PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
Years Ended October 30, 2016, November 1, 2015 and November 2, 2014
(in thousands, except share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Photronics, Inc. and its subsidiaries ("Photronics", the "Company", “we”, or “us”) is one of the world's leading manufacturers of photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays ("FPDs"), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits ("ICs") and a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally from nine manufacturing facilities; two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States. In August 2016 the Company announced its plans to build a research and development and manufacturing facility in Xiamen, China, with construction commencing in 2017 and production estimated to start in late 2018. See Note 21 for additional information.
Consolidation
The accompanying consolidated financial statements include the accounts of Photronics, Inc. and its majority-owned subsidiaries that the Company controls. All intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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. The Company's estimates are based on the facts and circumstances available at the time they are made. Actual results reported by the Company may differ from such estimates. The Company reviews these estimates periodically and reflects the effect of revisions in the period in which they are determined.
Fiscal Year
The Company's fiscal year ends on the Sunday closest to October thirty-first, and, as a result, a 53-week year occurs every 5 to 6 years. Fiscal years 2016, 2015 and 2014 each included 52 weeks.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of 3 months or less. The carrying values of cash equivalents approximate their fair values due to the short-term maturities of these instruments.
Inventories
Inventories are stated at the lower of cost, determined under the first-in, first-out ("FIFO") method, or market. Presented below are the components of inventory at the balance sheet dates:
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
142
|
|
|
$
|
861
|
|
Work in process
|
|
|
2,987
|
|
|
|
4,177
|
|
Raw materials
|
|
|
18,952
|
|
|
|
19,119
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,081
|
|
|
$
|
24,157
|
|
Property, Plant and Equipment
Property, plant and equipment, except as explained below under "Impairment of Long-Lived Assets," are 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, substantially all of which are included in cost of sales, are computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 15 to 40 years, machinery and equipment over 3 to 10 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. Judgment and assumptions are used in establishing estimated useful lives and depreciation periods. The Company also uses judgment and assumptions as it periodically reviews 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.
Intangible Assets
Intangible assets consist primarily of a technology license agreement and acquisition-related intangibles. These assets, except as explained below, 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.
The Company periodically evaluates the remaining useful lives of its 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 the carrying value may not, based on future undiscounted cash flows or market factors, be recoverable, and an impairment loss would be recorded in the period so determined. The measurement of the impairment loss would be based on the fair value of the intangible asset.
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. Determination of recoverability is based on the Company's 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 management expects to hold and use is based on the fair value of the assets. The carrying values of assets determined to be impaired are reduced to their estimated fair values. Fair values of any impaired assets would generally be determined using a market or income approach.
Business Combinations
When acquiring other businesses or participating in mergers or joint ventures in which the Company is deemed to be the acquirer, the Company generally recognizes identifiable assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, and separately from any goodwill that may be required to be recognized. Goodwill, when recognizable, would be measured as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed.
Accounting for such transactions requires the Company’s management to make significant assumptions and estimates and, although the Company believes any estimates and assumptions it makes to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those estimated by the Company. When required, the Company will adjust the values of the assets acquired and liabilities assumed against the acquisition gain or goodwill, as initially recorded, for a period of up to one year after the transaction.
Costs incurred to effect a merger or acquisition, such as legal, accounting, valuation and other third party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred. Costs incurred to issue any debt and equity securities are recognized in accordance with other applicable generally accepted accounting principles.
Investments in Joint Ventures
The financial results of investments in joint ventures of which the Company has a controlling financial interest are included in the Company’s consolidated financial statements. Investments in joint ventures over which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are accounted for under the equity method. An impairment loss would be recognized whenever a decrease in the fair value of such an investment below its carrying amount is determined to be other than temporary. In judging "other than temporary," the Company would consider the length of time and the extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and the Company's longer-term intent of retaining its investment in the investee.
Variable Interest Entities
The Company accounts for the investments it makes 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”.
The Company would consolidate the results of any such entity in which it determined that it has a controlling financial interest. The Company would have a “controlling financial interest” in such an entity when the Company has 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, the Company reassesses whether it has a controlling financial interest in any investments it has in these certain legal entities.
The Company accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over and holds at least a 20 percent ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless the investment had a readily determinable fair value, at which it would then be reported.
Income Taxes
The income tax provision is computed on the basis of the various tax jurisdictions' income or loss before income taxes. Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards. The Company uses judgment and 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, forecasted operations, future taxable income, and the amount of earnings in the tax jurisdictions in which it operates.
The Company considers income taxes in each of the tax jurisdictions in which it operates in order to determine its effective income tax rate. Current income tax exposure is 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 the Company's consolidated balance sheets. Additionally, we evaluate the potential realization of deferred income tax assets from future taxable income and establish valuation allowances if their realization is deemed not more likely than not. Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowance. Significant management estimates and judgment are required in determining any valuation allowances recorded against net deferred tax assets.
The Company accounts for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in its 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.
Share-Based Compensation
The Company recognizes share-based compensation expense over the service period that 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 also 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 the estimations of stock price volatility and the expected term of options granted.
