UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 2024
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 000-15451

graphic
 
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)

Registrant’s telephone number, including area code
 
(203) 775-9000

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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   No

Indicate by check mark 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

The registrant had 63,353,714 shares of common stock outstanding as of February 29, 2024.



PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
January 28, 2024

TABLE OF CONTENTS

 3
   
 4
     
PART I.
FINANCIAL INFORMATION
 

   
Item 1.
 5
     
 
 5
     
 
 6
     
 
 7
     
 
 8
     
 
 9
     
 
 10
     
Item 2.
 24
     
Item 3.
 31
     
Item 4.
 32

   
PART II.
OTHER INFORMATION
 


 
Item 1.
 33


 
Item 1A.
 33


 
Item 2.
 33


 
Item 3.
 33


 
Item 4.
 33


 
Item 5.
 33


 
Item 6.
 35

Glossary of Terms and Acronyms
 
Definitions of certain terms and acronyms that may appear in this report are provided below.
 
 
AMOLED
Active-matrix organic light-emitting diode. A technology used in mobile devices.
 
Application-specific IC
An integrated circuit customized for a particular use, rather than intended for general-purpose use
 
ASC
Accounting Standards Codification
 
ASP
Average Selling Price
 
ASU
Accounting Standards Update
 
DNP
Dai Nippon Printing Co., Ltd.
 
EUV
A wafer lithography technology using the industry standard extreme ultraviolet (EUV) wavelength. EUV photomasks function by selectively reflecting or blocking light, in contrast to conventional photomasks which function by selectively transmitting or blocking light
 
Exchange Act
The Securities Exchange Act of 1934 (as amended)
 
FASB
Financial Accounting Standards Board
 
Form 10-K
Annual Report on Form 10-K
 
Form 10-Q
Quarterly Report on Form 10-Q
 
FPDs
Flat-panel displays, or “displays”
 
Generation
In reference to flat-panel displays, refers to the size range of the underlying substrate to which a photomask is applied. Higher generation (or “G”) numbers represent larger substrates
 
High-end (photomasks)
For IC, photomasks that are 28nm or smaller; for FPD, AMOLED, G10.5+, and LTPS photomasks
 
ICs
Integrated circuits, or semiconductors
 
LIBOR
London Inter-Bank Offered Rate
 
LTPS
Low-Temperature Poly Silicon, a polycrystalline silicon synthesized at relatively low temperatures; polycrystalline silicon in thin-film transistors (TFTs) are used in liquid-crystal display (LCD) flat panels and to drive organic light-emitting diode (OLED) displays
 
MLA
Master Lease Agreement
 
Optical proximity correction
A photolithography enhancement technique applied to compensate for the limitations of light to maintain the edge placement integrity of an original design, imaged onto a silicon wafer, for further processing to an etched pattern.
 
PDMCX
Xiamen American Japan Photronics Mask Co., Ltd., a joint venture of Photronics and DNP
 
Phase-shift photomasks
Photomasks that take advantage of the interference generated by phase differences to improve image resolution in photolithography
 
Pure-play foundry
A company that does not produce a significant volume of IC products of its own design, but rather operates IC fabrication plants dedicated to producing ICs for other companies
 
RMB
Chinese renminbi
 
ROU (assets)
Right-of-use asset
 
SEC
Securities and Exchange Commission
 
Securities Act
The Securities Act of 1933 (as amended)
 
Sputtering
The bombardment of a material with energetic particles to cause microscopic particles of the material to eject from its surface.
 
U.S. GAAP
Accounting principles generally accepted in the United States of America
 
Wafer
A wafer, or silicon wafer, is a thin slice of semiconductor material that, in the fabrication of microelectronics, serves as the substrate for microelectronic devices built in and upon the wafer

Forward-Looking Statements

This Form 10-Q contains forward-looking statements, as defined by the SEC. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by us, or on our behalf. Forward-looking statements are statements other than statements of historical fact, including, without limitation, those statements that include such words as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “predicts”, and similar expressions, and, without limitation, may address our future plans, objectives, goals, strategies, events, or performance, as well as underlying assumptions and other statements that are other than statements of historical facts. On occasion, in other documents filed with the SEC, press releases, conferences, or by other means, we may discuss, publish, disseminate, or otherwise make available, forward-looking statements, including statements contained within Part I, Item 2 – “Management’s Discussion & Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. Our expectations, beliefs, and projections are expressed in good faith and are believed by us to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, information contained in our records, and information we’ve obtained from other parties. However, we can offer no assurance that our expectations, beliefs, or projections will be realized, accomplished, or achieved.

