10.24 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | Merger Agreement dated January 16, 2014, between Photronics Semiconductor Mask Corporation and DNP Photomask Technology Taiwan Co., Ltd.# | | 10-K/A | | 10.25 | | 7/8/2015 | | |
| | | | | | | | | | | |
| | Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief Technology Officer dated September 10, 2007.+ | | 10-K | | 10.18 | | 12/23/2019 | | |
| | | | | | | | | | | |
| | Executive Employment Agreement between the Company and Peter S. Kirlin dated May 4, 2015.+ | | 10-Q | | 10.28 | | 9/9/2015 | | |
| | | | | | | | | | | |
| | Executive Employment Agreement between the Company and Richelle E. Burr dated May 21, 2010.+ | | 10-K | | 10.30 | | 1/7/2016 | | |
| | | | | | | | | | | |
| | Executive Employment Agreement between the Company and John P. Jordan dated September 5, 2017.+ | | 10-K | | 10.31 | | 12/20/2017 | | |
| | | | | | | | | | | |
| | Executive Employment Agreement between Photronics Dai Nippon Mask Corporation and Frank Lee dated March 9, 2020 | | 10-Q | | 10.36 | | 3/11/2020 | | |
| | | | | | | | | | | |
| | Consulting Agreement between the Company and DEMA Associates, LLC dated January 20, 2018. | | 10-K | | 10.21 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Amendment dated March 9, 2020 between DEMA Associates, LLC and the Company | | 10-Q | | 10.37 | | 3/11/2020 | | |
| | Form of Amendment to Executive Employment Agreement dated March 16, 2012.+ | | 10-K | | 10.23 | | 12/23/2019 | | |
| | | | | | | | | | | |
| | Fourth Amended and Restated Credit Agreement dated as of September 27, 2018 among Photronics, Inc. the Foreign Subsidiary Borrower Party Thereto, the Lender Party Thereto, JPMorgan Chase Bank, N.A. as Administrative and Collateral Agent and Bank of America, N.A. as syndication agent | | 10-K | | 10.24 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Third Amended and Restated Security Agreement entered into as of September 27, 2018 by and among Photronics, Inc., the subsidiaries of the Company and JPMorgan Chase Bank N.A. | | 10-K | | 10.25 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Fixed Asset Loan Agreement between Photronics DNP Mask Corporation Xiamen and Industrial and Commercial Bank China Limited Xiamen Xiang’an Branch | | 10-K | | 10.26 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Working Capital Loan Agreement between Industrial and Commercial Bank China Limited Xiamen Xiang’an Branch and Photronics DNP Mask Corporation Xiamen effective as of November 7, 2018. | | 10-K | | 10.27 | | 12/21/2018 | | |
| | | | | | | | | | | |
| | Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte. Ltd. | | 10-Q | | 10.35 | | 9/2/2016 | | |
| | | | | | | | | | | |
| | Amendment No. 1 to the Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte, Ltd | | 10-K | | 10.29 | | 12/23/2019 | | |
| | | | | | | | | | | |
| | Contribution Agreement dated May 16, 2017 among Dai Nippon Printing Co., Ltd. (“DNP), DNP Asia Pacific Pte. Ltd. (“DNP Asia Pacific”), Photronics, Inc. (“Photronics”), Photronics Singapore Pte. Ltd., (“Photronics Singapore”), and Xiamen American Japan Photronics Mask Co., Ltd. (“PDMCX”).# | | 10-Q/A | | 10.26 | | 12/19/2017 | | |
| | | | | | | | | | | |
| | Joint Venture Operating Agreement dated May 16, 2017 among Photronics, Photronics Singapore, DNP and DNP Asia Pacific.# | | 10-Q/A | | 10.27 | | 12/19/2017 | | |
| | | | | | | | | | | |
| | Outsourcing Agreement dated May 16, 2017 among Photronics, DNP, Photronics DNP Photomask Corporation (“PDMC”), and PDMCX.# | | 10-Q/A | | 10.28 | | 12/19/2017 | | |
| | | | | | | | | | | |
| | Amended and Restated License Agreement dated May 16, 2017 between DNP and PDMC.# | | 10-Q/A | | 10.29 | | 12/19/2017 | | |
| | | | | | | | | | | |
| | Investment Cooperation Agreement between Hefei State Hi-tech Industry Development Zone and Photronics UK, Ltd. | | 10-K | | 10.42 | | 12/20/2017 | | |
| | | | | | | | | | | |
| | Section 382 Rights Agreement, dated as September 23, 2019, between Photronics, Inc. and Computershare Trust Company, N.A. as rights agent. | | 8-K | | 4.1 | | 9/24/2019 | | |
| | | | | | | | | | | |
| | Master Lease Agreement dated October 12, 2020 between TD Equipment Finance and the Company | | | | | | | | X |
| | | | | | | | | | | |
| | Fixed Asset Loan Contract dated October 1, 2020 between TD Equipment Finance,Inc. and the Company | | | | | | | | X |
| | | | | | | | | | | |
| | Maximum Mortgage Contract dated October 1, 2020 between Photronics Mask Corporation Hefei and China Construction Bank Corporation Hefei Shusshan Branch | | | | | | | | X |
| | | | | | | | | | | |
| | List of Subsidiaries of the Company. | | | | | | | | X |
| | | | | | | | | | | |
| | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | | | | | | | | X |
| | | | | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | | |
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
| | | | | | | | | | | |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X |
Exhibit
Number
101.INS | Description
|
| Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15, 2002 and June 20, 2005 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed January 3, 2014).XBRL Instance Document | | | | | | | | X |
| | |
| Amended and Restated By-laws of the Company dated as of September 7, 2016 (incorporated by reference to the Company’s Current Report on Form 8-K filed on September 13, 2016). |
