10-Q 1 brhc10041620_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 July 31, 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 61,689,388 shares of common stock outstanding as of September 1, 2022.



PHOTRONICS, INC.
QUARTERLY REPORT ON FORM 10-Q
July 31, 2022

TABLE OF CONTENTS

 3
   
 4
   
PART I. FINANCIAL INFORMATION  
     
Item 1.
 5
     
 
 5
     
 
 6
     
 
 7
     
 
 8
     
 
 10
     
 
 11
     
Item 2.
 28
     
Item 3.
 35
     
Item 4.
 36
     
PART II.
OTHER INFORMATION
 
     
Item 1.
 37
     
Item 2.
37
     
Item 6.
38

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
Coronavirus 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
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)
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)

 
July 31,
2022
   
October 31,
2021
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
380,833
   
$
276,670
 
Accounts receivable, net of allowance of $1,079 in 2022 and $1,218 in 2021
    206,495      
174,447
 
Inventories
   
50,313
     
55,249
 
Other current assets
   
40,414
     
44,250
 
                 
Total current assets
   
678,055
     
550,616
 
                 
Property, plant and equipment, net
   
640,805
     
696,553
 
Deferred income taxes
   
22,535
     
24,353
 
Other assets
   
8,202
     
22,680
 
Total assets
 
$
1,349,597
   
$
1,294,202
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current portion of long-term debt
 
$
10,727
   
$
22,248
 
Accounts payable
   
82,234
     
81,534
 
Accrued liabilities
   
104,153
     
72,366
 
                 
Total current liabilities
   
197,114
     
176,148
 
                 
Long-term debt
   
46,589
     
89,446
 
Other liabilities
   
25,936
     
28,046
 
                 
Total liabilities
   
269,639
     
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, 60,754 shares issued and outstanding at July 31, 2022, and 60,024 shares issued and outstanding at October 31, 2021
   
608
     
600
 
Additional paid-in capital
   
491,945
     
484,672
 
Retained earnings
   
398,574
     
317,849
 
Accumulated other comprehensive (loss) income
   
(40,809
)
   
20,571
 
                 
Total Photronics, Inc. shareholders’ equity
   
850,318
     
823,692
 
Noncontrolling interests
   
229,640
     
176,870
 
                 
Total equity
   
1,079,958
     
1,000,562
 
                 
Total liabilities and equity
 
$
1,349,597
   
$
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
   
Nine Months Ended
 
   
July 31,
2022
   
August 1,
2021
   
July 31,
2022
   
August 1,
2021
 
                         
Revenue
 
$
219,948
   
$
170,643
   
$
614,283
   
$
482,473
 
                                 
Cost of goods sold
   
136,085
     
125,318
     
400,338
     
367,370
 
                                 
Gross profit
   
83,863
     
45,325
     
213,945
     
115,103
 
                                 
Operating expenses:
                               
                                 
Selling, general and administrative
   
15,960
     
15,083
     
48,306
     
43,203
 
                                 
Research and development
   
4,151
     
5,305
     
14,297
     
14,390
 
                                 
Total operating expenses
   
20,111
     
20,388
     
62,603
     
57,593
 
                                 
Other operating (loss) income, net
    (23 )     3,525       (17 )     3,525  
                                 
Operating income
   
63,729
     
28,462
     
151,325
     
61,035
 
                                 
Non-operating income (expense):
                               
Foreign currency transactions impact, net
   
3,862
     
4,301
     
16,974
     
3,627
 
Interest expense, net of subsidies
   
(622
)
   
(1,060
)
   
(1,502
)
   
(637
)
Interest income and other income and expense, net
   
401
     
494
     
898
     
653
 
                                 
Income before income tax provision
   
67,370
     
32,197
     
167,695
     
64,678
 
                                 
Income tax provision
   
18,146
     
7,842
     
43,717
     
14,493
 
                                 
Net income
   
49,224
     
24,355
     
123,978
     
50,185
 
                                 
Net income attributable to noncontrolling interests
   
17,994
     
7,279
     
42,252
     
14,547
 
                                 
Net income attributable to Photronics, Inc. shareholders
 
$
31,230
   
$
17,076
   
$
81,726
   
$
35,638
 
                                 
Earnings per share:
                               
                                 
Basic
 
$
0.51
   
$
0.28
   
$
1.35
   
$
0.58
 
                                 
Diluted
 
$
0.51
   
$
0.28
   
$
1.34
   
$
0.57
 
                                 
Weighted-average number of common shares outstanding:
                               
                                 
Basic
   
60,701
     
60,884
     
60,488
     
61,804
 
                                 
Diluted
   
61,299
     
61,515
     
61,127
     
62,362
 

See accompanying notes to condensed consolidated financial statements.

