PHOTRONICS, INC. Overview
We sell substantially all of our photomasks to semiconductor designers and
manufacturers, and manufacturers of FPDs. Photomask technology is also being
applied to the fabrication of other higher-performance electronic products such
as photonics, micro-electronic mechanical systems, and certain nanotechnology
applications. Our selling cycle is tightly interwoven with the development and
release of new semiconductor and display designs and applications, particularly
as they relate to the semiconductor industry's migration to more advanced
product innovation, design methodologies, and fabrication processes. The demand
for photomasks primarily depends on design activity rather than sales volumes
from products manufactured using photomask technologies. Consequently, an
increase in semiconductor or display sales does not necessarily result in a
corresponding increase in photomask sales. However, the reduced use of
customized ICs, reductions in design complexity, other changes in the technology
or methods of manufacturing or designing semiconductors, or a slowdown in the
introduction of new semiconductor or display designs could reduce demand for
photomasks - even if the demand for semiconductors and FPDs increases. Advances
in semiconductor, display, and photomask design and production methods that
shift the burden of achieving device performance away from lithography could
also reduce the demand for photomasks. Historically, the microelectronic
industry has been volatile, experiencing periodic downturns and slowdowns in
design activity. These downturns have been characterized by, among other things,
diminished product demand, excess production capacity, and accelerated erosion
of selling prices with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of
time, sometimes within twenty-four hours. This results in a minimal level of
backlog orders, typically one to two weeks of backlog for IC photomasks and two
to three weeks of backlog for FPD photomasks.
The global microelectronics industry is driven by end markets which have been
closely tied to consumer-driven applications of high-performance devices,
including, but not limited to, mobile display devices, mobile communications,
and computing solutions. While we cannot predict the timing of the industry's
transition to volume production of next-generation technology nodes, or the
timing of up and down-cycles with precise accuracy, we believe that such
transitions and cycles will continue into the future, beneficially and adversely
affecting our business, financial condition, and operating results as they
occur. We believe our ability to remain successful in these environments is
dependent upon the achievement of our goals of being a service and technology
leader and efficient solutions supplier, which we believe should enable us to
continually reinvest in our global infrastructure.
We are focused on improving our competitiveness by advancing our technology and
reducing costs and, in connection therewith, have invested and plan to continue
to invest in manufacturing equipment to serve the high-end markets. As we face
challenges in the current and near term that require us to make significant
improvements in our competitiveness, we continue to evaluate further cost
reduction initiatives.
State-of-the-art production for semiconductor masks is considered to be 28
nanometer and smaller for ICs and Generation 10.5+ and AMOLED and LTPS
display-based process technologies for FPDs. However, 32 nanometer and above
geometries for semiconductors and Generation 8 and below (excluding AMOLED and
LTPS) process technologies for displays constitute the majority of designs
currently being fabricated in volume. At these geometries, we can produce full
lines of photomasks, and there is no significant technology employed by our
competitors that is not available to us. We expect advanced-generation designs
to continue to move to production throughout fiscal 2021, and we believe we are
well positioned to service an increasing volume of this business as a result of
our investments in manufacturing processes and technology in the regions where
our customers are located.
The photomask industry has been, and is expected to continue to be,
characterized by technological change and evolving industry standards. In order
to remain competitive, we will be required to continually anticipate, respond
to, and utilize changing technologies. In particular, we believe that, as
semiconductor geometries continue to become smaller, and display designs become
larger or otherwise more advanced, we will be required to manufacture even more
complex optically-enhanced reticles, including optical proximity correction and
phase-shift photomasks. Additionally, demand for photomasks has been, and could
in the future be, adversely affected by changes in high-performance electronics
fabrication methods that affect the type or quantity of photomasks used, such as
changes in semiconductor demand that favor field-programmable gate arrays and
other semiconductor designs that replace application-specific ICs, or the use of
certain chip-stacking methodologies that lessen the emphasis on conventional
lithography technology. Furthermore, increased market acceptance of alternative
methods of transferring circuit designs onto semiconductor wafers could reduce
or eliminate the need for photomasks in the production of semiconductors. As of
the end of fiscal year 2020, one alternative method, direct-write lithography,
has not been proven to be a commercially viable alternative to photomasks, as it
is considered to be too slow for high-volume semiconductor wafer production, and
we have not experienced a significant loss of revenue as a result of this or
other alternative semiconductor design methodologies. However, should
direct-write lithography or any other alternative method of transferring IC
designs to semiconductor wafers without the use of photomasks achieve market
acceptance, and we do not anticipate, respond to, or utilize these or other
changing technologies due to resource, technological, or other constraints, our
business and results of operations could be materially adversely affected.
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Both our revenues and costs have been affected by the increased demand for
high-end-technology photomasks that require more advanced manufacturing
capabilities, but generally command higher average selling prices ("ASPs"). Our
capital expenditure payments aggregated approximately $342 million for the three
fiscal years ended October 31, 2020 , which has significantly contributed to our
cost of goods sold. We intend to continue to make the required investments to
support the technological demands of our customers that we believe will position
the Company for future growth. In support of this effort, we expect capital
expenditure payments to be approximately $100 million in fiscal year 2021.
