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 negative trends 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. 22 -------------------------------------------------------------------------------- Table of Contents 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 semiconductor and FPD industries are 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 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 2022, 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 2021, 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. 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 ASPs. Our capital expenditure payments were
$109.1 million, $70.8 millionand $178.3 millionin 2021, 2020 and 2019, respectively, and the depreciation on these purchases 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 millionin fiscal year 2022. 23 -------------------------------------------------------------------------------- Table of Contents 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.
In the second quarter of 2021, under an MLA which we entered into effective
October 2020, we entered into a five-year $7.2 millionfinance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $0.1 millionper 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 the first quarter of 2021, under an MLA which we entered into effective July 2019, we entered into a five-year $35.5 millionfinance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from $0.04 millionafter the first three months to $0.6 millionfor 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 9 of Part II, Item 8 of this report, and includes a cross-default provision for any agreement or instrument with an outstanding, committed balance greater than $5.0 millionin which we are the indebted party. In the fourth quarter of 2020, we entered into a MLA 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 2020, and the financing entity made a progress payment to the vendor of $6.5 millionin the first quarter of 2021. The progress payment accrued interest at 1.56% payable monthly until the final payment for the tool was made in the second quarter of 2021, at which point the $7.2 millionlease described above began. In the fourth quarter of 2020, our Hefei, China, facility was approved to borrow 200 million RMB(approximately $31.3 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 allowing us to borrow additional funds set to expire in August 2022. The loan proceeds were used to fund purchases of two lithography tools at the Hefeifacility. As of October 31, 2021, we had borrowed 135.7 million RMB( $21.2 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 Hefeifacility, 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 October 31, 2021. 24 -------------------------------------------------------------------------------- Table of Contents In the fourth quarter of 2020, the Company's board of directors authorized the repurchase of up to $100 millionof its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. Through October 31, 2021, we had repurchased 5.6 million shares at a cost of $65.7 million(an average price of $11.64per share) under this authorization. All shares repurchased in 2020 were retired in 2020, and all shares repurchased in 2021 were retired in 2021.
In the first quarter of 2020, we acquired the remaining 0.2% of the non-controlling interests in
In the first quarter of 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 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 $0.01per 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 $0.01per 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 2019, upon our request, a financing entity made an advance payment of $3.5 millionto an equipment vendor. We entered into an MLA with this financing entity, which became effective in July 2019. The MLA enabled us to request advance payments or other funds to finance equipment to be leased or purchased in the U.S.In connection with this MLA, we had been approved for financing of $35 millionfor the purchase of a high-end lithography tool. Interest on this borrowing was variable and payable monthly at thirty-day LIBOR plus 1% and was to continue to accrue until the borrowing was repaid or, as allowed under the MLA, we entered into a lease for the equipment. During the first quarter of 2021, this financing entity made an additional payment of $28 millionto the equipment vendor on our behalf and we subsequently entered into the $35.5 millionfinance lease described above. In the fourth quarter of 2019, the Company's board of directors authorized the repurchase of up to $100 millionof 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 $11.34per share) under this authorization. The repurchase program was terminated on March 20, 2020.
In the second quarter of 2019, we repaid, at maturity, all
25 -------------------------------------------------------------------------------- Table of Contents In the first quarter of 2019, PDMCX obtained approval to borrow
345.0 million RMBfrom the Industrial and Commercial Bank of China. From November 2018through July 2020, PDMCX entered into separate loan agreements (the "Project Loans") for the entire approved amount and, as of October 31, 2021, 255.0 million RMB( $39.9 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 October 31, 2021. In the first quarter of 2019, 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 October 31, 2021, PDMCX had 78.0 million RMB( $12.2 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 are 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. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following tables show a selection of operating information expressed as a percentage of sales. Columns may not work due to rounding.
Three Months Ended October 31, August 1, October 31, 2021 2021 2020 Revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 71.3 73.4 78.6 Gross profit 28.7 26.6 21.4 Selling, general and administrative expenses 7.9 8.8 8.6 Research and development expenses 2.3 3.1 2.8 Other operating income, net - 2.1 - Operating income 18.5 16.7 10.0 Non-operating income (expense), net 2.1 2.2 (1.9 ) Income before income tax provision 20.6 18.9 8.1 Income tax provision 4.8 4.6 2.3 Net income 15.8 14.3 5.8 Net income attributable to noncontrolling interests 4.9 4.3 1.5 Net income attributable to
Photronics, Inc.shareholders 10.9 % 10.0 % 4.3 % Year Ended October 31, October 31, October 31, 2021 2020 2019 Revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 74.8 77.9 78.1 Gross profit 25.2 22.1 21.9 Selling, general and administrative expenses 8.7 8.8 9.5 Research and development expenses 2.8 2.8 2.9 Other operating income, net 0.5 - - Operating income 14.2 10.5 9.5 Non-operating income (expense), net 1.1 (0.4 ) (0.3 ) Income before income tax provision 15.4 10.1 9.2 Income tax provision 3.5 3.5 1.9 Net income 11.9 6.6 7.3 Net income attributable to noncontrolling interests 3.5 1.1 1.9 Net income attributable to Photronics, Inc.shareholders 8.4 % 5.5 % 5.4 % Note: All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2021(Q4 FY21), August 1, 2021(Q3 FY21) and October 31, 2020(Q4 FY20), and for the fiscal years ended October 31, 2021(FY21) and October 31, 2020(FY20). Please refer to the MD&A in our 2020 Annual Report on Form 10-K for comparative discussion of our fiscal years ended October 31, 2020, and October 31, 2019. Table columns may not foot due to rounding.
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 quarter 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. 27 -------------------------------------------------------------------------------- Table of Contents At the beginning of 2020, we changed the threshold for the definition of high-end FPD, from G8 and above and AMOLED display screens, to G10.5+, AMOLED, and LTPS display screens, to reflect the overall advancement of technology in the FPD industry. Our definition of high-end IC products remained as 28 nanometer or smaller. High-end photomasks typically have higher ASPs than mainstream products.
The following tables show the changes in income broken down by product type and geographic origin, in Q4 FY21 and FY21 compared to income from previous reporting periods.
Quarterly variations in income by type of product
Q4 FY21 from Q3 FY21 Q4 FY21 from Q4 FY20 Revenue in Increase Percent Increase Percent Q4 FY21 (Decrease) Change (Decrease) Change IC High-end*
$ 42.6 $ 0.20.5 % $ 4.411.6 % Mainstream 82.9 7.4 9.9 % 15.1 22.3 % Total IC $ 125.4 $ 7.76.5 % $ 19.518.4 % FPD High-end* $ 41.0 $ 0.30.8 % $ 9.730.9 % Mainstream 14.9 2.6 21.5 % 2.8 23.2 % Total FPD $ 55.8 $ 3.05.6 % $ 12.528.8 % Total Revenue $ 181.3 $ 10.66.2 % $ 32.021.4 %
* High-end photomasks generally have higher ASPs than consumer products.
Quarterly variations in turnover by geographic origin **
Q4 FY21 from Q3 FY21 Q4 FY21 from Q4 FY20 Revenue in Increase Percent Increase Percent Q4 FY21 (Decrease) Change (Decrease) Change Taiwan
$ 69.2 $ 5.38.3 % $ 12.522.1 % Korea 37.8 (1.8 ) (4.5 )% 1.2 3.4 % China 38.3 5.7 17.4 % 17.3 82.6 % United States 26.6 1.9 7.6 % (0.1 ) (0.4 )% Europe 9.0 (0.5 ) (4.9 )% 1.0 13.0 % Other 0.4 0.0 5.4 % 0.0 (4.6 )% Total revenue $ 181.3 $ 10.66.2 % $ 32.021.4 %
** This table breaks down income according to where it was earned.
Revenue in Q4 FY21 of
$181.3 millionincreased 6.2% compared with Q3 FY21 and 21.4% from Q4 FY20; on a year-to-date basis, revenue increased 8.9% in FY21, compared with FY20, to $663.8 million. A 6.5% increase in IC revenue in Q4 FY21, compared with Q3 FY21, was primarily the result of strong demand for mainstream masks, particularly at the most advanced levels. Industry-wide capacity constraints led to improved pricing for both high-end and mainstream products that resulted in IC revenue increasing 18.4% in Q4 FY21, compared with Q4 FY20. Increased demand from logic customers and Asia-based foundries were the sources of the increase, while demand for memory masks remained stable. 28 -------------------------------------------------------------------------------- Table of Contents FPD revenue increased 5.6% in Q4 FY21, compared with Q3 FY21, and 28.8% in Q4 FY21, compared with Q4 FY20. The increase from Q3 FY21 was primarily the result of increased demand attributable to new design releases of mainstream photomasks for liquid crystal displays ("LCD"), as panel manufacturers began to shift to introducing new designs to maintain or increase market share. This trend, and an increase in demand for AMOLED photomasks for displays used in mobile applications, were the primary drivers of the increase from the prior year quarter.
Year-to-year variations in income by product type
FY21 from FY20 Percent Revenue in FY21 Increase (Decrease) Change IC High-end* $ 163.0 $ 6.8 4.4 % Mainstream 297.2 34.9 13.3 % Total IC $ 460.2 $ 41.8 10.0 % FPD High-end* $ 155.7 $ 16.1 11.5 % Mainstream 47.9 (3.8 ) (7.4 )% Total FPD $ 203.6 $ 12.3 6.4 % Total Revenue $ 663.8 $ 54.1 8.9 %
* High end photomasks generally have higher ASPs than traditional photomasks.
Year-to-year variations in income by geographic origin **
FY21 from FY20 Revenue in Increase Percent FY21 (Decrease) Change Taiwan
$ 248.6 $ 9.54.0 % Korea 156.4 3.3 2.2 % China 115.7 36.4 45.8 % United States 105.0 0.1 0.1 % Europe 36.2 4.7 15.0 % Other 1.8 0.1 3.6 % Total Revenue $ 663.8 $ 54.18.9 %
** This table breaks down income according to where it was earned.
Revenue increased 8.9% in YTD FY21, compared with YTD FY20, to
$663.8 million. IC revenue increased 10.0%, due to both improved pricing for mainstream photomasks, and improved pricing and increased demand for high-end masks at the largest node levels. We believe that the increased demand for high-end photomasks at the largest node levels may be indicative of a trend towards chipmakers differentiating their products through the design of application specific integrated circuits ("ASIC"), in lieu of migrating to smaller tech-node photomasks. FPD revenue increased 6.4% from YTD FY20, due to both increased demand and improved pricing for AMOLED photomasks and, to a lesser extent, LTPS photomasks. 29 --------------------------------------------------------------------------------
Table of Contents Gross Margin Percent Change Q4 FY21 Q4 FY21 from Q3 from Q4 Q4 FY21 Q3 FY21 Q4 FY20 FY21 FY20 Gross profit
$ 51.9 $ 45.3 $ 31.914.6 % 62.9 % Gross margin 28.7 % 26.6 % 21.4 % Gross margin increased by 2.1 percentage points in Q4 FY21, from Q3 FY21, primarily as a result of the increase in revenue from the prior quarter. Material costs increased 3.4% from the prior quarter, but decreased, as a percentage of revenue, by 80 basis points. Labor costs decreased 0.3% and fell 70 basis points, as a percentage of revenue. Equipment and other overhead costs increased 4.3%, but decreased 60 basis points as a percentage of revenue, with higher outsourced manufacturing costs, partially offset by decreased equipment maintenance costs, most significantly contributing to the net cost increase. Gross margin increased by 7.3 percentage points in Q4 FY21, from Q4 FY20, primarily as a result of the increase in revenue from the prior year quarter. Material costs increased 14.7% from the prior year quarter, but decreased 160 basis points, as a percentage of revenue. Labor costs increased 10.9% from the prior year quarter, but fell 100 basis points as a percent of revenue, while equipment and other overhead costs rose 6.3%, but fell 460 basis points, as a percentage of revenue. Increased outsourced manufacturing costs and equipment service contract costs were the most significant contributors to the rise in equipment and other overhead costs. Percent Change FY21 FY20 FY21 from FY20 Gross profit $ 167.0 $ 134.724.1 %
Gross margin 25.2% 22.1%
