Item 1. Business
ITEM 1.
BUSINESS
General
Photronics, Inc. (and its subsidiaries, collectively referred to herein as “Photronics”, the “Company”, “we”, “our”, or “us”) is the world's leading manufacturer 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 ICs and FPDs and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during
the fabrication of ICs, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We have eleven manufacturing facilities, which are located in Taiwan (3), China (2), Korea, the United States (3), and Europe (2).
Our principal executive offices are located at 15 Secor Road, Brookfield, Connecticut, 06804, telephone (203) 775-9000. Our website address is http://www.photronics.com. We make available, free of charge through our
website, our Forms 10-K, Definitive Proxy Statements on Schedule 14A, Forms 10-Q, Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials are electronically filed with or furnished to
the SEC. The information found on, or incorporated into, our website is not part of this or any other report we file with or furnish to the SEC. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and
other information regarding SEC registrants, including Photronics.
Sales
We manufacture photomasks, which are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates. The photomasks we manufacture incorporate circuit designs provided to us on a confidential
basis by our customers. Photomasks are typically sold in sets comprised of layers, with each layer having a distinct pattern that is etched onto a different photomask. The resulting series of photomasks is then used to image the circuit patterns
onto each successive layer of a semiconductor wafer or FPD substrate. The typical manufacturing process for a photomask involves the receipt and conversion of circuit design data to manufacturing pattern data. A lithography system then exposes the
circuit pattern onto a photomask blank. The exposed areas are developed and etched to imprint the pattern on the photomask. The photomask is then inspected for defects and conformity to the customer's design data. After the repair of any defects,
the photomask is cleaned, any required pellicles (protective translucent cellulose membranes) are applied and, after final inspection, the photomask is shipped to the customer.
“High-end” photomasks support 28 nanometer and smaller design nodes for ICs and Generation 10.5+, AMOLED, and LTPS display-based process technologies for FPDs. However, 32 nanometer and above geometries for
semiconductors and Generation 8 and below (excluding AMOLED and LTPS) process technologies for displays, which we refer to as “mainstream” photomasks, constitute the majority of designs currently being fabricated in volume. At these geometries and
at various high-end nodes, we can produce full lines of photomasks. Moreover, there is no significant technology employed by our competitors that is not available to us. We expect advanced-generation designs to continue to be developed, and we
believe we are well positioned to service an increasing volume of this business as a result of our ongoing investments in manufacturing processes and technology in the regions where our customers are located.
Generally, Photronics and each of its customers engage in a qualification and correlation process before we become an approved supplier. Thereafter, based on the customer’s specifications, we typically negotiate
pricing parameters for the customer's order. Some prices may remain in effect for an extended period of time. In many instances, we enter into sales arrangements with an understanding that, as long as our performance is competitive, we will receive
a specified percentage of that customer's photomask orders.
The first several layers of photomasks are sometimes required to be delivered to customers within twenty-four hours from the time we receive customer design data. Because of the short period
between order and shipment dates (typically from one day to three weeks) for a significant amount of our revenue, the dollar amount of our current backlog is not a reliable indicator of future revenue. However, the demand for some IC photomasks can
extend over the traditional time period; thus, for some products, our backlog can expand to as long as two to three months.
5
Table of Contents
The ability to manufacture high-quality photomasks within short time periods is dependent upon robust processes, efficient manufacturing methods, high production yield, available manufacturing capacity, and high
equipment reliability. We work to meet these requirements by making significant investments in research and development, manufacturing capacity, preventive and on-going equipment maintenance programs, manufacturing and data processing systems, and
by utilizing statistical process control methods to optimize our manufacturing processes and reduce cycle times.
Quality control is an integral part of the photomask manufacturing process. Photomasks are manufactured in temperature, humidity, and particulate-controlled clean rooms because of the high level of precision, quality
and manufacturing yield required. Each photomask is inspected several times during the manufacturing process to ensure compliance with customer specifications. We continue to make substantial investments in equipment to produce, inspect and repair
photomasks to ensure that customer specifications are met.