Forward-looking statements within this Form 10-Q speak only as of the date of its filing, and we undertake no obligation to update any such statements to reflect changes in events or circumstances that may subsequently occur. Users of this Form 10-Q are cautioned that various factors may cause actual results to differ materially from those contained in any forward-looking statements found within this Form 10-Q and that they should not place undue reliance on any forward-looking statement. In addition, all forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by the risk factors provided in Part I, Item 1A “Risk Factors” of our Form 10-K, as well as any additional risk factors we may provide in Part II, Item 1A of our Quarterly Reports on Form 10-Q.

PART I.
FINANCIAL INFORMATION

Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)

 
January 28,
2024
   
October 31,
2023
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
508,518
   
$
499,292
 
Short-term investments
    12,996       12,915  
Accounts receivable, net of allowance of $1,090 in 2024 and $1,099 in 2023
    203,607      
194,927
 
Inventories
   
50,680
     
49,963
 
Other current assets
   
31,876
     
28,353
 
Total current assets
   
807,677
     
785,450
 
                 
Property, plant and equipment, net
   
742,671
     
709,244
 
Deferred income taxes
   
22,223
     
21,297
 
Other assets
   
10,265
     
10,230
 
Total assets
 
$
1,582,836
   
$
1,526,221
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current portion of long-term debt
 
$
20,771
   
$
6,621
 
Accounts payable
   
86,925
     
84,024
 
Accrued liabilities
   
77,593
     
94,578
 
Total current liabilities
   
185,289
     
185,223
 
                 
Long-term debt
   
2,655
     
17,998
 
Other liabilities
   
47,838
     
47,391
 
Total liabilities
   
235,782
     
250,612
 
                 
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, 61,746 shares issued and outstanding at January 28, 2024, and 61,310 shares issued and outstanding at October 31, 2023
   
617
     
613
 
Additional paid-in capital
   
502,903
     
502,010
 
Retained earnings
   
587,299
     
561,119
 
Accumulated other comprehensive loss
   
(67,863
)
   
(88,734
)
Total Photronics, Inc. shareholders’ equity
   
1,022,956
     
975,008
 
Noncontrolling interests
   
324,098
     
300,601
 
Total equity
   
1,347,054
     
1,275,609
 
Total liabilities and equity
 
$
1,582,836
   
$
1,526,221
 

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
 
   
January 28,
2024
   
January 29,
2023
 
Revenue
 
$
216,334
   
$
211,090
 
Cost of goods sold
   
137,079
     
135,013
 
Gross profit
   
79,255
     
76,077
 
                 
Operating expenses:
               
Selling, general, and administrative
   
18,321
     
16,818
 
Research and development
   
3,445
     
3,302
 
Total operating expenses
   
21,766
     
20,120
 
Operating income
   
57,489
     
55,957
 
 
               
Other income (expense):
               
Foreign currency transactions impact, net
   
(8,908
)
   
(16,944
)
Interest income and other income, net
   
5,251
     
2,584
 
Interest expense
   
(90
)
   
(65
)
Income before income tax provision
   
53,742
     
41,532
 
                 
Income tax provision
   
14,660
     
12,582
 
                 
Net income
   
39,082
     
28,950
 
                 
Net income attributable to noncontrolling interests
   
12,902
     
14,964
 
                 
Net income attributable to Photronics, Inc. shareholders
 
$
26,180
   
$
13,986
 
                 
Earnings per share:
               
Basic
 
$
0.43
   
$
0.23
 
Diluted
 
$
0.42
   
$
0.23
 
                 
Weighted-average number of common shares outstanding:
               
Basic
   
61,455
     
60,894
 
Diluted
   
62,283
     
61,470
 

See accompanying notes to condensed consolidated financial statements.

