2
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 semiconductorsICs and flat panel displays (“FPDs”),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”) andICs, 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;facilities, including two of which are locatedrecently constructed facilities in Europe, threeChina. Our FPD facility in Taiwan, oneHefei, China, and our IC facility in Korea and threeXiamen, China, commenced production in the United States. We have announced plans to construct two manufacturing facilities in China, as we expand our global manufacturing footprint. See Note 19 to the consolidated financial statements for additional information.second and third quarters of 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 ReportsForms 10-K, Definitive Proxy Statements on Form 10-K, Quarterly Reports on FormSchedule 14A, Forms 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”).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 BoardImpact of the COVID-19 Pandemic
All of our facilities have continued to operate throughout the COVID-19 pandemic. However, since shortly after it was first identified near the end of calendar year 2019, the pandemic has adoptedhad an impact on our business in a codenumber of ethics,ways including customer shutdowns, 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 appliesled to delays in new photomask design releases, and travel restrictions, which delayed tool installations and servicing. Proposed government actions, in response to the Company’s senior financial officers, includingpandemic, have made it more challenging to retain and hire new employees at 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 intendfacilities. To date, we have not experienced significant raw material shortages; however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders. While our business has continued to disclose any amendment to, or waiver from,grow over 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 rulescourse of the SEC and NASDAQ Stock Market LLC by posting such informationpandemic, we cannot predict its future impact on our website,business with a high level of certainty.
At certain facilities, employees not required to be on-site to maintain production have worked remotely at the address and location specified above.various times ‒ either at our discretion or due to government mandates. The implementation of these safety measures has not affected these employees’ abilities to support our operations.
Products and Manufacturing TechnologySales
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.
High-end production for photomasks is considered to be 28 nanometer and smaller for ICs and Generation 10.5+, AMOLED, and 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, which we refer to as mainstream, constitute the majority of designs currently being fabricated in volume. At these geometries and at various high-end nodes, we can produce full lines of photomasks. Moreover, there is no significant technology employed by our competitors that is not available to us. We currently supportexpect advanced-generation designs to continue to be developed throughout fiscal 2022, and we believe we are well positioned to service an increasing volume of this business as a result of our ongoing investments in manufacturing processes and technology in the regions where our customers acrossare located.
Generally, Photronics and each of its customers engage in a qualification and correlation process before we become an approved supplier. Thereafter, based on 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 sizecustomer’s specifications, we typically negotiate pricing parameters for the larger and more complex circuits currently being designed. Electron beam and laser generated photomasks can be used to produce the most advanced semiconductors and FPDscustomer's order. Some prices may remain in effect for use in an arrayextended period of products. However, in the casetime. In many instances, we enter into sales arrangements with an understanding that, as long as our performance is competitive, we will receive a specified percentage of IC production, the large majority of higher cost critical layer photomasks are fabricated using electron beam technologies, while photomasks produced using laser-based systems are less expensive and less precise. 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 systems.that customer's photomask orders.
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. Because of the short period between order and shipment dates (typically from one day to two weeks) for a significant amount of our revenue, the dollar amount of our current backlog is not a reliable indicator of future revenue.
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.
The majorityWe 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's management and technical personnel. We support non-U.S. customers through both our domestic and foreign facilities and consider our presence in non-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 Notes 8 and 16 to our consolidated financial statements for the amount of revenue and long-lived assets attributable to each of our geographic areas of operations.
