PHOTRONICS INC

Previous wording

Management's discussion and analysis (“MD&A”) of the Company's financial condition and results of operations should be read in conjunction with its condensed consolidated financial statements and related notes. Various sections of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Form 10-K for fiscal year 2023), that may cause actual results to materially differ from these expectations. See “Forward-Looking Statements”.

Current wording

Management’s discussion and analysis (“MD&A”) of the Company’s financial condition and results of operations should be read in conjunction with its condensed consolidated financial statements and related notes. Various sections of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company’s Form 10-K for the fiscal year ended October 31, 2023), that may cause actual results to materially differ from these expectations. See “Forward-Looking Statements”.

Previous wording

We are typically required to fulfill customer orders within a short period of time, sometimes within twenty-four hours. This has historically resulted in a minimal level of backlog, typically two to three weeks of backlog for FPD photomasks and one to two weeks for IC photomasks. However, due to market dynamics over the last two years, the demand for some IC photomasks had expanded beyond the industry’s capacity to supply them within the traditional time period; thus, for some products, the backlog had expanded to as long as two to three months. More recently however, while supply and demand balance generally still remains favorable for our products, backlogs for most high demand products have normalized to more manageable levels of less than a month.

Current wording

We are typically required to fulfill customer orders within a short period of time, sometimes within twenty-four hours. This has historically resulted in a minimal level of backlog, typically two to three weeks of backlog for FPD photomasks and one to two weeks for IC photomasks. However, due to market dynamics over the last two years, the demand for some IC photomasks had expanded beyond the industry’s capacity to supply them within the traditional time period; thus, for some products, the backlog had expanded to as long as two to three months. More recently however, while supply and demand balance generally remains favorable for our products, backlogs for most high demand products have normalized to more manageable levels of less than a month.

Previous wording

Note: All tabular comparisons included in the following discussion, unless otherwise indicated, are for the three months ended April 28, 2024 (Q2 FY24), January 28, 2024 (Q1 FY24), and April 30, 2023 (Q2 FY23) and for the six months ended April 28, 2024 (YTD FY24) and April 30, 2023 (YTD FY23).

Current wording

Note: All tabular comparisons included in the following discussion, unless otherwise indicated, are for the three months ended July 28, 2024 (Q3 FY24), April 28, 2024 (Q2 FY24), and July 30, 2023 (Q3 FY23) and for the nine months ended July 28, 2024 (YTD FY24) and July 30, 2023 (YTD FY23).

Previous wording

The following tables present changes in disaggregated revenue in Q2 FY24 from revenue in prior reporting periods.

Current wording

The following tables present changes in disaggregated revenue in Q3 FY24 from revenue in prior reporting periods. The columns may not foot due to rounding.

Previous wording

Quarterly Changes in Revenue by Product Type

Current wording

Quarterly and YTD Changes in Revenue by Product Type

Previous wording

Quarterly Changes in Revenue by Geographic Origin

Current wording

Quarterly and YTD Changes in Revenue by Geographic Origin

Previous wording

IC photomask revenue increased by 2.1% compared with Q1 FY24. The increase from Q1 FY 24 was primarily the result of increased mainstream demand in Asia offsetting decreased high end demand primarily in the U.S. IC photomask revenue decreased by 3.7% compared to Q2 FY23 as increased high-end demand were more than offset by decreased mainstream demand.

Current wording

IC photomask revenue decreased by 3.1% compared with Q2 FY24. The decrease from Q2 FY 24 was primarily as a result of lower demand from Asia foundries. IC photomask revenue decreased by 4.4% compared to Q3 FY23 as increased high-end demand was more than offset by decreased mainstream demand.

Previous wording

On a YTD basis, IC revenue decreased 1.6% and FPD revenue decreased 1.7%; both were due to soft demand in mainstream.

Current wording

On a YTD basis, IC revenue decreased 2.5% and FPD revenue decreased 4.4%; both were due to soft demand in mainstream.

Previous wording

Gross margin decreased 210 basis points, in Q2 FY24, from Q2 FY23, primarily as a result of the decrease in revenue from lower Premium charges. Material costs decreased 5.8% from the prior year quarter, and, decreased as a percentage of revenue by 11 basis points. Labor costs decreased 1.2% from the prior year quarter, but, increased, as a percent of revenue, by 49 basis points as labor increased in both the U.S. and at several Asia-based facilities, reflecting labor market conditions. Equipment and other overhead costs increased 0.5% from the prior quarter, and, increased 163 basis points as a percentage of revenue.