We conduct our sales and marketing activities primarily through a staff of full-time sales personnel and customer service representatives who work closely with the Company's management and technical personnel. We
support non-U.S. customers through both our domestic and foreign facilities and consider our presence in non-U.S. markets to be an important factor in attracting new customers, as it provides global solutions to our customers, minimizes delivery
time, and allows us to serve customers that utilize manufacturing foundries outside of the United States, principally in Asia. See Notes 9 and 17 to our consolidated financial statements in Part II, Item 8 of this report for the amount of revenue
and long-lived assets attributable to each of our geographic areas of operations.
Research and Development
We primarily conduct research and development activities for IC photomasks at our Boise, Idaho, facility and, to a lesser degree, Photronics DNP Mask Corporation (“PDMC”), our joint-venture subsidiary in Taiwan.
Research and development for FPD photomasks is primarily conducted at Photronics Korea, Ltd., our subsidiary in South Korea. Additionally, we conduct site-specific research and development programs to support local, strategic customer roadmaps. All
of these research and development programs and activities are undertaken to advance our competitiveness in technology and manufacturing efficiency. We also conduct application-oriented research and development, including data and service technology
to support the integration of photomasks into customer processes. Currently, research and development for IC photomasks are primarily focused on photomasks enabling wafer geometries of 14 nanometer node and smaller, including EUV and, for FPDs, on
Generations 8 and 10 substrate size photomasks for new TV technologies, emerging opportunities for micro- and mini-LED displays, and photomask technology for the complex FPD photomasks required in the manufacture of advanced mobile displays, such
as AMOLED. We believe these core competencies will continue to be a critical part of semiconductor and FPD manufacturing, as wafer and FPD substrate optical lithography continues to enable new high-end ICs and displays. We incurred research and
development expenses of $13.7 million, $18.3 million, and $18.5 million in 2023, 2022 and 2021, respectively. It is our belief that we own, control, or license the proprietary information (including trade secrets and patents) that we need to
continue to meet our customers’ requirements. We also believe that our intellectual property and trade secret know-how will continue to be important to maintaining technical leadership in the field of photomasks.
6
Table of Contents
Markets
The customers for photomasks are primarily semiconductor and FPD manufacturers and to a lesser degree fabless design and equipment companies serving those industries. The size of the photomask market is driven by the
number of designs released to support IC and FPD product introductions and manufacturing expansions. The photomasks required for those designs are manufactured by independent merchant manufacturers like Photronics and by semiconductor and FPD
manufacturers that produce photomasks for their own use (captive manufacturers). In rare instances, captive manufacturers also sell to other semiconductor or FPD manufacturers.
The value of masks produced by merchant suppliers has transitioned from a period when there was a trend toward the divesture or closing of captive photomask operations by semiconductor manufacturers, and an increase in
the share of the market served by independent merchant manufacturers. This trend was driven by the increased complexity and cost of capital equipment used in manufacturing photomasks and the lack of economy of scale for many semiconductor and FPD
manufacturers to effectively utilize the equipment.
That period was followed by a period during which, in order to reach certain roadmap milestones, some captive mask facilities invested at faster rates than independent manufacturers, and the revenue share of market
transitioned to masks being majority captive-supplied. More recently, there has been a tendency of more production being directed to the independent merchant manufacturers, and market share has begun moving toward the independents. Nevertheless,
most captive manufacturers maintain business and technology relationships with independent photomask manufacturers for ongoing support.
We support customers across the full spectrum of IC production and FPD technologies by manufacturing photomasks using electron beam or optical (laser-based) lithography systems. For IC photomasks, the predominant
writing technology used for advanced photomasks with fine-scale resolution requirements is electron beam writing systems, while FPD mask fabrication utilizes optical writing systems. These systems are capable of producing the most advanced
semiconductor and display photomasks for use in an array of products. End markets served with IC photomasks include devices used for microprocessors, memory, telecommunications, the Internet of Things, crypto mining, and other applications. We own
a number of both high-end and mature electron beam and laser-based lithography systems.