Research and Development
We primarily conduct corporate research and development activities for IC photomasks producedat our Boise, Idaho, facility and, to a lesser degree, Photronics DNP Mask Corporation (“PDMC”), our joint venture subsidiary in Taiwan. Research and development for FPD photomasks is primarily conducted at Photronics Cheonan, Ltd., our subsidiary in South Korea. Additionally, we conduct site-specific research and development programs to support local, strategic customer roadmaps. All of these research and development programs and activities are undertaken to advance our competitiveness in technology and manufacturing efficiency. We also conduct application-oriented research and development, including data and service technology to support the semiconductor industry employintegration of photomasks into customer processes. Currently, research and development for IC photomasks are primarily focused on photomasks enabling wafer geometries of larger than 45 nanometers. At these geometries, we can produce full lines of photomasks14 nanometer node and there is no significant technology employed by our competitors that is not also available to us. We are also capable of producing full lines of photomasks for high-end IC and FPD applications. In the case of ICs, this includes photomasks at and below the 45 nanometer technology nodesmaller and, for FPDs, aton Generations 8 and above10 substrate size photomasks for new TV technologies, emerging opportunities for micro- and mini-LED displays, and photomask technology for 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 competecomplex FPD photomasks required in the high-end markets that serve ICmanufacture of advanced mobile displays, such as AMOLED. We believe these core competencies will continue to be a critical part of semiconductor and FPD applications.manufacturing, as wafer and FPD substrate optical lithography continues to enable new high-end ICs and displays. We incurred research and development expenses of $18.5 million, $17.1 million, and $16.4 million in 2021, 2020 and 2019, 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. 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.
Markets
The market for photomasks primarily consists of domestic and non-USnon-U.S. 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 merchant 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 becomes an approved supplier. Thereafter, based on the customer’s expectations, we typically negotiate pricing parameters for a customer’s orders. Some prices may remain in effect for an extended period of time. In some 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’s photomask requirements.
We conduct our salessupport customers across the full spectrum of IC production and marketing activities primarily throughFPD technologies by manufacturing photomasks using electron beam or optical (laser-based) lithography systems. For IC photomasks, the predominant writing technology used for advanced photomasks with fine-scale resolution requirements is electron beam writing systems, while FPD mask fabrication utilizes optical writing systems. These systems are capable of producing the most advanced semiconductor and display photomasks for use in an array of products. End markets served with IC photomasks include devices used for microprocessors, memory, telecommunications, and related applications. We own a staffnumber of full-time sales personnelboth high-end and customer service representatives who work closely with the Company’s managementmature electron beam and technical personnel. We support non-US customers through both our domestic and foreign facilities. We consider our presence in non-US 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 13 to our consolidated financial statements for the amount of revenues and long-lived assets attributable to each of our geographic areas of operations.laser-based lithography systems.
Customers
We primarily sell our products primarily to leading semiconductor and FPD manufacturers. During fiscal year 2017,2021, we sold our products to approximately 600530 customers. Revenue from United Microelectronics Corp.Corp. Co., Ltd. accounted for approximately 16%17%, 17%16% and 15% of our total revenues in 2021, 2020 and sales to2019, respectively, and revenue from Samsung Electronics Co. Ltd., Ltd. accounted for approximately 16%12%, 19%14% and 18%16% of our total revenues in fiscal years 2017, 2016 and 2015, respectively.those respective years. Our five largest customers, in the aggregate, accounted for approximately 43%, 50%45% and 52%46% of our revenue in fiscal years 2017, 20162021, 2020 and 2015,2019, 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 patternsThe photomask industry is highly competitive, and most of our customers. We are typically impacted during our first quarter bycustomers utilize multiple photomask suppliers. Our ability to compete depends primarily upon the North American and European holiday periods, as some customers reduce their effective workdays and orders 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.
Research and Development
We conduct research and development activities for IC photomasks at our U.S. nanoFab, which is located in Boise, Idaho, as well as at PK, Ltd. (“PKL”), our subsidiary in Korea and Photronics DNP Mask Corporation (“PDMC”), oneconsistency of our subsidiariesproduct quality, timeliness of delivery, competitive pricing, technical capability, and service, which we believe are the principal factors considered by customers in Taiwan. Researchselecting their photomask suppliers. An inability to meet these requirements could adversely affect our financial condition, results of operations, and development for FPD photomasks is conducted at PKL. 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-oriented research and development activities to support the early adoption of new photomask or supporting data and services technology into our customers’ applications. Currently, research and development photomask activities for ICs are focused on 20 nanometer node and below, and, for FPDs, on Generation 8 resolution enhancement, substrates larger than Generation 8 and more complex masks for AMOLED-type displays. We believe these core competencies will continue to be a critical part of semiconductor and FPD manufacturing, as optical lithography continues to scale capabilities on high-end devices. We incurred research and development expenses of $15.9 million, $21.7 million, and $21.9 million in fiscal years 2017, 2016, and 2015, respectively. It is our belief that we own, control, or license the proprietary information that is necessary for our business, as it is presently conducted. This includes trade secrets as well as patents.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 intellectual propertycompetitors may have greater financial, sales, marketing, or other resources than Photronics, we believe that we are able to compete effectively because of our dedication to customer service, ongoing investments in state-of-the-art photomask equipment and trade secret know-how will continuefacilities, 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 $5.8 billion. 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 Qingyi Photomask, Ltd., SK-Electronics Co., Ltd., Taiwan Mask Corporation, and Toppan Electronics Products Co., Ltd. We also compete with semiconductor 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 be important to our maintaining technical leadershipface continued competition which, in the fieldpast, 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 photomasks.independent manufacturers, and we expect such pressure to continue in the future.
