1112
Condensed Consolidated Statement of Income Three Months Ended January 27, 2019
| |
| | As Reported | | | Adjustments | | | Balance without Adoption of Topic 606 | |
| | | | | | | | | |
Revenue | | $ | 124,712 | | | $ | (2,245 | ) | | $ | 122,467 | |
Cost of goods sold | | | 98,610 | | | | (901 | ) | | | 97,709 | |
| | | | | | | | | | | | |
Gross margin | | | 26,102 | | | | (1,344 | ) | | | 24,758 | |
Provision for taxes | | | 1,387 | | | | (208 | ) | | | 1,179 | |
| | | | | | | | | | | | |
Net income | | | 7,768 | | | | (1,136 | ) | | | 6,632 | |
Noncontrolling interests | | | 2,501 | | | | (431 | ) | | | 2,070 | |
| | | | | | | | | | | | |
Income attributable to Photronics, Inc. shareholders | | $ | 5,267 | | | $ | (705 | ) | | $ | 4,562 | |
Condensed Consolidated Statement of Cash Flows Three Months Ended January 27, 2019 | |
| |
| | As Reported | | | Adjustments | | | Balance without Adoption of Topic 606 | |
Net Income | | $ | 7,768 | | | $ | (1,136 | ) | | $ | 6,632 | |
Changes in operating accounts: | | | | | | | | | | | | |
Accounts receivable | | $ | (9,333 | ) | | $ | (287 | ) | | $ | (9,620 | ) |
Inventories | | | (2,313 | ) | | | (933 | ) | | | (3,246 | ) |
Other current assets | | | (22,082 | ) | | | 2,223 | | | | (19,859 | ) |
Accounts payable, accrued liabilities, and other | | | (12,107 | ) | | | 133 | | | | (11,974 | ) |
We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we invoice as they ship to customers. As the photomasks are manufactured to customer specifications they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask. At the end of a reporting period, there will be a number of revenue contracts on which we have performed; for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract.
As stated above, photomasks are manufactured in accordance with proprietary designs provided by our customers; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities and Accounts Receivable
We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time. Contract assets reflect our transfer of control to customers of photomasks that are in-process or completed but not yet shipped. A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks. Our contract assets account primarily consist of a significant amount of our work-in-process inventory and fully manufactured photomasks which have not yet shipped, if we have an enforceable right to collect consideration (including a reasonable profit), in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. Our contract assets and liabilities are typically classified as current, as our production cycle and our lead times are both under one year. Contract assets of $6.8 million are included in “Other” current assets, and contract liabilities of $9.5 million are included in “Other” current liabilities in our January 27, 2019 condensed consolidated balance sheet. At November 1, 2018, our date of adoption of Topic 606, we had contract assets of $4.6 million and contract liabilities of $7.8 million. We did not impair any contract assets during the three month period ended January 27, 2019, and we recognized $0.7 million of revenue from the settlement of contract liabilities that existed at the beginning of that period.
We generally record our accounts receivables at their billed amounts. All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable. We did not incur any credit losses on our accounts receivable during the three month period ended January 27, 2019.
Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require payment in advance of performance. We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid, is one year or less.
In August 2013,instances when we entered intoare paid in advance of our performance, we record a $26.4 million principal amount, five year capital lease to fund the purchase of a high-end lithography tool. Paymentscontract liability and, as allowed under the capital lease,practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically, advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.
Disaggregation of Revenue
The following tables present our revenue for the quarter ended January 27, 2019, disaggregated by product type, geographic location, and timing of recognition.
Revenue by Product Type | | Three Months Ended January 27, 2019 | |
IC | | | |
High-end | | $ | 34,566 | |
Mainstream | | | 60,314 | |
Total IC | | $ | 94,880 | |
| | | | |
FPD | | | | |
High-end | | $ | 21,466 | |
Mainstream | | | 8,366 | |
Total FPD | | $ | 29,832 | |
| | $ | 124,712 | |
| | | | |
Revenue by Geographic Location | |
Taiwan | | $
| 57,740 | |
Korea | | | 35,237 | |
United States | | | 22,472 | |
Europe | | | 8,354 | |
Other | | | 909 | |
| | $
| 124,712
| |
| | | | |
Revenue by Timing of Recognition | |
Over time | | $ | 120,845 | |
At a point in time | | | 3,867 | |
| | $ | 124,712 | |
Contract Costs
We pay commissions to third party sales agents for certain sales that they obtain for us. However, the basis of the commissions is the transaction prices of the sales, which bears interest at 2.77%, are $0.5 million per month through July 2018. The leasecompleted in less than one year; thus, no relationship is subjectestablished with a customer that will result in future business. Therefore, we would not recognize any portion of these sales commissions as costs of obtaining contract assets, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a cross default with cross acceleration provisionshort time period, our backlog of orders is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, comprised of completion of the manufacturing process of in-process photomasks, related to certain nonfinancial covenants incorporated into our credit facility. Ascontracts that have an original duration of January 28, 2018, the total amount payable through August 2018 (the end of the lease term) was $3.3 million, substantially all of which represented principal.one year or less.
Sales and Similar Taxes
We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
Product Warranty
Our photomasks are sold under warranties that generally range from 30 to 90 days. We warrant that our photomasks conform to customer specifications, and that we will repair or replace, at our option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. We incurred total share-based compensation expenses of $1.1 million and $0.9 million in each of the three month periods ended January 28, 201827, 2019 and January 29, 2017,28, 2018, and we received cash from option exercises of $0.7$0.5 million and $1.0$0.7 million during those respective periods. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.
Stock Options
Option awards generally vest in one-to-four years and have a ten-year contractual term. All incentive and non-qualified stock option grants have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of our common stock on the dates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of thean option is based on the U.S. Treasury yield curve in effect at the date of grant.
There were 132,000 share options granted during the three month period ended January 27, 2019, with a weighted-average grant date fair value of $3.31 per share, and there were 252,000 share options granted during the three month period ended January 28, 2018, with a weighted-average grant date fair value of $2.74 per share. As of January 27, 2019, the total unrecognized compensation cost related to unvested option awards was approximately $1.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.4 years.
The weighted-average inputs and risk-free rates of return used to calculate the grant date fair value of options issued during the three month periods ended January 28, 201827, 2019 and January 29, 2017,28, 2018, are presented in the following table.
| | Three Months Ended | | |
| | January 28, 2018 | | | January 29, 2017 | | | Three Months Ended | |
| | | | | | | | January 27, 2019 | | | January 28, 2018 | |
| | | | | | | | | | | | |
Volatility | | | 31.6% | | | | 32.2% | | | | 33.1 | % | | | 31.6 | % |
| | | | | | | | | | | | | | | | |
Risk free rate of return | | | 2.2% | | | | 1.9% | | | | 2.5-2.9 | % | | | 2.2 | % |
| | | | | | | | | | | | | | | | |
Dividend yield | | | 0.0% | | | | 0.0% | | | | 0.0 | % | | | 0.0 | % |
| | | | | | | | | | | | | | | | |
Expected term | | 5.0 years | | | 5.0 years | | | 5.1 years | | | 5.0 years | |
Information on outstanding and exercisable option awards as of January 28, 2018,27, 2019, is presented below.