Current wording

Gross margin decreased by 310 basis points in Q3 FY24, from Q3 FY23, primarily as a result of the decrease in revenue and its effect on operating leverage. Material costs decreased 6.2% from Q3 FY23 and decreased by 8 basis points as a percentage of revenue. Labor costs decreased 5.2% from Q3 FY23, but as a percent of revenue, increased by 8 basis points as a result of lower revenue in the current quarter. Equipment and other overhead costs increased 4.9% from Q3 FY23 and increased by 303 basis points as a percentage of revenue.

Previous wording

Gross margin decreased by 70 basis points in YTD FY24, from YTD FY23, primarily as a result of the decrease in revenue from lower Premium charges. Material costs decreased 1.9% from YTD FY23, and, decreased 7 basis points, as a percentage of revenue. Labor costs increased 1.4% from YTD FY23, and, increased 35 basis points as a percentage of revenue. The increase was primarily the result of increased labor cost in Asia. Equipment and other overhead costs rose 0.2%, and, increased 49 basis points, as a percentage of revenue. Increased depreciation expense, partially offset by decreased outsourced manufacturing, and increased R&D reclassification costs were the most significant contributors to the net increase in equipment and other overhead costs.

Current wording

Gross margin decreased by 150 basis points in YTD FY24, from YTD FY23, primarily as a result of the decrease in revenue and its effect on operating leverage. Material costs decreased 3.3% from YTD FY23 and decreased by 7 basis points as a percentage of revenue. Labor costs decreased 0.8 % from YTD FY23, but increased by 26 basis points as a percentage of revenue. Equipment and other overhead costs rose 1.8% and increased by 135 basis points as a percentage of revenue. Increased depreciation expense, partially offset by decreased outsourced manufacturing were the most significant contributors to the net increase in equipment and other overhead costs.

Previous wording

Selling, general, and administrative expenses were $19.0 million in Q2 FY24, compared with $18.3 million in Q1 FY24. The increase of $0.7 million was primarily the result of increased compensation and related expenses of $0.1 million and increased professional fees of $0.2 million. Selling, general, and administrative expenses increased $1.1 million in Q2 FY24, from $17.9 million in Q2 FY23, primarily as a result of increased compensation and related expenses of $1.2 million.

Current wording

Selling, general, and administrative expenses were$19.4 million in Q3 FY24, compared with $19.0 million in Q2 FY24. The increase of $0.4 million was primarily as a result of increased professional fees of $1.0 million offset by a decrease in compensation and related expense of $0.7 million. Selling, general, and administrative expenses increased $1.4 million in Q3 FY24, from $18.0 million in Q3 FY23, primarily as a result of increased professional fees of $1.3 million offset by a decrease in compensation and related expense of $0.6 million.

Previous wording

Selling, general, and administrative expenses increased $2.6 million in YTD FY24 to $37.3 million, compared with $34.7 million in YTD FY23. The increase was driven by the results of increased compensation and related expense of $2.4 million.

Current wording

Selling, general, and administrative expenses increased $4.1 million in YTD FY24 to $56.8 million, compared with $52.7 million in YTD FY23. The increase was primarily driven by higher compensation and related expense of $1.8 million, with the remaining difference mainly due to increase in professional service fees.

Previous wording

Research and development expenses, which primarily consist of development and qualification efforts related to process technologies for high-end IC and FPD applications, were $4.3 million in Q2 FY24, $3.4 million in Q1 FY24, and $3.5 million in Q2 FY23.

Current wording

Research and development expenses primarily consist of development and qualification efforts related to process technologies for high-end IC and FPD applications, were $3.6 million in Q3 FY24, $4.3 million in Q2 FY24, and $3.5 million in Q3 FY23. Thedecrease of $0.7 million from Q2 FY24 to Q3 FY24 was mainly due to the reduced research and development activities in the U.S.

Previous wording

Research and development expenses increased by $0.9 million in YTD FY24 to $7.7 million, compared with $6.8 million in YTD FY23. The increase was driven by the expansion of development activities in the U.S., Taiwan, and China.

Current wording

Research and development expenses increased by $1.0 million in YTD FY24 to $11.3 million, compared with $10.3 million in YTD FY23. The increase was driven by the expansion of development activities in the U.S. and Taiwan.