| | |
| Indenture dated January 22, 2015, by and between the Company and the Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 28, 2015). |
| | |
| The Company’s 1992 Employee Stock Purchase Plan. *+
|
| | |
| Amendment to the Employee Stock Purchase Plan as of March 24, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed on January 6, 2017). +
|
| | |
| Amendment to the Employee Stock Purchase Plan as of April 8, 2010 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed on January 7, 2016). +
|
| |
| Amendment to the Employee Stock Purchase Plan as of March 28, 2012 (incorporated by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q filed September 5, 2012).+
|
| |
| 2016 Equity Incentive Compensation Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed on February 26, 2016). +
|
| |
| The Company’s 2007 Long-Term Equity Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed on March 3, 2014). +
|
| |
| Amendment to the 2007 Long-Term Equity Incentive Plan as of April 8, 2010 (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K Field on January 7, 2016). +
|
| Amendment to the 2007 Long Term Equity Incentive Plan as of April 11, 2014 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K filed January 6, 2015). +
|
| |
| 2011 Executive Incentive Compensation Plan effective as of November 1, 2010 (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K filed January 6, 2015).+
|
| |
| Executive Employment Agreement between the Company and Constantine Macricostas dated May 4, 2015 (incorporated by reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q filed on September 9, 2015). +
|
| |
| Executive Employment Agreement between the Company and Sean T. Smith dated February 20, 2003 (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K filed January 6, 2015). +
|
| |
| Limited Liability Company Operating Agreement of MP Mask Technology Center, LLC (MP Mask) between Micron Technology, Inc. (“Micron”) and Photronics, Inc. (“Photronics”) dated May 5, 2006 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
|
| |
| Contribution and Units Purchase Agreement between Micron, Photronics and MP Mask dated May 5, 2006 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
|
| |
| Technology License Agreement among Micron, Photronics and MP Mask dated May 5, 2006 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
|
| |
| Photronics to Micron Supply Agreement between Micron and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
|
| |
| MP Mask to Photronics Supply Agreement between MP Mask and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
|
| |
| Special Warranty Deed dated as of February 29, 2012 (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 6, 2012). |
| |
| Outsource Supply Agreement between Micron and Photronics dated March 24, 2015 (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed on June 4, 2015). #
|
| |
| Bridge License Agreement between Micron and Photronics dated March 24, 2015 (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on June 4, 2015). #
|
| |
| Joint Venture Framework Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015). #
|
| |
| Joint Venture Operating Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd. (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
|
| |
| Outsourcing Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
|
| |
| License Agreement dated November 20, 2013, between the Company and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
|
| |
| License Agreement dated November 20, 2013, between Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015). #
|
| |
| Margin Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
|
| Merger Agreement dated January 16, 2014, between Photronics Semiconductor Mask Corporation and DNP Photomask Technology Taiwan Co., Ltd. (incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
|
| |
| Executive Employment Agreement between the Company and Soo Hong Jeong dated May 31, 2011 (incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K filed on January 6, 2017). +
|
| |
| Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief Technology Officer dated September 10, 2007 (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on January 11, 2008).+
|
| |
| Executive Employment Agreement between the Company and Peter S. Kirlin dated May 4, 2015 (incorporated by reference to Exhibit 10.28 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2015).+
|
| |
| Executive Employment Agreement between the Company and Richelle E. Burr dated May 21, 2010 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K filed on January 7, 2016).+
|
| |
| Executive Employment Agreement between the Company and John P. Jordan dated September 5, 2017* +
|
| |
| Form of Amendment to Executive Employment Agreement dated March 16, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 16, 2012). +
|
| |
| Third Amended and Restated Credit Agreement Dated as of December 5, 2013 (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on January 3, 2014).
|
| |
| Amendment No. 1 Dated as of August 22, 2014 to the Third Amended and Restated Credit Agreement Dated as of December 5, 2013 (incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K filed on January 6, 2015).
