Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We sell substantially all of our photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher-performance electronic
products such as virtual reality/augmented reality advanced IC packages, photonics, micro-electronic mechanical systems, and certain nanotechnology applications. Our selling cycle is tightly interwoven with the development and release of new
semiconductor and display designs and applications, particularly as they relate to the semiconductor industry's migration to more advanced product innovation, design methodologies, and fabrication processes. The demand for photomasks primarily
depends on design activity rather than sales volumes from products manufactured using semiconductor manufacturing technologies. Consequently, an increase in semiconductor or display sales does not necessarily result in a corresponding increase in
photomask sales. However, the reduced use of application-specific ICs, reductions in design complexities, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new
semiconductor or display designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, display, and photomask design and production methods that shift the burden of achieving
device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronics industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These negative trends have been
characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of time, sometimes within twenty-four hours. This results in a minimal level of backlog orders, typically one to two weeks of backlog for IC
photomasks and two to three weeks of backlog for FPD photomasks. However, the demand for some IC photomasks can extend longer than the traditional time period; thus, for some products, our backlog can expand to as long as two to three months.
The global semiconductor and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high-performance devices, including, but not limited to, mobile display devices,
mobile communications, and computing solutions. While we cannot predict the timing of the industry's transition to volume production of next-generation technology nodes, or the timing of up and down-cycles with precise accuracy, we believe that
such transitions and cycles will continue into the future, beneficially and adversely affecting our business, financial condition, and operating results as they occur. We believe our ability to remain successful in these environments is dependent
upon the achievement of our goals of being a service and technology leader and efficient solutions supplier, which we believe should enable us to continually reinvest in our global infrastructure.
We are focused on improving our competitiveness by advancing our technology and reducing costs and, in connection therewith, have invested and plan to continue to invest in manufacturing equipment to serve both the
high-end photomask and trailing-edge markets. As we face challenges that require us to make significant improvements in our competitiveness, we continue to evaluate further cost reduction initiatives.
State-of-the-art production for semiconductor masks is considered to be 28 nanometer and smaller for ICs and Generation 10.5+ and AMOLED and LTPS display-based process technologies for FPDs. However, 32 nanometer and
above geometries for semiconductors and Generation 8 and below (excluding AMOLED and LTPS) process technologies for displays constitute the majority of designs currently being fabricated in volume. At these geometries and various high-end nodes, we
can produce full lines of photomasks, and there is no significant technology employed by our competitors that is not available to us. We expect advanced-generation designs to continue to move to production throughout fiscal 2024, and we believe we
are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.
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The photomask industry has been, and is expected to continue to be characterized by technological change and evolving industry standards. In order to remain competitive, we will be required to continually anticipate,
respond to, and utilize changing technologies. In particular, we believe that, as semiconductor geometries continue to become smaller, and display designs become larger or otherwise more advanced, we will be required to manufacture even more
complex optically-enhanced reticles, including optical proximity correction, phase-shift and EUV photomasks. Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in high-performance electronics
fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain
chip-stacking methodologies that lessen the emphasis on conventional lithography technology. Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the
need for photomasks in the production of semiconductors. As of the end of 2023, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for
high-volume semiconductor wafer production, and we have not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies. However, should direct-write lithography or any other alternative
method of transferring IC designs to semiconductor wafers without the use of photomasks achieve market acceptance, and we do not anticipate, respond to, or utilize these or other changing technologies due to resource, technological, or other
constraints, our business and results of operations could be materially adversely affected.
Our revenues have benefitted, and our costs, including depreciation, have been affected by the increased demand for high-end-technology photomasks that require more advanced manufacturing capabilities, but generally
command higher ASPs. Our capital expenditure payments were $131.3 million, $112.3 million and $109.1 million in 2023, 2022 and 2021, respectively. Nonetheless, we intend to continue to make the required investments to support the technological
requirements of our customers that we believe will continue to enable our growth. In support of this effort, we expect capital expenditure payments to be approximately $140 million in fiscal year 2024.
The manufacture of photomasks for use in fabricating ICs, FPDs, and other related products built using comparable photomask-based process technologies has been, and continues to be, capital intensive. Our employees and
our integrated global manufacturing network represent a significant portion of our fixed operating cost base. Should our revenue decrease as a result of a decrease in design releases from our customers, we may have excess or underutilized
production capacity, which could significantly impact our operating margins, or result in write-offs from asset impairments.