The manufacture of photomasks for use in fabricating ICs, FPDs, and other
related products built using comparable photomask-based process technologies has
been, and continues to be, capital intensive. Our employees and our integrated
global manufacturing network represent a significant portion of our fixed
operating cost base. Should our revenue decrease as a result of a decrease in
design releases from our customers, we may have excess or underutilized
production capacity, which could significantly impact our operating margins, or
result in write-offs from asset impairments.
Recent Developments
During the fourth quarter of fiscal 2020, we entered into aMaster Lease Agreement with a financing entity for the lease of an inspection tool with a maximum value of$10 million . The tool was delivered during the fourth quarter of fiscal year 2020, and the financing entity made a progress payment to the vendor of$6.5 million in the first quarter of fiscal year 2021. The progress payment will accrue interest at 1.56% payable monthly until the final payment for the tool is made, at which time the lease will begin. In the fourth quarter of fiscal 2020, we were approved to borrow 200 million Chinese renminbi (RMB) (approximately$29.8 million , at the balance sheet date) from the China Construction Bank Corporation. We received initial proceeds of41 million RMB (approximately$6.2 million ) against this approval inNovember 2020 . Loan proceeds have been, and will be, used for the purchase of two lithography tools at our facility inHefei, China . Interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center less 0.45% (adjusted annually), and is to be repaid semiannually, over five years, commencing onMarch 5, 2022 . The interest rate on the loan was 4.2% at the borrowing date. The first five semiannual loan repayments will each be for 7.5 percent of the approved200 million RMB loan principal; the last five installments will each be for 12.5 percent of the approved loan principal, with the final installment due onSeptember 30, 2026 . Semiannual repayments of the initial$6.2 million borrowed will commence onMarch 5, 2022 , with a repayment of$2.3 million ; subsequent semiannual repayments will be in the amounts of$2.3 million and$1.6 million . The borrowings are secured by theHefei facility, its related land use right, and certain manufacturing equipment, which had a combined carrying value of$87.8 million as ofOctober 31, 2020 . In the fourth quarter of fiscal 2020, the Company's board of directors authorized the repurchase of up to$100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended) ("the Securities Act"). We repurchased 1.7 million shares at a cost of$17.5 million (an average price of$10.11 per share) under this authorization. All shares repurchased were retired in fiscal 2020.
In the fourth quarter of fiscal 2020, PDMC, the Company's majority-owned IC
subsidiary in
In the first quarter of fiscal 2020, we acquired the remaining 0.2% of
noncontrolling interests in
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In the first quarter of fiscal 2020, we adopted ASU 2016-02 and all subsequent
amendments, collectively codified in Accounting Standards Codification Topic 842
- "Leases" ("Topic 842"). This guidance requires modified retrospective
adoption, either at the beginning of the earliest period presented or at the
beginning of the period of adoption; we elected to apply the guidance at the
beginning of the period of adoption, and recognized right-of-use leased assets
of approximately $6.5 million , and corresponding lease liabilities, which were
discounted at our incremental borrowing rates, on our November 1, 2019 ,
consolidated balance sheet to reflect our adoption of the guidance. Our adoption
of Topic 842 did not affect our cash flows or our ability to comply with
covenants under our credit agreements.
In the fourth quarter of fiscal 2019, our board of directors declared a dividend
of one preferred stock purchase right (a "Right"), payable on or about October
1, 2019 , for each share of common stock, par value $0.01 per share, of the
Company outstanding on September 30, 2019 , to the stockholders of record on that
date. In connection with the distribution of the Rights, we entered into a
Section 382 Rights Agreement (the "Rights Agreement"), dated as of September 23,
2019 , between the Company and Computershare Trust Company, N.A. , a federally
chartered trust company, as rights agent. The purpose of the Rights Agreement is
to deter trading of our common stock that would result in a change in control
(as defined in Internal Revenue Control Section 382), thereby preserving our
future ability to use our historical federal net operating losses and other Tax
Attributes (as defined in the Rights Agreement). Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Preferred Stock, par value $0.01 per share, at a price of $33.63 ,
subject to adjustment. The Rights, which are described in the Company's Current
Report on Form 8-K filed on September 24, 2019 , are in all respects subject to
and governed by the provisions of the Rights Agreement. The Rights will expire
at the earliest to occur of (i) the date on which our board of directors
determines, in its sole discretion, that the Rights Agreement is no longer
necessary for the preservation of material valuable tax attributes, or the tax
attributes have been fully utilized and may no longer be carried forward, and
(ii) the close of business on September 22, 2022 .
In the fourth quarter of fiscal 2019, PDMC, the Company's majority-owned IC
subsidiary in
In the fourth quarter of fiscal 2019, upon our request, a financing entity made an advance payment of$3.5 million to an equipment vendor. We entered into a Master Lease Agreement ("MLA") with this financing entity, which became effective inJuly 2019 . The MLA enables us to request advance payments or other funds to finance equipment to be leased or purchased in theU.S. In connection with this MLA, we have been approved for financing of$35 million for the purchase of a high-end lithography tool. Interest on this borrowing is variable and payable monthly at thirty-day LIBOR plus 1% (1.15% atOctober 31, 2020 ), and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. During the first quarter of fiscal 2021, this financing entity made an additional payment of$28 million to the equipment vendor on our behalf. In the fourth quarter of fiscal 2019, the Company's board of directors authorized the repurchase of up to$100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). We repurchased 2.5 million shares at a cost of$27.9 million (an average price of$11.34 per share) under this authorization. The repurchase program was terminated onMarch 20, 2020 .