Gross margin increased by 3.1 percentage points in YTD FY21, from YTD FY20, primarily as a result of the increase in revenue from the prior year period. Material costs increased 6.2% from the prior year period, but decreased 70 basis points as a percentage of revenue. Labor costs increased 10.7% from the prior year, but rose only 10 basis points when compared to revenue. Equipment and other overhead costs increased by 1.2%, but decreased 250 basis points as a percentage of revenue, with increased equipment service contract costs most significantly contributing to the overall cost 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
$14.3 millionin Q4 FY21, compared with $15.1 millionin Q3 FY21, and $12.8 millionin Q4 FY20. The decrease from Q3 FY21 was primarily the result of decreased professional fees of $0.3 millionand compensation and related expenses of $0.2 million, and the increase from the prior year quarter was primarily the result of increased compensation and related expenses of $1.7 millionand increased export duties (primarily incurred in Asia) of $0.2 million; these increases were partially offset by decreased professional fees of $0.9 million. Selling, general and administrative expenses increased $3.9 million, or 7.4%, in YTD FY21, from YTD FY20, primarily due to an increase in compensation and related expenses of $3.9 million. 30 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses, which primarily consist of development and qualification efforts related to high-end process technologies for high-end IC and FPD applications, were $4.1 millionin Q4 FY21, compared with $5.3 millionin Q3 FY21; the decrease was primarily caused by a decline in development activities in the U.S.Research and development expenses in Q4 FY21 were unchanged from Q4 FY20. On a year-to-date basis, research and development expenses increased $1.3 million, primarily due to increased development activities in the U.S.exceeding a decline in such activities at our China-based FPD facility. Other Operating Income, Net
In the third quarter of 2021, we recorded a
Non-operating income (expenses)
Q4 FY21 Q3 FY21 Q4
Impact of currency transactions, net
(2.2 ) Interest expense, net (1.0 ) (1.1 ) (0.8 ) Interest income and other income, net 0.5 0.5 0.1 Total other income (expense)
$ 3.8 $ 3.7 $ (2.9 )Non-operating income and expense was essentially unchanged in Q4 FY21 from Q3 FY21, primarily due to favorable movements of the RMB against the U.S.dollar offsetting unfavorable movements of the South Korean won against the U.S.dollar, and interest expense, net decreasing due to our reduced loan and finance lease balances. Non-operating income and expense changed favorably from a loss of $2.9 millionin Q4 FY20 to income of $3.8 millionin Q4 FY21. The $6.7 millionfavorable change was primarily due to favorable movements of the New Taiwandollar and the South Korean won against the U.S.dollar, which were partially offset by unfavorable movements of the RMB against the U.S.dollar. FY21 FY20
Impact of currency transactions, net
Interest expense, net
(1.7 ) (2.4 )
Interest income and other net income 1.2 0.5
Total other income (expense)
$ 7.5 $ (2.3 )Non-operating income and expense increased $9.8 millionin YTD FY21, compared with YTD FY20, primarily due to favorable movements of the South Korean won and the RMB against the U.S.dollar. Interest expense, net decreased year over year, due to a lower weighted-average interest rate on our debt, which offset a year over year increase in our average debt balance. Income Tax Provision Q4 FY21 Q3 FY21 Q4 FY20 Income tax provision $ 8.7 $ 7.8 $ 3.5Effective income tax rate 23.3 % 24.4 % 28.8 % The effective income tax rates are 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. 31 -------------------------------------------------------------------------------- Table of Contents The effective income tax rate decreased slightly in Q4 FY21, compared with Q3 FY21, primarily due to changes in the period-to-period mix of jurisdictional earnings. The effective income tax rate decrease in Q4 FY21, compared with Q4 FY20, is primarily due to the benefits of investment credits in certain non- U.S.jurisdictions in Q4 FY21, as well as changes in the jurisdictional mix of earnings. FY21 FY20 Income tax provision $ 23.2 $ 21.3Effective income tax rate 22.7 % 34.5 %
The decrease in the effective tax rate for a full year during FY21, compared to FY20, is mainly explained by the establishment of a valuation allowance for a loss carried forward on a
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 of
October 31, 2021and October 31, 2020, are $3.8 millionand $2.0 millionrespectively, recorded in Other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rates.
Net income attributable to non-controlling interests
Net income attributable to noncontrolling interests was
$8.8 millionin Q4 FY21, compared with $7.3 millionin Q3 FY21, and $2.1 millionin Q4 FY20. On a year-to-date basis, net income attributable to noncontrolling interests increased $16.8 millionfrom $6.5 millionin YTD FY20 to $23.4 millionin YTD FY21. All of these increases resulted from improved net income at both our Taiwan-based and China-based IC facilities.
Liquidity and capital resources
Cash and cash equivalents totaled
$276.7 millionand $278.7 millionas of October 31, 2021and October 31, 2020, respectively. As of the most recent balance sheet date, total cash and cash equivalents included $216.5 millionheld by foreign subsidiaries. Our primary sources of liquidity are our cash on hand, cash we generate from operations, and borrowing capacity we have available from financial institutions. Our corporate credit agreement has a $50 millionborrowing limit, with an expansion capacity to $100 million. Although we have not accessed funds under our corporate credit facility since 2011, it continues to afford us financial flexibility. In addition, in China, we currently have approximately $22.9 millionof borrowing capacity to support local operations. Please refer to Note 7 to the consolidated financial statements for additional information on our current borrowing capacity. We continually evaluate alternatives for efficiently funding our capital expenditures and ongoing operations. These reviews may result in our engagement in a variety of financing transactions, in the transfer of cash among subsidiaries, and/or the repatriation of cash to the U.S.The transfer of funds among subsidiaries could be subject to foreign withholding taxes; in certain jurisdictions, repatriation of these funds to the U.S.may subject them to U.S.state income taxes and/or local country withholding taxes. We believe that our liquidity, including available financing, is sufficient to meet our requirements through the next twelve months and thereafter for the foreseeable future. Through the utilization of our existing liquidity, cash we generate from operations, and (potentially) our borrowing capacity under our financing arrangements, we plan to continue to invest in our business, with our investments targeted to align with our customers' technology road maps. In addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should the right opportunity be available. We estimate capital expenditures for our fiscal year 2022 will be approximately $100 million; these investments will be targeted towards high-end and mainstream point tools that will increase our operating capacity and efficiency, and enable us to support our customers' near-term demands. As of October 31, 2021, we had outstanding capital commitments of approximately $73.7 millionand recognized liabilities related to capital equipment purchases of approximately $9.7 million. Although payment timing could vary, primarily as a result of the timing of tool installation and testing, we currently estimate that we will fund $61.4 millionof our total $83.4 millioncommitted and recognized obligations for capital expenditures over the next twelve months. Please refer to Notes 9 and 14 to our consolidated financial statements for additional information on our lease liabilities and unrecognized commitments, respectively. 32 -------------------------------------------------------------------------------- Table of Contents In September 2020, the Company's board of directors authorized the repurchase of up to $100 millionof its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. This authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock. As of October 31, 2021, there was approximately $34.3 millionremaining under that authorization. Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares. Cash Flows Year Ended October 31, October 31, October 31, 2021 2020 2019 Net cash provided by operating activities $ 150.8 $ 143.0 $ 68.4Net cash used in investing activities $ (103.5 ) $ (65.7 ) $ (151.4 )Net cash used in financing activities $ (53.9 )$
Operating Activities: Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, and the effects of changes in operating assets and liabilities. Net cash provided by operating activities increased by
$7.7 millionin 2021, compared with 2020, due to increased net income and share based compensation, partially offset by lower depreciation and other noncash adjustments and net changes in working capital, predominantly in Asia. Investing Activities: Net cash flows used in investing activities primarily consisted of purchases of property, plant and equipment. Purchases of property, plant and equipment were $109.1 millionin 2021, compared with $70.8 millionin 2020, as we increased our tool purchases in the current year, primarily in response to market demands in Asia. Financing Activities: Net cash flows used in financing activities primarily consist of share repurchases, proceeds from and repayments of debt, and contributions from and distributions to noncontrolling interests. Net cash used in financing activities increased by $37.9 millionin 2021, compared with 2020, due to increased share repurchases of $13.9 million, an excess of the change in distributions to, as compared with contributions from, noncontrolling interests of $11.0 million, and increased debt repayments of $13.0 million. In January 2018, Photronics, through its wholly owned Singaporesubsidiary, 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. 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 operating 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 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party's ownership percentage of the joint venture's net book value, with closing to take place within three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of PDMCX's net assets, incur a loss. As of October 31, 2021, Photronics and DNP each had net investments in PDMCX of approximately $64.0 million. 33 -------------------------------------------------------------------------------- Table of Contents Business Outlook
Our current business outlook and direction was provided in our full year and fourth quarter fiscal 2021 results conference call, and accompanying slide show. These can be viewed in the investors section of our website – www.phototronics.com.
Our future results of operations and the other forward-looking statements contained in this filing and in our Full Year and Fourth Quarter Fiscal 2021 Results earnings call and presentation involve a number of risks and uncertainties, some of which are discussed in Part I, 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 valuation and
revenue recognition requires us to make judgments and estimates.
More specifically, the determination of whether the income related to our income
contracts must be accounted for over time or at a point in time, as these
determinations affect the timing and amount of our reported income and
Income. Other important judgments include estimating the point in the
manufacturing process for which we are entitled to receive payment, as well as
the progress of the order until its completion in order to determine the amount of
arrangement consideration earned for contractual revenue recognized over time.
• Tangible fixed assets: important judgment and assumptions are
employees when we establish estimated useful lives, amortization periods and
when depreciation is due to start on these assets that this valuation can
significantly our gross margin and our research and development expenses.
Significant judgment is also required when we periodically review the property,
factories and equipment for any potential impairment of carrying values, whenever
events such as a significant industrial slowdown, plant closures,
obsolescence or any other change in circumstances indicate that their transport
the amounts may not be recoverable because the assessment of collectability requires us to
forecast future cash flows associated with these assets; this assessment may
significantly our gross margin and our operating expenses.
• Leases: important judgment is exercised in determining whether a
the arrangement is, or contains, a lease and, in some cases, if the
should be classified as an operating lease or a finance lease, which may
affect the timing and classification of rental costs.
• Contingencies: We are subject to the possibility of losses of various
contingencies. Significant judgment is required to estimate the probability
and the amount of a loss, if any, resulting from those contingencies. A regularization is carried out when
it is probable that a liability has been incurred or that an asset has been impaired
and the amount of the loss can be reasonably estimated. By counting the
resolution of contingencies, significant judgment may be required to estimate
the amounts relating to periods prior to the resolution which 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
the jurisdictions where it is earned, the 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 maintain certain tax positions. We are subject to complex taxation
laws, in the
they apply may be subject to interpretation. The realization of deferred tax assets is
dependent on the generation of sufficient taxable income in the
competence in future periods, which involves business plans, planning
opportunities and expectations for future results. Our assessment is based on
estimates and assumptions, and may involve a series of complex judgments about
future events. 34
-------------------------------------------------------------------------------- Table of Contents 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 3, 8, 9, 12 and 14 to our consolidated financial statements in Part II, Item 8 for additional information relating to these critical accounting estimates and our other significant accounting policies.
Effect of recent accounting positions
See “Article 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 21 Recent Accounting Statements” for recent accounting statements that may have an impact on our financial information.
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