Notes to Condensed Consolidated Financial Statements
Three Months and Six Months Ended April 28, 2019 and April 29, 2018
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. (“Photronics”, “the Company”, “we”, “our”, or “us”) is one of the world’s leading manufacturers of
photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays (“FPDs”), and are used as
masters to transfer circuit patterns onto semiconductor wafers and flat panel display substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”) and a variety of FPDs and, to a lesser extent, other types of electrical
and optical components. We currently have eleven manufacturing facilities, which are located in Taiwan (3), Korea, the United States (3), Europe (2), and two recently constructed facilities
in
China. Our FPD Facility in Hefei, China, commenced production in the second quarter of 2019; we anticipate our IC facility in Xiamen, China, to commence production later in 2019.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a
fair presentation have been included. Our business is typically impacted during the first, and sometimes the second, quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development
and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2019. For further information, refer to the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2018.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or net realizable value.
Presented below are the components of inventory at the balance sheet dates:
|
|
|
April 28,
2019
|
|
|
October 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
34,276
|
|
|
$
|
25,110
|
|
|
Work in process
|
|
|
416
|
|
|
|
3,402
|
|
|
Finished goods
|
|
|
4
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,696
|
|
|
$
|
29,180
|
|
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
|
|
April 28,
2019
|
|
|
October 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
11,164
|
|
|
$
|
11,139
|
|
|
Buildings and improvements
|
|
|
124,374
|
|
|
|
124,771
|
|
|
Machinery and equipment
|
|
|
1,673,574
|
|
|
|
1,566,163
|
|
|
Leasehold improvements
|
|
|
19,598
|
|
|
|
19,577
|
|
|
Furniture, fixtures and office equipment
|
|
|
13,503
|
|
|
|
12,415
|
|
|
Construction in progress
|
|
|
132,394
|
|
|
|
128,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,974,607
|
|
|
|
1,862,714
|
|
|
Accumulated depreciation and amortization
|
|
|
(1,320,250
|
)
|
|
|
(1,290,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
654,357
|
|
|
$
|
571,781
|
|
Depreciation and amortization expense for property, plant and equipment was $18.6 million and $36.2 million in the three- and six-month
periods ended April 28, 2019, respectively, and $20.8 million and $42.0 million in the three- and six-month periods ended April 29, 2018, respectively.
In January 2017, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with fair
values of approximately $6.7 million during the six-month period ended April 29, 2018.
NOTE 4 - PDMCX JOINT VENTURE
In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or
“Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly-owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note, “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our
recently-established IC business in Xiamen, China, in which we anticipate production to commence in 2019. The joint venture, known as “
Xiamen American
Japan Photronics Mask Co., Ltd.
” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more
effectively for the merchant photomask business in China and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the
formation of this joint venture.
As of April 28, 2019, Photronics and DNP had each contributed cash of approximately $48 million to the joint venture.
The total investment
per the PDMCX operating agreement (the Agreement
) is $160 million, of which
approximately
$13 million
remained for Photronics as of April 28, 2019 and
will be
funded over the next several quarters with cash and
local borrowings.
Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These
circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. 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.
We recorded net losses from the operations of PDMCX of approximately $0.6 million, and $1.9 million during the three- and six-month periods
ended April 28, 2019, respectively, and $0.2 million and $0.7 million in the three- and six-month periods ended April 29, 2018, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum
exposure to loss from PDMCX at April 28, 2019, was $44.7 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification, we evaluated our involvement in PDMCX
for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity
at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were
the primary beneficiary during the current and prior year reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics, Inc. Our conclusion was based on the facts that we held a controlling financial
interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance), had the obligation to absorb losses, and the right to receive benefits that could potentially be
significant to PDMCX. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year reporting periods was based on our right to appoint the
majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of
PDMCX’s assets. In addition, as a result of the 50.01% variable interest we held during the current and prior
-
year periods, we had the obligation to absorb losses and
the right to receive benefits that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets are presented in the
following table, together with our exposure to loss related to these assets and liabilities.
