PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months and Nine Months Ended July 30, 2017 and
July 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”, “our”, 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
integrated circuits (“ICs”)
and flat panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto
IC
wafers and flat panel substrates during the fabrication of ICs and a variety of FPDs and, to a lesser extent, other types of electrical and optical components.
We
currently
operate
principally from nine manufacturing facilities, two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States.
We have
announced our
plans
to construct
two
manufacturing
facilities
in China
as we expand our global manufacturing footprint
. Please refer to Note 15 for additional information.
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. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. We are typically impacted during our first fiscal quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during these periods. Additionally,
we
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
our
Annual Report on Form 10-K for the year ended October 30, 2016.
NOTE 2 - CHANGES IN EQUITY
The following tables set forth
our
consolidated changes in equity for the three and nine month periods ended July 30, 2017 and July 31, 2016:
|
|
Three Months Ended July 30, 2017
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Non-
controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 1, 2017
|
|
|
68,496
|
|
|
$
|
685
|
|
|
$
|
545,019
|
|
|
$
|
180,004
|
|
|
$
|
4,171
|
|
|
$
|
114,875
|
|
|
$
|
844,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,001
|
|
|
|
-
|
|
|
|
798
|
|
|
|
4,799
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,678
|
|
|
|
(204
|
)
|
|
|
4,474
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
32
|
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
Restricted stock awards vesting and expense
|
|
|
19
|
|
|
|
-
|
|
|
|
409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
574
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
574
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 30, 2017
|
|
|
68,547
|
|
|
$
|
685
|
|
|
$
|
545,743
|
|
|
$
|
184,005
|
|
|
$
|
8,849
|
|
|
$
|
115,846
|
|
|
$
|
855,128
|
|
|
|
Three Months Ended July 31, 2016
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Non-
controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 2, 2016
|
|
|
67,943
|
|
|
$
|
679
|
|
|
$
|
538,535
|
|
|
$
|
162,916
|
|
|
$
|
(8,846
|
)
|
|
$
|
109,488
|
|
|
$
|
802,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,088
|
|
|
|
-
|
|
|
|
3,365
|
|
|
|
11,453
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,910
|
|
|
|
1,173
|
|
|
|
5,083
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
7
|
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
Restricted stock awards vesting and expense
|
|
|
18
|
|
|
|
1
|
|
|
|
313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
314
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
661
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
661
|
|
Return of capital to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(955
|
)
|
|
|
(955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2016
|
|
|
67,968
|
|
|
$
|
680
|
|
|
$
|
539,562
|
|
|
$
|
171,004
|
|
|
$
|
(4,936
|
)
|
|
$
|
113,071
|
|
|
$
|
819,381
|
|
|
|
Nine Months Ended July 30, 2017
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Non-
controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2016
|
|
|
68,080
|
|
|
$
|
681
|
|
|
$
|
541,093
|
|
|
$
|
176,260
|
|
|
$
|
(7,671
|
)
|
|
$
|
115,111
|
|
|
$
|
825,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,745
|
|
|
|
-
|
|
|
|
3,048
|
|
|
|
10,793
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,520
|
|
|
|
5,692
|
|
|
|
22,212
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
355
|
|
|
|
3
|
|
|
|
2,187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,190
|
|
Restricted stock awards vesting and expense
|
|
|
112
|
|
|
|
1
|
|
|
|
1,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,138
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,703
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,703
|
|
Subsidiary dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,382
|
)
|
|
|
(8,382
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 30, 2017
|
|
|
68,547
|
|
|
$
|
685
|
|
|
$
|
545,743
|
|
|
$
|
184,005
|
|
|
$
|
8,849
|
|
|
$
|
115,846
|
|
|
$
|
855,128
|
|
|
|
Nine Months Ended July 31, 2016
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Non-
controlling
Interests
|
|
|
Total
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 2, 2015
|
|
|
66,602
|
|
|
$
|
666
|
|
|
$
|
526,402
|
|
|
$
|
130,060
|
|
|
$
|
(10,573
|
)
|
|
$
|
115,511
|
|
|
$
|
762,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,944
|
|
|
|
-
|
|
|
|
8,162
|
|
|
|
49,106
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,637
|
|
|
