PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
Three Months Ended January 29, 2017 and January 31, 2016
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
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 plan 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. The Company is typically impacted during its first fiscal quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during these periods. Additionally, the Company can be impacted during its first or second quarter by the Asian New Year holiday period, which may also reduce customer orders. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 29, 2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 30, 2016.
NOTE 2 - CHANGES IN EQUITY
The following tables set forth the Company’s consolidated changes in equity for the three months ended January 29, 2017 and January 31, 2016:
|
|
Three Months Ended January 29, 2017
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2016
|
|
|
68,080
|
|
|
$
|
681
|
|
|
$
|
541,093
|
|
|
$
|
176,260
|
|
|
$
|
(7,671
|
)
|
|
$
|
115,111
|
|
|
$
|
825,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,946
|
|
|
|
-
|
|
|
|
2,564
|
|
|
|
4,510
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,859
|
)
|
|
|
1,257
|
|
|
|
(602
|
)
|
Sale of common stock through employee stock option and purchase plans
|
|
|
175
|
|
|
|
1
|
|
|
|
1,087
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,088
|
|
Restricted stock awards vesting and expense
|
|
|
78
|
|
|
|
1
|
|
|
|
297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
640
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2017
|
|
|
68,333
|
|
|
$
|
683
|
|
|
$
|
543,117
|
|
|
$
|
178,206
|
|
|
$
|
(9,530
|
)
|
|
$
|
118,932
|
|
|
$
|
831,408
|
|
|
|
Three Months Ended January 31, 2016
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 2, 2015
|
|
|
66,602
|
|
|
$
|
666
|
|
|
$
|
526,402
|
|
|
$
|
130,060
|
|
|
$
|
(10,573
|
)
|
|
$
|
115,511
|
|
|
$
|
762,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,002
|
|
|
|
-
|
|
|
|
2,499
|
|
|
|
23,501
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,432
|
)
|
|
|
(3,612
|
)
|
|
|
(21,044
|
)
|
Sale of common stock through employee stock option and purchase plans
|
|
|
384
|
|
|
|
4
|
|
|
|
2,039
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,043
|
|
Restricted stock awards vesting and expense
|
|
|
95
|
|
|
|
1
|
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
251
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
646
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2016
|
|
|
67,081
|
|
|
$
|
671
|
|
|
$
|
529,337
|
|
|
$
|
151,062
|
|
|
$
|
(28,005
|
)
|
|
$
|
114,398
|
|
|
$
|
767,463
|
|
NOTE 3
- 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:
|
|
January 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
178
|
|
|
$
|
142
|
|
Work in process
|
|
|
3,153
|
|
|
|
2,987
|
|
Raw materials
|
|
|
20,242
|
|
|
|
18,952
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,573
|
|
|
$
|
22,081
|
|
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
|
January 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
7,963
|
|
|
$
|
8,036
|
|
Buildings and improvements
|
|
|
121,550
|
|
|
|
121,873
|
|
Machinery and equipment
|
|
|
1,474,314
|
|
|
|
1,475,755
|
|
Leasehold improvements
|
|
|
19,429
|
|
|
|
19,224
|
|
Furniture, fixtures and office equipment
|
|
|
12,770
|
|
|
|
12,700
|
|
Construction in progress
|
|
|
29,984
|
|
|
|
23,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,666,010
|
|
|
|
1,661,549
|
|
Less accumulated depreciation and amortization
|
|
|
1,169,334
|
|
|
|
1,155,115
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
496,676
|
|
|
$
|
506,434
|
|
Equipment under capital leases are included in above property, plant and equipment as follows:
|
|
January 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,917
|
|
|
$
|
34,917
|
|
Less accumulated amortization
|
|
|
11,225
|
|
|
|
10,352
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,692
|
|
|
$
|
24,565
|
|
Depreciation and amortization expense for property, plant and equipment was $19.7 million and $19.1 million for the three month periods ended January 29, 2017 and January 31, 2016, respectively.
