Photronics(PLAB) - 2023 Q4 - Annual Report

Part I Business Overview Photronics is a leading global manufacturer of photomasks for integrated circuits and flat-panel displays, operating 11 facilities worldwide and focusing on both high-end and mainstream technologies - Photronics is the world's leading manufacturer of photomasks, critical for manufacturing integrated circuits (ICs) and flat-panel displays (FPDs), operating 11 manufacturing facilities globally[19] Key Customer Revenue Concentration | Customer | 2023 (%) | 2022 (%) | 2021 (%) | | :--- | :--- | :--- | :--- | | United Microelectronics Corp. | 14% | 15% | 17% | | Semiconductor Manufacturing Int'l Corp. | 13% | 5% | 3% | | Samsung Electronics Co., Ltd. | 10% | 11% | 12% | | Top 5 Customers (Aggregate) | 51% | 45% | 43% | - Research and development expenses were $13.7 million in 2023, a decrease from $18.3 million in 2022, with efforts focused on advanced IC and FPD photomasks[28] - The estimated total addressable market for IC and FPD photomasks is approximately $7.5 billion, with key competitors including Dai Nippon Printing and Hoya Corporation[37] Revenue from Non-U.S. Operations | Year | Percentage of Total Revenue (%) | | :--- | :--- | | 2023 | 86% | | 2022 | 85% | | 2021 | 84% | Risk Factors The company faces diverse risks including industry volatility, customer and supplier concentration, substantial capital needs, intense competition, rapid technological change, operational complexities, and regulatory challenges, particularly with international operations Concentration Related Risk Factors The company's business is highly dependent on the volatile microelectronics industry, relying on a limited number of key suppliers and a concentrated customer base, with the top five customers accounting for 51% of 2023 revenue - The business is highly dependent on the historically volatile microelectronics industry, with demand for photomasks linked to design activity rather than semiconductor sales volume[53] - Reliance on a limited number of suppliers for specialized manufacturing equipment and raw materials poses risks of operational delays or quality issues[54][55] - A significant portion of revenue is concentrated among a few large customers, with the top two accounting for 27% and the top five for 51% of 2023 revenue, posing a material risk if a major customer is lost[56] Financing Related Risk Factors Operating in a high fixed-cost, capital-intensive environment, the company faces risks that future cash flows may not cover projected $140 million in fiscal 2024 capital expenditures or that favorable additional financing will be available - The company's liquidity is highly dependent on revenue volume in a high fixed-cost environment, potentially leading to inadequate cash flows for capital expenditures, operations, and debt repayments[57] - Manufacturing leading-edge photomasks necessitates substantial and continuous capital investment, with projected capital expenditure payments for fiscal 2024 estimated at approximately $140 million[58] Industry and Competitive Related Risk Factors Success depends on retaining key personnel and adapting to rapid technological changes in the highly competitive photomask industry, where failure to anticipate market needs, protect intellectual property, or continuously invest could be detrimental - The photomask industry's rapid technological change requires continuous investment and adaptation to smaller semiconductor geometries and advanced FPDs to maintain competitiveness[60] - The business faces a high risk of cyberattacks that could compromise intellectual property and sensitive information, potentially disrupting operations and causing financial harm[61] - The highly competitive industry, where customers often use multiple suppliers, emphasizes product quality, delivery time, price, and technical capability as key competitive factors[64] Investment Related Risk Factors Investment risks include potential joint venture partner failures, substantial operational risks in China related to intellectual property and geopolitical tensions, and potential charges from facility closures or acquisition integration difficulties - Joint ventures involve shared control, where disagreements or a partner's failure to fulfill obligations could adversely affect operations and necessitate additional resources[65][66] - Operations in China, initiated in 2019, expose the company to significant risks including intellectual property protection challenges, U.S.-China geopolitical tensions, and potential restrictions on operations or investments[67] Operations Related Risk Factors Operational risks include significant fluctuations in quarterly results due to order timing and product mix, operating leverage risk from high fixed costs, and challenges in non-U.S. operations, which accounted for 86% of 2023 revenue, including currency fluctuations and political instability - Quarterly operating results fluctuate significantly due to short order-to-shipment cycles, high fixed costs, and variable demand, rendering quarter-to-quarter comparisons unreliable for future performance indication[71][72] - Non-U.S. operations, comprising approximately 86% of total revenues in 2023, are subject to inherent risks such as currency fluctuations, political and economic instability, and trade barriers[73][74] - The capital-intensive nature of the business results in high fixed costs, meaning a decline in sales volume could lead to underutilized capacity and significantly impact operating