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

 
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2022
   
August 1,
2021
   
July 31,
2022
   
August 1,
2021
 
                         
Net income
 
$
49,224
   
$
24,355
   
$
123,978
   
$
50,185
 
                                 
Other comprehensive (loss) income, net of tax of $0:
                               
                                 
Foreign currency translation adjustments
   
(22,136
)
   
(10,482
)
   
(76,086
)
   
11,584
 
                                 
Other
   
61
     
37
     
229
     
58
 
                                 
Net other comprehensive (loss) income
   
(22,075
)
   
(10,445
)
   
(75,857
)
   
11,642
 
                                 
Comprehensive income
   
27,149
     
13,910
     
48,121
     
61,827
 
                                 
Less: comprehensive income attributable to noncontrolling interests
   
13,809
     
7,144
     
27,775
     
19,265
 
                                 
Comprehensive income attributable to Photronics, Inc. shareholders
 
$
13,340
   
$
6,766
   
$
20,346
   
$
42,562
 

See accompanying notes to condensed consolidated financial statements.

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

 
Three Months Ended July 31, 2022
 
   
Photronics, Inc. Shareholders
             
         
Additional
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Non-
controlling
Interests
   
Total
Equity
 
     
 
Common Stock
 
   
Shares
   
Amount
 
                                                 
Balance at May 1, 2022
   
60,637
   
$
606
   
$
489,368
   
$
367,344
   
$
-
   
$
(22,919
)
 
$
215,831
   
$
1,050,230
 
                                                                 
Net income
   
-
     
-
     
-
     
31,230
     
-
     
-
     
17,994
     
49,224
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(17,890
)
   
(4,185
)
   
(22,075
)
Shares issued under equity plans
   
117
     
2
     
996
     
-
     
-
     
-
     
-
     
998
 
Share-based compensation expense
   
-
     
-
     
1,581
     
-
     
-
     
-
     
-
     
1,581
 
                                                                 
Balance at July 31, 2022
   
60,754
   
$
608
   
$
491,945
   
$
398,574
   
$
-
   
$
(40,809
)
 
$
229,640
   
$
1,079,958
 

 
Three Months Ended August 1, 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 May 2, 2021
   
63,606
   
$
636
   
$
511,215
   
$
297,599
   
$
(23,250
)
 
$
35,192
   
$
169,425
   
$
990,817
 
                                                                 
Net income
   
-
     
-
     
-
     
17,076
     
-
     
-
     
7,279
     
24,355
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(10,310
)
   
(135
)
   
(10,445
)
Shares issued under equity plans
   
135
     
2
     
921
     
-
     
-
     
-
     
-
     
923
 
Share-based compensation expense
   
-
     
-
     
1,311
     
-
     
-
     
-
     
-
     
1,311
 
Purchase of treasury stock
   
-
      -      
-
     
-
      (12,500 )     -       -       (12,500 )
Retirement of treasury stock
    (2,983 )     (30 )     (24,016 )     (11,704 )     35,750       -       -       -  
                                                                 
Balance at August 1, 2021
   
60,758
   
$
608
   
$
489,431
   
$
302,971
   
$
-
   
$
24,882
   
$
176,569
   
$
994,461
 

See accompanying notes to condensed consolidated financial statements.

 
Nine Months Ended July 31, 2022
 
   
Photronics, Inc. Shareholders
             
         
Additional
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
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
   
-
     
-
     
-
     
81,726
     
-
     
-
     
42,252
     
123,978
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(61,380
)
   
(14,477
)
   
(75,857
)
Shares issued under equity plans
   
917
     
9
     
4,170
     
-
     
-
     
-
     
-
     
4,179
 
Share-based compensation expense
   
-
     
-
     
4,623
     
-
     
-
     
-
     
-
     
4,623
 
Contribution from noncontrolling interest
    -       -       -       -       -       -       24,995       24,995  
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(2,522
)
   
-
     
-
     
(2,522
)
Retirement of treasury stock
   
(187
)
   
(1
)
   
(1,520
)
   
(1,001
)
   
2,522
     
-
     
-
     
-
 
                                                                 
Balance at July 31, 2022
   
60,754
   
$
608
   
$
491,945
   
$
398,574
   
$
-
   
$
(40,809
)
 
$
229,640
   
$
1,079,958
 

 
Nine Months Ended August 1, 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
   
-
     
-
     
-
     
35,638
     
-
     
-
     
14,547
     
50,185
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
6,924
     
4,718
     
11,642
 
Shares issued under equity plans
   
603
     
7
     
2,077
     
-
     
-
     
-
     
-
     
2,084
 
Share-based compensation expense
   
-
     
-
     
4,034
     
-
     
-
     
-
     
-
     
4,034
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(35,750
)
   
-
     
-
     
(35,750
)
Retirement of treasury stock
    (2,983 )     (30 )     (24,016 )     (11,704 )     35,750       -       -       -  
                                                                 
Balance at August 1, 2021
   
60,758
   
$
608
   
$
489,431
   
$
302,971
   
$
-
   
$
24,882
   
$
176,569
   
$
994,461
 

See accompanying notes to condensed consolidated financial statements.