During the three-month period ended January 29, 2017, the Company acquired a business comprised of manufacturing assets and certain intellectual property, that enables the Company to expand its manufacturing capability, primarily in large area masks for IC, for approximately $5.7 million, including a $0.3 million holdback payable one year from the acquisition date. The transaction was accounted for in accordance with ASC 805 – “Business Combinations”, with substantially all of the purchase price being allocated to long-lived assets that will be depreciated over five years.
During the three month period ended January 29, 2017, the Company entered into a noncash transaction with a customer which resulted in the acquisition of equipment with a fair value of approximately $2.1 million.
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, as well as, 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. 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
(presently due to expire in May 2017).
In addition, the Company forevermore has the right 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. MP Mask separately charged for any research and development activities it engaged in at the requests of its owners. The Company recorded cost of sales of $2.2 million during the three month period ended January 31, 2016, and research and development expenses of $0.2 million during the same period. As of January 31, 2016, the Company owed MP Mask $5.6 million, and had a receivable from Micron of $6.9 million, both primarily related to the aforementioned supply agreements.
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, 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.
The Company recorded a loss of $0.1 million from its investment in the three month period ended January 31, 2016. Income or loss from the VIE is included in “Interest and other income (expense), net” in the condensed consolidated statements of income.
NOTE 6 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
January 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2019
|
|
$
|
57,249
|
|
|
$
|
57,221
|
|
|
|
|
|
|
|
|
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
8,724
|
|
|
|
10,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,973
|
|
|
|
67,288
|
|
Less current portion
|
|
|
5,465
|
|
|
|
5,428
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,508
|
|
|
$
|
61,860
|
|
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 adopted Accounting Standard Update (“ASU
” or “Update
”) 2015-03 “Simplifying the Presentation of Debt Issuance Costs” in the first quarter of its 2017 fiscal year. This ASU requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct reduction from that debt liability, consistent with the presentation of a debt discount. We adopted this ASU on a retrospective basis, as a result of which our October 30, 2016, condensed consolidated balance sheet and its related long-term borrowings note have been adjusted, as necessary, to reflect
this Update’s
adoption. The effect on our October 30, 2016, condensed consolidated balance sheet is presented below.
Line Item
|
|
Previously
Reported
|
|
|
Change Due
to Adoption
|
|
|
Retrospectively
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
$
|
4,071
|
|
|
$
|
(279
|
)
|
|
$
|
3,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Borrowings
|
|
$
|
62,139
|
|
|
$
|
(279
|
)
|
|
$
|
61,860
|
|
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 January 29, 2017. The Company had no outstanding borrowings against the credit facility at January 29, 2017, and $50 million was available for borrowing. The interest rate on the credit facility (2.03% at January 29, 2017) 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. Under the terms of the lease agreement, the Company must maintain the equipment in good working order, and is subject to a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated in its credit facility. As of
January 29, 2017
, the total amount payable through the end of the lease term was $8.9 million, of which $8.7 million represented principal and $0.2 million represented interest.
NOTE 7 - 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 $0.9 million in the three month period ended January 29, 2017 and January 31, 2016, respectively, and the Company received cash from option exercises of $1.0 million and $2.0 million during those respective periods. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the 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 have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of the Company’s common stock on the dates 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 value of options issued during the three month periods ended January 29, 2017 and January 31, 2016, are presented in the following table.
|
|
Three Months Ended
|
|
|
|
January 29,
2017
|
|
|
January 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
32.2
|
%
|
|
|
49.9
|
%
|
|
|
|
|
|
|
|
|
|
Risk free rate of return
|
|
|
1.9
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
5.0 years
|
|
|
5.1 years
|
|
Information on outstanding and exercisable option awards as of January 29, 2017, is presented below.
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 29, 2017
|
|
|
3,676,160
|
|
|
$
|
7.97
|
|
6.5 years
|
|
$
|
13,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 29, 2017
|
|
|
2,329,981
|
|
|
$
|
6.53
|
|
5.3 years
|
|
$
|
12,017
|
|
There were 338,750 share options granted during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $3.60 per share, and there were 579,250 share options granted during the three month period ended January 31, 2016, with a weighted-average grant date fair value of $4.66 per share. As of January 29, 2017, the total unrecognized compensation cost related to unvested option awards was approximately $4.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.6 years.