Options | | Shares | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| | | | | | | | | | |
Outstanding at January 28, 2018 | | | 3,304,820 | | | $ | 7.98 | | 5.1 years | | $ | 4,468 | |
| | | | | | | | | | | | | |
Exercisable at January 28, 2018 | | | 2,421,655 | | | $ | 7.19 | | 3.8 years | | $ | 4,441 | |
There were 252,000 share options granted during the three month period ended January 28, 2018, with a weighted-average grant date fair value of $2.74 per share, and there were 338,750 share options granted during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $3.60 per share. As of January 28, 2018, the total unrecognized compensation cost related to unvested option awards was approximately $2.4 million. That cost is expected to be recognized over a weighted-average amortization period of 2.3 years.
Options | | Shares | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | |
| | | | | | |
| |
| |
| | | | | | | | | | |
Outstanding at January 27, 2019 | | | 2,452,168 | | | $ | 8.84 | | 5.9 years | | $ | 4,886 | |
| | | | | | | | | | | | | |
Exercisable at January 27, 2019 | | | 1,831,351 | | | $ | 8.42 | | 5.1 years | | $ | 4,373 | |
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one-to-four years. The fair value of the awards is determined on the date of grant, based on the closing price of our common stock. There were 435,000 restricted stock awards issued during the three month period ended January 27, 2019, with a weighted-average grant date fair value of $9.80 per share, and there were 280,000 restricted stock awards issued during the three month period ended January 28, 2018, with a weighted-average grant date fair value of $8.63 per share, and there were 260,000 restricted stock awards issued during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $11.35 per share. As of January 28, 2018,27, 2019, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $4.1$6.3 million. That cost is expected to be recognized over a weighted-average amortization period of 3.03.1 years. As of January 28, 2018,27, 2019, there were 488,673724,113 shares of restricted stock outstanding.
NOTE 8 - INCOME TAXES
The benefitWe calculate our provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
The effective tax rate of 15.2% differs from the U.S. statutory rate of 21.0% in the three month period ended January 27, 2019, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, the settlement of a tax audit, and the benefit of tax holidays and investment credits in certain foreign jurisdictions.
Valuation allowances in jurisdictions with historic losses, including the U.S., eliminate the tax benefit of losses in these jurisdictions.
Unrecognized tax benefits related to uncertain tax positions were $0.9 million at January 27, 2019, and $1.9 million at October 31, 2018, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at January 29, 2019 and October 31, 2018. Reduction in the amount of unrecognized tax benefits primarily resulted from the settlement of a tax audit with the tax authorities in Taiwan. Although timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that it is reasonably possible that an immaterial amount of its uncertain tax positions (including accrued interest and penalties, net of tax benefits) may be resolved over the next twelve months. The resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.
We were granted a five-year tax holiday in Taiwan that expires in December 31, 2019. This tax holiday reduced foreign taxes by $0.8 million, and $0.1 million in the three month periods ended January 27, 2019 and January 28, 2018, respectively, with a one half-cent per share impact in the January 27, 2019 period and a de minimis per share effect in the January 28, 2018 period.
The effective tax rate benefit of (23.1%) differs from the post U.S. Tax Reform blended statutory rate of 23.4% in the three month period ended January 28, 2018, primarily due to the benefit from U.S. and Taiwan Tax Reform (as discussed below), earnings being taxed at lower statutory rates in foreign jurisdictions, and the benefit of various investment credits in a foreign jurisdiction.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended, that we expect to have a positive impactamended. Based on our future after-tax earnings. Under ASC Topic 740 – “Income Taxes” (“ASC 740”), the effects of the new legislation are recognized in the interim and annual accounting periods that include the enactment date, which falls withinwe accounted for the Act in our interim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under ASCAccounting Standards Codification 740 is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018, and finalized the effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes:
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose; (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law for where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act.
We continue to analyze the provisions of the Act addressing the net deferred tax asset revaluation and its calculations, the deemed earnings repatriation, including the determination of undistributed non-U.S. earnings, and evaluate potential actions we may consider in light of the Act that could affect our fiscal year of 2018 U.S. taxable income. As such, our accounting for certain elements within the Act is preliminary, and subject to further clarification of the Act by Internal Revenue Service. The following is a discussion of the major provisions of the Act that affect our financial statements, and our preliminary assessment of the impact of such provisions on the statements.
| · | The Act repealsrepealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and providesprovided that existing AMT credit carryforwards are fully refundable overrefundable. We recognized a four year period, starting with the tax year beginning after December 31, 2017. We have approximately $3.9 million ofbenefit on AMT credit carryforwards that we previously determined were not more likely than not going to be realized and as such, established areversed the previously recorded valuation allowance for these carryforwards. Accordingly, the Act has changed our determination regarding the realization of the benefit of the carryforwards; therefore, the related valuation allowance has been reversed and the $3.9 million tax benefit has been recorded in our tax provision, excluding any impact of potential future sequestration reductions.allowance. |
| · | As of January 1, 2018, the Act reducesreduced the corporate income tax rate from a maximum 35% to a flat 21%. Our fiscal year 2018 blended statutory tax rate is approximately 23.4%, the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to our 2018 fiscal year prior to the rate change effective January 1, 2018 and the post-enactment U.S. federal statutory tax rate of 21% applicable to the balance of our 2018 fiscal year. The 21% rate will be applicable to fiscal year 2019 and beyond. Under generally accepted accounting principles, we are requiredrequiring us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our preliminary analysis of the two stepped revaluation indicates that our net deferred tax asset will be increasedis fully offset by $2.5 million, with an offsetting change in the relateda valuation allowance, resultingand the revaluation of the deferred tax assets and liabilities resulted in a provisional net zero impact for ourthe period. |
| · | The Act imposesimposed a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The transition tax effective rates are 15.5% on accumulated earnings held in cash (as defined by the Act), and 8% on any remaining balance. Our preliminary analysis indicates an estimated deemed repatriation transition tax of $28.4 million. The preliminary analysis also indicates that the entire amount of transition tax will bewas fully offset by tax credits, and/or available lossincluding carryforwards resulting, that resulted in a provisional net zero impact on our period, due in part to an offsetting change in the related valuation allowance. We do not expect that future earnings of foreign subsidiaries will be subject to U.S. federal income tax. No change has been or is anticipated to be made with respect to the year-end fiscal year 2017 indefinite reinvestment assertion of foreign subsidiary earnings. period. |
| · | Our preliminary analysis of other provisions of the Act, including, but not limited to, 100 percent bonus depreciation and changes to the limitations on the deducibility of meals and entertainment expenses indicate that under our current tax profile there should be limited or no provisional impact for our period. |
| · | Based on the effective date of certain provisions, we will be subject to additional requirements of tax reform beginning in fiscal year 2019. Those provisions include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion tax benefits (BEAT) from certain payments between a U.S. corporation and foreign subsidiaries, a limitation of certain executive compensation, a deduction for foreign derived intangible income (FDII) and interest expense limitations. We have not completed our analysis of those provisions and the estimated impact. |
On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17% to 20%. Under generally accepted accounting principles, we are required, requiring us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our analysis indicates that our Taiwan deferred tax asset will be increased and, accordingly,reverse. Accordingly, a net benefit of $0.2 million is reflected in our period tax provision.
The 19.0% effective tax rate differs fromprovision for the U.S. statutory rate of 35% in the three month period ended January 29, 2017, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, combined with the benefit of various investment credits in a foreign jurisdiction. Valuation allowances in jurisdictions with historic losses eliminate the tax benefit of these jurisdictions. Two five-year tax holidays in Taiwan, one that expired in 2017 and the other that expires in 2019, reduced foreign taxes by $0.1 million in the three month periods ended January 28, 2018 and January 29, 2017, respectively. These tax holidays had no effect on the earnings per share of either period.