|
2,246
|
|
|
|
7,883
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
521
|
|
|
|
5
|
|
|
|
2,890
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,895
|
|
Restricted stock awards vesting and expense
|
|
|
128
|
|
|
|
2
|
|
|
|
876
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
878
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,971
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,971
|
|
Conversion of debt to common stock
|
|
|
717
|
|
|
|
7
|
|
|
|
7,431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,438
|
|
Repurchase of common stock of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Subsidiary dividend payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,901
|
)
|
|
|
(11,901
|
)
|
Return of capital to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(955
|
)
|
|
|
(955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2016
|
|
|
67,968
|
|
|
$
|
680
|
|
|
$
|
539,562
|
|
|
$
|
171,004
|
|
|
$
|
(4,936
|
)
|
|
$
|
113,071
|
|
|
$
|
819,381
|
|
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:
|
|
July 30,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
358
|
|
|
$
|
142
|
|
Work in process
|
|
|
4,256
|
|
|
|
2,987
|
|
Raw materials
|
|
|
21,054
|
|
|
|
18,952
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,668
|
|
|
$
|
22,081
|
|
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
July 30,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,905
|
|
|
$
|
8,036
|
|
Buildings and improvements
|
|
|
123,613
|
|
|
|
121,873
|
|
Machinery and equipment
|
|
|
1,551,224
|
|
|
|
1,475,755
|
|
Leasehold improvements
|
|
|
20,077
|
|
|
|
19,224
|
|
Furniture, fixtures and office equipment
|
|
|
13,030
|
|
|
|
12,700
|
|
Construction in progress
|
|
|
23,222
|
|
|
|
23,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,741,071
|
|
|
|
1,661,549
|
|
Less accumulated depreciation and amortization
|
|
|
1,239,351
|
|
|
|
1,155,115
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
501,720
|
|
|
$
|
506,434
|
|
Equipment under capital leases are included in above property, plant and equipment as follows:
|
|
July 30,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,917
|
|
|
$
|
34,917
|
|
Less accumulated amortization
|
|
|
12,971
|
|
|
|
10,352
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,946
|
|
|
$
|
24,565
|
|
Depreciation and amortization expense for property, plant and equipment was $20.6 million and $60.5 million for the three and nine month periods ended July 30, 2017, respectively, and $18.4 million and $56.4 million for the three and nine month periods ended July 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 are being 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 $0.1 million and $5.1 million in the three and nine month periods ended July 30, 2017, respectively.
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 provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term and expired in May 2017. The Company forevermore has the right to use the technology it acquired 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 $0.8 million and $5.7 million
during the three and nine month periods ended July 31, 2016, respectively,
and research and development expenses of $0.5 million during the nine month period ended July 31, 2016.
The Company recorded a loss of $0.1 million related to its investment in MP Mask during the nine month period ended July 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:
|
|
July 30,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2019
|
|
$
|
57,308
|
|
|
$
|
57,221
|
|
|
|
|
|
|
|
|
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
6,009
|
|
|
|
10,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,317
|
|
|
|
67,288
|
|
Less current portion
|
|
|
5,541
|
|
|
|
5,428
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,776
|
|
|
$
|
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 stipulates that we may not pay cash dividends on Photronics, Inc. stock, 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 July 30, 2017. The Company had no outstanding borrowings against the credit facility at July 30, 2017, and $50 million was available for borrowing. The interest rate on the credit facility (2.49% at July 30, 2017) is based on the Company’s total leverage ratio at LIBOR plus a spread, as defined in the credit facility. In May 2017 the credit facility was amended primarily for our new joint venture and FPD manufacturing facility in China. See Note 15 for additional discussion of our new joint venture in China and our expansion of FPD manufacturing into China.
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
|
|
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.
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 July
30, 2017
, the total amount payable through the end of the lease term was $6.1 million, of which $6.0 million represented principal and $0.1 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.