PHOTRONICS, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
Net income
 
$
39,082
   
$
28,950
 
                 
Other comprehensive (loss) income, net of tax of $0:
               
Foreign currency translation adjustments
   
31,493
     
90,519
 
Other
   
(27
)
   
(54
)
Net other comprehensive (loss) income
   
31,466
     
90,465
 
                 
Comprehensive income
   
70,548
     
119,415
 
                 
Less: comprehensive income attributable to noncontrolling interests
   
23,497
     
31,393
 
                 
Comprehensive income attributable to Photronics, Inc. shareholders
 
$
47,051
   
$
88,022
 

See accompanying notes to condensed consolidated financial statements.

PHOTRONICS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)

 
Three Months Ended January 28, 2024
 
   
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, 2023
   
61,310
   
$
613
   
$
502,010
   
$
561,119
   
$
(88,734
)
 
$
300,601
   
$
1,275,609
 
                                                         
Net income
   
-
     
-
     
-
     
26,180
     
-
     
12,902
     
39,082
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
20,871
     
10,595
     
31,466
 
Shares issued under equity plans
   
436
     
4
     
(1,680
)
   
-
     
-
     
-
     
(1,676
)
Share-based compensation expense
   
-
     
-
     
2,573
     
-
     
-
     
-
     
2,573
 
                                                         
Balance at January 28, 2024
   
61,746
   
$
617
   
$
502,903
   
$
587,299
   
$
(67,863
)
 
$
324,098
   
$
1,347,054
 

 
Three Months Ended January 29, 2023
 
   
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, 2022
   
60,791
   
$
608
   
$
493,741
   
$
435,634
   
$
(98,456
)
 
$
230,562
   
$
1,062,089
 
                                                         
Net income
   
-
     
-
     
-
     
13,986
     
-
     
14,964
     
28,950
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
74,036
     
16,429
     
90,465
 
Shares issued under equity plans
   
311
     
3
     
(608
)
   
-
     
-
     
-
     
(605
)
Share-based compensation expense
   
-
     
-
     
1,821
     
-
     
-
     
-
     
1,821
 
                                                         
Balance at January 29, 2023
   
61,102
   
$
611
   
$
494,954
   
$
449,620
   
$
(24,420
)
 
$
261,955
   
$
1,182,720
 

See accompanying notes to condensed consolidated financial statements.

PHOTRONICS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
             
Cash flows from operating activities:
           
Net income
 
$
39,082
   
$
28,950
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
20,702
     
19,105
 
Share-based compensation
   
2,573
     
1,821
 
Changes in assets and liabilities:
               
Accounts receivable
   
(2,906
)
   
(7,565
)
Inventories
   
409
     
1,705
 
Other current assets
   
(2,844
)
   
(13,060
)
Accounts payable, accrued liabilities, and other
   
(15,508
)
   
(3,276
)
                 
Net cash provided by operating activities
   
41,508
     
27,680
 
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(43,314
)
   
(31,097
)
Purchases of available-for-sale debt securities
    (2,436 )     -  
Proceeds from maturities of available-for-sale debt securities
    2,500       -  
Government incentives
   
1,091
     
1,014
 
Other
   
(56
)
   
(87
)
                 
Net cash used in investing activities
   
(42,215
)
   
(30,170
)
                 
Cash flows from financing activities:
               
Repayments of debt
   
(1,194
)
   
(9,218
)
Proceeds from share-based arrangements
   
936
     
672
 
Net settlements of restricted stock awards
   
(2,613
)
   
(1,168
)
                 
Net cash used in financing activities
   
(2,871
)
   
(9,714
)
                 
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
   
13,026
     
27,499
 
                 
Net increase (decrease) in cash, cash equivalents, and restricted cash
   
9,448
     
15,295
 
Cash, cash equivalents, and restricted cash at beginning of period
   
501,867
     
322,409
 
                 
Cash, cash equivalents, and restricted cash at end of period
   
511,315
     
337,704
 
                 
Less: Ending restricted cash     2,797       2,912  
                 
Cash and cash equivalents at end of period   $ 508,518     $ 334,792  
                 
Supplemental disclosure of non-cash information:
               
                 
Accruals for property, plant and equipment purchased during the period
 
$
1,628
   
$
12,031
 

See accompanying notes to condensed consolidated financial statements.