Previous wording

Non-operating income (expense) increased $24.2 million to $20.5 million in Q2 FY24, compared with $(3.7) million in Q1 FY24, primarily due to foreign currency transactions impact, net, driven by favorable movements of the U.S. dollar againstthe New Taiwan Dollar and the South Korean won. Non-operating income (expense) increased $6.9 million compared with Q2 FY23, primarily due to foreign currency transaction impact, net, driven by favorable movements of the U.S. dollar against the New Taiwan Dollar.

Current wording

Non-operating income (expense) decreased $10.4 million to $10.1 million in Q3 FY24, compared with $20.5 million in Q2 FY24, primarily due to foreign currency transactions impact, net, driven by unfavorable movements of the U.S. dollar against the New Taiwan Dollar and the South Korean won. Non-operating income (expense) increased $11.0 million compared with Q3 FY23, primarily due to foreign currency transaction impact, net, driven by favorable movements of the U.S. dollar against the South Korean won and the RMB.

Previous wording

Interest income and other income (expense), net, of $5.8 million in Q2 FY24 increased $0.5 million compared with $5.3 million in Q1 FY24. Interest income and other income (expense), net, increased $2.8 million compared to $3.0 million in Q2 FY23 driven by an increase in time deposits within cash and cash equivalents, and higher interest rates.

Current wording

Interest income and other income (expense), net, of $6.1 million in Q3 FY24 increased $0.3 million from $5.8 million in Q2 FY24, and increased $2.4 million from $3.7 million in Q3 FY23, both driven by an increase in time deposits with higher interest rates.

Previous wording

Non-operating income (expense) increased $17.6 million to $16.8 million in YTD FY24, compared with $(0.8) million in YTD FY23, primarily due to foreign currency transactions impact, net, driven by favorable movements of the U.S. dollar against the New Taiwan Dollar and the South Korean won.

Current wording

Non-operating income (expense) increased $28.7 million to $26.9 million in YTD FY24, compared with $(1.8) million in YTD FY23, primarily due to foreign currency transactions impact, net, driven by favorable movements of the U.S. dollar against the South Korean won and the New Taiwan Dollar.

Previous wording

Interest income and other income (expense), net, increased to $11.1 million in YTD FY24, compared with $5.6 million in YTD FY23, primarily due to an increase in time deposits within cash invested and higher interest rates.

Current wording

Interest income and other income (expense), net, increased to $17.3 million in YTD FY24, compared with $9.3 million in YTD FY23, primarily due to an increase in time deposits with higher interest rates.

Previous wording

The effective income tax rate decrease in Q2 FY24, compared with Q1 FY24, is primarily due to changes in the jurisdictional mix of earnings anda decrease inforeign taxes in Q2 FY24.

Current wording

The effective income tax rate decrease in Q3 FY24, compared with Q2 FY24, is primarily due to changes in the jurisdictional mix of earnings and a decrease in foreign taxes in Q3 FY24.

Previous wording

Net income attributable to noncontrolling interests was $20.1 million in Q2 FY24, compared with $12.9 million in Q1 FY24, and $19.3 million in Q2 FY23. The increase from Q1 FY24 to Q2 FY24 resulted from increased net income at our Taiwan-based IC joint venture. Net income attributable to noncontrolling interest was $33.0 million in YTD FY24, compared with $34.3 million in YTD FY23 as a result of decreased net income at our Taiwan-based IC joint venture.

Current wording

Net income attributable to noncontrolling interests was $13.8 million in Q3 FY24, compared with $20.1 million in Q2 FY24, and $21.3 million in Q3 FY23. The decrease from Q2 FY24 and Q3 FY23 to Q3 FY24 resulted from decreased net income at our joint ventures. Net income attributable to noncontrolling interest was $46.8 million in YTD FY24, compared with $55.6 million in YTD FY23 as a result of decreased net income at our joint ventures.

Previous wording

Cash and cash equivalents were $493.9 million and $499.3 million as of April 28, 2024, and October 31, 2023, respectively. As of April 28, 2024, total cash and cash equivalents included $469.4 million held by foreign subsidiaries. Net Cash, a non-GAAP financial measure as defined and discussed in the Non-GAAP Financial Measures section below, was $472.1 million and $474.7 million as of April 28, 2024, and October 31, 2023, respectively. Our primary sources of liquidity are our cash on hand and cash we generate from operations. In addition, we currently have approximately $25.0 million of borrowing capacity in China to support local operations. See Note 7 to the condensed consolidated financial statements for additional information on our outstanding debt and currently available financing.

