PART I
General
Photronics, Inc. (and its subsidiaries, collectively referred to herein as “Photronics”, the “Company”, “we”, “our”, or “us”) is the world'sworld’s leading manufacturer of photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of ICs and FPDs and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of ICs, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We have eleven manufacturing facilities, including two recently constructed facilitieswhich are located in China. Our FPD facility in Hefei,Taiwan (3), China (2), Korea, the United States (3), and our IC facility in Xiamen, China, commenced production in the second and third quarters of 2019, respectively.Europe (2).
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 Forms 10-K, Definitive Proxy Statements on Schedule 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 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. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Photronics.
Impact 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 had an impact on our business in a number of ways including customer shutdowns, which led to delays in new photomask design releases, and travel restrictions, which delayed tool installations and servicing. Proposed government actions, in response to the pandemic, have made it more challenging to retain and hire new employees at our facilities. 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 grow over the course of the pandemic, we cannot predict its future impact on our business with a high level of certainty.
At certain facilities, employees not required to be on-site to maintain production have worked remotely at various times ‒ either at our discretion or due to government mandates. The implementation of these safety measures has not materially affected these employees’ abilities to support our operations.
Sales
We manufacture photomasks, which are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates. Photomasks are manufactured incorporatingThe photomasks we manufacture incorporate circuit designs provided to us on a confidential basis by our customers. IC and FPD photomaskPhotomasks are typically sold in sets are manufactured incomprised of layers, with each layer having a distinct pattern whichthat 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 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 thea photomask blank. The exposed areas are developed and etched to produce thatimprint the pattern on the photomask. The photomask is then inspected for defects and conformity to the customer'scustomer’s design data. After the repair of 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“High-end” photomasks is considered to besupport 28 nanometer and smaller design nodes 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,“mainstream” photomasks, 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 expect advanced-generation designs to continue to be developed throughout fiscal 2022,2023, 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 are 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 customer’s specifications, we typically negotiate pricing parameters for the customer'scustomer’s order. Some prices may remain in effect for an extended period of time. 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 that customer'scustomer’s photomask orders.
The first several layers of photomasks are sometimes required to be delivered to customers within 24twenty-four hours from the time we receive customer design data. Because of the short period between order and shipment dates (typically from one day to twothree weeks) for a significant amount of our revenue, the dollar amount of our current backlog is not a reliable indicator of future revenue. However, the demand for some IC photomasks has recently expanded beyond the industry’s capacity to supply them within the traditional time period; thus, for some products, our backlog can expand to as long as two to three months.
The ability to manufacture high-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, capitalmanufacturing capacity, preventive and on-going equipment maintenance programs, 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.
We conduct our sales and marketing activities primarily through a staff of full-time sales personnel and customer service representatives who work closely with the Company'sCompany’s management and technical personnel. We support non-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 87 and 1615 to our consolidated financial statements in Part II, Item 8 of this report 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 at our Boise, Idaho, facility and, to a lesser degree, Photronics DNP Mask Corporation (“PDMC”), our joint venturejoint-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 integration of photomasks into customer processes. Currently, research and development for IC photomasks are primarily focused on photomasks enabling wafer geometries of 14 nanometer node and smaller and, for FPDs, on Generations 8 and 10 substrate size photomasks for new TV technologies, emerging opportunities for micro- and mini-LED displays, and photomask technology for the complex FPD photomasks required in the manufacture of advanced mobile displays, such as AMOLED. We believe these core competencies will continue to be a critical part of semiconductor and FPD manufacturing, as wafer and FPD substrate optical lithography continues to enable new high-end ICs and displays. We incurred research and development expenses of $18.3 million, $18.5 million, and $17.1 million in 2022, 2021 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 forwe need to continue to meet our business, as it is presently conducted.customers’ requirements. 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-U.S. semiconductor and FPD manufacturers and designers.designers worldwide. 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 rare 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, to reach certain roadmap milestones, some captive mask facilities have been investing at faster rates than independent manufacturers, particularly in the foundry logic and memory spaces. Nevertheless, most captive manufacturers maintain business and technology relationships with independent photomask manufacturers for ongoing support.
We support customers across the full spectrum of IC production and FPD 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, the Internet of Things, crypto mining, and relatedother applications. We own a number of both high-end and mature electron beam and laser-based lithography systems.
We sell our products primarily to leading semiconductor and FPD designers and manufacturers. These include integrated device manufacturers, fabless semiconductor companies, and “pure play” foundries. During 2021,2022, we sold our products to approximately 530550 customers. Revenue from United Microelectronics Corp. Co., Ltd. accounted for approximately 17%15%, 16%17% and 15%16% of our total revenues in 2022, 2021 2020 and 2019,2020, respectively, and revenue from Samsung Electronics Co., Ltd. accounted for approximately 12%11%, 14%12% and 16%14% of our total revenues in those respective years. Our five largest customers, in the aggregate, accounted for approximately 43%45%, 45%43% and 46%45% of our revenue in 2022, 2021 2020 and 2019,2020, 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.
Competition
The photomask industry is highly competitive, and most of our customers utilize multiple photomask suppliers. Our ability to compete depends primarily upon the consistency of our product quality, timeliness of delivery, competitive pricing, technical capability, and service, which we believe are the principal factors considered by customers in selecting their photomask suppliers. An inability to meet these requirements could adversely affect our financial condition, results of operations, and cash flows. We also believe that geographic proximity to customers is an important factor in certain markets where cycle time from order to delivery is critical. While some of our competitors may have greater financial, 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 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 $5.8$7.5 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 WayNewway 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'manufacturers’ captive photomask manufacturing operations that supply photomasks for internal use and, in some instances, also for external customers and foundries. We expect to face continued competition which, in the past, has led to pressure to reduce prices. We believe the pressure to reduce prices, together with the significant investment required in capital equipment to manufacture high-end photomasks, has contributed to the decrease in the number of independent manufacturers, and we expect such pressure to continue in the future.
International Operations
Revenues from our non-U.S. operations were approximately 84%85%, 83%84% and 81%83% of our total revenues in 2022, 2021 2020 and 2019,2020, 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 serve. This requires significant investments in financial, managerial, operational, and other resources.
Operations outside of the United States are subject to inherent risks, including fluctuations in exchange rates, political and economic conditions in various countries, legal compliance and regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable collection cycles, potential restrictions on transfers of funds, and potentially adverse tax consequences. These factors may have a material adverse effect on our ability to generate revenue outside of the United States and to deploy resources where they could otherwise be used to their greatest advantage and, consequently, may adversely affect our financial condition and results of operations. Notes 87 and 1615 of our consolidated financial statements, in Part II, Item 8 of this report, respectively, present our revenue and long-lived assets by geographic area.
Resources
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 provide 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 affecthave a material adverse effect on our business and results of operations.
Intellectual Property Rights
We have developed and hold ownership interests in intellectual property (“IP”) rights, in the forms of patents 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 or the use of photomasks to manufacture other products. While we believe that our IP rights are, and will continue to be, important to our technical leadership in the field of photomasks, our operations are not dependent on any one individual 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 limited number of fixed-price contracts with the U.S. government. Revenues earned from these contracts do not comprise a significant portion of our total revenue.
Government Regulation
We are subject to government regulations within the U.S. and in other countries in which we produce or market our products. The effects of compliance with these regulations are currently not material to our results of operations, capital 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, 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;
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| • | 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 transfer 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 personal information of our customers and employees;
Regulations that require us to accurately determine our liabilities to taxing authorities, and to settle such liabilities within their statutorily prescribed time periods;
Regulations that require us to withhold and timely remit taxes on our employees’ compensation to government authorities;
Regulations that require us to contribute to government-sponsored social insurance plans;
Regulations that require us to contribute to employee severance plans;
Regulations that prohibit us from disseminating material nonpublic information prior to the public announcement of such information;
Regulations pertaining to financial reporting, insider transactions, executive compensation, and other areas overseen by the SEC and governing bodies in other countries in which our operations are located;
Human Capital
As of October 31, 2021,2022, we had approximately 1,7281,828 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, 2021,2022, none of our employees at any of our worldwide facilities was represented by a union. We consider our employee relations to be good. We believe our commitment to our diverse 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 professionalcareer development experiences,opportunities, 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 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. The health and wellness of our employees are critical to our success. 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 forFor US employees, we requiredrequire 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.
may amend this policy at any time.
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'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.
Set forth below are discussions of the risk factors we believe can make an investment in our business speculative or risky.