On May 5, 2016,International Operations
Revenues from our non-U.S. operationswere approximately 84%, 83% and 81% of our total revenues in 2021, 2020 and 2019, respectively. We believe that our ability to serve non-U.S. markets is enhanced by our having, among other things, a local presence in the markets we sold our investmentserve. This requires significant investments 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 incomefinancial, managerial, operational, and other income (expense). On that same date, a supply agreement commenced between Photronicsresources.
Operations outside of the United States are subject to inherent risks, including fluctuations in exchange rates, political 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.
Patents and Trademarks
We have ownership interests in approximately 49 issued U.S. patents. The subject matter of these patents, which are registeredeconomic conditions in various countries, generally relates to the manufacturelegal 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 IC photomasks or the use of photomasks to manufacture other products. The expiration dates of these patents range from 2018 to 2034. We alsofunds, and potentially adverse tax consequences. These factors may have a numbermaterial adverse effect on our ability to generate revenue outside of trademarks and trademark registrations in the United States and in other countries.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. Notes 8 and 16 of our consolidated financial statements, respectively, present revenue and long-lived assets by geographic area.
While we believe that our intellectual property is, 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. We protect our intellectual property rights and proprietary processes by utilizing patents and non-disclosure agreements with employees, customers and vendors.Resources
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 supplyprovide 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 or repair equipment when required could adversely affect our business and results of operations.
5Intellectual Property Rights
Backlog
The first several layersWe have developed and hold ownership interests in intellectual property (“IP”) rights, in the forms of a setpatents issued in the U.S., and other trademark and trademark registrations in the U.S. and other countries. Patents in which we hold ownership interests generally relate to the manufacture of photomasks for a circuit patternor the use of photomasks to manufacture other products. While we believe that our IP rights are, often requiredand will continue to be, shipped within 24 hoursimportant to our technical leadership in the field of receivingphotomasks, our operations are not dependent on any one individual IP right. In addition to patenting, when practicable, we further protect our IP rights, and our other proprietary processes, by utilizing non-disclosure agreements with employees, customers, and vendors.
Seasonality
Our business is typically impacted during the first quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during those periods.
Government Contracts
We are party to a customer’s designs. Becauselimited number of fixed-price contracts with the short period between order and shipment dates (typicallyU.S. government. Revenues earned from 1 day to 2 weeks) forthese contracts do not comprise 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. operations were approximately 77%, 76% and 75%portion of our total revenues in fiscal 2017, 2016 and 2015, respectively. We believe that our ability to serve non-US 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.revenue.
Operations outside of the United StatesGovernment Regulation
We are subject to inherent risks, including fluctuationsgovernment regulations within the U.S. and in exchange rates, political and economic conditionsother countries in various countries, legalwhich we produce or market our products. The effects of compliance and regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing internationalwith these regulations are currently not material to our results of operations, longer accounts receivable collection cycles, potential restrictions on transfers of funds and potentially adverse tax consequences. These factorscapital expenditures, or competitive position. However, compliance with changes to existing or new regulations may have a material adverse effect on our future results of operations, capital expenditures, or competitive position. We discuss the potential impact of our not adhering to a number of these regulations in Item 1A. “Risk Factors”, of this Form 10-K. The following is a list of major subjects of the regulations that pertain to our business:
| • | Regulations, such as those under the Foreign Corrupt practices Act that prohibit providing remuneration to government officials for the purpose of obtaining or securing business in the jurisdictions in which they serve; |
| • | Regulations that require the minimization and proper disposal of the by-products of our manufacturing processes; |
Regulations that require us to provide a safe working environment for our employees;
Regulations that restrict our ability to generate revenue outsidetransfer assets between operations not within the same legal jurisdiction;
Regulations that require us to provide information through the submission of government surveys;
Regulations that require us to maintain an effective system of internal accounting controls;
Regulations that prohibit us from engaging in business in specified countries, or with specified customers;
Regulations that require us to protect 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 13 of the notes to our consolidated financial statements presents revenue and long-lived assets by geographic area.