Current wording

Cash and cash equivalents were $537.3 million and $499.3 million as of July 28, 2024, and October 31, 2023, respectively. As of July 28, 2024, total cash and cash equivalents included $502.0 million held by foreign subsidiaries. Our primary sources of liquidity are our cash on hand and cash we generate from operations. In addition, we currently have $69.0 million in short-term investments and approximately $27.6 million of borrowing capacity in China, to support local operations. See Note 7 to the condensed consolidated financial statements for additional information on our outstanding debt and currently available financing.

Previous wording

We estimate capital expenditures for full year FY24 will be approximately $140.0 million; these investments will be targeted towards high-end and mainstream IC capacity and efficiency and enable us to support our customers’ near-term demands. As of April 28, 2024, we had outstanding capital commitments of approximately $133.3 million and recognized liabilities related to capital equipment purchases of approximately $18.9 million. Although payment timing could vary, primarily as a result of the timing of tool delivery, installation, and testing, we currently estimate that we will fund $98.0 million of our total $152.2 million committed and recognized obligations for capital expenditures over the next twelve months.

Current wording

We estimate capital expenditures for full year FY24 will be $130 million; these investments will be targeted towards high-end and mainstream IC capacity and efficiency and enable us to support our customers’ near-term demands. As of July 28, 2024, we had outstanding capital commitments of approximately $129.7 million and recognized liabilities related to capital equipment purchases of approximately $10.2 million. Although payment timing could vary, primarily as a result of the timing of tool delivery, installation, and testing, we currently estimate that we will fund $109.0 million of our total $139.9 million committed and recognized obligations for capital expenditures over the next twelve months.

Previous wording

In September 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act. This authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock. The most recent 10b5-1 plan expired on September 15, 2022, and has not been renewed. As of April 28, 2024, our current share repurchase program had approximately $31.7 million remaining under its authorization. Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.

Current wording

In September 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to one or more repurchase plans under Rule 10b5-1 of the Securities Act. This authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock. The most recent 10b5-1 plan under this authorization expired on September 15, 2022, and has not been renewed. As of July 28, 2024, our current share repurchase program had approximately $31.7 million remaining under its authorization.

Previous wording

As discussed in Note 6 to the condensed consolidated financial statements DNP, the noncontrolling interest in our China-based joint venture has, under certain circumstances, the right to put its interest in the joint venture to Photronics, or to purchase our interest in the joint venture. Under all such circumstances, the sale of DNP’s interest would be at its ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. As of April 28, 2024, Photronics and DNP each had net investments in this joint venture of approximately $130.1 million.

Current wording

As discussed in Note 6 to the condensed consolidated financial statements, DNP, the noncontrolling interest in our China-based joint venture, has, under certain circumstances, the right to put its interest in the joint venture to Photronics, or to purchase our interest in the joint venture. Under all such circumstances, the sale of DNP’s interest would be at its ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. As of the date of issuance of this report, DNP had not indicated its intention to exercise this right. As of July 28, 2024, Photronics and DNP each had net investments in this joint venture of approximately $134.3 million.

Previous wording

Operating Activities: Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, and the impacts of cash from changes in operating assets and liabilities. Net cash provided by operating activities increased $8.3 million in YTD FY24, compared with YTD FY23.

Current wording

Operating Activities: Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation, and the impacts of cash from changes in operating assets and liabilities. Net cash provided by operating activities decreased $2.5 million in YTD FY24, compared with YTD FY23.

Previous wording

Investing Activities: Net cash flows used in investing activities increased $52.4 million in YTD FY24, compared to YTD FY23, primarily driven by an increase of purchases of short-term investments of $56.2 million, purchases of property, plant, and equipment of $5.6 million, and partially offset by proceeds from maturities of short-term investments of $9.2 million.

Current wording

Investing Activities: Net cash flows used in investing activities increased $77.9 million in YTD FY24, compared to YTD FY23, primarily driven by an increase of purchases of short-term investments of $90.7 million and purchases of property, plant, and equipment of $8.9 million, and partially offset by proceeds from maturities of short-term investments of $22.2 million.

Previous wording

Financing Activities: Net cash used in financing activities decreased by $10.5 million in YTD FY24, compared to YTD FY23, primarily due to decreased debt repayments of $11.9 million.