Total share-based compensation costs for each of the three month periods ended July 30, 2017 and July 31, 2016, was $1.0 million, and was $2.8 million for each of the nine month periods ended July 30, 2017 and July 31, 2016, respectively. The Company received cash from option exercises of $0.1 million and $2.2 million in the three and nine month periods ended July 30, 2017, respectively, and $0.1 million and $2.9 million in the three and nine month periods ended July 31, 2016, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods 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 and nine month periods ended July 30, 2017 and July 31, 2016, are presented in the following table.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
-
|
|
|
|
38.9
|
%
|
|
|
32.2
|
%
|
|
|
48.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate of return
|
|
|
-
|
|
|
|
1.2
|
%
|
|
|
1.9-2.0
|
%
|
|
|
1.2-1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
-
|
|
|
5.1 years
|
|
|
5.0 years
|
|
|
5.1 years
|
|
Information on outstanding and exercisable option awards as of July 30, 2017, is presented below.
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 30, 2017
|
|
|
3,405,060
|
|
|
$
|
7.99
|
|
6.0 years
|
|
$
|
8,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 30, 2017
|
|
|
2,179,444
|
|
|
$
|
6.57
|
|
4.8 years
|
|
$
|
7,766
|
|
There were no share options granted during the three month period ended July 30, 2017 and there were 45,000 share options granted during the three month period ended July 31, 2016, with a weighted-average grant date fair value of $3.44 per share. There were 348,750 share options granted during the nine month period ended July 30, 2017, with a weighted-average grant date fair value of $3.59 per share and 647,250 share options granted during the nine month period ended July 31, 2016, with a weighted-average grant date fair value of $4.55 per share. As of July 30, 2017, the total unrecognized compensation cost related to unvested option awards was approximately $3.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.1 years.
Restricted Stock
The fair value of restricted stock awards is based on the Company’s closing stock price on the date of grant. The restrictions on these awards typically lapse over a service period of less-than-one to four years. There were 5,000 restricted stock awards granted during the three month period ended July 30, 2017, with a grant date fair value of $10.15, and 290,000 restricted stock awards granted during the nine month period ended July 30, 2017, with a weighted-average grant date fair value of $11.28 per share. No restricted stock awards were granted during the three month period ended July 31, 2016 and 115,225 restricted stock awards were granted during the nine month period ended July 31, 2016, with a weighted-average grant date fair value of $12.13 per share. As of July 30, 2017, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $2.9 million. That cost is expected to be recognized over a weighted-average amortization period of 2.7 years. As of July 30, 2017, there were 324,181 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 and nine month periods ended July 30, 2017 and July 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.
As of July 31, 2016, we determined that deferred tax assets of $2.5 million, whose realization was previously not considered to be more likely than not, are realizable and, therefore, reduced their related valuation allowance. During the nine month period ended July 31, 2016, we realized a $2.4 million benefit, which resulted from the reversal of a previously recorded undistributed earnings tax liability in a foreign jurisdiction. As a result of a shareholder action to approve a dividend in this jurisdiction, we determined that we are no longer liable for this tax. In addition, during the nine month period ended July 31, 2016, $0.7 million of withholding tax was incurred upon the completion of a foreign subsidiary’s share redemption.
Unrecognized tax benefits related to uncertain tax positions were $3.2 million at July 30, 2017 and $4.6 million at October 30, 2016, all of which, if recognized, would favorably impact our effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at July 30, 2017 and October 30, 2016. In the three and nine month periods ended July 30, 2017, the net reduction of unrecognized tax benefits was $0.8 and $1.2 respectively. The net reductions reflect the resolution of tax issues with foreign tax authorities and the expiration of assessment periods. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, we believe that it is reasonably possible that up to $1.1 million of our 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., our 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 or nine month periods ended July 30, 2017 and July 31, 2016. Photronics DNP Mask Corporation (“PDMC”), our IC manufacturing facility in Taiwan, was accorded a tax holiday that commenced in 2015 and expires in 2019. We realized $0.1 million in tax benefits from this tax holiday in each of the three month periods ended July 30, 2017 and July 31, 2016, and $0.2 million in the nine month periods ended July 30, 2017 and July 31, 2016. This tax holiday had no per share effect in the three and nine month periods ended July 30, 2017 and July 31, 2016.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
4,001
|
|
|
$
|
8,088
|
|
|
$
|
7,745
|
|
|
$
|
40,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on convertible notes, net of tax
|
|
|
-
|
|
|
|
496
|
|
|
|
-
|
|
|
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for diluted earnings per share
|
|
$
|
4,001
|
|
|
$
|
8,584
|
|
|
$
|
7,745
|
|
|
$
|
43,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
68,525
|
|
|
|
67,953
|
|
|
|
68,376
|
|
|
|
67,377
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
855
|
|
|
|
822
|
|
|
|
935
|
|
|
|
1,006
|
|
Convertible notes
|
|
|
-
|
|
|
|
5,542
|
|
|
|
-
|
|
|
|
8,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
855
|
|
|
|
6,364
|
|
|
|
935
|
|
|
|
9,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
69,380
|
|
|
|
74,317
|
|
|
|
69,311
|
|
|
|
76,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.61
|
|
Diluted earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.56
|
|
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. The table also shows convertible notes that, if converted, would have been anti-dilutive.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
July 30,
2017
|
|
|
July 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
5,542
|
|
|
|
-
|
|
|
|
5,542
|
|
|
|
-
|
|
Share-based payment awards
|
|
|
1,087
|
|
|
|
2,016
|
|
|
|
1,054
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares excluded
|
|
|
6,629
|
|
|
|
2,016
|
|
|
|
6,596
|
|
|
|
1,615
|
|
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth the
changes in
our
accumulated other comprehensive income by component (net of tax of $0)
for the three and nine month periods ended July 30, 2017 and July 31, 2016.
|
|
Three Months Ended July 30, 2017
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 1, 2017
|
|
$
|
5,258
|
|
|
$
|
(113
|
)
|
|
$
|
(974
|
)
|
|
$
|
4,171
|
|
Other comprehensive income before reclassifications
|
|
|
4,438
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4,442
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
4,438
|
|
|
|
32
|
|
|
|
4
|
|
|
|
4,474
|
|
Less: other comprehensive (income) loss attributable to noncontrolling interests
|
|
|
206
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 30, 2017
|
|
$
|
9,902
|
|
|
$
|
(81
|
)
|
|
$
|
(972
|
)
|
|
$
|
8,849
|
|
|
|
Three Months Ended July 31, 2016
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 2, 2016
|
|
$
|
(7,966
|
)
|
|
$
|
(242
|
)
|
|
$
|
(638
|
)
|
|
$
|
(8,846
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
5,064
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
5,051
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
5,064
|
|
|
|
32
|
|
|
|
(13
|
)
|
|
|
5,083
|
|
Less: other comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(1,180
|
)
|
|
|
-
|
|
|
|
7
|
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2016
|
|
$
|
(4,082
|
)
|
|
$
|
(210
|
)
|
|
$
|
(644
|
)
|
|
$
|
(4,936
|
)
|
|
|
Nine Months Ended July 30, 2017
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2016
|
|
$
|
(6,567
|
)
|
|
$
|
(177
|
)
|
|
$
|
(927
|
)
|
|
$
|
(7,671
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
22,205
|
|
|
|
-
|
|
|
|
(89
|
)
|
|
|
22,116
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
96
|
|
|
|
-
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
22,205
|
|
|
|
96
|
|
|
|
(89
|
)
|
|
|
22,212
|
|
Less: other comprehensive (income)loss attributable to noncontrolling interests
|
|
|
(5,736
|
)
|
|
|
-
|
|
|
|
44
|
|
|
|
(5,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 30, 2017
|
|
$
|
9,902
|
|
|
$
|
(81
|
)
|
|
$
|
(972
|
)
|
|
$
|
8,849
|
|
|
|
Nine Months Ended July 31, 2016
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 2, 2015
|
|
$
|
(9,634
|
)
|
|
$
|
(306
|
)
|
|
$
|
(633
|
)
|
|
$
|
(10,573
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
7,810
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
7,787
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
96
|
|
|
|
-
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
7,810
|
|
|
|
96
|
|
|
|
(23
|
)
|
|
|
7,883
|
|
Less: other comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(2,258
|
)
|
|
|
-
|
|
|
|
12
|
|
|
|
(2,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2016
|
|
$
|
(4,082
|
)
|
|
$
|
(210
|
)
|
|
$
|
(644
|
)
|
|
$
|
(4,936
|
)
|
The amortization of the cash flow hedge is included in cost of sales in the condensed consolidated statements of income for all periods presented.