The Company uses 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 global development efforts related to high-end process technologies for advanced sub-wavelength reticle solutions for IC photomask technologies. Research and development expenses also include the amortization of the estimated remaining value of a technology license agreement that the Company was a party to with Micron Technology, Inc. (“Micron”). Under this technology license agreement, the Company had access to certain photomask technology developed by Micron, which it retains the right to use in perpetuity.
Foreign Currency Translation
The Company's international 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. The effects of changes in exchange rates on foreign currency transactions, which are included in interest and other income (expense), net were a net gain/(loss) of $(0.3) million, $2.5 million and $1.4 million in fiscal years 2016, 2015 and 2014, respectively.
Noncontrolling Interests
Noncontrolling interests represents the minority shareholders' proportionate share in the equity of the Company's two majority-owned subsidiaries, Photronics DNP Mask Corporation ("PDMC") in Taiwan, of which noncontrolling interests owned 49.99% as of October 30, 2016 and November 1, 2015 and PK Ltd. ("PKL") in Korea of which noncontrolling shareholders owned approximately 0.3% and 0.2% as of October 30, 2016 and November 1, 2015, respectively.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is determined by the shipping terms of the individual sales transactions. For sales with FOB destination or similar shipping terms, delivery occurs when the Company’s product reaches its destination and is received by the customer. For sales with FOB shipping point terms, delivery occurs when the Company’s product is received by the common carrier. The Company uses judgment when estimating the effect on revenue of discounts and sales incentives, both of which are accrued when the related revenue is recognized. The Company reports its revenues net of any sales taxes billed to its customers.
Product Warranty
For a 30-day period, the Company warrants that items sold will conform to customer specifications. However, the Company’s liability is limited to the repair or replacement of the photomasks at its sole option. We inspect photomasks for conformity to customer specifications prior to shipment. Accordingly, customer claims related to items under warranty have historically been insignificant. The Company’s warranty policy includes accepting returns of products with defects, or products that have not been produced to precise customer specifications.
NOTE 2 – ACQUISITION OF DNP PHOTOMASK TECHNOLOGY TAIWAN CO., LTD.
On April 4, 2014, DPTT merged into PSMC, the Company’s IC manufacturing subsidiary located in Taiwan, to form PDMC. Throughout this report the merger of DPTT into PSMC is referred to as the “DPTT Acquisition.” In connection with the DPTT Acquisition, the Company transferred consideration with a fair value of $98.3 million. The Company owns 50.01 percent of PDMC and includes its financial results in its consolidated financial statements, while DNP owns the remaining 49.99 percent of PDMC. The Company also has the ability to appoint the majority of the directors of PDMC, including the chairman of its board of directors, select its management responsible for implementing its policies and procedures, and establish its operating and capital decisions and policies. Photronics determined it has control of PDMC by virtue of its tie-breaking voting rights within PDMC’s Board of Directors, thereby giving it the power to direct the activities of PDMC that most significantly impact its economic performance, including its decision making authority in the ordinary course of business. The DPTT Acquisition was the result of the Company’s desire to combine the strengths in logic and memory photomask technologies of PSMC and DPTT in order to enhance its capability with customers in the region.
The DPTT Acquisition met the conditions of a business combination as defined by Accounting Standards Codification (“ASC”) 805 and, as such, was accounted for under ASC 805 using the acquisition method of accounting. ASC 805 defines the three elements of a business as Input, Process and Output. As a result of the DPTT Acquisition, Photronics acquired the machinery and equipment utilized in the processes to manufacture product, the building that houses the entire operation and the processes needed to manufacture the product, all previously owned by DPTT. The former DPTT employees hired by Photronics in connection with the acquisition brought with them the skills, experience and know-how necessary to provide the operational processes that, when applied to the acquired assets, represent processes being applied to inputs to create outputs. Having met all three elements of a business as defined in ASC 805, the Company determined that the DPTT Acquisition should be accounted for as a business combination.
The following table summarizes the fair values of assets acquired and liabilities assumed of DPTT, the fair value of the noncontrolling interests and consideration given for DPTT at the acquisition date.
Cash and cash equivalents
|
|
$
|
4,508
|
|
Accounts receivable (gross amount of $28,560, of which $500 was estimated to be uncollectable)
|
|
|
28,060
|
|
Inventory
|
|
|
1,279
|
|
Deferred tax asset
|
|
|
9,787
|
|
Other current assets
|
|
|
11,517
|
|
Property, plant and equipment
|
|
|
95,431
|
|
Identifiable intangible assets
|
|
|
1,552
|
|
Other long-term assets
|
|
|
1,328
|
|
Accounts payable and accrued expenses
|
|
|
(32,410
|
)
|
Deferred tax liability
|
|
|
(3,042
|
)
|
Other long-term liabilities
|
|
|
(3,291
|
)
|
Total net assets acquired
|
|
|
114,719
|
|
Noncontrolling interests retained by DNP
|
|
|
57,348
|
|
|
|
|
57,371
|
|
Consideration – 49.99% of fair value of PSMC
|
|
|
40,999
|
|
Gain on acquisition
|
|
$
|
16,372
|
|
In addition to recording the fair values of the net assets acquired, the Company also recorded a gain on acquisition of $16.4 million in the three month period ended May 4, 2014, in accordance with ASC 805 using the acquisition method of accounting. The gain on acquisition was primarily due to the difference between the market values of the acquired real estate and personal property exceeding the fair value of the consideration transferred. In addition, a deferred tax liability of $3.0 million was recorded in the opening balance sheet, which had the effect of reducing the gain on acquisition to $16.4 million. Prior to recording the gain, the Company reassessed whether it had correctly identified all of the assets acquired and all of the liabilities assumed. Additionally, the Company also reviewed the procedures used to measure the amounts of the identifiable assets acquired, liabilities assumed and consideration transferred.