We sell our products primarily to leading semiconductor and FPD designers and manufacturers. These include integrated device manufacturers, fabless semiconductor companies, and “pure-play” foundries. During 2023, we
sold our products to approximately 696 customers. Revenue from United Microelectronics Corp. Co., Ltd. accounted for approximately 14%, 15% and 17% of our total revenues in 2023, 2022 and 2021, respectively, and revenue from Samsung Electronics
Co., Ltd. accounted for approximately 10%, 11% and 12% of our total revenues in those respective years. In addition, revenue from Semiconductor Manufacturing International Corporation accounted for approximately 13%, 5% and 3% of our total revenues
in 2023, 2022 and 2021, respectively. Our five largest customers, in the aggregate, accounted for approximately 51%, 45% and 43% of our revenue in 2023, 2022 and 2021, respectively. A significant decrease in the amount of revenue from any of these
customers could have a material adverse effect on our financial performance and business prospects.
Competition
The photomask industry is highly competitive, and most of our customers utilize multiple photomask suppliers. Our ability to compete depends primarily upon the consistency of our product quality, timeliness of
delivery, competitive pricing, technical capability, and service, which we believe are the principal factors considered by customers in selecting their photomask suppliers. An inability to meet these requirements could adversely affect our
financial condition, results of operations, and cash flows. We also believe that geographic proximity to customers is an important factor in certain markets where cycle time from order to delivery is critical. While some of our competitors may have
greater financial, sales, marketing, or other resources than Photronics, we believe that we are able to compete effectively because of our dedication to customer service, ongoing investments in state-of-the-art photomask equipment and facilities,
and experienced technical employees.
7
Table of Contents
We estimate that, for the types of photomasks we manufacture (IC and FPD), the size of the total market (captive and merchant) is approximately $7.5 billion. Our competitors include Compugraphics International, Ltd.,
Dai Nippon Printing Co., Ltd (outside of Taiwan and China), Hoya Corporation, LG Innotek Co., Ltd., Shenzhen Newway Photomask Making Co., Ltd., Shenzhen Qingyi Photomask, Ltd., SK-Electronics Co., Ltd., Taiwan Mask Corporation, and Toppan
Electronics Products Co., Ltd. We also compete with semiconductor and FPD manufacturers' captive photomask manufacturing operations that supply photomasks for internal use and, in some instances, also for external customers and foundries. We expect
to face continued competition which, in the past, has led to pressure to reduce prices. We believe the pressure to reduce prices, together with the significant investment required in capital equipment to manufacture high-end photomasks will
continue in the future.
International Operations
Revenues from our non-U.S. operations were approximately 86%, 85% and 84% of our total revenues in 2023, 2022 and 2021, respectively. We believe that our ability to serve
non-U.S. markets is enhanced by our having, among other things, a local presence in the markets we serve. This requires significant investments in financial, managerial, operational, and other resources.
Operations outside of the United States are subject to inherent risks, including fluctuations in currency exchange rates, political and economic conditions in various countries, legal compliance and regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable collection cycles, potential restrictions on transfers of funds, and potentially adverse tax consequences.
These factors may have a material adverse effect on our ability to generate revenue outside of the United States and may require us to deploy resources where they could otherwise be used to their greatest advantage and, consequently, may adversely
affect our financial condition and results of operations. Notes 9 and 17 of our consolidated financial statements, in Part II, Item 8 of this report, respectively, present our revenue and long-lived assets by geographic area.
Resources
Raw materials used by Photronics generally include: high precision quartz plates (including large area plates), which are used as photomask blanks and are primarily obtained from Japanese and Korean suppliers;
pellicles and electronic grade chemicals, which are used in the manufacturing process; and compacts, which are durable plastic containers in which photomasks are shipped. These materials are generally sourced from several suppliers. We believe that
our utilization of a select group of strategic suppliers enables us to access the most technologically advanced materials available. On an ongoing basis, we continue to consider additional supply sources.
We typically enter into annual pricing agreements with our suppliers, some of which include volume-based incentives that have resulted in substantial cost savings; these agreements do not require us to purchase minimum
dollar amounts or quantities of their subject materials.
We rely on a limited number of equipment suppliers to develop and provide the equipment used in the photomask manufacturing process. Although, historically, we have been able to obtain equipment on a timely basis, an
inability to obtain or repair equipment when required could have a material adverse effect on our business and results of operations.