Concentration 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 FPD designers, manufacturers and foundries, as well as to other high-performance electronics manufacturers. We believe that the demand for photomasks depends primarily on design activity rather than sales volume from products using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of customizedapplication-specific ICs, a reductionreductions in design complexity,complexities, 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 microelectronics industry has been volatile, with sharp periodic downturns and slowdowns. These negative trends have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling 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 be unable to fulfill orders from our customers, which could adversely affect our business and results of operations.
We rely on a limited number of photomask equipment manufacturers to develop, supply, and repair the equipment we use. These equipment manufacturers usually require lead times of twelve months or longer between the order date and the delivery of certain photomask imaging and inspection equipment. The failure of our suppliers to develop or deliver such equipment on a timely basis due to internal issues, supply chain constraints or government imposed restrictions 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 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 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 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 2022, 2021 2020 and 2019,2020, our two largest customers accounted for 29%25%, 29% and 31%29%, respectively, of our revenue. Our five largest customers accounted for 43%45%, 45%43% and 46%45% of our revenue in 2022, 2021 2020 and 2019,2020, respectively. The loss of a significant customer, 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.
Financing Related Risk Factors
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-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 agreements.
Our credit facility restricts our business activities, limits our ability to obtain additional financing or pay cash dividends, and may obligate us to repay debt before its maturity.
Financial covenants related to our 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-endadditional manufacturing capability. We expect that we will be required to continue to make substantial capital expenditures to meet the technological demands of our customerscustomer requirements and to position us for future growth. Our capital expenditure payments for fiscal 20222023 are expected to be approximately $100$130 million, of which approximately $9.7$5.3 million was included in Accounts payable and Accrued liabilities on our October 31, 2021,2022, consolidated balance sheet. We cannot provide assurance that we will be able to obtain the additional capital required to fund our operations or capital expenditures on reasonable terms, if at all, or that any such inability will not have a material adverse effect on our business and results of operations.
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 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.
Industry and Competitive Related Risk Factors
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, chief financial officer and chief technology officer) could have a material adverse effect on our business and results of operations. We 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 photomasks of increasingly more challenging photomasks.complexity. 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.ICs, or the use of certain chip-stacking methodologies that lessen the emphasis on conventional lithography technology. 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 2021,2022, 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;
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 WayNewway 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'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 intooperations in China entailsexpose us to 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, restructurings, or restructurings.forfeitures.
We cannot provide assurance that there will not be facility closures, restructurings, or restructuringsforfeitures in the near or long term, nor can we assure that we will not incur significant charges should there be any future facility closures, restructurings or restructurings.forfeitures.
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.
Revenues from our non-U.S. operations were approximately 84%85%, 83%84% and 81%83% of our total revenues in 2022, 2021 2020 and 2019,2020, 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 maycould result in the opening of additional facilities or closing of our current 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;requirements including import and export regulations; 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 tofor 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 complycomplied 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 USFor U.S. employees we required vaccinations against COVID-19. Werequire vaccination but may not be able to attract or retain employees as a result ofchange 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.
policy at any time.
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.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in the U.S. Among other provisions, the IRA included a new fifteen percent Corporate Alternative Minimum Tax (“CAMT”) and a one percent excise tax on corporate share repurchases. The CAMT, which we are not currently subject to, is effective for tax years beginning on or after January 1, 2023. The one percent excise tax on share repurchases applies to shares repurchased after December 31, 2022, and excludes repurchases under $1 million. We do not anticipate that the IRA will have a material effect on our financial performance.
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.
WeCertain of our products are or could be subject to the Export Administration Regulations (“EAR”) if they are manufactured in the U.S., or based on U.S. technology, or contain more than a de minimis amount of controlled U.S. content. The EAR could prohibit the export control laws of certain products out of the US or could prohibit our foreign sites from manufacturing or delivering photomasks to certain restricted entities. Additionally, the Company has a large, global business with sales outside the U.S. representing a majority of the Company’s total net sales, and the Company believes that it generally benefits from growth in international trade. However, trade policies and disputes and other international conflicts can result in tariffs, sanctions and other measures that restrict international trade, and can materially adversely affect the Company’s business, particularly if these measures occur in regions where the Company derives a significant portion of its revenues.
Based on the complex relationships between the United States and the export control laws of thecertain 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 requirementscountries including, but not limited to China, Russiathere is inherent risk that political, diplomatic and Venezuela; broadenednational security influences might lead to trade disputes, impacts and/or disruptions to our operations or our ability to sell our photomasks. The United States and other countries have imposed and may continue to impose trade restrictions and have also levied tariffs and taxes on certain goods and imposed export restrictions. Increases in tariffs, additional taxes or other trade restrictions and retaliatory measures may increasingly impact customer demand and customer investment in manufacturing equipment, increase our manufacturing costs, decrease margins, reduce 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 exportcompetitiveness of our products, or inhibit our ability to sell, export products or purchase necessary equipment services, and technology from the United States and abroad, increasing the time necessary to obtain required authorizations, and the possibilitysupplies, which could have a material adverse effect on our business, results of monetary fines and other penalties for non-compliance.operations, or financial condition.
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 cleanup 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 or 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,adversely impacted, 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 materially, adversely affected by terrorist acts, widespread outbreaks of infectious diseases (such as COVID-19), government responses such as shelter-in-place directivesemplaced to limit the impact of infectious diseases (such as shelter-in-place directives), or the outbreak or escalation of wars especially inincluding, but not limited to, the Asian markets in which we generate a significant portioninvasion of our sales and in Japan where we purchase raw materials and capital equipment.Ukraine by the Russian Federation. Such events in the geographic regions in which we do business, including escalations of political tensions and military conflicts withinin the Korean Peninsula, or betweenU.S., Europe, the Republic of South Korea, the People’s Republic of China, and the U.S. or the Republic of China (Taiwan), and any governmental sanctions enacted in reaction thereto, could result in a global energy crisis, economic inflation, supply-chain disruptions, or the confiscation or destruction of our facilities; all and any of these outcomes could have material, adverse impacts on our revenue, cost and availability of raw materials, results of operations, financial condition, and cash flows, and financial condition.flows.
Our production facilities could be damaged or disrupted by natural or manmade 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, flood, fire, 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-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.
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 portion of the communications between 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. Although we have technology and information security processes and disaster recovery plans in place 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 European Union (EU) on May 25, 2018, applies to the collection, use, retention, security, processing, and transfer of personally identifiable information of residents of EUE.U. 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 a manner that is adverse to, or unforeseen by us, including requirements that are inconsistent with our practices, or that we may otherwise fail to construe its requirements in ways that are satisfactory to the EUE.U. 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, but not limited to privacy, data protection, information security, or consumer protection related privacy laws and regulations, in one or more jurisdictions within the EU,E.U., the U.K. or elsewhere, could: result in proceedings or actions against us by governmental entities or individuals; subject us to significant fines, penalties, and/or judgments; require us to change our 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 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 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 2021,2022, we recorded a net gain from changes in foreign currency exchange rates of $8.0$27.3 million in our consolidated statement of income, while our net assets increaseddecreased by $8.5$151.2 million as a result of the translation of foreign currency financial statements to U.S. dollars. Significant foreign currency fluctuations may adversely affect our results of operations, financial condition, or cash flows.
Our hedging activity could negatively impact our results of operations and cash flows.
We may enter into derivatives to manage our exposures 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 exposures to interest rates and currency rates, elect to not apply hedge accounting (when doing so would have mitigated our losses), or fail to comply with the complex accounting requirements for hedging transactions, our results of operations and cash flows could be volatile, as well as negatively impacted.
The market price of our common stock is subject to volatility and could fluctuate widely in response to various factors, many of which are beyond our control.
Factors that may influence the price of our common stock include, but are not limited to, the following:
loss of any of our key customers or suppliers;
additions or departures of key personnel;
third party sales of common stock;
short interest in our common stock;
our ability to execute our business plan, including but not limited to, our expansion into China;
announcements and consummations of business acquisitions;
operating results that fall below or exceed expectations;
announcements of forecasted earnings or material transactions;
issuances or repurchases of our common stock;
intellectual property disputes;
reputational damage suffered with or without merit;
news about or disclosures made by our competitors or customers;
business combinations, divestitures, or bankruptcies by customers, suppliers, or competitors;
economic and other external factors including (but not limited to) inflation, recessions, natural disasters, military actions, political instability, or social unrest; and
period to period fluctuations in our financial results.