The fair value of the first component of consideration represented 49.99 percent of the fair value of PSMC, and was based on recent prices paid by the Company to acquire outstanding shares of PSMC (prior to the acquisition). As a result of the merger, the Company acquired the net assets of DPTT having a fair value of $114.7 million, less noncontrolling interests of $57.3 million retained by DNP, and transferred consideration with a fair value of $41.0 million, which resulted in a gain of $16.4 million. The fair value of the total consideration transferred as of the acquisition date was $98.3 million, comprised of the 49.99% noncontrolling interest in DPTT of $57.3 million, and 49.99% of the fair value of PSMC of $41.0 million (112.9 million shares, or 49.99% of the outstanding common stock of PSMC).
We estimated the $114.7 million fair value of DPTT as of the acquisition date by applying an income approach as our valuation technique. Our income approach followed a discounted cash flow method, which applied our best estimates of future cash flows and an estimated terminal value discounted to present value at a rate of return taking into account the relative risk of the cash flows. To confirm the reasonableness of the value derived from the income approach, we also analyzed the values of comparable companies which are publicly traded. The acquisition date fair value of the property, plant and equipment of DPTT was $95.4 million, which was determined by utilizing the cost and, to a lesser extent, the market approach, based on an in-use premise of value. Inputs utilized by the Company to determine fair values of DPTT’s property, plant and equipment included a cost approach, which was adjusted for depreciation and condition for equipment, and adjusted for depreciation and local market conditions for real property. The noncontrolling interest of DPTT was calculated using the 49.99% of its total fair value of $114.7 million. The Company also used a market approach to corroborate the enterprise value of DPTT. This fair value measurement was based on significant inputs that are not observable in the market and thus represented a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions included local and current construction replacement cost multipliers, amounts of ancillary replacement costs, physical deterioration, and economic and functional obsolescence to adjust the current replacement costs by, as well as the estimated economic lives of the assets.
Identifiable intangible assets acquired were primarily customer relationships, which represented the fair value of relationships and agreements DPTT had in place at the date of the merger. The customer relationships had a fair value of $1.5 million at the acquisition date, determined by using the multi-period excess earnings method, and are being amortized over a twelve year estimated useful life. The acquisition date fair value of the remainder of the identifiable assets acquired and liabilities assumed were equivalent to, or did not materially differ from, their carrying values.
Revenues and net income of PDMC included in the Company’s financial results from the April 4, 2014, acquisition date through November 2, 2014, were $101.8 million and $6.0 million, respectively. Acquisition costs related to the merger were $2.5 million in fiscal year 2014, and are included in selling, general, and administrative expenses in the consolidated statement of income.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents financial information as if the DPTT acquisition had occurred as of the beginning of fiscal year 2014. The pro forma earnings for fiscal year 2014 were adjusted to exclude the above mentioned $2.5 million non-recurring acquisition related costs and the gain on acquisition of $16.4 million. Other material non-recurring pro forma adjustments made to arrive at the below earnings amounts included the add back of additional depreciation recorded against DPTT long-lived assets of $6.6 million. The pro forma information presented does not purport to represent results that would have been achieved had the merger occurred as of the beginning of the earliest period presented, or to have been indicative of the Company’s future financial performance.
|
|
Year Ended
|
|
|
|
November 2,
2014
|
|
|
|
|
|
Revenues
|
|
$
|
499,968
|
|
|
|
|
|
|
Net income
|
|
|
23,969
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
|
12,169
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
0.19
|
|
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
8,036
|
|
|
$
|
8,172
|
|
Buildings and improvements
|
|
|
121,873
|
|
|
|
121,472
|
|
Machinery and equipment
|
|
|
1,475,755
|
|
|
|
1,458,623
|
|
Leasehold improvements
|
|
|
19,224
|
|
|
|
18,856
|
|
Furniture, fixtures and office equipment
|
|
|
12,700
|
|
|
|
12,700
|
|
Construction in progress
|
|
|
23,961
|
|
|
|
6,657
|
|
|
|
|
1,661,549
|
|
|
|
1,626,480
|
|
Less: Accumulated depreciation and amortization
|
|
|
1,155,115
|
|
|
|
1,079,196
|
|
|
|
$
|
506,434
|
|
|
$
|
547,284
|
|
Property under capital leases are included in above property, plant and equipment as follows:
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,917
|
|
|
$
|
56,245
|
|
Less accumulated amortization
|
|
|
10,352
|
|
|
|
16,054
|
|
|
|
$
|
24,565
|
|
|
$
|
40,191
|
|
NOTE 4 - INTANGIBLE ASSETS
Amortization expense of the Company’s finite lived intangible assets was $4.8 million, $6.0 million and $5.8 million in fiscal years 2016, 2015 and 2014, respectively.