Competition
The photomask industry is highly competitive and mostpersonal information of our customers utilize multiple photomask suppliers. Our abilityand employees;
Regulations that require us to compete depends primarily upon the consistency ofaccurately determine our product quality, timeliness of delivery, as well as pricing, technical capability,liabilities to taxing authorities, and service, which we believe are the principal factors considered by customers in selectingto settle such liabilities within their photomask suppliers. An inabilitystatutorily prescribed time periods;
Regulations that require us to meet these requirements could adversely affectwithhold and timely remit taxes on our financial condition, results of operations and cash flows. We also believeemployees’ compensation to government authorities;
Regulations that geographic proximityrequire us to customers is an important factor in certain markets where cycle timecontribute to government-sponsored social insurance plans;
Regulations that require us to contribute to employee severance plans;
Regulations that prohibit us from order to delivery is critical. While some of our competitors 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 billion. Our competitors include Compugraphics International, Ltd., Dai Nippon Printing Co., Ltd (outside of Taiwan), Hoya Corporation, SK-Electronics Co. Ltd., Taiwan Mask Corporation, Toppan Printing Co., Ltd., Supermask Co. Ltd., and Chengdu NeWay Photomask Making Co., Ltd. We also compete with semiconductor 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 contributeddisseminating material nonpublic information prior to the decreasepublic announcement of such information;
Regulations pertaining to financial reporting, insider transactions, executive compensation, and other areas overseen by the SEC and governing bodies in the number of independent manufacturers, and we expect such pressure to continueother countries in the future.which our operations are located;
EmployeesHuman Capital
As of October 29, 2017,31, 2021, 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, 2021, 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 minimize risks. Supervisors complete safety management courses as well. In response to COVID-19, 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 COVID-19, we have implemented a number of new health-related measures including the requirement to wear company provided facemasks at all times while on company property, temperature taking protocols, increased hygiene, cleaning and sanitizing procedures at all locations, social-distancing, restrictions on visitors to our facilities, and limiting in-person meetings and other gatherings. Additionally, we are following government policies and recommendations designed to slow the spread of COVID-19, and for US employees we required vaccinations against COVID-19. However, we are monitoring the actions of federal courts regarding mandated vaccinations. 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 performancehigh-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 downturnsnegative trends 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, supply, and repair 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, 20162021, 2020 and 20152019, our two largest customers accounted for 32%29%, 36%29% and 33%31%, respectively, of our revenue. Our five largest customers accounted for 43%, 50%45% and 52%46% of our revenue in fiscal years 2017, 20162021, 2020 and 20152019, 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 disadvantage with our competitors. We are also subject to covenants that limit our financing 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 amounts 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 our agreements. Our ability to comply with the financial and other covenants in our credit agreements 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.
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 2022 are expected to be approximately $100 million, of which approximately $9.7 million was included in Accounts payable and Accrued liabilities on our October 31, 2021, 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 (for example, our chief executive officer and chief technology officer) 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 dependent on the semiconductor and display industries, which are subject to rapid technological change and fluctuations in capacity needs. Consequently, we might fail to adequately time our capabilities to market needs, which could have a material adverse effect on our business and results of operations.
The photomask industry has been, and we expect it to continue to be, characterized by technological change and evolving industry requirements, which recent supply chain regionalization efforts have accelerated. In order to remain competitive, we will be required to continually anticipate, respond to, and scale 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. Moreover, the demand for photomasks in non-leading-edge nodes may increase beyond our ability to meet our customers’ requirements within adequate response times. 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 2021, 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 cyberattacks or data breaches could negatively impact our financial results.