PHOTRONICS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except share amounts and per share data)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION


Photronics, Inc. (“Photronics”, “the Company”, “we”, “our”, or “us”) is  one of the world’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 ICs and FPDs and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of ICs, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We operate eleven manufacturing facilities, which are located in Taiwan (3), Korea, China (2), the United States (3), and Europe (2).


The accompanying unaudited condensed consolidated financial statements (“the financial statements”) have been prepared in accordance with U.S. GAAP 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 U.S. GAAP 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. The financial statements include the accounts of Photronics, its wholly owned subsidiaries, and the majority-owned subsidiaries, which it controls. All intercompany balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Form 10-K for the fiscal year ended October 31, 2023, where we discuss and provide additional information about our accounting policies and the methods and assumptions used in our estimates.


The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect amounts reported in them. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the facts and circumstances at the time they are made. Subsequent actual results may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.



Our business is typically impacted during the first quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during this period. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2024.

NOTE 2 - ACCOUNT RECEIVABLES
 
The components of Accounts Receivable at the balance sheet dates are presented below.
 
 
 
January 28,
   
October 31,
 
 
 
2024
   
2023
 
Accounts Receivable
 
$
176,146
   
$
171,433
 
Unbilled Receivable
   
28,551
     
24,593
 
Allowance for Credit Losses
   
(1,090
)
   
(1,099
)
 
 
$
203,607
   
$
194,927
 


NOTE 3 - SHORT-TERM INVESTMENTS



Short-term investments consist of U.S. government securities and are classified as available-for-sale. We classify available-for-sale securities on our consolidated balance sheet as follows:


-
Maturing within three months or less from the date of purchase
Cash and cash equivalents
-
Maturing, as of the date of purchase, more than three months, but
with remaining maturities of less than one year, from the balance sheet date
Short-term investments
-
Maturing one year or more from the balance sheet date
Long-term marketable investments


       As of January 28, 2024, all of our available-for-sale securities had, at their dates of purchase, remaining maturities of more than three months, but less than one year, and have been classified as Short-term investments.



Available-for-sale debt investments are reported at fair value, with unrealized gains or losses (net of tax) reported in Accumulated other comprehensive income. The fair values of our available-for-sale securities are Level 1 measurements, based on quoted prices from active markets for identical assets. In the event of a sale of an available-for-sale debt investment, we would determine the cost of the investment sold at the specific individual security level and would include any gain or loss in Interest income and other income, net, where we also report periodic interest earned and the amortization (accretion) of discounts (premiums) related to these investments. The table below provides information on our available-for-sale debt securities.


   
January 28, 2024
   
October 31, 2023
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Carrying
Value
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Carrying
Value
 
Government securities
 
$
12,994
   
$
3
   
$
(1
)
 
$
12,996
   
$
12,913
   
$
4
   
$
(2
)
 
$
12,915
 

NOTE 4 - INVENTORIES


Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or net realizable value. Presented below are the components of Inventories at the balance sheet dates.

 
January 28,
2024
   
October 31,
2023
 
Raw materials
 
$
49,669
   
$
48,948
 
Work in process
   
1,000
     
1,010
 
Finished goods
   
11
     
5
 
   
$
50,680
   
$
49,963
 

NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT, NET


Presented below are the components of Property, plant, and equipment, net at the balance sheet dates.


 
January 28,
2024
   
October 31,
2023
 
Land
 
$
11,537
   
$
11,378
 
Buildings and improvements
   
189,152
     
185,850
 
Machinery and equipment
   
1,968,318
     
1,922,041
 
Leasehold improvements
   
19,572
     
18,894
 
Furniture, fixtures, and office equipment
   
16,985
     
15,856
 
Construction in progress
   
84,356
     
55,434
 
     
2,289,920
     
2,209,453
 
Accumulated depreciation and amortization
   
(1,547,249
)
   
(1,500,209
)
   
$
742,671
   
$
709,244
 


Information on ROU assets resulting from finance leases, at the balance sheet dates, is presented below.