Restricted Stock
The Company periodically grants restricted stock awards; the fair value of which are determined on the date of grant, based on the Company’s closing stock price. The restrictions on these awards typically lapse over a service period of one to four years. There were 260,000 restricted stock awards issued during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $11.35 per share, and there were 115,225 restricted stock awards issued during the three month period ended January 31, 2016, with a weighted-average grant date fair value of $12.13 per share. As of January 29, 2017, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $3.5 million. That cost is expected to be recognized over a weighted-average amortization period of 3.6 years. As of January 29, 2017, there were 344,569 shares of restricted stock outstanding.
NOTE 8 - INCOME TAXES
The effective tax rate differs from the U.S. statutory rate of 35% in the three month periods ended January 29, 2017 and January 31, 2016, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, combined with the benefit of various investment credits in a foreign jurisdiction. Valuation allowances in jurisdictions with historic losses eliminate the tax benefit of these jurisdictions.
Unrecognized tax benefits related to uncertain tax positions were $4.7 million at January 29, 2017 and $4.6 million at October 31, 2016, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at January 29, 2017 and October 31, 2016. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that it is reasonably possible that up to $1.4 million of its uncertain tax positions (including accrued interest
and
penalties, and net of tax benefits) may be resolved over the next twelve months. The resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.
PKLT
Co. Ltd.,
the Company’s FPD manufacturing facility in Taiwan, has been accorded a tax holiday, which started in 2012 and expires in 2017. This tax holiday had no dollar or per share effect in the three month periods ended January 29, 2017 and January 31, 2016.
Photronics DNP Mask Corporation (“PDMC”),
the Company’s IC manufacturing facility in Taiwan, was accorded a tax holiday that commenced in 2015 and expires in 2019. The Company realized $0.1 million in tax benefits from this tax holiday in each of the three month periods ended January 29, 2017 and January 31, 2016. The tax holiday had no per share effect in the three month periods ended January 29, 2017 and January 31, 2016.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
|
|
Three Months Ended
|
|
|
|
January 29,
2017
|
|
|
January 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
1,946
|
|
|
$
|
21,002
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Interest expense on convertible notes, net of tax
|
|
|
-
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
Earnings for diluted earnings per share
|
|
$
|
1,946
|
|
|
$
|
22,073
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
68,176
|
|
|
|
66,807
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
993
|
|
|
|
1,245
|
|
Convertible notes
|
|
|
-
|
|
|
|
11,084
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
993
|
|
|
|
12,329
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
69,169
|
|
|
|
79,136
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.31
|
|
Diluted earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.28
|
|
The table below shows the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive.
|
|
Three Months Ended
|
|
|
|
January 29,
2017
|
|
|
January 31,
2016
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
993
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares excluded
|
|
|
993
|
|
|
|
668
|
|
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth the
changes in the Company’s accumulated other comprehensive income by component (net of tax of $0)
for the three month periods ended January 29, 2017 and January 31, 2016.
|
|
Three Months Ended January 29, 2017
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2016
|
|
$
|
(6,567
|
)
|
|
$
|
(177
|
)
|
|
$
|
(927
|
)
|
|
$
|
(7,671
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(614
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(634
|
)
|
Amounts reclassified from other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(614
|
)
|
|
|
32
|
|
|
|
(20
|
)
|
|
|
(602
|
)
|
Less: other comprehensive (income)loss attributable to noncontrolling interests
|
|
|
(1,267
|
)
|
|
|
-
|
|
|
|
10
|
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2017
|
|
$
|
(8,448
|
)
|
|
$
|
(145
|
)
|
|
$
|
(937
|
)
|
|
$
|
(9,530
|
)
|
|
|
Three Months Ended January 31, 2016
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 2, 2015
|
|
$
|
(9,634
|
)
|
|
$
|
(306
|
)
|
|
$
|
(633
|
)
|
|
$
|
(10,573
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(21,115
|
)
|
|
|
-
|
|
|
|
39
|
|
|
|
(21,076
|
)
|
Amounts reclassified from other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(21,115
|
)
|
|
|
32
|
|
|
|
39
|
|
|
|
(21,044
|
)
|
Less: other comprehensive (income) loss attributable to noncontrolling interests
|
|
|
3,631
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
3,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2016
|
|
$
|
(27,118
|
)
|
|
$
|
(274
|
)
|
|
$
|
(613
|
)
|
|
$
|
(28,005
|
)
|
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
The Company did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at January 29, 2017 or October 30, 2016. In connection with the acquisition discussed in Note 4, the Company recorded and measured the assets acquired at fair value.
