What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-03-07 compared with 2023-09-07 · 88 added, 133 removed, 152 unchanged (59% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis (“MD&A”) of the Company's financial condition and results of operations should be read in conjunction with its condensed consolidated financial statements

and related notes.

Various sections of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing

and in the Company's Form 10-K for fiscal year 2022), that may cause actual results to materially differ from these expectations.

Management's discussion and analysis (“MD&A”) of the Company's financial condition and results of operations should be read in conjunction with its condensed consolidated financial statements and related notes.

Form 10-K for fiscal year 2023), that may cause actual results to materially differ from these expectations.

See “Forward-Looking Statements”.

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 photonics, microelectronic 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 photomask technologies.

Photomask technology is also being applied to the fabrication of other higher-performance

electronic products such as photonics, microelectronic 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 photomask 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

customized ICs, reductions in design complexity, 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 displays 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.

However, the reduced use of customized ICs, reductions

in design complexity, 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 displays 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.

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.

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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.

Impact of the COVID-19 Pandemic

All of our facilities have continued to operate throughout the COVID-19 pandemic.

However, since shortly after it was first identified near the end of calendar year 2019, the pandemic has had an impact on our

business in a number of ways including customer shutdowns, which led to delays in new photomask design releases, and travel restrictions, which delayed tool installations and servicing.

To date, we have not experienced significant raw material

however, supply-chain disruptions could potentially delay or prevent us from fulfilling customer orders.

At certain facilities, employees not required to be on-site to maintain production have worked remotely at various times ‒ either at our discretion or due to government mandates.

The implementation of these measures has not materially affected our operations.

Results of Operations

Three Months Ended July 30, 2023

Three Months Ended January 28, 2024

The following table presents selected operating information expressed as a percentage of revenue.

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Three Months Ended

Nine Months Ended

Cost of goods sold

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Operating income

Other operating expense, net

Other operating income (expense), net

Income before income tax provision

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Net income attributable to Photronics, Inc.

All tabular comparisons included in the following discussion, unless otherwise indicated, are for the three months ended July 30, 2023 (Q3 FY23), April 30, 2023 (Q2

FY23), and July 31, 2022 (Q3 FY22), and for the Nine Months ended July 30, 2023 (YTD FY23) and July 31, 2022 (YTD FY22), in millions of dollars.

All tabular comparisons included in the following discussion, unless otherwise indicated, are for the three months ended January 28, 2024 (Q1 FY24), October 31, 2023 (Q4

FY23), and January 29, 2023 (Q1 FY23).

The columns may not foot due to rounding.

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 disaggregated revenue in Q3 FY23 and YTD FY23 from revenue in prior reporting periods.

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 disaggregated revenue in Q1 FY24 from revenue in prior reporting periods.

Quarterly Changes in Revenue by Product Type

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Q1 FY24 compared with Q1 FY23

YTD FY23 from YTD FY22

Total Revenue

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Q1 FY24 compared with Q1 FY23

YTD FY23 from YTD22

United States

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The decrease from Q4 FY 23 was primarily the result of reduced mainstream demand in Asia.

IC Photomask revenue increased 1.2% and 11.4% from Q3 FY22 and

on a YTD basis.

These increases were driven by continued strong demand in Asia, and favorable pricing, resulting from robust design activity for mainstream products used for computer chips in the production of consumer goods, products considered

part of the “internet-of-things”, 5G wireless technology applications, and cryptocurrency mining.

IC photomask revenue slightly increased compared to Q1 FY23 with

an increase in high end demand offsetting the decrease in mainstream.

FPD revenue decreased 6.7% compared with Q4 FY23.

The decrease from Q2 FY23 was due to reduced high end demand, particularly from G10.5+ and LTPS Photomasks, more than offsetting continued strength in AMOLED demand.

FPD revenue increased 4.0% from Q3 FY22 due to increased mainstream demand.

High-end demand softened, as AMOLED growth was offset by G10.5%+ and LTPS photomasks.

On a YTD basis, FPD increased 0.2% as demand for high-end photomasks specifically

AMOLED, exceeded softness in mainstream.

We believe that strong demand for AMOLED photomasks will continue, as expected technology advances drives increasing overall demand for higher-value masks.

Gross margin increased 10 basis points in Q3 FY23, from Q2 FY23.

The decrease from Q4 FY23 was due to premium smartphone seasonality.

FPD revenue increased 7.8% from Q1 FY23 due to increased high end demand for AMOLED.

that strong demand for AMOLED photomasks will continue, as expected technology advances drives increasing overall demand for higher-value masks.

Gross margin decreased 70 basis points in Q1 FY24, from Q4 FY23.

Material costs decreased 5.1% from the prior quarter, and, as a percentage of revenue, by 3 basis points.