Current wording

Financing Activities: Net cash used in financing activities decreased by $10.0 million in YTD FY24, compared to YTD FY23, primarily due to decreased debt repayments of $11.9 million.

Previous wording

The increase in our cash balance from YTD FY23 was unfavorably impacted by the effects of exchange rate changes in the amount of $3.8 million in YTD FY24, which was less than the $15.6 million favorable impact of exchange rate changes on our cash balance in YTD FY23.

Current wording

The increase in our cash balance from YTD FY23 was unfavorably impacted by the effects of exchange rate changes in the amount of $6.5 million in YTD FY24, which was less than the $13.8 million favorable impact of exchange rate changes on our cash balance in YTD FY23.

Previous wording

Non-GAAP Net Income attributable to Photronics, Inc. shareholders, non-GAAP earnings per share and Net Cash are "non-GAAP financial measures" as such term is defined by the SEC and may differ from similarly named non-GAAP financial measures used by other companies. The financial tables below reconcile Photronics, Inc. financial results under GAAP to non-GAAP financial information. We believe these non-GAAP financial measures that exclude certain items are useful for analysts and investors to evaluate our future on-going performance because they enable a more meaningful comparison of our projected performance with our historical results. These non-GAAP metrics are not intended to represent funds available for our discretionary use and are not intended to represent, or be used as a substitute for, net income attributable to Photronics, Inc. shareholders, diluted earnings per share, cash and cash equivalents, or cash flows from operations, as measured under GAAP. The items excluded from these non-GAAP metrics but included in the calculation of their closest GAAP equivalent, are significant components of the condensed consolidated statements of income, condensed consolidated balance sheets and statement of cash flows and must be considered in performing a comprehensive assessment of overall financial performance.

Current wording

Non-GAAP Net Income attributable to Photronics, Inc. shareholders and non-GAAP earnings per share are “non-GAAP financial measures” as such term is defined by Regulation G of the Securities and Exchange Commission, and may differ from similarly named non-GAAP financial measures used by other companies. The financial tables below reconcile Photronics, Inc. financial results under GAAP to non-GAAP financial information. We believe these non-GAAP financial measures that exclude certain items are useful for analysts and investors to evaluate our future on-going performance because they enable a more meaningful comparison of our projected performance with our historical results. These non-GAAP metrics are not a measure of consolidated operating results under U.S. GAAP and should not be considered as an alternative to Net income (loss), Net income (loss) per share, or any other measure of consolidated results under U.S. GAAP. The items excluded from these non-GAAP metrics, but included in the calculation of their closest GAAP equivalent, are significant components of the condensed consolidated statement of income and must be considered in performing a comprehensive assessment of overall financial performance.

Previous wording

Our current business outlook and guidance was provided in the Photronics Q2 FY24 earnings release, earnings presentation, and financial results conference call, but is not incorporated herein. These can be accessed in the investor section of our website - www.photronics.com.

Current wording

Our current business outlook and guidance was provided in the Photronics Q3 FY24 earnings release, earnings presentation, and financial results conference call, but is not incorporated herein. These can be accessed in the investor section of our website -www.photronics.com. Information included on our website is not incorporated into this Form 10-Q.

Previous wording

Our future results of operations and the other forward-looking statements contained in this filing and in the Photronics Q2 FY24 earnings release, and the related financial results conference call and earnings presentation involve a number of risks and uncertainties, some of which were discussed in Part I, Item 1A of our 2023 Form 10-K. A number of other unforeseeable factors could cause actual results to differ materially from our expectations.

Current wording

Our future results of operations and the other forward-looking statements contained in this filing and in the Photronics Q3 FY24 earnings release, and the related financial results conference call and earnings presentation involve a number of risks and uncertainties, some of which were discussed in Part I, Item 1A of our Form 10-K for the fiscal year ended October 31, 2023. A number of other unforeseeable factors could cause actual results to differ materially from our expectations.

Previous wording

Please refer to Part II, Item 7 of our 2023 Form 10-K for discussion of our critical accounting estimates. There have been no changes to our critical accounting estimates since the filing of our Form 10-K for the year ended October 31, 2023.

Current wording

Please refer to Part II, Item 7 of our Form 10-K for the fiscal year ended October 31, 2023 for discussion of our critical accounting estimates. There have been no changes to our critical accounting estimates since the filing of our Form 10-K for the fiscal year ended October 31, 2023.