Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with “Cautionary Statement Regarding Forward Looking Statements” and our combined consolidated financial statements and notes thereto included in Item 8
of this Annual Report on Form 10-K.
For a comparison of results of operations for the fiscal years ended October 31, 2023 and 2022, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations of Photronics Inc.’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023, filed with the SEC on December 26, 2023.
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 2025, 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.
25
Table of Contents
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 2024, 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 $130.9 million, $131.3 million and $112.3 million in 2024, 2023 and 2022, 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 $200 million in fiscal year 2025.
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.
26
Table of Contents
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,
2024
July 28,
2024
October 31,
2023
Revenue
100.0
%
100.0
%
100.0
%
Cost of goods sold
63.0
64.4
62.7
Gross profit
37.0
35.6
37.3
Selling, general and administrative expenses
9.4
9.2
7.4
Research and development expenses
2.4
1.7
1.5
Operating income
25.2
24.7
28.5
Non-operating (expense) income, net
(0.5
)
4.8
8.2
Income before income tax provision
24.7
29.5
36.7
Income tax provision
6.5
6.7
8.9
Net income
18.2
22.8
27.8
Net income attributable to noncontrolling interests
2.9
6.5
8.2
Net income attributable to Photronics, Inc. shareholders
15.3
%
16.3
%
19.6
%
Year Ended
October 31,
2024
October 31,
2023
October 31,
2022
Revenue
100.0
%
100.0
%
100.0
%
Cost of goods sold
63.6
62.3
64.3
Gross profit
36.4
37.7
35.7
Selling, general and administrative expenses
9.0
7.8
7.8
Research and development expenses
1.9
1.5
2.2
Operating income
25.6
28.4
25.7
Non-operating income
3.0
1.9
3.3
Income before income tax provision
28.5
30.3
29.0
Income tax provision
7.3
7.9
7.3
Net income
21.2
22.4
21.7
Net income attributable to noncontrolling interests
6.1
8.3
7.3
Net income attributable to Photronics, Inc. shareholders
15.1
%
14.1
%
14.4
%
27
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Note: All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2024 (Q4 FY24), July 28, 2024 (Q3 FY24) and October 31,
2023 (Q4 FY23), and for the fiscal years ended October 31, 2024 (YTD FY24), October 31, 2023 (YTD FY23), and October 31, 2022 (YTD FY22). Please refer to Part II, Item 7 of our 2023 Form 10-K for comparative discussion of our fiscal years ended
October 31, 2023, and October 31, 2022. 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 FY24 and YTD FY24 from revenue in prior reporting periods.
Quarterly Changes in Revenue by Product Type ($ in millions)
Q4 FY24 compared with Q3 FY24
Q4 FY24 compared with Q4 FY23
Revenue in
Q4 FY24
Increase
(Decrease)
Percent
Change
Increase
(Decrease)
Percent
Change
IC
High-end *
$
60.1
$
10.6
21.3
%
$
2.4
4.1
%
Mainstream
103.6
(2.8
)
(2.5
)%
(3.2
)
(2.9
)%
Total IC
$
163.7
$
7.8
5.0
%
$
(0.8
)
(0.5
)%
FPD
High-end *
$
48.4
$
-
0.0
%
$
(4.9
)
(9.2
)%
Mainstream
10.5
3.8
56.6
%
0.8
8.3
%
Total FPD
$
58.9
$
3.8
6.9
%
$
(4.1
)
(6.5
)%
Total Revenue
$
222.6
$
11.6
5.5
%
$
(4.9
)
(2.1
)%
* High-end photomasks typically have higher ASPs than mainstream products.
Quarterly Changes in Revenue by Geographic Origin ($ in millions) **
Q4 FY24 compared with Q3 FY24
Q4 FY24 compared with Q4 FY23
Revenue in
Q4 FY24
Increase
(Decrease)
Percent
Change
Increase
(Decrease)
Percent
Change
Taiwan
$
69.7
$
1.5
2.3
%
$
(9.6
)
(12.1
)%
China
60.8
5.5
10.0
%
1.6
2.7
%
Korea
40.0
1.6
4.1
%
(2.2
)
(5.2
)%
United States
41.7
2.9
7.6
%
5.0
13.5
%
Europe
9.9
0.1
1.0
%
0.5
5.7
%
Other
0.5
-
(1.2
)%
(0.2
)
(27.9
)%
Total revenue
$
222.6
$
11.6
5.5
%
$
(4.9
)
(2.1
)%
** This table disaggregates revenue by the location in which it was earned.
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Table of Contents
Revenue in Q4 FY24 of $222.6 million represented an increase of 5.5% compared with Q3 FY24, and a decrease of 2.1% from Q4 FY23.
Overall IC revenue increased $7.8 million or 5.0% in Q4 FY24 from Q3 FY24 due to stronger high-end foundry and logic demand in Asia. Overall IC revenue decreased $0.8 million or 0.5% in Q4 FY24 from Q4 FY23. IC
mainstream decreased in Q4 FY24 by $2.8 million or 2.5% from Q3 FY24, and $3.2 million or 2.9% from Q4 FY23 primarily the result of reduced mainstream demand in Asia.
FPD revenue increased $3.8 million or 6.9% in Q4 FY24 from Q3 FY24 due to stronger demand for mainstream products. FPD revenue decreased $4.1 million or 6.5% in Q4 FY24 from Q4 FY23 due to slower demand in
high-end products. Revenue from mainstream products increased $3.8 million or 56.6% in Q4 FY24 from Q3 FY24 as more production capacity was dedicated to meet strong demand.
Year-over-Year Changes in Revenue by Product Type ($ in millions)
YTD FY24 compared with YTD FY23
Revenue in
YTD FY24
Increase
(Decrease)
Percent
Change
IC
High-end *
$
228.5
$
33.5
17.2
%
Mainstream
409.6
(46.7
)
(10.2
)%
Total IC
$
638.1
$
(13.2
)
(2.0
)%
FPD
High-end *
$
195.4
$
(5.5
)
(2.7
)%
Mainstream
33.4
(6.5
)
(16.3
)%
Total FPD
$
228.8
$
(12.0
)
(5.0
)%
Total Revenue
$
866.9
$
(25.2
)
(2.8
)%
* High-end photomasks typically have higher ASPs than mainstream photomasks.
Year-over-Year Changes in Revenue by Geographic Origin ($ in millions)**
YTD FY24 compared with YTD FY23
Revenue in
YTD FY24
Increase
(Decrease)
Percent
Change
Taiwan
$
288.3
$
(28.6
)
(9.0
)%
China
232.9
(12.4
)
(5.1
)%
Korea
158.0
(4.2
)
(2.6
)%
United States
146.7
17.7
13.8
%
Europe
39.2
2.6
7.1
%
Other
1.8
(0.3
)
(14.3
)%
$
866.9
$
(25.2
)
(2.8
)%
** This table disaggregates revenue by the location in which it was earned.
29
Table of Contents
Overall revenue decreased $25.2 million or 2.8% in YTD FY24 from YTD FY23. IC revenue decreased $13.2 million or 2.0% in YTD FY24 from YTD FY23 due to less demand for mainstream products earlier in the year which
was partially offset by strong demand for high-end products. FPD revenue decreased by $12.0 million or 5.0%, driven by a $6.5 million or 16.3% decrease in revenue from mainstream products due to a decrease in G8 products.
Gross Margin
Q4 FY24
Q3 FY24
Percent
Change
Q4 FY23
Percent
Change
Gross profit
$
82.3
$
75.1
9.6
%
$
84.9
(3.1
)%
Gross margin
37.0
%
35.6
%
37.3
%
Gross margin increased by 140 basis points in Q4 FY24 as compared to Q3 FY24, primarily as a result of the increase in revenue. The gross margin favorable impact
resulting from the increase in revenue in Q4 FY24 compared to Q3 FY24 was partially offset by increased material costs of 5.2%, or 6 basis points as a percentage of revenue. Labor costs increased 1.3%, or 45 basis points as a percentage of
revenue. Equipment and other overhead costs increased 2.7% from Q3 FY24 or 77 basis points as a percentage of revenue, mainly due to higher equipment cost in US high-end location.
Gross margin decreased by 30 basis points in Q4 FY24, from Q4 FY23, primarily as a result of the decrease in revenue of 2.1% and increased equipment and other
overhead costs of 4.6%, or 185 basis points as a percentage of revenue. This was partially offset by a decrease in material cost of 5.2%, or 77 basis points as a percentage of revenue, and labor costs of 8.5%, or 74 basis points as a
percentage of revenue.
YTD FY24
YTD FY23
Percent
Change
Gross profit
$
315.9
$
336.2
(6.0
)%
Gross margin
36.4
%
37.7
%
Gross margin decreased by 130 basis points in YTD FY24, from YTD FY23, primarily as a result of the decrease in revenue of 2.8% and increased equipment and other overhead costs of 2.5%, or 148 basis points as a
percentage of revenue. This was partially offset by a decrease in material cost of 3.8%, or 24 basis points as a percentage of revenue, and labor costs of 2.8%, but remained flat as a percentage of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $21.0 million in Q4 FY24, compared with $19.4 million in Q3 FY24, and $16.7 million in Q4 FY23. The $1.6 million increase from Q3 FY24 was primarily the result of
compensation and related expenses of $1.1 million. The $4.3 million increase from Q4 FY23 was primarily the result of increased compensation and related compensation expenses of $2.1 million and increased professional fees of $1.4 million.
Selling, general and administrative expenses were $77.8 million in YTD FY24, compared with $69.5 million in YTD FY23. The increase of $8.3 million is primarily due to an increase in compensation and related
expenses of $3.8 million and professional fees of $2.5 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, increased $1.7 million
to $5.3 million in Q4 FY24, from Q3 FY24; the increase was primarily caused by increased qualification activities. Research and development expenses in Q4 FY24 increased by $1.9 million from Q4 FY23 as a result of increased development
activities in the U.S. and Asia. On a year-to-date basis, research and development expenses increased $2.9 million, to $16.6 million, primarily due to increased development activities in the U.S.
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Table of Contents
Non-Operating Income (Expense)
Q4 FY24
Q3 FY24
Q4 FY23
Foreign currency transactions impact, net
$
(7.7
)
$
4.1
$
13.2
Interest expense, net
(0.1
)
(0.1
)
(0.1
)
Interest income and other income, net
6.8
6.1
5.6
Non-operating (expense) income, net
$
(1.0
)
$
10.1
$
18.7
Non-operating (expense) income decreased in Q4 FY24 from Q3 FY24 by $11.1 million and from Q4
FY23 by $19.7 million, primarily due to foreign currency impacts. The foreign currency impacts were primarily driven by unfavorable movements of the New Taiwan dollar and the South Korean won, against the U.S. dollar for both
periods.
YTD FY24
YTD FY23
Foreign currency transactions impact, net
$
2.2
$
2.5
Interest expense, net
(0.3
)
(0.4
)
Interest income and other income, net
24.0
14.8
Non-operating income, net
$
25.9
$
16.9
Non-operating income (expense) increased $9.0 million in YTD FY24, compared with YTD FY23, due to increased interest income and other income of $9.2 million, resulting from higher average
cash, cash equivalents and short-term investments balances in FY24 as compared with FY23.
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. The Company is currently not subject to Pillar Two but is continuously evaluating the potential impact of the Pillar Two Framework to ensure we are compliant in the future.
Q4 FY24
Q3 FY24
Q4 FY23
Income tax provision
$
14.6
$
14.1
$
20.3
Effective income tax rate
26.6
%
22.7
%
24.3
%
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.
The effective income tax rate increased in Q4 FY24, compared with Q3 FY24, primarily due to changes in the period-to-period mix of jurisdictional earnings as well as an increase in foreign tax as compared to the
prior quarter. The effective income tax rate increase in Q4 FY24, as compared with Q4 FY23, 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.
FY24
FY23
Income tax provision
$
63.6
$
70.3
Effective income tax rate
25.7
%
26.0
%
31
Table of Contents
The decrease in the effective income tax rate on a full-year basis in FY24, compared with FY23, is primarily due to 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, 2024 and October 31, 2023, are $14.7 million and $8.9 million respectively, recorded in Other liabilities in the consolidated balance sheets
that, if recognized, would impact the effective tax rates. The October 31, 2024 valuation allowance was reduced by $(2.0) million dollars which was offset by additional FIN 48 reserve of $5.8 million.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $6.4 million in Q4 FY24, compared with $13.8 million in Q3 FY24; the decrease was the result of a net decrease in the net incomes of our joint venture
operations. Net income attributable to noncontrolling interests decreased by $12.1 million in Q4 FY24 from Q4 FY23, and by $21.0 million in YTD FY24 from YTD FY23, as a result of decreased net income at both our Taiwan-based and China-based
IC facilities.