|
|
|
April 28, 2019
|
|
|
October 31, 2018
|
|
|
Classification
|
|
Carrying
Amount
|
|
|
Photronics
Interest
|
|
|
Carrying
Amount
|
|
|
Photronics
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
31,219
|
|
|
$
|
15,612
|
|
|
$
|
9,625
|
|
|
$
|
4,813
|
|
|
Non-current assets
|
|
|
116,677
|
|
|
|
58,350
|
|
|
|
43,415
|
|
|
|
21,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
147,896
|
|
|
|
73,962
|
|
|
|
53,040
|
|
|
|
26,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
22,668
|
|
|
|
11,336
|
|
|
|
21,205
|
|
|
|
10,603
|
|
|
Non-current liabilities
|
|
|
35,937
|
|
|
|
17,972
|
|
|
|
20
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
58,605
|
|
|
|
29,308
|
|
|
|
21,225
|
|
|
|
10,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
89,291
|
|
|
$
|
44,654
|
|
|
$
|
31,815
|
|
|
$
|
15,908
|
|
NOTE 5 – LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
April 28,
2019
|
|
|
October 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Project Loan due December 2025
|
|
$
|
|
|
|
$
|
-
|
|
|
Project Loan due December 2022
|
|
|
14,932
|
|
|
|
-
|
|
|
Working Capital Loan due January 2022
|
|
|
10,094
|
|
|
|
-
|
|
|
3.25% convertible senior notes matured April 2019
|
|
|
-
|
|
|
|
57,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,426
|
|
|
|
57,453
|
|
|
Current portion
|
|
|
(505
|
)
|
|
|
(57,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,921
|
|
|
$
|
-
|
|
In April 2019, the $57.5 million convertible senior notes, discussed below, matured and were repaid.
In January 2015, we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with
a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes was the same as that of the exchanged notes,
which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock. Note holders could convert each $1,000 principal
amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019; we were not required to redeem the notes, other than upon conversion, prior to their maturity date. Interest on
the notes accrued in arrears, and was paid semiannually through the notes’ maturity date.
In November 2018, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX
registered capital at the time of the borrowing, pursuant to which PDMCX will enter into separate loan agreements (“the Project Loans”) for each borrowing. The Project Loans, which are denominated in renminbi, are being used to finance certain
capital expenditures in China. PDMCX has agreed to grant a lien on the land, building and certain equipment owned by PDMCX as collateral for the Project Loans. As of April 28, 2019, PDMCX had borrowed $26.3 million against this approval, which
includes $11.4 million that was borrowed during the three-month period ended April 28, 2019.
Subsequent to April 28, 2019, PDMCX borrowed an additional $9.7 million.
Repayments
on the amounts borrowed before the three-month period ended April 28, 2019, will be made semiannually, commencing in June 2020 and ending in December 2022. Repayments on the amount borrowed
after
the three-month period ended
January 27
, 2019, will be made semiannually, commencing in June 2023 and ending in
December 2025. The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at April 28, 2019). Interest incurred on these loans will be reimbursed through incentives afforded to us by the
Xiamen Torch Hi-Tech Industrial Development Zone which, to a prescribed limit, provide for such reimbursements.
In November 2018, PDMCX was approved for credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. No
guarantees were required as part of this approval. As of April 28, 2019, PDMCX had borrowed $13.8 million against this approval of which $3.7 million were 90-day loans. The remaining $10.1 million borrowed (the “Working Capital Loans”) is to
be repaid semiannually from the dates of the individual borrowings; repayments commenced in May 2019 and end in January 2022. In May 2019, we borrowed an additional $1.9 million against this approval, and repaid $0.1 million. The 90-day loans
were repaid in our second quarter of 2019. The Working Capital Loans, which are denominated in renminbi, are being used for general financing purposes, including payments of import and value-added taxes. The interest rates on the 90-day loans
were the market rate on the date of issuance (4.9%), and interest rates on the Working Capital Loans are approximately 5%, and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points.
Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which, to a prescribed limit, provide for such reimbursements.
In September 2018, we entered into an amended and restated credit agreement (“the new agreement”) that expires in
September 2023. The new agreement, which replaced our prior credit facility, has a $50 million borrowing limit, with an expansion capacity to $100 million, and is secured by substantially all of our assets located in the United States and common
stock we own in certain of our foreign subsidiaries. The new agreement limits the amount we can pay in cash for dividends, distributions and redemption on Photronics, Inc. equity of up to an aggregate amount of $100 million, and contains the
following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance, all of which we were in compliance with as of April 28, 2019. We had no outstanding borrowings against the new agreement
as of April 28, 2019, and $50 million was available for borrowing. The interest rate on the new agreement (2.5% at April 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
NOTE 6 - REVENUE
We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in
Accounting Standards Codification Topic 606
-
“Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the modified retrospective
transition method, only
with respect
to contracts that were not complete as of the date of adoption. This approach
required
prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the
adoption. In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.