Intangible assets consist of:
As of October 30, 2016
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Technology license agreement
|
|
$
|
59,616
|
|
|
$
|
(41,400
|
)
|
|
$
|
18,216
|
|
Customer relationships
|
|
|
8,657
|
|
|
|
(7,522
|
)
|
|
|
1,135
|
|
Software and other
|
|
|
6,444
|
|
|
|
(5,941
|
)
|
|
|
503
|
|
|
|
$
|
74,717
|
|
|
$
|
(54,863
|
)
|
|
$
|
19,854
|
|
As of November 1, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology license agreement
|
|
$
|
59,616
|
|
|
$
|
(37,426
|
)
|
|
$
|
22,190
|
|
Customer relationships
|
|
|
8,616
|
|
|
|
(7,229
|
)
|
|
|
1,387
|
|
Supply agreements
|
|
|
6,959
|
|
|
|
(6,828
|
)
|
|
|
131
|
|
Software and other
|
|
|
6,577
|
|
|
|
(5,669
|
)
|
|
|
908
|
|
|
|
$
|
81,768
|
|
|
$
|
(57,152
|
)
|
|
$
|
24,616
|
|
The weighted-average amortization period for intangible assets acquired in fiscal years 2016 and 2015 is three years, which is comprised of software and other intangible assets that have weighted-average amortization periods of three years.
Intangible asset amortization over the next five years is estimated to be as follows:
Fiscal Years:
|
|
|
|
|
|
|
|
2017
|
|
$
|
4,557
|
|
2018
|
|
|
4,130
|
|
2019
|
|
|
4,092
|
|
2020
|
|
|
4,092
|
|
2021
|
|
|
2,436
|
|
NOTE 5 - JOINT VENTURE, TECHNOLOGY LICENSE AND OTHER AGREEMENTS WITH MICRON TECHNOLOGY, INC.
In May 2006, Photronics and Micron Technology, Inc. ("Micron") entered into the MP Mask joint venture (“MP Mask”), which developed and produced photomasks for leading-edge and advanced next generation semiconductors. At the time of the formation of the joint venture, the Company also entered into an agreement to license photomask technology developed by Micron and certain supply agreements. In May 2016 the Company sold its investment in MP Mask to Micron for $93.1 million and recorded a gain on the sale of $0.1 million, which is included in the Company’s 2016 consolidated statement of income in Interest and other income (expense), net. On that same date a supply agreement commenced between the Company and Micron, which provides that we will be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement has a one year term, subject to mutually agreeable renewals. In addition, the Company forevermore has the rights to use technology under the prior technology license agreement.
This joint venture was a variable interest entity ("VIE") (as that term is defined in ASC 810) because all costs of the joint venture were passed on to the Company and Micron through purchase agreements they had entered into with the joint venture, and it was dependent upon the Company and Micron for any additional cash requirements. On a quarterly basis the Company reassessed whether its interest in MP Mask gave it a controlling financial interest in this VIE. The purpose of this quarterly reassessment was to identify the primary beneficiary (which is defined in ASC 810 as the entity that consolidates a VIE) of the VIE. As a result of the reassessments in fiscal year 2016, the Company determined that Micron remained the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, thereby having given it the power to direct the activities of MP Mask that most significantly impacted its economic performance, including its decision making authority in the ordinary course of business and its purchasing the majority of products produced by the VIE.
The Company utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charged its variable interest holders based on their actual usage of its facility and charged separately for any research and development activities it engaged in at the requests of its owners.
MP Mask was governed by a Board of Managers appointed by Micron and the Company. Since MP Mask's inception, Micron, as a result of its majority ownership, had held majority voting power on the Board of Managers. The voting power held by each party was subject to change as ownership interests changed. Under the MP Mask joint venture operating agreement, the Company may have been required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, had the Board of Managers determined that further additional funding was required, MP Mask would have pursued its own financing. If MP Mask was unable to obtain its own financing, it may have requested additional capital contributions from the Company. Had the Company chosen not to make a requested contribution to MP Mask, its ownership percentage may have been reduced. MP Mask did not request, and the Company did not make, any contributions to MP Mask in fiscal years 2016 or 2015 and it did not receive any distributions (other than upon its sale of its investment to Micron in fiscal year 2016) from MP Mask during those fiscal years.
The Company's investment in the VIE, which represented its maximum exposure to loss, was $93.0 million at November 1, 2015. This amount is reported in the Company's fiscal year 2015 consolidated balance sheet as Investment in joint venture. The Company recorded losses from operations from its investment in MP Mask of $0.1 million in fiscal years 2016 and 2015 and recorded no income or loss from the investment in fiscal year 2014. Income (loss) from MP Mask is included in Interest and other income, net, in the consolidated statements of income.
The Company, in 2016, recorded $0.4 million of commission revenue earned under the supply agreements it had with Micron and MP Mask, and amortization of $0.1 million of the related supply agreement intangible asset. In 2016 the Company also recorded cost of sales in the amount of $5.7 million for photomasks produced by MP Mask for the Company's customers, and incurred expenses of $0.5 million for research and development activities and other goods and services purchased from MP Mask by the Company.
As of November 1, 2015, the Company owed MP Mask $4.3 million and had a receivable from Micron of $6.4 million, both primarily related to the aforementioned supply agreements. The Company, in 2015, recorded $0.8 million of commission revenue earned under the supply agreements it had with Micron and MP Mask, and amortization of $0.2 million of the related supply agreement intangible asset. In 2015 the Company also recorded cost of sales in the amount of $4.8 million for photomasks produced by MP Mask for the Company's customers, and incurred expenses of $3.1 million for research and development activities and other goods and services purchased from MP Mask by the Company.
As of November 2, 2014, the Company owed MP Mask $4.2 million and had a receivable from Micron of $6.8 million, both primarily related to the aforementioned supply agreements. The Company, in 2014, recorded $1.2 million of commission revenue earned under the supply agreements it had with Micron and MP Mask, and amortization of $0.2 million of the related supply agreement intangible asset. In 2014 the Company also recorded cost of sales in the amount of $3.2 million for photomasks produced by MP Mask for the Company's customers, and incurred expenses of $1.6 million for research and development activities and other goods and services purchased from MP Mask by the Company. In 2014 the Company purchased equipment from MP Mask for $1.3 million.
Summarized financial information of MP Mask is presented below. The financial results of 2016 are through May 5, 2016, the date of the sale of the Joint Venture.
|
|
As of Fiscal Year End
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
30,567
|
|
Noncurrent assets
|
|
|
-
|
|
|
|
173,840
|
|
Current liabilities
|
|
|
-
|
|
|
|
18,234
|
|
Noncurrent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
Fiscal Year
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
49,626
|
|
|
$
|
96,068
|
|
|
$
|
81,399
|
|
Gross profit
|
|
|
2,736
|
|
|
|
1,215
|
|
|
|
3,427
|
|
Net income (loss)
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
1,259
|
|
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities include salaries, wages and related benefits of $8.2 million, income taxes of $6.2 million and other accruals totaling $9.8 million at October 30, 2016, and salaries, wages and related benefits of $14.3 million, an acquisition liability of $7.1 million and other accruals totaling $17.8 million at November 1, 2015.
NOTE 7 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2019
|
|
$
|
57,500
|
|
|
$
|
57,500
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2016
|
|
|
-
|
|
|
|
57,500
|
|
|
|
|
|
|
|
|
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
10,067
|
|
|
|
15,346
|
|
|
|
|
|
|
|
|
|
|
3.09% capital lease obligation payable through March 2016
|
|
|
-
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,567
|
|
|
|
132,615
|
|
Less current portion
|
|
|
5,428
|
|
|
|
65,495
|
|
|
|
$
|
62,139
|
|
|
$
|
67,120
|
|
In April 2016 $57.5 million of the Company’s senior convertible notes matured. The Company repaid $50.1 million to noteholders and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.
In January 2015 the Company privately exchanged $57.5 million in aggregate principal amount of its 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated January 22, 2015. Note holders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and the Company is not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date.
The Company’s credit facility, which expires in December 2018, has a $50 million limit with an expansion capacity to $75 million, and is secured by substantially all of the Company’s assets located in the United States and common stock the Company owns in certain of its foreign subsidiaries. The credit facility precludes the Company from paying cash dividends, and is subject to a minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance financial covenants, all of which the Company was in compliance with at October 30, 2016. The Company had no outstanding borrowings against the credit facility at October 30, 2016, and $50 million was available for borrowing. The interest rate on the credit facility (1.78% at October 30, 2016) is based on the Company’s total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
In August 2013 a $26.4 million principal amount, five year capital lease commenced to fund the purchase of a high-end lithography tool. Payments under the capital lease, which bears interest at 2.77%, are $0.5 million per month through July 2018. The lease is subject to a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated in the Company’s credit facility. As of October 30, 2016, the total amount payable through the end of the lease term was $10.3 million, of which $10.1 million represented principal and $0.2 million represented interest.
In April 2011 the Company entered into a five year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, which bore interest at 3.09%, were $0.4 million per month through March 2016. The lease included a cross default with cross acceleration provision related to certain non-financial covenants incorporated in the Company's credit facility. In March 2016 the Company paid the final installment on this lease and assumed ownership of the related equipment.
As of October 30, 2016, minimum lease payments under the Company's capital lease obligation was as follows:
Fiscal Years:
|
|
|
|
|
|
|
|
2017
|
|
$
|
5,638
|
|
2018
|
|
|
4,698
|
|
|
|
|
10,336
|
|
Less interest
|
|
|
269
|
|
Net minimum lease payments under capital lease
|
|
|
10,067
|
|
Less current portion of net minimum lease payments
|
|
|
5,428
|
|
Long-term portion of minimum lease payments
|
|
$
|
4,639
|
|
Interest payments were $3.2 million, $4.4 million, and $6.3 million in fiscal years 2016, 2015 and 2014, respectively, and included deferred financing cost payments of $0.3 million in fiscal year 2014.
NOTE 8 - OPERATING LEASES
The Company leases various real estate and equipment under non-cancelable operating leases, for which rent expense was $2.8 million in each of fiscal years 2016, 2015 and 2014.
At October 30, 2016, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as follows:
2017
|
|
$
|
2,108
|
|
2018
|
|
|
1,059
|
|
2019
|
|
|
630
|
|
2020
|
|
|
394
|
|
2021
|
|
|
380
|
|
Thereafter
|
|
|
1,404
|
|
|
|
$
|
5,975
|
|
See Note 7 for disclosures related to the Company's capital lease obligations.
NOTE 9 – 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 the Company (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of the Company 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. The Company incurred total share-based compensation expenses of $3.8 million, $3.7 million, and $4.1 million in fiscal years 2016, 2015, and 2014, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the fiscal years presented.
Stock Options
Option awards generally vest in one to four years, and have a ten year contractual term. All incentive and non-qualified stock option grants must 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 the closing price of the Company’s common stock on the date of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's stock. The Company uses historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair values of stock options issued during fiscal years 2016, 2015 and 2014 are presented in the following
table:
|
|
Year Ended
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
November 2,
2014
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
48.4
|
%
|
|
|
53.7
|
%
|
|
|
61.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
|
1.2 – 1.7
|
%
|
|
|
1.3 – 1.6
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
5.1 years
|
|
|
4.7 years
|
|
|
4.6 years
|
|
The table below presents a summary of stock options activity during fiscal year 2016 and information on stock options outstanding at October 30, 2016.
Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 1, 2015
|
|
|
3,803,168
|
|
|
$
|
7.29
|
|
|
|
|
|
|
Granted
|
|
|
667,250
|
|
|
|
11.83
|
|
|
|
|
|
|
Exercised
|
|
|
(572,033
|
)
|
|
|
5.37
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(363,050
|
)
|
|
|
15.68
|
|
|
|
|
|
|
Outstanding at
October 30, 2016
|
|
|
3,535,335
|
|
|
$
|
7.59
|
|
6.4 years
|
|
$
|
9,413
|
|
Exercisable at
October 30, 2016
|
|
|
1,973,635
|
|
|
$
|
5.93
|
|
4.8 years
|
|
$
|
7,837
|
|
Vested and expected to vest as of
October 30, 2016
|
|
|
3,438,261
|
|
|
$
|
7.53
|
|
6.3 years
|
|
$
|
9,309
|
|
The weighted-average grant date fair value of options granted during fiscal years 2016, 2015 and 2014 were $4.51, $3.81and $4.44, respectively. The total intrinsic value of options exercised during fiscal years 2016, 2015 and 2014 was $3.5 million, $2.0 million and $1.4 million, respectively.
The Company received cash from option exercises of $3.1 million, $2.2 million and $1.1 million in fiscal years 2016, 2015 and 2014, respectively. As of October 30, 2016, the total unrecognized compensation cost of unvested option awards was approximately $4.3 million. That cost is expected to be recognized over a weighted-average amortization period of 2.5 years.
Restricted Stock
The Company periodically grants restricted stock awards. The restrictions on these awards typically lapse over a service period of one to four years. The fair value of restricted stock is determined and fixed on the grant date based on the company’s stock price. The weighted-average grant date fair values of restricted stock awards issued during fiscal years 2016, 2015 and 2014 were $12.13, $8.28 and $8.86, respectively. The total fair value of awards for which restrictions lapsed was $1.7 million, $1.4 million and $1.5 million during fiscal years 2016, 2015 and 2014, respectively. As of October 30, 2016, the total compensation cost for restricted stock awards not yet recognized was approximately $1.0 million. That cost is expected to be recognized over a weighted-average amortization period of 2.2 years.
A summary of restricted stock award activity during fiscal year 2016 and the status of the Company's outstanding restricted stock awards as of October 30, 2016, is presented below:
Restricted Stock
|
|
Shares
|
|
|
Weighted-Average
Fair Value at
Grant Date
|
|
|
|
|
|
|
|
|
Outstanding at November 1, 2015
|
|
|
189,588
|
|
|
$
|
7.34
|
|
Granted
|
|
|
115,225
|
|
|
|
12.13
|
|
Vested
|
|
|
(142,438
|
)
|
|
|
8.62
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at
October 30, 2016
|
|
|
162,375
|
|
|
$
|
9.61
|
|
Vested and expected to vest as of
October 30, 2016
|
|
|
154,245
|
|
|
$
|
9.64
|
|
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") permits employees to purchase shares at 85% of the lower of the closing market price at the commencement or ending date of the Plan year (approximately one year). The Company recognizes the ESPP expense during that same period. As of October 30, 2016, the maximum number of shares of common stock approved by the Company's shareholders to be purchased under the ESPP was 1.5 million shares. Under the ESPP, approximately 1.3 million shares had been issued through October 30, 2016, and approximately 67,000 shares are subject to outstanding subscriptions. As of October 30, 2016, the total compensation cost related to the ESPP not yet recognized was $0.1 million, which is expected to be recognized in fiscal 2017.
NOTE 10 - EMPLOYEE RETIREMENT PLANS
The Company maintains a 401(k) Savings and Profit Sharing Plan ("401(k) Plan") which covers all full and certain part time U.S. employees who have completed three months of service and are 18 years of age or older. Under the terms of the 401(k) Plan, employees may contribute up to 50% of their salary, subject to certain maximum amounts, which will be matched by the Company at 50% of the employee's contributions that are not in excess of 4% of the employee's compensation. Employee and employer contributions vest upon contribution. Annual employer contributions for all of the Company’s defined contribution plans were $0.6 million in fiscal year 2016 and $0.7 million in fiscal years 2015 and 2014.
NOTE 11 - INCOME TAXES
Income before the income tax provisions consist of the following:
|
|
Year Ended
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
November 2,
2014
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,270
|
|
|
$
|
6,646
|
|
|
$
|
(23,083
|
)
|
Foreign
|
|
|
54,204
|
|
|
|
63,394
|
|
|
|
64,413
|
|
|
|
$
|
60,474
|
|
|
$
|
70,040
|
|
|
$
|
41,330
|
|
The income tax provisions consist of the following:
|
|
Year Ended
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
November 2,
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
492
|
|
|
$
|
160
|
|
|
$
|
354
|
|
State
|
|
|
(2
|
)
|
|
|
(109
|
)
|
|
|
-
|
|
Foreign
|
|
|
8,115
|
|
|
|
9,729
|
|
|
|
4,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
10
|
|
|
|
7
|
|
|
|
(5
|
)
|
Foreign
|
|
|
(3,817
|
)
|
|
|
3,394
|
|
|
|
4,220
|
|
Total
|
|
$
|
4,798
|
|
|
$
|
13,181
|
|
|
$
|
9,295
|
|
The income tax provisions differ from the amount computed by applying the statutory U.S. federal income tax rate to income before income taxes as a result of the following:
|
|
Year Ended
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
November 2,
2014
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal income tax at statutory rate
|
|
$
|
21,166
|
|
|
$
|
24,514
|
|
|
$
|
14,465
|
|
Changes in valuation allowances
|
|
|
(9,516
|
)
|
|
|
(11,471
|
)
|
|
|
(7,575
|
)
|
Distributions from foreign subsidiaries
|
|
|
3,438
|
|
|
|
448
|
|
|
|
12,674
|
|
Foreign tax rate differentials
|
|
|
(9,620
|
)
|
|
|
(4,356
|
)
|
|
|
(4,864
|
)
|
Tax credits
|
|
|
(944
|
)
|
|
|
(2,729
|
)
|
|
|
(2,847
|
)
|
Uncertain tax positions, including reserves, settlements and resolutions
|
|
|
134
|
|
|
|
(175
|
)
|
|
|
(2,255
|
)
|
Gain on acquisition of DPTT
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,748
|
)
|
Intercompany gain elimination
|
|
|
-
|
|
|
|
-
|
|
|
|
4,759
|
|
Tax on foreign subsidiary earnings
|
|
|
225
|
|
|
|
6,589
|
|
|
|
-
|
|
Other, net
|
|
|
(85
|
)
|
|
|
361
|
|
|
|
686
|
|
|
|
$
|
4,798
|
|
|
$
|
13,181
|
|
|
$
|
9,295
|
|
The effective tax rates differ from the U.S. statutory rate of 35% in fiscal years 2016, 2015 and 2014 primarily due to earnings, including the fiscal year 2014 gain on acquisition of DPTT, being taxed at lower statutory rates in foreign jurisdictions, changes in deferred tax asset valuation allowances, including the reversals noted below, combined with the benefit of various investment credits in a foreign jurisdiction. In addition, the lower rate in fiscal year 2016 was partially driven by a benefit that resulted from the reversal of a previously recorded undistributed earnings tax liability in a foreign jurisdiction for which the Company is no longer liable. Five year tax holidays in Taiwan, that expire in 2017 and 2019, decreased foreign taxes by $0.5 million and $0.2 million in the years ended October 30, 2016 and November 1, 2015, respectively, and had no dollar benefit for the year ended November 2, 2014. The tax holidays had no per share effect on the Company’s financial results of the years ended October 30, 2016, November 1, 2015 and November 2, 2014.
The net deferred income tax assets consist of the following:
|
|
As of
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
Deferred income tax assets
:
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
46,158
|
|
|
$
|
56,582
|
|
Reserves not currently deductible
|
|
|
7,876
|
|
|
|
8,158
|
|
Alternative minimum tax credits
|
|
|
3,772
|
|
|
|
3,281
|
|
Tax credit carryforwards
|
|
|
8,814
|
|
|
|
8,809
|
|
Other
|
|
|
1,719
|
|
|
|
1,782
|
|
|
|
|
68,339
|
|
|
|
78,612
|
|
Valuation allowances
|
|
|
(29,315
|
)
|
|
|
(38,763
|
)
|
|
|
|
39,024
|
|
|
|
39,849
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Undistributed earnings of foreign subsidiaries
|
|
|
(3,962
|
)
|
|
|
(5,953
|
)
|
Property, plant and equipment
|
|
|
(19,977
|
)
|
|
|
(17,874
|
)
|
Investments
|
|
|
74
|
|
|
|
(4,596
|
)
|
Other
|
|
|
(328
|
)
|
|
|
(552
|
)
|
|
|
|
(24,193
|
)
|
|
|
(28,975
|
)
|
Net deferred income tax assets
|
|
$
|
14,831
|
|
|
$
|
10,874
|
|
Reported per adoption of new accounting standard (see below):
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
16,322
|
|
|
$
|
13,083
|
|
Deferred income tax liabilities
|
|
|
(1,491
|
)
|
|
|
(2,209
|
)
|
|
|
$
|
14,831
|
|
|
$
|
10,874
|
|
The Company has established a valuation allowance for a portion of its deferred tax assets because it believes, based on the weight of all available evidence, that it is more likely than not that a portion of its net operating loss carryforwards will expire prior to utilization. During fiscal years 2016 and 2015 the Company determined that sufficient positive evidence existed in certain foreign jurisdictions that it was more likely than not that additional deferred tax assets were realizable and, therefore, reduced the valuation allowance $4.3 million and $1.5 million respectively. In addition, the valuation allowance decreased in fiscal years 2016, 2015 and 2014 as a result of loss utilizations and deferred tax liability changes of $5.2 million, $9.3 million and $7.1 million respectively.