|
| |
| Amendment No. 2 to the Third Amended and Restated Credit Agreement Dated May 15, 2017 (incorporated by reference to Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q filed on june 8, 2017). |
| |
| Second Amended and Restated Security Agreement (incorporated by reference to Exhibit 10.33 of the Company’s Annual Report on Form 10-K filed on January 6, 2015). |
| |
| Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte. Ltd. dated August 18, 2016 (incorporated by reference to Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q filed on September 2, 2016).#
|
| |
10.38 | Contribution Agreement dated May 16, 2017 among Dai Nippon Printing Co., Ltd. (“DNP), DNP Asia Pacific Pte. Ltd. (“DNP Asia Pacific”), Photronics, Inc. (“Photronics”), Photronics Sigapore Pte. Ltd., (“Photronics Sigapore”), and Xiamen American Japan Photronics Mask Co., Ltd. (“PDMCX”) (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).#
|
| |
10.39 | Joint Venture Operating Agreement dated May 16, 2017 among Photronics, Photronics Singapore, DNP and DNP Asia Pacific (incorporated by reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).# |
| |
10.40 | Outsourcing Agreement dated May 16, 2017 among Photronics, DNP, Photronics DNP Photomask Corporation (“PDMC”), and PDMCX (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).# |
| |
10.41 | Amended and Restated License Agreement dated May 16, 2017 between DNP and PDMC (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).# |
| |
10.42 | Investment Cooperation Agreement between Hefei State Hi-tech Industry Development Zone and Photronics UK, Ltd. *#
|
| |
| List of Subsidiaries of the Company.* |
| |
| Consent of Deloitte & Touche LLP.* |
| |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| |
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| |
101.INS | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
+ | Represents a management contract or compensatory plan or arrangement. |
| # | Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. |
* | Represents an exhibit that is filed with this Annual Report on Form 10-K. |
The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Company’s general counsel at the address of the Company’s principal executive offices.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | PHOTRONICS, INC. |
| | (Registrant) |
| | |
| By | /s/ JOHNJohn P. JORDANJordan | By | December 20, 2017/s/ Eric Rivera |
| | John P. Jordan Executive Vice President, Chief Financial Officer (Principal Financial Officer) | | Eric Rivera Vice President, Corporate Controller (Principal Accounting Officer) |
| | Senior Vice PresidentJanuary 14, 2021 | | |
| Chief Financial Officer | | |
| (Principal Accounting Officer/ | | |
| Principal Financial Officer) | | January 14, 2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ PETERPeter S. KIRLINKirlin | | December 20, 2017
January 14, 2021 |
| | Peter S. Kirlin | | |
| Chief Executive Officer | | |
| Director | | |
| (Principal Executive Officer) | | |
| | |
| By | /s/ JOHNJohn P. JORDANJordan | | December 20, 2017
January 14, 2021 |
| | John P. Jordan | | |
| SeniorExecutive Vice President, | | |
| Chief Financial Officer | | |
| (Principal Accounting Officer/ | | |
| Principal Financial Officer) | | |
| | |
| By | /s/ CONSTANTINE S. MACRICOSTASEric Rivera | | December 20, 2017January 14, 2021 |
| | Constantine S. Macricostas | | |
| Executive Chairman of the Board | | |
| |
By | /s/ WALTER M. FIEDEROWICZ | | December 20, 2017Eric Rivera
|
| Walter M. Fiederowicz | | |
| Director | | |
| |
By | /s/ JOSEPH A. FIORITA, JR. | | December 20, 2017Vice President, Corporate Controller
|
| Joseph A. Fiorita, Jr. | | |
| Director | | |
| |
By | /s/ LIANG-CHOO HSIA | | December 20, 2017(Principal Accounting Officer)
|
| Liang-Choo Hsia | | |
| Director | | |
| |
By | /s/ GEORGE MACRICOSTAS | | December 20, 2017
|
| George Macricostas | | |
| Director | | |
| | | | |
| |
| By | /s/ MITCHELL G. TYSONConstantine S. Macricostas | | December 20, 2017
January 14, 2021 |
| | Mitchell G. TysonConstantine S. Macricostas Chairman of the Board | | |
| | |
| By | /s/ Walter M. Fiederowicz | | January 14, 2021 |
| Walter M. Fiederowicz Director | | |
| |
| By | /s/ Daniel Liao | | January 14, 2021 |
| Daniel Liao Director |
| |
| By | /s/ George Macricostas | | January 14, 2021 |
| George Macricostas Director | | |
| |
| By | /s/ Mary Paladino | | January 14, 2021 |
| Mary Paladino Director | | |
| |
| By | /s/ Mitchell G. Tyson | | January 14, 2021 |
| Mitchell G. Tyson Director | | |
63