In addition, securities markets have from time-to-timetime-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Such fluctuations may be the result of imbalances between buy and sell offers, the actions of quantitative or algorithmic stock traders and short-sellers, or low trading volume which can magnify the effects of a small number of transactions on the price of a stock.
We operate in a global, competitive environment which gives rise to operating and market risk exposure.
We sell our products in a competitive, global environment, and compete worldwide for sales on the basis of product quality, price, technology, and customer service. Sales of our products are also subject to federal, state, local, and foreign taxes, laws and regulations, trade agreements, import and export controls, duties, and tariffs. The imposition of additional regulations or controls including export controls, duties, tariffs, or changes to bilateral and regional trade agreements, could negatively impact our results of operations.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
The following table presents certain information about the Company'sCompany’s photomask manufacturing facilities:
Location | | Type of Interest |
| |
|
Allen, Texas | | Owned |
Boise, Idaho | | Owned |
Brookfield, Connecticut | | Owned |
Bridgend, Wales | | Leased |
Cheonan, Korea | | Owned |
Hefei, China | | Owned (1) |
Dresden, Germany | | Leased |
Hsinchu, Taiwan | | Owned (1) |
Hsinchu, Taiwan | | Leased |
Taichung, Taiwan | | Owned (1) |
Xiamen, China | | Owned (1) |
(1) We own our manufacturing facilities in Hefei, Taichung, Xiamen, and one of our manufacturing facilities in Hsinchu. However, we lease the related land at these sites. We believe our facilities, with planned expansions, are adequate to support our current and near-term requirements.
Please refer to Note 1413 to our consolidated financial statements in Part II, Item 8 of this report for information on legal proceedings involving the 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 |
Our common stock is traded on the NASDAQ Global Select Market ("NASDAQ"(“NASDAQ”) under the symbol PLAB. On December 9, 2021,15, 2022, the closing sale price of our common stock, per the NASDAQ Global Select Market, was $17.61.$17.35. Based on available information, we have 253238 registered shareholders.
To date, we have not paid any cash dividends on Photronics shares, and, for the foreseeable future, we anticipate that earnings will continue to be retained for use in our business. Further, our credit agreement limits the amount that can be paid as cash 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 programthis authorization commenced on September 16, 2020.
$2.5 million (an average of $13.43 per share) and, since the program’s inception, we repurchased 5.8 million shares at a cost of $68.3 million (an average of $11.70 per share). All of the shares purchasedrepurchased 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. have been retired.
The table below presents additional information on shares repurchasedshare repurchase activity during the fourth quarter of 2021.2022 as part of the repurchase program described above as well as shares repurchased in connection with the payment of withholding taxes related to the vesting of restricted stock awards.
| | | 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 | | | | | |
| | | Total Number of Shares Purchased | | | Average Price Paid Per share | | | Total Number of Shares Purchased as Part of
Publicly Announced Program | | | Dollar Value of Shares That May Yet Be Purchased (in millions) | |
| | | | | | | | | | | | | |
| August 1, 2022 – August 28, 2022 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 31.7 |
|
| August 29, 2022 – September 25, 2022 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 31.7 | |
| September 26, 2022 – October 31, 2022 | | | 508 | | | $ | 16.16 | | | | 0 | | | $ | 31.7 | |
| Total | | | 508 | | | | | | | | 0 | | | | | |
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. 20222023 Definitive Proxy Statement in Item 12 of Part III of this report. The 20222023 Definitive Proxy Statement will be filed within 120 days after our fiscal year ended October 31, 2021.2022.
| ITEM 7. | MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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-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 applications, particularly as they relate to the semiconductor industry'sindustry’s migration to more advanced product innovation, design methodologies, and fabrication processes. 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 display sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customizedapplication-specific ICs, reductions in design complexity,complexities, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or display designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, display, and photomask design and production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronicmicroelectronics industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These negative trends have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling 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 twenty-four 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. However, the demand for some IC photomasks has recently expanded beyond the industry’s capacity to supply them within the traditional time period; thus, for some products, our backlog can expand to as long as two to three months.
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.
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 both the high-end photomask and trailing-edge markets. As we face challenges that require us to make significant improvements in our competitiveness, we continue to evaluate further cost reduction initiatives.
State-of-the-art production for semiconductor masks is considered to be 28 nanometer and smaller for ICs and Generation 10.5+ and 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 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 advanced-generation designs to continue to move to production throughout fiscal 2022,2023, 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 display 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 high-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-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 2021,2022, 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, 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-technology photomasks that require more advanced manufacturing capabilities, but generally command higher ASPs. Our capital expenditure payments were $112.3 million, $109.1 million and $70.8 million in 2022, 2021 and $178.3 million in 2021, 2020, and 2019, respectively, and the depreciation on these purchasesinvestments has significantly contributed to our cost of goods sold. WeNonetheless, we intend to continue to make the required investments to support the technological demands of our customers that we believe will position the Companyus for future growth. In support of this effort, we expect capital expenditure payments to be approximately $100$130 million in fiscal year 2022.2023.
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 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 of6 to our consolidated financial statements in 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 2020, we entered 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 iswas subject to annual reviews and extension, withextension; the most recent extension allowing us to borrow additional funds set to expirewas expired 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.borrow; we repaid the entire outstanding balance in 2022, and did not apply to extend the agreement. The interest rate on the loan iswas variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings arewere secured by the Hefei facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan iswas 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.the time of our repayment.
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, 2021,2022, we had repurchased 5.65.8 million shares at a cost of $65.7$68.3 million (an average price of $11.64$11.70 per share) under this authorization. All shares repurchased under the program have been retired. On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in 2020 were retired in 2020, and allthe U.S. Among other provisions, the IRA included a one percent excise tax on corporate share repurchases. The one percent excise tax on share repurchases applies to shares repurchased in 2021 were retired in 2021.after December 31, 2022, and excludes repurchases under $1 million. We do not anticipate that the IRA will have a material effect on our financial performance.
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 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 federally chartered trust company, as rights agent. The purpose of the Rights Agreement is to deter trading of our common stock that would result in a change in control (as defined in Internal Revenue Control Section 382), thereby preserving our future ability to use our historical federal net operating losses and other Tax Attributes (as defined in the Rights Agreement). 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 had been approved for financing of $35 million for the purchase of a high-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 2021, this financing entity made an additional payment of $28 million to the equipment vendor on our behalf and we subsequently entered into the $35.5 million finance lease described above.
In the fourth quarter of 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act 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 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), and interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit and duration. The Project Loans are subject to covenants and provisions, certain of which relate to the assets pledged as security for the loans, all of which we were in compliance with at October 31, 2021.
In the first quarter of 2019, PDMCX obtained approval for revolving, unsecured credit of the equivalent of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements with varying terms to maturity. This facility is subject to annual reviews and extension. Unless extended, this facility will expire in October 2022. As of October 31, 2021, PDMCX had 78.0 million RMB ($12.2 million) outstanding against the approval. The interest rates are variable, based on the RMB Loan Prime Rate of the National Interbank Funding Center. Interest incurred on the loans are eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit and duration.
Results of Operations
The following tables present selected operating information expressed as a percentage of revenue. The columns may not foot due to rounding.