Liquidity and Capital Resources
Cash and cash equivalents was $598.5 million and $499.3 million as of October 31, 2024, and October 31, 2023, respectively. As of October 31, 2024, total cash and cash equivalents included $562.1 million held
by foreign subsidiaries. In addition, we currently have $42.2 million in short-term investments and RMB 200 million (approximately $28.1 million) of borrowing capacity in China to support local operations. See Note 8 – Debt to the consolidated financial statements for additional information on our outstanding debt and currently available financing. 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 2025 will be approximately $200 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, 2024, we had outstanding capital commitments of approximately $105.4 million and accrued liabilities related to capital equipment purchases
of approximately $6.7 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 $98.1 million of our total $112.1 million committed
and recognized obligations for capital expenditures over the next twelve months. Please refer to Notes 11 - Leases and 16 – Commitments and Contingencies to
our consolidated financial statements for additional information on our lease liabilities and unrecognized commitments, respectively.
On August 28, 2024, the Board of Directors authorized an increase to the Company’s existing share repurchase program from the remaining $31.7 million up to $100 million. As of October 31, 2024, there was $100 million remaining under that authorization.
Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.
As discussed in Note 6 – PDMCX Joint Venture 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, 2024, Photronics and DNP each had net investments in this joint venture of approximately $140.6 million.
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Table of Contents
Cash Flows
Year Ended
October 31,
2024
October 31,
2023
October 31,
2022
Net cash provided by operating activities
$
261.4
$
302.2
$
275.2
Net cash used in investing activities
$
(156.5
)
$
(101.5
)
$
(147.8
)
Net cash used in financing activities
$
(7.7
)
$
(18.5
)
$
(38.7
)
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 decreased by $40.8 million
in FY24, compared with FY23, primarily due to decreased net income and net cash-favorable changes in working capital, predominantly in Asia.
Investing Activities : Net cash flows used in investing activities increased by $55.0 million in FY24, compared to FY23, primarily driven by an increase of
purchases of short-term investments of $80.4 million. This was partially offset by an increase in proceeds from the maturity of short-term investments of $25.3 million.
Financing Activities : Net cash used in financing activities decreased by $10.8 million in FY24, compared to FY23. This was driven by a decrease in repayments
of debt of $11.8 million
Our cash, cash equivalents, and restricted cash balances were positively impacted by changes in foreign currency exchange rates in FY24 of $2.1 million.
Non-GAAP Financial Measures
Non-GAAP Net Income attributable to Photronics, Inc. shareholders and non-GAAP diluted earnings per share are “non-GAAP financial measures” as such term is defined by Regulation G of 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 on-going performance because they enable a more meaningful comparison of historical results of our core business. These
non-GAAP metrics are not a measure of consolidated operating results under U.S. GAAP and should not be considered as an alternative to Net income (loss), Net income (loss) per share, or any other measure of consolidated results under U.S.
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 statement of income and must be considered in performing a
comprehensive assessment of overall financial performance.
The following table reconciles GAAP to Non-GAAP Income for the indicated periods. The columns may not foot due to rounding.
33
Table of Contents
Three Months ended
Year ended
Oct 31,
2024
July 28,
2024
Oct 31,
2023
Oct 31,
2024
Oct 31,
2023
Oct 31,
2022
Reconciliation of GAAP to Non-GAAP Net Income:
GAAP Net Income attributable to Photronics, Inc. shareholders
$
33,869
$
34,388
$
44,611
$
130,688
$
125,485
$
118,786
FX loss (gain)
7,758
(4,068
)
(13,234
)
(2,168
)
(2,466
)
(27,344
)
Estimated tax effects of above
(1,936
)
914
3,437
477
317
5,933
Estimated noncontrolling interest effects of above
(2,637
)
681
2,431
(1,407
)
2,676
4,275
Non-GAAP Net Income attributable to Photronics, Inc. shareholders
$
37,054
$
31,915
$
37,245
$
127,590
$
126,012
$
101,650
Weighted-average number of common shares
outstanding - Diluted
62,456
62,414
62,067
62,391
61,755
61,189
Reconciliation of GAAP to Non-GAAP EPS:
GAAP diluted earnings per share
$
0.54
$
0.55
$
0.72
$
2.09
$
2.03
$
1.94
Effects of the above adjustments
0.05
(0.04
)
(0.12
)
(0.04
)
0.01
(0.28
)
Non-GAAP diluted earnings per share
$
0.59
$
0.51
$
0.60
$
2.05
$
2.04
$
1.66
Business Outlook
Our current business outlook and guidance was provided in our Full Year and Fourth Quarter Fiscal 2024 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 2024 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 revenue as we
perform or upon the completion of our performance, as these determinations impact the timing and amount of our reported revenue 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.
•
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.
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•
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.
Effect of Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements of this report for recent accounting pronouncements that may affect our financial reporting.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.