Cyberattacks or data breaches could compromise confidential, business-critical information, cause disruptions in our operations, expose us to potential litigation, 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 continually reviewed, maintained, and upgraded, we cannot assure that we are invulnerable to cyberattacks and data breaches which, if significant, could negatively impact our business and 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 Qingyi Photomask, Ltd., SK-Electronics Co. Ltd., Taiwan Mask Corporation, and Toppan Electronics Products 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, 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; limited access to electricity; 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 exposed us to a significant additional foreign currency exchange risk, which we had not been subject to in prior years. In addition, as tensions have, from time to time, 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 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. Our 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; 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 business’ standards, processes, procedures and controls with our operations; variability in financial performance arising from the implementation of acquisition accounting; inability to coordinate new product and process development; loss of senior managers and other critical personnel; problems with new labor unions; and challenges arising from the increased scope, geographic diversity, and complexity of our 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 consequential expense levels are, to some extent, 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 84%, 83% and 81% of our total revenues in 2021, 2020 and 2019, 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 currency 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 collection cycles. In addition: foreign countries may enact other restrictions on foreign trade or investment, including: currency exchange controls; trade sanctions which result in our losing access to customers and suppliers; legislation which renders agreements to be difficult to enforce; impositions on the movement of funds or other assets; 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 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 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.
Because 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
COVID-19 vaccination mandates could adversely affect our ability to attract and maintain employees.
In response to COVID-19, 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 COVID-19, we have implemented a number of new health-related measures including the requirement to wear company provided facemasks at all times while on company property, temperature taking protocols, increased hygiene, cleaning and sanitizing procedures at all locations, social-distancing, restrictions on visitors to our facilities, and limiting in-person meetings and other gatherings. Additionally, we are following government policies and recommendations designed to slow the spread of COVID-19 and for US employees we required vaccinations against COVID-19. We may not be able to attract or retain employees as a result of this mandate, and though we believe these actions are appropriate and prudent to safeguard our employees, contractors, suppliers and customers while allowing us to safely continue operations, we cannot predict how the steps we, our team members, government entities, suppliers or customers take in response to COVID-19 will ultimately impact our business, outlook, or results of operations.
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 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 experience difficulties in implementing internal controls, our business and operating results could be harmed, and we could fail to meet our financial reporting obligations.
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 COVID-19), 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 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. Although we have technology and information security processes and disaster recovery plans in Japan where we purchase raw materials and capital equipment. Such eventsplace to mitigate our risks to these vulnerabilities, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.
The General Data Protection Regulation (“GDPR”), which went into effect in the geographic regionsEuropean Union (EU) on May 25, 2018, applies to the collection, use, retention, security, processing, and transfer of personally 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 applied in whicha manner that is adverse to, or unforeseen by us, including requirements that are inconsistent with our practices, or that we do business,may otherwise fail to construe its requirements in ways that are satisfactory to the EU authorities. Upon leaving the E.U. on January 31, 2021, the U.K. enacted a new domestic data privacy law called the “U.K. – General Data Protection Regulation” (“UK-GDPR”). Although somewhat less restrictive than the GDPR, the UK-GDPR is similar to the GDPR with respect to both an entity’s obligation to protect personal information and the imposition of significant fines for violations.
Any failure, or perceived failure, by us to comply with the GDPR or the UK-GDPR, or with any applicable regulatory requirements or orders, including escalations of political tensionsbut not limited to privacy, data protection, information security, or consumer protection related privacy laws and military operationsregulations, in one or more jurisdictions within the Korean Peninsula, where aEU, the U.K. or elsewhere, could: result in proceedings or actions against us by governmental entities or individuals; subject us to significant portionfines, penalties, and/or judgments; require us to change our business practices; limit access to our products and services in certain 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 future, incur net losses.
Although the Company has been profitable since fiscal 2010, it has, in the past, incurred net losses. We cannot provide assurance that the Company will not incur net losses in the future.
Market Related Risk Factors
Changes in foreign operations are located,currency exchange rates could have a material adverse impactseffect on our revenue, cost and availability of raw materials, results of operations, financial condition, or cash flows and financial condition.flows.
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 abilityconsolidated financial statements are prepared in accordance with 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 2021, we recorded a net gain from changes in foreign currency exchange rates of $8.0 million in our statement of income, while our net assets increased by $8.5 million as a result of the translation of foreign currency financial statements to make scheduled paymentsU.S. dollars. Significant foreign currency fluctuations may adversely affect our results 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 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. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.cash flows.
