0001140361-20-005521.txt : 20200311 0001140361-20-005521.hdr.sgml : 20200311 20200311172042 ACCESSION NUMBER: 0001140361-20-005521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 78 CONFORMED PERIOD OF REPORT: 20200202 FILED AS OF DATE: 20200311 DATE AS OF CHANGE: 20200311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOTRONICS INC CENTRAL INDEX KEY: 0000810136 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 060854886 STATE OF INCORPORATION: CT FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-39063 FILM NUMBER: 20706244 BUSINESS ADDRESS: STREET 1: 15 SECOR ROAD STREET 2: PO BOX 5226 CITY: BROOKFIELD STATE: CT ZIP: 06804 BUSINESS PHONE: 2037759000 MAIL ADDRESS: STREET 1: 15 SECOR ROAD STREET 2: P O BOX 5226 CITY: BROOKFIELD STATE: CT ZIP: 06804 FORMER COMPANY: FORMER CONFORMED NAME: PHOTRONIC LABS INC DATE OF NAME CHANGE: 19900514 10-Q 1 form10q.htm 10-Q


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 February 2, 2020
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

graphic

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

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
PREFERRED STOCK PURCHASE RIGHTS
N/A
N/A

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 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

The registrant had 65,119,738 shares of common stock outstanding as of March 9, 2020.


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, business, and political conditions in both domestic as well as international markets; pandemics affecting our labor force, customers or suppliers; 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 import and 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
 
 
 
 
8
 
 
 
 
9
 
 
 
Item 2.
22
 
 
 
Item 3.
29
 
 
 
Item 4.
29
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1A.
30
 
 
 
Item 2.
31
     
Item 5.
31
 
 
 
Item 6.
32

3



PART I.
FINANCIAL INFORMATION

Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)

 
February 2,
2020
   
October 31,
2019
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
218,309
   
$
206,530
 
Accounts receivable, net of allowance of $1,295 in 2020 and $1,334 in 2019
   
141,720
     
134,454
 
Inventories
   
49,673
     
48,155
 
Other current assets
   
31,202
     
38,388
 
                 
Total current assets
   
440,904
     
427,527
 
                 
Property, plant and equipment, net
   
619,935
     
632,441
 
Intangible assets, net
   
6,847
     
7,870
 
Deferred income taxes
   
17,594
     
20,779
 
Other assets
   
40,180
     
30,048
 
                 
Total assets
 
$
1,125,460
   
$
1,118,665
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Short-term debt
 
$
9,975
   
$
8,731
 
Current portion of long-term debt
   
7,959
     
2,142
 
Accounts payable
   
84,707
     
91,379
 
Accrued liabilities
   
55,013
     
49,702
 
                 
Total current liabilities
   
157,654
     
151,954
 
                 
Long-term debt
   
36,449
     
41,887
 
Other liabilities
   
18,556
     
13,732
 
                 
Total liabilities
   
212,659
     
207,573
 
                 
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, 66,144 shares issued and 65,228 outstanding at February 2, 2020 and 65,595 shares issued and outstanding at October 31, 2019
   
661
     
656
 
Additional paid-in capital
   
528,535
     
524,319
 
Retained earnings
   
264,222
     
253,922
 
Treasury stock, 916 shares at February 2, 2020
   
(11,000
)
   
-
 
Accumulated other comprehensive loss
   
(11,742
)
   
(9,005
)
                 
Total Photronics, Inc. shareholders’ equity
   
770,676
     
769,892
 
Noncontrolling interests
   
142,125
     
141,200
 
                 
Total equity
   
912,801
     
911,092
 
                 
Total liabilities and equity
 
$
1,125,460
   
$
1,118,665
 

See accompanying notes to condensed consolidated financial statements.