 
 
January 28,
2024
   
October 31,
2023
 
Machinery and equipment
 
$
42,817
   
$
42,820
 
Accumulated amortization
   
(8,351
)
   
(7,655
)
 
 
$
34,466
   
$
35,165
 


The following table presents depreciation expense (including the amortization of ROU assets) related to property, plant, and equipment incurred during the reporting periods.

 
Three Months Ended
 
 
January 28,
2024
 
January 29,
2023
 
Depreciation Expense   $ 20,605     $ 19,028  

NOTE 6 - PDMCX JOINT VENTURE


In January 2018, Photronics, Inc., through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, “us”, or “our”), and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.”, entered into a joint venture under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, which we refer to as “PDMCX”, was established to develop and manufacture photomasks for 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 provides to enable us to offer advanced-process technology to our customers.



In 2020, in combination with local financing obtained by PDMCX, Photronics and DNP fulfilled their investment obligations under the PDMCX operating agreement (the Agreement”). As discussed in Note 7, liens were granted to the local financing entity on property, plant, and equipment and were paid off during fiscal year 2023 and there was no remaining debt at October 31, 2023.


Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. As of the date of issuance of these financial statements, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20.0% 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.


The following table presents net income we recorded from the operations of PDMCX during the reporting periods.

   
Three Months Ended
 

 
January 28,
2024
   
January 29,
2023
 
Net income from PDMCX
 
$
6,463
   
$
5,918
 


As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification (“ASC”), 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 was 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 periods; thus, as required, the PDMCX financial results have been consolidated with Photronics. Our conclusion was based on the facts that we held a controlling financial interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance) and had the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year reporting periods were 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’s 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 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 following table presents the carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets. General creditors of PDMCX do not have recourse to the assets of Photronics (other than the net assets of PDMCX); therefore, our maximum exposure to loss from PDMCX is our interest in the carrying amount of the net assets of the joint venture.


 
January 28,
2024
   
October 31,
2023
 
Classification
 
Carrying
Amount
   
Photronics
Interest
   
Carrying
Amount
   
Photronics
Interest
 
Current assets
 
$
143,250
   
$
71,639
   
$
135,960
   
$
67,994
 
Noncurrent assets
   
150,077
     
75,054
     
136,334
     
68,181
 
Total assets
   
293,327
     
146,693
     
272,294
     
136,175
 
                                 
Current liabilities
   
36,661
     
18,334
     
36,305
     
18,156
 
Noncurrent liabilities
   
1,929
     
965
     
1,873
     
937
 
Total liabilities
   
38,590
     
19,299
     
38,178
     
19,093
 
                                 
Net assets
 
$
254,737
   
$
127,394
   
$
234,116
   
$
117,082
 

NOTE 7 - DEBT


As of January 28, 2024, the Current portion of long-term debt and the Long-term debt balances were comprised of finance leases as described below:

As of January 28, 2024
 
Finance
Leases
 
Principal due:
     
Next 12 months
 
$
20,771
 
Months 13 – 24
 
$
2,632
 
Months 25 – 36
   
12
 
Months 37 – 48
   
11
 
Months 49 – 60
    -  
Long-term debt
   
2,655
 
Total debt
  $ 23,426  
 
       
Interest rate at balance sheet date
    N/A
 
Basis spread on interest rates
   
N/A
 
Interest rate reset
   
N/A
 
Maturity date
    N/A
 
Periodic payment amount     Varies as Lease mature  
Periodic payment frequency
 
Monthly
 
Loan collateral (carrying amount)
 
$
34,466
(1) 

 
(1)
Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests.


The table below provides information on our long-term debt as of October 31, 2023.

As of October 31, 2023
 
Finance
Leases
 
Principal due:
      
Next 12 months
  $ 6,621  
Months 13 – 24
  $ 17,972  
Months 25 – 36
    12  
Months 37 – 48
    13  
Months 49 – 60
     1
   
Long-term debt
 
17,998  
Total debt
  $ 24,619
 
 
          
Interest rate at balance sheet date
    N/A  
Basis spread on interest rates
    N/A  
Interest rate reset     N/A
 
Maturity date
    N/A
 
Periodic payment amount     Varies as Lease mature  
Periodic payment frequency     Monthly  
Loan collateral (carrying amount)
  $ 35,165 (1)

 
(1)
Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests.