Fair Value of Other Financial Instruments
The fair values of the Company’s cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of the Company’s convertible senior notes is a Level 2 measurement, as they were determined using inputs that were either observable market data, or could be derived from or corroborated with observable market data. These inputs included the Company’s stock price and interest rates offered on debt issued by entities with credit ratings similar to that of the Company’s.
The table below presents the fair and carrying values of the Company’s convertible senior notes at January 29, 2017 and October 30, 2016.
|
|
January 29, 2017
|
|
|
October 30, 2016
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due 2019
|
|
$
|
73,215
|
|
|
$
|
57,249
|
|
|
$
|
68,230
|
|
|
$
|
57,221
|
|
NOTE 12 - COMMITMENTS AND CONTINGENCIES
As of January 29, 2017, the Company had commitments outstanding for capital equipment expenditures of approximately $64 million.
The Company is subject to various claims that arise in the ordinary course of business. The Company believes such claims, individually or in the aggregate, will not have a material effect on its condensed consolidated financial statements.
NOTE 13 - GAIN ON SALE OF INVESTMENT
The Company had a minority interest in a foreign entity. In the first quarter of fiscal year 2016, the Company sold this investment and recognized a gain of $8.8 million.
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017 the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 of the goodwill impairment test and requires entities to perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, in the event the reporting unit fails the qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for the Company in its first quarter of its fiscal year
2021
, and should be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions that the Company may make.
In January 2017 the FASB issued ASU 2017-01 “Clarifying the Definition of a Business”, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for the Company in its first quarter of fiscal year 2019, and should be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions or dispositions that the Company may make.
In November 2016 the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for the Company in its first quarter of fiscal year 2019 and should be applied on a retrospective transition basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In October 2016 the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for the Company in its first quarter of fiscal year 2019 and should be applied on a modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In August 2016 the FASB issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for the Company in its first quarter of fiscal year 2019 and should be applied using a retrospective transition approach. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In June 2016 the FASB issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss impairment methodology found in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 is effective for the Company in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In March 2016 the FASB issued ASU 2016 – 09 “Improvements to Employee Share-Based Payment Accounting”, which simplifies the accounting for share-based payment transactions including their income tax consequences, classification as either equity or liability awards, classification on the statement of cash flows, and other areas. The method of adoption varies with the different aspects of the Update. ASU 2016-09 is effective for the Company in its first quarter of fiscal year 2018, with early application permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In February 2016 the FASB issued ASU 2016 – 02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. ASU 2016-02 is to be adopted using a modified retrospective approach, which includes a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. The ASU is effective for the Company in its first quarter of fiscal year 2020, with early application permitted, and the Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In January 2016 the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include, equity investments, financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. The ASU also changes certain presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This ASU is effective for the Company in its first quarter of fiscal year 2019. Early adoption, with certain exceptions, is not permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
In April 2015 the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. The Company adopted this ASU, and applied it on a retrospective basis, in the first quarter of its 2017 fiscal year. See Note 6 for the effects of its adoption on the Company’s October 30, 2016 condensed consolidated balance sheet.
In May 2014 the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which will supersede nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015 the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year and allows entities to early adopt, but no earlier than the original effective date. ASU 2014-09 will now be effective for the Company in its first quarter of fiscal 2019. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. The Company is evaluating the transition method that will be elected and the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.