4


PHOTRONICS, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended
 
   
February 2,
2020
   
January 27,
2019
 
             
Revenue
 
$
159,736
   
$
124,712
 
                 
Cost of goods sold
   
125,134
     
98,610
 
                 
Gross profit
   
34,602
     
26,102
 
                 
Operating expenses:
               
                 
Selling, general and administrative
   
14,219
     
13,792
 
                 
Research and development
   
4,080
     
4,263
 
                 
Total operating expenses
   
18,299
     
18,055
 
                 
Operating income
   
16,303
     
8,047
 
                 
Other income (expense):
               
Interest income and other income (expense), net
   
5,495
     
1,639
 
Interest expense
   
(1,798
)
   
(531
)
                 
Income before income taxes
   
20,000
     
9,155
 
                 
Income tax provision
   
9,072
     
1,387
 
                 
Net income
   
10,928
     
7,768
 
                 
Net income attributable to noncontrolling interests
   
628
     
2,501
 
                 
Net income attributable to Photronics, Inc. shareholders
 
$
10,300
   
$
5,267
 
                 
Earnings per share:
               
                 
Basic
 
$
0.16
   
$
0.08
 
                 
Diluted
 
$
0.16
   
$
0.08
 
                 
Weighted-average number of common shares outstanding:
               
                 
Basic
   
65,554
     
66,583
 
                 
Diluted
   
66,449
     
67,047
 

See accompanying notes to condensed consolidated financial statements.

5



PHOTRONICS, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Three Months Ended
 
   
February 2,
2020
   
January 27,
2019
 
             
Net income
 
$
10,928
   
$
7,768
 
                 
Other comprehensive (loss) income, net of tax of $:
               
                 
Foreign currency translation adjustments
   
(1,564
)
   
6,572
 
Other
   
17
     
19
 
                 
Net other comprehensive (loss) income
   
(1,547
)
   
6,591
 
                 
Comprehensive income
   
9,381
     
14,359
 
                 
Less: comprehensive income attributable to noncontrolling interests
   
1,818
     
3,783
 
                 
Comprehensive income attributable to Photronics, Inc. shareholders
 
$
7,563
   
$
10,576
 

See accompanying notes to condensed consolidated financial statements.

6



PHOTRONICS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)

 
Three Months Ended February 2, 2020
 
   
Photronics, Inc. Shareholders
             
         
Additional
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Non-
controlling
Interests
   
Total
Equity
 
     
 
Common Stock
 
   
Shares
   
Amount
 
                                                 
Balance at October 31, 2019
   
65,595
   
$
656
   
$
524,319
   
$
253,922
   
$
-
   
$
(9,005
)
 
$
141,200
   
$
911,092
 
                                                                 
Net income
   
-
     
-
     
-
     
10,300
     
-
     
-
     
628
     
10,928
 
Other comprehensive (loss) income
   
-
     
-
     
-
     
-
     
-
     
(2,737
)
   
1,190
     
(1,547
)
Sale of common stock through employee stock option and purchase plans
   
358
     
3
     
2,854
     
-
     
-
     
-
     
-
     
2,857
 
Restricted stock awards vesting and expense
   
191
     
2
     
756
     
-
     
-
     
-
     
-
     
758
 
Share-based compensation expense
   
-
     
-
     
351
     
-
     
-
     
-
     
-
     
351
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(11,000
)
   
-
     
-
     
(11,000
)
Repurchase of common stock of subsidiary
   
-
     
-
     
255
     
-
     
-
     
-
     
(893
)
   
(638
)
                                                                 
Balance at February 2, 2020
   
66,144
   
$
661
   
$
528,535
   
$
264,222
   
$
(11,000
)
 
$
(11,742
)
 
$
142,125
   
$
912,801
 

 
Three Months Ended January 27, 2019
 
   
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
(Loss) Income
   
Interests
   
Equity
 
                                                 
Balance at October 31, 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
   
-
     
-
     
-
     
5,267
     
-
     
-
     
2,501
     
7,768
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
5,309
     
1,282
     
6,591
 
Sale of common stock through employee stock option and purchase plans
   
94
     
1
     
521
     
-
     
-
     
-
     
-
     
522
 
Restricted stock awards vesting and expense
   
123
     
1
     
567
     
-
     
-
     
-
     
-
     
568
 
Share-based compensation expense
   
-
     
-
     
494
     
-
     
-
     
-
     
-
     
494
 
Contribution from noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
29,394
     
29,394
 
Dividends to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
(26,102
)
   
(26,102
)
Repurchase of common stock of subsidiary
   
-
     
-
     
-
     
-
     
-
     
-
     
(9
)
   
(9
)
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(10,696
)
   
-
     
-
     
(10,696
)
                                                                 
Balance at January 27, 2019
   
69,917
   
$
699
   
$
557,188
   
$
236,665
   
$
(33,807
)
 