Our hedging activity could negatively impact our results of operations and cash flows.
We may enter into derivatives to manage our exposureexposures 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 exposureexposures 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 the Company’sour common stock is subject to volatility and could fluctuate widely in price in response to various factors, many of which are beyond our control.
Factors that may influence the price of theour common stock include, without limitation,but are not limited to, the following:
| · | loss of any of our key customers or suppliers; |
loss of any of our key customers or suppliers;
| · | additions or departures of key personnel; |
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 plans to expand into China;our ability to execute our business plan, including but not limited to, our expansion into China; |
| · | announcements and consummations of business acquisitions; |
announcements and consummations of business acquisitions;
| · | operating results that fall below expectations; |
operating results that fall below or exceed expectations;
| · | additional issuances of common stock; |
announcements of forecasted earnings or material transactions;
issuances or repurchases of our common stock;
intellectual property disputes;
news or disclosures by competitors or customers;
business combinations, divestitures, or bankruptcies by customers, suppliers, or competitors;
13
economic and other external factors including (but not limited to) recessions, natural disasters, military actions, political instability, or social unrest; and | · | 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.
| · | 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 and adversely affect the market price of the Company’sour common stock. One should alsoSuch fluctuations may be aware that price volatility might be worse if the result of imbalances between buy and sell offers, or low trading volume which can magnify the effects of sharesa small number of transactions on the common stock is low.price of a stock.
Ineffective internalWe 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, could impact the Company’s businessduties, and operating results.
tariffs. The Company’s internal control over financial reporting may not preventimposition of additional regulations 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 failureexport controls, duties, tariffs, or changes to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company’s businessbilateral and operatingregional trade agreements, could negatively impact our results could be harmed, and the Company could fail to meet its financial reporting obligations.
of operations.None.
We have announced plans to expand into China and construct two manufacturing facilities. Production at both20
We are subjectPlease refer to various claims that ariseNote 14 in Part II, Item 8 of this report for information on legal proceedings involving the ordinary course of business. We believe such claims, individually or in the aggregate, will not have a material adverse effect on our business.Company.
| 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, 2017,9, 2021, the closing sale price of our Common Stock,common stock, per the NASDAQ Global Select Market, was $8.70.$17.61. Based on available information, we estimate that we have approximately 11,285253 registered 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. Share repurchases under the program commenced on September 16, 2020.
All of the shares purchased under the program in 2020 were retired prior to the end of 2020, and all of the shares purchased under the program in 2021 were retired prior to the end of the fiscal year. The table below presents additional information on shares repurchased during the fourth quarter of 2021.
| | | 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) | |
| | | | | | | | | | | | | |
| August 2, 2021 – August 29, 2021 | | | 0.67 | | | $ | 13.31 | | | | 0.67 | | | $ | 37.8 | |
| August 30, 2021 – September 26, 2021 | | | 0.02 | | | $ | 13.51 | | | | 0.02 | | | $ | 37.6 | |
| September 27, 2021 – October 31, 2021 | | | 0.25 | | | $ | 13.42 | | | | 0.25 | | | $ | 34.3 | |
| Total | | | 0.94 | | | | | | | | 0.94 | | | | | |
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 definitive2022 Definitive Proxy Statement in Item 12 of Part III of this report. The 20182022 Definitive Proxy Statement will be filed within 120 days after our fiscal year ended October 29, 2017.31, 2021.
| ITEM 6. | SELECTED FINANCIAL DATA[RESERVED] |
The following selected financial data (in thousands, except per share amounts) 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 | |
| | | 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 | |
| (a) | 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 venture |
| (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 downturnsnegative trends 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 semiconductor industry isand FPD industries are 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 2018,2022, 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 2017,2021, 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 $246were $109.1 million, for$70.8 million and $178.3 million in 2021, 2020 and 2019, respectively, and the three fiscal years ended October 29, 2017, whichdepreciation on these purchases 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 2018.2022.
