10-Q 1 brhc10034862_10q.htm 10-Q

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 30, 2022
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

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
PREFERRED STOCK PURCHASE RIGHTS
N/A
N/A

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 61,729,440 shares of common stock outstanding as of March 3, 2022.


PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
January 30, 2022

TABLE OF CONTENTS

3
4
     
PART I.
FINANCIAL INFORMATION
 
 
   
Item 1.
5
     
 
5
     
 
6
     
 
7
     
 
8
     
 
9
     
 
10
     
Item 2.
25
     
Item 3.
31
     
Item 4.
32
 
   
PART II.
OTHER INFORMATION
 
     
Item 1.
32
     
Item 2.
32
     
Item 6.
33

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.
ASC
Accounting Standards Codification
ASP
Average Selling Price
ASU
Accounting Standards Update
Chip stacking
Placement of a computer chip on top of another computer chip, resulting in the reduction of the distance between the chips in a circuit board
COVID-19
Covid virus 2019, an infectious disease that was declared a pandemic by the World Health Organization in March 2020
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
LTM (free cash flow)
Last Twelve Months Free Cash Flow
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, after processing, into the etched image on a silicon wafer
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
RMB
Chinese renminbi
ROU (assets)
Right-of-use asset
SEC
Securities and Exchange Commission
Securities Act
The Securities Act of 1933 (as amended)
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 Item 1A “Risk Factors” of our Form 10-K, as well as any additional risk factors we may provide in 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 30,
2022
   
October 31,
2021
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
314,195
   
$
276,670
 
Accounts receivable, net of allowance of $1,157 in 2022 and $1,218 in 2021
    170,673      
174,447
 
Inventories
   
61,971
     
55,249
 
Other current assets
   
50,940
     
44,250
 
                 
Total current assets
   
597,779
     
550,616
 
                 
Property, plant and equipment, net
   
692,289
     
696,553
 
Deferred income taxes
   
24,447
     
24,353
 
Other assets
   
20,733
     
22,680
 
Total assets
 
$
1,335,248
   
$
1,294,202
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current portion of long-term debt
 
$
18,307
   
$
22,248
 
Accounts payable
   
94,914
     
81,534
 
Accrued liabilities
   
77,873
     
72,366
 
                 
Total current liabilities
   
191,094
     
176,148
 
                 
Long-term debt
   
78,540
     
89,446
 
Other liabilities
   
26,448
     
28,046
 
                 
Total liabilities
   
296,082
     
293,640
 
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, 60,564 shares issued and outstanding at January 30, 2022, and 60,024 shares issued and outstanding at October 31, 2021
   
606
     
600
 
Additional paid-in capital
   
487,342
     
484,672
 
Retained earnings
   
339,912
     
317,849
 
Accumulated other comprehensive income
   
10,565
     
20,571
 
                 
Total Photronics, Inc. shareholders’ equity
   
838,425
     
823,692
 
Noncontrolling interests
   
200,741
     
176,870
 
                 
Total equity
   
1,039,166
     
1,000,562
 
                 
Total liabilities and equity
 
$
1,335,248
   
$
1,294,202
 

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 30,
2022
   
January 31,
2021
 
             
Revenue
 
$
189,827
   
$
152,067
 
                 
Cost of goods sold
   
129,964
     
121,538
 
                 
Gross profit
   
59,863
     
30,529
 
                 
Operating expenses:
               
                 
Selling, general and administrative
   
15,727
     
14,053
 
                 
Research and development
   
5,939
     
4,710
 
                 
Total operating expenses
   
21,666
     
18,763
 
                 
Operating income
   
38,197
     
11,766
 
                 
Other income (expense):
               
Foreign currency transactions impact, net
   
5,268
     
1,382
 
Interest income and other income, net
   
334
     
121
 
Interest expense
   
(895
)
   
(823
)
                 
Income before income tax provision
   
42,904
     
12,446
 
                 
Income tax provision
   
11,178
     
2,937
 
                 
Net income
   
31,726
     
9,509
 
                 
Net income attributable to noncontrolling interests
   
8,662
     
1,473
 
                 
Net income attributable to Photronics, Inc. shareholders
 
$
23,064
   
$
8,036
 
                 
Earnings per share:
               
                 
Basic
 
$
0.38
   
$
0.13
 
                 
Diluted
 
$
0.38
   
$
0.13
 
                 
Weighted-average number of common shares outstanding:
               
                 
Basic
   
60,158
     
62,475
 
                 
Diluted
   
60,936
     
63,005
 

See accompanying notes to condensed consolidated financial statements.