$
343
   
$
152,082
   
$
913,170
 


See accompanying notes to condensed consolidated financial statements.
7



PHOTRONICS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Three Months Ended
 
   
February 2,
2020
   
January 27,
2019
 
             
Cash flows from operating activities:
           
Net income
 
$
10,928
   
$
7,768
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
24,626
     
18,781
 
Share-based compensation
   
1,356
     
1,062
 
Changes in assets and liabilities:
               
Accounts receivable
   
(6,699
)
   
(9,333
)
Inventories
   
(1,435
)
   
(2,313
)
Other current assets
   
4,724
     
(22,082
)
Accounts payable, accrued liabilities, and other
   
(2,715
)
   
(13,169
)
                 
Net cash provided by (used in) operating activities
   
30,785
     
(19,286
)
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(13,807
)
   
(106,925
)
Government incentives
   
2,417
     
5,029
 
Other
   
(139
)
   
19
 
                 
Net cash used in investing activities
   
(11,529
)
   
(101,877
)
                 
Cash flows from financing activities:
               
Proceeds from debt
   
1,140
     
28,180
 
Purchase of treasury stock
   
(11,000
)
   
(10,696
)
Repayments of debt
   
(389
)
   
-
 
Proceeds from share-based arrangements
   
2,886
     
650
 
Contribution from noncontrolling interest
   
-
     
29,394
 
Dividends paid to noncontrolling interest
   
-
     
(26,102
)
Other
   
(248
)
   
(45
)
                 
Net cash (used in) provided by financing activities
   
(7,611
)
   
21,381
 
                 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
   
149
     
2,961
 
                 
Net increase (decrease) in cash, cash equivalents, and restricted cash
   
11,794
     
(96,821
)
Cash, cash equivalents, and restricted cash at beginning of period
   
209,291
     
331,989
 
                 
Cash, cash equivalents, and restricted cash at end of period
 
$
221,085
   
$
235,168
 
                 
Supplemental disclosure information:
               
                 
Accrual for property, plant and equipment purchased during the period
 
$
1,511
   
$
30,697
 
Accrual for property, plant and equipment purchased with funds receivable from government incentives
 
$
-
   
$
11,799
 

See accompanying notes to condensed consolidated financial statements.

8


PHOTRONICS, INC.
Notes to Condensed Consolidated Financial Statements
(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 FPD 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 fiscal 2019 and our IC facility in Xiamen, China, commenced production in the third quarter of fiscal 2019.


The accompanying unaudited condensed consolidated financial statements (“the 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. The financial statements include the accounts of Photronics, Inc., its wholly owned subsidiaries, and the majority-owned subsidiaries which it controls. All intercompany balances and transactions have been eliminated in consolidation.


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in them. Estimates are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available at the time they are made. Actual results we report may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.


Our business is typically impacted during the first, and sometimes the second, quarters 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, 2020. 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, 2019.

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:


 
February 2,
2020
   
October 31,
2019
 
             
Raw materials
 
$
46,090
   
$
46,027
 
Work in process
   
2,981
     
2,122
 
Finished goods
   
602
     
6
 
                 
   
$
49,673
   
$
48,155
 


9

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT


Property, plant and equipment consists of the following:


 
February 2,
2020
   
October 31,
2019
 
             
Land
 
$
12,055
   
$
12,085
 
Buildings and improvements
   
173,497
     
172,340
 
Machinery and equipment
   
1,759,785
     
1,748,483
 
Leasehold improvements
   
20,021
     
19,921
 
Furniture, fixtures and office equipment
   
14,304
     
14,404
 
Construction in progress
   
18,521
     
28,135
 
                 
     
1,998,183
     
1,995,368
 
Accumulated depreciation and amortization
   
(1,378,248
)
   
(1,362,927
)
                 
   
$
619,935
   
$
632,441
 


Depreciation and amortization expense for property, plant and equipment was $23.5 million and $17.6 million for the three-month periods ended February 2, 2020 and January 27, 2019, respectively.

NOTE 4 - PDMCX JOINT VENTURE


In January 2018, Photronics, through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, or “our”), 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 IC business in Xiamen, China. 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 provides to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the formation of this joint venture.