In the second quarter of fiscal 2019, we repaid, upon maturity, the entire
In the first quarter of fiscal 2019, PDMC paid a dividend, of which 49.99%, or
approximately
In the first quarter of fiscal 2019, PDMCX was approved for credit of345.0 million RMB (approximately$51.4 million , at the balance sheet date), subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements ("the Project Loans") for intermittent borrowings. The Project Loans, which are denominated in RMB, are being used to finance certain capital expenditures inChina . PDMCX granted liens on its land, building, and certain equipment as collateral for the Project Loans. As ofOctober 31, 2020 , PDMCX had outstanding336.0 million RMB ($50.1 million ) against this approval. Payments on these borrowings are due semiannually throughDecember 2025 . See Note 7 of the consolidated financial statements for additional information on these loans. 23 -------------------------------------------------------------------------------- Table of Contents In the first quarter of fiscal 2019, PDMCX received approval for unsecured credit of$25.0 million , pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the "Working Capital Loans"), PDMCX can borrow up to140.0 million RMB to pay value-added taxes ("VAT") and up to60.0 million RMB to fund operations; combined total borrowings are limited to the equivalent of$25.0 million . As ofOctober 31, 2020 , PDMCX had outstanding8.0 million RMB ($1.2 million ) to fund operations, with repayments due one year from the borrowing dates of the separate loan agreements. As ofOctober 31, 2020 , PDMCX had outstanding93.2 million RMB ($13.9 million ) borrowed to pay VAT. Payments on these borrowings are due semiannually, in increasing amounts, throughJuly 2023 . See Note 7 of the consolidated financial statements for additional information on these loans. In the fourth quarter of fiscal 2018, the Company's board of directors authorized the repurchase of up to$25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under Rule 10b5-1, onOctober 22, 2018 , and was terminated onFebruary 1, 2019 . In total, we repurchased 1.5 million shares at a cost of$13.8 million (an average of$9.41 per share) under this authorization. In the third quarter of fiscal 2018, the Company's board of directors authorized the repurchase of up to$20 million of its common stock, which was effectuated in open-market transactions or in accordance with a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced onJuly 10, 2018 , and ended inOctober 2018 . In total, under this authorization, we repurchased 2.2 million shares at a cost of$20.0 million (an average of$8.97 per share).
In the third quarter of fiscal 2018, PDMC paid a dividend, of which 49.99%, or
approximately
In the first quarter of fiscal 2018, we announced the successful closing of theChina joint venture agreement with Dai Nippon Printing Co., Ltd. ("DNP"), which we had agreed to enter into and announced in the third quarter of fiscal 2017. Under the agreement, our wholly-ownedSingapore subsidiary owns 50.01% of the joint venture, which is namedXiamen American Japan Photronics Mask Co., Ltd. (PDMCX), and a subsidiary of DNP owns the remaining 49.99%. The financial results of the joint venture, which commenced production in the third quarter of 2019, are included in thePhotronics, Inc. consolidated financial statements. See Note 5 of the consolidated financial statements for additional information on the joint venture. 24 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables present selected operating information expressed as a percentage of revenue: Three Months Ended October 31, August 2, October 31, 2020 2020 2019 Revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 78.6 76.1 75.6 Gross profit 21.4 23.9 24.4 Selling, general and administrative expenses 8.6 8.4 7.8 Research and development expenses 2.8 2.9 2.9 Operating income 10.0 12.6 13.7 Other income (expense), net (1.9 ) (1.3 ) (3.9 ) Income before income tax provision 8.1 11.3 9.8 Income tax provision 2.3 3.2 1.5 Net income 5.8 8.1 8.3 Net income attributable to noncontrolling interests 1.5 1.3 2.1 Net income attributable toPhotronics, Inc. shareholders 4.3 % 6.8 % 6.2 % Year Ended October 31, October 31, October 31, 2020 2019 2018 Revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 77.9 78.1 75.4 Gross profit 22.1 21.9 24.6 Selling, general and administrative expenses 8.8 9.5 9.6 Research and development expenses 2.8 2.9 2.7 Operating income 10.5 9.5 12.3 Other income (expense), net (0.4 ) (0.3 ) 0.5 Income before income tax provision 10.1 9.2 12.8 Income tax provision 3.5 1.9 1.4 Net income 6.6 7.3 11.4 Net income attributable to noncontrolling interests 1.1 1.9 3.5 Net income attributable toPhotronics, Inc. shareholders 5.5 % 5.4 % 7.9 % Note: All the following tabular comparisons, unless otherwise indicated, are for the three months endedOctober 31, 2020 (Q4 FY20),August 2, 2020 (Q3 FY20) andOctober 31, 2019 (Q4 FY19), and for the fiscal years endedOctober 31, 2020 (FY20) andOctober 31, 2019 (FY19). Please refer to the MD&A in our 2019 Annual Report on Form 10-K for comparative discussion of our fiscal years endedOctober 31, 2019 andOctober 31, 2018 . 25 -------------------------------------------------------------------------------- Table of Contents Revenue Our quarterly revenues can be affected by the seasonal purchasing practices of our customers. As a result, demand for our products is typically reduced during the first, and sometimes the second, quarters of our fiscal year, by the North American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods. At the beginning of fiscal year 2020, we changed the threshold for the definition of high-end FPD, from G8 and above and active matrix organic light-emitting diode (AMOLED) display screens, to G10.5+, AMOLED, and low-temperature polysilicon (LTPS) display screens, to reflect the overall advancement of technology in the FPD industry. Our definition of high-end IC products remains as 28 nanometer or smaller. High-end photomasks typically have higher selling prices (ASPs) than mainstream products.
