UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 29, 201828, 2019
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission file number 0-15451
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)
| Connecticut | 06-0854886 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| 15 Secor Road, Brookfield, Connecticut | 06804 | |
| (Address of principal executive offices) | (Zip Code) |
| (203) 775-9000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | ||||
| Non-Accelerated Filer | ☐ | ||||||
| Smaller Reporting Company | ☐ | ||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| COMMON | PLAB | NASDAQ Global Select Market |
The registrant had 69,934,19667,065,655 shares of common stock outstanding as of May 31, 2018.June 3, 2019.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"“safe harbor” for forward-looking statements made by or on behalf of Photronics, Inc. ("(“Photronics”, the "Company”“Company”, “we”, “our”, or “us”). These statements are based on management'smanagement’s beliefs, as well as assumptions made by, and information currently available to, management. Forward-looking statements may be identified by words like "expect," "anticipate," "believe," "plan," "project,"“expect,” “anticipate,” “believe,” “plan,” “project,” “could,” “should,” “estimate,” “intend,” “may,” “will” and similar expressions, or the negative of such terms, or other comparable terminology. All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this quarterly report on Form 10-Q or in other documents filed with the Securities and Exchange Commission in press releases or in the Company'sCompany’s communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of transactions, joint ventures, business combinations, divestitures and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the Company'sCompany’s products; competitive factors in the industries and geographic markets in which the Company competes; the timing of orders received from customers; the gain or loss of significant customers; competition from other manufacturers; changes in accounting standards; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); changes in the jurisdictional mix of our earnings and changes in tax laws and rates; interest rate and other capital market conditions, including changes in the market price of the Company'sCompany’s securities; foreign currency exchange rate fluctuations; changes in technology; technology or intellectual property infringement, including cyber-securitycybersecurity breaches, and other innovation risks; unsuccessful or unproductive research and development or capital expenditures; the timing, impact, and other uncertainties related to transactions and acquisitions, divestitures, business combinations, and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structures and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; changes in laws and government regulation impacting our operations or our products;products, including laws relating to export controls and import laws, rules and tariffs; the occurrence of regulatory or legal violations, proceedings, claims or litigation; customer complaints or disputes; damage or destruction to the Company'sCompany’s facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; construction of new facilities and assembly of new equipment; dilutive issuances of the Company’s stock; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company'sCompany’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of anythe forward-looking statements and does not assume an obligation to provide revisions to suchany forward-looking statements, except as otherwise required by securities and other applicable laws.
2
PHOTRONICS, INC.
INDEX
| PART I. | FINANCIAL INFORMATION | ||
| Item 1. | 4 | ||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| 9 | |||
| 10 | |||
| Item 2. | 25 | ||
| Item 3. | 32 | ||
| Item 4. | 32 | ||
| PART II. | OTHER INFORMATION | ||
| Item 1A. | 33 | ||
| Item 2. | 33 | ||
| Item 6. | 34 |
| PART I. | FINANCIAL INFORMATION |
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
April 29, 2018 | October 29, 2017 | April 28, 2019 | October 31, 2018 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 321,246 | $ | 308,021 | $ | 167,066 | $ | 329,277 | ||||||||
| Accounts receivable, net of allowance of $2,449 in 2018 and $2,319 in 2017 | 124,331 | 105,320 | ||||||||||||||
| Accounts receivable, net of allowance of $1,360 in 2019 and $1,526 in 2018 | 123,371 | 120,515 | ||||||||||||||
| Inventories | 31,936 | 23,703 | 34,696 | 29,180 | ||||||||||||
| Prepaid expenses | 7,542 | 3,162 | 8,531 | 6,901 | ||||||||||||
| Other current assets | 15,244 | 8,918 | 38,304 | 16,858 | ||||||||||||
| Total current assets | 500,299 | 449,124 | 371,968 | 502,731 | ||||||||||||
| Property, plant and equipment, net | 563,313 | 535,197 | 654,357 | 571,781 | ||||||||||||
| Intangible assets, net | 14,708 | 17,122 | 10,182 | 12,368 | ||||||||||||
| Deferred income taxes | 19,925 | 15,481 | 15,121 | 18,109 | ||||||||||||
| Other assets | 4,036 | 3,870 | 33,610 | 5,020 | ||||||||||||
| Total assets | $ | 1,102,281 | $ | 1,020,794 | $ | 1,085,238 | $ | 1,110,009 | ||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Current portion of long-term borrowings | $ | 59,263 | $ | 4,639 | ||||||||||||
| Current portion of long-term debt | $ | 505 | $ | 57,453 | ||||||||||||
| Accounts payable | 64,944 | 50,834 | 80,120 | 89,149 | ||||||||||||
| Accrued liabilities | 42,301 | 26,303 | 58,659 | 44,474 | ||||||||||||
| Total current liabilities | 166,508 | 81,776 | 139,284 | 191,076 | ||||||||||||
| Long-term borrowings | - | 57,337 | ||||||||||||||
| Long-term debt | 35,921 | - | ||||||||||||||
| Deferred income taxes | 829 | 643 | ||||||||||||||
| Other liabilities | 17,707 | 16,386 | 10,876 | 13,721 | ||||||||||||
| Total liabilities | 184,215 | 155,499 | 186,910 | 205,440 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Equity: | ||||||||||||||||
| Preferred stock, $0.01 par value, 2,000 shares authorized, none issued and outstanding | - | - | - | - | ||||||||||||
| Common stock, $0.01 par value, 150,000 shares authorized, 69,443 shares issued and outstanding at April 29, 2018 and 68,666 shares issued and outstanding at October 29, 2017 | 694 | 687 | ||||||||||||||
| Common stock, $0.01 par value, 150,000 shares authorized, 69,984 shares issued and 66,289 outstanding at April 28, 2019 and 69,700 shares issued and 67,142 outstanding at October 31, 2018 | 700 | 697 | ||||||||||||||
| Additional paid-in capital | 552,977 | 547,596 | 558,359 | 555,606 | ||||||||||||
| Retained earnings | 205,953 | 189,390 | 245,144 | 231,445 | ||||||||||||
| Accumulated other comprehensive income | 23,756 | 6,891 | ||||||||||||||
| Treasury stock, 3,695 shares at April 28, 2019 and 2,558 shares at October 31, 2018 | (33,807 | ) | (23,111 | ) | ||||||||||||
| Accumulated other comprehensive loss | (6,828 | ) | (4,966 | ) | ||||||||||||
| Total Photronics, Inc. shareholders' equity | 783,380 | 744,564 | ||||||||||||||
| Total Photronics, Inc. shareholders’ equity | 763,568 | 759,671 | ||||||||||||||
| Noncontrolling interests | 134,686 | 120,731 | 134,760 | 144,898 | ||||||||||||
| Total equity | 918,066 | 865,295 | 898,328 | 904,569 | ||||||||||||
| Total liabilities and equity | $ | 1,102,281 | $ | 1,020,794 | $ | 1,085,238 | $ | 1,110,009 | ||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
April 29, 2018 | April 30, 2017 | April 29, 2018 | April 30, 2017 | April 28, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | |||||||||||||||||||||||||
| Revenue | $ | 130,779 | $ | 108,297 | $ | 254,225 | $ | 218,128 | $ | 131,580 | $ | 130,779 | $ | 256,291 | $ | 254,225 | ||||||||||||||||
| Cost of goods sold | (97,960 | ) | (88,140 | ) | (193,744 | ) | (174,973 | ) | 105,570 | 97,960 | 204,179 | 193,744 | ||||||||||||||||||||
| Gross profit | 32,819 | 20,157 | 60,481 | 43,155 | 26,010 | 32,819 | 52,112 | 60,481 | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | (13,637 | ) | (10,894 | ) | (25,387 | ) | (21,764 | ) | 13,269 | 13,637 | 27,061 | 25,387 | ||||||||||||||||||||
| Research and development | (3,817 | ) | (3,726 | ) | (7,921 | ) | (7,212 | ) | 3,542 | 3,817 | 7,805 | 7,921 | ||||||||||||||||||||
| Total operating expenses | (17,454 | ) | (14,620 | ) | (33,308 | ) | (28,976 | ) | 16,811 | 17,454 | 34,866 | 33,308 | ||||||||||||||||||||
| Operating income | 15,365 | 5,537 | 27,173 | 14,179 | 9,199 | 15,365 | 17,246 | 27,173 | ||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Interest income and other income (expense), net | 3,883 | (3,073 | ) | 351 | (4,596 | ) | 4,286 | 3,883 | 5,925 | 351 | ||||||||||||||||||||||
| Interest expense | (551 | ) | (549 | ) | (1,125 | ) | (1,108 | ) | 355 | 551 | 886 | 1,125 | ||||||||||||||||||||
| Income before income taxes | 18,697 | 1,915 | 26,399 | 8,475 | 13,130 | 18,697 | 22,285 | 26,399 | ||||||||||||||||||||||||
| Income tax provision | (3,508 | ) | (431 | ) | (1,729 | ) | (2,481 | ) | 3,278 | 3,508 | 4,665 | 1,729 | ||||||||||||||||||||
| Net income | 15,189 | 1,484 | 24,670 | 5,994 | 9,852 | 15,189 | 17,620 | 24,670 | ||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (4,524 | ) | 313 | (8,107 | ) | (2,250 | ) | |||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 1,373 | 4,524 | 3,874 | 8,107 | ||||||||||||||||||||||||||||
| Net income attributable to Photronics, Inc. shareholders | $ | 10,665 | $ | 1,797 | $ | 16,563 | $ | 3,744 | $ | 8,479 | $ | 10,665 | $ | 13,746 | $ | 16,563 | ||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.15 | $ | 0.03 | $ | 0.24 | $ | 0.05 | $ | 0.13 | $ | 0.15 | $ | 0.21 | $ | 0.24 | ||||||||||||||||
| Diluted | $ | 0.15 | $ | 0.03 | $ | 0.23 | $ | 0.05 | $ | 0.13 | $ | 0.15 | $ | 0.20 | $ | 0.23 | ||||||||||||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 69,293 | 68,426 | 69,024 | 68,301 | 66,261 | 69,293 | 66,422 | 69,024 | ||||||||||||||||||||||||
| Diluted | 75,190 | 69,385 | 75,052 | 69,277 | 70,597 | 75,190 | 71,593 | 75,052 | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
April 29, 2018 | April 30, 2017 | April 29, 2018 | April 30, 2017 | |||||||||||||||||||||||||||||
April 28, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | |||||||||||||||||||||||||||||
| Net income | $ | 15,189 | $ | 1,484 | $ | 24,670 | $ | 5,994 | $ | 9,852 | $ | 15,189 | $ | 17,620 | $ | 24,670 | ||||||||||||||||
| Other comprehensive income (loss), net of tax of $0: | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (11,098 | ) | 18,382 | 18,989 | 17,769 | (7,054 | ) | (11,098 | ) | (482 | ) | 18,989 | ||||||||||||||||||||
| Amortization of cash flow hedge | 16 | 32 | 48 | 64 | - | 16 | - | 48 | ||||||||||||||||||||||||
| Other | 54 | (74 | ) | 22 | (94 | ) | 25 | 54 | 44 | 22 | ||||||||||||||||||||||
| Net other comprehensive income (loss) | (11,028 | ) | 18,340 | 19,059 | 17,739 | |||||||||||||||||||||||||||
| Net other comprehensive (loss) income | (7,029 | ) | (11,028 | ) | (438 | ) | 19,059 | |||||||||||||||||||||||||
| Comprehensive income | 4,161 | 19,824 | 43,729 | 23,733 | 2,823 | 4,161 | 17,182 | 43,729 | ||||||||||||||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 1,841 | 4,326 | 10,301 | 8,147 | 1,515 | 1,841 | 5,298 | 10,301 | ||||||||||||||||||||||||
| Comprehensive income attributable to Photronics, Inc. shareholders | $ | 2,320 | $ | 15,498 | $ | 33,428 | $ | 15,586 | $ | 1,308 | $ | 2,320 | $ | 11,884 | $ | 33,428 | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
| Three Months Ended April 28, 2019 | ||||||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at January 28, 2019 | 69,917 | $ | 699 | $ | 557,188 | $ | 236,665 | $ | (33,807 | ) | $ | 343 | $ | 152,082 | $ | 913,170 | ||||||||||||||||
| Net income | - | - | - | 8,479 | - | - | 1,373 | 9,852 | ||||||||||||||||||||||||
| Other comprehensive (loss) income | - | - | - | - | - | (7,171 | ) | 142 | (7,029 | ) | ||||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 41 | 1 | 271 | - | - | - | - | 272 | ||||||||||||||||||||||||
| Restricted stock awards vesting and expense | 26 | - | 650 | - | - | - | - | 650 | ||||||||||||||||||||||||
| Share-based compensation expense | - | - | 250 | - | - | - | - | 250 | ||||||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | - | (18,837 | ) | (18,837 | ) | ||||||||||||||||||||||
| Balance at April 28, 2019 | 69,984 | $ | 700 | $ | 558,359 | $ | 245,144 | $ | (33,807 | ) | $ | (6,828 | ) | $ | 134,760 | $ | 898,328 | |||||||||||||||
| Three Months Ended April 29, 2018 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Non- controlling Interests | Total Equity | |||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at January 29, 2018 | 68,869 | $ | 689 | $ | 549,328 | $ | 195,288 | $ | 32,128 | $ | 141,014 | $ | 918,447 | |||||||||||||||
| Net income | - | - | - | 10,665 | - | 4,524 | 15,189 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (8,372 | ) | (2,656 | ) | (11,028 | ) | ||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 548 | 5 | 2,892 | - | - | - | 2,897 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 26 | - | 457 | - | - | - | 457 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 300 | - | - | - | 300 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,196 | ) | (8,196 | ) | |||||||||||||||||||
| Balance at April 29, 2018 | 69,443 | $ | 694 | $ | 552,977 | $ | 205,953 | $ | 23,756 | $ | 134,686 | $ | 918,066 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
Condensed Consolidated Statements of Equity (continued)
(in thousands)
(unaudited)
| Six Months Ended April 28, 2019 | ||||||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Non- controlling Interests | ||||||||||||||||||||||||||||||