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Results of Operations
The following tables present selected operating information expressed as a percentage of revenue. The columns may not foot due to rounding.
Three Months Ended
October 31,
2023
July 30,
2023
October 31,
2022
Revenue
100.0
%
100.0
%
100.0
%
Cost of goods sold
62.7
61.3
61.8
Gross profit
37.3
38.7
38.2
Selling, general and administrative expenses
7.4
8.0
7.5
Research and development expenses
1.5
1.6
1.9
Operating income
28.5
%
29.1
%
28.8
%
Non-operating income (expense), net
8.2
-0.4
5.1
Income before income tax provision
36.7
28.7
33.9
Income tax provision
8.9
7.2
7.6
Net income
27.8
21.5
26.3
Net income attributable to noncontrolling interests
8.2
9.5
8.7
Net income attributable to Photronics, Inc. shareholders
19.6
%
12.0
%
17.6
%
Year Ended
October 31,
2023
October 31,
2022
October 31,
2021
Revenue
100.0
%
100.0
%
100.0
%
Cost of goods sold
62.3
64.3
74.8
Gross profit
37.7
35.7
25.2
Selling, general and administrative expenses
7.8
7.8
8.7
Research and development expenses
1.5
2.2
2.8
Other operating income, net
0.0
0.0
0.5
Operating income
28.4
%
25.7
%
14.2
%
Non-operating income (expense), net
1.9
3.3
1.1
Income before income tax provision
30.3
29.0
15.4
Income tax provision
7.9
7.3
3.5
Net income
22.4
21.7
11.9
Net income attributable to noncontrolling interests
8.3
7.3
3.5
Net income attributable to Photronics, Inc. shareholders
14.1
%
14.4
%
8.4
%
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Note: All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2023 (Q4 FY23), July 30, 2023 (Q3 FY23) and October 31, 2022
(Q4 FY22), and for the fiscal years ended October 31, 2023 (YTD FY23) and October 31, 2022 (YTD FY22). Please refer to Part II, Item 7 of our 2022 Form 10-K for comparative discussion of our fiscal years ended October 31, 2022, and October 31,
2021. The tables in this item may not foot due to rounding.
Revenue
Our quarterly revenues can be affected by the seasonal purchasing practices of our customers. As a result, demand for our products is typically reduced during the first quarter of our fiscal year by the North American,
European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods.
The following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY23 and YTD FY23 from revenue in prior reporting periods.
Quarterly Changes in Revenue by Product Type
Q4 FY23 compared with Q3 FY23
Q4 FY23 compared with Q4 FY22
Revenue in
Increase
Percent
Increase
Percent
Q4 FY23
(Decrease)
Change
(Decrease)
Change
IC
High-end *
$
57.7
$
12.4
27.4
%
$
13.4
30.2
%
Mainstream
106.8
(11.0
)
(9.3
)%
(5.1
)
(4.5
)%
Total IC
$
164.5
$
1.4
0.8
%
$
8.3
5.3
%
FPD
High-end *
$
53.3
$
3.3
6.6
%
$
9.9
22.8
%
Mainstream
9.7
(1.4
)
(12.5
)%
(0.9
)
(8.9
)%
Total FPD
$
63.0
$
1.9
3.1
%
$
9.0
16.5
%
Total Revenue
$
227.5
$
3.3
1.5
%
$
17.2
8.2
%
*
High-end photomasks typically have higher ASPs than mainstream products.
Quarterly Changes in Revenue by Geographic Origin**
Q4 FY23 compared with Q3 FY23
Q4 FY23 compared with Q4 FY22
Revenue in
Increase
Percent
Increase
Percent
Q4 FY23
(Decrease)
Change
(Decrease)
Change
Taiwan
$
79.3
$
(2.3
)
(2.8
)%
$
3.0
3.9
%
China
59.2
(2.9
)
(4.6
)%
6.8
12.9
%
Korea
42.2
1.4
3.3
%
4.2
11.2
%
United States
36.8
7.1
23.9
%
2.8
8.2
%
Europe
9.3
(0.2
)
(2.2
)%
0.3
3.0
%
Other
0.7
0.2
34.4
%
0.1
24.7
%
Total revenue
$
227.5
$
3.3
1.5
%
$
17.2
8.2
%
**
This table disaggregates revenue by the location in which it was earned.