Under Topic 606, we recognize revenue when, or as, control of a good or service transfers to a customer,
in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services, whereas, prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some
arrangements, when the customers received the goods. The following tables present the impacts of our adoption of Topic 606 on our April 28, 2019, condensed consolidated balance sheet, and condensed consolidated statements of income for the three
and six months ended April 28, 2019, and cash flows for the six months ended April 28, 2019.
Condensed Consolidated Balance Sheet
April 28, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balance without
Adoption of Topic 606
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
123,371
|
|
|
$
|
(794
|
)
|
|
$
|
122,577
|
|
|
Inventory
|
|
|
34,696
|
|
|
|
4,807
|
|
|
|
39,503
|
|
|
Other current assets
|
|
|
38,304
|
|
|
|
(6,237
|
)
|
|
|
32,067
|
|
|
Deferred income taxes
|
|
|
15,121
|
|
|
|
105
|
|
|
|
15,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
|
|
|
$
|
686
|
|
|
$
|
59,
345
|
|
|
Deferred income taxes
|
|
|
829
|
|
|
|
(367
|
)
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Photronics, Inc. shareholders’ equity
|
|
$
|
763,568
|
|
|
$
|
(1,963
|
)
|
|
$
|
761,605
|
|
|
Noncontrolling interests
|
|
|
134,760
|
|
|
|
(475
|
)
|
|
|
134,285
|
|
Condensed Consolidated Statement of Income
Three Months Ended April 28, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balance without
Adoption of Topic 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
131,580
|
|
|
$
|
(242
|
)
|
|
$
|
131,338
|
|
|
Cost of goods sold
|
|
|
105,570
|
|
|
|
(162
|
)
|
|
|
105,408
|
|
|
Gross profit
|
|
|
26,010
|
|
|
|
(80
|
)
|
|
|
25,930
|
|
|
Provision for taxes
|
|
|
3,278
|
|
|
|
(48
|
)
|
|
|
3,230
|
|
|
Net income
|
|
|
9,852
|
|
|
|
(128
|
)
|
|
|
9,724
|
|
|
Noncontrolling interests
|
|
|
1,373
|
|
|
|
78
|
|
|
|
1,451
|
|
|
Income attributable to Photronics, Inc. shareholders
|
|
$
|
8,479
|
|
|
$
|
(206
|
)
|
|
$
|
8,273
|
|
Condensed Consolidated Statement of Income
Six Months Ended April 28, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balance without
Adoption of Topic 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
256,291
|
|
|
$
|
(2,524
|
)
|
|
$
|
253,767
|
|
|
Cost of goods sold
|
|
|
204,179
|
|
|
|
(1,041
|
)
|
|
|
203,138
|
|
|
Gross profit
|
|
|
52,112
|
|
|
|
(1,483
|
)
|
|
|
50,629
|
|
|
Provision for taxes
|
|
|
4,665
|
|
|
|
(178
|
)
|
|
|
4,487
|
|
|
Net income
|
|
|
17,620
|
|
|
|
(1,305
|
)
|
|
|
16,315
|
|
|
Noncontrolling interests
|
|
|
3,874
|
|
|
|
(353
|
)
|
|
|
3,521
|
|
|
Income attributable to Photronics, Inc. shareholders
|
|
$
|
13,746
|
|
|
$
|
(952
|
)
|
|
$
|
12,794
|
|
Condensed Consolidated Statement of Cash Flows
Six Months Ended April 28, 2019
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balance without
Adoption of Topic 606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
17,620
|
|
|
$
|
(1,305
|
)
|
|
$
|
16,315
|
|
|
Changes in operating accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(2,295
|
)
|
|
$
|
211
|
|
|
$
|
(2,084
|
)
|
|
Inventories
|
|
|
(9,447
|
)
|
|
|
(1,204
|
)
|
|
|
(10,651
|
)
|
|
Other current assets
|
|
|
(6,114
|
)
|
|
|
1,799
|
|
|
|
(4,315
|
)
|
|
Accounts payable, accrued liabilities, and other
|
|
|
(40,566
|
)
|
|
|
499
|
|
|
|
(40,067
|
)
|
We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the
contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of
our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we invoice as they ship to
customers. As the photomasks are manufactured to customer specifications
,
they have no alternative use to us and, as our contracts generally provide us with the right
to payment for work completed to date, we recognize revenue as we perform, or “over time” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various
manufacturing phases of a photomask. At the end of a reporting period, there will be a number of revenue contracts on which we have performed; for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable
profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer
the good to the customer, rather than as promised services, or performance obligations, under the contract.