Finance Leases


In February 2021, we entered into a five-year $7.2 million finance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $0.1 million per month. Upon the payment of the fiftieth monthly payment and prior to payment of the fifty-first monthly payment, we may exercise an early buyout option to purchase the tool for $2.4 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, the lease shall continue to renew on a month-to-month basis at the same rental terms; at our option, after the original term or any renewal periods, we may return the tool, elect to extend the lease, or purchase the tool at its fair market value. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.08%.



In December 2020, we entered into a five-year $35.5 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from $0.04 million during the first three months to $0.6 million for the following nine months, followed by forty-eight monthly payments of $0.5 million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool for $14.1 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value, as determined by the lessor. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58%. The lease agreement incorporates the covenants included in our Credit Agreement, as defined below (expired in September 2023), which are detailed below, and includes a cross-default provision for any agreement or instrument with an outstanding, committed balance greater than $5.0 million in which we are the indebted party.


Corporate Credit Agreement


In September 2018, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”), which had a $50 million borrowing limit, with an expansion capacity to $100 million. The Credit Agreement was secured by substantially all of our assets located in the United States and common stock we own in certain subsidiaries. The Credit Agreement was subject to covenants around minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance (all of which we were in compliance with at the termination of the agreement in September 2023), and limited the amount of cash dividends, distributions, and redemptions we could pay on our common stock to an aggregate annual amount of $50 million. The Credit Agreement expired, and was not renewed as of October 31, 2023.  There were no outstanding borrowings against the Credit Agreement at its expiration.


Xiamen Working Capital Loans


In November 2018, PDMCX obtained approval for revolving, unsecured credit of the equivalent of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements with varying terms to maturity. This facility is subject to annual reviews and extensions, with the most recent extension set to expire in July 2024. In December 2022, we repaid our entire outstanding balance of RMB 25.6 million ($3.6 million). As of January 28, 2024, PDMCX had no amount outstanding against the approval. The interest rates are variable, based on the RMB Loan Prime Rate of the National Interbank Funding Center. Interest incurred on the loans related to the amount borrowed was eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provided for such reimbursements up to a prescribed limit and duration.
 
NOTE 8 - REVENUE


We recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services. We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks, which are comprised of multiple layers, the predominance of which we invoice as they ship to customers. As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time”, on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask. At the end of a reporting period, there are a number of uncompleted revenue contracts on which we have performed; for any such contracts under which we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract. We report our revenue net of any sales or similar taxes we collect on behalf of government entities.

As stated above, photomasks are manufactured to customer specifications in accordance with their proprietary designs; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability was 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 of photomasks that are in process or completed but not yet shipped to customers. A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks. Our contract assets primarily consist of a significant amount of our in-process production orders and fully manufactured photomasks which have not yet shipped, for which we have an enforceable right to collect consideration (including a reasonable profit) in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. We did not identify impairment indicators for any outstanding contract assets during the three-month periods ended January 28, 2024, or January 29, 2023.


The following table provides information about our contract balances at the balance sheet dates.


Classification
 
January 28,
2024
   
October 31,
2023
 
Contract Assets            
Other current assets
 
$
12,376
    $
10,984
 
                 
Contract Liabilities
               
Accrued liabilities
  $ 8,968
    $ 9,965  
Other liabilities
    11,820
      12,454
 
    $ 20,788     $ 22,419  


The following table presents revenue recognized from contract liabilities that existed at the beginning of the reporting periods.

 
Three Months Ended
 
 
 
January 28,
2024
   
January 29,
2023
 
Revenue recognized from beginning liability
 
$
5,507
   
$
7,638
 


We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed for collectability during, and at the end of, every reporting period. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit an allowance for credit losses. In the event that an amount is determined to be uncollectible, we charge the allowance for credit losses and derecognize the related receivable. We did not incur any credit losses on our accounts receivable during the three-month periods ended January 28, 2024 or January 29, 2023.