There were unrecognized tax benefits related to uncertain tax positionsAdoption of $3.7 million at January 28, 2018, and $3.4 million at October 29, 2017, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at January 28, 2018 and October 29, 2017. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, we believe that it is reasonably possible that up to $1.4 million of our uncertain tax positions (including accrued interest and penalties, and net of tax benefits) may be resolved over the next twelve months. Resolution of these uncertain tax positions may result from either or both of the lapses of statutes of limitations and tax settlements.New Accounting Standard
In the first quarter of 2019, the Company adopted Accounting Standards Update 2016-16 – “Intra-Entity Transfers Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. In connection therewith, we recorded a transition adjustment of $1.1 million that reduced prepaid income taxes (included in Other current assets on the condensed consolidated balance sheets) against beginning retained earnings.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
| | Three Months Ended | | | Three Months Ended | |
| | January 28, 2018 | | | January 29, 2017 | | | January 27, 2019 | | | January 28, 2018 | |
| | | | | | | | | | | | |
Net income attributable to Photronics, Inc. shareholders | | $ | 5,898 | | | $ | 1,946 | | | $ | 5,267 | | | $ | 5,898 | |
| | | | | | | | | | | | | | | | |
Effect of dilutive securities | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Earnings used for diluted earnings per share | | $ | 5,898 | | | $ | 1,946 | | | $ | 5,267 | | | $ | 5,898 | |
| | | | | | | | | | | | | | | | |
Weighted-average common shares computations: | | | | | | | | | | | | | | | | |
Weighted-average common shares used for basic earnings per share | | | 68,755 | | | | 68,176 | | | | 66,583 | | | | 68,755 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Share-based payment awards | | | 617 | | | | 993 | | | | 464 | | | | 617 | |
| | | | | | | | | | | | | | | | |
Potentially dilutive common shares | | | 617 | | | | 993 | | | | 464 | | | | 617 | |
| | | | | | | | | | | | | | | | |
Weighted-average common shares used for diluted earnings per share | | | 69,372 | | | | 69,169 | | | | 67,047 | | | | 69,372 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.09 | | | $ | 0.03 | | | $ | 0.08 | | | $ | 0.09 | |
Diluted earnings per share | | $ | 0.09 | | | $ | 0.03 | | | $ | 0.08 | | | $ | 0.09 | |
The table below shows the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive.antidilutive. The table also shows convertible notes that, if converted, would be antidilutive.
| | Three Months Ended | | | Three Months Ended | |
| | January 28, 2018 | | | January 29, 2017 | | | January 27, 2019 | | | January 28, 2018 | |
| | | | | | | | | | | | |
Convertible notes | | | 5,542 | | | | - | | | | 5,542 | | | | 5,542 | |
Share-based payment awards | | | 1,583 | | | | 993 | | | | 1,063 | | | | 1,583 | |
| | | | | | | | | | | | | | | | |
Total potentially dilutive shares excluded | | | 7,125 | | | | 993 | | | | 6,605 | | | | 7,125 | |
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth thechanges in our accumulated other comprehensive income by component (net of tax of $0)for the three month periods ended January 28, 201827, 2019 and January 29, 2017.28, 2018.
| | Three Months Ended January 28, 2018 | |
| | Foreign Currency Translation Adjustments | | | Amortization of Cash Flow Hedge | | | Other | | | Total | |
| | | | | | | | | | | | |
Balance at October 30, 2017 | | $ | 7,627 | | | $ | (48 | ) | | $ | (688 | ) | | $ | 6,891 | |
Other comprehensive income (loss) before reclassifications | | | 30,087 | | | | - | | | | (32 | ) | | | 30,055 | |
Amounts reclassified from other comprehensive income | | | - | | | | 32 | | | | - | | | | 32 | |
| | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) | | | 30,087 | | | | 32 | | | | (32 | ) | | | 30,087 | |
Less: other comprehensive (income)loss attributable to noncontrolling interests | | | (4,866 | ) | | | - | | | | 16 | | | | (4,850 | ) |
| | | | | | | | | | | | | | | | |
Balance at January 28, 2018 | | $ | 32,848 | | | $ | (16 | ) | | $ | (704 | ) | | $ | 32,128 | |
| | Three Months Ended January 29, 2017 | |
| | Foreign Currency Translation Adjustments | | | Amortization of Cash Flow Hedge | | | Other | | | Total | |
| | | | | | | | | | | | |
Balance at October 31, 2016 | | $ | (6,567 | ) | | $ | (177 | ) | | $ | (927 | ) | | $ | (7,671 | ) |
Other comprehensive income (loss) before reclassifications | | | (614 | ) | | | - | | | | (20 | ) | | | (634 | ) |
Amounts reclassified from other comprehensive income | | | - | | | | 32 | | | | - | | | | 32 | |
| | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) | | | (614 | ) | | | 32 | | | | (20 | ) | | | (602 | ) |
Less: other comprehensive (income)loss attributable to noncontrolling interests | | | (1,267 | ) | | | - | | | | 10 | | | | (1,257 | ) |
| | | | | | | | | | | | | | | | |
Balance at January 29, 2017 | | $ | (8,448 | ) | | $ | (145 | ) | | $ | (937 | ) | | $ | (9,530 | ) |
| | Three Months Ended January 27, 2019 | |
| | | |
| | Foreign Currency Translation Adjustments | | | Other | | | Total | |
| | | | | | | | | |
Balance at November 1, 2018 | | $ | (4,328 | ) | | $ | (638 | ) | | $ | (4,966 | ) |
Other comprehensive income | | | 6,572 | | | | 19 | | | | 6,591 | |
Less: other comprehensive income attributable to noncontrolling interests | | | 1,273 | | | | 9 | | | | 1,282 | |
| | | | | | | | | | | | |
Balance at January 27, 2019 | | $ | 971 | | | $ | (628 | ) | | $ | 343 | |
| | Three Months Ended January 28, 2018 | |
| | | |
| | Foreign Currency TranslationAdjustments | | | | | | Other | | | Total | |
| | | | | | | | | | | | |
Balance at October 30, 2017 | | $ | 7,627 | | | $ | (48 | ) | | $ | (688 | ) | | $ | 6,891 | |
Other comprehensive income (loss) before reclassifications | | | 30,087 | | | | - | | | | (32 | ) | | | 30,055 | |
Amounts reclassified from other comprehensive income | | | - | | | | 32 | | | | - | | | | 32 | |
| | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) | | | 30,087 | | | | 32 | | | | (32 | ) | | | 30,087 | |
Less: other comprehensive income(loss) attributable to noncontrolling interests | | | 4,866 | | | | - | | | | (16 | ) | | | 4,850 | |
| | | | | | | | | | | | | | | | |
Balance at January 28, 2018 | | $ | 32,848 | | | $ | (16 | ) | | $ | (704 | ) | | $ | 32,128 | |
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at January 28, 2018 or October 29, 2017. The assets acquired in connection with our acquisition discussed in Note 4 were recorded at fair value.
Fair Value of Other Financial Instruments
The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of our convertible senior notes is a Level 2 measurement, as it was determined using inputs that were either observable market data, or could be derived from, or corroborated with, observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at January 27, 2019 or October 31, 2018.