| | | Three Months Ended | | | Three Months Ended | |
| | | October 31, 2021 | | | August 1, 2021 | | | October 31, 2020 | | | October 31, 2022 | | | July 31, 2022 | | | October 31, 2021 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | | | 71.3 | | | | 73.4 | | | | 78.6 | | | | 61.8 | | | | 61.9 | | | | 71.3 | |
| | | | | | | | | | | | | | | | | | | |
| Gross profit | | 28.7 | | | 26.6 | | | 21.4 | | | 38.2 | | | 38.1 | | | 28.7 | |
| Selling, general and administrative expenses | | 7.9 | | | 8.8 | | | 8.6 | | | 7.5 | | | 7.3 | | | 7.9 | |
| Research and development expenses | | 2.3 | | | 3.1 | | | 2.8 | | | | 1.9 | | | | 1.9 | | | | 2.3 | |
| Other operating income, net | | | - | | | | 2.1 | | | | - | | |
| | | | | | | | | | | | | | | | | | | |
| Operating income | | 18.5 | | | 16.7 | | | 10.0 | | | 28.8 | | | 29.0 | | | 18.5 | |
| Non-operating income (expense), net | | | 2.1 | | | | 2.2 | | | | (1.9 | ) | | | 5.1 | | | | 1.7 | | | | 2.1 | |
| | | | | | | | | | | | | | | | | | | |
| Income before income tax provision | | 20.6 | | | 18.9 | | | 8.1 | | | 33.9 | | | 30.6 | | | 20.6 | |
| Income tax provision | | | 4.8 | | | | 4.6 | | | | 2.3 | | | | 7.6 | | | | 8.3 | | | | 4.8 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | 15.8 | | | 14.3 | | | 5.8 | | | 26.3 | | | 22.4 | | | 15.8 | |
| Net income attributable to noncontrolling interests | | | 4.9 | | | | 4.3 | | | | 1.5 | | | | 8.7 | | | | 8.2 | | | | 4.9 | |
| | | | | | | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | | 10.9 | % | | | 10.0 | % | | | 4.3 | % | | | 17.6 | % | | | 14.2 | % | | | 10.9 | % |
| | | Year Ended | | | Year Ended | |
| | | October 31, 2021 | | | October 31, 2020 | | | October 31, 2019 | | | October 31, 2022 | | | October 31, 2021 | | | October 31, 2020 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | | | 74.8 | | | | 77.9 | | | | 78.1 | | | | 64.3 | | | | 74.8 | | | | 77.9 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 25.2 | | | | 22.1 | | | | 21.9 | | | 35.7 | | | 25.2 | | | 22.1 | |
| Selling, general and administrative expenses | | | 8.7 | | | | 8.8 | | | | 9.5 | | | 7.8 | | | 8.7 | | | 8.8 | |
| Research and development expenses | | | 2.8 | | | | 2.8 | | | | 2.9 | | | 2.2 | | | 2.8 | | | 2.8 | |
| Other operating income, net | | | 0.5 | | | | - | | | | - | | | | 0.0 | | | | 0.5 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 14.2 | | | | 10.5 | | | | 9.5 | | | 25.7 | | | 14.2 | | | 10.5 | |
| Non-operating income (expense), net | | | 1.1 | | | | (0.4 | ) | | | (0.3 | ) | | | 3.3 | | | | 1.1 | | | | (0.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Income before income tax provision | | | 15.4 | | | | 10.1 | | | | 9.2 | | | 29.0 | | | 15.4 | | | 10.1 | |
| Income tax provision | | | 3.5 | | | | 3.5 | | | | 1.9 | | | | 7.3 | | | | 3.5 | | | | 3.5 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 11.9 | | | | 6.6 | | | | 7.3 | | | 21.7 | | | 11.9 | | | 6.6 | |
| Net income attributable to noncontrolling interests | | | 3.5 | | | | 1.1 | | | | 1.9 | | | | 7.3 | | | | 3.5 | | | | 1.1 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to Photronics, Inc. shareholders | | | 8.4 | % | | | 5.5 | % | | | 5.4 | % | | | 14.4 | % | | | 8.4 | % | | | 5.5 | % |
Note: All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 20212022 (Q4 FY21)FY22), August 1, 2021July 31, 2022 (Q3 FY21)FY22) and October 31, 20202021 (Q4 FY20)FY21), and for the fiscal years ended October 31, 2021 (FY21)2022 (FY22) and October 31, 2020 (FY20)2021 (FY21). Please refer to the MD&A inPart II, Item 7 of our 2020 Annual Report on2021 Form 10-K for comparative discussion of our fiscal years ended October 31, 2020,2021, and October 31, 2019. Table columns2020. The tables in this item may not foot due to rounding.
Revenue
Our quarterly revenues can be affected by the seasonal purchasing practices of our customers. As a result, demand for our products is typically reduced during the first quarter 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.
At the beginning of 2020, we changed the threshold for the definition of high-end FPD, from G8 and above and AMOLED display screens, to G10.5+, AMOLED, and LTPS display screens, to reflect the overall advancement of technology in the FPD industry. Our definition of high-end IC products remained as 28 nanometer or smaller. High-end photomasks typically have higher ASPs than mainstream products.
The following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY21FY22 and FY21FY22 from revenue in prior reporting periods.
Quarterly Changes in Revenue by Product Type
| | | Q4 FY21 from Q3 FY21 | | | Q4 FY21 from Q4 FY20 | | |
| | | Revenue in Q4 FY21 | | Increase (Decrease) | | Percent Change | | Increase (Decrease) | | Percent Change | | | Q4 FY22 compared to Q3 FY22 | | | Q4 FY22 compared to Q4 FY21 | |
| | | | | | | | | | | | | | | | | | Revenue in Q4 FY22 | | | Increase (Decrease) | | | Percent Change | | | Increase (Decrease) | | | Percent Change | |
| IC | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| High-end* | | $ | 42.6 | | | $ | 0.2 | | | | 0.5 | % | | $ | 4.4 | | | | 11.6 | % | | $ | 44.3 | | | $ | (8.3 | ) | | | (15.8 | )% | | $ | 1.8 | | | | 4.1 | % |
| Mainstream | | | 82.9 | | | | 7.4 | | | | 9.9 | % | | | 15.1 | | | | 22.3 | % | | | 111.9 | | | | 3.3 | | | | 3.0 | % | | | 29.0 | | | | 35.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total IC | | $ | 125.4 | | | $ | 7.7 | | | | 6.5 | % | | $ | 19.5 | | | | 18.4 | % | | $ | 156.2 | | | $ | (5.0 | ) | | | (3.1 | )% | | $ | 30.8 | | | | 24.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FPD | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| High-end* | | $ | 41.0 | | | $ | 0.3 | | | | 0.8 | % | | $ | 9.7 | | | | 30.9 | % | | $ | 43.4 | | | $ | (7.3 | ) | | | (14.4 | )% | | $ | 2.4 | | | | 5.9 | % |
| Mainstream | | | 14.9 | | | | 2.6 | | | | 21.5 | % | | | 2.8 | | | | 23.2 | % | | | 10.6 | | | | 2.6 | | | | 33.0 | % | | | (4.2 | ) | | | (28.3 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total FPD | | $ | 55.8 | | | $ | 3.0 | | | | 5.6 | % | | $ | 12.5 | | | | 28.8 | % | | $ | 54.1 | | | $ | (4.6 | ) | | | (7.9 | )% | | $ | (1.8 | ) | | | (3.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 181.3 | | | $ | 10.6 | | | | 6.2 | % | | $ | 32.0 | | | | 21.4 | % | | $ | 210.3 | | | $ | (9.7 | ) | | | (4.4 | )% | | $ | 29.0 | | | | 16.0 | % |
* High-end photomasks typically have higher ASPs than mainstream products.
Quarterly Changes in Revenue by Geographic Origin**
| | | Q4 FY21 from Q3 FY21 | | Q4 FY21 from Q4 FY20 | | |
| | | | | | | | | Q4 FY22 compared to Q3 FY22 | | | Q4 FY22 compared to Q4 FY21 | |
| | | Revenue in Q4 FY21 | | Increase (Decrease) | | Percent Change | | Increase (Decrease) | | Percent Change | | | Revenue in Q4 FY22 | | | Increase (Decrease) | | | Percent Change | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taiwan | | $ | 69.2 | | | $ | 5.3 | | | | 8.3 | % | | $ | 12.5 | | | | 22.1 | % | | $ | 76.3 | | | $ | (1.1 | ) | | | (1.4 | )% | | $ | 7.1 | | | | 10.3 | % |
| China | | | | 52.4 | | | | (8.1 | ) | | | (13.4 | )% | | | 14.1 | | | | 36.7 | % |
| Korea | | | 37.8 | | | | (1.8 | ) | | | (4.5 | )% | | | 1.2 | | | | 3.4 | % | | | 38.0 | | | | 0.1 | | | | 0.2 | % | | | 0.2 | | | | 0.4 | % |
| China | | | 38.3 | | | | 5.7 | | | | 17.4 | % | | | 17.3 | | | | 82.6 | % | |
| United States | | | 26.6 | | | | 1.9 | | | | 7.6 | % | | | (0.1 | ) | | | (0.4 | )% | | | 34.0 | | | | (0.7 | ) | | | (1.9 | )% | | | 7.4 | | | | 28.0 | % |
| Europe | | | 9.0 | | | | (0.5 | ) | | | (4.9 | )% | | | 1.0 | | | | 13.0 | % | | | 9.0 | | | | 0.1 | | | | 1.3 | % | | | 0.1 | | | | 0.9 | % |
| Other | | | 0.4 | | | | 0.0 | | | | 5.4 | % | | | 0.0 | | | | (4.6 | )% | | | 0.5 | | | | 0.0 | | | | 2.3 | % | | | 0.1 | | | | 21.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 181.3 | | | $ | 10.6 | | | | 6.2 | % | | $ | 32.0 | | | | 21.4 | % | | $ | 210.3 | | | $ | (9.7 | ) | | | (4.4 | )% | | $ | 29.0 | | | | 16.0 | % |
** This table disaggregates revenue by the location in which it was earned.
Revenue in Q4 FY21FY22 of $181.3$210.3 million increased 6.2%represented a decrease of 4.4% compared with Q3 FY21 and 21.4% from Q4 FY20; on a year-to-date basis, revenue increased 8.9% in FY21, compared with FY20, to $663.8 million.
