Photronics(PLAB) - 2021 Q4 - Annual Report

Glossary of Terms and Acronyms This section provides definitions for key terms and acronyms used throughout the report Forward-Looking Statements This section outlines cautionary statements regarding future expectations and potential risks PART I This part covers the company's business operations, risk factors, properties, and legal proceedings ITEM 1. BUSINESS Photronics, Inc. is a leading global manufacturer of high-precision photomasks for ICs and FPDs, with extensive international operations and R&D focus on advanced technologies General Business Overview Photronics is the world's leading photomask manufacturer, operating eleven manufacturing facilities globally, including two new ones in China that started production in 2019[22] Impact of the COVID-19 Pandemic All facilities continued to operate during COVID-19, but experienced impacts such as customer shutdowns, delays in new photomask design releases, travel restrictions affecting tool installations, and challenges in employee retention/hiring due to proposed government actions[24] Sales and Manufacturing Process - Photomasks are manufactured in layers based on customer circuit designs, involving data conversion, lithography, etching, inspection, defect repair, cleaning, and pellicle application before shipment[26] - High-end photomasks are defined as 28nm or smaller for ICs and Generation 10.5+, AMOLED, and LTPS for FPDs, while mainstream products (32nm+ for ICs, G8 and below for FPDs excluding AMOLED/LTPS) constitute the majority of current volume[27] - The short lead time for orders (1 day to 2 weeks) means backlog is not a reliable indicator of future revenue, emphasizing the need for robust processes, efficient manufacturing, high yield, and equipment reliability[29][30] Research and Development - R&D activities for IC photomasks are primarily conducted in Boise, Idaho, and Taiwan (PDMC), while FPD photomask R&D is in South Korea, focusing on 14nm and smaller IC nodes, and G8/G10 FPDs for new TV, micro/mini-LED, and advanced mobile displays (AMOLED)[33] Research and Development Expenses (2019-2021) | Fiscal Year | R&D Expenses (Millions USD) | | :------------ | :--------------------------: | | 2021 | $18.5 | | 2020 | $17.1 | | 2019 | $16.4 | Markets and Customer Concentration - The market consists of domestic and non-U.S. semiconductor and FPD manufacturers and designers, served by independent merchant manufacturers (like Photronics) and captive manufacturers[35] - The company serves approximately 530 customers, with significant revenue concentration from a few large clients[37] Revenue Concentration by Key Customers (2019-2021) | Customer | 2021 Revenue % | 2020 Revenue % | 2019 Revenue % | | :------- | :-------------: | :-------------: | :-------------: | | UMC | 17% | 16% | 15% | | Samsung | 12% | 14% | 16% | | Top 5 | 43% | 45% | 46% | Competitive Landscape - The photomask industry is highly competitive, with key factors for success being product quality, timely delivery, competitive pricing, technical capability, and service, with the total market size for IC and FPD photomasks estimated at $5.8 billion[38][39] International Operations and Risks - Non-U.S. operations generated 84%, 83%, and 81% of total revenues in 2021, 2020, and 2019, respectively, highlighting a significant international presence[40] - International operations are subject to risks including exchange rate fluctuations, political/economic conditions, regulatory requirements, tariffs, management difficulties, longer accounts receivable cycles, and potential restrictions on fund transfers[41] Resources and Supply Chain - Key raw materials include high-precision quartz plates (photomask blanks), pellicles, electronic grade chemicals, and compacts, primarily sourced from Japanese and Korean suppliers[42] - The company relies on a limited number of equipment suppliers, and an inability to obtain or repair equipment could adversely affect business[44] Intellectual Property Rights Photronics holds patents, trademarks, and proprietary information related to photomask manufacturing, which are crucial for maintaining technical leadership, with protection also achieved through non-disclosure agreements[45] Seasonality Business is typically impacted during the first fiscal quarter due to North American, European, and Asian holiday periods, leading to reduced customer development and buying activities[46] Government Contracts Revenues from U.S. government fixed-price contracts are not a significant portion of total revenue[47] Government Regulation The company is subject to various government regulations in the U.S. and other operating countries, covering areas like anti-corruption, environmental protection, workplace safety, asset transfer restrictions, tax compliance, and data privacy (e.g., GDPR, UK-GDPR)[48][49][98][99] Human Capital - As of October 31, 2021, Photronics had approximately 1,728 full-time and part-time employees worldwide, with employee relations considered good and no union representation[50] - The company prioritizes employee safety, professional development (tuition reimbursement, leadership training), and health/wellness programs, including COVID-19 safety measures and vaccination requirements for U.S. employees[50][51][52] ITEM 1A. RISK FACTORS The company faces risks from industry volatility, customer/supplier concentration, financing, rapid technological change, international expansion, and evolving regulations Concentration Related Risk Factors - High dependency on the microelectronics industry, where demand for photomasks is tied to design activity rather than sales volume, can lead to volatility[54] - Reliance on a limited number of suppliers for equipment and raw materials (e.g., quartz photomask blanks, pellicles, chemicals) poses a risk of delays or quality issues[55][56] - Significant customer concentration, with the two largest customers accounting for 29% of revenue in 2021 and the top five for 43%, means loss of any could materially impact financial performance[58] Financing Related Risk Factors - Cash flows from operations and current cash holdings may not be adequate for current and long-term capital expenditures, operations, and debt repayments, especially in a high fixed-cost environment[59] - Credit facility covenants (total leverage ratio, interest coverage ratio, minimum unrestricted cash) restrict business activities, limit additional financing, and cap cash dividends at $50 million annually[60] - Substantial capital expenditures are required for leading-edge photomasks, with approximately $100 million expected for fiscal 2022, and funding may not always be available on reasonable terms[61] Industry and Competitive Related Risk Factors - Dependence on highly demanded managerial and technical personnel, with inability to attract and retain qualified employees posing a risk to business and operations[64] - The photomask industry is subject to rapid technological change, requiring continuous anticipation and scaling of technologies, and alternative methods like direct-write lithography, if commercially viable, could reduce demand for photomasks[65] - Risk of loss of intellectual property, trade secrets, or sensitive information due to cyberattacks or data breaches, despite comprehensive cybersecurity programs[66] - Operating in a highly competitive environment with multiple suppliers and some competitors having greater resources, leading to pressure on pricing and the need for continuous investment in advanced technology[69] Investment Related Risk Factors - Joint ventures may not operate according to plans if partners fail to fulfill obligations or if differing views lead to delayed decisions, potentially adversely affecting results[70] - Expansion into China carries substantial risks, including intellectual property protection challenges, unexpected negotiation periods, quality issues with local vendors, limited electricity access, high labor costs, and potential restrictions or expropriation due to U.S.-China tensions[72] - Future acquisitions or joint ventures may not be consummated or successfully integrated, leading to unforeseen expenses, losses, and operational difficulties[74][75] Operations Related Risk Factors - Quarterly operating results fluctuate significantly due to factors like order timing, customer loss, product mix changes, technological advancements, and competitor actions, making quarter-to-quarter comparisons unreliable indicators of future performance[76][78] - Substantial non-U.S. operations (84% of 2021 revenue) are subject to additional risks such as currency fluctuations, political instability, regulatory changes, trade barriers, and difficulties in managing international staff[79][80] - Risk of damages or customer loss from product failures to meet quality specifications or shorter useful life than warrantied, especially with limited performance and life cycle warranties[81] - High fixed costs in photomask manufacturing mean sales volume declines can lead to excess capacity, negatively impacting operating margins or resulting in asset impairment write-offs[83] Regulatory Related Risk Factors - COVID-19 vaccination mandates for U.S. employees could adversely affect the ability to attract and retain staff[84] - Audits by tax authorities in various jurisdictions could result in additional tax assessments, potentially impacting financial results[85] - Expansion of the U.S. foreign-produced direct product rule and additions to the Entity List (e.g., Huawei) may increase regulatory compliance costs, delay authorizations, and reduce demand from affected customers[86][87] - Non-compliance with U.S. and foreign export control laws could lead to substantial fines, penalties, and injunctions[89][90] - Changes to environmental laws and regulations or non-compliance could result in significant liabilities, fines, and operational disruptions[91][92] General Risk Factors - Ineffective internal controls over financial reporting, due to inherent limitations, could lead to misstatements and harm business results[93] - Global or regional catastrophic events (e.g., terrorist acts, infectious diseases, wars, political tensions in Asia) could adversely impact revenue, costs, and financial condition[94] - Production facilities are vulnerable to damage or disruption from natural disasters (e.g., earthquakes in Taiwan) or labor strikes, causing shipment delays and revenue loss[95] - Technology failures or cybersecurity breaches could disrupt operations, compromise confidential information, and lead to litigation or reputational harm[97] Market Related Risk Factors - Fluctuations in foreign currency exchange rates (e.g., South Korean won, New Taiwan dollar, Chinese renminbi) can significantly affect reported revenue, operating income, assets, and liabilities[101] - Hedging activities, if not accurately forecasted or effectively managed, could negatively impact results of operations and cash flows[102] - The market price of common stock is subject to volatility due to various factors, including operating results, customer/supplier changes, acquisitions, industry developments, and general economic conditions[103] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC ITEM 2. PROPERTIES Photronics operates photomask manufacturing facilities across various global locations, including owned and leased properties, deemed adequate for current needs Photomask Manufacturing Facilities | Location | Type of Interest | | :-------------------- | :--------------- | | Allen, Texas | Owned | | Boise, Idaho | Owned | | Brookfield, Connecticut | Owned | | Bridgend, Wales | Leased | | Cheonan, Korea | Owned | | Hefei, China | Owned (1) | | Dresden, Germany | Leased | | Hsinchu, Taiwan | Owned (1) | | Hsinchu, Taiwan | Leased | | Taichung, Taiwan | Owned (1) | | Xiamen, China | Owned (1) | (1) Land is leased at these owned facilities[107] ITEM 3. LEGAL PROCEEDINGS Information on legal proceedings involving the company is detailed in Note 14 of the financial statements ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company's operations PART II This part details market information, financial condition, results of operations, market risk, and financial statements ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Photronics' common stock trades on NASDAQ, with 60.9 million shares outstanding, no cash dividends paid, and an active share repurchase program - Common stock (PLAB) traded on NASDAQ Global Select Market, with 60,900,453 shares outstanding as of December 9, 2021[7] - No cash dividends have been paid, and earnings are expected to be retained, with the credit agreement limiting annual cash dividends to $50 million[113] - A share repurchase program authorized up to $100 million in September 2020, with approximately $34.3 million remaining under this authorization as of October 31, 2021[114][176] Shares Repurchased in Q4 FY21 | Period | Total Shares Purchased (millions) | Average Price Paid Per Share | Dollar Value Remaining (millions) | | :----------------------------------- | :-------------------------------: | :--------------------------: | :-------------------------------: | | August 2, 2021 – August 29, 2021 | 0.67 | $13.31 | $37.8 | | August 30, 2021 – September 26, 2021 | 0.02 | $13.51 | $37.6 | | September 27, 2021 – October 31, 2021| 0.25 | $13.42 | $34.3 | | Total | 0.94 | | | ITEM 6. [RESERVED] This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Photronics' financial performance is driven by photomask demand, with increased FY21 revenue and gross margin, supported by strong liquidity and strategic investments Overview - Demand for photomasks is primarily driven by design activity in the semiconductor and FPD industries, not necessarily sales volumes of end products[118] - The company operates with minimal backlog (1-2 weeks for IC, 2-3 weeks for FPD) due to short fulfillment times[120] - Photronics is focused on improving competitiveness through technology advancement and cost reduction, with significant investments in high-end manufacturing equipment[122] - Capital expenditure payments were $109.1 million in 2021, $70.8 million in 2020, and $178.3 million in 2019, with an expected $100 million for fiscal year 2022[125] Recent Developments - Entered into a five-year $7.2 million finance lease for a high-end inspection tool in Q2 2021 and a five-year $35.5 million finance lease for a high-end lithography tool in Q1 2021[128][129] - Hefei, China facility approved to borrow 200 million RMB (approx. $31.3 million) from China Construction Bank in Q4 2020, with $21.2 million borrowed as of Oct 31, 2021, for lithography tool purchases[131] - Board authorized repurchase of up to $100 million of common stock in Q4 2020; 5.6 million shares repurchased for $65.7 million by Oct 31, 2021[133] - PDMCX (China IC joint venture) obtained approval for 345 million RMB in Project Loans (255 million RMB outstanding as of Oct 31, 2021) and $25 million in revolving unsecured credit (78 million RMB outstanding) in Q1 2019[141][142] Results of Operations Key Financial Ratios (Percentage of Revenue) | Metric | FY21 | FY20 | FY19 | | :---------------------------------------- | :------: | :------: | :------: | | Revenue | 100.0% | 100.0% | 100.0% | | Cost of goods sold | 74.8% | 77.9% | 78.1% | | Gross profit | 25.2% | 22.1% | 21.9% | | Selling, general and administrative expenses | 8.7% | 8.8% | 9.5% | | Research and development expenses | 2.8% | 2.8% | 2.9% | | Operating income | 14.2% | 10.5% | 9.5% | | Net income attributable to Photronics, Inc. shareholders | 8.4% | 5.5% | 5.4% | Revenue by Product Type (FY21 vs FY20) | Product Type | FY21 Revenue ($M) | FY20 Revenue ($M) | Increase ($M) | Percent Change | | :----------- | :----------------: | :----------------: | :------------: | :-------------: | | IC High-end | 163.0 | 156.1 | 6.8 | 4.4% | | IC Mainstream| 297.2 | 262.3 | 34.9 | 13.3% | | Total IC | 460.2 | 418.4 | 41.8 | 10.0% | | FPD High-end | 155.7 | 139.6 | 16.1 | 11.5% | | FPD Mainstream| 47.9 | 51.7 | (3.8) | (7.4)% | | Total FPD| 203.6 | 191.3 | 12.3 | 6.4% | | Total Revenue| 663.8 | 609.7 | 54.1 | 8.9% | Revenue by Geographic Origin (FY21 vs FY20) | Geographic Origin | FY21 Revenue ($M) | FY20 Revenue ($M) | Increase ($M) | Percent Change | | :---------------- | :----------------: | :----------------: | :------------: | :-------------: | | Taiwan | 248.6 | 239.1 | 9.5 | 4.0% | | Korea | 156.4 | 153.1 | 3.3 | 2.2% | | China | 115.7 | 79.4 | 36.4 | 45.8% | | United States | 105.0 | 104.9 | 0.1 | 0.1% | | Europe | 36.2 | 31.5 | 4.7 | 15.0% | | Other | 1.8 | 1.7 | 0.1 | 3.6% | | Total Revenue | 663.8 | 609.7 | 54.1 | 8.9% | - Gross margin increased by 3.1 percentage points in FY21 from FY20, primarily due to increased revenue and improved capacity utilization in a high fixed-cost environment[160][161] - Non-operating income and expense increased $9.8 million in YTD FY21 compared to YTD FY20, mainly due to favorable movements of the South Korean won and RMB against the U.S. dollar[167] - The effective income tax rate decreased from 34.5% in FY20 to 22.7% in FY21, primarily due to the establishment of a valuation allowance for a loss carryforward in a non-U.S. jurisdiction in FY20 and changes in the jurisdictional mix of earnings[170] - Net income attributable to noncontrolling interests increased significantly from $6.5 million in FY20 to $23.4 million in FY21, driven by improved net income at Taiwan-based and China-based IC facilities[172] Liquidity and Capital Resources Cash and Cash Equivalents | As of October 31, | Amount ($M) | | :---------------- | :----------: | | 2021 | $276.7 | | 2020 | $278.7 | - Primary liquidity sources are cash on hand, cash from operations, and borrowing capacity from financial institutions, including a $50 million corporate credit agreement (with $100 million expansion capacity) and $22.9 million in China[173] - Estimated capital expenditures for fiscal year 2022 are approximately $100 million, targeted at high-end and mainstream tools to increase operating capacity and efficiency[175] Cash Flows Summary of Cash Flows (2019-2021) | Cash Flow Activity | 2021 ($M) | 2020 ($M) | 2019 ($M) | | :--------------------------- | :-------: | :-------: | :-------: | | Operating Activities | $150.8 | $143.0 | $68.4 | | Investing Activities | $(103.5) | $(65.7) | $(151.4) | | Financing Activities | $(53.9) | $(16.0) | $(42.1) | - Net cash provided by operating activities increased by $7.7 million in 2021 compared to 2020, driven by increased net income and share-based compensation[177] - Net cash used in investing activities increased in 2021 to $103.5 million from $65.7 million in 2020, primarily due to increased property, plant, and equipment purchases in Asia[178] - Net cash used in financing activities increased by $37.9 million in 2021 compared to 2020, mainly due to increased share repurchases, higher net distributions to noncontrolling interests, and increased debt repayments[179] Business Outlook Future results are subject to risks and uncertainties discussed in Item 1A, and unforeseeable factors could cause actual results to differ materially from expectations[183] Critical Accounting Estimates Critical accounting estimates involve significant judgment and assumptions in areas such as revenue recognition (timing, amount, contract assets), property, plant and equipment (useful lives, impairment), leases (classification, costs), contingencies (probability and amount of loss), and income taxes (tax rates, deferred tax assets, uncertain tax positions)[184][185] Effect of Recent Accounting Pronouncements Refer to Note 21 for details on recent accounting pronouncements, including ASU 2016-13 (Measurement of Credit Losses) adopted in Q1 2021 with immaterial effect, and ASU 2021-10 (Government Assistance) and ASU 2020-04 (Reference Rate Reform) currently being evaluated[187][372][373][374] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Photronics faces foreign currency exchange rate risk, with a 10% adverse movement potentially causing a $35.2 million pre-tax loss, while interest rate risk is immaterial Foreign Currency Exchange Rate Risk - Primary foreign currency exposures include South Korean won, New Taiwan dollar, Chinese renminbi, Japanese yen, Singapore dollar, British pound, and euro[190] - A 10% adverse movement in these currencies would result in a net unrealized pre-tax loss of $35.2 million as of October 31, 2021, an increase of $3.3 million from 2020, primarily due to increased net exposures of the New Taiwan dollar and RMB[190] - Risk mitigation strategies include producing products in the same country they are sold, managing working capital, and using derivative contracts for significant obligations/receivables[189] Interest Rate Risk A 10% adverse movement in interest rates on variable rate borrowings would not have a material effect on the October 31, 2021, consolidated financial statements[191] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes, with an unqualified audit opinion Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for the period ended October 31, 2021, and on the effectiveness of the company's internal control over financial reporting[196][197] - A critical audit matter identified was the determination of revenue recognized over time for in-process production orders, due to significant estimates and assumptions in determining the progress point and corresponding contract asset[201][202] Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of assets, liabilities, and equity as of October 31, 2021 and 2020 Consolidated Balance Sheet Highlights (in thousands USD) | Metric | October 31, 2021 | October 31, 2020 | | :-------------------------- | :--------------: | :--------------: | | Cash and cash equivalents | $276,670 | $278,665 | | Total current assets | $550,616 | $500,139 | | Property, plant and equipment, net | $696,553 | $631,475 | | Total assets | $1,294,202 | $1,188,182 | | Total current liabilities | $176,148 | $142,939 | | Long-term debt | $89,446 | $54,980 | | Total liabilities | $293,640 | $225,916 | | Total Photronics, Inc. shareholders' equity | $823,692 | $804,962 | | Total equity | $1,000,562 | $962,266 | Consolidated Statements of Income The consolidated statements of income detail revenue, expenses, and net income for the fiscal years 2021, 2020, and 2019 Consolidated Statements of Income Highlights (in thousands USD) | Metric | 2021 | 2020 | 2019 | | :---------------------------------------- | :--------: | :--------: | :--------: | | Revenue | $663,761 | $609,691 | $550,660 | | Gross profit | $167,044 | $134,654 | $120,841 | | Operating income | $94,554 | $63,928 | $52,121 | | Income before income tax provision | $102,006 | $61,601 | $50,701 | | Net income | $78,816 | $40,343 | $40,491 | | Net income attributable to Photronics, Inc. shareholders | $55,449 | $33,820 | $29,793 | | Basic EPS | $0.90 | $0.52 | $0.45 | | Diluted EPS | $0.89 | $0.52 | $0.44 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income present net income and other comprehensive income components, including foreign currency adjustments Consolidated Statements of Comprehensive Income Highlights (in thousands USD) | Metric | 2021 | 2020 | 2019 | | :---------------------------------------- | :--------: | :--------: | :--------: | | Net income | $78,816 | $40,343 | $40,491 | | Foreign currency translation adjustments | $8,478 | $36,381 | $(2,877) | | Comprehensive income | $87,225 | $76,334 | $37,540 | | Comprehensive income attributable to Photronics, Inc. shareholders | $58,062 | $60,783 | $25,754 | Consolidated Statements of Equity The consolidated statements of equity show changes in common stock, retained earnings, and noncontrolling interests over the past three fiscal years Consolidated Statements of Equity Highlights (in thousands USD) | Metric | October 31, 2021 | October 31, 2020 | October 31, 2019 | | :---------------------------------------- | :--------------: | :--------------: | :--------------: | | Common Stock (Amount) | $600 | $631 | $656 | | Additional Paid-In Capital | $484,672 | $507,336 | $524,319 | | Retained Earnings | $317,849 | $279,037 | $253,922 | | Accumulated Other Comprehensive Income (Loss) | $20,571 | $17,958 | $(9,005) | | Noncontrolling Interests | $176,870 | $157,304 | $141,200 | | Total Equity | $1,000,562 | $962,266 | $911,092 | Consolidated Statements of Cash Flows The consolidated statements of cash flows summarize cash generated and used in operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (in thousands USD) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--------------------------- | :--------: | :--------: | :--------: | | Net cash provided by operating activities | $150,772 | $143,046 | $68,386 | | Net cash used in investing activities | $(103,494) | $(65,711) | $(151,406) | | Net cash used in financing activities | $(53,903) | $(16,010) | $(42,059) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(1,922) | $72,311 | $(122,698) | | Cash and cash equivalents at end of year | $276,670 | $278,665 | $206,530 | Notes to Consolidated Financial Statements These notes provide detailed explanations of critical accounting policies, financial statement line items, and other relevant disclosures NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's key accounting policies, including revenue recognition, leases, and share-based compensation - Photronics recognizes revenue over time for in-process production orders where it has an enforceable right to bill and collect consideration, including profit, if orders are cancelled, with performance measured using an input method based on estimated costs to complete manufacturing phases[239] - The company adopted ASU 2016-02 (Leases) on November 1, 2019, recognizing $6.5 million in Right-of-Use (ROU) assets and corresponding lease liabilities, with short-term leases (12 months or less) not recognized on the balance sheet[248][250] - Share-based compensation expense is recognized over the service period, with fair values of restricted stock awards determined by closing stock price on grant date and stock options valued using the Black-Scholes model[253][254] NOTE 2 - OTHER CURRENT ASSETS This note details the components of other current assets, including recoverable VAT, contract assets, and prepaid expenses Other Current Assets (in thousands USD) | Item | October 31, 2021 | October 31, 2020 | | :---------------------------- | :--------------: | :--------------: | | Recoverable value added taxes | $24,213 | $16,539 | | Contract assets | $9,859 | $6,313 | | Prepaid expenses | $7,999 | $6,153 | | Prepaid and refundable income taxes | $1,550 | $122 | | Other | $629 | $608 | | Total | $44,250 | $29,735 | NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET This note provides a breakdown of property, plant, and equipment, net, including depreciation expenses and asset disposals Property, Plant and Equipment, Net (in thousands USD) | Item | October 31, 2021 | October 31, 2020 | | :---------------------------- | :--------------: | :--------------: | | Land | $12,442 | $12,422 | | Buildings and improvements | $181,922 | $179,162 | | Machinery and equipment | $1,961,474 | $1,812,791 | | Leasehold improvements | $21,751 | $21,157 | | Furniture, fixtures and office equipment | $15,534 | $15,665 | | Construction in progress | $35,009 | $70,915 | | Accumulated depreciation and amortization | $(1,531,579) | $(1,480,637) | | Total | $696,553 | $631,475 | - Depreciation expense for property, plant and equipment was $85.7 million in 2021, $89.2 million in 2020, and $79.2 million in 2019[269] - A $3.5 million gain was recorded in Q3 2021 from the trade-in of a lithography tool[270] NOTE 4 - INTANGIBLE ASSETS, NET This note details the company's intangible assets, net, including customer relationships, software, and amortization expenses Intangible Assets, Net (in thousands USD) | Item | October 31, 2021 Net | October 31, 2020 Net | | :---------------------------- | :------------------: | :------------------: | | Customer relationships | $606 | $815 | | Software and other | $168 | $304 | | Technology license agreement | - | $2,318 | | Total | $774 | $3,437 | - Amortization expense for finite-lived intangible assets was $2.9 million in 2021, $4.6 million in 2020, and $4.6 million in 2019[273] Estimated Intangible Asset Amortization (in thousands USD) | Fiscal Year | Amount | | :---------- | :-----: | | 2022 | $269 | | 2023 | $171 | | 2024 | $136 | | 2025 | $136 | | 2026 | $62 | NOTE 5 - PDMCX JOINT VENTURE This note describes the PDMCX joint venture in China, its financial performance, and Photronics' consolidation as primary beneficiary - Photronics and DNP formed PDMCX in January 2018, a joint venture