The following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY20 and FY20 from revenue in prior reporting periods. Columns may not total due to rounding.
Quarterly Changes in Revenue by Product Type
Q4 FY20 from Q3 FY20 Q4 FY20 from Q4 FY19
Revenue in Increase Percent Increase Percent
Q4 FY20 (Decrease) Change (Decrease) Change
IC
High-end $ 38.2 $ (0.5 ) (1.3 )% $ (6.8 ) (15.1 )%
Mainstream 67.8 (2.2 ) (3.2 )% 0.2 0.3 %
Total IC $ 105.9 $ (2.7 ) (2.5 )% $ (6.6 ) (5.9 )%
FPD
High-end $ 31.3 $ (5.4 ) (14.6 )% $ 5.9 23.1 %
Mainstream 12.1 (0.5 ) (4.0 )% (6.2 ) (34.1 )%
Total FPD $ 43.4 $ (5.9 ) (11.9 )% $ (0.4 ) (0.8 )%
Total Revenue $ 149.3 $ (8.6 ) (5.5 )% $ (7.0 ) (4.5 )%
Quarterly Changes in Revenue by Geographic Origin
Q4 FY20 from Q3 FY20 Q4 FY20 from Q4 FY19
Revenue in Increase Percent Increase Percent
Q4 FY20 (Decrease) Change (Decrease) Change
Taiwan $ 56.6 $ (4.2 ) (6.9 )% $ (12.3 ) (17.8 )%
Korea 36.6 (2.9 ) (7.4 )% (0.8 ) (2.1 )%
United States 26.7 (1.7 ) (5.9 )% (3.8 ) (12.5 )%
China 21.0 0.0 0.1 % 9.7 85.6 %
Europe 7.9 0.3 3.3 % 0.1 1.0 %
Other 0.5 (0.1 ) (13.7 )% 0.1 23.5 %
Total revenue $ 149.3 $ (8.6 ) (5.5 )% $ (7.0 ) (4.5 )%
Revenue decreased 5.5% in Q4 FY20, compared with Q3 FY20, as FPD demand fell
11.9% due, in significant part, to U.S. trade sanctions placed on Huawei
Technologies Co., Ltd. which negatively impacted their ability to release new
mobile devices, thereby decreasing demand for new display panels and,
ultimately, new FPD photomasks; consequentially, our mobile display panel
revenue declined 21% from Q3 FY20. In addition, high prices and unit demand for
current products resulted in panel producers extending production runs of
current designs and delaying design changes, which led to decreased demand of
masks used for production of LCD displays on G10.5+, and smaller substrates. FPD
revenue attributable to China decreased 12% from Q3 FY20, while representing 56%
of our total FPD revenue in Q4 FY20. IC revenue decreased from the prior quarter
by 2.5%, as improvement at some logic foundries in the U.S. and Asia somewhat
mitigated weakened demand for memory photomasks. IC revenue attributable to
China increased 14% from Q3 FY20, and accounted for a quarter of our IC revenue
in the current quarter.
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Revenue decreased 4.5% in Q4 FY20, compared with Q4 FY19; IC demand declined
5.9%, due to weakened demand for memory photomasks, while FPD demand fell less
than 1%, despite the disruptions to the China supply chain discussed above.
Year-over-Year Changes in Revenue by Product Type
FY20 from FY19
Revenue in Percent
FY20 Increase (Decrease) Change
IC
High-end $ 156.1 $ (0.3 ) (0.2 )%
Mainstream 262.3 12.5 5.0 %
Total IC $ 418.4 $ 12.2 3.0 %
FPD
High-end $ 139.6 $ 53.6 62.4 %
Mainstream 51.7 (6.8 ) (11.7 )%
Total FPD $ 191.3 $ 46.8 32.4 %
Total Revenue $ 609.7 $ 59.0 10.7 %
Year-over-Year Changes in Revenue by Geographic Origin
FY20 from FY19
Revenue in Increase Percent
FY20 (Decrease) Change
Taiwan $ 239.1 $ (5.3 ) (2.2 )%
Korea 153.1 5.3 3.6 %
United States 104.9 (0.1 ) (0.1 )%
China 79.4 60.4 317.5 %
Europe 31.5 (1.1 ) (3.3 )%
Other 1.7 (0.2 ) (10.2 )%
Total Revenue $ 609.7 $ 59.0 10.7 %
Revenue increased 10.7% in FY20, compared with FY19, to a record high of $609.7
million , eclipsing our previous record set in FY19. FPD revenue increased 32.4%,
on strong demand for high-end products, despite the disruptions to the China FPD
supply chain encountered in Q4 FY20. IC revenue increased 3.0%, year-over-year;
the increase was driven by higher demand for mainstream logic masks in Asia and
the U.S. The outbreak of the COVID 19 pandemic in FY20 tempered revenue growth
for both IC and FPD, as supply chains were, at least temporarily, disrupted and
travel restrictions were imposed, resulting in delays to equipment installations
and customer design team projects.