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 collectability risk, we modify terms of sale, which may require payment in advance of performance. At the time of adoption, we elected the practical expedient allowed under ASC Topic 606 “Revenue from Contracts with Customers” (“Topic 606”) that permits us not to adjust a contract’s promised amount of 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 have received from customers have generally not preceded the completion of our performance obligations by more than one year.

Disaggregation of Revenue


The following tables present our revenue for the three-month periods ended January 28, 2024, and January 29, 2023, disaggregated by product type, geographic origin, and timing of recognition.

 
Three Months Ended
 

 
January 28,
2024
   
January 29,
2023
 
Revenue by Product Type
           
IC
           
High-end
 
$
60,875
   
$
48,003
 
Mainstream
   
96,714
     
108,586
 
Total IC
 
$
157,589
   
$
156,589
 
                 
FPD
               
High-end
 
$
50,616
   
$
45,691
 
Mainstream
   
8,129
     
8,810
 
Total FPD
 
$
58,745
   
$
54,501
 
   
$
216,334
   
$
211,090
 

 
Three Months Ended
 

 
January 28,
2024
   
   January 29,
   2023
 
Revenue by Geographic Origin*
           
Taiwan
 
$
74,965
   
$
75,569
 
China
   
58,137
     
58,932
 
Korea
   
40,335
     
37,832
 
United States
   
32,733
     
29,881
 
Europe
   
9,705
     
8,447
 
Other
   
459
     
429
 
   
$
216,334
   
$
211,090
 

* This table disaggregates revenue by the location in which it was earned.

 
Three Months Ended
 
Revenue by Timing of Recognition
 
January 28,
2024
   
   January 29, 2023
 
Over time
 
$
203,527
   
$
197,164
 
At a point in time
   
12,807
     
13,926
 

 
$
216,334
   
$
211,090
 

Contract Costs


We pay commissions to third-party sales agents for certain sales they procure on our behalf. However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we do 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 contract obtainment costs as assets.

Remaining Performance Obligations


As we are typically required to fulfill customer orders within a short period of time, our backlog of orders has historically been two to three weeks for FPD photomasks and one to two weeks for IC photomasks. However, the demand for some IC photomasks has expanded beyond the industrys capacity to supply them within the traditional time period; thus, the backlog, in some cases, can expand to as long as two to three months. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.

Product Warranties


Our photomasks are sold under warranties that generally range from one to twenty-four months. We warrant that our photomasks conform to customer specifications and will typically repair, replace, or issue a refund for any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranties have been immaterial.

NOTE 9 - SHARE-BASED COMPENSATION


In March 2016, shareholders approved our current 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), or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan was four million shares. On March 16, 2023, at its annual meeting of shareholders, the shareholders of Photronics, Inc., approved amendments to the Plan to increase the number of shares available for issuance by an additional one million shares, thereby increasing the shares available for issuance under the Plan from four million to five million. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. The table below presents information on our share-based compensation expenses for the three-month periods ended January 28, 2024, and January 29, 2023.


    Three Months Ended  
   
January 28,
2024
   
January 29,
2023
 
Expense reported in:
           
Cost of goods sold
 
$
595
   
$
281
 
Selling, general, and administrative
   
1,749
     
1,378
 
Research and development
   
229
     
162
 
Total expense incurred
 
$
2,573
   
$
1,821
 
                 
Expense by award type:
               
Restricted stock awards
 
$
2,573
   
$
1,764
 
Stock options
   
-
     
1
 
Employee stock purchase plan
   
-
     
56
 
Total expense incurred
 
$
2,573
   
$
1,821
 
                 
Income tax benefits of share-based compensation
 
$
99
   
$
155
 
Share-based compensation cost capitalized
 
$
-
   
$
-
 



Restricted Stock Awards



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. The table below presents information on our restricted stock awards for the three-month periods ended January 28, 2024, and January 29, 2023.