The total investment per the PDMCX operating agreement (“the Agreement”) is $160 million. As of February 2, 2020, Photronics and DNP had each contributed cash of approximately $48 million, and PDMCX obtained local financing of approximately $35 million. The remaining $29 million investment will be funded, over the next several quarters, with  additional local financing of $15 million and approximately $14 million of cash contributions from Photronics and DNP. As discussed in Note 5, liens were granted to a financing entity on assets with a total carrying value of $92.9 million, as collateral for loans.


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. As of the date of issuance of these financial statements, DNP had not indicated its intention to exercise this right. 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 twenty percent 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 $3.7 million, and $1.3 million during the three-month periods ended February 2, 2020 and January 27, 2019, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum exposure to loss from PDMCX at February 2, 2020, was $36.6 million.
10





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) and 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's 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.


 
February 2, 2020
   
October 31, 2019
 
Classification
 
Carrying
Amount
   
Photronics
Interest
   
Carrying
Amount
   
Photronics
Interest
 
                         
Current assets
 
$
23,638
   
$
11,821
   
$
24,142
   
$
12,074
 
Non-current assets
   
110,296
     
55,159
     
114,015
     
57,019
 
                                 
Total assets
   
133,934
     
66,980
     
138,157
     
69,093
 
                                 
Current liabilities
   
24,044
     
12,024
     
16,889
     
8,446
 
Non-current liabilities
   
36,716
     
18,362
     
42,094
     
21,051
 
                                 
Total liabilities
   
60,760
     
30,386
     
58,983
     
29,497
 
                                 
Net assets
 
$
73,174
   
$
36,594
   
$
79,174
   
$
39,596
 

NOTE 5 – LONG-TERM DEBT


Long-term debt consists of the following:


 
February 2,
2020
   
October 31,
2019
 
             
Project Loans
 
$
35,094
   
$
34,490
 
Working Capital Loans (value added tax component)
   
9,314
     
9,539
 
                 
     
44,408
     
44,029
 
Current portion of long-term debt
   
(7,959
)
   
(2,142
)
                 
 Long-term debt
 
$
36,449
   
$
41,887
 

11



At February 2, 2020, maturities of our long-term debt over the next five fiscal years and thereafter were as follows:

2020 (remainder of)
 
$
1,788
 
2021
   
8,449
 
2022
   
12,648
 
2023
   
3,501
 
2024
   
6,704
 
Thereafter
   
11,318
 
 
 
$
44,408
 


As of February 2, 2020 and October 31, 2019, the weighted-average interest rates of our short-term debt were 3.90% and 3.84%, respectively.

Project Loans


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 initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in Chinese renminbi (RMB), are being used to finance certain capital expenditures in China. PDMCX granted liens on its land, building, and certain equipment, which had a combined carrying value of $92.9 million as of February 2, 2020, as collateral for the Project Loans. As of February 2, 2020, PDMCX had borrowed 243.4 million RMB ($35.1 million) against this approval. Payments on these borrowings are due semi-annually through December 2025; the initial payment is scheduled for June 2020. The table below presents, in U.S. dollars, the timing of future payments against the borrowings.



 
Fiscal Year
 
   
2020
   
2021
   
2022
   
2023
   
2024
   
2025
   
2026
 
                                           
Principal payments
 
$
1,298
   
$
6,488
   
$
5,785
   
$
3,501
   
$
6,704
   
$
6,416
   
$
4,902
 


The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at February 2, 2020). Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.


Working Capital Loans


 In November 2018, PDMCX received approval for unsecured credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loans”), PDMCX can borrow up to 140.0 million RMB to pay value-added taxes (“VAT”), and up to 60.0 million RMB to fund operations; combined total borrowings are limited to $25.0 million. As of February 2, 2020, PDMCX had 64.6 million RMB ($9.3 million) outstanding against the approval to pay VAT. Payments on these borrowings are due semiannually, at an increasing rate, through January 2022; PDMCX made installment payments totaling $0.4 million during the three-month period ended February 2, 2020. The table below presents, in U.S. dollars, the timing of future payments against these borrowings.


 
Fiscal Year
 
   
2020
   
2021
   
2022
 
                   
Principal payments
 
$
490
   
$
1,961
   
$
6,863
 


As of February 2, 2020, PDMCX had borrowed, in several transactions to fund operations, 44.8 million RMB ($6.5 million) against the approval, all of which was outstanding as of that date repayments are due one year from the borrowing dates.


The interest rates on borrowings to fund operations are approximately 4.4 to 4.6% and interest rates on borrowings to pay VAT are approximately 4.8 to 4.9%; both rates are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus spreads that range from 25.75 to 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 provide for such reimbursements up to a prescribed limit.
12



Equipment Loan


Effective July 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds to finance equipment to be leased or purchased in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of a high-end lithography tool. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.5 million to the equipment vendor on our behalf. Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1% (2.67% at February 2, 2020), and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. We intend to enter into a lease agreement for the related equipment in fiscal year 2020; as such, we have classified this borrowing as current debt. All borrowings under the MLA are secured by the equipment to be leased or purchased.

Credit Agreement


In September 2018, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The Credit Agreement is secured by substantially all of our assets located in the United States and common stock we own in certain foreign subsidiaries. The Credit Agreement includes minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance covenants (all of which we were in compliance with at February 2, 2020), and limits the amount of cash dividends, distributions, and redemptions we can pay on our common stock to an aggregate annual amount of $50 million. We had no outstanding borrowings against the Credit Agreement at February 2, 2020, and $50 million was available for borrowing. The interest rate on the Credit Agreement (2.65% at February 2, 2020) is based on our total leverage ratio at LIBOR plus a spread, as defined in the Credit Agreement.

NOTE 6 - REVENUE



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. 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 uncompleted revenue contracts on which we have performed; for any such contracts under which 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 to customer specifications, in accordance with their proprietary designs; 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 primarily consist of a significant amount of our in-process production orders and fully manufactured photomasks which have not yet shipped, for which 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 $7.9 million are included in “Other” current assets, and contract liabilities of $11.8 million are included in Accrued liabilities in our February 2, 2020 condensed consolidated balance sheet. Our October 31, 2019 condensed consolidated balance sheet includes contract assets of $7.6 million and contract liabilities of $11.5 million; with like classification to the February 2, 2020, balances. We did not impair any contract assets during the three-month periods ended February 2, 2020 or January 27, 2019, and we recognized $1.2 million and $0.7 million of revenue from the settlement of contract liabilities that existed at the beginning of those respective periods.
13




We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed for collectibility during, and at the end of, every reporting period. 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 derecognize the related receivable. Credit losses incurred on our accounts receivable during the three-month period ended February 2, 2020, were immaterial, and we did not incur any credit losses on our accounts receivable during the three-month period ended January 27, 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 modify terms of sale, which may require payment in advance of performance. We have elected the practical expedient allowed under ASC Topic 606 “Revenue from Contracts with Customers” (“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-month periods ended February 2, 2020 and January 27, 2019, disaggregated by product type, geographic origin, and timing of recognition. In the three-month period ended February 2, 2020, we changed the threshold for the definition of high-end FPD, from G8 and above and active matrix organic light-emitting diode (AMOLED) display screens, to G10.5 and above, AMOLED, and low-temperature polysilicon display screens (LTPS), to reflect the overall advancement of technology in the FPD industry. Our definition of high-end IC products remains as 28 nanometer or smaller. The revenue by product type for the three-month period ended January 27, 2019, presented below has been reclassified to conform to the current period presentation.


 
Three Months Ended
   
Three Months Ended
 
   
February 2, 2020
   
January 27, 2019
 
Revenue by Product Type
           
             
IC
           
High-end
 
$
41,041
   
$
34,566
 
Mainstream
   
65,937
     
60,314
 
                 
Total IC
 
$
106,978
   
$
94,880
 
                 
                 
FPD
               
High-end
 
$
39,770
   
$
15,350
 
Mainstream
   
12,988
     
14,482
 
                 
Total FPD
 
$
52,758
   
$
29,832
 
                 
   
$
159,736
   
$
124,712
 

14


Revenue by Geographic Origin
       
Taiwan
 
$
66,114
   
$
57,740
 
Korea
   
40,736
     
35,237
 
United States
   
25,067
     
22,472
 
Europe
   
7,543
     
8,354
 
China
   
19,900
     
263
 
All other Asia
   
376
     
646
 
                 
   
$
159,736
   
$
124,712
 

Revenue by Timing of Recognition
       
Over time
 
$
137,696
   
$
120,845
 
At a point in time
   
22,040
     
3,867
 
   
$
159,736
   
$
124,712
 

Contract Costs


We pay commissions to third party sales agents for certain sales that they obtain for us. However, the bases of the commissions are 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 one to twenty-four months. We warrant that our photomasks conform to customer specifications, and will typically repair, replace, or issue a refund for, 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 – LEASES


We adopted ASU 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842”), on November 1, 2019. The guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption. We elected to apply the guidance at the beginning of the period of adoption and recorded, as of November 1, 2019, right-of-use (ROU) leased assets of $6.5 million. In conjuction with this, we recorded lease liabilities, which had been discounted at our incremental borrowing rates, of $6.5 million.


The guidance allows a number of elections and practical expedients, of which we elected the following:

-
Election not to recognize short-term leases on the balance sheet.
-
Practical expedient to not separate lease and non-lease components in a contract.

15


-
Practical expedient “package” for transitioning to the new guidance:
-
Not reassessing whether any expired or existing contracts are, or contain, leases.
-
Not reassessing lease classification for any existing or expired leases.
-
Not reassessing initial direct costs for any existing leases.


Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is or contains a lease on the date of the lease agreement or commitment, if earlier. Our evaluation considers whether the arrangement includes an identified asset and whether it affords us the right to control the asset. Our having the right to control the identified asset is determined by whether we are entitled to substantially all of its economic benefits and can direct its use.


We recognize leases on our consolidated balance sheet when a lessor makes an asset underlying a lease having a term in excess of twelve months available for our use. The present value of lease payments over the term of the lease, which is determined using our incremental borrowing rate for collateralized loans at the commencement date of the lease, provides the basis for the initial measurement of ROU assets and their related lease liabilities. Variable lease payments, other than those that are dependent on an index or on a rate, are not included in the measurement of ROU assets and their related lease liabilities. Lease terms will include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise.


ROU assets underlying our leases include the land and facilities of some of our operating facilities, other real property, and machinery and equipment. As of February 2, 2020, we had ROU assets under operating leases of $7.0 million, included in “Other Assets”, and $1.9 and $4.4 million of lease liabilities in Accrued liabilities and Other liabilities, respectively, and recognized operating lease and short-term lease costs of $1.2 million and $0.1 million, respectively, in the three-month period then ended; variable lease costs incurred were not material. The following tables present lease payments under non-cancellable leases as of February 2, 2020.

 
 
Fiscal Year
                     
 
 
2020
   
2021
   
2022
   
2023
   
2024
   
Thereafter
   
Total Lease
Payments
   
Imputed
Interest*
   
Total
 
Lease payments
 
$
1,521
   
$
1,767
   
$
1,652
   
$
770
   
$
438
   
$
386
   
$
6,534
   
$
(286
)
 
$
6,248
 


*          Imputed interest represents difference between undiscounted cash flows and discounted cash flows.


Presented below is other information related to our operating leases.

 
 
Three Months Ended
 
Supplemental cash flows information:
 
February 2, 2020
 
       
Operating cash flows from operating leases
 
$
1,885
 
ROU assets obtained in exchange for lease obligations
 
$
282
 

 
 
As of
 
 
 
February 2, 2020
 
 
     
Weighted-average remaining lease term
 
3.9 years
 
Weighted-average discount rate
   
2.38
%


Rent expense, as calculated under guidance in effect prior to our adoption of the new leases guidance, was $3.0 million in fiscal year 2019. At October 31, 2019, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as presented in the table below. The amounts are undiscounted and were calculated in accordance with guidance in effect prior to our adoption of the new leases guidance.
16




2020
 
$
1,885
 
2021
   
1,613
 
2022
   
1,535
 
2023
   
742
 
2024
   
424
 
Thereafter
   
377
 
         
   
$
6,576
 

NOTE 8 - 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 held in the treasury, or a combination thereof. The maximum number of shares of common stock approved for issuance 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. We incurred total share-based compensation expenses of $1.4 million and $1.1 million in the three-month periods ended February 2, 2020 and January 27, 2019, and we received cash from option exercises of $2.8 million and $0.5 million during those respective periods. 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 annually, on a straight-line basis,over 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 granted are expected to remain outstanding. The risk-free rate of return for the estimated term of an option is based on the U.S. Treasury yield curve in effect at the date of grant.



There were no options granted during the three-month period ended February 2, 2020, and there were 132,000 share options granted during the three-month period ended January 27, 2019, with a weighted-average grant date fair value of $3.31 per share. As of February 2, 2020, the total unrecognized compensation cost related to unvested option awards was approximately $0.7 million. That cost is expected to be recognized over a weighted-average amortization period of 2.1 years.


The weighted-average inputs and risk-free rates of return used to calculate the grant-date fair value of options issued during the three-month period ended January 27, 2019, are presented in the following table.



Three Months Ended
 
January 27, 2019
 
 
Volatility
 
33.1%
 
 
 
Risk free rate of return
 
2.5-2.9%
 
 
 
Dividend yield
 
0.0%
 
 
 
Expected term
 
5.1 years

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Information on outstanding and exercisable option awards as of February 2, 2020, is presented below.

Options
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
                       
Outstanding at February 2, 2020
 
1,795,989
 
$
9.17
 
5.4 years
 
$
6,492
 
                       
Exercisable at February 2, 2020
 
1,487,661
 
$
9.07
 
4.8 years
 
$
5,518
 

Restricted Stock


We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one to four years. . The fair value of an award is the closing price of our common stock on the date of grant. There were 522,000 restricted stock awards issued during the three-month period ended February 2, 2020, with a weighted-average grant-date fair value of $15.26 per share, and there were 435,000 restricted stock awards issued during the three-month period ended January 27, 2019, with a weighted-average grant-date fair value of $9.80 per share. As of February 2, 2020, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $10.6 million. That cost is expected to be recognized over a weighted-average amortization period of 3.2 years. As of February 2, 2020, there were 939,766 shares of restricted stock outstanding.

NOTE 9 - INCOME TAXES


We calculate our provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.


The effective tax rate of 45.4% exceeds the U.S. statutory rate of 21.0% in the three-month period ended February 2, 2020, primarily due to the non-recognition of the tax benefit of losses that, in certain jurisdictions, have been offset by valuation allowances, and the establishment of a valuation allowance for a loss carryforward in a non-U.S. jurisdiction, which were partially offset by the benefit of tax holidays and investment credits in certain foreign jurisdictions.


Valuation allowances, in jurisdictions with historic losses, eliminate the current tax benefit of losses in these jurisdictions where, based on the weight of information available to us, we determined that it is more likely than not that the tax benefits will not be realized. In the three-month period ended February 2,2020, as a result of the reassessment of the aforementioned available information, we established a valuation allowance of $2.1 million against a non-U.S. based loss carryforward deferred tax asset that is not more likely than not to be realized.


Unrecognized tax benefits related to uncertain tax positions were $1.9 million at February 2, 2020, and October 31, 2019, substantially all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.2 million at February 2, 2020 and October 31, 2019. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that the amount of uncertain tax positions (including interest and penalties, and net of tax benefits) that may be resolved over the next twelve months is immaterial. Resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements. The Company is no longer subject to tax authority examinations in the U.S. and major foreign or state jurisdictions for years prior to fiscal year 2015.


We were granted a five-year tax holiday in Taiwan that expired on December 31, 2019. This tax holiday reduced foreign taxes by $0.1 million, and $0.8 million in the three-month periods ended February 2, 2020 and January 27, 2019, respectively, with an immaterial per share impact in the February 2, 2020 period and a one half-cent per share effect in the January 27, 2019 period.


The effective tax rate of 15.2% differs from the U.S. statutory rate of 21.0% in the three-month period ended January 27, 2019, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, the settlement of a tax audit, the benefit of a tax holiday, and investment credits in certain foreign jurisdictions.
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NOTE 10 - EARNINGS PER SHARE


The calculation of basic and diluted earnings per share is presented below.


 
Three Months Ended
 
       
   
February 2,
2020
   
January 27,
2019
 
             
Net income attributable to Photronics, Inc. shareholders
 
$
10,300
   
$
5,267
 
                 
Earnings used for diluted earnings per share
 
$
10,300
   
$
5,267
 
                 
Weighted-average common shares computations:
               
Weighted-average common shares used for basic earnings per share
   
65,554
     
66,583
 
Effect of dilutive securities: