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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Oct. 31, 2021
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business 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 ICs and FPDs, and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits, 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 China (2). Our FPD facility in Hefei, China, commenced production in the second quarter of 2019, and our IC facility in Xiamen, China, commenced production in the third quarter of 2019. Consolidation The accompanying consolidated 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. Estimates and Assumptions The preparation of financial statements in conformity with U.S.GAAP requires us to make estimates and assumptions that affect amounts reported in them. Our estimates are based on historical experience and on various assumptions that are believed to be reasonable, including estimates of the impact of COVID 19, based on the facts and circumstances available at the time they are made. Subsequent actual results may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined. Reclassifications In 2021, we separated share-based compensation activity into the two categories of Shares issued under equity plans and Share-based compensation expense in the consolidated statements of equity; in previous reports, we separated this activity into three categories. Reclassified prior period amounts have been made to conform to the current period presentation. Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less, readily convertible to known amounts of cash, and so near to their maturity that they present insignificant risk of changes in value because of changes in interest rates. The carrying values of cash equivalents approximate their fair values, due to the short-term maturities of these instruments. Accounts Receivable and Allowance for Credit Losses We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed for collectability during, and at the end of, every reporting period. To the extent that we believe a loss on the collection of a customer invoice is probable, we record the loss and credit an allowance for credit losses. In the event that an amount is determined to be uncollectible, we charge the allowance for credit losses and derecognize the related receivable. Refer to our revenue recognition policy, below, for additional information on our accounting for accounts receivable. On November 1, 2020, we adopted ASU 2016-13 – “Measurement of Credit Losses” (“ASU 2016-13) which replaced the incurred loss model (which was required to be used to measure credit losses under previous accounting guidance) with an expected credit loss model. Our adoption of ASU 2016-13 did not have a material effect on our financial statements. Inventories Inventories are stated at the lower of cost, determined under the first-in, first-out ("FIFO") method, or net realizable value. The components of inventory at the balance sheet dates are presented below.
|  | October 31, 2021 |  |  | October 31, 2020 |
Raw materials |  | $ | 54,019 |  |  | $ | 56,389 |
Work in process |  |  | 1,121 |  |  |  | 767 |
Finished goods |  |  | 109 |  |  |  | 113 |
|  | $ | 55,249 |  |  | $ | 57,269 |
Property, Plant and Equipment Property, plant and equipment, except as explained below under "Impairment of Long-Lived Assets," is stated at cost less accumulated depreciation and amortization. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to operations as incurred, while those that improve or extend the lives of existing assets are capitalized. Upon sale or other disposition, the cost of the asset and its related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings. Depreciation and amortization, essentially all of which are included in Cost of goods sold in our consolidated statements of income, are computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 10 to 39 years, machinery and equipment over 5 to 15 years, and furniture, fixtures, and office equipment over 3 to 5 years. Leasehold improvements are amortized over the life of the lease or the estimated useful life of the improvement, whichever is less. We employ judgment and assumptions when we establish estimated useful lives and depreciation periods, as well as when we periodically review property, plant, and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other change in circumstances indicate that their carrying amounts may not be recoverable. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determinations of recoverability are based upon our judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the assets, determined using a market or income approach, compared with the carrying value of the asset. The carrying values of assets determined to be impaired would be reduced to their estimated fair values. Intangible Assets Intangible assets are stated at fair value as of the date acquired, less accumulated amortization. Amortization is calculated based on the estimated useful lives of the assets, which range from 3 to 15 years, using the straight-line method or another method that more fairly represents the utilization of the assets. We periodically evaluate the remaining useful lives of our intangible assets to determine whether events or circumstances warrant a revision to the remaining periods of amortization. In the event that the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. If it is determined that an intangible asset has an indefinite useful life, that intangible asset would be subject to impairment testing annually or whenever events or circumstances indicate that its carrying value may not, based on future undiscounted cash flows or market factors, be recoverable. An impairment loss, the recorded amount of which would be based on the fair value of the intangible asset at the measurement date, would be recorded in the period in which the impairment determination was made. Restricted Cash Restricted cash in the amounts of $3.0 million and $2.9 million are included in Other assets on our October 31, 2021 and October 31, 2020, consolidated balance sheets, respectively. The restrictions on these amounts are primarily related to land lease agreements and customs requirements. Treasury Stock We record treasury stock purchases under the cost method, recording the entire cost of the acquired stock as treasury stock. Gains and losses on subsequent reissuances would be credited or charged to additional paid-in capital, and we would employ the average cost method (with average cost being determined separately for each share repurchase program), in the event that we subsequently reissue shares. Revenue Recognition 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, 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 are 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. We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities. 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 to customers. 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. Contract assets of $9.9 million are included in Other current assets, and contract liabilities of $14.7 million and $5.2 million are included in Accrued liabilities and Other liabilities, respectively, in our October 31, 2021, consolidated balance sheet. Our October 31, 2020, condensed consolidated balance sheet includes contract assets of $6.3 million, included in Other current assets, and contract liabilities of $8.0 and $5.2 million, included in Accrued liabilities and Other liabilities, respectively. We did not impair any contract assets in 2021, 2020, or 2019. In 2021, 2020, and 2019, we recognized revenue of $5.3 million, $2.8 million, and $1.3 million, respectively, from the settlement of contract liabilities that existed at the beginning of those years. 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 collectability risk, we modify terms of sale, which may require payment in advance of performance. At the time of adoption, we 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 generally not preceded the completion of our performance obligations by more than one year. Contract Costs We pay commissions to third-party sales agents for certain sales that they procure on our behalf. 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. Product Warranties 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 we will typically repair, replace, or issue a refund for any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranties have been immaterial. Leases We adopted ASU 2016-02 - “Leases (Topic 842)” (“Topic 842”) on November 1, 2019. As allowed by the guidance, we elected to adopt ASU 2016-02 using the modified retrospective method at the beginning of the period of adoption; our adoption resulted in our recognition of $6.5 million of ROU assets and $6.5 million of lease liabilities on our opening 2020 balance sheet. At the time of transition, we elected a number of practical expedients offered by the guidance, which are described in Note 9. The following discussion is germane to our accounting for leases under Topic 842. We determine if an arrangement is, or contains a lease, at the inception of the arrangement. An arrangement is determined to be a lease when it conveys to us the right to control the use of an identified asset for a period of time in exchange for consideration. Our determination as to whether we have the right to control the use of an identified asset centers on whether the arrangement conveys to us the rights to 1) obtain substantially all of the economic benefits of the identified asset and 2) direct the use of the identified asset. If an arrangement is determined to be, or include, a lease, we then apply the classification criteria in Topic 842 to determine whether the lease is a finance lease or an operating lease. For both types of leases, at their commencement dates (which are the dates on which a lessor makes an underlying asset available for our use), we recognize ROU assets, which represent our use of the underlying assets, and lease liabilities which represent our obligation to make payments for our right to use the related assets. The initial measurement process for both types of leases is the same, except that, for operating leases, we generally apply our incremental borrowing rate for collateralized borrowings over terms similar to the lease’s terms to determine the lease liability, while for finance leases, we use the interest rates implicit in the leases. The initial measurement of ROU assets may require further adjustments for lease prepayments and initial direct costs we incur. As allowed under Topic 842, we elected not to recognize short-term leases, which are defined as leases that have a term (at their commencement dates) of twelve months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Operating leases are expensed on a straight-line basis over the terms of the leases, and are included in the consolidated statement of income in Cost of goods sold, Selling, general and administrative, or Research and development expense in accordance with the use of the underlying asset. Finance lease ROU assets are amortized over the estimated useful life of the underlying asset; the expense is included in the consolidated statement of income in Cost of goods sold. Finance lease liabilities are subsequently remeasured by increasing the liability to reflect interest accrued during a period and decreasing the liability to reflect payments made during the period. Interest expense incurred on finance leases is included in Interest expense on the consolidated statements of income. Cash paid for operating leases and interest paid for finance leases are included in the consolidated statement of cash flows as operating activities in Accounts payable, accrued liabilities and other; cash paid for finance lease principal is included in Repayments of debt in the financing activities section of the consolidated statement of cash flows. Share-Based Compensation We recognize share-based compensation expense over the service period during which the awards are expected to vest. Share-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized in the period of change and will impact the amount of expense to be recognized in future periods. Determining the appropriate option pricing model, calculating the grant date fair value of share-based awards, and estimating forfeiture rates requires considerable judgment, including estimations of stock price volatility and the expected term of options granted. We use the Black-Scholes option pricing model to value employee stock options. We estimate stock price volatility based on daily averages of our common stock’s historical volatility over a term approximately equal to the estimated time period the grant will remain outstanding. The expected term of options and forfeiture rate assumptions are derived from historical data. Research and Development Research and development costs are expensed as incurred and consist primarily of development efforts related to high-end process technologies for advanced subwavelength reticle solutions for IC and FPD photomask technologies. Foreign Currency Translation Our non-U.S. subsidiaries maintain their accounts in their respective local currencies. Assets and liabilities of such subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Foreign currency translation adjustments are accumulated and reported in Accumulated other comprehensive income, a component of equity on our consolidated balance sheets. Government Grants We account for funds we receive from government grants by reducing the costs of the assets or expenses to which we apply the funds. Funds we receive that cannot be attributed to specific assets or expenses would be recognized as other income, and included in Interest income and other income (expense), net in the consolidated statements of income. Funds we receive from government grants are classified in our consolidated statements of cash flows as either cash flows from operating activities or cash flows from investing activities, in accordance with how we expend the funds. Income Taxes The income tax provision is computed on the basis of the income or loss before income taxes for each entity in its respective tax jurisdiction. Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and their amounts used for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards. We use judgment and make assumptions to determine if valuation allowances for deferred income tax assets are required, if their realization is not more likely than not, by considering future market growth, operating forecasts, future taxable income, and the mix of earnings among the tax jurisdictions in which we operate. Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowances. We consider income taxes in each of the tax jurisdictions in which we operate in order to determine our effective income tax rate. Our current income tax expense is thus identified, and temporary differences resulting from differing treatments of items for tax and financial reporting purposes are assessed. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We account for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in our tax returns. We include any applicable interest and penalties related to uncertain tax positions in our income tax provision. Earnings Per Share Basic earnings per share (“EPS”) is based on the weighted-average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if certain share-based payment awards or financial instruments were exercised, earned or converted. Variable Interest Entities We account for the investments we make in certain legal entities in which equity investors do not have: 1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, 2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, 3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity as “variable interest entities”, or “VIEs”. We consolidate the results of any such entity in which we have determined that we have a controlling financial interest. We would have a “controlling financial interest” (and thus be considered the “primary beneficiary” of the entity) in such an entity when we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, we reassess whether we have a controlling financial interest in any investments we have in these entities. We account for investments we make in VIEs in which we have determined that we do not have a controlling financial interest but have a significant influence over, and hold at least a twenty percent ownership interest in, using the equity method. Any such investment not meeting the parameters to be accounted for under the equity method would be accounted for using the cost method, unless the investment had a readily determinable fair value, at which value it would then be reported.

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