Retained Earnings | Treasury Stock | Total Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at November 1, 2018 | 69,700 | $ | 697 | $ | 555,606 | $ | 231,445 | $ | (23,111 | ) | $ | (4,966 | ) | $ | 144,898 | $ | 904,569 | |||||||||||||||
| Adoption of ASU 2014-09 | - | - | - | 1,083 | - | - | 121 | 1,204 | ||||||||||||||||||||||||
| Adoption of ASU 2016-16 | - | - | - | (1,130 | ) | - | - | (3 | ) | (1,133 | ) | |||||||||||||||||||||
| Net income | - | - | - | 13,746 | - | - | 3,874 | 17,620 | ||||||||||||||||||||||||
| Other comprehensive (loss) income | - | - | - | - | - | (1,862 | ) | 1,424 | (438 | ) | ||||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 136 | 1 | 792 | - | - | - | - | 793 | ||||||||||||||||||||||||
| Restricted stock awards vesting and expense | 148 | 2 | 1,217 | - | - | - | - | 1,219 | ||||||||||||||||||||||||
| Share-based compensation expense | - | - | 744 | - | - | - | - | 744 | ||||||||||||||||||||||||
| Contribution from noncontrolling interest | - | - | - | - | - | - | 29,394 | 29,394 | ||||||||||||||||||||||||
| Dividends to noncontrolling interests | - | - | - | - | - | - | (26,102 | ) | (26,102 | ) | ||||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | - | (18,837 | ) | (18,837 | ) | ||||||||||||||||||||||
| Repurchase of common stock of subsidiary | - | - | - | - | - | - | (9 | ) | (9 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (10,696 | ) | - | - | (10,696 | ) | ||||||||||||||||||||||
| Balance at April 28, 2019 | 69,984 | $ | 700 | $ | 558,359 | $ | 245,144 | $ | (33,807 | ) | $ | (6,828 | ) | $ | 134,760 | $ | 898,328 | |||||||||||||||
| Six Months Ended April 29, 2018 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||
Retained Earnings | ||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at October 30, 2017 | 68,666 | $ | 687 | $ | 547,596 | $ | 189,390 | $ | 6,891 | $ | 120,731 | $ | 865,295 | |||||||||||||||
| Net income | - | - | - | 16,563 | - | 8,107 | 24,670 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | - | 16,865 | 2,194 | 19,059 | |||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 664 | 7 | 3,592 | - | - | - | 3,599 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 113 | - | 843 | - | - | - | 843 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 798 | - | - | - | 798 | |||||||||||||||||||||
| Contribution from noncontrolling interest | - | - | 148 | - | - | 11,850 | 11,998 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,196 | ) | (8,196 | ) | |||||||||||||||||||
| Balance at April 29, 2018 | 69,443 | $ | 694 | $ | 552,977 | $ | 205,953 | $ | 23,756 | $ | 134,686 | $ | 918,066 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
| Six Months Ended | Six Months Ended | |||||||||||||||
April 29, 2018 | April 30, 2017 | April 28, 2019 | April 29, 2018 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 24,670 | $ | 5,994 | $ | 17,620 | $ | 24,670 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 44,429 | 42,242 | 38,515 | 44,429 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Accounts receivable | (16,976 | ) | 4,204 | (2,295 | ) | (16,976 | ) | |||||||||
| Inventories | (7,765 | ) | (1,506 | ) | (9,447 | ) | (7,765 | ) | ||||||||
| Other current assets | (9,666 | ) | 2,103 | (6,114 | ) | (9,666 | ) | |||||||||
| Accounts payable, accrued liabilities, and other | 3,216 | (6,130 | ) | (40,566 | ) | 3,216 | ||||||||||
| Net cash provided by operating activities | 37,908 | 46,907 | ||||||||||||||
| Net cash (used in) provided by operating activities | (2,287 | ) | 37,908 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchases of property, plant and equipment | (44,129 | ) | (14,152 | ) | (140,436 | ) | (44,129 | ) | ||||||||
| Acquisition of business | - | (5,400 | ) | |||||||||||||
| Proceeds from sale of investment | - | 167 | ||||||||||||||
| Government incentives | 5,698 | - | ||||||||||||||
| Other | 436 | (462 | ) | (23 | ) | 296 | * | |||||||||
| Net cash used in investing activities | (43,693 | ) | (19,847 | ) | (134,761 | ) | (43,833 | )* | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Repayments of long-term borrowings | (2,771 | ) | (2,695 | ) | ||||||||||||
| Proceeds from debt | 39,633 | - | ||||||||||||||
| Contribution from noncontrolling interest | 11,998 | - | 29,394 | 11,998 | ||||||||||||
| Repayments of long-term debt | (61,220 | ) | (2,771 | ) | ||||||||||||
| Dividends paid to noncontrolling interests | (26,102 | ) | - | |||||||||||||
| Purchase of treasury stock | (10,696 | ) | - | |||||||||||||
| Proceeds from share-based arrangements | 3,776 | 2,311 | 1,033 | 3,776 | ||||||||||||
| Other | (267 | ) | (23 | ) | (45 | ) | (267 | ) | ||||||||
| Net cash provided by (used in) financing activities | 12,736 | (407 | ) | |||||||||||||
| Net cash (used in) provided by financing activities | (28,003 | ) | 12,736 | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 6,274 | 4,997 | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 2,843 | 6,330 | * | |||||||||||||
| Net increase in cash and cash equivalents | 13,225 | 31,650 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 308,021 | 314,074 | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (162,208 | ) | 13,141 | * | ||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 331,989 | * | 310,936 | * | ||||||||||||
| Cash and cash equivalents at end of period | $ | 321,246 | $ | 345,724 | ||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 169,781 | $ | 324,077 | * | |||||||||||
| Supplemental disclosure information: | ||||||||||||||||
| Accrual for property, plant and equipment purchased during the period | $ | 10,317 | $ | 11,409 | $ | 17,454 | $ | 10,317 | ||||||||
| Accrual for property, plant and equipment purchased with funds receivable from government incentives | $ | 13,402 | $ | - | ||||||||||||
| Subsidiary dividend payable | $ | 8,196 | $ | 8,383 | $ | 18,837 | $ | 8,196 | ||||||||
* Amount has been modified to reflect the adoption of ASU 2016-18 (see Note 14).
See accompanying notes to condensed consolidated financial statements.
PHOTRONICS, INC.
Three Months and Six Months Ended April 29, 201828, 2019 and April 30, 201729, 2018
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. ("Photronics"(“Photronics”, "the Company"“the Company”, "we"“we”, “our”, or "us"“us”) is one of the world'sworld’s leading manufacturers of photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays ("FPDs"(“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display substrates during the fabrication of integrated circuits ("ICs"(“ICs” or “semiconductors”) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We currently operate principally from ninehave eleven manufacturing facilities, two of which are located in Taiwan (3), Korea, the United States (3), Europe three (2), and two recently constructed facilities in Taiwan, oneChina. Our FPD Facility in Korea, and threeHefei, China, commenced production in the United States. We have commenced constructionsecond quarter of two manufacturing facilities2019; we anticipate our IC facility in Xiamen, China, and anticipateto commence production to begin at these facilities during the first half oflater in 2019.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. Our business is typically impacted during the first, and sometimes the second, 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. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 28, 2018.31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 29, 2017.31, 2018.
NOTE 2 - CHANGES IN EQUITY
| Three Months Ended April 29, 2018 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at January 29, 2018 | 68,869 | $ | 689 | $ | 549,328 | $ | 195,288 | $ | 32,128 | $ | 141,014 | $ | 918,447 | |||||||||||||||
| Net income | - | - | - | 10,665 | - | 4,524 | 15,189 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (8,372 | ) | (2,656 | ) | (11,028 | ) | ||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 548 | 5 | 2,892 | - | - | - | 2,897 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 26 | - | 457 | - | - | - | 457 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 300 | - | - | - | 300 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,196 | ) | (8,196 | ) | |||||||||||||||||||
| Balance at April 29, 2018 | 69,443 | $ | 694 | $ | 552,977 | $ | 205,953 | $ | 23,756 | $ | 134,686 | $ | 918,066 | |||||||||||||||
| Three Months Ended April 30, 2017 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at January 30, 2017 | 68,333 | $ | 683 | $ | 543,116 | $ | 178,207 | $ | (9,530 | ) | $ | 118,932 | $ | 831,408 | ||||||||||||||
| Net income (loss) | - | - | - | 1,797 | - | (313 | ) | 1,484 | ||||||||||||||||||||
| Other comprehensive income | - | - | - | - | 13,701 | 4,639 | 18,340 | |||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 148 | 2 | 982 | - | - | - | 984 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 15 | - | 431 | - | - | - | 431 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 490 | - | - | - | 490 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,383 | ) | (8,383 | ) | |||||||||||||||||||
| Balance at April 30, 2017 | 68,496 | $ | 685 | $ | 545,019 | $ | 180,004 | $ | 4,171 | $ | 114,875 | $ | 844,754 | |||||||||||||||
| Six Months Ended April 29, 2018 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Non- controlling Interests | Total Equity | |||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at October 30, 2017 | 68,666 | $ | 687 | $ | 547,596 | $ | 189,390 | $ | 6,891 | $ | 120,731 | $ | 865,295 | |||||||||||||||
| Net income | - | - | - | 16,563 | - | 8,107 | 24,670 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | - | 16,865 | 2,194 | 19,059 | |||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 664 | 7 | 3,592 | - | - | - | 3,599 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 113 | - | 843 | - | - | - | 843 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 798 | - | - | - | 798 | |||||||||||||||||||||
| Contribution from noncontrolling interest | - | - | 148 | - | - | 11,850 | 11,998 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,196 | ) | (8,196 | ) | |||||||||||||||||||
| Balance at April 29, 2018 | 69,443 | $ | 694 | $ | 552,977 | $ | 205,953 | $ | 23,756 | $ | 134,686 | $ | 918,066 | |||||||||||||||
| Six Months Ended April 30, 2017 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests | Total Equity | ||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||
| Balance at October 31, 2016 | 68,080 | $ | 681 | $ | 541,093 | $ | 176,260 | $ | (7,671 | ) | $ | 115,111 | $ | 825,474 | ||||||||||||||
| Net income | - | - | - | 3,744 | - | 2,250 | 5,994 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | - | 11,842 | 5,897 | 17,739 | |||||||||||||||||||||
| Sale of common stock through employee stock option and purchase plans | 323 | 3 | 2,068 | - | - | - | 2,071 | |||||||||||||||||||||
| Restricted stock awards vesting and expense | 93 | 1 | 728 | - | - | - | 729 | |||||||||||||||||||||
| Share-based compensation expense | - | - | 1,130 | - | - | - | 1,130 | |||||||||||||||||||||
| Subsidiary dividend payable | - | - | - | - | - | (8,383 | ) | (8,383 | ) | |||||||||||||||||||
| Balance at April 30, 2017 | 68,496 | $ | 685 | $ | 545,019 | $ | 180,004 | $ | 4,171 | $ | 114,875 | $ | 844,754 | |||||||||||||||
Inventories are stated at the lower of cost, determined under the first-in, first-out ("FIFO"(“FIFO”) method, or net realizable value. Presented below are the components of inventory at the balance sheet dates:
April 29, 2018 | October 29, 2017 | April 28, 2019 | October 31, 2018 | |||||||||||||
| Raw materials | $ | 34,276 | $ | 25,110 | ||||||||||||
| Work in process | 416 | 3,402 | ||||||||||||||
| Finished goods | $ | 2,011 | $ | 664 | 4 | 668 | ||||||||||
| Work in process | 4,901 | 2,957 | ||||||||||||||
| Raw materials | 25,024 | 20,082 | ||||||||||||||
| $ | 31,936 | $ | 23,703 | $ | 34,696 | $ | 29,180 | |||||||||
NOTE 43 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
April 28, 2019 | October 31, 2018 | |||||||
| Land | $ | 11,164 | $ | 11,139 | ||||
| Buildings and improvements | 124,374 | 124,771 | ||||||
| Machinery and equipment | 1,673,574 | 1,566,163 | ||||||
| Leasehold improvements | 19,598 | 19,577 | ||||||
| Furniture, fixtures and office equipment | 13,503 | 12,415 | ||||||
| Construction in progress | 132,394 | 128,649 | ||||||
| 1,974,607 | 1,862,714 | |||||||
| Accumulated depreciation and amortization | (1,320,250 | ) | (1,290,933 | ) | ||||
| $ | 654,357 | $ | 571,781 | |||||
April 29, 2018 | October 29, 2017 | |||||||
| Land | $ | 11,697 | $ | 9,959 | ||||
| Buildings and improvements | 127,148 | 125,290 | ||||||
| Machinery and equipment | 1,609,456 | 1,547,870 | ||||||
| Leasehold improvements | 20,415 | 20,050 | ||||||
| Furniture, fixtures and office equipment | 13,816 | 12,989 | ||||||
| Construction in progress | 83,554 | 72,045 | ||||||
| 1,866,086 | 1,788,203 | |||||||
| Accumulated depreciation and amortization | (1,302,773 | ) | (1,253,006 | ) | ||||
| $ | 563,313 | $ | 535,197 | |||||
April 29, 2018 | October 29, 2017 | |||||||
| Machinery and equipment | $ | 34,917 | $ | 34,917 | ||||
| Accumulated amortization | (19,328 | ) | (13,843 | ) | ||||
| $ | 15,589 | $ | 21,074 | |||||
Depreciation and amortization expense for property, plant and equipment was $18.6 million and $36.2 million in the three- and six-month periods ended April 28, 2019, respectively, and $20.8 million and $42.0 million forin the threethree- and six monthsix-month periods ended April 29, 2018, respectively, and $20.1 million and $39.8 million for the three and six month periods ended April 30, 2017, respectively.
NOTE 54 - PDMCX JOINT VENTURE
In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or “Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly ownedwholly-owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note, “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our recently establishedrecently-established IC business in Xiamen, China, in which includes the facility currently under construction.we anticipate production to commence in 2019. The joint venture, known as “Photronics DNP“Xiamen American Japan Photronics Mask Corporation Xiamen”Co., Ltd.” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced processadvanced-process technology to our customers. No gain or loss was recorded upon the formation of thethis joint venture.
As of April 29, 2018,28, 2019, Photronics and DNP havehad each contributed cash of approximately $12$48 million to the joint venture. We estimate that,The total investment per the PDMCX operating agreement (the Agreement) is $160 million, of which approximately $13 million remained for Photronics as of April 28, 2019 and will be funded over the next several years and per the PDMCX joint venture operating agreement (“the Agreement”), DNP and Photronics will each contribute an additional $43 million ofquarters with cash and additional amounts to be obtained through local borrowings.
Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two yeartwo-year term of the Agreement and cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance.
We recorded net losses from the operations of the PDMCX joint venture of approximately $0.6 million, and $1.9 million during the three- and six-month periods ended April 28, 2019, respectively, and $0.2 million and $0.7 million in the threethree- and six monthsix-month periods ended April 29, 2018.2018, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and theour maximum exposure to loss for Photronics from PDMCX at April 29, 2018,28, 2019, was $11.4$44.7 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification, Standards, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it iswas a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were the primary beneficiary during the current and prior year reporting period;periods; thus, as required, the PDMCX financial results should behave been consolidated with Photronics, Inc. Our conclusion was based on the factfacts that we held a controlling financial interest in PDMCX which(which resulted from our having the power to direct the activities that most significantly impacted its economic performance,performance), had the obligation to absorb losses, and the right to receive benefits that could potentially be significant to PDMCX. Our conclusionconclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current periodand prior year reporting periods was based on our right to appoint the majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX’sPDMCX management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of PDMCX’s assets. In addition, as a result of the 50.01% variable interest we held during the current period,and prior-year periods, we had the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheet as of April 29, 2018,sheets are presented in the following table, together with the maximumour exposure to loss of Photronics duerelated to its interests in the netthese assets of this joint venture.and liabilities.
| April 28, 2019 | October 31, 2018 | |||||||||||||||||||||||
| Classification | Carrying Amount | Photronics Interest | Carrying Amount | Photronics Interest | Carrying Amount | Photronics Interest | ||||||||||||||||||
| Current assets | $ | 11,226 | $ | 5,614 | $ | 31,219 | $ | 15,612 | $ | 9,625 | $ | 4,813 | ||||||||||||
| Non-current assets | 15,635 | 7,819 | 116,677 | 58,350 | 43,415 | 21,708 | ||||||||||||||||||
| Total assets | 26,861 | 13,433 | 147,896 | 73,962 | 53,040 | 26,521 | ||||||||||||||||||
| Current liabilities | 4,000 | 2,000 | 22,668 | 11,336 | 21,205 | 10,603 | ||||||||||||||||||
| Non-current liabilities | 16 | 8 | 35,937 | 17,972 | 20 | 10 | ||||||||||||||||||
| Total liabilities | 4,016 | 2,008 | 58,605 | 29,308 | 21,225 | 10,613 | ||||||||||||||||||
| Net assets | $ | 22,845 | $ | 11,425 | $ | 89,291 | $ | 44,654 | $ | 31,815 | $ | 15,908 | ||||||||||||
NOTE 6 -5 – LONG-TERM BORROWINGSDEBT
Long-term borrowings consistdebt consists of the following:
April 29, 2018 | October 29, 2017 | |||||||
| 3.25% convertible senior notes due in April 2019 | $ | 57,395 | $ | 57,337 | ||||
| 2.77% capital lease obligation payable through July 2018 | 1,868 | 4,639 | ||||||
| 59,263 | 61,976 | |||||||
| Current portion | (59,263 | ) | (4,639 | ) | ||||
| $ | - | $ | 57,337 | |||||
April 28, 2019 | October 31, 2018 | |||||||
| Project Loan due December 2025 | $ | 11,400 | $ | - | ||||
| Project Loan due December 2022 | 14,932 | - | ||||||
| Working Capital Loan due January 2022 | 10,094 | - | ||||||
| 3.25% convertible senior notes matured April 2019 | - | 57,453 | ||||||
| 36,426 | 57,453 | |||||||
| Current portion | (505 | ) | (57,453 | ) | ||||
| $ | 35,921 | $ | - | |||||
In April 2019, the $57.5 million convertible senior notes, discussed below, matured and were repaid.
In January 2015, we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes iswas the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, subject to adjustment upon the occurrence of certain events described in the indenture dated January 22, 2015.stock. Note holders maycould convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and2019; we arewere not required to redeem the notes, other than upon conversion, prior to their maturity date. Interest on the notes accruesaccrued in arrears, and iswas paid semiannually through the notes’ maturity date.
In November 2018, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of the borrowing, pursuant to which PDMCX will enter into separate loan agreements (“the Project Loans”) for each borrowing. The Project Loans, which are denominated in renminbi, are being used to finance certain capital expenditures in China. PDMCX has agreed to grant a lien on the land, building and certain equipment owned by PDMCX as collateral for the Project Loans. As of April 28, 2019, PDMCX had borrowed $26.3 million against this approval, which includes $11.4 million that was borrowed during the three-month period ended April 28, 2019. Subsequent to April 28, 2019, PDMCX borrowed an additional $9.7 million. Repayments on the amounts borrowed before the three-month period ended April 28, 2019, will be made semiannually, commencing in June 2020 and ending in December 2022. Repayments on the amount borrowed after the three-month period ended January 27, 2019, will be made semiannually, commencing in June 2023 and ending in December 2025. The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at April 28, 2019). Interest incurred on these loans will be reimbursed through incentives afforded to us by the Xiamen Torch Hi-Tech Industrial Development Zone which, to a prescribed limit, provide for such reimbursements.
In November 2018, PDMCX was approved for credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. No guarantees were required as part of this approval. As of April 28, 2019, PDMCX had borrowed $13.8 million against this approval of which $3.7 million were 90-day loans. The remaining $10.1 million borrowed (the “Working Capital Loans”) is to be repaid semiannually from the dates of the individual borrowings; repayments commenced in May 2019 and end in January 2022. In May 2019, we borrowed an additional $1.9 million against this approval, and repaid $0.1 million. The 90-day loans were repaid in our second quarter of 2019. The Working Capital Loans, which are denominated in renminbi, are being used for general financing purposes, including payments of import and value-added taxes. The interest rates on the 90-day loans were the market rate on the date of issuance (4.9%), and interest rates on the Working Capital Loans are approximately 5%, and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points. Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which, to a prescribed limit, provide for such reimbursements.
In September 2018, we entered into an amended and restated credit agreement (“the new agreement”) that expires in September 2023. The new agreement, which replaced our prior credit facility, which expires in December 2018, has a $50 million borrowing limit, with an expansion capacity to $75$100 million, and is secured by substantially all of our assets located in the United States and common stock we own in certain of our foreign subsidiaries. The credit facility stipulates thatnew agreement limits the amount we may notcan pay in cash for dividends, distributions and redemption on Photronics, Inc. stock,equity of up to an aggregate amount of $100 million, and contains the following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance, all of which we were in compliance with atas of April 29, 2018.28, 2019. We had no outstanding borrowings against the credit facility atnew agreement as of April 29, 2018,28, 2019, and $50 million was available for borrowing. The interest rate on the credit facility (3.62%new agreement (2.5% at April 29, 2018)28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
NOTE 6 - REVENUE
We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the modified retrospective transition method, only with respect to contracts that were not complete as of the date of adoption. This approach required prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the adoption. In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.
Under Topic 606, we recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services, whereas, prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods. The following tables present the impacts of our adoption of Topic 606 on our April 2018, our credit facility was amended to change28, 2019, condensed consolidated balance sheet, and condensed consolidated statements of income for the definition of “specified capital expenditures”, which is used to calculatethree and six months ended April 28, 2019, and cash flows for the interest coverage ratio.six months ended April 28, 2019.
Condensed Consolidated Balance Sheet
April 28, 2019
As Reported | Adjustments | Balance without Adoption of Topic 606 | ||||||||||
Assets | ||||||||||||
| Accounts receivable | $ | 123,371 | $ | (794 | ) | $ | 122,577 | |||||
| Inventory | 34,696 | 4,807 | 39,503 | |||||||||
| Other current assets | 38,304 | (6,237 | ) | 32,067 | ||||||||
| Deferred income taxes | 15,121 | 105 | 15,226 | |||||||||
Liabilities | ||||||||||||
| Accrued liabilities | $ | 58,659 | $ | 686 | $ | 59,345 | ||||||
| Deferred income taxes | 829 | (367 | ) | 462 | ||||||||
Equity | ||||||||||||
| Photronics, Inc. shareholders’ equity | $ | 763,568 | $ | (1,963 | ) | $ | 761,605 | |||||
| Noncontrolling interests | 134,760 | (475 | ) | 134,285 | ||||||||
Condensed Consolidated Statement of Income
Three Months Ended April 28, 2019
As Reported | Adjustments | Balance without Adoption of Topic 606 | ||||||||||
| Revenue | $ | 131,580 | $ | (242 | ) | $ | 131,338 | |||||
| Cost of goods sold | 105,570 | (162 | ) | 105,408 | ||||||||
| Gross profit | 26,010 | (80 | ) | 25,930 | ||||||||
| Provision for taxes | 3,278 | (48 | ) | 3,230 | ||||||||
| Net income | 9,852 | (128 | ) | 9,724 | ||||||||
| Noncontrolling interests | 1,373 | 78 | 1,451 | |||||||||
| Income attributable to Photronics, Inc. shareholders | $ | 8,479 | $ | (206 | ) | $ | 8,273 | |||||
Condensed Consolidated Statement of Income
Six Months Ended April 28, 2019
As Reported | Adjustments | Balance without Adoption of Topic 606 | ||||||||||
| Revenue | $ | 256,291 | $ | (2,524 | ) | $ | 253,767 | |||||
| Cost of goods sold | 204,179 | (1,041 | ) | 203,138 | ||||||||
| Gross profit | 52,112 | (1,483 | ) | 50,629 | ||||||||
| Provision for taxes | 4,665 | (178 | ) | 4,487 | ||||||||
| Net income | 17,620 | (1,305 | ) | 16,315 | ||||||||
| Noncontrolling interests | 3,874 | (353 | ) | 3,521 | ||||||||
| Income attributable to Photronics, Inc. shareholders | $ | 13,746 | $ | (952 | ) | $ | 12,794 | |||||
Condensed Consolidated Statement of Cash Flows
Six Months Ended April 28, 2019
| As Reported | Adjustments | Balance without Adoption of Topic 606 | ||||||||||
| Net Income | $ | 17,620 | $ | (1,305 | ) | $ | 16,315 | |||||
| Changes in operating accounts: | ||||||||||||
| Accounts receivable | $ | (2,295 | ) | $ | 211 | $ | (2,084 | ) | ||||
| Inventories | (9,447 | ) | (1,204 | ) | (10,651 | ) | ||||||
| Other current assets | (6,114 | ) | 1,799 | (4,315 | ) | |||||||
| Accounts payable, accrued liabilities, and other | (40,566 | ) | 499 | (40,067 | ) | |||||||
We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we entered into a $26.4 million principal amount, five year capital leaseinvoice as they ship to fundcustomers. As the purchasephotomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a high-end lithography tool. Paymentsphotomask. At the end of a reporting period, there will be a number of revenue contracts on which we have performed; for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the capital lease,contract.
As stated above, photomasks are manufactured in accordance with proprietary designs provided by our customers; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities and Accounts Receivable
We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time. Contract assets reflect our transfer of control to customers of photomasks that are in-process or completed but not yet shipped. A receivable is recognized when we have an unconditional right to payment for our performance, which bears interest at 2.77%generally occurs when we ship the photomasks. Our contract assets account primarily consists of a significant amount of our work-in-process inventory and fully-manufactured photomasks which have not yet shipped, if we have an enforceable right to collect consideration (including a reasonable profit), in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. Our contract assets and liabilities are typically classified as current, as our production cycle and our lead times are both under one year. Contract assets of $6.2 million are included in “Other” current assets, and contract liabilities of $7.9 million are included in “Other” current liabilities in our April 28, 2019 condensed consolidated balance sheet. At November 1, 2018, our date of adoption of Topic 606, we had contract assets of $4.6 million and contract liabilities of $7.8 million. We did not impair any contract assets during the six-month period ended April 28, 2019, and, during the respective three- and six-month periods ended April 28, 2019, we recognized $0.5 million per and $1.2 million of revenue from the settlement of contract liabilities that existed at the beginning of those periods.
We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable. We did not incur any credit losses on our accounts receivable during the six-month through July 2018. period ended April 28, 2019.
Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require payment in advance of performance. We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid is one year or less.
In instances when we are paid in advance of our performance, we record a contract liability and, as allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically, advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.
Disaggregation of Revenue
The leasefollowing tables present our revenue for the three and six-month periods ended April 28, 2019, disaggregated by product type, geographic location, and timing of recognition.
Revenue by Product Type | Three Months Ended April 28, 2019 | Six Months Ended April 28, 2019 | ||||||
IC | ||||||||
| High-end | $ | 38,429 | $ | 72,995 | ||||
| Mainstream | 60,158 | 120,471 | ||||||
| Total IC | $ | 98,587 | $ | 193,466 | ||||
FPD | ||||||||
| High-end | $ | 22,956 | $ | 44,422 | ||||
| Mainstream | 10,037 | 18,403 | ||||||
| Total FPD | $ | 32,993 | $ | 62,825 | ||||
| $ | 131,580 | $ | 256,291 | |||||
Revenue by Geographic Location | ||||||||
| Taiwan | $ | 56,469 | $ | 114,209 | ||||
| Korea | 38,038 | 73,275 | ||||||
| United States | 26,742 | 49,215 | ||||||
| Europe | 8,435 | 16,788 | ||||||
| China | 1,467 | 1,730 | ||||||
| Other | 429 | 1,074 | ||||||
| $ | 131,580 | $ | 256,291 | |||||
Revenue by Timing of Recognition | ||||||||
| Over time | $ | 123,853 | $ | 244,699 | ||||
| At a point in time | 7,727 | 11,592 | ||||||
| $ | 131,580 | $ | 256,291 | |||||
Contract Costs
We pay commissions to third party sales agents for certain sales that they obtain for us. However, the basis of the commissions is subjectthe transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a cross defaultshort time period, our backlog of orders is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with cross acceleration provisionthe completion of the manufacturing process of in-process photomasks related to certain nonfinancial covenants incorporated into our credit facility. Ascontracts that have an original duration of April 29, 2018, the total amount payable through August 2018 (the end of the lease term) was $1.9 million, substantially all of which represented principal.one year or less.
Sales and Similar Taxes
We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
Product Warranty
Our photomasks are sold under warranties that generally range from 1 to 12 months. We warrant that our photomasks conform to customer specifications, and that we will repair or replace, at our option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics.Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. Total share-based compensation costs for the three and six-month periods ended April 28, 2019, were $0.9 million and $2.0 million, respectively, and $0.8 million and $1.6 million for the three and six-month periods ended April 29, 2018, were $0.8 million and $1.6 million, respectively, and $0.9 million and $1.9 million for the three and six month periods ended April 30, 2017, respectively. The Company received cash from option exercises of $0.3 million and $0.8 million for the three and six-month periods ended April 28, 2019, respectively, and $2.9 million and $3.6 million for the three and six-month periods ended April 29, 2018, respectively, and $1.0 million and $2.1 million for the three and six month periods ended April 30, 2017, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.
Stock Options
Option awards generally vest in one-to-four years, and have a ten-year contractual term. All incentive and non-qualified stock option grants have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of our common stock on the dates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
There were no share options granted during the three month periodthree-month periods ended April 28, 2019 and April 29, 2018, and 10,0002018. There were 132,000 share options granted during the three monthsix-month period ended April 30, 2017,28, 2019, with a weighted-average grant dategrant-date fair value of $3.35$3.31 per share. There wereshare, and 252,000 share options granted during the six monthsix-month period ended April 29, 2018, with a weighted-average grant dategrant-date fair value of $2.74 per share, and 348,750 share options granted during the six month period ended April 30, 2017, with a weighted-average grant date fair value of $3.59 per share. As of April 29, 2018,28, 2019, the total unrecognized compensation cost related to unvested option awards was approximately $2.1$1.2 million. That cost is expected to be recognized over a weighted-average amortization period of 2.12.4 years.
The weighted-average inputs and risk-free rate of return ranges used to calculate the grant-date fair value of options issued during the three and six-month periods ended April 29, 201828, 2019 and April 30, 2017,29, 2018, are presented in the following table.
| Three Months Ended | Six Months Ended | |||||||||||||||
April 28, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | |||||||||||||
| Volatility | N/A | N/A | 33.1 | % | 31.6 | % | ||||||||||
| Risk free rate of return | N/A | N/A | 2.5-2.9 | % | 2.2 | % | ||||||||||
| Dividend yield | N/A | N/A | 0.0 | % | 0.0 | % | ||||||||||
| Expected term | N/A | N/A | 5.1 years | 5.0 years | ||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
April 29, 2018 | April 30, 2017 | April 29, 2018 | April 30, 2017 | |||||||||||||
| Volatility | N/A | 31.6 | % | 31.6 | % | 32.2 | % | |||||||||
| Risk free rate of return | N/A | 2.0 | % | 2.2 | % | 1.9-2.0 | % | |||||||||
| Dividend yield | N/A | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||
| Expected term | N/A | 5.0 years | 5.0 years | 5.0 years | ||||||||||||
Information on outstanding and exercisable option awards as of April 29, 2018,28, 2019, is presented below.
| Options | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||
| Outstanding at April 29, 2018 | 2,613,640 | $ | 8.47 | 6.2 years | $ | 2,054 | |||||||||
| Exercisable at April 29, 2018 | 1,744,975 | $ | 7.62 | 5.0 years | $ | 2,054 | |||||||||
| Options | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||
| Outstanding at April 28, 2019 | 2,405,318 | $ | 8.88 | 5.7 years | $ | 2,968 | |||||||
| Exercisable at April 28, 2019 | 1,795,651 | $ | 8.47 | 4.9 years | $ | 2,797 | |||||||
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one-to-four years. The fair value of the awards is determined on the date of grant, based on the closing price of our common stock. There were 435,000 restricted stock awards granted during the six-month period ended April 28, 2019, with a grant date fair value of $9.80 per share. There were 10,000 restricted stock awards granted during the three-month period ended April 29, 2018, with a grant-date fair value of $8.40 per share, and 290,000 restricted stock awards granted during the six-month period ended April 29, 2018, with a weighted-average fair value of $8.62 per share. There were 25,000 restricted stock awards granted during the three month period ended April 30, 2017, with a grant date fair value of $10.75, and 285,000 restricted stock awards granted during the six month period ended April 30, 2017, with a weighted-average grant date fair value of $11.30 per share. As of April 29, 2018,28, 2019, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $3.7$5.7 million. That cost is expected to be recognized over a weighted-average amortization period of 2.82.9 years. As of April 29, 2018,28, 2019, there were 472,673698,613 shares of restricted stock outstanding.
NOTE 8 - INCOME TAXES
We calculate our provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
The effective tax rate of 18.8%25.0% differs from the U.S. statutory rate of 21.0% in the three-month period ended April 28, 2019, primarily due to the elimination of tax benefits in jurisdictions, including the U.S, in which it is not more likely than not that the benefit will be realized; the effects of these eliminations were partially offset by the benefits of tax holidays and 6.5% forinvestment credits in certain foreign jurisdictions.
The effective tax rate of 20.9% differs from the U.S. statutory rate of 21.0% in the six-month period ended April 28, 2019, primarily due to the elimination of the tax benefits in jurisdictions, including the U.S, in which it is not more likely than not that the benefit will be realized; the effects of these eliminations were partially offset by the benefits of the settlement of a tax audit, as well as a tax holiday and investment credits in certain foreign jurisdictions.
Unrecognized tax benefits related to uncertain tax positions were $0.8 million at April 28, 2019, and $1.9 million at October 31, 2018, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at April 28, 2019 and October 31, 2018. The year to date reduction in the amount primarily resulted from settlement of a tax audit in Taiwan in Q1 FY19. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that it is reasonably possible that an immaterial amount of its uncertain tax positions (including accrued interest and penalties, net of tax benefits) may be resolved over the next twelve months. The resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.
We were granted a five-year tax holiday in Taiwan which expires at the end of calendar year 2019. This tax holiday reduced foreign taxes by $0.3 million, and $1.1 million in the three and six-month periods ended April 28, 2019, and $0.7 and $0.8 million in the respective prior year periods. The per share impact of the tax holiday was a deminimus amount for the three-month period ended April 28, 2019, and one cent per share for the six-month periods ended April 28, 2019 and April 29, 2018, respectively,and the three-month period ended April 29, 2018.
The effective tax rates of 18.8% and 6.5% differ from the post U.S. Tax Reform blended statutory rate of 23.4%, in the three and six-month periods ended April 29, 2018, primarily due to the benefitbenefits from U.S. and Taiwan Tax Reform (as discussed below), earnings being taxed at lower statutory rates in foreign jurisdictions, and the benefitbenefits of various investment credits in a foreign jurisdiction, and a tax holiday in Taiwan.jurisdiction.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended, that we expect to have a positive impactamended. Based on our future after-tax earnings. Under ASC Topic 740 – “Income Taxes” (“ASC 740”), the effects of the new legislation are recognized in the interim and annual accounting periods that include the enactment date, which falls withinwe accounted for the Act in our six monthinterim period ended April 29,January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under ASCAccounting Standards Codification Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018, and finalized the effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes:
The Act repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provided that existing AMT credit carryforwards are fully refundable. We recognized a three-step process$3.9 million benefit on AMT credit carryforwards that we previously determined were not more likely than not going to be applied at each reporting periodrealized and reversed the previously-recorded valuation allowance.
As of January 1, 2018, the Act reduced the corporate income tax rate from a maximum 35% to account fora flat 21%, requiring us to revalue our deferred tax assets and qualitatively disclose: (1)liabilities utilizing the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and, therefore, taxes are reflected in accordance with law priorrate applicable to the enactment of the Act.
The Act that could affect our fiscal year 2018 U.S. taxable income. As such, our accountingimposed a transition tax for certain elements within the Act is preliminary, and subject to further clarificationa one-time deemed repatriation of the Actaccumulated earnings of foreign subsidiaries. The entire amount of transition tax was fully offset by tax credits (including carryforwards) that resulted in a provisional net zero impact on the Internal Revenue Service. The following is a discussion of the major provisions of the Act that affect our financial statements, and our preliminary assessment of the impact of such provisions on our financial statements.
On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17% to 20%. Under generally accepted accounting principles, we are, which required us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our analysis indicates that our Taiwan deferred tax asset will be increased and, accordingly,Accordingly, a net benefit of $0.2 million wasis reflected in our January 28, 2018, tax provision.
Adoption of New Accounting Standard
In the U.S. statutory ratefirst quarter of 35%2019, the Company adopted Accounting Standards Update No. 2016-16 – “Intra-Entity Transfers Other Than Inventory”, primarily duewhich requires an entity to earnings being taxed at lower statutory ratesrecognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. In connection therewith, we recorded a transition adjustment of $1.1 million that reduced prepaid income taxes (included in foreign jurisdictions, combined withOther current assets on the benefit of various investment credits in a foreign jurisdiction. Valuation allowances in jurisdictions with historic losses eliminate the tax benefit that would be recognized in these jurisdictions. We have two five-year tax holidays in Taiwan, one that expired in 2017 and the other that expires in 2019. The latter tax holiday reduced foreign taxes by $0.7 million and $0.8 million in the three and six month periods ended April 29, 2018, respectively, and had a $0.01 effect on earnings per share in each period. For the three and six month periods ended April 30, 2017, the company realized benefits from the tax holidays of $0.1 million and $0.2 million, respectively, with de minimis per share effects for these periods.condensed consolidated balance sheets) against beginning retained earnings.
NOTE 9 - EARNINGS PER SHARE
The calculations of basic and diluted earnings per share is presented below.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
April 29, 2018 | April 30, 2017 | April 29 2018 | April 30 2017 | April 28, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | |||||||||||||||||||||||||
| Net income attributable to Photronics, Inc. shareholders | $ | 10,665 | $ | 1,797 | $ | 16,563 | $ | 3,744 | $ | 8,479 | $ | 10,665 | $ | 13,746 | $ | 16,563 | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
| Interest expense on convertible notes, net of tax | 496 | - | 992 | - | 349 | 496 | 845 | 992 | ||||||||||||||||||||||||
| Earnings used for diluted earnings per share | $ | 11,161 | $ | 1,797 | $ | 17,555 | $ | 3,744 | $ | 8,828 | $ | 11,161 | $ | 14,591 | $ | 17,555 | ||||||||||||||||
| Weighted-average common shares computations: | ||||||||||||||||||||||||||||||||
| Weighted-average common shares used for basic earnings per share | 69,293 | 68,426 | 69,024 | 68,301 | 66,261 | 69,293 | 66,422 | 69,024 | ||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||
| Convertible notes | 5,542 | - | 5,542 | - | 3,898 | 5,542 | 4,720 | 5,542 | ||||||||||||||||||||||||
| Share-based payment awards | 355 | 959 | 486 | 976 | 438 | 355 | 451 | 486 | ||||||||||||||||||||||||
| Potentially dilutive common shares | 5,897 | 959 | 6,028 | 976 | 4,336 | 5,897 | 5,171 | 6,028 | ||||||||||||||||||||||||
| Weighted-average common shares used for diluted earnings per share | 75,190 | 69,385 | 75,052 | 69,277 | 70,597 | 75,190 | 71,593 | 75,052 | ||||||||||||||||||||||||
| Basic earnings per share | $ | 0.15 | $ | 0.03 | $ | 0.24 | $ | 0.05 | $ | 0.13 | $ | 0.15 | $ | 0.21 | $ | 0.24 | ||||||||||||||||
| Diluted earnings per share | $ | 0.15 | $ | 0.03 | $ | 0.23 | $ | 0.05 | $ | 0.13 | $ | 0.15 | $ | 0.20 | $ | 0.23 | ||||||||||||||||
The table below shows the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive. The table also shows convertible notes that, if converted, would have been anti-dilutive.
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
April 29, 2018 | April 30, 2017 | April 29, 2018 | April 30, 2017 | |||||||||||||||||||||||||||||
April 28, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | |||||||||||||||||||||||||||||
| Share-based payment awards | 2,022 | 1,082 | 1,803 | 1,038 | 1,204 | 2,022 | 1,134 | 1,803 | ||||||||||||||||||||||||
| Convertible notes | - | 5,542 | - | 5,542 | ||||||||||||||||||||||||||||
| Total potentially dilutive shares excluded | 2,022 | 6,624 | 1,803 | 6,580 | 1,204 | 2,022 | 1,134 | 1,803 | ||||||||||||||||||||||||
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth thechanges in our accumulated other comprehensive income by component (net of tax of $0)for the three and six-month periods ended April 29, 201828, 2019 and April 30, 2017.29, 2018.
| Three Months Ended April 29, 2018 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at January 29, 2018 | $ | 32,848 | $ | (16 | ) | $ | (704 | ) | $ | 32,128 | ||||||
| Other comprehensive income (loss) before Reclassifications | (11,098 | ) | - | 54 | (11,044 | ) | ||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 16 | - | 16 | ||||||||||||
| Net current period other comprehensive (loss) income | (11,098 | ) | 16 | 54 | (11,028 | ) | ||||||||||
| Less: other comprehensive (income) loss attributable to noncontrolling interests | 2,683 | - | (27 | ) | 2,656 | |||||||||||
| Balance at April 29, 2018 | $ | 24,433 | $ | - | $ | (677 | ) | $ | 23,756 | |||||||
| Three Months Ended April 28, 2019 | ||||||||||||
Foreign Currency Translation | Other | Total | ||||||||||
| Balance at January 28, 2019 | $ | 971 | $ | (628 | ) | $ | 343 | |||||
| Other comprehensive (loss) income | (7,054 | ) | 25 | (7,029 | ) | |||||||
| Less: other comprehensive income attributable to noncontrolling interests | 129 | 13 | 142 | |||||||||
| Balance at April 28, 2019 | $ | (6,212 | ) | $ | (616 | ) | $ | (6,828 | ) | |||
| Three Months Ended April 29, 2018 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at January 29, 2018 | $ | 32,848 | $ | (16 | ) | $ | (704 | ) | $ | 32,128 | ||||||
| Other comprehensive (loss) income before Reclassifications | (11,098 | ) | - | 54 | (11,044 | ) | ||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 16 | - | 16 | ||||||||||||
| Net current period other comprehensive (loss) income | (11,098 | ) | 16 | 54 | (11,028 | ) | ||||||||||
| Less: other comprehensive (loss) income attributable to noncontrolling interests | (2,683 | ) | - | 27 | (2,656 | ) | ||||||||||
| Balance at April 29, 2018 | $ | 24,433 | $ | - | $ | (677 | ) | $ | 23,756 | |||||||
| Three Months Ended April 30, 2017 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at January 30, 2017 | $ | (8,448 | ) | $ | (145 | ) | $ | (937 | ) | $ | (9,530 | ) | ||||
| Other comprehensive income (loss) before reclassifications | 18,382 | - | (74 | ) | 18,308 | |||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 32 | - | 32 | ||||||||||||
| Net current period other comprehensive income (loss) | 18,382 | 32 | (74 | ) | 18,340 | |||||||||||
| Less: other comprehensive (income) loss attributable to noncontrolling interests | (4,676 | ) | - | 37 | (4,639 | ) | ||||||||||
| Balance at April 30, 2017 | $ | 5,258 | $ | (113 | ) | $ | (974 | ) | $ | 4,171 | ||||||
| Six Months Ended April 28, 2019 | ||||||||||||
Foreign Currency Translation Adjustments | Other | Total | ||||||||||
| Balance at November 1, 2018 | $ | (4,328 | ) | $ | (638 | ) | $ | (4,966 | ) | |||
| Other comprehensive (loss) income | (482 | ) | 44 | (438 | ) | |||||||
| Less: other comprehensive income attributable to noncontrolling interests | 1,402 | 22 | 1,424 | |||||||||
| Balance at April 28, 2019 | $ | (6,212 | ) | $ | (616 | ) | $ | (6,828 | ) | |||
| Six Months Ended April 29, 2018 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at October 30, 2017 | $ | 7,627 | $ | (48 | ) | $ | (688 | ) | $ | 6,891 | ||||||
| Other comprehensive income before Reclassifications | 18,989 | - | 22 | 19,011 | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 48 | - | 48 | ||||||||||||
| Net current period other comprehensive income | 18,989 | 48 | 22 | 19,059 | ||||||||||||
| Less: other comprehensive income attributable to noncontrolling interests | 2,183 | - | 11 | 2,194 | ||||||||||||
| Balance at April 29, 2018 | $ | 24,433 | $ | - | $ | (677 | ) | $ | 23,756 | |||||||
| Six Months Ended April 29, 2018 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at October 30, 2017 | $ | 7,627 | $ | (48 | ) | $ | (688 | ) | $ | 6,891 | ||||||
| Other comprehensive income (loss) before reclassifications | 18,989 | - | 22 | 19,011 | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 48 | - | 48 | ||||||||||||
| Net current period other comprehensive income (loss) | 18,989 | 48 | 22 | 19,059 | ||||||||||||
| Less: other comprehensive income attributable to noncontrolling interests | (2,183 | ) | - | (11 | ) | (2,194 | ) | |||||||||
| Balance at April 29, 2018 | $ | 24,433 | $ | - | $ | (677 | ) | $ | 23,756 | |||||||
| Six Months Ended April 30, 2017 | ||||||||||||||||
Foreign Currency Translation Adjustments | Amortization of Cash Flow Hedge | Other | Total | |||||||||||||
| Balance at October 31, 2016 | $ | (6,567 | ) | $ | (177 | ) | $ | (927 | ) | $ | (7,671 | ) | ||||
| Other comprehensive income (loss) before reclassifications | 17,769 | - | (94 | ) | 17,675 | |||||||||||
| Amounts reclassified from accumulated other comprehensive income | - | 64 | - | 64 | ||||||||||||
| Net current period other comprehensive income (loss) | 17,769 | 64 | (94 | ) | 17,739 | |||||||||||
| Less: other comprehensive (income) loss attributable to noncontrolling interests | (5,944 | ) | - | 47 | (5,897 | ) | ||||||||||
| Balance at April 30, 2017 | $ | 5,258 | $ | (113 | ) | $ | (974 | ) | $ | 4,171 | ||||||
The amortization of the cash flow hedge is included in cost of sales in the condensed consolidated statements of income for all periods presented.
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of our convertible senior notes is a Level 2 measurement, as it iswas determined using inputs that were either observable market data, or could be derived from, or corroborated with, observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at April 28, 2019 or October 31, 2018.
Fair Value of Financial Instruments Not Measured at Fair Value
The fair value of our convertible senior notes was a Level 2 measurement, as it was determined using inputs that were either observable market data or could be derived from or corroborated with observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. The table below presents the fair and carrying values of our convertible senior notes at April 29,October 31, 2018.
| October 31, 2018 | ||||||||
| Fair Value | Carrying Value | |||||||
| 3.25% convertible senior notes matured 2019 | $ | 62,094 | $ | 57,453 | ||||
NOTE 12 – SHARE REPURCHASE PROGRAM
In October 2018, the Company’s Board of Directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on October 22, 2018, and October 29, 2017.was terminated on February 1, 2019.
| April 29, 2018 | October 29, 2017 | |||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
| 3.25% convertible senior notes due 2019 | $ | 62,549 | $ | 57,395 | $ | 67,396 | $ | 57,337 | ||||||||
Six Months Ended April 28, 2019 | From Inception Date of October 22, 2018 | |||||||
| Number of shares repurchased | 1,137 | 1,467 | ||||||
| Cost of shares repurchased | $ | 10,694 | $ | 13,807 | ||||
| Average price paid per share | $ | 9.40 | $ | 9.41 | ||||
NOTE 1213 - COMMITMENTS AND CONTINGENCIES
As of April 29, 2018, we28, 2019, the Company had commitments outstanding for capital equipment expenditures of approximately $176$37 million, nearly all of which relatesrelated to building and equipping our China facilities under construction.facilities.
We are subject to various claims that arise in the ordinary course of business. We believe that such claims, individually or in the aggregate, will not have a material effect on the condensed consolidated financial statements.
NOTE 1314 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Bulletin No. 118 (“SAB 118”)Standards Updates to address situations where the accounting under ASC Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, and changed existing U.S. tax law. We adopted this guidance in our first quarter of fiscal year 2018. Please see Note 8 for a discussion of the effects of adopting this guidance.be Implemented
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss impairment methodology, found in current GAAP, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 is effective for Photronics, Inc. in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016 – 09 “Improvements to Employee Share-Based Payment Accounting”, which simplifies the accounting for share-based payment transactions including their income tax consequences, classification as either equity or liability awards, classification on the statement of cash flows, and other areas. The method of adoption varies with the different aspects of the Update. Adoption of this guidance in the first quarter of our fiscal year 2018 did not have a material impact on our financial statements.
Accounting Standards Updates Implemented
In November 2016, the FASB issued ASU is2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for Photronics, Inc. in theits first quarter of fiscal year 2020, with early application permitted. We are currently evaluating the effect that2019 and was applied on a retrospective transition basis. Our adoption of this ASU will have onUpdate did not materially impact our consolidated financial statements.cash flows statement.
In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for us in our first quarter of fiscal year 2019 and should be applied on a modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. Please see Note 8 for a discussion of the effects of adopting the guidance.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which will supersedesuperseded nearly all then existing revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which defersdeferred the effective date of ASU 2014-09 by one year and allowsallowed entities to early adopt, but no earlier than the original effective date. ASU 2014-09 will now be effective for Photronics, Inc. in the first quarter of our fiscal year 2019. This update allowsallowed for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amendsamended guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 arewere the same as those for ASU 2014-09.
We anticipateadopted the new revenue and related guidance on November 1, 2018, using the modified retrospective approach, under which we increased our accounts receivable by $0.6 million, recognized contract assets of $4.6 million, reduced our inventories balance by $3.7 million, and recorded an accrual for income taxes of $0.3 million. The recognition and adjustments to these items was reflected in increases to our retained earnings and noncontrolling interest balances of $1.1 million and $0.1 million, respectively. The most significant impact of the new guidance on our financial statements is its requirement for us to recognize revenue as we manufacture products for which, in the event that the customer cancels the contract, we are entitled to reasonable compensation for work we have completed prior to cancellation. Prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods. The impact of the adoption of this ASUguidance on our January 27, 2019, financial statements is presented in Note 6.
The guidance allows for a number of accounting policy elections and practical expedients. In addition to our above-mentioned election to use the modified retrospective application method for adopting the guidance, those we have employed that are most significant to us are summarized below.
Shipping and handling activities performed after control of a good is transferred to a customer
We have elected to treat shipping and handling activities that occur after control of a good is transferred to a customer as activities to fulfill our promise to transfer goods to the customer. Thus, such activities will result in the accelerated recognition of certain revenue streams as, upon adoption of this Update, some amounts in our work-in process inventory willnot be considered to represent promisedbe separate performance obligations under contracts with our customers.
Non-recognition of financing component when we transfer goods transferredto a customer and the period between when we transfer and when we are paid will be less than one year
We have elected the practical expedient that allows for the non-recognition, as a component of a customer contract, of a financing component when the period between when we transfer a good and when we are paid will be less than one year.
Exclusion of sales and similar taxes collected from customers in the transaction price
Consistent with our practice before adoption of the new guidance, we will not recognize sales and similar taxes we collect from customers as revenue.
Use of an “input method” to measure our progress towards the transfer of control of performance obligations to customers
As, in our judgment, an input method based on our efforts to satisfy our performance obligations will best serve to depict the transfer of control of our performance obligations to our customers, requiring uswe have adopted an accounting policy to recognize consideration for thoseemploy such a method. Our decision was based primarily on the facts that our photomasks are not physically transferred goods in amountsto customers until they are complete, and that we expectcan employ our input-based cost accumulation systems and methods to be entitledmeasure our progress towards the transfer of control of our performance obligations to receive in exchange for them. However, we cannot currently quantify with reasonable certainty the effect this anticipated acceleration of revenue will have on our consolidated financial statements. We expect to adopt this guidance using the modified retrospective approach.customers.
Non-disclosure of the transaction prices of unsatisfied or partially satisfied performance obligations
For contracts that have an original expected duration of one year or less, we have elected the practical expedient that allows us not to disclose the aggregate transaction prices of unsatisfied or partially-satisfied performance obligations that exist at the end of a reporting period.
| Item 2. |
Overview
We sell substantially all of our photomasks to semiconductor and Flat Panel Display (“FPD”)FPD designers and manufacturers. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. Our selling cycle is tightly interwoven with the development and release of new semiconductor and FPD designs and applications, particularly as they relate to the microelectronic industry'smicro-electronic industry’s migration to more advanced product innovation, design methodologies and fabrication processes. We believe that the demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized Integrated Circuits (“ICs”),ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, FPD and photomask design and semiconductor and FPD production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronic industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices.prices, with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of time, sometimes within 24 hours. This results in a minimal level of backlog orders, typically one to two weeks of backlog for IC photomasks and two to three weeks of backlog for FPD photomasks.
The global semiconductor and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high performancehigh-performance devices, including, but not limited to, mobile display devices, mobile communications, and computing solutions. While we cannot predict the timing of the industry'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 also enable us to continually reinvest in our global infrastructure.
In the second quarter of fiscal 2019, PDMC, the Company’s majority owned IC subsidiary in Taiwan, declared a dividend of which 49.99%, or approximately $18.8 million, is payable to noncontrolling interests.
In the first quarter of fiscal 2019, PDMC paid a dividend, of which 49.99%, or approximately $26.1 million, was paid to noncontrolling interests.
In November 2018, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of the borrowing, pursuant to which PDMCX will enter into separate loan agreements (“the Project Loans”) for each borrowing. The Project Loans, which are denominated in renminbi, are being used to finance certain capital expenditures in China. PDMCX has agreed to grant a lien on the land, building and certain equipment owned by PDMCX as collateral for the Project Loans. As of April 28, 2019, PDMCX had borrowed $26.3 million against this approval, which includes $11.4 million that was borrowed during the three-month period ended April 28, 2019. Subsequent to April 28, 2019, PDMCX borrowed an additional $9.7 million. Repayments on the amounts borrowed before the three-month period ended April 28, 2019, will be made semiannually, commencing in June 2020 and ending in December 2022. Repayments on the amount borrowed after the three-month period ended January 27, 2019, will be made semiannually, commencing in June 2023 and ending in December 2025. The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at April 28, 2019). Interest incurred on these loans will be reimbursed through incentives afforded to us by the Xiamen Torch Hi-Tech Industrial Development Zone which, to a prescribed limit, provide for such reimbursements.
In the first quarter of 2019, PDMCX was approved for credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. No guarantees were required as part of this approval. As of April 28, 2019, PDMCX had borrowed $13.8 million against this approval of which $3.7 million were 90-day loans. The remaining $10.1 million borrowed (the “Working Capital Loans”) is to be repaid semiannually from the dates of the individual borrowings; repayments commenced in May 2019 and end in January 2022. In May 2019, we borrowed an additional $1.9 million against this approval, and repaid $0.1 million. The 90-day loans were repaid in our second quarter of 2019. The Working Capital Loans, which are denominated in renminbi, are being used for general financing purposes, including payments of import and value added taxes. The interest rates on the 90-day loans were the market rate on the date of issuance (4.9%), and interest rates on the Working Capital Loans are approximately 5%, and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points. Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone which, to a prescribed limit, provide for such reimbursements.
In the fourth quarter of fiscal 2018, we entered into an amended and restated credit agreement (“the new agreement”) that expires in September 2023. The new agreement, which replaced our prior credit agreement, has a $50 million borrowing limit, and a $50 million expansion capacity, which represents a $25 million increase over the previous credit agreement. The new agreement is secured by substantially all of our assets located in the United States and common stock we own in certain of our foreign subsidiaries, and limits the amount we can pay in cash dividends on Photronics, Inc. stock. The new agreement contains the following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance, all of which we were in compliance with at April 28, 2019. We had no outstanding borrowings against the new agreement at April 28, 2019, and $50 million was available for borrowing. The interest rate on the new agreement (2.5% at April 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit agreement.
In the fourth quarter of fiscal 2018, the Company’s Board of Directors authorized the repurchase of up to $25 million of its common stock, to be executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under 10b5-1, on October 22, 2018, and expired on February 1, 2019. In total, we repurchased 1.5 million shares at a cost of $13.8 million (an average of $9.41 per share) under this program.
In the first quarter of fiscal 2018, we announced the successful closing of the China joint venture agreement with Dai Nippon Printing Co., Ltd. (“DNP”), which we had agreed to enter into and announced in the third quarter of fiscal 2017.2017 (see discussion below). Under the agreement, our wholly-owned Singapore subsidiary owns 50.01% of the joint venture, which is named Xiamen American Japan Photronics DNP Mask Corporation XiamenCo., Ltd. (PDMCX), and a subsidiary of DNP owns the remaining 49.99%. The financial results of the joint venture are included in the Photronics, Inc. consolidated financial statements. See Note 54 of the condensed consolidated financial statements for additional information on the joint venture.
In the fourth quarter of fiscal 2017, we announced that Photronics UK, Ltd., our wholly owneda wholly-owned subsidiary of ours, signed an investment agreement with the Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we willagreed to invest a minimum of $160 million a portion of which may be funded with local borrowings, to build and operate a research and development and manufacturing facility for high-end and mainstream FPD photomasks. TheAs of April 28, 2019, we have met the minimum investment requirement and satisfied the terms of the agreement. Hefei State Hi-tech Industry Development Zone will provide certain investment incentives and support for this facility, which will have initial capability to produce up to G10.5+ large area masks and AMOLED products. Construction beganof this facility was completed in late 20172018, and production is anticipatedcommenced in the second quarter of 2019. We expect depreciation expense to commence during the first half of 2019.increase accordingly as production activities continue to ramp up.
In the fourth quarter of fiscal 2016, Photronics Singapore Pte, Ltd., a wholly ownedwholly-owned subsidiary, signed an investment agreement with the Administrative Committee of Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement, we will build and operate an IC facility to engage in research and development, manufacture and sale of photomasks, in return for which Xiamen Torch will provide certain investment incentives and support. This expansion is also substantially supported by customer commitments for its output. As discussed above, in the first quarter of fiscal 2018, we entered into a joint venture agreement with DNP, under which they obtainedhold a 49.99% ownership interest in this facility.investment. The total investment per the agreement is $160 million, toof which approximately $13 million remained for Photronics as of April 28, 2019, and will be funded over the next several yearsquarters with cash and local borrowings. Construction began in 2017 and production is anticipated to start during the first half ofcommence later in 2019. We expect depreciation expense will increase accordingly as production activities ramp up.
Material Changes in Results of Operations
Three Months ended April 28, 2019, January 27, 2019 and April 29, 2018, and Six Months ended April 29, 201828, 2019 and April 30, 201729, 2018
The following table presents selected operating information expressed as a percentage of revenue.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | April 28, 2019 | January 27, 2019 | April 29, 2018 | April 28, 2019 | April 29, 2018 | ||||||||||||||||||||||||||||||||||
April 29, 2018 | January 28, 2018 | April 30, 2017 | April 29, 2018 | April 30, 2017 | ||||||||||||||||||||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||
| Cost of goods sold | (74.9 | ) | (77.6 | ) | (81.4 | ) | (76.2 | ) | (80.2 | ) | 80.2 | 79.1 | 74.9 | 79.7 | 76.2 | |||||||||||||||||||||||||
| Gross profit | 25.1 | 22.4 | 18.6 | 23.8 | 19.8 | 19.8 | 20.9 | 25.1 | 20.3 | 23.8 | ||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (10.4 | ) | (9.5 | ) | (10.1 | ) | (10.0 | ) | (10.0 | ) | 10.1 | 11.0 | 10.4 | 10.6 | 10.0 | |||||||||||||||||||||||||
| Research and development expenses | (2.9 | ) | (3.3 | ) | (3.4 | ) | (3.1 | ) | (3.3 | ) | 2.7 | 3.4 | 2.9 | 3.0 | 3.1 | |||||||||||||||||||||||||
| Operating income | 11.8 | 9.6 | 5.1 | 10.7 | 6.5 | 7.0 | 6.5 | 11.8 | 6.7 | 10.7 | ||||||||||||||||||||||||||||||
| Other income (expense), net | 2.5 | (3.4 | ) | (3.3 | ) | (0.3 | ) | (2.6 | ) | 3.0 | 0.8 | 2.5 | 2.0 | (0.3 | ) | |||||||||||||||||||||||||
| Income before income taxes | 14.3 | 6.2 | 1.8 | 10.4 | 3.9 | 10.0 | 7.3 | 14.3 | 8.7 | 10.4 | ||||||||||||||||||||||||||||||
| Income tax (provision) benefit | (2.7 | ) | 1.5 | (0.4 | ) | (0.7 | ) | (1.2 | ) | |||||||||||||||||||||||||||||||
| Income tax provision | 2.5 | 1.1 | 2.7 | 1.8 | 0.7 | |||||||||||||||||||||||||||||||||||
| Net income | 11.6 | 7.7 | 1.4 | 9.7 | 2.7 | 7.5 | 6.2 | 11.6 | 6.9 | 9.7 | ||||||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (3.4 | ) | (2.9 | ) | 0.3 | (3.2 | ) | (1.0 | ) | |||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | 1.1 | 2.0 | 3.4 | 1.5 | 3.2 | |||||||||||||||||||||||||||||||||||
| Net income attributable to Photronics, Inc. shareholders | 8.2 | % | 4.8 | % | 1.7 | % | 6.5 | % | 1.7 | % | 6.4 | % | 4.2 | % | 8.2 | % | 5.4 | % | 6.5 | % | ||||||||||||||||||||
Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended April 28, 2019 (Q2 FY19), January 27, 2019 (Q1 FY19) and April 29, 2018 (Q2 FY18), January 28, 2018 (Q1 FY18) and April 30, 2017 (Q2 FY17) and for the six months ended April 28, 2019 (YTD FY19) and April 29, 2018 (YTD FY18) and April 30, 2017 (YTD FY17), in millions of dollars.