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Gross margin increased 60 basis points, in Q1 FY24, from Q1 FY23, primarily as a result of the increase in revenue from the prior year quarter and favorable product mix.

Material costs decreased 1.8% from the prior

year quarter, and decreased as a percentage of revenue by 89 basis points.

Material costs increased 2.3% from the prior

year quarter, but decreased as a percentage of revenue by 3 basis points.

Labor and benefits costs increased 4.1% from the prior year quarter, and increased, as a percent of revenue, by 19 basis points as labor increased in both the U.S.

several Asia-based facilities, reflecting labor market conditions.

Equipment and other overhead costs increased 0.8% but decreased 30 basis points as a percentage of revenue.

Increased utilities, equipment service contract costs and importation

costs, partially offset by decreased WIP, were the most significant contributors to the net increase in equipment and other overhead costs.

Gross margin increased by 3.0 percentage points in YTD FY23, from YTD FY22, primarily as a result of the increase in revenue from the prior year and favorable product mix.

Material costs increased 0.2% from YTD FY22,

but decreased 190 basis points, as a percentage of revenue.

Labor costs increased 11.5% from YTD FY22 and increased 34 basis points as a percentage of revenue.

The increase was primarily the result of increased labor cost in Asia.

Equipment and

other overhead costs rose 2.8%, but decreased 143 basis points, as a percentage of revenue.

Increased WIP and reduced R&D reclassification costs, partially offset by decreased importation costs, Outsourced manufacturing, and depreciation

expense, were the most significant contributors to the net increase in equipment and other overhead costs.

Equipment and other overhead costs remained flat but decreased 67 basis points as a percentage of revenue.

Selling, General, and Administrative Expenses

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The increase of $1.6 million was primarily the result of increased compensation and related

expenses of $1.0 million which was offset by decreases in professional fees of $0.5 million.

Selling, general, and administrative expenses increased $2.0 million in Q3 FY23, from $16.0 million in Q3 FY22, primarily as a result of increased

compensation and related expenses of $2.0 million.

Selling, general, and administrative expenses increased $4.4 million in YTD FY23 to $52.7 million, compared with $48.3 million in YTD FY22.

The increase was driven by the results of increased compensation and related

expense of $3.1 million and increased professional fees of $1.1 million.

expenses of $1.6 million.

Selling, general, and administrative expenses increased $1.5 million in Q1 FY24, from $16.8 million in Q1 FY23, primarily as a result of increased compensation and related expenses of $1.4 million.

Research and Development Expenses

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Q4 FY23, and $3.3 million in Q1 FY23.

Research and development expenses remained flat compared to Q2 FY23 and decreased compared to Q3 FY22 as a result of less development activities in the U.S.

Research and development expenses decreased by $4.0 million in YTD FY 23 to $10.3 million, compared with $14.3 million in YTD FY22.

The decrease was driven by less development activities in the U.S.

Non-operating Income (Expense)

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Non-operating income (expense) decreased $22.4 million to $(3.7) million in Q1 FY24, compared with $18.7 million in Q4 FY23, primarily due to foreign currency transactions impact, net, driven by unfavorable movements

of the South Korean won and the RMB against the U.S.

Non-operating income (expense) decreased $4.5 million from Q3 FY22, primarily due to foreign currency transaction impact, net, driven by unfavorable movements of the South Korean won

and RMB against the U.S.

Interest income and other income (expense), net, increased to $3.7 million in Q3 FY23, compared with $3.0 million in Q2 FY23, and $0.4 million in Q3 FY22 driven by an increase in cash invested and higher interest

Non-operating income (expense) decreased $18.1 million to $(1.8) million in YTD FY23, compared with $16.4 million in YTD FY22, primarily due to foreign currency transactions impact, net, driven by unfavorable

movements of the South Korean won and the New Taiwan dollar against the U.S.

Interest income and other income (expense), net, increased to $9.3 million in YTD FY23, compared with $0.9 million in YTD FY22, primarily due to an increase in cash invested and higher interest rates.

of New Taiwan Dollar and the South Korean won against the U.S.

Non-operating income (expense) increased $10.7 million from Q1 FY23 compared with $(14.4) million, primarily due to foreign currency transaction impact, net, driven by favorable

movements of the South Korean won and RMB against the U.S.

Interest income and other income (expense), net, of $5.3 million in Q1 FY24 remained flat compared with $5.6 million in Q4 FY23.

Interest income and other income (expense), net, increased $2.7 million compared to Q1

FY23 driven by an increase in cash and cash equivalents, and higher interest rates.

Income Tax Provision

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losses are not available.

The effective income tax rate decrease in Q3 FY23, compared with Q2 FY23 and Q3 FY22 is primarily due to changes in the jurisdictional mix of earnings and a decrease in foreign taxes in Q3 FY23.