   
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
Number of shares granted in period
   
825,050
     
786,500
 
Weighted-average grant-date fair value of awards (in dollars per share)
 
$
29.77
   
$
16.77
 
Compensation cost not yet recognized
 
$
31,426
   
$
18,526
 
Weighted-average amortization period for cost not yet recognized (in years)
   
3.3
     
3.2
 
Shares outstanding at balance sheet date
   
1,634,315
     
1,374,422
 



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 must 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 an option is based on the U.S. Treasury yield curve in effect at the date of grant. The table below presents information on our stock options for the three-month periods ended January 28, 2024, and January 29, 2023.


   
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
Number of options granted in period
   
-
     
-
 
Cash received from options exercised
 
$
936
   
$
563
 
Compensation cost not yet recognized
 
$
-
   
$
-
 
Weighted-average amortization period for cost not yet recognized (in years)
   
-
     
-
 


Information on outstanding and exercisable option awards as of January 28, 2024, is presented below.

Options
 
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Life (in years)
   
Aggregate
Intrinsic
Value
 
Outstanding and exercisable at January 28, 2024
   
375,525
   
$
10.31
   

2.59
   
$
7,448
 

NOTE 10 - 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 table below sets forth the primary reasons that our effective income tax rates differed from the U.S. statutory tax rates in effect during the three-month periods ended January 28, 2024, and January 29, 2023.

Reporting Period
 
U.S. Statutory
Tax Rates
   
Photronics
Effective Tax
Rates
 
Primary Reasons for Differences

 
   
   
Three months ended January 28, 2024
   
21.0%

   
27.3%

Non-recognition of the tax benefit of losses that, in certain jurisdictions, have been offset by valuation allowances; non-U.S. pre-tax income being taxed at higher statutory rates in non-U.S. jurisdictions; and the establishment of uncertain tax positions in non-U.S. jurisdictions.
                      
Three months ended January 29, 2023
   
21.0%

   
30.3%

Non-recognition of the tax benefit of losses that, in certain jurisdictions, have been offset by valuation allowances; non-U.S. pre-tax income being taxed at higher statutory rates in non-U.S. jurisdictions; and the establishment of uncertain tax positions in non-U.S. jurisdictions.



Uncertain Tax Positions


Although the timing of reversal of uncertain tax positions may be uncertain, as they can be dependent upon the settlement of tax audits, we believe that the amount of uncertain tax positions (including interest and penalties, and net of tax benefits) that may be resolved over the next twelve months is immaterial. Resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements. We are no longer subject to tax authority examinations in the U.S., major foreign, or state tax jurisdictions for years prior to fiscal year 2018. The table below presents information on our unrecognized tax benefits as of the balance sheet dates.

   
January 28,
2024
   
October 31,
2023
 
Unrecognized tax benefits related to uncertain tax positions
 
$
9,744
   
$
8,908
 
Unrecognized tax benefits that, if recognized, would impact the effective tax rate
 
$
9,744
   
$
8,908
 
Accrued interest and penalties related to uncertain tax positions
 
$
688
   
$
576
 

NOTE 11 - EARNINGS PER SHARE


The calculations of basic and diluted earnings per share are presented below.

 
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
Net income attributable to Photronics, Inc. shareholders
 
$
26,180
   
$
13,986
 
Effect of dilutive securities
   
-
     
-
 
Earnings used for diluted earnings per share
 
$
26,180
   
$
13,986
 
                 
Weighted-average common shares computations:
               
Weighted-average common shares used for basic earnings per share
   
61,455
     
60,894
 
Effect of dilutive securities:
               
Share-based payment awards
   
828
     
576
 
Potentially dilutive common shares
   
828
     
576
 
                 
Weighted-average common shares used for diluted earnings per share
   
62,283
     
61,470
 
                 
Basic earnings per share
 
$
0.43
   
$
0.23
 
Diluted earnings per share
 
$
0.42
   
$
0.23
 


The table below illustrates the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be antidilutive.

 
Three Months Ended
 
   
January 28,
2024
   
January 29,
2023
 
Share-based payment awards
   
241
     
268
 
Total potentially dilutive shares excluded
   
241
     
268
 

NOTE 12 - COMMITMENTS AND CONTINGENCIES