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

 
Three Months Ended
 
   
January 30,
2022
   
January 31,
2021
 
             
Net income
 
$
31,726
   
$
9,509
 
                 
Other comprehensive (loss) income, net of tax of $0:
               
                 
Foreign currency translation adjustments
   
(9,831
)
   
18,289
 
                 
Other
   
37
     
(1
)
                 
Net other comprehensive (loss) income
   
(9,794
)
   
18,288
 
                 
Comprehensive income
   
21,932
     
27,797
 
                 
Less: comprehensive income attributable to noncontrolling interests
   
8,874
     
5,690
 
                 
Comprehensive income attributable to Photronics, Inc. shareholders
 
$
13,058
   
$
22,107
 

See accompanying notes to condensed consolidated financial statements.


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

 
Three Months Ended January 30, 2022
 
   
Photronics, Inc. Shareholders
             
         
Additional
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income
   
Non-
controlling
Interests
   
Total
Equity
 
     
 
Common Stock
 
   
Shares
   
Amount
 
                                                 
Balance at October 31, 2021
   
60,024
   
$
600
   
$
484,672
   
$
317,849
   
$
-
   
$
20,571
   
$
176,870
   
$
1,000,562
 
                                                                 
Net income
   
-
     
-
     
-
     
23,064
     
-
     
-
     
8,662
     
31,726
 
Other comprehensive  (loss) income
   
-
     
-
     
-
     
-
     
-
     
(10,006
)
   
212
     
(9,794
)
Shares issued under equity plans
   
728
     
7
     
2,733
     
-
     
-
     
-
     
-
     
2,740
 
Share-based compensation expense
   
-
     
-
     
1,457
     
-
     
-
     
-
     
-
     
1,457
 
Contribution from noncontrolling interest
    -       -       -       -       -       -       14,997       14,997  
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(2,522
)
   
-
     
-
     
(2,522
)
Retirement of treasury stock
    (188 )     (1 )     (1,520 )     (1,001 )     2,522       -       -       -  
                                                                 
Balance at January 30, 2022
   
60,564
   
$
606
   
$
487,342
   
$
339,912
   
$
-
   
$
10,565
   
$
200,741
   
$
1,039,166
 

 
Three Months Ended January 31, 2021
 
   
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Income
   
Interests
   
Equity
 
                                                 
Balance at October 31, 2020
   
63,138
   
$
631
   
$
507,336
   
$
279,037
   
$
-
   
$
17,958
   
$
157,304
   
$
962,266
 
                                                                 
Net income
   
-
     
-
     
-
     
8,036
     
-
     
-
     
1,473
     
9,509
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
14,071
     
4,217
     
18,288
 
Shares issued under equity plans
   
368
     
4
     
337
     
-
     
-
     
-
     
-
     
341
 
Share-based compensation expense
   
-
     
-
     
1,301
     
-
     
-
     
-
     
-
     
1,301
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(13,209
)
   
-
     
-
     
(13,209
)
                                                                 
Balance at January 31, 2021
   
63,506
   
$
635
   
$
508,974
   
$
287,073
   
$
(13,209
)
 
$
32,029
   
$
162,994
   
$
978,496
 

See accompanying notes to condensed consolidated financial statements.