Intellectual Property Rights
We have developed and hold ownership interests in intellectual property (“IP”) rights, in the forms of patents issued in the U.S., and other trademark and trademark registrations in the U.S. and other countries.
Patents in which we hold ownership interests generally relate to the manufacture of photomasks or the use of photomasks to manufacture other products. While we believe that our IP rights are, and will continue to be, important to our technical
leadership in the field of photomasks, our operations are not dependent on any one individual IP right. In addition to patenting, when practicable, we further protect our IP rights, and our other proprietary processes and trade secrets, by
utilizing non-disclosure agreements with employees, customers, and vendors.
8
Table of Contents
Seasonality
Our business is typically impacted during the first 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.
Government Contracts
We are party to a limited number of fixed-price contracts with the U.S. government. Revenues earned from these contracts do not comprise a significant portion of our total revenue.
9
Table of Contents
Government Regulation
We are subject to government regulations within the U.S. and in other countries in which we produce or market our products. The effects of compliance with these regulations are currently not material to our results of
operations, capital expenditures, or competitive position. However, compliance with changes to existing or new regulations may have a material adverse effect on our future results of operations, capital expenditures, or competitive position. We
discuss the potential impact of our not adhering to a number of these regulations in Item 1A. “Risk Factors”, of this Form 10-K. The following is a list of major subjects of the regulations that pertain to our business:
•
Regulations, such as those under the Foreign Corrupt practices Act that prohibit providing remuneration to government officials for the purpose of obtaining or securing business in the jurisdictions in which they serve;
•
Regulations that require the minimization and proper disposal of the by-products of our manufacturing processes;
•
Regulations that require us to provide a safe working environment for our employees;
•
Regulations that restrict our ability to transfer assets between operations not within the same legal jurisdiction;
•
Regulations that require us to provide information through the submission of government surveys;
•
Regulations that require us to maintain an effective system of internal accounting controls;
•
Regulations that prohibit us from engaging in business in specified countries, or with specified customers;
•
Regulations that require us to protect the personal information of our customers and employees;
•
Regulations that require us to accurately determine our liabilities to taxing authorities, and to settle such liabilities within their statutorily prescribed time periods;
•
Regulations that require us to withhold and timely remit taxes on our employees’ compensation to government authorities;
•
Regulations that require us to contribute to government-sponsored social insurance plans;
•
Regulations that require us to contribute to employee severance plans;
•
Regulations that prohibit us from disseminating material nonpublic information prior to the public announcement of such information;
•
Regulations pertaining to financial reporting, insider transactions, executive compensation, and other areas overseen by the SEC and governing bodies in other countries in which our operations are located.
Human Capital
As of October 31, 2023, we had approximately 1,885 full-time and part-time employees worldwide. Our business results depend in part on our ability to successfully manage our human capital resources, including
attracting, identifying, and retaining key talent. Factors that may affect our ability to attract and retain qualified employees include employee morale, our reputation, competition from other employers, and availability of qualified individuals.
As of October 31, 2023, none of our employees at any of our worldwide facilities was represented by a union. We consider our employee relations to be good. We believe our commitment to our diverse human capital resources is an important component
of our mission to deliver superior photomasks and customer care. We provide all employees with the opportunity to share their opinions in open dialogues with our human resources department and senior management. We provide all employees a wide
range of career development opportunities, both formal and informal. Our formal offerings include tuition reimbursement, leadership development experiences and vocational training. The safety of our employees is a paramount value for us.
10
Table of Contents
We provide mandatory safety trainings in our production facilities, which are designed to focus on empowering our employees with the knowledge and tools they need to make safe choices and to minimize risks. Supervisors
complete safety management courses as well. The health and wellness of our employees are critical to our success.
We provide our employees with access to a variety of innovative, flexible and convenient health and wellness programs. Such programs are designed to support employees' physical and mental health by providing tools and
resources to help them improve or maintain their health status and encourage engagement in healthy behaviors. Additionally, we provide robust compensation and benefits. In addition to salaries, these programs, which vary by country/region, can
include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources,
employee assistance programs, and tuition assistance.