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Gross Margin
Percent Change
Q4 FY20 Q4 FY20
Q4 FY20 Q3 FY20 Q4 FY19 from from
Q3 FY20 Q4 FY19
Gross profit $ 31.9 $ 37.7 $ 38.2 (15.5 )% (16.4 )%
Gross margin 21.4 % 23.9 % 24.4 %
Gross margin decreased by 2.5 percentage points in Q4 FY20, from Q3 FY20,
primarily as a result of the above mentioned 5.5% decrease in revenue from the
prior quarter. Gross margins decreased in Taiwan , Korea , and the U.S. , primarily
as a result of decreased revenue; gross margins at our China -based operations
increased, overall, primarily due to lower glass blank costs. Total cost of
goods sold decreased $2.7 million , or 2.3%, from the prior quarter, primarily
due to a 6.1% decrease in material costs, which were essentially flat as a
percentage of revenue. Labor costs decreased 1.9%, but were essentially flat as
a percentage of revenue, while overhead costs increased $0.5 million , and 2.3
percentage points, as a percentage of revenue.
Gross margin decreased by 3.0 percentage points in Q4 FY20, from Q4 FY19,
primarily as a result of the 4.5% decrease in revenue in the current year
quarter. Gross margins at our China -based IC and FPD operations increased as
they continue to ramp up to full production. Gross margins decreased in Taiwan ,
and the U.S. , primarily as a result of decreased revenue. Total cost of goods
sold decreased $0.7 million , or 0.6%, from the prior year quarter, with $1.9
million of the decrease resulting from lower materials costs, which fell 4.1%,
but were essentially flat as a percentage of revenue. Labor costs increased
9.5%, up 1.5 percentage points of revenue, while overhead costs were essentially
flat, and up 1.4 percentage points of revenue.
Percent Change
FY20
FY20 FY19 from
FY19
Gross profit $ 134.7 $ 120.8 11.4 %
Gross margin 22.1 % 21.9 %
Gross margin increased by 0.2 percentage points in YTD FY20, from YTD FY19,
primarily as a result of the 10.7% increase in revenue from the prior year
period. Gross margins at our China -based IC and FPD operations increased as
these facilities continue to ramp up to full production. Gross margins decreased
in Taiwan primarily due to lower revenue, and in the U.S due to overhead costs
increasing, while revenue was, essentially, unchanged. Total cost of goods sold
increased $45.2 million , or 10.5%, from the prior year period, with $19.6
million of the increase resulting from greater materials costs, which were up
12.0% from YTD FY19, and increased 0.4%, as a percentage of revenue. Labor costs
increased 4.9%, but were down 0.6 percentage points against revenue, while
overhead costs increased 11.2%, with increased equipment costs (which reflected
our expanded installed tool base) comprising the majority of this increase.
As we operate in a high fixed cost environment, increases or decreases in our
revenues and capacity utilization will generally positively or negatively impact
our gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$12.8 million in Q4 FY20, compared with$13.3 million in Q3 FY20, and$12.1 million in Q4 FY19. The decrease from Q3 FY20 was primarily the result of decreased compensation and related expenses of$0.8 million , and the increase from the prior year quarter was primarily the result of increased compensation and related expenses of$1.2 million , which were partially offset by decreased travel costs of$0.6 million . Selling, general and administrative expenses increased$1.3 million , or 2.4%, in YTD FY20, from YTD FY19, primarily as a result of increased compensation and related expenses and professional fees of$2.7 million and$0.8 million , respectively, partially offset by decreased travel expenses of$1.7 million . 28 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses
Research and development expenses consist of development efforts related to high-end process technologies for high-end IC and FPD applications.
Research and development expenses were$4.1 million in Q4 FY20, compared with$4.5 million in both Q3 FY20 and Q4 FY19. The decrease from Q3 FY20 was primarily the result of decreased development activities in theU.S. , which were partially offset by increased activities inChina , and the decrease from the prior year quarter was the result of decreased activities inChina andTaiwan . Research and development expenses increased$0.8 million , or 4.6%, in YTD FY20 from YTD FY19, primarily due to increased development activities inChina , which were partially offset by reduced activities in theU.S. andTaiwan . Other Income (Expense), net Q4 FY20 Q3 FY20 Q4 FY19
Foreign currency transactions (losses) gains, net
(0.8 ) (0.6 ) (0.2 )
Interest income and other income (expense), net 0.1 - 0.3
Total other income (expense) $ (2.9 ) $ (2.1 ) $ (6.1 )
The unfavorable change in Other income (expense), net of $0.8 million , from a
loss of $2.1 million in Q3 FY20, to a loss of $2.9 million in Q4 FY20, was
primarily due to increased foreign currency exchange losses of $0.7 million , and
increased interest expense on our China -based debt. The majority of the interest
on our China -based debt is eligible for reimbursements through subsidies, which
we recognize upon receipt. Other income (expense), net increased $3.2 million
from Q4 FY19, primarily due to less unfavorable foreign currency transaction
results of $4.0 million , which were partially offset by increased interest
expense of $0.6 million on our China -based debt; the increased interest expense
reflected the higher average debt balance in the current year quarter.
FY20 FY19
Interest expense $ (2.4 ) $ (1.4 ) Interest income and other income (expense), net 0.5 1.3 Foreign currency transactions (losses) gains, net (0.5 ) (1.3 )
Total other income (expense)$ (2.3 ) $ (1.4 ) The unfavorable year-to-date change in Other income (expense), net of$0.9 million was primarily due to increased interest expense of$1 million on ourChina -based debt, and decreased interest income of$0.6 million . The effects of these decreases were partially offset by decreased foreign currency exchange losses of$0.8 million . Income Tax Provision Certain provisions of theU.S. Tax Cuts and Jobs Act, which was signed into law onDecember 22, 2017 , were effective for tax years beginning on or afterJanuary 1, 2018 . As a fiscal yearU.S. taxpayer, these provisions were applied to our fiscal year 2019, including the elimination of the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions. Q4 FY20 Q3 FY20 Q4 FY19 Income tax provision$ 3.5 $ 4.9 $ 2.3 Effective income tax rate 28.8 % 27.7 % 15.1 % 29
-------------------------------------------------------------------------------- Table of Contents The effective income tax rate is sensitive to the jurisdictional mix of our earnings, due, in part, to the non-recognition of tax provisions and benefits on losses in jurisdictions with valuation allowances. The effective income tax rate increased in Q4 FY20, compared with Q3 FY20, due to the non-recognition of more tax benefits in Q4 FY20 on losses in theU.S. and in a non-U.S. jurisdiction; non-recognized tax benefits in both quarters were a result of valuation allowances applying to those provisions and benefits. The effective income tax rate increased in Q4 FY20, from Q4 FY19, due to the non-recognition of tax benefits in a non-U.S. jurisdiction during FY20; the non-recognized tax benefits in both quarters were a result of valuation allowances applying to those benefits. However, in Q4 FY19, tax benefits not recognized onU.S. quarterly income were somewhat reduced by the benefit of$0.9 million from a tax holiday inTaiwan . FY20 FY19 Income tax provision$ 21.3 $ 10.2 Effective income tax rate 34.5 % 20.1 % The increase in the effective income tax rate on a full-year basis in FY20, compared with FY19, is primarily due to the net increase in non-recognition of tax benefits in the US and in a non-U.S. jurisdiction during FY20; the non-recognition is the result of valuation allowances applying to those benefits, the$1.5 million post-settlements increase in the provision for unrecognized tax benefits, and a$1.9 million decrease in the benefit related to the FY20 tax holiday inTaiwan , which expired at the end ofDecember 2019 . We consider all available evidence when evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance. We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded accruals for such contingencies. Included in the balance of unrecognized tax benefits as ofOctober 31, 2020 andOctober 31, 2019 , are$2.0 million and$1.9 million respectively, recorded in Other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rates.
Net Income Attributable to Noncontrolling Interests
Q4 FY20 Q3 FY20 Q4 FY19 FY20 FY19
Net income attributable to
noncontrolling interests $ 2.1 $ 2.1 $ 3.3 $ 6.5 $ 10.7
Net income attributable to noncontrolling interests was $2.1 million in Q4 FY20,
unchanged from Q3 FY20, and was the result of net income realized at our
China -based IC facility in Q4 FY20, which realized a net loss in Q3 FY20, and
decreased net income at our Taiwan -based IC facility. Net income attributable to
noncontrolling interests decreased $1.2 million in Q4 FY20 from $3.3 million in
Q4 FY19; decreased income at our Taiwan -based IC facility exceeded the favorable
effect of our China -based IC facility income in the current year quarter, and a
net loss in the prior year quarter.
On a year-to-date basis, net income attributable to noncontrolling interests
decreased $4.2 million ; the decrease was the result of decreased net income at
our Taiwan -based IC facility, the effect of which was somewhat mitigated by a
decreased net loss at our China -based IC facility. We hold 50.01% ownership
interests in both the China -based and Taiwan -based IC facilities.
Liquidity and Capital Resources
October 31, October 31,
2020 2019
(in $ millions) (in $ millions)
Cash and cash equivalents $ 278.7 $ 206.5
Net cash provided by operating activities $ 143.0 $ 68.4
Net cash used in investing activities $ (65.7 ) $ (151.4 )
Net cash used in financing activities $ (16.0 ) $ (42.1 )
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We had cash and cash equivalents of
-$143.0 million provided by operating activities; -$17.6 million contributed to ourChina -based IC joint venture by noncontrolling interests; -$5.3 million government incentives received inChina ; -$4.2 million received from exercises of employee stock options; -$20.3 million received from borrowings inChina ; -$(70.8) million paid for property, plant, and equipment; -$(34.4) million used to repurchase our common stock; -$(16.2) million dividend paid to noncontrolling interest -$(7.4) million used to repay debt; -$11.0 million favorable effects of currency exchange rate changes on cash
Our working capital at the end of Q4 FY20 was
- Increased cash and cash equivalents of$72.2 million ; - Increased inventories of$9.1 million , mainly acquired to protect against potential COVID-19 related supply chain disruptions; - Increased compensation and related expenses accrual of($2.1) million ; - Increased contract liabilities of$(3.7) million ; - Increased current debt of$(2.8) million ; - Increased current portion of operating leases of$(2.3) million , reflecting our adoption of ASC 842 atNovember 1, 2019 .
The net cash provided by operating activities of
- Increased non-cash add backs to net income, including depreciation, amortization, share-based compensation, and deferred income taxes of$14.4 million ; - A comparative decrease in accounts receivable of$19.3 million ; - A comparative decrease in the build-up of inventories of$16.2 million , which was primarily the result of our initially supplying ourChina -based FPD facility in YTD FY19; - A comparative increase in other current assets of$16.5 million , mostly related to increases in refundable income tax of$4.6 million , contract assets of$8.9 million and recoverable VAT of$2.2 million . - A comparative increase in accounts payable, accrued liabilities and other of$8.5 million , mostly related to the net of the following comparative changes: an increase in noncurrent recoverable VAT of$28.3 million related to ourChina facilities, increase in contract liability of$5.3 million , decrease in accounts payable and accruals of$(24.5) million , and a decrease in income tax payable of$(3.2) million . Net cash used in investing activities was$65.7 million in YTD FY20, a decrease of$85.7 million from$151.4 million used in YTD FY19. The net decrease in cash used was primarily attributable to decreased capital expenditures of$107.6 million ; this was the result of a reduction in payments to equip ourChina -based facilities, which were in the start-up phase in the first half of fiscal year 2019. A reduction in investment incentives of$21.7 million in YTD FY20, from YTD FY19, also reduced net cash flows used in investing activities.
Net cash flows from financing activities changed from
- Repayments of debt were$53.9 million less in YTD FY20 than in YTD FY19; the primary cause of the decrease was repayment (upon their maturity) of our convertible senior notes in YTD FY19; - Dividends to DNP (related to their 49.99% interest in our IC facility inTaiwan ) were$28.9 million less in YTD FY20; -$(34.3) million less debt was incurred in YTD FY20 than in YTD FY19; -$(11.8) million less contributed by DNP to maintain their proportionate ownership interest in our IC joint venture inChina in YTD FY20 than in YTD FY19; -$(12.7) million more paid in YTD FY20, than in YTD FY19, to acquire our common stock. As ofOctober 31, 2020 andOctober 31, 2019 , our total cash and cash equivalents included$218.0 million and$147.2 million , respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to theU.S. may subject them toU.S. state income taxes and local country withholding taxes in certain jurisdictions. Furthermore, our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD sectors. Since we operate in a high fixed cost environment, our liquidity is highly dependent on our revenue, cash conversion cycle, and the timing of our capital expenditures (which can vary significantly from period to period). We believe that our cash on hand, cash generated from operations, and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. However, depending on conditions in the semiconductor and display markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments we have used in the past may not be available to us when required. Consequently, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit agreements (which are discussed in Note 7 to the consolidated financial statements). Please also refer to Financing Related Risk Factors. 31
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As ofOctober 31, 2020 , we had outstanding capital commitments of approximately$112 million . We intend to finance our capital expenditures with our working capital, contributions from our joint venture partners, cash generated from operations and, if necessary, additional borrowings. As of the end of fiscal 2020, we had no unfulfilled commitments to fund our IC facility inChina .
Cash Requirements
Our cash requirements in fiscal 2021 will primarily be for funding our operations, capital spending, and debt repayments. At our option, should we deem it to be an optimal use of our cash, we may repurchase some of our common stock. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our cash requirements exceed our existing cash and cash available under our credit agreements.
Contractual Obligations
The following table presents our contractual obligations as ofOctober 31, 2020 : Payment due by period Total Less 1 - 3 3 - 5 More Than Years Years Than Contractual Obligations 1 Year 5 Years Debt$ 68,658 $ 13,678 $ 28,548 $ 19,221 $ 7,211 Operating leases 7,535 2,275 3,362 1,374 524 Purchase obligations 130,431 124,365 5,802 264 - Interest 7,987 2,876 3,743 1,339 29 Other noncurrent liabilities 15,099 674 2,110 887 11,428 Total$ 229,710 $ 143,868 $ 43,565 $ 23,085 $ 19,192 32
-------------------------------------------------------------------------------- Table of Contents As ofOctober 31, 2020 , the Company had recorded accruals for uncertain tax positions and related interest and penalties of$2.7 million ; these accruals were not included in the above table due to the high degree of uncertainty regarding the timing of future payments related to such liabilities.
Off-Balance Sheet Arrangements
InJanuary 2018 , Photronics, through its wholly ownedSingapore subsidiary, entered into the PDMCX joint venture with DNP, through its wholly owned subsidiary "DNP Asia Pacific PTE, Ltd. " under which DNP obtained a 49.99% interest in our IC business inXiamen, China . The joint venture was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. Under the joint venture's operating agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement that cannot be resolved between the two parties. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 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. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of PDMCX's net assets, incur a loss. As ofOctober 31, 2020 , Photronics and DNP each had net investments in PDMCX of$54.8 million . We lease certain office facilities and equipment under leases with terms of one year or less that may require us to pay taxes, insurance and maintenance expenses related to the properties. See Note 9 to the consolidated financial statements for additional information on these short-term leases. In concurrence with ourNovember 1, 2019 , adoption of Accounting Standards Codification Topic 842 - "Leases", we recognized right-of-use leased assets of approximately$6.5 million and corresponding lease liabilities, which were discounted at our incremental borrowing rates. As a result, most of our lease agreements ceased to be off-balance sheet arrangements on that date.
Business Outlook
While we, as always, caution that our outlook, due to our short back-log
(which typically does not exceed two weeks) is limited, we expect revenue to
increase, as a percentage of FY20 revenue, in the high single digits. We are
also anticipating operating profit to grow at a rate similar to the 23% increase
we experienced in FY20. The bases of our expectations include growth for both IC
and FPD in FY2021. IC growth drivers include added capacity across our global
operations including the completion of Phase 1 of our China IC facility ramp,
growing demand for semiconductor masks in China , and increased demand in the IC
memory space. For FPD, mobile displays are once again expected to be a sector of
growth with additional demand coming from new large-screen TV technology, such
as OLED, which will be supported by the implementation of the next phase of
investment at our Asia -based FPD facilities. We are also encouraged by the
impending distribution of recently developed coronavirus vaccines, as we think
this supports a reasonable expectation that supply chain disruptions and travel
restrictions will be eased, thereby reducing the impediments to growth they
represented in FY20.
The impact, if any, on our business of changing geopolitical conditions, such as
U.S. -China trade relations, tensions between the Republic of South Korea and
Japan , and the effects of the United Kingdom exiting the European Union cannot
be predicted. However, we believe the impending change in leadership in the U.S.
may lead to an improvement in its trade relationship with China , including the
possible removal of sanctions on some Chinese enterprises, as well as a
reduction in the likelihood of the impositions of additional sanctions.
We believe that a majority of the growth in the IC and FPD markets will come
from the Asia region, predominantly in China . We expect to meet these demands
both through the utilization of our facilities in China and by importing
photomasks into China from our other facilities. We make continual assessments
of our global manufacturing strategy and monitor our revenue and related cash
flows from operations. These ongoing assessments could result in future facility
closures, asset redeployments, impairments of intangible or long-lived assets,
workforce reductions, or the addition of manufacturing facilities, all of which
would be based on market conditions and customer requirements.
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Our future results of operations and the other forward-looking statements
contained in this filing involve a number of risks and uncertainties, some of
which are discussed in Part1, Item 1A of this report; a number of other
unforeseeable factors could cause actual results to differ materially from our
expectations.
Critical Accounting Estimates
Our consolidated financial statements are based on the selection and application
of accounting policies, which require management to make significant estimates
and assumptions. We believe the following to be the more critical areas that
require judgment when applying our accounting policies:
• Revenue Recognition: Application of GAAP related to the measurement and
recognition of revenue requires us to make judgments and estimates.
Specifically, the determination of whether revenues related to our revenue
contracts should be recognized over time or at a point in time, as these
determinations impact the timing and amount of our reported revenues and net
income. Other significant judgments include the estimation of the point in the
manufacturing process at which we are entitled to receive payment, as well as
the progress of the job order to completion in order to determine the amount of
arrangement consideration earned for contractual revenue recognized over time.
• Property, Plant and Equipment: Significant judgment and assumptions are
employed when we establish estimated useful lives, depreciation periods and
when depreciation should begin on such assets as this evaluation can
significantly impact our gross margin and research and development expenses.
Significant judgement is also required when we periodically review property,
plant and equipment for any potential impairment in carrying values, whenever
events such as a significant industry downturn, plant closures, technological
obsolescence, or other change in circumstances indicate that their carrying
amounts may not be recoverable as the recoverability assessment requires us to
forecast future cash flows related to these assets; this evaluation can
significantly impact our gross margin and operating expense.
• Leases: Significant judgement is applied in the determination of whether an
arrangement is, or contains, a lease and, in certain instances, whether the
lease should be classified as an operating lease or a finance lease, which can
impact the timing and classification of lease costs.
• Contingencies: We are subject to the possibility of losses from various
contingencies. Significant judgment is necessary to estimate the probability
and amount of a loss, if any, from such contingencies. An accrual is made when
it is probable that a liability has been incurred or an asset has been impaired
and the amount of loss can be reasonably estimated. In accounting for the
resolution of contingencies, significant judgment may be necessary to estimate
amounts pertaining to periods prior to the resolution that are charged to
operations in the period of resolution and amounts related to future periods. • Income Taxes: Our annual tax rate is determined based on our income and the
jurisdictions where it is earned, statutory tax rates, and the tax impacts of
items treated differently for tax purposes than for financial reporting
purposes. Also inherent in determining our annual tax rate are judgments and
assumptions regarding the recoverability of certain deferred tax balances, and
our ability to uphold certain tax positions. We are subject to complex tax
laws, in the
they apply can be open to interpretation. Realization of deferred tax assets is
dependent upon generating sufficient taxable income in the appropriate
jurisdiction in future periods, which involves business plans, planning
opportunities, and expectations about future outcomes. Our assessment relies on
estimates and assumptions, and may involve a series of complex judgments about
future events. Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective tax rate.
Please refer to Notes 1, 8, 9, 12, and 14 to our consolidated financial statements for additional information related to these critical accounting estimates and our other significant accounting policies.
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Recent Accounting Pronouncements
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 23 Recent Accounting Pronouncements" for recent accounting pronouncements that may affect our financial reporting.
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