A 6.5% increase in IC revenue in Q4 FY21, compared with Q3 FY21, was primarily the result of strong demand for mainstream masks, particularly at the most advanced levels. Industry-wide capacity constraints led to improved pricing for both high-end and mainstream products that resulted in IC revenue increasing 18.4% in Q4 FY21, compared with Q4 FY20. Increased demand from logic customers and Asia-based foundries were the sources of the increase, while demand for memory masks remained stable.
FPD revenue increased 5.6% in Q4 FY21, compared with Q3 FY21, and 28.8% in Q4 FY21, compared with Q4 FY20. The increase from Q3 FY21 was primarily the result of increased demand attributable to new design releases of mainstream photomasks for liquid crystal displays (“LCD”), as panel manufacturers began to shift to introducing new designs to maintain or increase market share. This trend,FY22, and an increase of 16.0% from Q4 FY21.
Overall IC revenue decreased 3.1% from Q3 FY22 due to lower high-end foundry and logic demand in demand for AMOLED photomasks for displays used in mobile applications, were the primary drivers of the increaseAsia, but increased 24.5% from the prior year quarter. IC mainstream growth continued in Q4 FY22, increasing 3.0% from Q3 FY22, and 35.0% from Q4 FY21, due to continued growth in demand and favorable pricing on photomasks used to produce semiconductors required to make or support consumer products, the “internet-of-things”, 5G wireless technology, and cryptocurrency mining.
FPD revenue decreased 7.9% and 3.2% in Q4 FY22, compared, respectively, with Q3 FY22 and Q4 FY21. The decreases were caused by weakened demand from Q322 for high-end large-area masks used for mobile displays and G10.5+ masks used for ultra-large screen televisions. Revenue from mainstream products increased 33.0% from Q3 FY22, as capacity became available from the decreased demand for high-end products.
Year-over-Year Changes in Revenue by Product Type
| | | FY21 from FY20 | | | FY22 compared to FY21 | |
| | | Revenue in FY21 | | | Increase (Decrease) | | | Percent Change | | | Revenue in FY22 | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | | | | |
| IC | | | | | | | | | | | | | | | | | | |
| High-end* | | $ | 163.0 | | | $ | 6.8 | | | | 4.4 | % | | $ | 195.3 | | | $ | 32.4 | | | | 19.9 | % |
| Mainstream | | | 297.2 | | | | 34.9 | | | | 13.3 | % | | | 397.7 | | | | 100.5 | | | | 33.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total IC | | $ | 460.2 | | | $ | 41.8 | | | | 10.0 | % | | $ | 593.0 | | | $ | 132.9 | | | | 28.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| FPD | | | | | | | | | | | | | | | | | | | | | | | | |
| High-end* | | $ | 155.7 | | | $ | 16.1 | | | | 11.5 | % | | $ | 187.0 | | | $ | 31.3 | | | | 20.1 | % |
| Mainstream | | | 47.9 | | | | (3.8 | ) | | | (7.4 | )% | | | 44.5 | | | | (3.4 | ) | | | (7.1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total FPD | | $ | 203.6 | | | $ | 12.3 | | | | 6.4 | % | | $ | 231.5 | | | $ | 27.9 | | | | 13.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 663.8 | | | $ | 54.1 | | | | 8.9 | % | | $ | 824.5 | | | $ | 160.8 | | | | 24.2 | % |
* High-end photomasks typically have higher ASPs than mainstream photomasks.
Year-over-Year Changes in Revenue by Geographic Origin**
| | | FY21 from FY20 | | |
| | | | | | FY22 compared to FY21 | |
| | | Revenue in FY21 | | Increase (Decrease) | | Percent Change | | | Revenue in FY22 | | | Increase (Decrease) | | | Percent Change | |
| | | | | | | | | | | | | | | | | | | |
| Taiwan | | $ | 248.6 | | | $ | 9.5 | | | | 4.0 | % | | $ | 291.3 | | | $ | 42.7 | | | 17.2 | % |
| China | | | 212.6 | | | 96.9 | | | 83.7 | % |
| Korea | | | 156.4 | | | | 3.3 | | | | 2.2 | % | | 156.1 | | | (0.3 | ) | | (0.2 | )% |
| China | | | 115.7 | | | | 36.4 | | | | 45.8 | % | |
| United States | | | 105.0 | | | | 0.1 | | | | 0.1 | % | | 126.2 | | | 21.2 | | | 20.2 | % |
| Europe | | | 36.2 | | | | 4.7 | | | | 15.0 | % | | 36.4 | | | 0.2 | | | 0.4 | % |
| Other | | | 1.8 | | | | 0.1 | | | | 3.6 | % | | | 1.9 | | | | 0.1 | | | 4.9 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 663.8 | | | $ | 54.1 | | | | 8.9 | % | | $ | 824.5 | | | $ | 160.8 | | | 24.2 | % |
** This table disaggregates revenue by the location in which it was earned.
Revenue increased 8.9%in YTD FY22 of $824.5 million surpassed our prior record revenue set in YTD FY21 compared with YTD FY20, to $663.8 million.by $160.8 million, or 24.2%. IC revenue increased 10.0%by 28.9%, due to strong demand for both improved pricing forhigh-end and mainstream photomasks and improved pricing for mainstream products and products at the most advanced node levels. FPD revenue increased by 13.7%, driven by a 20.1% increase in revenue from high-end products, which was driven by increased demand and better pricing for AMOLED products used in mobile displays and increased demand for high-endG10.5+ large area masks at the largest node levels. We believe that the increased demandused for high-end photomasks at the largest node levels may be indicative of a trend towards chipmakers differentiating their products through the design of application specific integrated circuits (“ASIC”), in lieu of migrating to smaller tech-node photomasks. FPD revenue increased 6.4% from YTD FY20, due to both increased demand and improved pricing for AMOLED photomasks and, to a lesser extent, LTPS photomasks.ultra-large televisions.
Gross Margin
| | | | | | | | | | | | | Percent Change | |
| | | | | | | |
| Percent Change | | | Q4 FY22 | | | Q3 FY22 | | | Q4 FY21 | | | Q4 FY22 from Q3 FY22 | | | Q4 FY22 from Q4 FY21 | |
| |
|
Q4 FY21 | |
|
Q3 FY21 | |
|
Q4 FY20 | |
| Q4 FY21 from Q3 FY21 | |
| Q4 FY21 from Q4 FY20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | $ | 51.9 | | | $ | 45.3 | | | $ | 31.9 | | | | 14.6 | % | | | 62.9 | % | | $ | 80.3 | | | $ | 83.9 | | | $ | 51.9 | | | (4.3 | )% | | 54.5 | % |
| Gross margin | | | 28.7 | % | | | 26.6 | % | | | 21.4 | % | | | | | | | | | | 38.2 | % | | 38.1 | % | | 28.7 | % | | | | | | |
Gross margin was 38.2% for Q4 FY22, representing a slight increase from the Q3 FY22 gross margin of 38.1%, as decreased revenue of 4.4% was offset by decreased material costs which fell 7.7%, or 80 basis points as a percentage of revenue. Labor costs increased 5.2%, or 100 basis points as a percentage of revenue, due to increased costs in some locations. Equipment and other overhead costs decreased 5.3%, or 30 basis points as a percentage of revenue, with lower outsourced manufacturing costs, partially offset by increased equipment maintenance costs, most significantly contributing to the net cost decrease.