The effective income tax rate increase in YTD FY23 compared with YTD FY22, is primarily due to changes in the jurisdictional mix of earnings and an increase in foreign taxes in Q2 FY23.

Provisions enacted in the Tax Cuts and Jobs Act of 2017 (“TCJA”) include requiring the capitalization for tax purposes of research and experimental expenditures and became effective for tax years beginning our fiscal

We have implemented this change and will continue to stay up-to-date with guidance that could impact interpretation of the law.

The effective income tax rate increase in Q1 FY24, compared with Q4 FY23, is primarily due to changes in the jurisdictional mix of earnings and an increase in foreign taxes in Q1

The effective income tax rate decrease in Q1 FY24, compared with Q1 FY23, is primarily due to changes in the jurisdictional mix of earnings.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests was $12.9 million in Q1 FY24, compared with $18.5 million in Q4 FY23, and $15.0 million in Q1 FY23.

The increases from Q3 FY22 to Q3 FY23 resulted from increased

net income at our Taiwan-based and China-based IC joint ventures.

The decrease from Q4 FY23 and Q1 FY23, to Q1 FY24 resulted from

decreased net income at our Taiwan-based IC joint venture.

Liquidity and Capital Resources

Cash and cash equivalents were $448.5 million and $319.7 million as of July 30, 2023, and October 31, 2022, respectively.

Cash and cash equivalents were $508.5 million and $499.3 million as of January 28, 2024, and October 31, 2023, respectively.

As of the most recent balance sheet date, total cash

and cash equivalents included $494.0 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 $421.8

million and $277.4 million as of July 30, 2023, and October 31, 2022, respectively.

Our primary sources of liquidity are our cash on hand, cash we generate from operations, and borrowing capacity we have available from financial institutions.

corporate credit agreement has a $50 million borrowing limit, with an expansion capacity to $100 million.

Although we have not accessed funds under our corporate credit facilities since 2011, it continues to afford us financial flexibility.

addition, in China, we currently have approximately $25.0 million of borrowing capacity to support local operations.

See Note 6 to the condensed consolidated financial statements for additional information on our currently available financing.

Net Cash, a non-GAAP financial measure as defined and discussed in the Non-GAAP Financial Measures section below, was $485.0 million and $474.7 million as of January 28, 2024, and October 31, 2023, respectively.

Our primary sources of liquidity are our cash on hand, cash we generate from operations, and

borrowing capacity we have available from financial institutions.

In China, we currently have approximately $25.0 million of borrowing capacity to support local operations.

See Note 7 to the condensed consolidated financial statements for

additional information on our outstanding debt and currently available financing.

We continually evaluate alternatives for efficiently funding our capital expenditures and ongoing operations.

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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, short-term investments, and (potentially) our borrowing capacity under our financing arrangements, we plan to continue to invest in our business, with our

Through the utilization of our existing liquidity, cash we generate from operations, short-term investments, and (potentially) our borrowing capacity under our financing arrangement, we plan to continue to invest in our business, with our

investments targeted to align with our customers’ technology road maps.

We may also elect to use our cash to reduce our debt through early repayments.

In addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships,

should a suitable opportunity arise.

In addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should

a suitable opportunity arise.

We estimate capital expenditures for full year FY24 will be approximately $140 million;

these investments will be targeted towards high-end and mainstream IC capacity and efficiency, and enable us to support our

customers’ near-term demands.

As of July 30, 2023, we had outstanding capital commitments of approximately $118.0 million and recognized liabilities related to capital equipment purchases of approximately $23.5 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 $120.3 million of our total $141.5 million committed and recognized obligations for capital expenditures over the

next twelve months.

Please refer to Note 6 to the condensed consolidated financial statements for information on our outstanding debt.

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.

these investments will be targeted towards high-end and mainstream IC capacity and efficiency and enable us to support our customers’ near-term

As of January 28, 2024, we had outstanding capital commitments of approximately $142.2 million and recognized liabilities related to capital equipment purchases of approximately $13.9 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 $99.1 million of our total $156.1 million committed and recognized obligations for capital expenditures over the next twelve months.

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 July 30, 2023, our current share repurchase program had approximately $31.7 million remaining under

its authorization.

Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.

On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in

Among other provisions, the IRA included a one percent excise tax on corporate share repurchases.

The one percent excise tax on share repurchases applies to shares repurchased after December 31, 2022, and excludes repurchases under $1

We do not anticipate that the IRA will have a material effect on our liquidity.

The most recent 10b5-1 plan expired on September 15, 2022, and has not been renewed.

As of January 28, 2024, our current share repurchase program had approximately $31.7 million remaining under its authorization.

Depending on market

conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.