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

 
Three Months Ended
 
   
January 30,
2022
   
January 31,
2021
 
             
Cash flows from operating activities:
           
Net income
 
$
31,726
   
$
9,509
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
20,810
     
23,724
 
Share-based compensation
   
1,457
     
1,301
 
Changes in assets and liabilities:
               
Accounts receivable
   
3,269
     
(2,011
)
Inventories
   
(7,020
)
   
2,095
 
Other current assets
   
(6,730
)
   
(824
)
Accounts payable, accrued liabilities, and other
   
15,618
     
(7,507
)
                 
Net cash provided by operating activities
   
59,130
     
26,287
 
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(19,175
)
   
(17,532
)
Government incentives
   
-
     
397
 
Other
   
(43
)
   
(61
)
                 
Net cash used in investing activities
   
(19,218
)
   
(17,196
)
                 
Cash flows from financing activities:
               
Repayments of debt
   
(15,192
)
   
(7,796
)
Purchases of treasury stock
   
(2,522
)
   
(13,209
)
Contribution from noncontrolling interest
    14,997       -  
Proceeds from debt
   
-
     
6,205
 
Proceeds from share-based arrangements
   
3,840
     
765
 
Net settlements of restricted stock awards
   
(1,458
)
   
(315
)
                 
Net cash used in financing activities
   
(335
)
   
(14,350
)
                 
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
   
(2,057
)
   
5,195
 
                 
Net increase (decrease) in cash, cash equivalents, and restricted cash
   
37,520
     
(64
)
Cash, cash equivalents, and restricted cash at beginning of period
   
279,680
     
281,602
 
                 
Cash, cash equivalents, and restricted cash at end of period
 

317,200
   

281,538
 
                 
Less: Ending restricted cash     3,005       2,999  
Cash and cash equivalents at end of period   $
314,195     $
278,539  
                 
Supplemental disclosure of non-cash information:
               
                 
Accruals for property, plant and equipment purchased during the period
 
$
7,092
   
$
4,938
 

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 semiconductors and flat-panel displays (“FPDs” or “displays”), and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”), a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We currently have 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, 2021, 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, including those on the impact of COVID-19, are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available 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 period are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2022. 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 31, 2021.

NOTE 2 - 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 inventory at the balance sheet dates:

 
January 30,
2022
   
October 31,
2021
 
             
Raw materials
 
$
60,243
   
$
54,019
 
Work in process
   
1,544
     
1,121
 
Finished goods
   
184
     
109
 
                 
   
$
61,971
   
$
55,249
 

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET


Property, plant and equipment consists of the following:

 
January 30,
2022
   
October 31,
2021
 
                 
Land
 
$
12,279
   
$
12,442
 
Buildings and improvements
   
181,174
     
181,922
 
Machinery and equipment
   
1,950,583
     
1,961,474
 
Leasehold improvements
   
21,709
     
21,751
 
Furniture, fixtures and office equipment
   
15,770
     
15,534
 
Construction in progress
   
47,008
     
35,009
 
                 
     
2,228,523
     
2,228,132
 
Accumulated depreciation and amortization
   
(1,536,234
)
   
(1,531,579
)
                 
   
$
692,289
   
$
696,553
 


ROU assets resulting from finance leases are included in the table above as follows:

 
 
January 30,
2022
   
October 31,
2021
 
                 
Machinery and equipment
 
$
42,760
   
$
42,760
 
Accumulated amortization
   
(2,644
)
   
(1,933
)
                 
 
 
$
40,116
   
$
40,827
 


Depreciation and amortization expense for property, plant and equipment (including amortization expense for ROU assets) was $20.7 million and $22.6 million for the three-month periods ended January 30, 2022, and January 31, 2021.

NOTE 4 - 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 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 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 5, liens were granted to the local financing entity on property, plant and equipment with a January 30, 2022, total carrying value of $88.4 million, as collateral for the loans.


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 twenty percent 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 income from the operations of PDMCX of $1.9 million during the three-month period ended January 30, 2022, and a loss of $0.1 million during the three-month period ended January 31, 2021, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics (other than the net assets of PDMCX), and our maximum exposure to loss from PDMCX at January 30, 2022, was $81.3 million.


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 carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets are presented in the following table, together with our exposure to loss related to these assets and liabilities.

 
January 30,
2022
   
October 31,
2021
 
Classification
 
Carrying
Amount
   
Photronics
Interest
   
Carrying
Amount
   
Photronics
Interest
 
Current assets
 
$
80,953
   
$
40,485
   
$
59,745
   
$
29,879
 
Noncurrent assets
   
143,353
     
71,690
     
137,799
     
68,913
 
                                 
Total assets
   
224,306
     
112,175
     
197,544
     
98,792
 
                                 
Current liabilities
   
28,209
     
14,107
     
26,559
     
13,282
 
Noncurrent liabilities
   
33,542
     
16,774
     
42,917
     
21,463
 
                                 
Total liabilities
   
61,751
     
30,881
     
69,476
     
34,745
 
                                 
Net assets
 
$
162,555
   
$
81,294
   
$
128,068
   
$
64,047
 

NOTE 5 - DEBT


The tables below provide information on our long-term debt.

As of January 30, 2022
 
Xiamen
Project Loans
   
Xiamen
Working
Capital Loans
   
Hefei
Equipment
Loan
   
Finance Leases
   
Total
 
Principal due:
                             
Next 12 months
 
$
5,708
   
$
1,006
   
$
4,717
   
$
6,876
   
$
18,307
 
Months 13 – 24
 
$
9,277
   
$
3,523
   
$
4,717
   
$
6,537
   
$
24,054
 
Months 25 – 36
   
10,221
     
-
     
6,290
     
20,308
     
36,819
 
Months 37 – 48
   
9,434
     
-
     
5,613
     
2,620
     
17,667
 
Long-term debt
 
$
28,932
   
$
3,523
   
$
16,620
   
$
29,465
   
$
78,540
 
Total
  $ 34,640     $ 4,529     $ 21,337     $ 36,341     $ 96,847  
 
                                       
Interest rate at balance sheet date
   
4.65
%
   
4.61
%
   
4.20
%
    (3)         
Basis spread on interest rates
   
0.00
     
76.00
     
(45.00
)
   
N/A
         
Interest rate reset
 
Quarterly
   
Monthly/Annually
   
Annually
     
N/A
         
Maturity date
 
December 2025
   
July 2023
   
September 2025
      (3)         
Periodic payment amount
 
Varies as loans mature
   
Increases as loans mature
   
Varies (1)
      (3)         
Periodic payment frequency
 
Semiannual, on individual loans
   
Semiannual, on individual loans
   
Semiannual(2)
   
Monthly
         
Loan collateral (carrying amount)
 
$
88,356
     
N/A
   
$
85,558
   
$
40,116
(4)        

(1) First five loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal; last five installments will each be for 12.5 percent of the approved loan principal.
(2) Semiannual repayments commence in March 2022.
(3) See Note 7 for periodic payment amounts.
(4) Amount represents the carrying amount of the related right-of-use asset, in which the lessors have a secured interest.

As of October 31, 2021
 
Xiamen
Project Loans
   
Xiamen
Working
Capital Loans
   
Hefei
Equipment
Loan
   
Finance
Leases
   
Total
 
Principal due:
                             
Next 12 months
 
$
2,068
   
$
8,197
    $
4,694     $
7,289    
$
22,248
 
Months 13 – 24
 
$
10,071
   
$
4,005
    $ 4,693     $
6,512    
$
25,281
 
Months 25 – 36
   
10,278
     
-
      6,257       6,610      
23,145
 
Months 37 – 48
   
9,902
     
-
      5,585       17,961      
33,448
 
Months 49 – 60
   
7,572
     
-
      -       -      
7,572
 
Long-term debt
 
$
37,823
   
$
4,005
    $
16,535     $
31,083    
$
89,446
 
Total
  $ 39,891     $ 12,202     $
21,229     $ 38,372     $ 111,694  
 
                                       
Interest rate at balance sheet date
   
4.65
%
   
4.53% - 4.61
%
    4.20 %    
(3)         
Basis spread on interest rates
   
0.00
     
67.75 - 76.00
      (45.00 )     N/A          
Interest rate reset     Quarterly
      Monthly/Annually
      Annually
      N/A          
Maturity date
  December 2025     July 2023     September 2025       (3)         
Periodic payment amount
  Varies as loans mature     Increases as loans mature     Varies(1)       (3)         
Periodic payment frequency
  Semiannual, on individual loans     Semiannual, on individual loans     Semiannual(2)     Monthly          
Loan collateral (carrying amount)
 
$
90,096
     
N/A
    $
86,487     $
40,826
(4)        

(1) First five loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal; last five installments will each be for 12.5 percent of the approved loan principal.
(2) Semiannual repayments commence in March 2022.
(3)
See Note 7 for interest rates on lease liabilities, maturity dates, and periodic payment amounts.
(4) Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests.

Xiamen Project Loans


In November 2018, PDMCX obtained approval to borrow 345.0 million RMB from the Industrial and Commercial Bank of China. From November 2018 through July 2020, PDMCX entered into separate loan agreements (the “Project Loans”) for the entire approved amount and, as of January 30, 2022, 220.3 million RMB ($34.6 million) remained outstanding. The Project Loans were used to finance certain capital expenditures at the PDMCX facility and are collateralized by liens granted on the land use right, building, and certain equipment located at the facility. The interest rates on the Project Loans are variable (based on the RMB Loan Prime Rate of the National Interbank Funding Center), and interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit and duration. The Project Loans are subject to covenants and provisions, certain of which relate to the assets pledged as security for the loans, all of which we were in compliance with at January 30, 2022.

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 extension. Unless extended, this facility will expire in October 2022. As of January 30, 2022, PDMCX had 28.8 million RMB ($4.5 million) outstanding against the approval. The interest rates are variable, based on the RMB Loan Prime Rate of the National Interbank Funding Center. Interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit and duration.

Hefei Equipment Loan


In October 2020, our Hefei, China, facility was approved to borrow 200 million RMB (approximately $31.4 million, at the balance sheet date) from the China Construction Bank Corporation. This credit facility is subject to annual reviews and extension, with the most recent extension set to expire in August 2022. The loan proceeds were used to fund the purchase of two lithography tools at the Hefei facility. As of January 30, 2022, we had borrowed 135.7 million RMB ($21.3 million) against this approval (all of which was then outstanding), and 64.3 million RMB ($10.1 million) remained available to borrow. The interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan is subject to covenants and provisions, certain of which relate to the assets pledged as security for the loan, including covenants for the ratio of total liabilities to total assets and the ratio of current assets to current liabilities, all of which we were in compliance with at January 30, 2022.

Finance Leases


In February 2021, we entered into a five-year $7.2 million finance lease for a high-end inspection tool and, in December 2020, we entered into a $35.5 million lease for a high-end lithography tool. See Note 7 for additional information on these leases.

Corporate Credit Agreement


In September 2018, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The Credit Agreement is secured by substantially all of our assets located in the United States and common stock we own in certain subsidiaries. The Credit Agreement includes covenants around minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance (all of which we were in compliance with at January 30, 2022), and limits the amount of cash dividends, distributions, and redemptions we can pay on our common stock to an aggregate annual amount of $50 million. We had no outstanding borrowings against the Credit Agreement at January 30, 2022. The interest rate on the Credit Agreement (1.11% at January 30, 2022) is based on our total leverage ratio at 1-month LIBOR plus a spread, as defined in the Credit Agreement.

NOTE 6 - 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. Contract assets of $11.8 million are included in Other current assets, and contract liabilities of $19.5 million and $5.2 million are included in Accrued liabilities and Other liabilities, respectively, in our January 30, 2022, condensed consolidated balance sheet. Our October 31, 2021, condensed consolidated balance sheet includes contract assets of $9.9 million, included in Other current assets, and contract liabilities of $14.7 million and $5.2 million are included in Accrued liabilities and Other liabilities, respectively. We did not impair any contract assets during the three-month periods ended January 30, 2022, or January 31, 2021. We recognized $4.2 million of revenue from the settlement of contract liabilities that existed at the beginning of the three-month period ended January 30, 2022, and recognized $2.5 million of revenue in the respective prior year period, that related to the settlement of contract liabilities that existed at the beginning of that period.