for IC photomask manufacturing in Xiamen, China, with DNP holding a 49.99% interest, and the total investment is $160 million[275][276] - PDMCX generated net income of $6.4 million in 2021, compared to losses of $(4.7) million in 2020 and $(4.9) million in 2019[278] - Photronics consolidates PDMCX's financial results as it is deemed the primary beneficiary, holding a controlling financial interest and the power to direct significant activities[279] PDMCX Assets and Liabilities (in thousands USD) | Classification | October 31, 2021 Carrying Amount | October 31, 2020 Carrying Amount | | :------------------ | :------------------------------: | :------------------------------: | | Current assets | $59,745 | $56,095 | | Noncurrent assets | $137,799 | $141,097 | | Total assets | $197,544 | $197,192 | | Current liabilities | $26,559 | $31,922 | | Noncurrent liabilities | $42,917 | $55,676 | | Total liabilities | $69,476 | $87,598 | | Net assets | $128,068 | $109,594 | NOTE 6 - ACCRUED LIABILITIES This note provides a detailed breakdown of accrued liabilities, including compensation, income taxes, and contract liabilities Accrued Liabilities (in thousands USD) | Item | October 31, 2021 | October 31, 2020 | | :---------------------------- | :--------------: | :--------------: | | Compensation related expenses | $22,632 | $16,405 | | Income taxes | $15,596 | $11,432 | | Contract liabilities | $14,717 | $8,024 | | Property, plant, and equipment | $3,331 | $2,355 | | Value added and other taxes | $2,540 | $1,925 | | Operating leases | $2,273 | $2,175 | | Contract manufacturing | $1,210 | $1,275 | | Telecommunications and utilities | $1,067 | $1,006 | | Professional fees | $665 | $1,254 | | Inventory | $605 | $1,026 | | Other | $7,730 | $7,006 | | Total | $72,366 | $53,883 | NOTE 7 - DEBT This note details the company's debt obligations, including project loans, equipment loans, finance leases, and the corporate credit agreement Long-Term Debt Principal Due (in thousands USD) | Principal Due (Oct 31, 2021) | Xiamen Project Loans | Xiamen Working Capital Loans | Hefei Equipment Loan | Finance Leases | Total | | :--------------------------- | :------------------: | :--------------------------: | :------------------: | :------------: | :-----: | | Next 12 months | $2,068 | $8,197 | $4,694 | $7,289 | $22,248 | | Months 13 – 24 | $10,071 | $4,005 | $4,693 | $6,512 | $25,281 | | Months 25 – 36 | $10,278 | - | $6,257 | $6,610 | $23,145 | | Months 37 – 48 | $9,902 | - | $5,585 | $17,961 | $33,448 | | Months 49 – 60 | $7,572 | - | - | - | $7,572 | | Long-term debt | $37,823 | $4,005 | $16,535 | $31,083 | $89,446 | - Interest payments were $3.8 million in 2021, $2.6 million in 2020, and $2.6 million in 2019[283] - The Corporate Credit Agreement, expiring in September 2023, has a $50 million borrowing limit (expandable to $100 million) and is secured by U.S. assets and common stock in certain foreign subsidiaries, with no outstanding borrowings against it as of October 31, 2021[293] NOTE 8 - REVENUE This note provides a detailed breakdown of revenue by product type, geographic origin, and timing of recognition Revenue by Product Type (in thousands USD) | Product Type | 2021 | 2020 | 2019 | | :----------- | :--------: | :--------: | :--------: | | IC High-end | $162,973 | $156,129 | $156,418 | | IC Mainstream| $297,198 | $262,281 | $249,773 | | Total IC | $460,171 | $418,410 | $406,191 | | FPD High-end | $155,670 | $139,558 | $98,832 | | FPD Mainstream| $47,920 | $51,723 | $45,637 | | Total FPD| $203,590 | $191,281 | $144,469 | | Total | $663,761 | $609,691 | $550,660 | Revenue by Geographic Origin (in thousands USD) | Geographic Origin | 2021 | 2020 | 2019 | | :---------------- | :--------: | :--------: | :--------: | | Taiwan | $248,597 | $239,101 | $244,377 | | Korea | $156,391 | $153,052 | $147,734 | | China | $115,732 | $79,374 | $19,010 | | United States | $105,023 | $104,949 | $105,045 | | Europe | $36,242 | $31,501 | $32,585 | | Other | $1,776 | $1,714 | $1,909 | | Total | $663,761 | $609,691 | $550,660 | Revenue by Timing of Recognition (in thousands USD) | Timing of Recognition | 2021 | 2020 | 2019 | | :-------------------- | :--------: | :--------: | :--------: | | Over time | $606,332 | $535,071 | $497,942 | | At a point in time | $57,429 | $74,620 | $52,718 | | Total | $663,761 | $609,691 | $550,660 | NOTE 9 - LEASES This note details lease information, including Right-of-Use assets, lease liabilities, future payments, and lease costs for operating and finance leases Lease Information (in thousands USD) | Classification | October 31, 2021 | October 31, 2020 | | :---------------------------- | :--------------: | :--------------: | | ROU Assets – Operating Leases | $5,581 | $7,706 | | ROU Assets – Finance Leases | $40,827 | - | | Lease Liabilities – Operating Leases | $5,519 | $7,183 | | Lease Liabilities – Finance Leases | $38,372 | - | Future Lease Payments (in thousands USD) | Fiscal Year | Operating Leases | Finance Leases | | :---------- | :--------------: | :------------: | | 2022 | $2,351 | $7,856 | | 2023 | $1,374 | $6,938 | | 2024 | $819 | $6,938 | | 2025 | $646 | $18,012 | | 2026 | $398 | - | | Thereafter | $157 | - | | Total lease payments | $5,745 | $39,744 | | Imputed interest | $226 | $1,372 | | Lease liabilities | $5,519 | $38,372 | Lease Costs (in thousands USD) | Lease Cost Item | 2021 | 2020 | | :------------------------ | :------: | :------: | | Operating lease costs | $2,904 | $3,076 | | Short-term lease costs | $232 | $359 | | Variable lease costs | $498 | $378 | | Interest on lease liabilities | $510 | - | | Amortization of ROU assets | $1,867 | - | NOTE 10 - SHARE-BASED COMPENSATION This note details share-based compensation expenses, outstanding restricted stock, and stock options, including their amortization and contractual lives Share-Based Compensation Expenses (in thousands USD) | Expense Category | 2021 | 2020 | 2019 | | :-------------------------------- | :------: | :------: | :------: | | Cost of goods sold | $446 | $337 | $250 | | Selling, general and administrative | $4,446 | $4,590 | $3,430 | | Research and development | $456 | - | - | | Total expense incurred | $5,348 | $4,927 | $3,680 | | Income tax benefits | $0.2 | $0.2 | - | - As of October 31, 2021, there were 929,147 shares of restricted stock outstanding, with a weighted-average amortization period of 2.6 years for unrecognized compensation cost[315][316] - As of October 31, 2021, 1,173,103 stock options were outstanding with a weighted-average exercise price of $9.49 and a remaining contractual life of 4.0 years, with no stock options granted in 2021 or 2020[320][323] NOTE 11 - EMPLOYEE RETIREMENT PLANS This note describes the 401(k) Savings and Profit-Sharing Plan for U.S. employees, including employer matching contributions - The company maintains a 401(k) Savings and Profit-Sharing Plan for U.S. employees, matching 50% of employee contributions up to 4% of compensation, with total employer contributions of $0.8 million in 2021, $0.7 million in 2020, and $0.7 million in 2019[326] NOTE 12 - INCOME TAXES This note provides details on income before taxes, tax provisions, effective tax rates, deferred tax assets, and unrecognized tax benefits Income Before Income Tax Provisions (in thousands USD) | Geographic Area | 2021 | 2020 | 2019 | | :---------------- | :---------: | :---------: | :---------: | | United States | $(19,447) | $(10,672) | $(8,379) | | Foreign | $121,453 | $72,273 | $59,080 | | Total | $102,006 | $61,601 | $50,701 | Income Tax Provisions (in thousands USD) | Tax Type | 2021 | 2020 | 2019 | | :------- | :--------: | :--------: | :--------: | | Current | $25,300 | $21,702 | $13,872 | | Deferred | $(2,110) | $(444) | $(3,662) | | Total| $23,190 | $21,258 | $10,210 | - The effective tax rate was 22.7% in 2021, 34.5% in 2020, and 20.1% in 2019, with differences from the U.S. federal statutory rate primarily due to valuation allowances on losses, foreign tax rate differentials, and tax credits[329][330][331][332] Net Deferred Income Tax Assets (in thousands USD) | Item | October 31, 2021 | October 31, 2020 | | :---------------------------- | :--------------: | :--------------: | | Deferred income tax assets | $68,092 | $55,816 | | Valuation allowances | $(34,337) | $(33,973) | | Deferred income tax liabilities | $(9,698) | - | | Net deferred income tax assets | $24,057 | $21,843 | - Unrecognized tax benefits (including interest and penalties) were $3.8 million as of October 31, 2021, with $0.5 million expected to be resolved in the next twelve months[341][342] NOTE 13 - EARNINGS PER SHARE This note presents basic and diluted earnings per share, along with the weighted-average common shares outstanding Earnings Per Share (EPS) | Metric | 2021 | 2020 | 2019 | | :---------- | :----: | :----: | :----: | | Basic EPS | $0.90 | $0.52 | $0.45 | | Diluted EPS | $0.89 | $0.52 | $0.44 | Weighted-Average Common Shares Outstanding (in thousands) | Metric | 2021 | 2020 | 2019 | | :---------------------------------------- | :------: | :------: | :------: | | Basic | 61,407 | 64,866 | 66,347 | | Dilutive share-based payment awards | 592 | 604 | 448 | | Dilutive convertible notes | - | - | 2,360 | | Diluted | 61,999 | 65,470 | 69,155 | NOTE 14 - COMMITMENTS AND CONTINGENCIES This note outlines the company's unrecognized commitments for capital equipment and potential liabilities from ordinary course business claims Unrecognized Commitments (in thousands USD) | Fiscal Year | Amount | | :---------- | :-----: | | 2022 | $82,323 | | 2023 | $25,630 | | 2024 | $3,654 | | Total | $111,607 | - The company has commitments of $73.7 million for capital equipment purchases as of October 31, 2021[348] - Potential liability from ordinary course business claims is not expected to have a material effect on consolidated financial statements[350] NOTE 15 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT This note details changes in accumulated other comprehensive income, including foreign currency translation adjustments Changes in Accumulated Other Comprehensive Income (in thousands USD) | Item | Year Ended Oct 31, 2021 | Year Ended Oct 31, 2020 | | :---------------------------------------- | :---------------------: | :---------------------: | | Balance at beginning of year | $17,958 | $(9,005) | | Other comprehensive income (loss) | $8,409 | $35,991 | | Less: attributable to noncontrolling interests | $5,796 | $9,028 | | Balance at end of year | $20,571 | $17,958 | NOTE 16 – RISKS AND CONCENTRATIONS This note discusses credit risk in trade receivables and cash, customer concentration, and geographic distribution of assets - Credit risk in trade receivables is mitigated by ongoing credit evaluation and short collection terms, with no general collateral requirement[353] - Cash and cash equivalents are deposited across multiple financial institutions globally, minimizing credit risk due to high quality institutions and diversification[355] - One customer accounted for 20% of net accounts receivable in 2021 and 17% of total revenue in 2021, while another customer accounted for 12% of net accounts receivable and 12% of total revenue in 2021[356] Property, Plant, and Equipment, Net and Net Assets by Geographic Area (in thousands USD) | Geographic Area | Oct 31, 2021 PP&E, Net | Oct 31, 2021 Net Assets | Oct 31, 2020 PP&E, Net | Oct 31, 2020 Net Assets | | :---------------- | :--------------------: | :---------------------: | :--------------------: | :---------------------: | | China | $285,756 | $210,437 | $262,800 | $180,404 | | Taiwan | $129,660 | $341,291 | $123,979 | $309,911 | | United States | $137,049 | $173,062 | $130,164 | $225,411 | | Korea | $140,380 | $254,357 | $110,815 | $228,579 | | Europe and Other | $3,708 | $21,415 | $3,717 | $17,961 | | Total | $696,553 | $1,000,562 | $631,475 | $962,266 | NOTE 17 - RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, including consulting agreements and revenue from a customer related to an officer - A consulting agreement with DEMA Associates, LLC (where the chairman of the board is a member) incurred expenses of $0.1 million in 2021 and $0.2 million in 2020[360] - Revenue from a customer related to an officer of the company was $111.0 million in 2021, $96.4 million in 2020, and $87.0 million in 2019, with accounts receivable from this customer being $34.5 million in 2021 and $32.7 million in 2020[361] NOTE 18 - FAIR VALUE MEASUREMENTS This note explains the fair value measurements of financial instruments, categorizing them into Level 1 and Level 2 - Fair values of cash and cash equivalents (Level 1), accounts receivable, accounts payable, and certain other current assets/liabilities (Level 2) approximate their carrying values due to short-term maturities, with variable rate debt instruments also being Level 2 measurements[364] NOTE 19 - SHARE REPURCHASE PROGRAMS This note details the board-authorized share repurchase programs, including the $100 million program initiated in September 2020 - The board authorized a $100 million share repurchase program in September 2020, following a similar program in August 2019 (terminated March 2020)[366][367] Share Repurchase Program Activity | Metric | 2021 | 2020 | 2019 | | :------------------------- | :--------: | :--------: | :--------: | | Number of shares repurchased | 3,919 | 3,194 | 2,133 | | Cost of shares repurchased | $48,249 | $34,394 | $21,696 | | Average price paid per share | $12.31 | $10.77 | $10.17 | NOTE 20 - SUBSIDIARY DIVIDENDS This note discloses dividends paid by PDMC, the Taiwan-based subsidiary, to noncontrolling interests - PDMC, the Taiwan-based majority-owned subsidiary, paid dividends of $9.6 million to noncontrolling interests in 2021, $16.2 million in 2020, and $45.1 million in 2019[371] NOTE 21 - RECENT ACCOUNTING PRONOUNCEMENTS This note outlines recent accounting pronouncements and their adoption status or ongoing evaluation by the company - ASU 2016-13, "Measurement of Credit Losses," was adopted on November 1, 2020, with an immaterial effect on financial statements[372] - ASU 2021-10, "Government Assistance," effective for fiscal year 2023, requires increased transparency in government assistance disclosures[373] - ASU 2020-04, "Reference Rate Reform," provides optional expedients for transitioning from LIBOR to alternative rates, with the company currently evaluating its potential impact[374] - ASU 2019-12, "Income Taxes," simplifying accounting for income taxes, is effective for Q1 fiscal year 2022, and its effect is currently being evaluated[375] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls were effective, and the previously reported material weakness in internal control was remediated as of October 31, 2021 Evaluation of Disclosure Controls and Procedures Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of October 31, 2021[377] Management's Report on Internal Control over Financial Reporting Management assessed the effectiveness of internal control over financial reporting as of October 31, 2021, based on COSO criteria, and concluded it was effective[380] Changes in Internal Control over Financial Reporting The previously reported material weakness in internal control over financial reporting for fiscal year 2020 was remediated as of October 31, 2021, through changes in organizational reporting structures and new control implementations[382] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the company's internal control over financial reporting as of October 31, 2021[386] ITEM 9B. OTHER INFORMATION This item contains no additional information ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to the company PART III This part incorporates information on directors, executive compensation, security ownership, related transactions, and accountant fees ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance, including the code of ethics, is incorporated by reference from the 2022 Definitive Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Definitive Proxy Statement[395] - The company has adopted a code of ethics applicable to its principal executive, financial, and accounting officers[396] ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated by reference from the 2022 Definitive Proxy Statement - Executive compensation details are incorporated by reference from the 2022 Definitive Proxy Statement[397] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of beneficial owners and management, as well as equity compensation plan information, is incorporated by reference from the 2022 Definitive Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Definitive Proxy Statement[398] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Definitive Proxy Statement - Details on related party transactions and director independence are incorporated by reference from the 2022 Definitive Proxy Statement[399] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the 2022 Definitive Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2022 Definitive Proxy Statement[401] PART IV This part contains a comprehensive list of exhibits and financial statement schedules filed as part of the 10-K report ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists all exhibits and financial statement schedules fil