Revenue
| Q2 FY19 from Q1 FY19 | Q2 FY19 from Q2 FY18 | YTD FY19 from YTD FY18 | ||||||||||||||||||||||||||||||
Revenue in Q2 FY19 | Percent Change | Increase (Decrease) | Percent Change | Increase (Decrease) | Revenue in YTD FY19 | Percent Change | Increase (Decrease) | |||||||||||||||||||||||||
IC | ||||||||||||||||||||||||||||||||
| High-end | $ | 38.4 | 11.2 | % | $ | 3.8 | (7.3 | )% | $ | (3.1 | ) | $ | 73.0 | (2.5 | )% | $ | (1.8 | ) | ||||||||||||||
| Mainstream | 60.2 | (0.3 | )% | (0.1 | ) | (1.1 | )% | (0.6 | ) | 120.5 | (2.1 | )% | (2.6 | ) | ||||||||||||||||||
| Total IC | $ | 98.6 | 3.9 | % | $ | 3.7 | (3.6 | )% | $ | (3.7 | ) | $ | 193.5 | (2.3 | )% | $ | (4.4 | ) | ||||||||||||||
FPD | ||||||||||||||||||||||||||||||||
| High-end | $ | 23.0 | 6.9 | % | $ | 1.5 | 25.9 | % | $ | 4.8 | $ | 44.4 | 20.0 | % | $ | 7.4 | ||||||||||||||||
| Mainstream | 10.0 | 20.0 | % | 1.7 | (2.4 | )% | (0.3 | ) | 18.4 | (4.5 | )% | (0.9 | ) | |||||||||||||||||||
| Total FPD | $ | 33.0 | 10.6 | % | $ | 3.2 | 15.7 | % | $ | 4.5 | $ | 62.8 | 11.6 | % | $ | 6.5 | ||||||||||||||||
| Total Revenue | $ | 131.6 | 5.5 | % | $ | 6.9 | 0.6 | % | $ | 0.8 | $ | 256.3 | 0.8 | % | $ | 2.1 | ||||||||||||||||
The following tables present revenue changes by product type and technology level:geographic area:
| Q2 FY18 compared with Q1 FY18 | Q2 FY18 compared with Q2 FY17 | YTD FY18 compared with YTD FY17 | ||||||||||||||||||||||||||||||
Revenue in Q2 FY18 | Percent Change | Increase (Decrease) | Percent Change | Increase (Decrease) | Revenue in YTD FY18 | Percent Change | Increase (Decrease) | |||||||||||||||||||||||||
| IC | ||||||||||||||||||||||||||||||||
| High-end | $ | 41.5 | 24.2 | % | $ | 8.1 | 82.7 | % | $ | 18.8 | $ | 74.8 | 66.8 | % | $ | 30.0 | ||||||||||||||||
| Mainstream | 60.8 | (2.4 | )% | (1.5 | ) | 1.4 | % | 0.8 | 123.1 | (0.9 | )% | (1.1 | ) | |||||||||||||||||||
| Total IC | $ | 102.3 | 6.9 | % | $ | 6.6 | 23.7 | % | $ | 19.6 | $ | 197.9 | 17.1 | % | $ | 28.9 | ||||||||||||||||
| FPD | ||||||||||||||||||||||||||||||||
| High-end | $ | 18.2 | (2.9 | )% | $ | (0.6 | ) | 8.8 | % | $ | 1.5 | $ | 37.0 | 8.9 | % | $ | 3.0 | |||||||||||||||
| Mainstream | 10.3 | 14.5 | % | 1.3 | 15.7 | % | 1.4 | 19.3 | 27.8 | % | 4.2 | |||||||||||||||||||||
| Total FPD | $ | 28.5 | 2.7 | % | $ | 0.7 | 11.2 | % | $ | 2.9 | $ | 56.3 | 14.7 | % | $ | 7.2 | ||||||||||||||||
| Total Revenue | $ | 130.8 | 5.9 | % | $ | 7.3 | 20.8 | % | $ | 22.5 | $ | 254.2 | 16.5 | % | $ | 36.1 | ||||||||||||||||
| Q2 FY19 from Q1 FY19 | Q2 FY19 from Q2 FY18 | YTD FY19 from YTD FY18 | ||||||||||||||||||||||||||||||
Revenue in Q2 FY19 | Percent Change | Increase (Decrease) | Percent Change | Increase (Decrease) | Revenue in YTD FY19 | Percent Change | Increase (Decrease) | |||||||||||||||||||||||||
| Taiwan | $ | 56.6 | (2.0 | )% | $ | (1.1 | ) | 0.9 | % | $ | 0.5 | $ | 114.2 | 1.4 | % | $ | 1.6 | |||||||||||||||
| Korea | 38.0 | 7.9 | % | 2.8 | 5.4 | % | 1.9 | 73.3 | 6.0 | % | 4.2 | |||||||||||||||||||||
| United States | 26.7 | 19.0 | % | 4.2 | (8.4 | )% | (2.5 | ) | 49.2 | (9.2 | )% | (5.0 | ) | |||||||||||||||||||
| Europe | 8.4 | 1.0 | % | 0.0 | (3.6 | )% | (0.3 | ) | 16.8 | (2.6 | )% | (0.4 | ) | |||||||||||||||||||
| China | 1.5 | 457.8 | % | 1.2 | 505.6 | % | 1.3 | 1.7 | 542.2 | % | 1.4 | |||||||||||||||||||||
| Other | 0.4 | (33.6 | )% | (0.2 | ) | (2.4 | )% | (0.1 | ) | 1.1 | 36.9 | % | 0.3 | |||||||||||||||||||
| $ | 131.6 | 5.5 | % | $ | 6.9 | 0.6 | % | $ | 0.8 | $ | 256.3 | 0.8 | % | $ | 2.1 | |||||||||||||||||
Our quarterly revenues can be affected by the seasonal purchasing tendencies of our customers. As a result, demand for our products is typically negatively impacted during the first, and sometimes the second, quarters of our fiscal year by the North American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods.
| Q2 FY18 with Q1 FY18 | Q2 FY18 with Q2 FY17 | YTD FY18 with YTD FY17 | ||||||||||||||||||||||||||||||
Revenue in Q2 FY18 | Percent Change | Increase (Decrease) | Percent Change | Increase (Decrease) | Revenue in YTD FY18 | Percent Change | Increase (Decrease) | |||||||||||||||||||||||||
| Taiwan | $ | 56.1 | (0.9 | )% | $ | (0.5 | ) | 32.8 | % | $ | 13.8 | $ | 112.6 | 26.9 | % | $ | 23.9 | |||||||||||||||
| Korea | 36.1 | 9.4 | % | 3.1 | 16.7 | % | 5.2 | 69.1 | 12.9 | % | 7.9 | |||||||||||||||||||||
| United States | 29.2 | 16.7 | % | 4.2 | 12.5 | % | 3.3 | 54.2 | 9.4 | % | 4.6 | |||||||||||||||||||||
| Europe | 8.7 | 3.1 | % | 0.2 | 0.4 | % | - | 17.2 | (1.2 | )% | (0.2 | ) | ||||||||||||||||||||
| Other | 0.7 | 82.7 | % | 0.3 | 36.5 | % | 0.2 | 1.1 | (10.3 | )% | (0.1 | ) | ||||||||||||||||||||
| $ | 130.8 | 5.9 | % | $ | 7.3 | 20.8 | % | $ | 22.5 | $ | 254.2 | 16.5 | % | $ | 36.1 | |||||||||||||||||
Revenue increased 20.8%0.6% in Q2 FY18FY19, compared with Q2 FY17,FY18, primarily as a result of high-end IC growth. That revenueFPD growth, which increased 82.7% 25.9% from Q2 FY18, due to growth in both logic and memoryincrease demand for AMOLED products. IC revenue decreased 3.6% as demand moderated from the healthy foundry demand across Asia. IC mainstream increased 1.4%, as demand was slightly stronger. FPD revenue increased 11.2% from Q2 FY17 due to better demand across our products and markets.prior year quarter.
Revenue increased 16.5%0.8% in YTD Q2 2018 when2019, compared with YTD Q2 2017, primarily2018, as a result of high-end FPD revenue, led by an increase in demand for AMOLED display masks, grew 20.0%. Demand for IC growth. That revenue increased 66.8%masks for both memory and logic applications fell from YTD 2017, due to growth in both logic and memory from the healthy foundryQ218, as did demand across Asia. ICfor mainstream decreased 0.9%, as demand was slightly softer. FPD revenue increased 14.7% due to better demand across our products and markets.masks.
Gross Margin
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Q2 FY19 | Q1 FY19 | Percent Change | Q2 FY18 | Percent Change | YTD FY19 | YTD FY18 | Percent Change | |||||||||||||||||||||||||
| Gross profit | $ | 26.0 | $ | 26.1 | (0.4 | )% | $ | 32.8 | (20.7 | )% | $ | 52.1 | $ | 60.5 | (13.8 | )% | ||||||||||||||||
| Gross margin | 19.8 | % | 20.9 | % | 25.1 | % | 20.3 | % | 23.8 | % | ||||||||||||||||||||||
Gross Profitmargin decreased 1.1% from Q1 FY19, as the increase in revenue discussed above was offset by increased compensation expense of $0.6 million, primarily the result of Q2 FY19 having three more days than Q1 FY19. Depreciation expense increased $0.9 million from the prior quarter due both to the additional days in Q2 FY19 and the commencement of depreciation of equipment in our China FPD plant, which began production in April 2019. In addition, inbound freight expense increased $0.5 million sequentially, with much of the increase related to the ramp-up of our China FPD plant, as did service contract expenses of $0.4 million, primarily caused by additional equipment being placed under service contracts at our Korea-based facility. Transfers of manufacturing overhead costs to research and development decreased by $1.0 million from last quarter, reflecting a reduction of qualification activity. These increases were somewhat offset by decreased equipment relocation costs of $1.7 million at our IC facility in China, since the relocated equipment is now in place. Material costs were consistent, as a percentage of revenue, in both periods.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Q2 FY18 | Q1 FY18 | Percent Change | Q2 FY17 | Percent Change | YTD FY18 | YTD FY17 | Percent Change | |||||||||||||||||||||||||
| Gross profit | $ | 32.8 | $ | 27.7 | 18.6 | % | $ | 20.2 | 62.8 | % | $ | 60.5 | % | $ | 43.2 | 40.1 | % | |||||||||||||||
| Gross margin | 25.1 | % | 22.4 | % | 18.6 | % | 23.8 | % | 19.8 | % | ||||||||||||||||||||||
On a year-to-date basis, gross margin decreased 3.5%, with increased losses totaling $5.6 million at our two China-based facilitiesthe most significant cause. Service contract expenseincreased $1.4 million from Q2 FY18, primarilyin units sold response to additional equipment placed under service contracts. These and increased compensation costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.9decreased $0.5 million, or 16.1%3.8%, to $13.3 million in Q2 FY19, from $13.8 million in Q1 FY19, primarily due to decreased non-China compensation related expenses of $0.9 million, which were the result of reduced health insurance costs, share-based compensation expense, and other savings. Smaller increases in other categories somewhat offset these reductions. Selling, general and administrative expenses decreased in Q2 FY19 $0.4 million, or 2.7%, to $13.3 million from $13.6 million in Q2 FY18 from $11.8 million in Q1 FY18,; the decrease was primarily due to increased compensation and selling expenses. Selling, general and administrative expenses increased in Q2 FY18 by $2.7 million, or 25.2%, to $13.7 million, from $10.9 million in Q2 FY17, primarily as a result of increasedlower compensation professional services,-related expenses of $0.8 million, somewhat offset by costs associated with the opening of our China-based facilities and freight expenses.smaller increases in other categories. On a year-to-date basis, selling, general and administrative expenses increased $3.6$1.7 million, or 16.6%6.6%, to $25.4$27.1 million from $21.8 million, primarily due to increases in professional fees, freight, compensation, and travel expenses, most of which increased as a result of activities$25.4 million. Expenses related to our expansion into China.China accounted for $1.3 million of this increase, with compensation related expenses of $0.4 million being the largest single component.
Research and Development
Research and development expense decreased $0.3$0.7 million, or 7.0%16.9%, from Q1 FY18, as decreased expenditures, and relatedFY19, reflecting a decline in IC qualification activities, which was somewhat offset by an increase in the U.S. were somewhat offset by increased spending in Asia.FPD qualifications, including initial qualification activities at our China-based FPD facility. Research and development expense was up moderately ($0.1down $0.3 million in Q2 FY19, or 7.2%, lower than Q2 FY18, and $0.1 million or 2.4%) from Q2 FY17, with increased spending1.5% in Asia (primarily Korea) exceedingYTD FY19 lower than YTD FY18, as decreased expenditures and IC-related activities in the U.S. On a YTD basis, research and development expense increased $0.7 million, or 9.8%, as spending and related activities increased in both the U.S. and Asia.activity was somewhat offset by initial qualification activity at our China-based FPD facility.
Other Income (Expense), net
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
| Q2 FY18 | Q1 FY18 | Q2 FY17 | YTD FY18 | YTD FY17 | Q2 FY19 | Q1 FY19 | Q2 FY18 | YTD FY19 | YTD FY18 | |||||||||||||||||||||||||||||||
| Interest income and other income (expense), net | $ | 3.9 | $ | (3.5 | ) | $ | (3.1 | ) | $ | 0.3 | $ | (4.6 | ) | $ | 4.3 | $ | 1.6 | $ | 3.9 | $ | 5.9 | $ | 0.3 | |||||||||||||||||
| Interest expense | (0.6 | ) | (0.6 | ) | (0.5 | ) | (1.1 | ) | (1.1 | ) | 0.4 | 0.5 | 0.6 | 0.9 | 1.1 | |||||||||||||||||||||||||
| Other income (expense), net | $ | 3.3 | $ | (4.1 | ) | $ | (3.6 | ) | $ | (0.8 | ) | $ | (5.7 | ) | $ | 3.9 | $ | 1.1 | $ | 3.3 | $ | 5.0 | $ | (0.8 | ) | |||||||||||||||
Interest income and other income (expense), net increased from Q1 FY18FY19 by $7.4$2.6 million primarily due to favorablea $2.9 million increase in foreign currency exchange gains in Q2 FY19. Interest income and other income (expense), net increased from Q2 FY18 by $0.4 million as a result of increased foreign currency exchange gains of $1.7 million, the second quarter, in contrast to the losses incurred in the previous quarter, the net effecteffects of which was $6.9 million. In addition, we recognizedwere partially offset by gains on the sale of certain assets in Q2 FY18 of $0.6 million that did not repeat in Q2 FY18. Foreign currency exchange gainsFY19, and reduced interest income of $0.4 million, reflecting lower average cash balance in the second quarter also contrasted with losses experienced in the priorcurrent year quarter, having a favorable net effect of $5.7 million on this line item. The aforementioned gains on the sale of certain assets also contributed to the favorability of the current quarter over Q2 FY17.
quarter. On a year-to-date basis, interestInterest income and other income (expense), net increased $5.6 million primarily as a result of $3.1the impact of $7.5 million of less unfavorablefrom foreign currency exchange gains in YTD FY19, in contrast to losses andincurred in YTD FY18, somewhat offset by the previously-mentioned gains$0.6 million gain on the sale of certain assets.assets in YTD FY18, and reduced interest income of $0.6 million, due to the lower average cash balance in the current year period.