As stated above, photomasks are manufactured in accordance with proprietary designs provided by our
customers; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list”
prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration
would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities and Accounts Receivable
We recognize a contract asset when our performance under a contract
precedes our receipt of consideration from a customer, or before payment is due,
and our receipt of consideration is conditional upon factors other than the
passage of time. Contract assets reflect our transfer of control to customers
of photomasks that are in-process or completed but not yet shipped. A
receivable is recognized when we have an unconditional right to payment for our
performance, which generally occurs when we ship the photomasks. Our contract
assets account primarily consists of a significant amount of our
work-in-process inventory and fully-manufactured photomasks which have not yet
shipped, if we have an enforceable right to collect consideration (including a
reasonable profit), in the event the in-process orders are cancelled by
customers. On an individual contract basis, we net contract assets with
contract liabilities (deferred revenue) for financial reporting purposes. Our
contract assets and liabilities are typically classified as current, as our
production cycle and our lead times are both under one year. Contract assets of
$6.2 million are included in “Other” current assets, and contract liabilities
of $7.9 million are included in “Other” current liabilities in our April 28,
2019 condensed consolidated balance sheet. At November 1, 2018, our date of
adoption of Topic 606, we had contract assets of $4.6 million and contract
liabilities of $7.8 million. We did not impair any contract assets during the six-month
period ended April 28, 2019, and, during the respective three- and six-month
periods ended April 28, 2019, we recognized $0.5 million and $1.2 million of
revenue from the settlement of contract liabilities that existed at the
beginning of those periods.
We generally record our accounts
receivable
at their billed amounts. All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss
and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable. We did not incur any credit losses on our accounts
receivable during the six
-
month period ended April 28, 2019.
Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market
in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require
payment in advance of performance. We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we
transfer control of goods or services to customers and when we are paid is one year or less.
In instances when we are paid in advance of our performance, we record a contract liability and, as
allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically,
advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.
Disaggregation of Revenue
The following tables present our revenue for the three and six
-
month periods ended April 28, 2019, disaggregated by product type, geographic location, and timing of recognition.
|
Revenue by Product Type
|
|
Three Months Ended
April 28, 2019
|
|
|
Six Months Ended
April 28, 2019
|
|
|
|
|
|
|
|
|
|
|
IC
|
|
|
|
|
|
|
|
High-end
|
|
$
|
38,429
|
|
|
$
|
72,995
|
|
|
Mainstream
|
|
|
60,158
|
|
|
|
120,471
|
|
|
Total IC
|
|
$
|
98,587
|
|
|
$
|
193,466
|
|
|
|
|
|
|
|
|
|
|
|
|
FPD
|
|
|
|
|
|
|
|
|
|
High-end
|
|
$
|
22,956
|
|
|
$
|
44,422
|
|
|
Mainstream
|
|
|
10,037
|
|
|
|
18,403
|
|
|
Total FPD
|
|
$
|
32,993
|
|
|
$
|
62,825
|
|
|
|
|
$
|
131,580
|
|
|
$
|
256,291
|
|
|
Revenue by Geographic Location
|
|
|
|
|
|
|
Taiwan
|
|
$
|
56,469
|
|
|
$
|
114,209
|
|
|
Korea
|
|
|
38,038
|
|
|
|
73,275
|
|
|
United States
|
|
|
26,742
|
|
|
|
49,215
|
|
|
Europe
|
|
|
8,435
|
|
|
|
16,788
|
|
|
China
|
|
|
1,467
|
|
|
|
1,730
|
|
|
Other
|
|
|
429
|
|
|
|
1,074
|
|
|
|
|
$
|
131,580
|
|
|
$
|
256,291
|
|
|
Revenue by Timing of Recognition
|
|
|
|
|
|
|
Over time
|
|
$
|
123,853
|
|
|
$
|
244,699
|
|
|
At a point in time
|
|
|
7,727
|
|
|
|
11,592
|
|
|
|
|
$
|
131,580
|
|
|
$
|
256,291
|
|
Contract Costs
We pay commissions to third party sales agents for certain sales that they obtain for us. However, the
basis of the commissions is the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of
these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a short time period, our backlog of orders
is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated
with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.
Sales and Similar Taxes
We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
Product Warranty
Our photomasks are sold under warranties that generally range from
1
to
12 months
. We warrant that our photomasks conform to customer specifications, and that we will repair or replace, at our
option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options,
non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under
the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of
common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a
change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans.
Total share-based compensation costs for the three and six
-
month periods ended April 28, 2019, were $0.9 million and $2.0 million, respectively, and $0.8 million and $1.6 million for the three and six
-
month periods ended April 29, 2018, respectively. The Company received cash from option exercises
of $0.3 million and $0.8 million for the three and six
-
month
periods ended April 28, 2019, respectively, and $2.9 million and $3.6 million for the three and six
-
month periods ended April 29, 2018, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.
Stock Options
Option awards generally vest in one-to-four years, and have a ten-year contractual term. All incentive and
non-qualified stock option grants have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of our common stock on the dates of
grant and
are
calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use
historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options are expected to remain outstanding. The risk-free rate of return for the estimated term of the option
is based on the U.S. Treasury yield curve in effect at the date of grant.
There were no share options granted during the three-month periods ended April 28, 2019 and April 29, 2018. There
were 132,000 share options granted during the six-month period ended April 28, 2019, with a weighted-average grant-date fair value of $3.31 per share, and 252,000 share options granted during the six-month period ended April 29, 2018, with a
weighted-average grant-date fair value of $2.74 per share. As of April 28, 2019, the total unrecognized compensation cost related to unvested option awards was approximately $1.2 million. That cost is expected to be recognized over a
weighted-average amortization period of 2.4 years.
The weighted-average inputs and risk-free rate of return ranges used to calculate the grant
-
date fair value of options issued during the three and six
-
month periods ended April
28, 2019 and April 29, 2018, are presented in the following table.
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
33.1
|
%
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate of return
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2.5-2.9
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
N/A
|
|
|
|
N/A
|
|
|
5.1 years
|
|
|
5.0 years
|
|
Information on outstanding and exercisable option awards as of April 28, 2019, is presented below.
|
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 28, 2019
|
|
|
2,405,318
|
|
|
$
|
8.88
|
|
5.7 years
|
|
$
|
2,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 28, 2019
|
|
|
1,795,651
|
|
|
$
|
8.47
|
|
4.9 years
|
|
$
|
2,797
|
|
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of
one-to-four years. The fair value of the awards is determined on the date of grant, based on the closing price of our common stock. There were 435,000 restricted stock awards granted during the six
-
month period ended April 28, 2019, with a grant date fair value of $9.80 per share. There were 10,000 restricted stock awards granted during the three
-
month period ended April 29, 2018, with a grant
-
date fair value of $8.40 per share, and 290,000 restricted stock awards granted during the
six
-
month period ended April 29, 2018, with a weighted-average fair value of $8.62 per share. As of April 28, 2019, the total compensation cost not yet recognized
related to unvested restricted stock awards was approximately $5.7 million. That cost is expected to be recognized over a weighted-average amortization period of 2.9 years. As of April 28, 2019, there were 698,613 shares of restricted stock
outstanding.
NOTE 8 - INCOME TAXES
We calculate our provision for
income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.
The effective tax rate of 25.0% differs from the U.S. statutory rate of 21.0% in the three
-
month period ended April 28, 2019, primarily due to the elimination of tax benefits in jurisdictions, including the U.S, in which it is not more likely than not that the benefit will be
realized; the effects of these eliminations were partially offset by the benefits of tax holidays and investment credits in certain foreign jurisdictions.
The effective tax rate of 20.9% differs from the U.S. statutory rate of 21.0% in the six
-
month period ended April 28, 2019, primarily due to the elimination of the tax benefits in jurisdictions, including the U.S, in which it is not more likely than not that the benefit
will be realized; the effects of these eliminations were partially offset by the benefits of the settlement of a tax audit, as well as a tax holiday and investment credits in certain foreign jurisdictions.
Unrecognized tax benefits related to uncertain tax positions were $0.8 million at April 28, 2019, and
$1.9 million at October 31, 2018, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at April 28, 2019 and October 31,
2018. The year to date reduction in the amount primarily resulted from settlement of a tax audit in Taiwan in Q1 FY19. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the
settlement of tax audits, the Company believes that it is reasonably possible that an immaterial amount of its uncertain tax positions (including accrued interest and penalties, net of tax benefits) may be resolved over the next twelve
months. The resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.
We were granted a five-year tax holiday in Taiwan which expires
at the end of
calendar year 2019. This tax holiday reduced foreign taxes by $0.3 million, and $1.1 million in the three and six
-
month periods
ended April 28, 2019, and $0.7 and $0.8 million in the respective prior year periods. The per share impact of the tax holiday was a deminimus amount for the three
-
month
period ended April 28, 2019, and one cent per share for the six
-
month periods ended April 28, 2019 and April 29, 2018, and the three
-
month period ended April 29, 2018.
The effective tax rates of 18.8% and 6.5% differ from the post U.S. Tax Reform blended statutory rate of 23.4% in the
three and six
-
month periods ended April 29, 2018, primarily due to benefits from U.S. and Taiwan Tax Reform (as discussed below), earnings being taxed at lower
statutory rates in foreign jurisdictions, and the benefits of various investment credits in a foreign jurisdiction.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting
significant changes to the United States Internal Revenue Code of 1986, as amended. Based on the enactment date, we accounted for the Act in our interim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission
released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under Accounting Standards Codification Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Act. We adopted SAB 118 in
our first quarter of fiscal year 2018, and finalized the effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes:
|
•
|
The Act repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provided
that existing AMT credit carryforwards are fully refundable. We recognized a $3.9 million benefit on AMT credit carryforwards that we previously determined were not more likely than not going to be realized and reversed the previously
-
recorded valuation allowance.
|
|
•
|
As of January 1, 2018, the Act reduced the corporate income tax rate from a maximum 35% to a flat 21%, requiring us to revalue our deferred
tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our net deferred tax asset is fully offset by a valuation allowance, and the revaluation of the deferred tax assets and
liabilities resulted in a net zero impact for the period.
|
|
•
|
The Act imposed a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The entire amount
of transition tax was fully offset by tax credits (including carryforwards) that resulted in a provisional net zero impact on the period.
|
On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income
Tax Act, enacting an increase in the corporate tax rate from 17% to 20%, which required us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Accordingly, a net
benefit of $0.2 million is reflected in our tax provision for the period.
Adoption of New Accounting Standard
In the first quarter of 2019, the Company adopted Accounting Standards Update No.
2016-16 – “Intra-Entity Transfers Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. In connection therewith, we recorded
a transition adjustment of $1.1 million that reduced prepaid income taxes (included in Other current assets on the condensed consolidated balance sheets) against beginning retained earnings.
NOTE 9 - EARNINGS PER SHARE
The calculations of basic and diluted earnings per share is presented below.
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
8,479
|
|
|
$
|
10,665
|
|
|
$
|
13,746
|
|
|
$
|
16,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on convertible notes, net of tax
|
|
|
349
|
|
|
|
496
|
|
|
|
845
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings used for diluted earnings per share
|
|
$
|
8,828
|
|
|
$
|
11,161
|
|
|
$
|
14,591
|
|
|
$
|
17,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
66,261
|
|
|
|
69,293
|
|
|
|
66,422
|
|
|
|
69,024
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
3,898
|
|
|
|
5,542
|
|
|
|
4,720
|
|
|
|
5,542
|
|
|
Share-based payment awards
|
|
|
438
|
|
|
|
355
|
|
|
|
451
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
4,336
|
|
|
|
5,897
|
|
|
|
5,171
|
|
|
|
6,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
70,597
|
|
|
|
75,190
|
|
|
|
71,593
|
|
|
|
75,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
Diluted earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
The table below shows the outstanding weighted-average share-based payment awards that were excluded
from the calculation of diluted earnings per share because their exercise prices exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be
anti-dilutive.
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
April 28,
2019
|
|
|
April 29,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
1,204
|
|
|
|
2,022
|
|
|
|
1,134
|
|
|
|
1,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares excluded
|
|
|
1,204
|
|
|
|
2,022
|
|
|
|
1,134
|
|
|
|
1,803
|
|
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth the
changes in our accumulated other comprehensive income by component (net of
tax of $0)
for the three and six
-
month periods ended April 28, 2019 and April 29, 2018.
|
|
|
Three Months Ended April 28, 2019
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2019
|
|
$
|
971
|
|
|
$
|
(628
|
)
|
|
$
|
343
|
|
|
Other comprehensive (loss) income
|
|
|
(7,054
|
)
|
|
|
25
|
|
|
|
(7,029
|
)
|
|
Less: other comprehensive income attributable to noncontrolling interests
|
|
|
129
|
|
|
|
13
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 28, 2019
|
|
$
|
(6,212
|
)
|
|
$
|
(616
|
)
|
|
$
|
(6,828
|
)
|
|
|
|
Three Months Ended April 29, 2018
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2018
|
|
$
|
32,848
|
|
|
$
|
(16
|
)
|
|
$
|
(704
|
)
|
|
$
|
32,128
|
|
|
Other comprehensive (loss) income before Reclassifications
|
|
|
(11,098
|
)
|
|
|
-
|
|
|
|
54
|
|
|
|
(11,044
|
)
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive (loss) income
|
|
|
(11,098
|
)
|
|
|
16
|
|
|
|
54
|
|
|
|
(11,028
|
)
|
|
Less: other comprehensive (loss) income attributable to noncontrolling interests
|
|
|
(2,683
|
)
|
|
|
-
|
|
|
|
27
|
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 29, 2018
|
|
$
|
24,433
|
|
|
$
|
-
|
|
|
$
|
(677
|
)
|
|
$
|
23,756
|
|
|
|
|
Six Months Ended April 28, 2019
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 1, 2018
|
|
$
|
(4,328
|
)
|
|
$
|
(638
|
)
|
|
$
|
(4,966
|
)
|
|
Other comprehensive (loss) income
|
|
|
(482
|
)
|
|
|
44
|
|
|
|
(438
|
)
|
|
Less: other comprehensive income attributable to noncontrolling interests
|
|
|
1,402
|
|
|
|
22
|
|
|
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 28, 2019
|
|
$
|
(6,212
|
)
|
|
$
|
(616
|
)
|
|
$
|
(6,828
|
)
|
|
|
|
Six Months Ended April 29, 2018
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2017
|
|
$
|
7,627
|
|
|
$
|
(48
|
)
|
|
$
|
(688
|
)
|
|
$
|
6,891
|
|
|
Other comprehensive income before Reclassifications
|
|
|
18,989
|
|
|
|
-
|
|
|
|
22
|
|
|
|
19,011
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
18,989
|
|
|
|
48
|
|
|
|
22
|
|
|
|
19,059
|
|
|
Less: other comprehensive income attributable to noncontrolling interests
|
|
|
2,183
|
|
|
|
-
|
|
|
|
11
|
|
|
|
2,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 29, 2018
|
|
$
|
24,433
|
|
|
$
|
-
|
|
|
$
|
(677
|
)
|
|
$
|
23,756
|
|
The amortization of the cash flow hedge is included in cost of sales in the condensed consolidated
statements of income for all periods presented.
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and
reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined
as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not
corroborated by market data.
The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other
current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of our convertible senior notes is a Level 2 measurement, as it was determined using inputs that
were either observable market data, or could be derived from, or corroborated with, observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. We did
not have any assets or liabilities
measured
at fair value, on a recurring or a nonrecurring basis, at April 28, 2019 or October 31, 2018.
Fair Value of Financial
Instruments Not Measured at Fair Value
The fair value of our convertible senior notes was a Level 2 measurement, as it was determined using
inputs that were either observable market data or could be derived from or corroborated with observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours.
The table below presents the fair and carrying values of our convertible senior notes at October 31, 2018.
|
|
|
October 31, 2018
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes matured 2019
|
|
$
|
62,094
|
|
|
$
|
57,453
|
|
NOTE 12 – SHARE REPURCHASE PROGRAM
In October 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 on October 22, 2018, and was terminated on February 1, 2019.
|
|
|
Six Months Ended
April 28, 2019
|
|
|
From Inception Date of
October 22, 2018
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased
|
|
|
1,137
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of shares repurchased
|
|
$
|
10,694
|
|
|
$
|
13,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price paid per share
|
|
$
|
9.40
|
|
|
$
|
9.41
|
|
NOTE 13 - COMMITMENTS AND CONTINGENCIES
As of April 28, 2019, the Company had commitments outstanding for capital equipment expenditures of
approximately $37 million, nearly all of which related to building and equipping our China facilities.
We are subject to various claims that arise in the ordinary course of business. We believe that such
claims, individually or in the aggregate, will not have a material effect on the consolidated financial statements.
NOTE 14 -
RECENT
ACCOUNTING
PRONOUNCEMENTS
Accounting Standards Updates to be
Implemented
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful
information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss impairment methodology, found in current GAAP, with a
methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the
first reporting period in which the guidance is adopted. ASU 2016-13 is effective for Photronics, Inc. in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. We are currently
evaluating the effect that this ASU will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (ASU 2016-02”), which requires lessees to recognize right-of-use assets and
corresponding liabilities for all leases with an initial term in excess of twelve months. ASU 2016-02 was to be adopted using a modified retrospective approach, that requires leases to be measured and recognized under the new guidance at the
beginning of the earliest period presented. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) – Targeted Improvements” (“ASU 2018-11”), which provided entities with an additional (and optional) transition method to adopt the new leases
standard. Under this optional transition method, an entity initially applies the new leases standard at its adoption date and recognizes the effects of adoption through cumulative-effect adjustments to its beginning balance sheet. We will utilize
this optional method when we transition to the new leases guidance and, as a result, expect to recognize significant amounts of right of use assets and lease liabilities in our fiscal year 2020 beginning balance sheet. ASU 2016-02 included a number
of practical expedients, which we are currently in the process of evaluating, that entities can elect to use as they transition to the new guidance. To date,
an
implementation team has been established to evaluate
the
lease portfolio, system process and policy change requirements. The Company has
made progress
in
drafting new lease accounting policies
, gathering
the
necessary data elements for the lease population, and selected
a
system provider
, with system configuration and
implementation underway
.
Accounting Standards Updates
Implemented
In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the
change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for Photronics, Inc. in its first quarter of fiscal year 2019 and
was applied on a retrospective transition basis. Our adoption of this Update did not materially impact our cash flows statement.
In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the
exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for us in our first quarter of fiscal year 2019 and should be applied on a
modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. Please see Note 8 for a
discussion of the effects of adopting the guidance.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which superseded nearly all then existing
revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or
services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by
one year and allowed entities to early adopt, but no earlier than the original effective date. This update allowed for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying
Performance Obligations and Licensing” which amended guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 were the same as those for ASU 2014-09.
We adopted the new revenue and related guidance on November 1, 2018, using the modified retrospective approach, under which we
increased our accounts receivable by $0.6 million, recognized contract assets of $4.6 million, reduced our inventories balance by $3.7 million, and recorded an accrual for income taxes of $0.3 million. The recognition and adjustments to these
items was reflected in increases to our retained earnings and noncontrolling interest balances of $1.1 million and $0.1 million, respectively. The most significant impact of the new guidance on our financial statements is its requirement for us
to recognize revenue as we manufacture products for which, in the event that the customer cancels the contract, we are entitled to reasonable compensation for work we have completed prior to cancellation.
Prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods.
The impact of the
adoption of this guidance on our January 27, 2019, financial statements is presented in Note 6.
The guidance allows for a number of accounting policy elections and practical expedients. In addition to our
above-mentioned election to use the modified retrospective application method for adopting the guidance, those we have employed that are most significant to us are summarized below.
Shipping and handling
activities performed after control of a good is transferred to a customer
We have elected to treat shipping and handling activities that occur after control of a good is
transferred to a customer as activities to fulfill our promise to transfer goods to the customer. Thus, such activities will not be considered to be separate performance obligations under contracts with our customers.
Non-recognition of financing
component when we transfer goods to a customer and the period between when we transfer and when we are paid will be less than one year
We have elected the practical expedient that allows for the non-recognition, as a component of a
customer contract, of a financing component when the period between when we transfer a good and when we are paid will be less than one year.
Exclusion of sales and
similar taxes collected from customers in the transaction price
Consistent with our practice before adoption of the new guidance, we will not recognize sales and
similar taxes we collect from customers as revenue.
Use of an “input method” to
measure our progress towards the transfer of control of performance obligations to customers
As, in our judgment, an input method based on our efforts to satisfy our performance obligations will
best serve to depict the transfer of control of our performance obligations to our customers, we have adopted an accounting policy to employ such a method. Our decision was based primarily on the facts that our photomasks are not physically
transferred to customers until they are complete, and that we can employ our input-based cost accumulation systems and methods to measure our progress towards the transfer of control of our performance obligations to customers.
Non-disclosure of the
transaction prices of unsatisfied or partially satisfied performance obligations
For contracts that have an original expected duration of one year or less, we have elected the practical expedient
that allows us not to disclose the aggregate transaction prices of unsatisfied or partially
-
satisfied performance obligations that exist at the end of a reporting
period.