We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed for collectibility 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 30, 2022, or January 31, 2021.


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 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 30, 2022, and January 31, 2021, disaggregated by product type, geographic origin, and timing of recognition.

 
Three Months Ended
 

 
January 30, 2022
   
January 31, 2021
 
Revenue by Product Type
           
IC
           
High-end
 
$
46,534
   
$
36,780
 
Mainstream
   
83,227
     
68,176
 
                 
Total IC
 
$
129,761
   
$
104,956
 
                 
                 
FPD
               
High-end
 
$
46,276
   
$
34,645
 
Mainstream
   
13,790
     
12,466
 
                 
Total FPD
 
$
60,066
   
$
47,111
 
                 
   
$
189,827
   
$
152,067
 

 
Three Months Ended
 

 
January 30, 2022
   
January 31, 2021
 
Revenue by Geographic Origin*
           
Taiwan
 
$
67,841
   
$
56,590
 
China
   
45,953
     
20,997
 
Korea
   
39,515
     
38,783
 
United States
   
27,176
     
26,604
 
Europe
   
8,914
     
8,575
 
Other
   
428
     
518
 
                 
   
$
189,827
   
$
152,067
 

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

 
Three Months Ended
 

 
January 30, 2022
   
January 31, 2021
 
Revenue by Timing of Recognition
           
Over time
 
$
170,264
   
$
141,284
 
At a point in time
   
19,563
     
10,783
 
   
$
189,827
   
$
152,067
 


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 of backlog 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 2 to 3 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 (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 warranties have been immaterial.

NOTE 7 - LEASES


Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is or contains a lease on the earlier of the date of the agreement or the date on which we commit to entering the agreement. Our evaluation considers whether the agreement includes an identified asset and whether it affords us the right to control the asset. Our having the right to control the identified asset is determined by whether we are entitled to substantially all of its economic benefits and can direct its use.


We recognize leases on our consolidated balance sheet when a lessor makes an asset underlying a lease having a term in excess of twelve months available for our use. As allowed under ASC Topic 842 – “Leases” (“Topic 842”), we have elected not to apply the recognition requirements to leases that, at their commencement dates, have lease terms of twelve months or less and do not include options to purchase their underlying assets that we are reasonably certain to exercise. The present value of lease payments over the term of the lease provides the basis for the initial measurement of ROU assets and their related lease liabilities. We measure finance lease liabilities using the rates implicit in the leases; operating lease liabilities are measured using our incremental borrowing rates, for collateralized loans, at the commencement date. Variable lease payments, other than those that are dependent on an index or on a rate, are not included in the measurement of ROU assets and their related lease liabilities. Lease terms include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise. As allowed under Topic 842, we have elected, for all classes of assets, the practical expedient to not separate lease components of a contract from nonlease components of a contract.


 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, to be followed by forty-eight monthly payments of $0.5 million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool for $14.1 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value as determined by the lessor. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58%. The lease agreement incorporates the covenants included in our Corporate Credit Agreement, which are detailed in Note 5, 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.


The following table provides information on operating and finance leases included in our consolidated balance sheets.

Classification
 
January 30,
2022
   
October 31,
2021
 
             
ROU Assets – Operating Leases
           
Other assets
 
$
4,977
   
$
5,581
 
                 
ROU Assets – Finance Leases
               
Property, plant and equipment, net
 
$
40,116
   
$
40,827
 
                 
Lease Liabilities – Operating Leases
               
Accrued liabilities
 
$
2,233
   
$
2,273
 
Other liabilities
   
2,690
     
3,246
 
   
$
4,923
   
$
5,519
 
                 
Lease Liabilities – Finance Leases
               
Current portion of long-term debt
 
$
6,876
   
$
7,289
 
Long-term debt
   
29,465
     
31,083
 
   
$
36,341
   
$
38,372
 
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