Fair Value of Financial Instruments Not Measured at Fair Value
The fair value of our convertible senior notes is a Level 2 measurement, as it was determined using inputs that were either observable market data or could be derived from or corroborated with observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. The table below presents the fair and carrying values of our convertible senior notes at January 28,27, 2019 and October 31, 2018.
| | January 27, 2019 | | | October 31, 2018 | |
| | Fair Value | | | Carrying Value | | | Fair Value | | | Carrying Value | |
| | | | | | | | | | | | |
3.25% convertible senior notes due 2019 | | $ | 63,405 | | | $ | 57,482 | | | $ | 62,094 | | | $ | 57,453 | |
NOTE 12 – SHARE REPURCHASE PROGRAM
In October 2018, the Company’s Board of Directors authorized the repurchase of up to $25 million of its common stock, to be executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on October 22, 2018, and October 29, 2017.expired on February 1, 2019. The number of shares repurchased is subject to market conditions and our continual evaluation of the optimal use of our cash.
| | Three Months Ended January 27, 2019 | | | From Inception Date of October 22, 2018 | |
| | | | | | |
Number of shares repurchased | | | 1,137 | | | | 1,467 | |
| | | | | | | | |
Cost of shares repurchased | | $ | 10,694 | | | $ | 13,807 | |
| | | | | | | | |
Average price paid per share | | $ | 9.40 | | | $ | 9.41 | |
| | January 28, 2018 | | | October 29, 2017 | |
| | Fair Value | | | Carrying Value | | | Fair Value | | | Carrying Value | |
| | | | | | | | | | | | |
3.25% convertible senior notes due 2019 | | $ | 64,486 | | | $ | 57,366 | | | $ | 67,396 | | | $ | 57,337 | |
NOTE 1213 - COMMITMENTS AND CONTINGENCIES
As of January 28, 2018,27, 2019, the Company had commitments outstanding for capital equipment expenditures of approximately $190 million.$38 million, nearly all of which related to building and equipping our China facilities.
The Company isWe are subject to various claims that arise in the ordinary course of business. We believe that such claims, individually or in the aggregate, will not have a material effect on the condensed consolidated financial statements.
NOTE 1314 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where the accounting under ASC Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, and changed existing U.S. tax law. We adopted this guidance in our first quarter of fiscal year 2018. Please see Note 8 for a discussion of the effects of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 iswas effective for Photronics, Inc. in its first quarter of fiscal year 2019 and should bewas applied on a retrospective transition basis. Early adoption is permitted, including adoption in an interim period. We are currently evaluatingOur adoption of the effect that this ASU will have onupdate did not materially impact our consolidated financial statements.cash flows statement.
In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for us in our first quarter of fiscal year 2019 and should be applied on a modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. We are currently evaluatingPlease see Note 8 for a discussion of the effect this ASU will have on our consolidated financial statements.
effects of adopting the guidance.
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss impairment methodology, found in current GAAP, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 is effective for Photronics, Inc. in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016 – 09 “Improvements to Employee Share-Based Payment Accounting”, which simplifies the accounting for share-based payment transactions including their income tax consequences, classification as either equity or liability awards, classification on the statement of cash flows, and other areas. The method of adoption varies with the different aspects of the Update. Adoption of this guidance in the first quarter of our fiscal year 2018 did not have a material impact on our financial statements.20
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. ASU 2016-02 is to be adopted using a modified retrospective approach, which includes a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. The ASU is effective for Photronics, Inc. in the first quarter of fiscal year 2020, with early application permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which will supersedesuperseded nearly all then existing revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which defersdeferred the effective date of ASU 2014-09 by one year and allowsallowed entities to early adopt, but no earlier than the original effective date. ASU 2014-09 will now be effective for Photronics, Inc. in the first quarter of our fiscal year 2019. This update allowsallowed for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amendsamended guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 arewere the same as those for ASU 2014-09.
We anticipateadopted the new revenue and related guidance on November 1, 2018, using the modified retrospective approach, under which we increased our accounts receivable by $0.6 million, recognized contract assets of $4.6 million, reduced our inventories balance by $3.7 million, and recorded an accrual for income taxes of $0.3 million. The recognition and adjustments to these items was reflected in increases to our retained earnings and noncontrolling interest balances of $1.1 million and $0.1 million, respectively. The most significant impact of the new guidance on our financial statements is its requirement for us to recognize revenue as we manufacture products for which, in the event that the customer cancels the contract, we are entitled to reasonable compensation for work we have completed prior to cancellation. Prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods. The impact of the adoption of this ASUguidance on our January 27, 2019, financial statements is presented in Note 6.
The guidance allows for a number of accounting policy elections and practical expedients. In addition to our above mentioned election to use the modified retrospective application method for adopting the guidance, those we have employed that are most significant to us are summarized below.
Shipping and handling activities performed after control of a good is transferred to a customer
We have elected to treat shipping and handling activities that occur after control of a good is transferred to a customer as activities to fulfill our promise to transfer goods to the customer. Thus, such activities will result in the accelerated recognition of certain revenue streams as, upon adoption of this Update, some amounts in our work-in process inventory willnot be considered to represent promisedbe separate performance obligations under contracts with our customers.
Non-recognition of financing component when we transfer goods transferredto a customer and the period between when we transfer and when we are paid will be less than one year
We have elected the practical expedient that allows for the non-recognition, as a component of a customer contract, of a financing component when the period between when we transfer a good and when we are paid will be less than one year.
Exclusion of sales and similar taxes collected from customers in the transaction price
Consistent with our practice before adoption of the new guidance, we will not recognize sales and similar taxes we collect from customers as revenue.
Use of an “input method” to measure our progress towards the transfer of control of performance obligations to customers
As, in our judgment, an input method based on our efforts to satisfy our performance obligations will best serve to depict the transfer of control of our performance obligations to our customers, requiring uswe have adopted an accounting policy to recognize consideration for thoseemploy such a method. Our decision was based primarily on the facts that our photomasks are not physically transferred goods in amountsto customers until they are complete, and that we expectcan employ our input-based cost accumulation systems and methods to be entitledmeasure our progress towards the transfer of control of our performance obligations to receive in exchange for them. However, we cannot currently quantify with reasonable certainty the effect this anticipated acceleration of revenue will have on our consolidated financial statements. We expect to adopt this guidance using the modified retrospective approach.customers.
Non-disclosure of the transaction prices of unsatisfied or partially satisfied performance obligations
For contracts that have an original expected duration of one year or less, we have elected the practical expedient that allows us not to disclose the aggregate transaction prices of unsatisfied or partially satisfied performance obligations that exist at the end of a reporting period.
Item 2. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Management'sManagement’s discussion and analysis ("(“MD&A"&A”) of the Company'sCompany’s financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company'sCompany’s Annual Report on Form 10-K for the fiscal 20172018 year), that may cause actual results to materially differ from these expectations.
We sell substantially all of our photomasks to semiconductor and FPD designers and manufacturers. Photomask technology is also being applied to the fabrication of other higher 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 FPD designs and applications, particularly as they relate to the microeletronicmicro-electronic industry's migration to more advanced product innovation, design methodologies and fabrication processes. We believe that the demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies. Consequently, an increase in semiconductor or FPD 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 FPD designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, FPD and photomask design and semiconductor and FPD production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronic industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices.prices, with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of time, sometimes within 24 hours. This results in 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 and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high 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 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.
In the first quarter of fiscal 2019, PDMC, the Company’s majority owned subsidiary in Taiwan, paid a dividend, of which 49.99%, or approximately $26.1 million, was paid to noncontrolling interests.