Revenue in Q4 FY23 of $227.5 million represented an increase of 1.5% compared with Q3 FY23, and an increase of 8.2% from Q4 FY22.
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Overall IC revenue increased 0.8 % from Q3 FY23, and increased 5.3% from Q4 FY22 due to stronger high-end foundry and logic demand in Asia. IC mainstream decreased in Q4 FY23 by 9.3% from Q3 FY23, and 4.5% from Q4 FY22
primarily the result of reduced mainstream demand in Asia.
FPD revenue increased 3.1% and 16.5% in Q4 FY23, compared, respectively, with Q3 FY23 and Q4 FY22. The increases were caused by continued strong AMOLED demand in mobile display during Q4 FY23. Revenue from mainstream
products decreased 12.5% from Q3 FY23 as more production capacity was dedicated to meet strong high-end demand.
Year-over-Year Changes in Revenue by Product Type
YTD FY23 compared with YTD FY22
Revenue in
Increase
Percent
YTD FY23
(Decrease)
Change
IC
High-end *
$
195.0
$
(0.4
)
(0.2
)%
Mainstream
456.3
58.6
14.7
%
Total IC
651.3
$
58.3
9.8
%
FPD
High-end *
200.8
$
13.9
7.4
%
Mainstream
40.0
(4.6
)
(10.3
)%
Total FPD
240.8
$
9.3
4.0
%
Total Revenue
892.1
$
67.5
8.2
%
*
High-end photomasks typically have higher ASPs than mainstream photomasks.
Year-over-Year Changes in Revenue by Geographic Origin**
YTD FY23 compared with YTD FY22
Revenue in
Increase
Percent
YTD FY23
(Decrease)
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
%
$
892.1
$
67.5
8.2
%
**
This table disaggregates revenue by the location in which it was earned.
Revenue in YTD FY23 of $892.1 million surpassed our prior record revenue set in YTD FY22 by $67.5 million, or 8.2%. IC revenue increased by 9.8%, due to strong demand for mainstream products
earlier in the year. FPD revenue increased by 4.0%, driven by a 7.4% increase in revenue from high-end products due to increased AMOLED demand in mobile displays, which offset decreased mainstream resulting from shifting capacity to meet strong
high-end demand. We believe that strong demand for AMOLED photomasks will continue, as expected technology advances drives increasing overall demand for higher-value masks.
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Table of Contents
Gross Margin
Percent
Percent
Q4 FY23
Q3 FY23
Change
Q4 FY22
Change
Gross profit
$
84.9
$
86.8
(2.2
)%
$
80.3
5.7
%
Gross margin
37.3
%
38.7
%
38.2
%
Gross margin was 37.3% for Q4 FY23, representing a slight decrease from the Q3 FY23 gross margin of 38.7%, as increase in revenue of 1.5% was offset by increased material costs of 4.2%, or 69 basis points as a
percentage of revenue. Labor costs increased 4.5%, or 30 basis points as a percentage of revenue, due to increased costs in some locations. Equipment and other overhead costs increased 3.0%, or 41 basis points as a percentage of revenue, with
increased equipment maintenance costs, partially offset by lower outsourced manufacturing costs, most significantly contributing to the net cost increase.
Gross margin decreased by 0.9 percentage points in Q4 FY23, from Q4 FY22, primarily as a result of the increase in material costs as a percentage of revenue from the prior year quarter. Equipment and other overhead
costs increased 9.7%, or 37 basis points, as a percentage of revenue. Increased depreciation expense, utilities expenses, and outsourced manufacturing costs, which were partially offset by decreased equipment maintenance costs, were the primary
contributors to the overall increase.
Percent
YTD FY23
YTD FY22
Change
Gross profit
$
336.2
$
294.2
14.3
%
Gross margin
37.7
%
35.7
%
Gross margin increased by 2.0 percentage points in YTD FY23, from YTD FY22, primarily as a result of the increase in revenue from the prior year period, offset somewhat by the
following net cost increases: Material costs increased 2.8% from the prior year period, but decreased 129 basis points as a percentage of revenue. Labor costs increased 10.3% from the prior year, and increased 30 basis points as a percentage of
revenue, primarily due to increased labor costs in Asia. Equipment and other overhead costs increased by 4.5% but decreased 95 basis points as a percentage of revenue, with increased utilities, equipment
service contract costs, and less transfer of research and development cost from cost of goods sold to research and development expense, as well as increases in computer software costs, offset by decreased importation costs most significantly
contributing to the overall cost increase.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $16.7 million in Q4 FY23, compared with $18.0 million in Q3 FY23, and $15.7 million in Q4 FY22. The decrease from Q3 FY23 was primarily the result of decreased
compensation and related expenses of $1.5 million offset partially by increased insurance expenses and outside services of $0.1 million and $0.1 million, respectively. The increase from the prior year quarter was primarily the result of increased
compensation and related expenses of $1.0 million and increased insurance expenses of $0.2 million. Selling, general and administrative expenses increased $5.5 million to $69.5 million in YTD FY23, from $64.0 million in YTD FY22, primarily due to
an increase in compensation and related expenses, professional fees, travel and entertainment and insurance expenses in the respective amounts of $4.1 million, $1.2 million, $0.4 million and $0.3 million.
Research and Development Expenses
Research and development expenses, which primarily consist of development and qualification efforts related to process technologies for high-end IC and FPD applications, decreased $0.1 million to
$3.4 million in Q4 FY23, from Q3 FY23; the decrease was primarily caused by a decline in development activities in Asia. Research and development expenses in Q4 FY23 decreased by $0.7 million from Q4 FY22 as a result of decreased development
activities in the U.S. and Asia. On a year-to-date basis, research and development expenses decreased $4.7 million, to $13.7 million, primarily due to decreased development activities in the U.S.
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Table of Contents
Non-Operating Income (Expense)
Q4 FY23
Q3 FY23
Q4 FY22
Foreign currency transactions impact, net
$
13.2
$
(4.5
)
$
10.4
Interest expense, net
(0.1
)
(0.1
)
(0.4
)
Interest income and other income, net
5.6
3.7
0.8
Non-operating income (expense), net
$
18.7
$
(0.9
)
$
10.8
Non-operating income (expense) increased in Q4 FY23 from Q3 FY23 by $19.6 million, primarily due to foreign currency impacts, driven by favorable movements of the South Korean
won, the New Taiwan dollar, RMB dollar against the U.S. dollar offsetting unfavorable movements of the Singapore dollar against the U.S. dollar. Non-operating income (expense) increased from Q4 FY22, by $7.9 million,
primarily due to higher interest and investment income earned on our cash balances, in addition to foreign currency transactions impact.
YTD FY23
YTD FY22
Foreign currency transactions impact, net
$
2.5
$
27.3
Interest expense, net
(0.4
)
(1.9
)
Interest income and other income, net
14.8
1.7
Non-operating income (expense), net
$
16.9
$
27.2
Non-operating income (expense) decreased $10.3 million in full year FY23, compared with full year FY22, due to foreign currency transactions, driven by unfavorable movements of the South Korean won, the New Taiwan
dollar, and the Singapore dollar offsetting favorable movements of the RMB against the U.S. dollar, partially offset by increased interest income in the current year resulting from higher average cash, cash equivalents and short-term investments
balances in FY23, compared with FY22 and lower interest expense, net of subsidies, due to receiving a lower amount of interest subsidies on our China-based debt in FY23, the effect of which was partially mitigated by lower average interest-bearing
debt balance in FY23 than in the prior year. The columns presented above may not foot due to rounding.
Income Tax Provision
On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum
effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework. The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive. A
significant number of other countries are expected to also implement similar legislation with varying effective dates in the future. The Company is continuing to evaluate the potential impact on future periods of the Pillar Two Framework, pending
legislative adoption by additional individual countries.
Q4 FY23
Q3 FY23
Q4 FY22
Income tax provision
$
20.3
$
16.1
$
16.1
Effective income tax rate
24.3
%
25.0
%
22.5
%
The effective income tax rates are sensitive to the jurisdictional mix of our earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances where the tax benefits
of losses are not available.
The effective income tax rate decreased slightly in Q4 FY23, compared with Q3 FY23, primarily due to changes in the period-to-period mix of jurisdictional earnings. The effective income tax rate increase in Q4 FY23, as
compared with Q4 FY22, is primarily due to changes in the jurisdictional mix of earnings as well as an increase in foreign tax as compared to the prior year.
FY23
FY22
Income tax provision
$
70.3
$
59.8
Effective income tax rate
26.0
%
25.0
%
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The increase in the effective income tax rate on a full-year basis in FY23, compared with FY22, is primarily due to an increase of unremitted earnings tax in a non-US jurisdiction, as well as changes in the
jurisdictional mix of earnings. We consider all available evidence when evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that
some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance. We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded
accruals for such contingencies. Included in the balance of unrecognized tax benefits as of October 31, 2023 and October 31, 2022, are $8.9 million and $5.6 million respectively, recorded in Other liabilities
in the consolidated balance sheets that, if recognized, would impact the effective tax rates.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $18.5 million in Q4 FY23, compared with $21.3 million in Q3 FY23; the decrease was the result of a net decrease in the net
incomes of our joint venture operations. Net income attributable to noncontrolling interests increased by $0.3 million in Q4 FY23 from Q4 FY22, and by $13.7 million in
YTD FY23 from YTD FY22, as a result of increased net income at both our Taiwan-based and China-based IC facilities.
Liquidity and Capital Resources
Cash and cash equivalents was $499.3 million and $319.7 million as of October 31, 2023, and October 31, 2022, respectively. As of the most recent balance sheet date, total cash
and cash equivalents included $473.2 million held by foreign subsidiaries. Net Cash, a non-GAAP financial measure as defined and discussed in the Non-GAAP Financial Measures section below, was $474.7 million
and $277.3 million as of October 31, 2023, and October 31, 2022, respectively. Our primary sources of liquidity are our cash on hand and cash we generate from operations.
We continually evaluate alternatives for efficiently funding our capital expenditures and ongoing operations. These reviews may result in our engagement in a variety of investing and financing transactions, in the
transfer of cash among subsidiaries, and/or the repatriation of cash to the U.S. The transfer of funds among subsidiaries could be subject to foreign withholding taxes; in certain jurisdictions, repatriation of these funds to the U.S. may subject
them to U.S. state income taxes and/or local country withholding taxes. We believe that our liquidity, including available financing, is sufficient to meet our requirements through the next twelve months and thereafter for the foreseeable future.
Through the utilization of our existing liquidity, cash we generate from operations and short-term investments, we plan to continue to invest in our business, with our investments targeted to align with our customers’ technology road maps. In
addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should a suitable opportunity arise.
We estimate capital expenditures for our fiscal year 2024 will be approximately $140 million; these investments will be targeted towards high-end and mainstream “point” tools
that will increase our operating capacity and efficiency, and enable us to support our customers’ near-term demands. As of October 31, 2023, we had outstanding capital commitments of approximately $106.8 million
and recognized liabilities related to capital equipment purchases of approximately $18.7 million. Although payment timing could vary, primarily as a result of the timing of tool delivery, installation and
testing, we currently estimate that we will fund $88.6 million of our total $125.5 million committed and recognized obligations for capital expenditures over the next
twelve months. Please refer to Notes 10 and 15 to our consolidated financial statements for additional information on our lease liabilities and unrecognized commitments, respectively.
In September 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. This authorization does
not obligate the Company to repurchase any dollar amount or number of shares of common stock. As of October 31, 2023, there was approximately $31.7 million remaining under that authorization. Depending on market conditions, we may utilize some or
the entire remaining approved amount to reacquire additional shares.
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As discussed in Note 6 of our consolidated financial statements, DNP, the noncontrolling interest in our China-based joint venture has, under certain circumstances, the right to put its interest in the joint venture to
Photronics, or to purchase our interest in the joint venture. Under all such circumstances, the sale of DNP’s interest would be at its 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. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. As of October 31, 2023, Photronics and DNP each had net investments in this joint venture of
approximately $117.1 million.
Cash Flows
Year Ended
October 31, 2023
October 31, 2022
October 31, 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
)
Operating Activities : Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization,
share-based compensation, and the effects of changes in operating assets and liabilities. Net cash provided by operating activities increased by $27.0 million in FY23, compared with FY22, primarily due to
increased net income and net cash-favorable changes in working capital, predominantly in Asia.
Free Cash Flow, which is a non-GAAP financial measure as discussed in the “Non-GAAP Financial Measures” section below, increased by $8.0 million in FY23, compared with FY22, and
$121.2 million in FY22, compared with FY21, primarily due to increases in net cash provided by operating activities.
Investing Activities : In FY23, net cash flows used in investing activities primarily consisted of purchases of $131.3 million
of property, plant and equipment. Net cash flows used in investing activities decreased by $46.2 million in FY23, compared with FY22, primarily as a result of $47.5 million in proceeds from the maturity of
available-for-sale debt securities.
Financing Activities : In FY23, net cash flows used in financing activities primarily consisted of debt repayments of $18.5 million. Net cash used in financing
activities decreased by $20.2 million in FY23, compared with FY22, primarily due to decreased repayments of debt of $47.0 million, offset by decreased contributions from noncontrolling interests of $25.0 million that occurred in FY22 but did not
repeat in FY23.
Our cash, cash equivalents, and restricted cash balances were negatively impacted by changes in foreign currency exchange rates in FY23 by $2.7 million.
Non-GAAP Financial Measures
Non-GAAP Non-operating (loss) income, Non-GAAP Income tax provision, Non-GAAP Noncontrolling interests, Non-GAAP Net Income attributable to Photronics, Inc. shareholders and non-GAAP earnings per share, Free Cash Flow,
and Net Cash are "non-GAAP financial measures" as such term is defined by the Securities and Exchange Commission and may differ from similarly named non-GAAP financial measures used by other companies. The financial tables below reconcile
Photronics, Inc. financial results under GAAP to non-GAAP financial information. We believe these non-GAAP financial measures that exclude certain items are useful for analysts and investors to evaluate our future on-going performance because they
enable a more meaningful comparison of our projected performance with our historical results. These non-GAAP metrics are not intended to represent funds available for our discretionary use and are not intended to represent, or be used as a
substitute for, net income attributable to Photronics, Inc. shareholders, diluted earnings per share, cash and cash equivalents, or cash flows from operations, as measured under GAAP. The items excluded from these non-GAAP metrics but included in
the calculation of their closest GAAP equivalent, are significant components of the consolidated statements of income, consolidated balance sheets and statement of cash flows and must be considered in performing a comprehensive assessment of
overall financial performance.
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The following table reconciles GAAP to Non-GAAP Income at the balance sheet dates. The columns may not foot due to rounding.
Three Months ended
Year ended
Oct 31,
July 30,
Oct 31,
Oct 31,
Oct 31,
Oct 31,
2023
2023
2022
2023
2022
2021
Reconciliation of GAAP to Non-GAAP Non-operating (loss) Income:
GAAP Non-operating (loss) income, net
$
18,660
$
(911
)
$
10,797
$
16,896
$
27,167
$
7,452
FX (gain) loss
(13,234
)
4,543
(10,369
)
(2,466
)
(27,344
)
(7,972
)
Non-GAAP Non-operating (loss) income, net
$
5,426
$
3,632
$
428
$
14,430
$
(177
)
$
(520
)
Reconciliation of GAAP to Non-GAAP Income tax provision:
GAAP Income tax provision
$
20,288
$
16,098
$
16,074
$
70,312
$
59,791
$
23,190
Estimated tax effects of FX (gain) loss
3,437
(1,193
)
2,522
317
5,933
1,829
Non-GAAP Income tax provision
$
16,851
$
17,291
$
13,552
$
69,995
$
53,858
$
21,361
Reconciliation of GAAP to Non-GAAP Noncontrolling interests:
GAAP Noncontrolling interests
$
18,545
$
21,296
$
18,204
$
74,149
$
60,456
$
23,367
Estimated noncontrolling interest effects of above
2,431
1,328
1,990
2,676
4,275
(481
)
Non-GAAP Noncontrolling interests
$
16,114
$
19,968
$
16,214
$
71,473
$
56,181
$
23,848
Reconciliation of GAAP to Non-GAAP Net Income:
GAAP Net Income
$
44,611
$
26,959
$
37,060
$
125,485
$
118,786
$
55,449
FX (gain) loss
(13,234
)
4,543
(10,369
)
(2,466
)
(27,344
)
(7,972
)
Estimated tax effects of above
3,437
(1,193
)
2,522
317
5,933
1,829
Estimated noncontrolling interest effects of above
2,431
1,328
1,990
2,676
4,275
(481
)
Non-GAAP Net Income
$
37,245
$
31,637
$
31,203
$
126,012
$
101,650
$
48,825
Weighted-average number of common shares outstanding - Diluted
62,067
61,974
61,374
61,755
61,189
61,999
Reconciliation of GAAP to Non-GAAP EPS:
GAAP diluted earnings per share
$
0.72
$
0.44
$
0.60
$
2.03
$
1.94
$
0.89
Effects of the above adjustments
(0.12
)
0.07
(0.10
)
0.01
(0.28
)
(0.10
)
Non-GAAP diluted earnings per share
$
0.60
$
0.51
$
0.51
$
2.04
$
1.66
$
0.79
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The following table reconciles Net cash provided by operating activities to Free Cash Flow for FY23, FY22, and FY21. The columns may not foot due to rounding. Prior year
amounts in the non-GAAP disclosure below have been recast to eliminate government incentives to conform to current year presentation.
FY23
FY22
FY21
Free Cash Flow
Net cash provided by operating activities
$
302.2
$
275.2
$
150.8
Purchases of property, plant and equipment
(131.3
)
(112.3
)
(109.1
)
Free cash flow
$
170.9
$
162.9
$
41.7
The following table reconciles Cash and cash equivalents to Net Cash at the balance sheet dates. The increase in Net Cash was primarily driven by an increase in Net cash provided by
operating activities, as discussed above. The columns may not foot due to rounding.
As of
October 31,
2023
October 31,
2022
Net Cash
Cash, cash equivalents
$
499.3
$
319.7
Current portion of Long-term debt
(6.6
)
(10.0
)
Long-term debt
(18.0
)
(32.3
)
Net cash
$
474.7
$
277.4
Business Outlook
Our current business outlook and guidance was provided in our Full Year and Fourth Quarter Fiscal 2023 Results earnings call, and related slide deck. These can be accessed in the investor section of our website -
www.photronics.com.
Our future results of operations and the other forward-looking statements contained in this filing and in our “ Full Year and Fourth Quarter Fiscal 2023 Results ” earnings call
and presentation involve a number of risks and uncertainties, some of which are discussed in Part I, Item 1A of this report. A number of other unforeseeable factors could cause actual results to differ materially from our expectations.
Critical Accounting Estimates
Our consolidated financial statements are based on the selection and application of accounting policies, which require management to make significant estimates and assumptions. We believe the following to be the more
critical areas that require judgment when applying our accounting policies:
•
Revenue Recognition : The application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates, including the determination of whether we should recognize revenues as we perform or
upon the completion of our performance, as these determinations impact the timing and amount of our reported revenues and net income. Other significant judgments include the estimation of the point in the manufacturing process at which we
are entitled to recognize revenue, as well as the measurement of our progress towards satisfying our performance obligations, which determine the amount of revenue we are entitled to recognize.
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•
Property, Plant and Equipment : Significant judgment and assumptions are employed when we establish the estimated useful lives of asset classes, and determine when depreciation should commence for individual assets, as these
determinations can significantly impact our gross margin and research and development expenses. Significant judgment would also be employed when events or changes in circumstances indicate that the carrying amount of a group of assets may
not be recoverable, as the recoverability assessment requires us to forecast future cash flows related to these assets; this evaluation can significantly impact our gross margin and operating expense.
•
Leases : Significant judgment is applied in the determination of whether an arrangement is, or contains, a lease and, in certain instances, whether the lease should be classified as an operating lease or a finance lease, which can
impact the timing and classification of lease costs.
•
Contingencies : We are subject to the possibility of losses from various contingencies. Significant judgment is necessary to estimate the probability and amount of a loss, if any, from such contingencies. An accrual is made when
it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Changes in estimates related to, and resolutions of, contingencies may have a material impact on our
financial performance.
•
Income Taxes : Our annual tax rate is determined based on our income and the jurisdictions where it is earned, statutory tax rates, and the tax impacts of items treated differently for tax purposes than for financial reporting
purposes. Also inherent in determining our annual tax rate are judgments and assumptions regarding the recoverability of certain deferred tax assets, and our ability to uphold certain tax positions. We are subject to complex tax laws, in
the U.S. and numerous foreign jurisdictions, and the manner in which they apply can be open to interpretation. Realization of deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction in
future periods, which involves business plans, planning opportunities, and expectations about future outcomes. Our assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.
There are a number of estimates and assumptions inherent in calculating the various components of our tax provision. Future events such as changes in tax legislation, geographic mix of earnings, findings in tax audits,
and earnings repatriation plans could have an impact on those estimates and our effective tax rate.
Please refer to Notes 1, 10, 13, and 15 to our consolidated financial statements for additional information related to these critical accounting estimates.
Effect of Recent Accounting Pronouncements
See Note 22 to our consolidated financial statements of this report for recent accounting pronouncements that may affect our financial reporting.
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