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
In the second quarter of 2021, under an MLA which we entered into effective October 2020, we entered into a five-year $7.2 million finance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $0.1 million per month. Upon the payment of the fiftieth monthly payment and prior to payment of the fifty-first monthly payment, we may exercise an early buyout option to purchase the tool for $2.4 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, the lease shall continue to renew on a month-to-month basis at the same rental terms; at our option, after the original term or any renewal periods, we may return the tool, elect to extend the lease, or purchase the tool at its fair market value. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.08%.
In the first quarter of 2021, under an MLA which we entered into effective July 2019, we entered into a five-year $35.5 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from $0.04 million after the first three months to $0.6 million for the following nine months, to be followed by forty-eight monthly payments of $0.5 million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool for $14.1 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value as determined by the lessor. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58%. The lease agreement incorporates the covenants included in our Corporate Credit Agreement, which are detailed in Note 9 of Part II, Item 8 of this report, and includes a cross-default provision for any agreement or instrument with an outstanding, committed balance greater than $5.0 million in which we are the indebted party.
In the fourth quarter of fiscal 2017,2020, we announcedentered into a MLA 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 2020, and the financing entity made a progress payment to the vendor of $6.5 million in the first quarter of 2021. The progress payment accrued interest at 1.56% payable monthly until the final payment for the tool was made in the second quarter of 2021, at which point the $7.2 million lease described above began.
In the fourth quarter of 2020, our Hefei, China, facility was approved to borrow 200 million RMB (approximately $31.3 million, at the balance sheet date) from the China Construction Bank Corporation. This credit facility is subject to annual reviews and extension, with the most recent extension allowing us to borrow additional funds set to expire in August 2022. The loan proceeds were used to fund purchases of two lithography tools at the Hefei facility. As of October 31, 2021, we had borrowed 135.7 million RMB ($21.2 million) against this approval (all of which was then outstanding), and 64.3 million RMB ($10.1 million) remained available to borrow. The interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan is subject to covenants and provisions, certain of which relate to the assets pledged as security for the loan, including covenants for the ratio of total liabilities to total assets and the ratio of current assets to current liabilities, all of which we were in compliance with at October 31, 2021.
In the fourth quarter of 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. Through October 31, 2021, we had repurchased 5.6 million shares at a cost of $65.7 million (an average price of $11.64 per share) under this authorization. All shares repurchased in 2020 were retired in 2020, and all shares repurchased in 2021 were retired in 2021.
In the first quarter of 2020, we acquired the remaining 0.2% of noncontrolling interests in Photronics Cheonan, Ltd. for $0.6 million.
In the first quarter of 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 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 Photronics UK, Ltd.date. In connection with the distribution of the Rights, we 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 subsidiary,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 2019, upon our request, a financing entity made an advance payment of $3.5 million to an equipment vendor. We entered into an MLA with this financing entity, which became effective in July 2019. The MLA enabled 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 will investhad been approved for financing of $35 million for the purchase of a minimumhigh-end lithography tool. Interest on this borrowing was variable and payable monthly at thirty-day LIBOR plus 1% and was to continue to accrue until the borrowing was repaid or, as allowed under the MLA, we entered into a lease for the equipment. During the first quarter of $1602021, this financing entity made an additional payment of $28 million a portionto the equipment vendor on our behalf and we subsequently entered into the $35.5 million finance lease described above.
In the fourth quarter of which may be funded with local borrowings, 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 produce2019, 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.the second quarter of 2019, we repaid, upon maturity, the entire $57.5 million principal amount of the convertible senior notes we issued in April 2016.
In the first quarter of 2019, PDMCX obtained approval to borrow 345.0 million RMB from the Industrial and Commercial Bank of China. From November 2018 through July 2020, PDMCX entered into separate loan agreements (the “Project Loans”) for the entire approved amount and, as of October 31, 2021, 255.0 million RMB ($39.9 million) remained outstanding. The Project Loans were used to finance certain capital expenditures at the PDMCX facility, and are collateralized by liens granted on the land use right, building, and certain equipment located at the facility. The interest rates on the Project Loans are variable (based on the RMB Loan Prime Rate of the National Interbank Funding Center), a wholly owned subsidiary, signed an investment agreement withand interest incurred on the Administrative Committee ofloans is eligible for reimbursement through incentives provided by the 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 returnwhich provide 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.