In the first quarter of 2019, Xiamen American Japan Photronics Mask Co., Ltd. (“PDMCX”), an indirect majority owned joint venture subsidiary of Photronics, Inc., was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of borrowing, pursuant to which PDMCX will enter into separate loan agreements (“the Project Loans”) for each borrowing. The Project Loans, which are denominated in renminbi, are being used to finance certain capital expenditures in China. PDMCX has agreed to grant a lien on the land, building and certain equipment owned by PDMCX as collateral for the Project Loans. As of January 27, 2019, PDMCX had borrowed $14.8 million against this approval. This borrowing will be repaid in semiannual installments, which will commence in June 2020 and end in December 2022. In February 2019, PDMCX borrowed an additional $11.4 million, which will be repaid semiannually; repayments will commence in June 2023 and end in December 2025. The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at January 27, 2019). Interest incurred on these loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
In the first quarter of 2019, PDMCX was approved for credit of $25.0 million, subject to certain limitations related to PDMCX registered capital at the time of borrowing, pursuant to which PDMCX may enter into separate loan agreements. No guarantees are required as part of this approval. As of January 27, 2019, PDMCX had borrowed $13.8 million against this approval of which $3.7 million were 90-day loans. The remaining $10.1 million borrowed (the “Working Capital Loans”) is to be repaid semiannually from the dates of the individual borrowings, with repayments commencing in May 2019 and ending in January 2022. The 90-day loans were repaid in our second quarter of 2019. These loans, which are denominated in renminbi and U.S. dollars are being used for general financing purposes, including payments of import and value added taxes. The interest rates on the 90-day loans were the market rate on the date of issuance (4.9%), and interest rates on the Working Capital Loans are approximately 5%, and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points. Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.
In the fourth quarter of fiscal 2018, we entered into an amended and restated credit agreement (“the new agreement”) that expires in September 2023. The new agreement, which replaced our prior credit agreement, has a $50 million borrowing limit, and a $50 million expansion capacity, which represents a $25 million increase over the previous credit agreement. The new agreement is secured by substantially all of our assets located in the United States and common stock we own in certain of our foreign subsidiaries, and limits the amount we can pay in cash dividends on Photronics, Inc. stock. The new agreement contains the following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance, all of which we were in compliance with at January 27, 2019. We had no outstanding borrowings against the new agreement at January 27, 2019, and $50 million was available for borrowing. The interest rate on the new agreement (2.5% at January 27, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit agreement.
In the fourth quarter of fiscal 2018, the Company’s Board of Directors authorized the repurchase of up to $25 million of its common stock, to be executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under 10b5-1, on October 22, 2018, and expired on February 1, 2019. As of January 27, 2019, we had repurchased 1.5 million shares at a cost of $13.8 million (an average of $9.41 per share) under this program. The number of shares repurchased is subject to market conditions, and our continual evaluation of the optimal use of our cash.
In the first quarter of fiscal 2018, we announced the successful closing of the China joint venture agreement with Dai Nippon Printing Co., Ltd. (“DNP”), which we had agreed to enter into and announced in the third quarter of fiscal 2017.2017 (see discussion below). Under the agreement, our wholly-owned Singapore subsidiary owns 50.01% of the joint venture, which is named Photronics DNP Mask Corporation Xiamen (PDMCX), and a subsidiary of DNP owns the remaining 49.99%. The financial results of the joint venture are included in the Photronics, Inc. consolidated financial statements. See Note 54 of the condensed consolidated financial statements for additional information on the joint venture.
In the fourth quarter of fiscal 2017, we announced that Photronics UK, Ltd., our wholly owneda wholly-owned subsidiary of ours, signed an investment agreement with the Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we will invest a minimum of $160 million, a portion 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. TheAs of January 27, 2019, we had invested $53 million in this facility. Hefei State Hi-tech Industry Development Zone will provide certain investment incentives and support for this facility, which will have initial capability to produce up to G10.5+ large area masks and AMOLED products. Construction beganof this facility was completed in late 20172018, and production is anticipated to commencebegin in the first half of 2019.
In the fourth quarter of fiscal 2016, Photronics Singapore Pte, Ltd., a wholly ownedwholly-owned subsidiary, signed an investment agreement with the Administrative Committee of Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement, we will build and operate an IC facility to engage in research and development, manufacture and sale of photomasks, in return for which Xiamen Torch will provide certain investment incentives and support. This expansion is also substantially supported by customer commitments for its output. As discussed above, in the first quarter of fiscal 2018, we entered into a joint venture agreement with DNP, under which they obtainedhold a 49.99% ownership interest in this facility.investment. The total investment per the agreement is $160 million, toof which approximately $32 million remained for Photronics as of January 27, 2019, and will be funded over the next several years with cash and local borrowings. Construction began in 2017 and production is anticipated to start in the second half of 2019.
Material Changes in Results of Operations
Three Months ended January 28,27, 2019, October 31, 2018 October 29, 2017 and January 29, 201728, 2018
The following table represents selected operating information expressed as a percentage of net sales.
| | Three Months Ended | | | Three Months Ended | |
| | January 28, 2018 | | | October 29, 2017 | | | January 29, 2017 | | | January 27, 2019 | | | October 31, 2018 | | | January 28, 2018 | |
| | | | | | | | | | | | | | | | | | |
Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | | (77.6 | ) | | | (78.1 | ) | | | (79.1 | ) | | | 79.1 | | | | 75.5 | | | | 77.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 22.4 | | | | 21.9 | | | | 20.9 | | | | 20.9 | | | | 24.5 | | | | 22.4 | |
Selling, general and administrative expenses | | | (9.5 | ) | | | (8.4 | ) | | | (9.9 | ) | | | 11.0 | | | | 9.3 | | | | 9.5 | |
Research and development expenses | | | (3.3 | ) | | | (3.2 | ) | | | (3.1 | ) | | | 3.4 | | | | 2.7 | | | | 3.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 9.6 | | | | 10.3 | | | | 7.9 | | | | 6.5 | | | | 12.5 | | | | 9.6 | |
Other income (expense), net | | | (3.4 | ) | | | 0.4 | | | | (1.9 | ) | | | 0.8 | | | | 1.5 | | | | (3.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 6.2 | | | | 10.7 | | | | 6.0 | | | | 7.3 | | | | 14.0 | | | | 6.2 | |
Income tax benefit (provision) | | | 1.5 | | | | (2.0 | ) | | | (1.9 | ) | |
Income tax (provision) benefit | | | | (1.1 | ) | | | (2.4 | ) | | | 1.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 7.7 | | | | 8.7 | | | | 4.1 | | | | 6.2 | | | | 11.6 | | | | 7.7 | |
Net income attributable to noncontrolling interests | | | (2.9 | ) | | | (4.2 | ) | | | (2.3 | ) | | | 2.0 | | | | 3.0 | | | | 2.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Photronics, Inc. shareholders | | | 4.8 | % | | | 4.5 | % | | | 1.8 | % | | | 4.2 | % | | | 8.6 | % | | | 4.8 | % |
Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended January 27, 2019 (Q1 FY19), October 31, 2018 (Q4 FY18) and January 28, 2018 (Q1 FY18), October 29, 2017 (Q4 FY17) and January 29, 2017 (Q1 FY17) in millions of dollars.
Revenue
| | | Q1 FY19 from Q4 FY18 | | | Q1 FY19 from Q1 FY18 | |
| | | | | | | |
| | Q1 FY18 FROM Q4 FY17 | | | Q1 FY18 FROM Q1 FY17 | | | Revenue in Q1 FY19 | | | Percent Change | | | Increase (Decrease) | | | Revenue in Q1 FY19 | | | Percent Change | | | Increase (Decrease) | |
| | Revenue in Q1 FY18 | | | Percent Change | | | Increase (Decrease) | | | Revenue in Q1 FY18 | | | Percent Change | | | Increase (Decrease) | | | | | | | | | | | | | | | | | | | |
IC | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
High-end | | $ | 33.4 | | | | 9.6 | % | | $ | 2.9 | | | $ | 33.4 | | | | 50.6 | % | | $ | 11.2 | | | $ | 34.6 | | | | (12.3 | )% | | $ | (4.9 | ) | | $ | 34.6 | | | | 3.6 | % | | $ | 1.2 | |
Mainstream | | | 62.3 | | | | (5.0 | %) | | | (3.3 | ) | | | 62.3 | | | | (3.0 | %) | | | (1.9 | ) | | | 60.3 | | | | (15.6 | )% | | | (11.1 | ) | | | 60.3 | | | | (3.2 | )% | | | (2.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 95.7 | | | | (0.4 | %) | | $ | (0.4 | ) | | $ | 95.7 | | | | 10.7 | % | | $ | 9.3 | | | $ | 94.9 | | | | (14.4 | )% | | $ | (16.0 | ) | | $ | 94.9 | | | | (0.8 | )% | | $ | (0.8 | ) |
FPD | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
High-end | | $ | 18.7 | | | | 9.6 | % | | $ | 1.7 | | | $ | 18.7 | | | | 8.9 | % | | $ | 1.5 | | | $ | 21.5 | | | | (2.5 | )% | | $ | (0.5 | ) | | $ | 21.5 | | | | 14.3 | % | | $ | 2.7 | |
Mainstream | | | 9.0 | | | | 15.4 | % | | | 1.2 | | | | 9.0 | | | | 45.3 | % | | | 2.8 | | | | 8.3 | | | | (28.9 | )% | | | (3.5 | ) | | | 8.3 | | | | (6.9 | )% | | | (0.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 27.7 | | | | 11.4 | % | | $ | 2.9 | | | $ | 27.7 | | | | 18.5 | % | | $ | 4.3 | | | $ | 29.8 | | | | (11.7 | )% | | $ | (4.0 | ) | | $ | 29.8 | | | | 7.4 | % | | $ | 2.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 123.4 | | | | 2.0 | % | | $ | 2.5 | | | $ | 123.4 | | | | 12.4 | % | | $ | 13.6 | | | $ | 124.7 | | | | (13.8 | )% | | $ | (20.0 | ) | | $ | 124.7 | | | | 1.0 | % | | $ | 1.3 | |
Revenue increased 2.0% in Q1 FY18, compared with Q4 FY17, mainly due to increased FPD and high-end IC revenues, partially offset by decreased mainstream IC sales. The high-end IC increase was driven by sales of high-end logic to Asian foundries. For FPD, demand for LCD masks improved as our customers released new designs in an effort to improve factory utilization. Sales of mainstream IC products were down due to seasonal softness.
Revenue increased 12.4% in Q1 FY18, compared with Q1 FY17, mainly due to increased FPD and high-end IC revenues, partially offset by decreased mainstream IC sales. The high-end IC increase was driven by high-end logic and memory sales to Asian foundries, as demand in the prior year had been soft for these products. For FPD, demand of LCD masks improved as our customers released new designs in an effort to improve factory utilization. Mainstream IC demand was softer compared to last year.
InThe following tables compare revenue in Q1 FY19 with revenue in Q4 FY18 and Q1 FY18 we changed the threshold for the definition of high-end IC, from 45 nanometer or smaller to 28 nanometer or smaller, to reflect the overall advancement of technology in the semiconductor industry. All comparisons to prior period results in this MD&A reflect this modification. Our definition of high-end FPD products remains as G8 and above and active matrix organic light-emitting diode (AMOLED) display screens. High-end photomasks typically have higher ASPs than mainstream products.by geographic area:
| | Q1 FY19 from Q4 FY18 | | | Q1 FY19 from Q1 FY18 | |
| | | | | | |
| | Revenue in Q1 FY19 | | | Percent Change | | | Increase (Decrease) | | | Revenue in Q1 FY19 | | | Percent Change | | | Increase (Decrease) | |
| | | | | | | | | | | | | | | | | | |
Taiwan | | $ | 57.7 | | | | (7.3 | )% | | $ | (4.6 | ) | | $ | 57.7 | | | | 2.1 | % | | $ | 1.2 | |
Korea | | | 35.2 | | | | (13.5 | )% | | | (5.5 | ) | | | 35.2 | | | | 6.8 | % | | | 2.2 | |
United States | | | 22.5 | | | | (26.8 | )% | | | (8.2 | ) | | | 22.5 | | | | (10.2 | )% | | | (2.5 | ) |
Europe | | | 8.4 | | | | (14.5 | )% | | | (1.4 | ) | | | 8.4 | | | | (1.5 | )% | | | (0.1 | ) |
Other | | | 0.9 | | | | (19.0 | )% | | | (0.2 | ) | | | 0.9 | | | | 143.6 | % | | | 0.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 124.7 | | | | (13.8 | )% | | $ | (19.9 | ) | | $ | 124.7 | | | | 1.0 | % | | $ | 1.3 | |
The revenue momentum at the end of 2017 has continued into 2018. We anticipate that most of our high-end markets should continue to grow in Q2 FY18, the exception being high-end logic where, given the increase in business that we have experienced during the last two quarters, there may be a pause.
Our quarterly revenues can be affected by the seasonal purchasing tendencies of our customers. As a result, demand for our products is typically negatively impacted during the first, and sometimes the second, quarters of our fiscal year by the North American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods.
Revenue decreased 13.8% in Q1 FY19, compared with Q4 FY18, due to seasonal softness and macroeconomic headwinds. There were also six fewer days in the first quarter of our fiscal 2019 than in the fourth quarter of fiscal 2018, due to our adoption of October 31 as the Company’s fiscal year-end. Overall IC and FPD revenues decreased 14.4% and 11.7% respectively. The following tables present changesdecrease in revenuemainstream IC of 15.6% was mostly in Asia, particularly Taiwan and China, where macro uncertainty delayed our customers’ initiatives to design new products. The decrease in high-end IC photomasks of 12.3% was due to declines in both logic, as new designs for advanced applications such as smartphones decreased, and memory, due to the postponements of orders from Q4 FY17a large customer. Mainstream FPD decreased 28.9%, as we devoted a greater portion of our mainstream capacity to building the non-critical layers of AMOLED mask sets. This redirection of our resources was also in response to competitive pressures that resulted from an over-supplied market. High-end FPD revenues decreased 2.5% as a result of softer demand for G8.5 masks used for large LCD TVs. High-end photomask applications include mask sets for 28 nanometer and smaller products, and G8 and above and active matrix organic light-emitting diode (AMOLED) display technologies for FPD products. High-end photomasks typically have higher selling prices than mainstream products.
Revenue increased 1.0% in Q1 FY17 toFY19, compared with Q1 FY18, primarily due to increased high-end FPD and IC revenues, which were partially offset by geographic area:decreased mainstream IC and FPD sales. High-end FPD increased 14.3% due to AMOLED growth, which was the result of an overall increase in industry demand from the prior year’s quarter. High-end IC increased 3.6% due to stronger logic demand. Mainstream IC decreased 3.2%, as demand was softer. Mainstream FPD decreased 6.9% due to a decline in demand for G8.5 masks used for large-screen TVs, and lower demand for LTPS LCD screens in mobile applications.
| | Q1 FY18 FROM Q4 FY17 | | | Q1 FY18 FROM Q1 FY17 | |
| | Revenue in Q1 FY18 | | | Percent Change | | | Increase (Decrease) | | | Revenue in Q1 FY18 | | | Percent Change | | | Increase (Decrease) | |
| | | | | | | | | | | | | | | | | | |
Taiwan | | $ | 56.5 | | | | 2.7 | % | | $ | 1.5 | | | $ | 56.5 | | | | 21.6 | % | | $ | 10.0 | |
Korea | | | 33.0 | | | | 14.0 | % | | | 4.0 | | | | 33.0 | | | | 8.9 | % | | | 2.7 | |
United States | | | 25.0 | | | | (5.5 | )% | | | (1.5 | ) | | | 25.0 | | | | 5.9 | % | | | 1.4 | |
Europe | | | 8.5 | | | | (12.8 | )% | | | (1.2 | ) | | | 8.5 | | | | (2.8 | )% | | | (0.2 | ) |
Other | | | 0.4 | | | | (48.7 | )% | | | (0.4 | ) | | | 0.4 | | | | (44.8 | )% | | | (0.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 123.4 | | | | 2.0 | % | | $ | 2.4 | | | $ | 123.4 | | | | 12.4 | % | | $ | 13.6 | |
We expect our FPD revenues to increase in our second quarter, primarily as a result of increased demand for mobile displays. We plan to support our customers’ enhanced requirements with additional capacity we will bring on-line in China. With respect to our IC business, we expect to see a pick-up in memory demand and, while we do not expect to see a material deterioration in logic, believe that a recovery in logic may occur beyond the second quarter.
Gross Profit
| | Three Months Ended | | | Three Months Ended | |
| | | Q1 FY18 | | | | Q4 FY17 | | | Percent Change | | | | Q1 FY17 | | | Percent Change | | | Q1 FY19 | | | Q4 FY18 | | | Percent Change | | | Q1 FY18 | | | Percent Change | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 27.7 | | | $ | 26.4 | | | | 4.6 | % | | $ | 23.0 | | | | 20.3 | % | | $ | 26.1 | | | $ | 35.4 | | | | (26.3 | )% | | $ | 27.7 | | | | (5.6 | )% |
Gross margin | | | 22.4 | % | | | 21.9 | % | | | | | | | 20.9 | % | | | | | | | 20.9 | % | | | 24.5 | % | | | | | | | 22.4 | % | | | | |
Gross profit and gross margin both increaseddecreased in Q1 FY18FY19 from Q4 FY17FY18 primarily as a result of increaseddecreased revenue, and reduced laborthe effects of which were partially mitigated by decreased material costs and overhead costs with the greatest reductions experienced in equipment maintenanceof $7.5 million and outsourced manufacturing costs. These reductions were somewhat offset by increased material costs.$3.7 million, respectively. Gross profit and gross margin increaseddecreased in Q1 FY18,FY19, compared with Q1 FY17,FY18, primarily due to an increase in overall revenue,increased compensation and related benefits expense and overhead costs of $2.6 million and of $0.8 million, respectively, which was predominantly drivenwere partially offset by increased salesdecreased material costs of high-end IC photomasks. We$0.5 million. As we operate in a high fixed cost environment, and, to the extent thatincreases or decreases in our revenues and capacity utilization increase or decrease, our gross margin and gross profit will generally be positively or negatively impacted.impact our gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.6$0.3 million, or 15.4%2.1%, to $11.8$13.8 million in Q1 FY18,FY19, from $10.2$13.5 million in Q4 FY17,FY18, primarily due to a $0.3 million decrease in bad debt reserve adjustments that occurred inrecoveries from the prior quarter and increased professional fees in the current quarter. Selling, general and administrative expenses increased in Q1 FY18FY19 by $0.9$2.0 million, or 8.1%17.4%, tofrom $11.8 million, from $10.9 million in Q1 FY17,FY18, primarily as a result of increased professional fees,compensation and related benefits of $1.4 million and increased freight and travel expenses of $0.4 million, which increased as a result of activities relatedincreased sales to our expansion into China.
Research and Development
ResearchIn the U.S., research and development expenses primarily consist of development efforts related to high-end process technologies for 28nm and belowsmaller IC nodes, while in Asia, in addition to the focus on high-end IC technology nodes, G8 and above FPDs and AMOLED applications. applications are also under development.
Research and development expensesexpense increased by $0.3$0.4 million or 6.9%, to $4.1$4.3 million in Q1 FY19, or 9.1%, from Q4 FY18, from $3.8 millionprimarily as a result of increased development activities in Q4 FY17,the U.S. Research and by $0.6development expense was up moderately ($0.2 million, or 17.8%,3.9%) in Q1 FY19 from Q1 FY17,FY18, with both of the increases primarily resulting from increased customer qualification costs for high-end IC reticlesspending in the U.S.Taiwan exceeding decreased expenditures and related activities on large area masks in Korea.
Other Income (Expense), net
| | Three Months Ended | | | Three Months Ended | |
| | | Q1 FY18 | | | | Q4 FY17 | | | | Q1 FY17 | | | Q1 FY19 | | | Q4 FY18 | | | Q1 FY18 | |
| | | | | | | | | | | | | | | | | | | | | |
Interest income and other income (expense), net | | $ | (3.5 | ) | | $ | 1.1 | | | $ | (1.5 | ) | | $ | 1.6 | | | $ | 2.9 | | | $ | (3.5 | ) |
Interest expense | | | (0.6 | ) | | | (0.6 | ) | | | (0.6 | ) | | | (0.5 | ) | | | (0.6 | ) | | | (0.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | $ | (4.1 | ) | | $ | 0.5 | | | $ | (2.1 | ) | | $ | 1.1 | | | $ | 2.3 | | | $ | (4.1 | ) |
Other income (expense), net decreased in Q1 FY18FY19 by $4.6 million and $2.0$1.2 million from Q4 FY17 and Q1 FY17, respectively.FY18. The decreases weredecrease was primarily the result of significantreduced foreign currency lossesgains and interest income of $0.6 million and $0.3 million, respectively, in the current quarter, and gains recorded on the sale of long-lived assets recorded in Q4 FY18 of $0.4 million. Other income (expense), net increased in Q1 FY19 by $5.2 million from Q1 FY18, whileprimarily due to foreign currency gains experienced in Q4 FY17, we recognized the current quarter, in contrast to unfavorable foreign currency results in the prior year quarter, with a net gain, and in Q1 FY17, we recognized a more moderate loss from our cross-currency transactions.effect of $5.7 million. Reduced interest income of $0.3 million partially offset the favorable impact of the foreign currency results.