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

 
Nine Months Ended
 
   
July 31,
2022
   
August 1,
2021
 
             
Cash flows from operating activities:
           
Net income
 
$
123,978
   
$
50,185
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
61,210
     
69,305
 
Share-based compensation
   
4,623
     
4,034
 
Changes in assets and liabilities:
               
Accounts receivable
   
(45,199
)
   
(13,854
)
Inventories
   
1,570
     
5,073
 
Other current assets
   
661
     
(12,280
)
Accounts payable, accrued liabilities, and other
   
49,078
     
10,633
 
                 
Net cash provided by operating activities
   
195,921
     
113,096
 
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(46,337
)
   
(92,301
)
Government incentives
   
1,394
     
5,775
 
Other
   
(179
)
   
(170
)
                 
Net cash used in investing activities
   
(45,122
)
   
(86,696
)
                 
Cash flows from financing activities:
               
Repayments of debt
   
(51,917
)
   
(13,311
)
Purchases of treasury stock
   
(2,522
)
   
(35,750
)
Contributions from noncontrolling interest
    24,995       -  
Proceeds from share-based arrangements
   
5,505
     
2,251
 
Proceeds from long-term debt
    -       20,858  
Net settlements of restricted stock awards
   
(1,463
)
   
(403
)
                 
Net cash used in financing activities
   
(25,402
)
   
(26,355
)
                 
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
   
(21,308
)
   
4,602
 
                 
Net increase in cash, cash equivalents, and restricted cash
   
104,089
     
4,647
 
Cash, cash equivalents, and restricted cash at beginning of period
   
279,680
     
281,602
 
                 
Cash, cash equivalents, and restricted cash at end of period
   
383,769
     
286,249
 
                 
Less: Ending restricted cash     2,936       3,000  
Cash and cash equivalents at end of period   $ 380,833     $ 283,249  
                 
Supplemental disclosures of non-cash information:
               
                 
Accruals for property, plant and equipment purchased during the period
 
$
5,558
   
$
7,367
 

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 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, 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 periods are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2022.

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 Inventories at the balance sheet dates.

 
July 31,
2022
   
October 31,
2021
 
             
Raw materials
 
$
48,679
   
$
54,019
 
Work in process
   
1,413
     
1,121
 
Finished goods
   
221
     
109
 
                 
   
$
50,313
   
$
55,249
 

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET


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

 
July 31,
2022
   
October 31,
2021
 
                 
Land
 
$
11,713
   
$
12,442
 
Buildings and improvements
   
175,331
     
181,922
 
Machinery and equipment
   
1,854,967
     
1,961,474
 
Leasehold improvements
   
20,177
     
21,751
 
Furniture, fixtures and office equipment
   
14,982
     
15,534
 
Construction in progress
   
46,832
     
35,009
 
                 
     
2,124,002
     
2,228,132
 
Accumulated depreciation and amortization
   
(1,483,197
)
   
(1,531,579
)
                 
   
$
640,805
   
$
696,553
 


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

 
 
July 31,
2022
   
October 31,
2021
 
                 
Machinery and equipment
 
$
42,760
   
$
42,760
 
Accumulated amortization
   
(4,066
)
   
(1,933
)
                 
 
 
$
38,694
   
$
40,827
 


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
   
Nine Months Ended
 
   
July 31,
2022
   
August 1,
2021
   
July 31,
2022
   
August 1,
2021
 
                         
Depreciation expense
$
19,710

$
21,720

$
60,939

$
66,577

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 July 31, 2022, and October 31, 2021, total carrying value of $79.2 million and $90.1 million, respectively, 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.

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

   
Three Months Ended
    Nine Months Ended  

 
July 31,
2022
   
August 1,
2021
   
July 31,
2022
   
August 1,
2021
 
                                 
Net income from PDMCX
 
$
5,356
   
$
1,800
   
$
12,129
   
$
3,994
 


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.

 
July 31,
2022
   
October 31,
2021
 
Classification
 
Carrying
Amount
   
Photronics
Interest
   
Carrying
Amount
   
Photronics
Interest
 
Current assets
 
$
132,414
   
$
66,220
   
$
59,745
   
$
29,879
 
Noncurrent assets
   
129,810
     
64,918
     
137,799
     
68,913
 
                                 
Total assets
   
262,224
     
131,138
     
197,544
     
98,792
 
                                 
Current liabilities
   
48,688
     
24,349
     
26,559
     
13,282
 
Noncurrent liabilities
   
21,396
     
10,700
     
42,917
     
21,463
 
                                 
Total liabilities