Interest expense decreased $0.2 million in Q2 FY19 from both Q1 FY19 and Q2 FY18, primarily as a result of the repayment of the $57.5 million convertible senior notes in April 2019. On a year-to-date basis, Interest expense also decreased $0.2 million, which was also principally the result of the repayment of the senior convertible notes.
Income Tax (Provision) BenefitProvision
| Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
| Q2 FY18 | Q1 FY18 | Q2 FY17 | YTD FY18 | YTD FY17 | ||||||||||||||||||||||||||||||||||||
| Q2 FY19 | Q1 FY19 | Q2 FY18 | YTD FY19 | YTD FY18 | ||||||||||||||||||||||||||||||||||||
| Income tax (provision) benefit | $ | (3.5 | ) | $ | 1.8 | $ | (0.4 | ) | $ | (1.7 | ) | $ | (2.5 | ) | ||||||||||||||||||||||||||
| Income tax provision | $ | 3.3 | $ | 1.4 | $ | 3.5 | $ | 4.7 | $ | 1.7 | ||||||||||||||||||||||||||||||
| Effective income tax rate | 18.8 | % | (23.1 | )% | 22.5 | % | 6.5 | % | 29.3 | % | 25.0 | % | 15.2 | % | 18.8 | % | 20.9 | % | 6.5 | % | ||||||||||||||||||||
The effective income tax rate is sensitive to the jurisdictional mix of earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances.
The effective income tax rate increased in Q2 FY18,FY19, compared with Q1 FY18, changed from a benefit to a provision,FY19, primarily due to the non-recurring impact of an audit settlement accounted for discretely in Q1 FY19 and changes in the jurisdictional mix of earnings. The effective income tax rate increased in Q2 FY19, compared with Q2 FY18 due to changes in the jurisdictional mix of earnings.
The effective income tax rate increased in YTD FY19, compared with YTD FY18, primarily due to Q1 FY18 nonrecurring tax benefits ($4.2 million) related to tax reform in the US and Taiwan, that were partially offset by an increaseda one-time audit settlement benefit ($0.6 million) from the tax holiday in Taiwan. The effective income tax rate decreasedQ1 FY19, as well as changes in Q2 FY18, compared with Q2 FY17, primarily due to a lower percentagejurisdictional mix of income before taxes being generated in jurisdictions where the company incurs tax losses that, due to valuation allowances, did not result in the recognition of tax benefits.
Net (Income) Loss Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $4.5$1.4 million in Q2 FY18,FY19, which represented an increasea decrease of $0.9$1.1 million and an increase of $4.8$3.2 million from Q1 FY18FY19 and Q2 FY17,FY18, respectively. Year-to-date, noncontrolling interests’ share increased $5.9decreased $4.2 million from YTD FY17.FY18. The changes fromfor all comparative periods were due to changes in net income at our IC manufacturing facilityfacilities in Taiwan and China, in which wenoncontrolling interests hold a 50.01%49.99% ownership interest.interests.
Liquidity and Capital Resources
Our working capital at the end of Q2 FY18FY19 was $333.8$232.7 million, compared with $367.3$311.7 million at the end of Q4 FY17.FY18. The $79.0 million decrease is primarily attributable to the reclassificationa decrease in our cash and cash equivalents of our$104.8 million (net of $57.5 million principal amountused to repay our senior convertible notes, which did not impact working capital). Significant factors contributingto current status.the decrease in our cash balance were $114.9 million used to purchase capital assets (the preponderance of which related to equipping our China-based facilities), and $10.7 million to repurchase our common stock. Our working capital increased due to incentives received and receivable from Chinese government authorities of $19.1 million, and reduced accounts payable of $9.0 million, which was predominantly the result of an $8.6 million decrease from Q4 FY18 of amounts we owed for capital equipment purchases. Cash and cash equivalents increaseddecreased in fiscal year 20182019 by $13.2$162.2 million to $167.1 million from $308.0$329.3 million at October 29, 2017.31, 2018. Net cash used in operating activities was $2.3 million in YTD FY19, compared with $37.9 million provided in YTD FY18. The unfavorable movement in operating cash flows was largely the result of a $37.3 million increase in prepaid value-added taxes at our two China facilities. These prepayments are recoverable through future sales transactions of the facilities. The favorable effects of foreign currency exchange rates contributed $6.3$2.8 million to the increase. Netour reported cash provided by operating activities was $37.9 million in YTD FY18, compared with $46.9 million in YTD FY17, as increased net cash consumed by operating activities exceeded increases in both net income and noncash expenses by $9.0 million. balance at April 28, 2019.
Net cash used in investing activities was $43.7$134.8 million in YTD FY18,FY19, an increase of $23.8$90.9 million from the $19.8$43.8 million used in YTD FY17.FY18. The increase was primarily attributable to increased capital expenditures of $30.0 million;$96.3 million, in excess of ninety percent of which related to the increase attributable to higher CAPEX was partially offset by cashbuilding and equipping of $5.4 million used to acquire a business in YTD FY17 that was not repeated in FY18.our China facilities. Cash flows from financing activities increaseddecreased from funds usedprovided of $0.4$12.7 million in YTD FY17FY18 to $12.7$28.0 million providedof funds used in YTD FY18, primarily dueFY19. In YTD FY19, significant uses of cash in finance activities included the $57.5 million repayment (upon their maturity), of our senior convertible notes, dividends of $26.1 million paid to DNP (related to their 49.99% interest in our IC facility in Taiwan), and $10.7 million to acquire our common stock under a share repurchase program. We received cash in YTD FY19 in the receiptforms of $12.0a $29.4 million contribution from a noncontrolling interestDNP for their investment in our recently established IC joint venture in China, and an increase in proceeds received from share-based arrangementsloans of $1.5 million.$39.6 million to equip and provide working capital for that same facility.
As of April 29, 201828, 2019, and October 29, 2017,31, 2018, our total cash and cash equivalents included $183$134.5 million and $190.0$244.5 million, respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to the U.S. may subject them to U.S. state income taxes and local country withholding taxes in certain jurisdictions. Our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD areas.
As of April 29, 2018,28, 2019, we had capital commitments outstanding of approximately $176 million.$37 million, nearly all of which related to building and equipping our China facilities (discussed below). We intend to finance our capital expenditures with our working capital, cash generated from operations and, if necessary, additional borrowings. We have entered into a joint venture that is constructing an IC facility in China with an estimated total joint investment of $160 million. Our remaining funding commitment for the joint venture is approximately $68$13 million which we will fulfill over the next several years. We have alsoquarters. In Q2 FY19, we commenced construction of anproduction at our newly constructed FPD facility in China in which, as of April 28, 2019, we will invest $160 million over that same period.had invested $160 million. We believe that our cash on hand, cash generated from operations and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our capital requirements exceed our existing cash, cash generated by operations, and cash available under our credit facility.facilities.
Our liquidity, as we operate in a high fixed cost environment, is highly dependent on our revenue, cash conversion cycle, and the timing of our capital expenditures (which can vary significantly from period to period). Depending on conditions in the semiconductor and FPD markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments we have used in the past may not be available to us when required. Consequently, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit facility.
Off-Balance Sheet Arrangements
In January 2018, Photronics, through its wholly-owned Singapore subsidiary, and DNP, through its wholly ownedwholly-owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” ( “PDMCX”(“PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. Under the Joint Venture Operating Agreement of Photronics DNP Mask Corporation XiamenPDMCX (“the Agreement”), DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two yeartwo-year term of the Agreement that cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of thePDMCX’s net assets, of PDMCX, incur a loss. As of April 28, 2019, Photronics and DNP each had net investments in PDMCX of approximately $44.7 million.
We lease certain office facilities and equipment under operating leases that may require us to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms.
Business Outlook
A majority of our revenue growth is expected to continue to come from the AsianAsia region, predominantly in China. In response to this expectation, we have entered into a joint venture that will completecompleted the construction of an IC research and development and manufacturing facility in Xiamen, China, in late 2018. Production is anticipated to begin at this facility duringin the firstsecond half of 2019. In addition, in August 2017, we entered into an investment agreement to construct an FPD manufacturing facility in Hefei, China. Construction of this facility was completed in late 2018, and production commenced in Q1 FY18, and production is anticipated to begin during the first halfsecond quarter of 2019.
We continue to assessmake continual assessments of our global manufacturing strategy and monitor our revenue and related cash flows from operations. This ongoing assessment could result in future facility closures, asset redeployments, additional impairments of intangible or long-lived assets, workforce reductions, or the addition of increased manufacturing facilities, all of which would be based on market conditions and customer requirements.
Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties. While various risks and uncertainties were discussed in Part1, Item 1A in our Annual Report on Form 10-K for the year ended October 29, 2017,31, 2018, a number of other unforeseen factors could cause actual results to differ materially from our expectations.
Effect of Recent Accounting Pronouncements
See “Item 1. Condensed Consolidated Financial Statements–Statements – Notes to Condensed Consolidated Financial Statements – Note 1314 – Recent Accounting Pronouncements” for recent accounting pronouncements that may affect the Company’s financial reporting.
Foreign Currency Exchange Rate Risk
We conduct business in several major international currencies throughout our worldwide operations, and our financial performance may be affected by fluctuations in the exchange rates of these currencies. Changes in exchange rates can positively or negatively affect our reported revenue, operating income, assets, liabilities, and equity. The functional currencies of our Asian subsidiaries are the South Korean won, the New Taiwan dollar, the Chinese renminbi and the Singapore dollar. The functional currencies of our European subsidiaries are the British pound and the euro. In addition, we have transactions and balances in Japanese yen.
We attempt to minimize our risk of foreign currency transaction losses by producing products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing our working capital. However, in some instances, we sell and collect for products in a currency other than the functional currency of the country where it was produced, or purchase products in a currency that differs from the functional currency of the purchasing manufacturing facility.entity. 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.
As of April 29, 2018,28, 2019, a 10% adverse movement in the value of currencies different than the functional currencies of our subsidiaries would have resulted in a net unrealized pre-tax loss of $7.1$34.1 million, which represents a decreasean increase of $8.9 million and $5.9$20.9 million from April 29, 2018 andour exposure at October 29, 2017, respectively.31, 2018. The decreaseincrease in foreign currency exchange rate change risk from both comparative balance sheet dates is primarily the result of decreasedincreased exposures toof the Chinese renminbi, South Korean won and New Taiwan dollar against the U.S. dollar. We do not believe that a 10% change in the exchange rates of non-US dollar currencies, other than the aforementioned currencies and the Japanese yen denominated exposures in Taiwan, and decreased exposure to U.S. dollar denominated exposures in China.Yen, would have had a material effect on our April 28, 2019, condensed consolidated financial statements.
Interest Rate Risk
As the Company will be reimbursed for interest incurred on our outstanding variable rate borrowings through incentives afforded to us by government authorities under agreements currently in place, we did not have any variableinterest rate borrowings. A 10% change in interest rates would not have had a material effect on our consolidated financial position, resultsrisk as of operations, or cash flows in the three month period ended April 29, 2018.28, 2019.
Evaluation of Disclosure Controls and Procedures
We have established and currently maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the second quarter of fiscal year 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no other material changes to risks relating to our business as disclosed in Part 1, Item 1A of our Form 10-K for the year ended October 29, 2017.31, 2018.
Issuer Purchases of Equity Securities
In October 2018, the Company’s Board of Directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The repurchase program was terminated February 1, 2019.
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) | |||||||||||||
Period | ||||||||||||||||
| October 12, 2018 – October 31, 2018 | 0.3 | $ | 9.45 | 0.3 | $ | 21.9 | ||||||||||
| November 1, 2018 – November 25, 2018 | 0.2 | $ | 9.49 | 0.2 | $ | 20.1 | ||||||||||
| November 26, 2018 – December 23, 2018 | 0.7 | $ | 9.38 | 0.7 | $ | 13.4 | ||||||||||
| December 24, 2018 – January 27, 2019 | 0.2 | $ | 9.41 | 0.2 | $ | 11.2 | * | |||||||||
| Total | 1.4 | 1.4 | ||||||||||||||
* The share repurchase program was terminated on February 1, 2019, with no additional shares being purchased subsequent to January 27, 2019.
| (a) | Exhibits | ||||
Exhibit Number | Description | ||||
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Photronics, Inc. | ||
| (Registrant) | ||
| By: | /s/ JOHN P. JORDAN | |
| JOHN P. JORDAN | ||
| Senior Vice President | ||
| Chief Financial Officer | ||
| (Principal Accounting Officer/ | ||
| Principal Financial Officer) |
Date: June 5, 20182019