Income Tax Benefit (Provision)Provision
| | | Three Months Ended | |
| | Three Months Ended | | | | |
| | | Q1 FY18 | | | | Q4 FY17 | | | | Q1 FY17 | | | Q1 FY19 | | | Q4 FY18 | | | Q1 FY18 | |
| | | | | | | | | | | | | | | | | | | | | |
Income tax benefit (provision) | | $ | 1.8 | | | $ | (2.5 | ) | | $ | (2.1 | ) | | $ | (1.4 | ) | | $ | (3.6 | ) | | $ | 1.8 | |
Effective income tax rate | | | (23.1 | )% | | | 19.0 | % | | | 31.3 | % | | | 15.2 | % | | | 17.5 | % | | | (23.1 | )% |
The effective income tax rate is sensitive to the jurisdictional mix of earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances. The effective income tax rate decreased in Q1 FY19, compared with Q4 FY18, is primarily attributable to the net decrease in tax accruals no longer required as a result of the settlement of a non-U.S. income tax audit. The effective income tax rate increase in Q1 FY18,FY19, compared with Q1 FY17 and Q4 FY17,FY18, is primarily attributable to Q1 FY18 benefits related to the recognition of $3.9 million of previously unrecognized deferred tax benefits related toassociated with alternative minimum tax credits as a result ofthat resulted from the U.S. Tax Cuts and Jobs Act, ("Act"), which was signed into law on December 22, 2017, (See Note 8 to the condensed consolidated financial statements for further information), and an increase of deferred tax assets of $0.2 million, which was the result of an increase in the Taiwan corporate tax rate. These benefits were partially offset by a higher percentage of income before income taxes being generated in jurisdictions where we recorded income tax provisions which, due to valuation allowances, were not offset by income tax benefits recorded in jurisdictions in which we incurred losses before income taxes.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.6$2.5 million in Q1 FY18,FY19, which represented a decrease of $1.5$1.8 million and an increase of $1.0$1.1 million from Q4 FY17FY18 and Q1 FY17,FY18, respectively. The changes from both comparative periods were due to changes indecreased net income at our IC manufacturing facility in Taiwan, in which we hold a 50.01% ownership interest.
Liquidity and Capital Resources
Our working capital at the end of Q1 FY18FY19 was $404.3$258.5 million, compared with $367.3$311.7 million at the end of Q4 FY17,FY18, and our cash and cash equivalents decreased in Q1 FY19 by $96.8 million from $329.3 million at October 31, 2018. Cash flows related to operating activities decreased $50.1 million to $19.3 million used in Q1 FY19 from $30.9 million provided in Q1 FY18. In addition to the decrease in net income of $1.7 million from the prior year’s quarter, significant contributors to the decrease in cash flows from operating activities in Q1 FY19, compared with Q1 FY18, were increases in accounts receivable of $14.0 million and other current assets of $22.5 million, a significant cause of which was an increase in recoverable value added taxes related to our investments in China. Decreased accounts payable of $6.3 million also contributed to the year-over-year decrease in operating cash flows.
Net cash used in investing activities was $101.9 million in Q1 FY19, an increase of $90.7 million from the $11.1 million used in Q1 FY18. The increase was primarily attributable to increased capital expenditures of $92.9, the preponderance of which related to building and equipping our China facilities. Cash flows provided by financing activities increased from $11.2 million in Q1 FY18 to $21.4 million in Q1 FY19. The increase was primarily the result of proceeds from contributions from DNP of $29.4 million to PDMCX (in which they hold a 49.99% interest) and the receipt of debt proceeds by $40.5PDMCX of $28.2 million, from $308.6the effects of which were partially offset by dividends paid to DNP of $26.1 million at October 29, 2017.(related to their 49.99 percent interest in our IC facility in Taiwan), and $10.7 million used to acquire our common stock under a share repurchase program. Favorable effects of foreign currency exchange rates contributed $9.7$3.0 million and $9.8 million to our increasethe changes in cash balances in Q1 FY18. Net cash provided by operating activities was $30.9 million inFY19 and Q1 FY18, compared with $31.5 million in Q1 FY17, as increased net income and noncash expenses were exceeded by net cash consumed by operating assets and liabilities by $0.7 million. Net cash used in investing activities was $11.1 million in Q1 FY18, a decrease of $4.3 million from the $15.4 million used in Q1 FY17. The decrease was primarily attributable to cash of $5.4 million used to acquire a business in Q1 FY17, which was somewhat offset by a $1.4 million increase in purchases of property, plant and equipment in Q1 FY18. Cash flows from financing activities increased from funds used of $0.2 million in Q1 FY17 to $11.2 million provided in Q1 FY18, primarily due to the receipt of $12.0 million from a noncontrolling interest for their investment in our recently established IC business in China.respectively.
As of January 28, 201827, 2019, and October 29, 2017,31, 2018, our total cash and cash equivalents included $213.3$195.7 million and $190.0$244.5 million, respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to the U.S. may subject them to U.S. state income taxes and local country withholding taxes in certain jurisdictions. Our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD areas.
Our credit facility, which expires in December 2018, has a $50 million limit with an expansion capacity to $75 million, and is secured by substantially all of our assets located in the United States and the common stock of certain foreign subsidiaries. The credit facility is subject to a minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance financial covenants, all of which we were in compliance with at January 28, 2018. We had no outstanding borrowings against the credit facility at January 28, 2018, and $50 million was available for borrowing. The interest rate on the credit facility (2.82% at January 28, 2018) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
As of January 28, 2018,27, 2019, we had capital commitments outstanding of approximately $190 million.$38 million, nearly all of which related to building and equipping our China facilities (discussed below). We intend to finance our capital expenditures with our working capital, cash generated from operations and, if necessary, additional borrowings. We have entered into a joint venture that is constructing an IC facility in China with an estimated total joint investment of $160 million. Our remaining funding commitment for the joint venture is approximately $68$32 million which we will fulfill over the next several years.quarters. We have also commenced construction of an FPD facility in China in which, as of January 27, 2019, we will invest $160 million over that same period.have invested $53 million. We believe that our cash on hand, cash generated from operations and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our capital requirements exceed our existing cash, cash generated by operations, and cash available under our credit facility.facilities.
Our liquidity, as we operate in a high fixed cost environment, is highly dependent on our revenue, cash conversion cycle, 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 we have used in the past may not be available to us when required. Consequently, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit facility.
In January 2018, Photronics, through its wholly-owned Singapore subsidiary, and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” ( “PDMCX”(“PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. Under the Joint Venture Operating Agreement of Photronics DNP Mask Corporation Xiamen (“the Agreement”), DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two year term of the Agreement that cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of PDMCX'sPDMCX’s net assets, incur a loss.
We lease certain office facilities and equipment under operating leases that may require us to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms.
Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties. While various risks and uncertainties were discussed in Part1, Item 1A in our Annual Report on Form 10-K for the year ended October 29, 2017,31, 2018, a number of other unforeseen factors could cause actual results to differ materially from our expectations.
See “Item 1. Condensed Consolidated Financial Statements– Notes to Condensed Consolidated Financial Statements – Note 1314 – Recent Accounting Pronouncements” for recent accounting pronouncements that may affect the Company’s financial reporting.
We conduct business in several major international currencies throughout our worldwide operations, and our financial performance may be affected by fluctuations in the exchange rates of these currencies. Changes in exchange rates can positively or negatively affect our reported revenue, operating income, assets, liabilities, and equity. The functional currencies of our Asian subsidiaries are the South Korean won, the New Taiwan dollar, the Chinese renminbi and the Singapore dollar. The functional currencies of our European subsidiaries are the British pound and the euro. In addition, we have transactions and balances in Japanese yen.
We attempt to minimize our risk of foreign currency transaction losses by producing products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing our working capital. However, in some instances, we sell and collect for products in a currency other than the functional currency of the country where it was produced, or purchase products in a currency that differs from the functional currency of the purchasing manufacturing facility.
We have established and currently maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
There was no change in our internal control over financial reporting during the first quarter of fiscal year 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.