As discussed in Note 6 to the condensed consolidated financial statements, DNP, the noncontrolling interest in our China-based joint venture has, under certain circumstances, the right

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As of the date of issuance of this report, DNP had not indicated its intention to exercise this right.

As of July 30, 2023, Photronics and

As of January 28, 2024, Photronics and

DNP each had net investments in this joint venture of approximately $ 127.4 million .

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share-based compensation, and the impacts of cash from changes in operating assets and liabilities.

Net cash provided by operating activities remained nearly unchanged in YTD FY23, compared with YTD FY22.

Free Cash Flow, which is a non-GAAP financial measure as discussed in the “Non-GAAP Financial Measures” section below, decreased by $32.8 million compared with YTD FY22, primarily due to the increase in spending on

property, plant, and equipment.

Net cash provided by operating activities increased $13.8 million in Q1 FY24, compared with Q1 FY23.

Free Cash Flow which is non-GAAP financial measure as discussed in the “Non-GAAP Financial Measures” section below, increased by $1.6 million, compared with Q1 FY23, primarily due to the increase in net cash provided by operating activities,

partially offset by the increase in purchases of property, plant, and equipment.

Investing Activities:

Net cash flows used in investing activities primarily consisted of purchases of property, plant, and equipment of $43.3 million, which increased

$32.5 million and proceeds from available-for-sale debt securities of $22.5 million, which increased $22.5 million in YTD FY23, compared with YTD FY22.

$12.2 million in Q1 FY24, compared with Q1 FY23.

Financing Activities:

Net cash used in financing activities decreased by $9.0 million in YTD FY23, compared with YTD FY22, primarily due to decreased debt repayments of $35.6 million, partially offset by

contributions from noncontrolling interests in our majority owned subsidiaries in Taiwan and China of $25.0 million in YTD FY22, which did not repeat during YTD FY23.

The increase in our cash balance from YTD FY22 was favorably impacted by the effects of exchange rate changes in the amount of $13.8 million in YTD FY23, which was in contrast to the $21.3 million unfavorable impact

effect of exchange rate changes had on our cash balance in YTD FY22.

Net cash used in financing activities decreased by $6.8 million in Q1 FY24, compared with Q1 FY23, primarily due to decreased debt repayments of $8.0 million.

The increase in our cash balance from Q1 FY23 was favorably impacted by the effects of exchange rate changes in the amount of $13.0 million in Q1 FY24, which was less than the $27.5 million favorable impact of exchange

rate changes had on our cash balance in Q1 FY23.

Non-GAAP Financial Measures

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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.

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 condensed consolidated statements of income, condensed consolidated balance sheets and statement of cash flows and must be

considered in performing a comprehensive assessment of overall financial performance.

The items excluded from these non-GAAP metrics

but included in the calculation of their closest GAAP equivalent, are significant components of the condensed consolidated statements of income, condensed consolidated balance sheets and statement of cash flows and must be considered in performing

a comprehensive assessment of overall financial performance.

The following table reconciles GAAP to Non-GAAP Income at the balance sheet dates.

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Non-GAAP Income tax provision

Reconciliation of GAAP to Non-GAAP Noncontrolling interest:

GAAP Noncontrolling interest

Reconciliation of GAAP to Non-GAAP Noncontrolling interests:

GAAP Noncontrolling interests

Estimated noncontrolling interest effects of above

Non-GAAP Noncontrolling interest

Non-GAAP Noncontrolling interests

Reconciliation of GAAP to Non-GAAP Net Income:

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Non-GAAP diluted earnings per share

The following table reconciles Net cash provided by operating activities to Free Cash Flow for YTD FY23 and YTD FY22.

The following tables reconcile Net cash provided by operating activities to Free Cash Flow for Q1 FY24 and Q1 FY23.

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.

Prior year amounts in the non-GAAP disclosure below have been recast to eliminate government incentives to

conform to current year presentation.

Free Cash Flow

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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 and decreased spending on property, plant, and equipment, as discussed above.

The increase in Net Cash was primarily driven by proceeds from maturities of available-for-sale debt

securities, decreased debt repayments and increase in Net cash provided by operating activities, as discussed above.

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.

Prior year amounts in the non-GAAP disclosure below have been recast to eliminate

government incentives to conform to current year presentation.

Cash and cash equivalents

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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 the Photronics Q3 FY23 earnings presentation and the related financial results conference call

and slide deck involve a number of risks and uncertainties, some of which are discussed in Part I, Item 1A of our 2022 Form 10-K.

Our future results of operations and the other forward-looking statements contained in this filing and in the Photronics Q1 FY24 earnings release, and the related financial results conference call and earnings presentation involve a number

of risks and uncertainties, some of which were discussed in Part I, Item 1A of our 2023 Form 10-K.

A number of other unforeseeable factors could cause actual results to differ materially from our expectations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis