UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended April 28, 2019
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ___ to ___
Commission file number 0-15451
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)
|
Connecticut
|
06-0854886
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(IRS Employer Identification No.)
|
|
15 Secor Road, Brookfield, Connecticut
|
06804
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
Registrant’s telephone number, including area code
|
(203) 775-9000
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large Accelerated Filer
|
☒ |
Accelerated Filer
|
☐ |
Non-Accelerated Filer
|
☐ |
|
Smaller Reporting Company
|
☐ |
Emerging growth company
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which
registered
|
|
COMMON
|
PLAB
|
NASDAQ Global Select Market
|
The registrant had 67,065,655 shares of common stock outstanding as of June 3, 2019.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking
statements made by or on behalf of Photronics, Inc. (“Photronics”, the “Company”, “we”, “our”, or “us”). These statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management.
Forward-looking statements may be identified by words like “expect,” “anticipate,” “believe,” “plan,” “project,” “could,” “estimate,” “intend,” “may,” “will” and similar expressions, or the negative of such terms, or other comparable terminology.
All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this quarterly report on Form 10-Q or in other documents filed with the Securities and Exchange Commission in
press releases or in the Company’s communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of
transactions, joint ventures, business combinations, divestitures and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks,
uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or
implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the
Company’s products; competitive factors in the industries and geographic markets in which the Company competes; the timing of orders received from customers; the gain or loss of significant customers; competition from other manufacturers; changes
in accounting standards; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); changes in the jurisdictional mix of our earnings and changes in tax laws and rates;
interest rate and other capital market conditions, including changes in the market price of the Company’s securities; foreign currency exchange rate fluctuations; changes in technology; technology or intellectual property infringement, including
cybersecurity breaches, and other innovation risks; unsuccessful or unproductive research and development or capital expenditures; the timing, impact, and other uncertainties related to transactions and acquisitions, divestitures, business
combinations, and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structures and other matters; the seasonal and cyclical nature of the semiconductor and flat
panel display industries; management changes; changes in laws and government regulation impacting our operations or our products, including laws relating to export controls and import laws, rules and tariffs; the occurrence of regulatory
proceedings, claims or litigation; damage or destruction to the Company’s facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; construction of new facilities
and assembly of new equipment; dilutive issuances of the Company’s stock; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings;
(iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors.
Accordingly, there is no assurance that the Company’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide
revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.
2
PHOTRONICS, INC.
INDEX
|
PART I.
|
FINANCIAL INFORMATION
|
||
|
Item 1.
|
4
|
||
|
4
|
|||
|
5
|
|||
|
6
|
|||
|
7
|
|||
|
9
|
|||
|
10
|
|||
|
Item 2.
|
25
|
||
|
Item 3.
|
32
|
||
|
Item 4.
|
32
|
||
|
PART II.
|
OTHER INFORMATION
|
||
|
Item 1A.
|
33
|
||
|
Item 2.
|
33
|
||
|
Item 6.
|
34
|
| PART I. |
FINANCIAL INFORMATION
|
PHOTRONICS, INC.
(in thousands, except per share amounts)
(unaudited)
|
April 28,
2019
|
October 31,
2018
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
167,066
|
$
|
329,277
|
||||
|
Accounts receivable, net of allowance of $1,360 in 2019 and $1,526 in 2018
|
123,371
|
120,515
|
||||||
|
Inventories
|
34,696
|
29,180
|
||||||
|
Prepaid expenses
|
8,531
|
6,901
|
||||||
|
Other current assets
|
38,304
|
16,858
|
||||||
|
Total current assets
|
371,968
|
502,731
|
||||||
|
Property, plant and equipment, net
|
654,357
|
571,781
|
||||||
|
Intangible assets, net
|
10,182
|
12,368
|
||||||
|
Deferred income taxes
|
15,121
|
18,109
|
||||||
|
Other assets
|
33,610
|
5,020
|
||||||
|
Total assets
|
$
|
1,085,238
|
$
|
1,110,009
|
||||
|
LIABILITIES AND EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt
|
$
|
505
|
$
|
57,453
|
||||
|
Accounts payable
|
80,120
|
89,149
|
||||||
|
Accrued liabilities
|
58,659
|
44,474
|
||||||
|
|
||||||||
|
Total current liabilities
|
139,284
|
191,076
|
||||||
|
Long-term debt
|
35,921
|
-
|
||||||
|
Deferred income taxes
|
829
|
643
|
||||||
|
Other liabilities
|
10,876
|
13,721
|
||||||
|
Total liabilities
|
186,910
|
205,440
|
||||||
|
Commitments and contingencies
|
||||||||
|
Equity:
|
||||||||
|
Preferred stock, $0.01 par value, 2,000 shares authorized, none issued and outstanding
|
-
|
-
|
||||||
|
Common stock, $0.01 par value, 150,000 shares authorized, 69,984 shares issued and 66,289
outstanding at April 28, 2019 and 69,700 shares issued and 67,142 outstanding at October 31, 2018
|
700
|
697
|
||||||
|
Additional paid-in capital
|
558,359
|
555,606
|
||||||
|
Retained earnings
|
245,144
|
231,445
|
||||||
|
Treasury stock, 3,695 shares at April 28, 2019 and 2,558 shares at October 31, 2018
|
(33,807
|
)
|
(23,111
|
)
|
||||
|
Accumulated other comprehensive loss
|
(6,828
|
)
|
(4,966
|
)
|
||||
|
Total Photronics, Inc. shareholders’ equity
|
763,568
|
759,671
|
||||||
|
Noncontrolling interests
|
134,760
|
144,898
|
||||||
|
Total equity
|
898,328
|
904,569
|
||||||
|
Total liabilities and equity
|
$
|
1,085,238
|
$
|
1,110,009
|
||||
See accompanying notes to condensed consolidated financial
statements.
PHOTRONICS, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
April 28,
2019
|
April 29,
2018
|
April 28,
2019
|
April 29,
2018
|
|||||||||||||
|
Revenue
|
$
|
131,580
|
$
|
130,779
|
$
|
256,291
|
$
|
254,225
|
||||||||
|
Cost of goods sold
|
105,570
|
97,960
|
204,179
|
193,744
|
||||||||||||
|
Gross profit
|
26,010
|
32,819
|
52,112
|
60,481
|
||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Selling, general and administrative
|
13,269
|
13,637
|
27,061
|
25,387
|
||||||||||||
|
|
||||||||||||||||
|
Research and development
|
3,542
|
3,817
|
7,805
|
7,921
|
||||||||||||
|
Total operating expenses
|
16,811
|
17,454
|
34,866
|
33,308
|
||||||||||||
|
Operating income
|
9,199
|
15,365
|
17,246
|
27,173
|
||||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income and other income (expense), net
|
4,286
|
3,883
|
5,925
|
351
|
||||||||||||
|
Interest expense
|
355
|
551
|
886
|
1,125
|
||||||||||||
|
Income before income taxes
|
13,130
|
18,697
|
22,285
|
26,399
|
||||||||||||
|
Income tax provision
|
3,278
|
3,508
|
4,665
|
1,729
|
||||||||||||
|
Net income
|
9,852
|
15,189
|
17,620
|
24,670
|
||||||||||||
|
Net income attributable to noncontrolling interests
|
1,373
|
4,524
|
3,874
|
8,107
|
||||||||||||
|
Net income attributable to Photronics, Inc. shareholders
|
$
|
8,479
|
$
|
10,665
|
$
|
13,746
|
$
|
16,563
|
||||||||
|
Earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.13
|
$
|
0.15
|
$
|
0.21
|
$
|
0.24
|
||||||||
|
Diluted
|
$
|
0.13
|
$
|
0.15
|
$
|
0.20
|
$
|
0.23
|
||||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||
|
Basic
|
66,261
|
69,293
|
66,422
|
69,024
|
||||||||||||
|
Diluted
|
70,597
|
75,190
|
71,593
|
75,052
|
||||||||||||
See accompanying notes to condensed consolidated financial
statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
April 28,
2019
|
April 29,
2018
|
April 28,
2019
|
April 29,
2018
|
|||||||||||||
|
Net income
|
$
|
9,852
|
$
|
15,189
|
$
|
17,620
|
$
|
24,670
|
||||||||
|
Other comprehensive income (loss), net of tax of $0:
|
||||||||||||||||
|
Foreign currency translation adjustments
|
(7,054
|
)
|
(11,098
|
)
|
(482
|
)
|
18,989
|
|||||||||
|
Amortization of cash flow hedge
|
-
|
16
|
-
|
48
|
||||||||||||
|
Other
|
25
|
54
|
44
|
22
|
||||||||||||
|
Net other comprehensive (loss) income
|
(7,029
|
)
|
(11,028
|
)
|
(438
|
)
|
19,059
|
|||||||||
|
Comprehensive income
|
2,823
|
4,161
|
17,182
|
43,729
|
||||||||||||
|
|
||||||||||||||||
|
Less: comprehensive income attributable to noncontrolling interests
|
1,515
|
1,841
|
5,298
|
10,301
|
||||||||||||
|
Comprehensive income attributable to Photronics, Inc. shareholders
|
$
|
1,308
|
$
|
2,320
|
$
|
11,884
|
$
|
33,428
|
||||||||
See accompanying notes to condensed consolidated financial
statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Three Months Ended April 28, 2019
|
||||||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Non-
controlling
Interests
|
Total
Equity
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
|
Balance at January 28, 2019
|
69,917
|
$
|
699
|
$
|
557,188
|
$
|
236,665
|
$
|
(33,807
|
)
|
$
|
343
|
$
|
152,082
|
$
|
913,170
|
||||||||||||||||
|
Net income
|
-
|
-
|
-
|
8,479
|
-
|
-
|
1,373
|
9,852
|
||||||||||||||||||||||||
|
Other comprehensive (loss) income
|
-
|
-
|
-
|
-
|
-
|
(7,171
|
)
|
142
|
(7,029
|
)
|
||||||||||||||||||||||
|
Sale of common stock through employee stock option and purchase plans
|
41
|
1
|
271
|
-
|
-
|
-
|
-
|
272
|
||||||||||||||||||||||||
|
Restricted stock awards vesting and expense
|
26
|
-
|
650
|
-
|
-
|
-
|
-
|
650
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
-
|
250
|
-
|
-
|
-
|
-
|
250
|
||||||||||||||||||||||||
|
Subsidiary dividend payable
|
-
|
-
|
-
|
-
|
-
|
-
|
(18,837
|
)
|
(18,837
|
)
|
||||||||||||||||||||||
|
Balance at April 28, 2019
|
69,984
|
$
|
700
|
$
|
558,359
|
$
|
245,144
|
$
|
(33,807
|
)
|
$
|
(6,828
|
)
|
$
|
134,760
|
$
|
898,328
|
|||||||||||||||
|
Three Months Ended April 29, 2018
|
||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Non-
controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||
|
Balance at January 29, 2018
|
68,869
|
$
|
689
|
$
|
549,328
|
$
|
195,288
|
$
|
32,128
|
$
|
141,014
|
$
|
918,447
|
|||||||||||||||
|
Net income
|
-
|
-
|
-
|
10,665
|
-
|
4,524
|
15,189
|
|||||||||||||||||||||
|
Other comprehensive loss
|
-
|
-
|
-
|
-
|
(8,372
|
)
|
(2,656
|
)
|
(11,028
|
)
|
||||||||||||||||||
|
Sale of common stock through employee stock option and purchase plans
|
548
|
5
|
2,892
|
-
|
-
|
-
|
2,897
|
|||||||||||||||||||||
|
Restricted stock awards vesting and expense
|
26
|
-
|
457
|
-
|
-
|
-
|
457
|
|||||||||||||||||||||
|
Share-based compensation expense
|
-
|
-
|
300
|
-
|
-
|
-
|
300
|
|||||||||||||||||||||
|
Subsidiary dividend payable
|
-
|
-
|
-
|
-
|
-
|
(8,196
|
)
|
(8,196
|
)
|
|||||||||||||||||||
|
Balance at April 29, 2018
|
69,443
|
$
|
694
|
$
|
552,977
|
$
|
205,953
|
$
|
23,756
|
$
|
134,686
|
$
|
918,066
|
|||||||||||||||
See accompanying notes to condensed consolidated financial
statements.
PHOTRONICS, INC.
Condensed Consolidated Statements of Equity (continued)
(in thousands)
(unaudited)
| Six Months Ended April 28, 2019 | ||||||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
|
Accumulated
Other
Comprehensive
Loss
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Non-
controlling
Interests
|
||||||||||||||||||||||||||||||
|
Retained
Earnings
|
Treasury
Stock
|
Total
Equity
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
|
Balance at November 1, 2018
|
69,700
|
$
|
697
|
$
|
555,606
|
$
|
231,445
|
$
|
(23,111
|
)
|
$
|
(4,966
|
)
|
$
|
144,898
|
$
|
904,569
|
|||||||||||||||
|
Adoption of ASU 2014-09
|
-
|
-
|
-
|
1,083
|
-
|
-
|
121
|
1,204
|
||||||||||||||||||||||||
|
Adoption of ASU 2016-16
|
-
|
-
|
-
|
(1,130
|
)
|
-
|
-
|
(3
|
)
|
(1,133
|
)
|
|||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
13,746
|
-
|
-
|
3,874
|
17,620
|
||||||||||||||||||||||||
|
Other comprehensive (loss) income
|
-
|
-
|
-
|
-
|
-
|
(1,862
|
)
|
1,424
|
(438
|
)
|
||||||||||||||||||||||
|
Sale of common stock through employee stock option and purchase plans
|
136
|
1
|
792
|
-
|
-
|
-
|
-
|
793
|
||||||||||||||||||||||||
|
Restricted stock awards vesting and expense
|
148
|
2
|
1,217
|
-
|
-
|
-
|
-
|
1,219
|
||||||||||||||||||||||||
|
Share-based compensation expense
|
-
|
-
|
744
|
-
|
-
|
-
|
-
|
744
|
||||||||||||||||||||||||
|
Contribution from noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
29,394
|
29,394
|
||||||||||||||||||||||||
|
Dividends to noncontrolling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
(26,102
|
)
|
(26,102
|
)
|
||||||||||||||||||||||
|
Subsidiary dividend payable
|
-
|
-
|
-
|
-
|
-
|
-
|
(18,837
|
)
|
(18,837
|
)
|
||||||||||||||||||||||
|
Repurchase of common stock of subsidiary
|
-
|
-
|
-
|
-
|
-
|
-
|
(9
|
)
|
(9
|
)
|
||||||||||||||||||||||
|
Purchase of treasury stock
|
-
|
-
|
-
|
-
|
(10,696
|
)
|
-
|
-
|
(10,696
|
)
|
||||||||||||||||||||||
|
Balance at April 28, 2019
|
69,984
|
$
|
700
|
$
|
558,359
|
$
|
245,144
|
$
|
(33,807
|
)
|
$
|
(6,828
|
)
|
$
|
134,760
|
$
|
898,328
|
|||||||||||||||
|
Six Months Ended April 29, 2018
|