As of October 30, 2016, the undistributed earnings of foreign subsidiaries included in consolidated retained earnings amounted to $176.6 million, of which $11.3 million is not considered to be permanently invested. No provision has been made for future U.S. taxes payable on the remaining undistributed earnings of $165.3 million, as they are expected to be indefinitely invested in foreign jurisdictions and, therefore, are not anticipated to be subject to U.S. tax. Should the Company elect in the future to repatriate the foreign earnings so invested, it may incur additional income tax expense on those foreign earnings, the amount of which is not practicable to compute.
The following tables present the Company’s available operating loss and credit carryforwards at October 30, 2016, and their related expiration periods:
Operating Loss Carryforwards
|
|
Amount
|
|
|
Expiration
Periods
|
|
Federal
|
|
$
|
98,525
|
|
|
|
2025-2033
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
211,665
|
|
|
|
2017-2036
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
27,403
|
|
|
|
2018-2023
|
|
Tax Credit Carryforwards
|
|
Amount
|
|
|
Expiration
Period
|
|
|
|
|
|
|
|
|
Federal research and development
|
|
$
|
5,121
|
|
|
|
2019-2036
|
|
|
|
|
|
|
|
|
|
|
Federal alternative minimum tax
|
|
|
3,772
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
State tax
|
|
|
5,681
|
|
|
|
2017-2030
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
Year Ended
|
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
November 2,
2014
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,029
|
|
|
$
|
4,993
|
|
|
$
|
4,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions (reductions) for tax positions in prior years
|
|
|
744
|
|
|
|
(212
|
)
|
|
|
3,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions based on current year tax positions
|
|
|
268
|
|
|
|
318
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(378
|
)
|
|
|
(720
|
)
|
|
|
(3,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lapses of statutes of limitations
|
|
|
(57
|
)
|
|
|
(350
|
)
|
|
|
(318
|
)
|
Balance at end of year
|
|
$
|
4,606
|
|
|
$
|
4,029
|
|
|
$
|
4,993
|
|
Included in the balance of unrecognized tax benefits as of October 30, 2016, November 1, 2015 and November 2, 2014, are $4.6 million, $4.1 million and $5.0 million recorded in other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rate. Also included in the balance as of November 2, 2014, is $0.1 million of tax benefit
that, if recognized, would result in adjustment to deferred tax accounts. Included in these amounts in fiscal years 2016, 2015 and 2014 were $0.1 million of interest and penalties. The Company includes any applicable interest and penalties related to uncertain tax positions in its income tax provision. The fiscal years 2016 and 2015 tables include the settlement of non-US audits. The fiscal year 2014 table includes the recognition of previously unrecognized tax benefits that resulted from the lapse of their assessment periods, the increase for uncertain tax positions related to the acquisition of DPTT (as discussed in Note 2) and the settlement of an Internal Revenue Service (“IRS”) income tax examination of the Company’s 2012 and 2011 federal income tax returns. The IRS income tax settlement had limited impact on fiscal year 2014 income tax expense, as the changes that resulted from the examination were offset by loss carryforwards for which the related deferred tax assets were subject to valuation allowances. As of October 30, 2016, the Company does not believe it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the U.S. for years prior to and including fiscal year 2012. With respect to major foreign and state tax jurisdictions, the Company is no longer subject to tax authority examinations for years prior to and including fiscal year 2011.
Income tax payments were $11.4 million, $4.9 million and $5.2 million in fiscal years 2016, 2015 and 2014, respectively. Cash received for refunds of income taxes paid in prior years amounted to $0.2 million, $0.1 million and $1.4 million in fiscal years 2016, 2015 and 2014, respectively.
Adoption of New Accounting Standard
The Company adopted Accounting Standards Update (“ASU”) 2015-17 – “Balance Sheet Classification of Deferred Taxes” in the fourth quarter of its 2016 fiscal year. This ASU requires that deferred tax assets and liabilities be classified as noncurrent on a classified balance sheet. The Company adopted this ASU on a retrospective basis, as a result of which our prior year financial statements and related notes have been adjusted, as necessary, to show its effects on those periods. The effect on our fiscal year 2015 financial statement deferred income taxes line items of adopting ASU 2015-17 is presented below.
Classification
|
|
Previously
Reported
|
|
|
Change Due
to Adoption
|
|
|
Retrospectively
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,354
|
|
|
$
|
(3,354
|
)
|
|
$
|
-
|
|
Noncurrent assets
|
|
|
11,908
|
|
|
|
1,175
|
|
|
|
13,083
|
|
Noncurrent liabilities
|
|
|
4,388
|
|
|
|
(2,179
|
)
|
|
|
2,209
|
|
NOTE 12 - EARNINGS PER SHARE