Gross margin increased by 2.19.5 percentage points in Q4 FY21,FY22, from Q3Q4 FY21, primarily as a result of the increase in revenue from the prior quarter. Materialyear quarter, together with 1.6% decrease in material costs increased 3.4% from the prior year quarter. Labor costs increased 21.8% from the prior year quarter, but decreased,or 50 basis points as a percentage of revenue, primarily due to increased costs in some locations. Equipment and other overhead costs decreased 4.9%, or 580 basis points, as a percentage of revenue. Decreased depreciation expense and outsourced manufacturing costs, which were partially offset by 80increased equipment maintenance costs, were the primary contributors to the overall decrease.
| | | FY22 | | | FY21 | | | Percent Change FY22 from FY21 | |
| | | | | | | | | | |
| Gross profit | | $ | 294.2 | | | $ | 167.0 | | | | 76.1 | % |
| Gross margin | | | 35.7 | % | | | 25.2 | % | | | | |
Gross margin increased by 10.5 percentage points in FY22, from FY21, primarily as a result of the increase in revenue from the prior year period, offset somewhat by the following net cost increases: Material costs increased 7.9% from the prior year period, but decreased 380 basis points.points as a percentage of revenue. Labor costs decreased 0.3% and fell 70increased 15.6% from the prior year, or 100 basis points as a percentage of revenue. Equipment and other overhead costs increased 4.3%by 2.7%, but decreased 60 basis points as a percentage of revenue, with higher outsourced manufacturing costs, partially offset by decreased equipment maintenance costs, most significantly contributing to the net cost increase.
Gross margin increased by 7.3 percentage points in Q4 FY21, from Q4 FY20, primarily as a result of the increase in revenue from the prior year quarter. Material costs increased 14.7% from the prior year quarter, but decreased 160 basis points, as a percentage of revenue. Labor costs increased 10.9% from the prior year quarter, but fell 100 basis points as a percent of revenue, while equipment and other overhead costs rose 6.3%, but fell 460 basis points, as a percentage of revenue. Increased outsourced manufacturing costs and equipment service contract costs were the most significant contributors to the rise in equipment and other overhead costs.
| | | FY21 | | | FY20 | | | Percent Change FY21 from FY20 | |
| | | | | | | | | | | | | |
| Gross profit | | $ | 167.0 | | | $ | 134.7 | | | | 24.1 | % |
| Gross margin | | | 25.2 | % | | | 22.1 | % | | | | |
Gross margin increased by 3.1 percentage points in YTD FY21, from YTD FY20, primarily as a result of the increase in revenue from the prior year period. Material costs increased 6.2% from the prior year period, but decreased 70 basis points as a percentage of revenue. Labor costs increased 10.7% from the prior year, but rose only 10 basis points when compared to revenue. Equipment and other overhead costs increased by 1.2%, but decreased 250580 basis points as a percentage of revenue, with increased equipment service contractoutsourced manufacturing costs, which were partially offset by decreased depreciation expense, most significantly contributing to the overall cost increase.
As we operate in a high fixed cost environment, increases or decreases in our revenues and capacity utilization will generally positively or negatively impact our gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $15.7 million in Q4 FY22, compared with $16.0 million in Q3 FY22, and $14.3 million in Q4 FY21 compared with $15.1 million in Q3 FY21, and $12.8 million in Q4 FY20. . The decrease from Q3 FY21FY22 was primarily the result of decreased professional fees of $0.3 million and compensation and related expenses of $0.2$0.5 million, and the increase from the prior year quarter was primarily the result of increased compensation and related expensesprofessional fees of $1.7$0.7 million and increased export duties (primarily incurred in Asia)travel expenses of $0.2 million; these increases were partially offset by decreased professional fees of $0.9$0.3 million. Selling, general and administrative expenses increased $3.9$6.5 million or 7.4%,to $64.0 million in YTDFY22, from $57.5 million in FY21, from YTD FY20, primarily due to an increase in compensation and related expenses, professional fees, and travel expenses in the respective amounts of $3.9$4.6 million, $0.7 million, and $0.6 million.
Research and Development Expenses
Research and development expenses, which primarily consist of development and qualification efforts related to high-end process technologies for high-end IC and FPD applications, were $4.1decreased $0.1 million to $4.0 million in Q4 FY21, compared with $5.3 million inFY22, from Q3 FY21;FY22; the decrease was primarily caused by a decline in development activities in the U.S., which were partially offset by increased activities in Asia. Research and development expenses in Q4 FY21 were unchangedFY22 decreased by $0.1 million in Q4 FY22 from Q4 FY20.FY21 as a result of decreased development activities in Asia moderately exceeding increased development activities in the U.S. On a year-to-date basis, research and development expenses increased $1.3decreased $0.1 million, to $18.3 million, primarily due to increaseddecreased development activities in Asia exceeding increased activities in the U.S. exceeding a decline in such activities at our China-based FPD facility.
Other Operating Income, Net
In the third quarter of 2021, we recorded a $3.5 million gain on the trade-in of a lithography tool with a tool vendor as partial compensation for a more advanced tool.
Non-Operating Income (Expense)
| |
| Q4 FY21 | |
| Q3 FY21 | |
| Q4 FY20 | | | Q4 FY22 | | | Q3 FY22 | | | Q4 FY21 | |
| | | | | | | | | | | | | | | | |
| Foreign currency transactions impact, net | | $ | 4.3 | | | $ | 4.3 | | | $ | (2.2 | ) | | $ | 10.4 | | | $ | 3.9 | | | $ | 4.3 | |
| Interest expense, net | | | (1.0 | ) | | | (1.1 | ) | | | (0.8 | ) | | | (0.4 | ) | | | (0.6 | ) | | | (1.0 | ) |
| Interest income and other income, net | | | 0.5 | | | | 0.5 | | | | 0.1 | | | | 0.8 | | | | 0.4 | | | | 0.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total other income (expense) | | $ | 3.8 | | | $ | 3.7 | | | $ | (2.9 | ) | | $ | 10.8 | | | $ | 3.6 | | | $ | 3.8 | |
Non-operating income and expense was essentially unchanged(expense) increased in Q4 FY21FY22 from Q3 FY22 by $7.2 million, and from Q4 FY21 by $7.0 million, primarily due to foreign currency impacts, driven by favorable movements of the RMBSouth Korean won, the New Taiwan dollar, and the Singapore dollar against the U.S. dollar offsetting unfavorable movements of the South Korean wonRMB against the U.S. dollar,dollar. In addition, higher average cash, cash equivalents, and short-term investments balances in Q4 FY22 resulted in increased interest income compared to both prior comparative periods, and lower average interest-bearing debt balances resulted in lower interest expense, net decreasing due to our reduced loan and finance lease balances. of subsidies received in Q4 FY22, than was incurred in the prior comparative periods.
| | | FY22 | | | FY21 | |
| | | | | | | |
| Foreign currency transactions impact, net | | $ | 27.3 | | | $ | 8.0 | |
| Interest expense, net | | | (1.9 | ) | | | (1.7 | ) |
| Interest income and other income, net | | | 1.7 | | | | 1.2 | |
| | | | | | | | | |
| Total other income (expense) | | $ | 27.2 | | | $ | 7.5 | |
Non-operating income and expense changed favorably from a loss of $2.9(expense) increased $19.7 million in Q4 FY20 to income of $3.8 million in Q4 FY21. The $6.7 million favorable change wasfull year FY22, compared with full year FY21, primarily due to foreign currency transactions, driven by favorable movements of the South Korean won, the New Taiwan dollar, and the South Korean won against the U.S.Singapore dollar which were partially offset byoffsetting unfavorable movements of the RMB against the U.S. dollar.
| | | FY21 | | | FY20 | |
| | | | | | | |
Foreign currency transactions impact, net | | $ | 8.0 | | | $ | (0.5 | ) |
Interest expense, net | | | (1.7 | ) | | | (2.4 | ) |
Interest income and other income, net | | | 1.2 | | | | 0.5 | |
| | | | | | | | | |
Total other income (expense) | | $ | 7.5 | | | $ | (2.3 | ) |
Non-operating income In addition, higher average cash, cash equivalents, and expense increased $9.8 millionshort-term investments balances in YTD FY21,FY22, compared with YTD FY20, primarily due to favorable movements ofFY21, resulted in increased interest income in the South Korean won and the RMB against the U.S. dollar.current year. Interest expense, net decreased year over year,of subsidies increased in FY22, compared with FY21, due to receiving a lower weighted-averageamount of interest ratesubsidies on our China-based debt in FY22, the effect of which offset a year over year increasewas partially mitigated by lower average interest-bearing debt balance in our average debt balance.FY22 than in the prior year.
Income Tax Provision
| |
| Q4 FY21 | |
| Q3 FY21 | |
| Q4 FY20 | | | Q4 FY22 | | | Q3 FY22 | | | Q4 FY21 | |
| | | | | | | | | | | | | | | | |
Income tax provision | | $ | 8.7 | | | $ | 7.8 | | | $ | 3.5 | | | $ | 16.1 | | | $ | 18.1 | | | $ | 8.7 | |
Effective income tax rate | | | 23.3 | % | | | 24.4 | % | | | 28.8 | % | | 22.5 | % | | 26.9 | % | | 23.3 | % |
The effective income tax rates are sensitive to the jurisdictional mix of our earnings, due, in part, to the non-recognition of tax provisions and benefits on losses in jurisdictions with valuation allowances.allowances where the tax benefits of losses are not available.
The effective income tax rate decreased slightly in Q4 FY21,FY22, compared with Q3 FY21,FY22, primarily due to changes in the period-to-period mix of jurisdictional earnings. The effective income tax rate decrease in Q4 FY21,FY22, compared with Q4 FY20,FY21, is primarily due to the benefits of investment credits in certain non-U.S. jurisdictions in Q4 FY21,FY22, as well as changes in the jurisdictional mix of earnings.
| |
| FY21 | |
| FY20 | |
| | | | | |
| Income tax provision | | $ | 23.2 | | | $ | 21.3 | |
| Effective income tax rate | | | 22.7 | % | | | 34.5 | % |
| | | FY22 | | | FY21 | |
| | | | | | | |
Income tax provision | | $ | 59.8 | | | $ | 23.2 | |
Effective income tax rate | | | 25.0 | % | | | 22.7 | % |
The decreaseincrease in the effective income tax rate on a full-year basis in FY21,FY22, compared with FY20,FY21, is primarily due to an increase of unremitted earnings tax and a decrease in credits in non-U.S. jurisdictions and the establishmentrelease of a valuation allowance for a loss carryforward in a non-U.S. jurisdiction in YTD-FY20, as well as changes in the jurisdictional mix of earnings.FY21.
We consider all available evidence when evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance. We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded accruals for such contingencies. Included in the balance of unrecognized tax benefits as of October 31, 20212022 and October 31, 2020,2021, are $3.8$5.6 million and $2.0$3.8 million respectively, recorded in Other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rates.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $8.8$18.2 million in Q4 FY21,FY22, compared with $7.3$18.0 million in Q3 FY21, and $2.1 millionFY22; the increase was the result of a net increase in Q4 FY20. On a year-to-date basis,the net incomes of our joint venture operations. Net income attributable to noncontrolling interests increased $16.8 million from $6.5by $9.4 million in YTD FY20 to $23.4Q4 FY22 from Q4 FY21, and by $37.1 million in YTD FY21. AllFY22 from FY21, as a result of these increases resulted from improvedincreased net income at both our Taiwan-based and China-based IC facilities.
Liquidity and Capital Resources
Cash and cash equivalents totaled $276.7was $319.7 million and $278.7$276.7 million as of October 31, 20212022, and October 31, 2020,2021, respectively. As of the most recent balance sheet date, total cash and cash equivalents included $216.5$299.7 million held by foreign subsidiaries. Net Cash, a non-GAAP financial measure as defined and discussed in the Non-GAAP Financial Measures section below, was $316.2 million and $165.0 million as of October 31, 2022, and October 31, 2021, respectively. Our primary sources of liquidity are our cash on hand, cash we generate from operations, short-term investments, and borrowing capacity we have available from financial institutions. Our corporate credit agreement has a $50 million borrowing limit, with an expansion capacity to $100 million. Although we have not accessed funds under our corporate credit facilityfacilities since 2011, it continues to afford us financial flexibility. In addition, in China, we currently have approximately $22.9$21.5 million of borrowing capacity to support local operations. Please referSee Note 6 to Note 7 to theour condensed consolidated financial statements in Part II, Item 8 for additional information on our current borrowing capacity.currently available financing.
We continually evaluate alternatives for efficiently funding our capital expenditures and ongoing operations. These reviews may result in our engagement in a variety of investing and financing transactions, in the transfer of cash among subsidiaries, and/or the repatriation of cash to the U.S. The transfer of funds among subsidiaries could be subject to foreign withholding taxes; in certain jurisdictions, repatriation of these funds to the U.S. may subject them to U.S. state income taxes and/or local country withholding taxes. We believe that our liquidity, including available financing, is sufficient to meet our requirements through the next twelve months and thereafter for the foreseeable future. Through the utilization of our existing liquidity, cash we generate from operations, short-term investments, and (potentially) our borrowing capacity under our financing arrangements, we plan to continue to invest in our business, with our investments targeted to align with our customers’ technology road maps. In addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should the righta suitable opportunity be available.arise.
We estimate capital expenditures for our fiscal year 20222023 will be approximately $100$130 million; these investments will be targeted towards high-end and mainstream point tools that will increase our operating capacity and efficiency, and enable us to support our customers’ near-term demands. As of October 31, 2021,2022, we had outstanding capital commitments of approximately $73.7$147.8 million and recognized liabilities related to capital equipment purchases of approximately $9.7$5.3 million. Although payment timing could vary, primarily as a result of the timing of tool delivery, installation and testing, we currently estimate that we will fund $61.4$90.0 million of our total $83.4$153.1 million committed and recognized obligations for capital expenditures over the next twelve months. Please refer to Notes 98 and 1413 to our consolidated financial statements in Part II, Item 8 for additional information on our lease liabilities and unrecognized commitments, respectively., respectively.
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. This authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock. As of October 31, 2021,2022, there was approximately $34.3$31.7 million remaining under that authorization. Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in the U.S. Among other provisions, the IRA included a one percent excise tax on corporate share repurchases. The one percent excise tax on share repurchases applies to shares repurchased after December 31, 2022, and excludes repurchases under $1 million. We do not anticipate that the IRA will have a material effect on our liquidity.
As discussed in Note 4 of our consolidated financial statements in Part II, Item 8, DNP, the noncontrolling interest in our China-based joint venture has, under certain circumstances, the right to put its interest in the joint venture to Photronics, or to purchase our interest in the joint venture. Under all such circumstances, the sale of DNP’s interest would be at its 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. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. As of October 31, 2022, Photronics and DNP each had net investments in this joint venture of approximately $93.3 million.
| |
| Year Ended | | | Year Ended | |
| |
| October 31, 2021 | |
| October 31, 2020 | |
| October 31, 2019 | | | October 31, 2022 | | | October 31, 2021 | | | October 31, 2020 | |
| | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 150.8 | | | $ | 143.0 | | | $ | 68.4 | | | $ | 275.2 | | | $ | 150.8 | | | $ | 143.0 | |
| Net cash used in investing activities | | $ | (103.5 | ) | | $ | (65.7 | ) | | $ | (151.4 | ) | | $ | (147.8 | ) | | $ | (103.5 | ) | | $ | (65.7 | ) |
| Net cash used in financing activities | | $ | (53.9 | ) | | $ | (16.0 | ) | | $ | (42.1 | ) | | $ | (38.7 | ) | | $ | (53.9 | ) | | $ | (16.0 | ) |
Operating Activities: Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, and the effects of changes in operating assets and liabilities. Net cash provided by operating activities increased by $7.7$124.4 million in 2021,FY22, compared with 2020,FY21, primarily due to increased net income and share based compensation, partially offset by lower depreciation and other noncash adjustments and net cash-favorable changes in working capital, predominantly in Asia.
Free Cash Flow, which is a non-GAAP financial measure as discussed in the “Non-GAAP Financial Measures” section below, increased by $119.0 million in FY22, compared with FY21, primarily due to increased net cash provided by operating activities, and decreased by $30.0 million in FY21, compared with FY20, primarily due to an increase in spending on property, plant and equipment.
Investing Activities: NetIn FY22, net cash flows used in investing activities primarily consisted of purchases of $112.3 million of property, plant and equipment. Purchases of property, plant and equipment were $109.1Net cash flows used in investing activities increased by $44.3 million in 2021,FY22, compared with $70.8FY21, primarily as a result of our investment of $38.9 million in 2020, as we increased our tool purchasesshort-term debt securities in the current year, primarily in response to market demands in Asia.FY22.
Financing Activities: NetIn FY22, net cash flows used in financing activities primarily consistconsisted of share repurchases, proceeds from anddebt repayments of debt, and$65.4 million, which were partially offset by contributions from and distributions to noncontrolling interests.interests of $25.0 million. Net cash used in financing activities increaseddecreased by $37.9$15.2 million in 2021,FY22, compared with 2020,FY21, primarily due to increaseddecreased share repurchases of $13.9$45.7 million and an excess of the change in distributions to,contributions from, as compared with contributions from,distributions to, noncontrolling interests of $11.0$34.6 million, andwhich were partially offset by increased debt repayments of $13.0$45.1 million (which included early repayments of $15.8 million), and decreased proceeds from long-term debt of $20.9 million.
Our cash, cash equivalents, and restricted cash balances were negatively impacted by changes in foreign currency exchange rates in FY22 by $46.0 million.
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, which we refer to as PDMCX, was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. Under the joint venture’s operating 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 operating agreement that cannot be resolved between the two parties. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 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’s net assets, incur a loss. As of October 31, 2021, Photronics and DNP each had net investments in PDMCX of approximately $64.0 million.
Non-GAAP Financial Measures
We consider Free Cash Flow and Net Cash, which are “non-GAAP financial measures” (as such term is defined by the SEC), to be useful metrics in measuring our cash-generating performance. (Note that we may define these terms differently than other companies that use similarly-named non-GAAP financial measures.) These non-GAAP metrics are not intended to represent funds available for our discretionary use or to be used as a substitute for Cash and cash equivalents or Net cash provided by operating activities, as measured under GAAP. The following tables reconcile Net cash provided by operating activities to Free Cash Flow for FY22, FY21 and FY20. The columns may not foot due to rounding.
| | | FY22 | | | FY21 | | | FY20 | |
| | | | | | | | | | |
| Free Cash Flow | | | | | | | | | |
| Net cash provided by operating activities | | $ | 275.2 | | | $ | 150.8 | | | $ | 143.0 | |
| Purchases of property, plant and equipment | | | (112.3 | ) | | | (109.1 | ) | | | (70.8 | ) |
| Government incentives | | | 3.6 | | | | 5.8 | | | | 5.3 | |
| Free cash flow | | $ | 166.5 | | | $ | 47.4 | | | $ | 77.5 | |
The following table reconciles Cash and cash equivalents to Net Cash at the balance sheet dates. The increase in Net Cash was primarily driven by an increase in Net cash provided by operating activities, as discussed above. The columns may not foot due to rounding.
| | | As of | |
| | | October 31, 2022 | | | October 31, 2021 | |
| | | | | | | |
| Net Cash | | | | | | |
| Cash, cash equivalents | | $ | 319.7 | | | $ | 276.7 | |
| Short-term investments | | | 38.9 | | | | - | |
| Current portion of Long-term debt | | | (10.0 | ) | | | (22.2 | ) |
| Long-term debt | | | (32.3 | ) | | | (89.4 | ) |
| Net cash | | $ | 316.2 | | | $ | 165.0 | |
Business Outlook
Our current business outlook and guidance was provided in our Full Year and Fourth Quarter Fiscal 20212022 Results earnings call, and related slide deck. These can be accessed in the investor section of our website - www.photronics.com.
Our future results of operations and the other forward-looking statements contained in this filing and in our Full Year and Fourth Quarter Fiscal 20212022 Results earnings call and presentation involve a number of risks and uncertainties, some of which are discussed in Part I, Item 1A of this report. A number of other unforeseeable factors could cause actual results to differ materially from our expectations.
Critical Accounting Estimates
Our consolidated financial statements are based on the selection and application of accounting policies, which require management to make significant estimates and assumptions. We believe the following to be the more critical areas that require judgment when applying our accounting policies:
| • | Revenue Recognition: The aApplicationpplication of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically,estimates, including the determination of whether we should recognize revenues related toas we perform or upon the completion of our revenue contracts should be recognized over time or at a point in time,performance, as these determinations impact the timing and amount of our reported revenues and net income. Other significant judgments include the estimation of the point in the manufacturing process at which we are entitled to receive payment,recognize revenue, as well as the measurement of our progress of the job order to completion in order totowards satisfying our performance obligations, which determine the amount of arrangement consideration earned for contractual revenue recognized over time.we are entitled to recognize. |
| • | Property, Plant and Equipment: Significant judgment and assumptions are employed when we establish the estimated useful lives depreciation periodsof asset classes, and determine when depreciation should begin on suchcommence for individual assets, as this evaluationthese determinations can significantly impact our gross margin and research and development expenses. Significant judgement iswould also requiredbe employed when we periodically review property, plant and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other changechanges in circumstances indicate that theirthe carrying amountsamount of a group of assets may not be recoverable, as the recoverability assessment requires us to forecast future cash flows related to these assets; this evaluation can significantly impact our gross margin and operating expense. |
| • | Leases: Significant judgement is applied in the determination of whether an arrangement is, or contains, a lease and, in certain instances, whether the lease should be classified as an operating lease or a finance lease, which can impact the timing and classification of lease costs. |
| • | Contingencies: We are subject to the possibility of losses from various contingencies. Significant judgment is necessary to estimate the probability and amount of a loss, if any, from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. In accounting for the resolutionChanges in estimates related to, and resolutions of, contingencies significant judgment may be necessary to estimate amounts pertaining to periods prior to the resolution that are charged to operations in the period of resolution and amounts related to future periods.have a material impact on our financial performance. |
| • | Income Taxes: Our annual tax rate is determined based on our income and the jurisdictions where it is earned, statutory tax rates, and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual tax rate are judgments and assumptions regarding the recoverability of certain deferred tax balances,assets, and our ability to uphold certain tax positions. We are subject to complex tax laws, in the U.S. and numerous foreign jurisdictions, and the manner in which they apply can be open to interpretation. Realization of deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction in future periods, which involves business plans, planning opportunities, and expectations about future outcomes. Our assessment relies on estimates and assumptions, and may involve a series of complex judgments about future events. |
There are a number of estimates and assumptions inherent in calculating the various components of our tax provision. Future events such as changes in tax legislation, geographic mix of earnings, completion offindings in tax audits, orand earnings repatriation plans could have an impact on those estimates and our effective tax rate.
Please refer to Notes 3, 8, 9, 121, 11, and 1413 to our consolidated financial statements in Part II, Item 8 for additional information related to these critical accounting estimates and our other significant accounting policies.estimates.
Effect of Recent Accounting Pronouncements
See “Item 8. Financial Statements and Supplementary Data – NotesNote 20 to Consolidated Financial Statements – Note 21 Recent Accounting Pronouncements”our consolidated financial statements in Part II, Item 8 of this report for recent accounting pronouncements that may affect our financial reporting.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency Exchange Rate Risk
We conduct business in several major 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 renminbiRMB, and the Singapore dollar. The functional currencies of our European subsidiaries are the British pound and the euro. In addition, we engage in transactions and have exposures to the Japanese yen.
We attempt to minimize our risk of foreign currency transaction losses by producing products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing our working capital. However, in some instances, we sell products in a currency other than the functional currency of the country where it was produced, or purchase products in a currency that differs from the functional currency of the purchasing entity. In addition, to the extent practicable, we attempt to reduce our exposure to foreign currency exchange fluctuations by converting cash and cash equivalents into the functional currency of the subsidiary which holds the cash. We may also enter into derivative contracts to mitigate our exposure to foreign currency fluctuations when we have a significant purchase obligation or significant receivable denominated in a currency that differs from the functional currency of the transacting subsidiary. We do not enter into derivatives for speculative purposes. There can be no assurance that this approach will protect us from the need to recognize significant foreign currency transaction gains and losses, especially in the event of a significant adverse movement in the value of any foreign currency in which we conduct business against any of our functional currencies, including the U.S. dollar.
Our primary net foreign currency exposures as of October 31, 2021,2022, included the South Korean won, the Japanese yen, the New Taiwan dollar, the Chinese renminbi, the Singapore dollar, the British pound sterling, and the euro. As of October 31, 2021,2022, a 10% adverse movement in the value of these currencies against the functional currencies of our subsidiaries would have resulted in a net unrealized pre-tax loss of $35.2$34.7 million, which represents an increasea decrease of $3.3$0.5 million from the same movement as of October 31, 2020.2021. The increasedecrease in foreign currency rate change risk is primarily the result of decreased net exposures of the RMB against the U.S. dollar, which were largely offset increased net exposures of the New Taiwan dollar and the RMB against the U.S. dollar. We do not believe that a 10% change in the exchange rates of other non-U.S. dollar currencies would have had a material effect on our October 31, 2021,2022, consolidated financial statements.
Interest Rate Risk
A 10% adverse movement in the interest rates on our variable rate borrowings would not have had a material effect on our October 31, 2021,2022, consolidated financial statements.