||||||||||||||||||||||||||||
|
Photronics, Inc. Shareholders
|
||||||||||||||||||||||||||||
|
Accumulated
Other
Comprehensive
Income
|
||||||||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Non-
controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||
|
Retained
Earnings
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||
|
Balance at October 30, 2017
|
68,666
|
$
|
687
|
$
|
547,596
|
$
|
189,390
|
$
|
6,891
|
$
|
120,731
|
$
|
865,295
|
|||||||||||||||
|
Net income
|
-
|
-
|
-
|
16,563
|
-
|
8,107
|
24,670
|
|||||||||||||||||||||
|
Other comprehensive income
|
-
|
-
|
-
|
-
|
16,865
|
2,194
|
19,059
|
|||||||||||||||||||||
|
Sale of common stock through employee stock option and purchase plans
|
664
|
7
|
3,592
|
-
|
-
|
-
|
3,599
|
|||||||||||||||||||||
|
Restricted stock awards vesting and expense
|
113
|
-
|
843
|
-
|
-
|
-
|
843
|
|||||||||||||||||||||
|
Share-based compensation expense
|
-
|
-
|
798
|
-
|
-
|
-
|
798
|
|||||||||||||||||||||
|
Contribution from noncontrolling interest
|
-
|
-
|
148
|
-
|
-
|
11,850
|
11,998
|
|||||||||||||||||||||
|
Subsidiary dividend payable
|
-
|
-
|
-
|
-
|
-
|
(8,196
|
)
|
(8,196
|
)
|
|||||||||||||||||||
|
Balance at April 29, 2018
|
69,443
|
$
|
694
|
$
|
552,977
|
$
|
205,953
|
$
|
23,756
|
$
|
134,686
|
$
|
918,066
|
|||||||||||||||
See accompanying notes to condensed consolidated financial
statements.
PHOTRONICS, INC.
(in thousands)
(unaudited)
|
Six Months Ended
|
||||||||
|
April 28,
2019
|
April 29,
2018
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$
|
17,620
|
$
|
24,670
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
38,515
|
44,429
|
||||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable
|
(2,295
|
)
|
(16,976
|
)
|
||||
|
Inventories
|
(9,447
|
)
|
(7,765
|
)
|
||||
|
Other current assets
|
(6,114
|
)
|
(9,666
|
)
|
||||
|
Accounts payable, accrued liabilities, and other
|
(40,566
|
)
|
3,216
|
|||||
|
Net cash (used in) provided by operating activities
|
(2,287
|
)
|
37,908
|
|||||
|
Cash flows from investing activities:
|
||||||||
|
Purchases of property, plant and equipment
|
(140,436
|
)
|
(44,129
|
)
|
||||
|
Government incentives
|
5,698
|
-
|
||||||
|
Other
|
(23
|
)
|
296
|
*
|
||||
|
Net cash used in investing activities
|
(134,761
|
)
|
(43,833
|
)*
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from debt
|
39,633
|
-
|
||||||
|
Contribution from noncontrolling interest
|
29,394
|
11,998
|
||||||
|
Repayments of long-term debt
|
(61,220
|
)
|
(2,771
|
)
|
||||
|
Dividends paid to noncontrolling interests
|
(26,102
|
)
|
-
|
|||||
|
Purchase of treasury stock
|
(10,696
|
)
|
-
|
|||||
|
Proceeds from share-based arrangements
|
1,033
|
3,776
|
||||||
|
Other
|
(45
|
)
|
(267
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(28,003
|
)
|
12,736
|
|||||
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
2,843
|
6,330
|
*
|
|||||
|
Net (decrease) increase in cash, cash equivalents, and restricted cash
|
(162,208
|
)
|
13,141
|
*
|
||||
|
Cash, cash equivalents, and restricted cash at beginning of period
|
331,989
|
*
|
310,936
|
*
|
||||
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
169,781
|
$
|
324,077
|
*
|
|||
|
Supplemental disclosure information:
|
||||||||
|
Accrual for property, plant and equipment purchased during the period
|
$
|
17,454
|
$
|
10,317
|
||||
|
Accrual for property, plant and equipment purchased with funds receivable from government
incentives
|
$
|
13,402
|
$
|
-
|
||||
|
Subsidiary dividend payable
|
$
|
18,837
|
$
|
8,196
|
||||
* Amount has been modified to reflect the adoption of ASU 2016-18 (see Note 14).
See accompanying notes to
condensed consolidated financial statements.
PHOTRONICS, INC.
Three Months and Six Months Ended April 28, 2019 and April 29, 2018
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. (“Photronics”, “the Company”, “we”, “our”, or “us”) is one of the world’s leading manufacturers of
photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays (“FPDs”), and are used as
masters to transfer circuit patterns onto semiconductor wafers and flat panel display substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”) and a variety of FPDs and, to a lesser extent, other types of electrical
and optical components. We currently have eleven manufacturing facilities, which are located in Taiwan (3), Korea, the United States (3), Europe (2), and two recently constructed facilities in China. Our FPD Facility in Hefei, China, commenced production in the second quarter of 2019; we anticipate our IC facility in Xiamen, China, to commence production later in 2019.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a
fair presentation have been included. Our business is typically impacted during the first, and sometimes the second, quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development
and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2019. For further information, refer to the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2018.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or net realizable value.
Presented below are the components of inventory at the balance sheet dates:
|
April 28,
2019
|
October 31,
2018
|
|||||||
|
Raw materials
|
$
|
34,276
|
$
|
25,110
|
||||
|
Work in process
|
416
|
3,402
|
||||||
|
Finished goods
|
4
|
668
|
||||||
|
$
|
34,696
|
$
|
29,180
|
|||||
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
April 28,
2019
|
October 31,
2018
|
|||||||
|
Land
|
$
|
11,164
|
$
|
11,139
|
||||
|
Buildings and improvements
|
124,374
|
124,771
|
||||||
|
Machinery and equipment
|
1,673,574
|
1,566,163
|
||||||
|
Leasehold improvements
|
19,598
|
19,577
|
||||||
|
Furniture, fixtures and office equipment
|
13,503
|
12,415
|
||||||
|
Construction in progress
|
132,394
|
128,649
|
||||||
|
1,974,607
|
1,862,714
|
|||||||
|
Accumulated depreciation and amortization
|
(1,320,250
|
)
|
(1,290,933
|
)
|
||||
|
$
|
654,357
|
$
|
571,781
|
|||||
Depreciation and amortization expense for property, plant and equipment was $18.6 million and $36.2 million in the three- and six-month
periods ended April 28, 2019, respectively, and $20.8 million and $42.0 million in the three- and six-month periods ended April 29, 2018, respectively.
In January 2017, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with fair
values of approximately $6.7 million during the six-month period ended April 29, 2018.
NOTE 4 - PDMCX JOINT VENTURE
In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or
“Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly-owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note, “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our
recently-established IC business in Xiamen, China, in which we anticipate production to commence in 2019. The joint venture, known as “Xiamen American
Japan Photronics Mask Co., Ltd.” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more
effectively for the merchant photomask business in China and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the
formation of this joint venture.
As of April 28, 2019, Photronics and DNP had each contributed cash of approximately $48 million to the joint venture. The total investment per the PDMCX operating agreement (the Agreement) is $160 million, of which
approximately $13 million remained for Photronics as of April 28, 2019 and will be funded over the next several quarters with cash and local borrowings.
Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These
circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to
purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting
party’s 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.
We recorded net losses from the operations of PDMCX of approximately $0.6 million, and $1.9 million during the three- and six-month periods
ended April 28, 2019, respectively, and $0.2 million and $0.7 million in the three- and six-month periods ended April 29, 2018, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum
exposure to loss from PDMCX at April 28, 2019, was $44.7 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification, we evaluated our involvement in PDMCX
for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity
at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were
the primary beneficiary during the current and prior year reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics, Inc. Our conclusion was based on the facts that we held a controlling financial
interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance), had the obligation to absorb losses, and the right to receive benefits that could potentially be
significant to PDMCX. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year reporting periods was based on our right to appoint the
majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of
PDMCX’s assets. In addition, as a result of the 50.01% variable interest we held during the current and prior-year periods, we had the obligation to absorb losses and
the right to receive benefits that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets are presented in the
following table, together with our exposure to loss related to these assets and liabilities.
|
April 28, 2019
|
October 31, 2018
|
|||||||||||||||
|
Classification
|
Carrying
Amount
|
Photronics
Interest
|
Carrying
Amount
|
Photronics
Interest
|
||||||||||||
|
|
||||||||||||||||
|
Current assets
|
$
|
31,219
|
$
|
15,612
|
$
|
9,625
|
$
|
4,813
|
||||||||
|
Non-current assets
|
116,677
|
58,350
|
43,415
|
21,708
|
||||||||||||
|
Total assets
|
147,896
|
73,962
|
53,040
|
26,521
|
||||||||||||
|
Current liabilities
|
22,668
|
11,336
|
21,205
|
10,603
|
||||||||||||
|
Non-current liabilities
|
35,937
|
17,972
|
20
|
10
|
||||||||||||
|
Total liabilities
|
58,605
|
29,308
|
21,225
|
10,613
|
||||||||||||
|
Net assets
|
$
|
89,291
|
$
|
44,654
|
$
|
31,815
|
$
|
15,908
|
||||||||
NOTE 5 – LONG-TERM DEBT
Long-term debt consists of the following:
|
April 28,
2019
|
October 31,
2018
|
|||||||
|
Project Loan due December 2025
|
$
|
11,400
|
$
|
-
|
||||
|
Project Loan due December 2022
|
14,932
|
- | ||||||
|
Working Capital Loan due January 2022
|
10,094
|
-
|
||||||
|
3.25% convertible senior notes matured April 2019
|
-
|
57,453
|
||||||
|
36,426
|
57,453
|
|||||||
|
Current portion
|
(505
|
)
|
(57,453
|
)
|
||||
|
$
|
35,921
|
$
|
-
|
|||||
In April 2019, the $57.5 million convertible senior notes, discussed below, matured and were repaid.
In January 2015, we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with
a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes was the same as that of the exchanged notes,
which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock. Note holders could convert each $1,000 principal
amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019; we were not required to redeem the notes, other than upon conversion, prior to their maturity date. Interest on
the notes accrued in arrears, and was paid semiannually through the notes’ maturity date.
In November 2018, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX
registered capital at the time of the borrowing, pursuant to which PDMCX will enter into separate loan agreements (“the Project Loans”) for each borrowing. The Project Loans, which are denominated in renminbi, are being used to finance certain
capital expenditures in China. PDMCX has agreed to grant a lien on the land, building and certain equipment owned by PDMCX as collateral for the Project Loans. As of April 28, 2019, PDMCX had borrowed $26.3 million against this approval, which
includes $11.4 million that was borrowed during the three-month period ended April 28, 2019. Subsequent to April 28, 2019, PDMCX borrowed an additional $9.7 million. Repayments
on the amounts borrowed before the three-month period ended April 28, 2019, will be made semiannually, commencing in June 2020 and ending in December 2022. Repayments on the amount borrowed after the three-month period ended January 27, 2019, will be made semiannually, commencing in June 2023 and ending in
December 2025. The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at April 28, 2019). Interest incurred on these loans will be reimbursed through incentives afforded to us by the
Xiamen Torch Hi-Tech Industrial Development Zone which, to a prescribed limit, provide for such reimbursements.
In November 2018, PDMCX was approved for credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. No
guarantees were required as part of this approval. As of April 28, 2019, PDMCX had borrowed $13.8 million against this approval of which $3.7 million were 90-day loans. The remaining $10.1 million borrowed (the “Working Capital Loans”) is to
be repaid semiannually from the dates of the individual borrowings; repayments commenced in May 2019 and end in January 2022. In May 2019, we borrowed an additional $1.9 million against this approval, and repaid $0.1 million. The 90-day loans
were repaid in our second quarter of 2019. The Working Capital Loans, which are denominated in renminbi, are being used for general financing purposes, including payments of import and value-added taxes. The interest rates on the 90-day loans
were the market rate on the date of issuance (4.9%), and interest rates on the Working Capital Loans are approximately 5%, and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points.
Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which, to a prescribed limit, provide for such reimbursements.
In September 2018, we entered into an amended and restated credit agreement (“the new agreement”) that expires in
September 2023. The new agreement, which replaced our prior credit facility, has a $50 million borrowing limit, with an expansion capacity to $100 million, and is secured by substantially all of our assets located in the United States and common
stock we own in certain of our foreign subsidiaries. The new agreement limits the amount we can pay in cash for dividends, distributions and redemption on Photronics, Inc. equity of up to an aggregate amount of $100 million, and contains the
following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance, all of which we were in compliance with as of April 28, 2019. We had no outstanding borrowings against the new agreement
as of April 28, 2019, and $50 million was available for borrowing. The interest rate on the new agreement (2.5% at April 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
NOTE 6 - REVENUE
We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in
Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the modified retrospective
transition method, only with respect to contracts that were not complete as of the date of adoption. This approach required prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the
adoption. In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.
Under Topic 606, we recognize revenue when, or as, control of a good or service transfers to a customer,
in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services, whereas, prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some
arrangements, when the customers received the goods. The following tables present the impacts of our adoption of Topic 606 on our April 28, 2019, condensed consolidated balance sheet, and condensed consolidated statements of income for the three
and six months ended April 28, 2019, and cash flows for the six months ended April 28, 2019.
Condensed Consolidated Balance Sheet
April 28, 2019
|
As Reported
|
Adjustments
|
Balance without
Adoption of Topic 606
|
||||||||||
|
Assets
|
||||||||||||
|
Accounts receivable
|
$
|
123,371
|
$
|
(794
|
)
|
$
|
122,577
|
|||||
|
Inventory
|
34,696
|
4,807
|
39,503
|
|||||||||
|
Other current assets
|
38,304
|
(6,237
|
)
|
32,067
|
||||||||
|
Deferred income taxes
|
15,121
|
105
|
15,226
|
|||||||||
|
Liabilities
|
||||||||||||
|
Accrued liabilities
|
$
|
58,659
|
$
|
686
|
$
|
59,345
|
||||||
|
Deferred income taxes
|
829
|
(367
|
)
|
462
|
||||||||
|
Equity
|
||||||||||||
|
Photronics, Inc. shareholders’ equity
|
$
|
763,568
|
$
|
(1,963
|
)
|
$
|
761,605
|
|||||
|
Noncontrolling interests
|
134,760
|
(475
|
)
|
134,285
|
||||||||
Condensed Consolidated Statement of Income
Three Months Ended April 28, 2019
|
As Reported
|
Adjustments
|
Balance without
Adoption of Topic 606
|
||||||||||
|
Revenue
|
$
|
131,580
|
$
|
(242
|
)
|
$
|
131,338
|
|||||
|
Cost of goods sold
|
105,570 | (162 |
)
|
105,408 | ||||||||
|
Gross profit
|
26,010
|
(80
|
)
|
25,930
|
||||||||
|
Provision for taxes
|
3,278 | (48 |
)
|
3,230 | ||||||||
|
Net income
|
9,852
|
(128
|
)
|
9,724
|
||||||||
|
Noncontrolling interests
|
1,373 | 78 | 1,451 | |||||||||
|
Income attributable to Photronics, Inc. shareholders
|
$
|
8,479
|
$
|
(206
|
)
|
$
|
8,273
|
|||||
Condensed Consolidated Statement of Income
Six Months Ended April 28, 2019
|
As Reported
|
Adjustments
|
Balance without
Adoption of Topic 606
|
||||||||||
|
Revenue
|
$
|
256,291
|
$
|
(2,524
|
)
|
$
|
253,767
|
|||||
|
Cost of goods sold
|
204,179
|
(1,041
|
)
|
203,138
|
||||||||
|
Gross profit
|
52,112
|
(1,483
|
)
|
50,629
|
||||||||
|
Provision for taxes
|
4,665
|
(178
|
)
|
4,487
|
||||||||
|
Net income
|
17,620
|
(1,305
|
)
|
16,315
|
||||||||
|
Noncontrolling interests
|
3,874
|
(353
|
)
|
3,521
|
||||||||
|
Income attributable to Photronics, Inc. shareholders
|
$
|
13,746
|
$
|
(952
|
)
|
$
|
12,794
|
|||||
Condensed Consolidated Statement of Cash Flows
Six Months Ended April 28, 2019
|
As Reported
|
Adjustments
|
Balance without
Adoption of Topic 606
|
||||||||||
|
Net Income
|
$
|
17,620
|
$
|
(1,305
|
)
|
$
|
16,315
|
|||||
|
Changes in operating accounts:
|
||||||||||||
|
Accounts receivable
|
$
|
(2,295
|
)
|
$
|
211
|
$
|
(2,084
|
)
|
||||
|
Inventories
|
(9,447
|
)
|
(1,204
|
)
|
(10,651
|
)
|
||||||
|
Other current assets
|
(6,114
|
)
|
1,799
|
(4,315
|
)
|
|||||||
|
Accounts payable, accrued liabilities, and other
|
(40,566
|
)
|
499
|
(40,067
|
)
|
|||||||
We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the
contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of
our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we invoice as they ship to
customers. As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right
to payment for work completed to date, we recognize revenue as we perform, or “over time” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various
manufacturing phases of a photomask. At the end of a reporting period, there will be a number of revenue contracts on which we have performed; for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable
profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer
the good to the customer, rather than as promised services, or performance obligations, under the contract.
As stated above, photomasks are manufactured in accordance with proprietary designs provided by our
customers; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list”
prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration
would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
Contract Assets, Contract Liabilities and Accounts Receivable
We recognize a contract asset when our performance under a contract
precedes our receipt of consideration from a customer, or before payment is due,
and our receipt of consideration is conditional upon factors other than the
passage of time. Contract assets reflect our transfer of control to customers
of photomasks that are in-process or completed but not yet shipped. A
receivable is recognized when we have an unconditional right to payment for our
performance, which generally occurs when we ship the photomasks. Our contract
assets account primarily consists of a significant amount of our
work-in-process inventory and fully-manufactured photomasks which have not yet
shipped, if we have an enforceable right to collect consideration (including a
reasonable profit), in the event the in-process orders are cancelled by
customers. On an individual contract basis, we net contract assets with
contract liabilities (deferred revenue) for financial reporting purposes. Our
contract assets and liabilities are typically classified as current, as our
production cycle and our lead times are both under one year. Contract assets of
$6.2 million are included in “Other” current assets, and contract liabilities
of $7.9 million are included in “Other” current liabilities in our April 28,
2019 condensed consolidated balance sheet. At November 1, 2018, our date of
adoption of Topic 606, we had contract assets of $4.6 million and contract
liabilities of $7.8 million. We did not impair any contract assets during the six-month
period ended April 28, 2019, and, during the respective three- and six-month
periods ended April 28, 2019, we recognized $0.5 million and $1.2 million of
revenue from the settlement of contract liabilities that existed at the
beginning of those periods.
We generally record our accounts receivable
at their billed amounts. All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss
and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable. We did not incur any credit losses on our accounts
receivable during the six-month period ended April 28, 2019.
Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market
in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require
payment in advance of performance. We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we
transfer control of goods or services to customers and when we are paid is one year or less.
In instances when we are paid in advance of our performance, we record a contract liability and, as
allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically,
advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.
Disaggregation of Revenue
The following tables present our revenue for the three and six-month periods ended April 28, 2019, disaggregated by product type, geographic location, and timing of recognition.
|
Revenue by Product Type
|
Three Months Ended
April 28, 2019
|
Six Months Ended
April 28, 2019
|
||||||
|
IC
|
||||||||
|
High-end
|
$
|
38,429
|
$
|
72,995
|
||||
|
Mainstream
|
60,158
|
120,471
|
||||||
|
Total IC
|
$
|
98,587
|
$
|
193,466
|
||||
|
FPD
|
||||||||
|
High-end
|
$
|
22,956
|
$
|
44,422
|
||||
|
Mainstream
|
10,037
|
18,403
|
||||||
|
Total FPD
|
$
|
32,993
|
$
|
62,825
|
||||
|
$
|
131,580
|
$
|
256,291
|
|||||
|
Revenue by Geographic Location
|
||||||||
|
Taiwan
|
$
|
56,469
|
$
|
114,209
|
||||
|
Korea
|
38,038
|
73,275
|
||||||
|
United States
|
26,742
|
49,215
|
||||||
|
Europe
|
8,435
|
16,788
|
||||||
|
China
|
1,467
|
1,730
|
||||||
|
Other
|
429
|
1,074
|
||||||
|
$
|
131,580
|
$
|
256,291
|
|||||
|
Revenue by Timing of Recognition
|
||||||||
|
Over time
|
$
|
123,853
|
$
|
244,699
|
||||
|
At a point in time
|
7,727
|
11,592
|
||||||
|
$
|
131,580
|
$
|
256,291
|
|||||
Contract Costs
We pay commissions to third party sales agents for certain sales that they obtain for us. However, the
basis of the commissions is the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of
these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.
Remaining Performance Obligations
As we are typically required to fulfill customer orders within a short time period, our backlog of orders
is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated
with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.
Sales and Similar Taxes
We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.
Product Warranty
Our photomasks are sold under warranties that generally range from 1 to 12 months. We warrant that our photomasks conform to customer specifications, and that we will repair or replace, at our
option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options,
non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under
the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of
common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a
change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. Total share-based compensation costs for the three and six-month periods ended April 28, 2019, were $0.9 million and $2.0 million, respectively, and $0.8 million and $1.6 million for the three and six-month periods ended April 29, 2018, respectively. The Company received cash from option exercises
of $0.3 million and $0.8 million for the three and six-month
periods ended April 28, 2019, respectively, and $2.9 million and $3.6 million for the three and six-month periods ended April 29, 2018, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.
Stock Options
Option awards generally vest in one-to-four years, and have a ten-year contractual term. All incentive and
non-qualified stock option grants have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of our common stock on the dates of
grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use
historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options are expected to remain outstanding. The risk-free rate of return for the estimated term of the option
is based on the U.S. Treasury yield curve in effect at the date of grant.
There were no share options granted during the three-month periods ended April 28, 2019 and April 29, 2018. There
were 132,000 share options granted during the six-month period ended April 28, 2019, with a weighted-average grant-date fair value of $3.31 per share, and 252,000 share options granted during the six-month period ended April 29, 2018, with a
weighted-average grant-date fair value of $2.74 per share. As of April 28, 2019, the total unrecognized compensation cost related to unvested option awards was approximately $1.2 million. That cost is expected to be recognized over a
weighted-average amortization period of 2.4 years.