LEASES

6 Months Ended

May 02, 2021

NOTE 8 - 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. As allowed under ASC Topic 842 – “Leases” (“Topic 842”), we have elected to not apply the recognition requirements to leases that, at their commencement dates, have lease terms of twelve months or less and do not include options to purchase their underlying assets that we are reasonably certain to exercise. The present value of lease payments over the term of the lease provides the basis for the initial measurement of right-of-use assets and their related lease liabilities. Finance lease liabilities are determined using the rates implicit in the leases and operating lease liabilities are determined using our incremental borrowing rate, for collateralized loans, at the commencement date. 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. As allowed under Topic 842 we have elected, for all classes of assets, the practical expedient to not separate lease components of a contract from nonlease components of a contract.

In February 2021, we entered into a five-year $7.2 million finance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $0.1 million per month. Upon the payment of the fiftieth monthly payment and prior to payment of the fifty-first monthly payment, we may exercise an early buyout option to purchase the tool at 33.684638% of its original cost. If we do not exercise the early buyout option, then at the end of the five-year lease term, the lease shall continue to renew on a month-to-month basis at the same rental; at our option, after the original term or any renewal periods, we may return the tool, elect to extend the lease, or purchase the tool at its fair market value. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.08%.

In December 2020, we entered into a five-year $35.5 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from $0.04 million after the first three months to $0.6 million for the following nine months, followed by forty-eight monthly payments of $0.5 million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool at 39.84% of the initial lease liability. If we do not exercise the early buyout option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value as determined by the lessor. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58%. The lease agreement incorporates the covenants included in our Corporate Credit Agreement, which are detailed in Note 6, and includes a cross-default provision for any agreement or instrument with an outstanding, committed balance greater than $5.0 million in which we are the indebted party.

The following table provides information on operating and finance leases included in our consolidated balance sheets.

Classification	May 2, 2021		October 31, 2020
ROU Assets – Operating Leases
Other assets	$	6,967	$	7,706

ROU Assets – Finance Leases
Property, plant and equipment, net	$	42,248	$	-

Lease Liabilities – Operating Leases
Accrued liabilities	$	2,281	$	2,175
Other liabilities		4,326		5,008
	$	6,607	$	7,183

Lease Liabilities – Finance Leases
Current portion of long-term debt	$	7,531	$	-
Long-term debt		34,301		-
	$	41,832	$	-

The following table presents future lease payments under noncancelable operating and finance leases as of May 2, 2021. Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.

	Operating Leases		Finance Leases
Remainder of fiscal year 2021	$	1,194	$	4,348
2022		2,342		7,231
2023		1,357		6,938
2024		803		6,938
2025		647		18,012
Thereafter		559		-
Total lease payments		6,902		43,467
Imputed interest		295		1,635
Lease liabilities	$	6,607	$	41,832

The following table presents lease costs for the three and six-month periods ended May 2, 2021 and May 3, 2020.

	Three Months Ended				Six Months Ended
	May 2, 2021		May 3, 2020		May 2, 2021		May 3, 2020
Operating lease costs	$	724	$	633	$	1,389	$	1,797
Short-term lease costs	$	39	$	102	$	86	$	212
Variable lease costs	$	157	$	129	$	301	$	129
Interest on lease liabilities	$	166	$	-	$	201	$	-
Amortization of ROU assets	$	455	$	-	$	455	$	-

Presented below is statistical information related to our operating and finance leases. The information presented is as of the balance sheet dates.

	May 2, 2021					October 31, 2020
Classification	Weighted-average remaining lease term (in years)		Weighted-average discount rate			Weighted-average remaining lease term (in years)		Weighted-average discount rate
Operating leases		3.7		2.37	%		4.1		2.37	%
Finance leases		3.7		1.50	%		-		-

Supplemental cash flows information:

	Three Months Ended				Six Months Ended
	May 2, 2021		May 3, 2020		May 2, 2021		May 3, 2020
Operating cash flows used for operating leases	$	627	$	502	$	1,229	$	2,387
Operating cash flows used for finance leases	$	166	$	-	$	201	$	-
Financing cash flows used for finance leases	$	864	$	-	$	864	$	-
ROU assets obtained in exchange for operating lease obligations	$	99	$	58	$	367	$	340
ROU assets obtained in exchange for finance lease obligations	$	7,200	$	-	$	42,672	$	-