margins[77] Regulatory and General Risk Factors The company faces various regulatory risks, including changes in tax laws, U.S. and foreign export controls, and environmental regulations, alongside general risks such as ESG matters, internal control effectiveness, global catastrophic events, and stock price volatility - The company is subject to U.S. and foreign export control laws, such as EAR, which could prohibit product sales to restricted entities or regions, especially amidst trade disputes involving countries like China[79][80][81] - Global catastrophic events, including pandemics, wars (e.g., Russia-Ukraine), and political tensions in operating regions like Taiwan and China, could adversely affect the business[86] - The company's stock price is subject to volatility influenced by financial results, customer or supplier changes, industry developments, and broader economic conditions[96] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[98] Item 1C. Cybersecurity This item is not applicable for this reporting period - Not applicable[99] Item 2. Properties The company operates photomask manufacturing facilities globally, with owned properties in the US and Korea, owned buildings on leased land in Asia, and leased facilities in Europe and Taiwan Manufacturing Facilities | Location | Ownership Type | | :--- | :--- | | Allen, Texas | Owned | | Boise, Idaho | Owned | | Brookfield, Connecticut | Owned | | Cheonan, Korea | Owned | | Hefei, China | Owned (Land Leased) | | Taichung, Taiwan | Owned (Land Leased) | | Xiamen, China | Owned (Land Leased) | | Hsinchu, Taiwan | Owned (Land Leased) | | Bridgend, Wales | Leased | | Dresden, Germany | Leased | | Hsinchu, Taiwan | Leased | Item 3. Legal Proceedings Information regarding legal proceedings involving the company is detailed in Note 15 to the consolidated financial statements - For information on legal proceedings, refer to Note 15 to the consolidated financial statements in Part II, Item 8 of this report[101] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[102] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Global Select Market under PLAB, has never paid cash dividends, and has $31.7 million remaining under its $100 million share repurchase program as of 2023, with no repurchases in fiscal 2023 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol PLAB[104] - The company has never paid cash dividends and plans to retain future earnings for business operations[105] - A $100 million share repurchase plan authorized in September 2020 has $31.7 million remaining as of the report date, with no shares repurchased in fiscal 2023[106] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[109] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2023 saw record revenue of $892.1 million, an 8.2% increase, driven by growth in both IC and FPD segments, with improved gross margin, increased operating income, and strong liquidity, while projecting $140 million in capital expenditures for fiscal 2024 Results of Operations Fiscal year 2023 total revenue increased 8.2% to $892.1 million, driven by 9.8% IC growth and 4.0% FPD growth, leading to a 2.0 percentage point gross margin expansion to 37.7%, despite a decrease in non-operating income due to foreign currency impacts Fiscal Year Revenue by Product Type (YTD FY23 vs YTD FY22) | Product Type | YTD FY23 Revenue ($M) | YoY Change ($M) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Total IC | $651.3 | $58.3 | 9.8% | | High-end IC | $195.0 | $(0.4) | (0.2)% | | Mainstream IC | $456.3 | $58.6 | 14.7% | | Total FPD | $240.8 | $9.3 | 4.0% | | High-end FPD | $200.8 | $13.9 | 7.4% | | Mainstream FPD | $40.0 | $(4.6) | (10.3)% | | Total Revenue | $892.1 | $67.5 | 8.2% | Fiscal Year Revenue by Geographic Origin (YTD FY23 vs YTD FY22) | Geographic Origin | YTD FY23 Revenue ($M) | YoY Change ($M) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Taiwan | $316.9 | $25.5 | 8.8% | | China | $245.4 | $32.8 | 15.4% | | Korea | $162.2 | $6.1 | 3.9% | | United States | $128.9 | $2.7 | 2.1% | | Europe | $36.6 | $0.2 | 0.5% | | Other | $2.1 | $0.3 | 13.5% | Gross Margin Performance | Period | Gross Profit ($M) | Gross Margin (%) | | :--- | :--- | :--- | | YTD FY23 | $336.2 | 37.7% | | YTD FY22 | $294.2 | 35.7% | - Non-operating income decreased by $10.3 million in FY23 primarily due to less favorable foreign currency transaction impacts, partially offset by increased interest income from higher cash balances[141] Liquidity and Capital Resources The company maintains strong liquidity with cash and cash equivalents increasing to $499.3 million in fiscal 2023, supported by $302.2 million in operating cash flow, and plans $140 million in capital expenditures for fiscal 2024, with $31.7 million remaining in its share repurchase program Cash Position | Metric | Oct 31, 2023 ($M) | Oct 31, 2022 ($M) | | :--- | :--- | :--- | | Cash and cash equivalents | $499.3 | $319.7 | | Net Cash (Non-GAAP) | $474.7 | $277.3 | - Capital expenditures for fiscal year 2024 are estimated at approximately $140 million, aimed at high-end and mainstream tools to increase operating capacity and support customer demand[150] Cash Flow Summary | Cash Flow Activity ($M) | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $302.2 | $275.2 | $150.8 | | Net cash used in investing activities | $(101.5) | $(147.8) | $(103.5) | | Net cash used in financing activities | $(18.5) | $(38.7) | $(53.9) | - Free Cash Flow (non-GAAP) increased to $170.9 million in FY23 from $162.9 million in FY22, driven by higher net cash from operating activities[155][164] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange rate fluctuations from global operations, where a hypothetical 10% adverse movement could result in a $52.0 million pre-tax loss, while interest rate risk is considered immaterial - The company's primary market risk stems from foreign currency exchange rate fluctuations, with key exposures including the South Korean won, New Taiwan dollar, Chinese renminbi, Japanese yen, and euro[173] - As of October 31, 2023, a hypothetical 10% adverse movement in key foreign currencies against functional currencies would have resulted in a net unrealized pre-tax loss of $52.0 million[175] - Interest rate risk is considered minimal, as a 10% adverse movement in interest rates on variable rate borrowings would not materially affect the financial statements[176] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year ended October 31, 2023, including balance sheets, income statements, and cash flows, with an unqualified opinion from Deloitte & Touche LLP on both financial statements and internal control effectiveness Consolidated Financial Statements The consolidated financial statements for fiscal 2023 reflect a strong financial position, with total assets growing to $1,526.2 million, total equity reaching $975.0 million, revenue increasing to $892.1 million, and net income attributable to shareholders at $125.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2023 | Oct 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $499,292 | $319,680 | | Total current assets | $785,450 | $644,652 | | Total assets | $1,526,221 | $1,315,830 | | Total liabilities | $250,612 | $253,741 | | Total Photronics, Inc. shareholders' equity | $975,008 | $831,527 | Consolidated Statement of Income Highlights (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Revenue | $892,076 | $824,549 | $663,761 | | Gross profit | $336,162 | $294,213 | $167,044 | | Operating income | $253,050 | $211,866 | $94,554 | | Net income attributable to Photronics, Inc. shareholders | $125,485 | $118,786 | $55,449 | | Diluted EPS | $2.03 | $1.94 | $0.89 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $302,176 | $275,187 | $150,772 | | Net cash used in investing activities | $(101,545) | $(147,757) | $(103,494) | | Net cash used in financing activities | $(18,493) | $(38,689) | $(53,903) | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including revenue recognition over time, asset and liability composition, the consolidation of the PDMCX joint venture as a VIE, share-based compensation, income tax details with a 26.0% effective tax rate, and customer concentration, with three customers exceeding 10% of 2023 revenue - The company recognizes most revenue "over time" for custom photomasks, as products have no alternative use and contracts ensure payment for completed work[220] - The PDMCX joint venture in Xiamen, China, is consolidated as a Variable Interest Entity (VIE) for which Photronics is the primary beneficiary[260] - In February 2023, the PDMCX joint venture repaid its RMB 26.4 million ($3.9 million) Project Loans, and the Corporate Credit Agreement expired in September 2023 without renewal[273][275] - The effective income tax rate for FY23 was 26.0%, higher than the U.S. statutory rate of 21.0%, primarily due to foreign tax rate differentials and uncertain tax positions in non-U.S. jurisdictions[307] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[346] Item 9A. Controls and Procedures As of October 31, 2023, management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective, a conclusion supported by Deloitte & Touche LLP, with no material changes reported during 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of October 31, 2023[347] - Management assessed the company's internal control over financial reporting as effective as of October 31, 2023, based on the COSO framework, with Deloitte & Touche LLP issuing an unqualified opinion on its effectiveness[350][351] - No material changes to internal control over financial reporting were reported during 2023[352] Item 9B. Other Information The company reports no other information for this item - None[360] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[361] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Definitive Proxy Statement - Required information is incorporated by reference from the 2023 Definitive Proxy Statement[363] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Definitive Proxy Statement - Required information is incorporated by reference from the 2023 Definitive Proxy Statement[365] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from the company's 2024 Definitive Proxy Statement - Required information is incorporated by reference from the 2024 Definitive Proxy Statement[366] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2023 Definitive Proxy Statement - Required information is incorporated by reference from the 2023 Definitive Proxy Statement[367] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 Definitive Proxy Statement - Required information is incorporated by reference from the 2024 Definitive Proxy Statement[369] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K, with all financial statement schedules omitted due to immateriality or inapplicability - This section lists the financial statements and exhibits filed with the report, with all financial statement schedules omitted as they are not applicable or immaterial[371] Item 16. Form 10-K Summary This item is not applicable - Not applicable[378]