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.
We
did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at July 30, 2017 or October 30, 2016. In connection with the acquisition discussed in Note 4,
we
recorded and measured the assets acquired at fair value.
Fair Value of Other Financial Instruments
The fair values of
our
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
our
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
our
stock price and interest rates offered on debt issued by entities with credit ratings similar to
ours
.
The table below presents the fair and carrying values of
our
convertible senior notes at July 30, 2017 and October 30, 2016.
|
|
July 30, 2017
|
|
|
October 30, 2016
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due 2019
|
|
$
|
68,644
|
|
|
$
|
57,308
|
|
|
$
|
68,230
|
|
|
$
|
57,221
|
|
NOTE 12 - COMMITMENTS AND CONTINGENCIES
As of July 30, 2017,
we
had commitments outstanding for capital equipment expenditures of approximately $60 million.
We are
subject to various claims that arise in the ordinary course of business.
We believe
such claims, individually or in the aggregate, will not have a material effect on
our
condensed consolidated financial statements.
NOTE 13 - SUBSIDIARY DIVIDEND
In April 2017 PDMC,
our
majority owned IC subsidiary in Taiwan, declared a dividend of $16.6 million which 49.99%, or $8.3 million, was paid to the third party that owns a noncontrolling interest in PDMC in the third quarter fiscal year 2017.
NOTE 14 - GAIN ON SALE OF INVESTMENT
We
had a minority interest in a foreign entity. In the first quarter of fiscal year 2016,
we
sold this investment and realized a gain of $8.8 million.
NOTE 15 – EXPANSION INTO CHINA
Expansion of IC Manufacturing into China
In May 2017 we announced that we
have
entered into an agreement with Dai Nippon Printing Co., Ltd. (DNP) to form a joint venture to serve semiconductor manufacturers in China. Under the agreement, our wholly owned Singapore subsidiary will own 50.01% of the joint venture, which will be named Photronics DNP Mask Corporation Xiamen (PDMCX), and a subsidiary of DNP will own the remaining 49.99%. The financial results of the joint venture will be included in Photronics’ consolidated financial statements.
This IC investment in China of $160 million, which we initially announced in August 2016, will be based in Xiamen, China. Construction of the facility is currently underway, and production is anticipated to commence in early 2019. Photronics and DNP will contribute cash, in proportion to their ownership percentages, over five years to fund the equity portion of the investment, which will also receive certain incentives and support from the local industrial development zone. The joint venture, itself, may also fund a portion of the investment with local borrowings. The formation of the joint venture, which is subject to regulatory approvals and customary closing conditions, is expected to be completed by the end of our 2017 fiscal year.
Expansion of FPD Manufacturing into China
In August 2017 we announced that Photronics, UK, Ltd., a wholly owned subsidiary of ours, signed an investment agreement with Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we will invest a minimum of $160 million, a portion of which may be funded
with local
borrowings, to build and operate a research and development and manufacturing facility for high-end and mainstream FPD photomasks. Hefei State Hi-tech Industry Development Zone will provide certain investment incentives and support for this facility, which will have initial capability to produce up to G10.5 large area masks and AMOLED products. Construction is planned to begin in late 2017 and production is anticipated to commence in early 2019.
NOTE 16 - 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.