PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended February 2, 2014 and January 27, 2013
(unaudited)
(in thousands, except share amounts)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. and its subsidiaries ("Photronics" or “the Company") 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 eight manufacturing facilities, two of which are located in Europe, two in Taiwan, one in Korea, and three in the United States.
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, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending November 2, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended November 3, 2013.
NOTE 2 - CHANGES IN EQUITY
The following tables set forth the Company's consolidated changes in equity for the three months ended February 2, 2014 and January 27, 2013:
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Three Months Ended February 2, 2014
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Photronics, Inc. Shareholders
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|
|
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|
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|
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|
|
|
|
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|
|
|
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Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
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Additional
|
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|
|
|
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Other
|
|
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Non-
|
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|
|
|
|
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Paid-in
|
|
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Retained
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Comprehensive
|
|
|
controlling
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Total
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Shares
|
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Amount
|
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Capital
|
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Earnings
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|
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Income
|
|
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Interests
|
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Equity
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance at November 3, 2013
|
|
|
61,083
|
|
|
$
|
611
|
|
|
$
|
498,861
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|
|
$
|
59,439
|
|
|
$
|
26,403
|
|
|
$
|
2,517
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|
|
$
|
587,831
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|
|
|
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|
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|
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Net income
|
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|
-
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|
-
|
|
|
|
-
|
|
|
|
1,993
|
|
|
|
-
|
|
|
|
48
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|
|
|
2,041
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Other comprehensive income
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|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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|
(8,412
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)
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|
(80
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)
|
|
|
(8,492
|
)
|
Sale of common stock through employee stock option and purchase plans
|
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|
130
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|
|
|
1
|
|
|
|
408
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|
|
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-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409
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|
Restricted stock awards vesting and expense
|
|
|
112
|
|
|
|
1
|
|
|
|
208
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
209
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|
Share-based compensation expense
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|
|
-
|
|
|
|
-
|
|
|
|
896
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|
|
|
-
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|
|
|
-
|
|
|
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-
|
|
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|
896
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Redemption of common stock by subsidiary
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|
-
|
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|
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-
|
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36
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|
|
|
-
|
|
|
|
(11
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)
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|
(1,715
|
)
|
|
|
(1,690
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)
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Balance at February 2, 2014
|
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61,325
|
|
|
$
|
613
|
|
|
$
|
500,409
|
|
|
$
|
61,432
|
|
|
$
|
17,980
|
|
|
$
|
770
|
|
|
$
|
581,204
|
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Three Months Ended January 27, 2013
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Photronics, Inc. Shareholders
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Accumulated
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Common Stock
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Additional
|
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Other
|
|
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Non-
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|
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|
|
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Paid-in
|
|
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Retained
|
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Comprehensive
|
|
|
controlling
|
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Total
|
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|
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Shares
|
|
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Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interests
|
|
|
Equity
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Balance at October 28, 2012
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|
60,213
|
|
|
$
|
602
|
|
|
$
|
493,411
|
|
|
$
|
41,473
|
|
|
$
|
15,900
|
|
|
$
|
34,615
|
|
|
$
|
586,001
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,323
|
|
|
|
-
|
|
|
|
536
|
|
|
|
2,859
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,939
|
|
|
|
230
|
|
|
|
8,169
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
77
|
|
|
|
1
|
|
|
|
110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
Restricted stock awards vesting and expense
|
|
|
72
|
|
|
|
-
|
|
|
|
269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
269
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
616
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|
Repurchase of common stock by subsidiary
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|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
(4,736
|
)
|
|
|
(4,184
|
)
|
Balance at January 27, 2013
|
|
|
60,362
|
|
|
$
|
603
|
|
|
$
|
494,985
|
|
|
$
|
43,796
|
|
|
$
|
23,812
|
|
|
$
|
30,645
|
|
|
$
|
593,841
|
|
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
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February 2,
2014
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|
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November 3,
2013
|
|
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|
|
|
|
|
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Land
|
|
$
|
8,637
|
|
|
$
|
8,692
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|
Buildings and improvements
|
|
|
104,641
|
|
|
|
103,676
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|
Machinery and equipment
|
|
|
1,253,911
|
|
|
|
1,225,091
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|
Leasehold improvements
|
|
|
3,919
|
|
|
|
4,179
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|
Furniture, fixtures and office equipment
|
|
|
11,137
|
|
|
|
11,546
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|
Construction in progress
|
|
|
76,668
|
|
|
|
97,319
|
|
|
|
|
1,458,913
|
|
|
|
1,450,503
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|
Less accumulated depreciation and amortization
|
|
|
1,024,712
|
|
|
|
1,027,763
|
|
|
|
$
|
434,201
|
|
|
$
|
422,740
|
|
Equipment under capital leases are included in above property, plant and equipment as follows:
|
|
February 2,
2014
|
|
|
November 3,
2013
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
56,245
|
|
|
$
|
21,327
|
|
Construction in progress
|
|
|
-
|
|
|
|
34,918
|
|
|
|
|
56,245
|
|
|
|
56,245
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|
Less accumulated amortization
|
|
|
6,213
|
|
|
|
4,932
|
|
|
|
$
|
50,032
|
|
|
$
|
51,313
|
|
Depreciation expense for property, plant and equipment (excluding equipment under capital leases) was $14.7 million and $17.1 million for the three month periods ended February 2, 2014 and January 27, 2013, respectively. Amortization expense for equipment under capital leases was $1.3 million and $0.5 million for the three month periods ended February 2, 2014 and January 27, 2013, respectively.
NOTE 4 - 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 develops and produces photomasks for leading-edge and advanced next generation semiconductors. At the time of the formation of the joint venture, the Company also entered into both an agreement to license photomask technology developed by Micron and certain supply agreements.
This joint venture is a variable interest entity ("VIE") (as that term is defined in the Accounting Standards Codification ("ASC")) because all costs of the joint venture are passed on to the Company and Micron through purchase agreements they have entered into with the joint venture, and it is dependent upon the Company and Micron for any additional cash requirements. On a quarterly basis the Company reassesses whether its interest in MP Mask gives it a controlling financial interest in this VIE. The purpose of this quarterly reassessment is to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the reassessment in the current quarter, the Company determined that Micron is still the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, thereby giving it the power to direct the activities of MP Mask that most significantly impact 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 has utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charges its variable interest holders based on their actual usage of its facility. MP Mask separately charges for any research and development activities it engages in at the requests of its owners. The Company recorded cost of sales of $1.0 million and $1.9 million during the three month periods ended February 2, 2014 and January 27, 2013, respectively, and research and development expenses of $0.2 million during each of the three month periods. As of February 2, 2014 and November 3, 2013, the Company owed MP Mask $3.6 million and $4.5 million, respectively, and had a receivable from Micron of $5.4 million and $4.9 million, respectively, both primarily related to the aforementioned supply agreements.
MP Mask is 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, has held majority voting power on the Board of Managers. The voting power held by each party is subject to change as ownership interests change. Under the MP Mask joint venture operating agreement, the Company may be required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, MP Mask shall pursue its own financing. If MP Mask is unable to obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose not to make a requested contribution to MP Mask, its ownership percentage may be reduced.
The Company's investment in the VIE, which represents its maximum exposure to loss, was $93.1 million at February 2, 2014 and at November 3, 2013. This amount is reported in the Company's condensed consolidated balance sheets as "Investment in joint venture". The Company recorded a loss of $0.2 million from its investment in the three month period ended January 27, 2013 and recorded no income or loss in the three month period ended February 2, 2014. Income or loss from the VIE is included in "Interest and other income (expense), net" in the condensed consolidated statements of income.
NOTE 5 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
February 2,
2014
|
|
|
November 3,
2013
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2016
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
23,826
|
|
|
|
25,065
|
|
5.50% convertible senior notes due in October 2014
|
|
|
22,054
|
|
|
|
22,054
|
|
Term loan, which bore interest at a variable rate, as defined, repaid in December 2013
|
|
|
-
|
|
|
|
21,250
|
|
3.09% capital lease obligation payable through March 2016
|
|
|
9,587
|
|
|
|
10,652
|
|
|
|
|
170,467
|
|
|
|
194,021
|
|
Less current portion
|
|
|
9,387
|
|
|
|
11,818
|
|
|
|
$
|
161,080
|
|
|
$
|
182,203
|
|
In December 2013 the Company amended its credit facility, increasing its limit to $50 million with an expansion capacity to $75 million, and extending its term to December 2018. The interest rate spread on borrowings has been reduced and the minimum fixed charge ratio has been replaced with a minimum interest coverage ratio under the terms of the amended credit facility which, in addition, increased the investment baskets (as defined in the credit facility) and continues to include total leverage ratio and minimum unrestricted cash balance covenants. The credit facility bears interest (1.9% at February 2, 2014) based on the Company’s total leverage ratio, at LIBOR plus a spread, as defined in the credit facility. As of February 2, 2014, the Company had no outstanding borrowings under the credit facility and $50 million was available for borrowing. The credit facility is secured by substantially all of the Company’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries.
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 February 2, 2014, the total amount payable through the end of the lease term was $25.4 million, of which $23.8 million represented principal and $1.6 million represented interest.
In March 2012 the Company, in connection with its purchase of the U.S. nanoFab facility, amended its credit facility (“the credit facility”) to include the addition of a $25 million term loan that was to mature in March 2017. In December 2013, simultaneous with the amendment of its credit facility discussed above, the Company repaid the $21.3 million balance of this term loan that was outstanding at November 3, 2013.
In March 2011 the Company issued through a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended, $115 million aggregate principal amount of 3.25% convertible senior notes. The notes mature on April 1, 2016, and note holders may convert each $1,000 principal amount of notes to approximately 96 shares of common stock (equivalent to an initial conversion price of $10.37 per share of common stock) at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2016. The conversion rate is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated March 28, 2011. 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 net proceeds of the notes were approximately $110.7 million, which were used, in part, to acquire $35.4 million of the Company’s 5.5% convertible senior notes which were to mature on October 1, 2014, and to repay, in full, its then outstanding obligations under capital leases of $19.8 million.
In September 2009 the Company issued, through a public offering, $57.5 million aggregate principal amount of 5.5% convertible senior notes, which were to mature on October 1, 2014. Under the terms of the offering, the note holders could convert each $1,000 principal amount of notes to approximately 197 shares of common stock (equivalent to an initial conversion price of $5.08 per share of common stock) on, or before, September 30, 2014. The conversion rate is subject to adjustment upon the occurrence of certain events which are described in the indenture dated September 16, 2009. The Company is not required to redeem the notes prior to their maturity. The net proceeds of this offering were approximately $54.9 million, which were used to reduce amounts outstanding under the Company’s credit facility. As discussed above, $35.4 million aggregate principal amount of these notes were acquired by the Company during fiscal 2011. As discussed above, in December 2013 the Company entered into a new five year $50 million credit facility. The Company intends to repay the remaining outstanding 5.5% convertible senior notes issued in September 2009 with borrowings against this new credit facility and, therefore, has classified as long-term the entire $22.1 million of those notes that were outstanding as of February 2, 2014.
In April 2011 the Company entered into a five year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, which bears interest at 3.09%, are $0.4 million per month through March 2016. The lease agreement provides that the Company must maintain the equipment in good working order, and includes a cross default with cross acceleration provision related to certain non-financial covenants incorporated in the Company's credit facility agreement. As of February 2, 2014, the total amount payable through the end of the lease term was $9.9 million, of which $9.6 million represented principal and $0.3 million represented interest.
NOTE 6 - COMMON STOCK WARRANTS
In September 2009 the Company entered into two warrant agreements with Intel Capital Corporation to purchase a total of 750,000 shares of the Company's common stock. Under one warrant agreement 500,000 shares of the Company's common stock could be purchased at an exercise price of $4.15 per share and under the second warrant agreement 250,000 shares of the Company's common stock could be purchased at an exercise price of $5.08 per share. The warrant agreements were to expire in September 2014. Also in September 2009, the Company and Intel Corporation entered into an agreement to share technical and operations information regarding the development of the Company's products, the capabilities of the Company's photomask manufacturing lines and the alignment of photomask toolsets. Intel Capital Corporation also invested in the Company's convertible debt offering of September 2009. The warrants were recorded at their fair value on their date of grant, which was determined using the Black-Scholes option pricing model. In June 2013 Intel Capital Corporation exercised all of the warrants under both warrant agreements on a net share basis and received 0.3 million shares of the Company’s common stock.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2007 the Company’s shareholders approved a new share-based compensation plan ("Plan"), under which options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other awards based on, or related to, shares of the Company's common stock may be granted from shares authorized but unissued or shares previously issued and reacquired by the Company. A maximum of six million shares of common stock may be issued under the Plan. 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 costs of $1.1 million and $0.9 million for the three month periods ended February 2, 2014 and January 27, 2013, 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 month periods ended February 2, 2014 and January 27, 2013, are presented in the following table.
|
|
Three Months Ended
|
|
|
|
February 2,
2014
|
|
|
January 27,
2013
|
|
Volatility
|
|
|
61.1
|
%
|
|
|
100.1
|
%
|
Risk free rate of return
|
|
|
1.4
|
%
|
|
|
0.5% - 0.7
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term
|
|
4.6 years
|
|
|
4.3 years
|
|
Information on outstanding and exercisable option awards as of February 2, 2014, is presented below.
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at February 2, 2014
|
|
|
4,616,076
|
|
|
$
|
8.62
|
|
6.0 years
|
|
$
|
9,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 2, 2014
|
|
|
3,042,501
|
|
|
$
|
9.36
|
|
4.5 years
|
|
$
|
7,421
|
|
There were 612,500 share options granted during the three month period ended February 2, 2014, with a weighted-average grant date fair value of $4.45 per share, and there were 564,000 share options granted during the three month period ended January 27, 2013, with a weighted-average grant date fair value of $3.99 per share. As of February 2, 2014, the total unrecognized compensation cost related to unvested option awards was approximately $5.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.8 years.
Restricted Stock
The Company periodically grants restricted stock awards. The restrictions on these awards lapse over a service period that has ranged from less-than-one to eight years. There were 111,667 restricted stock awards issued during the three month period ended February 2, 2014, with a weighted-average grant date fair value of $8.86 per share, and there were 204,500 restricted stock awards granted during the three month period ended January 27, 2013, with a weighted-average grant date fair value of $5.46 per share. As of February 2, 2014, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.1 years. As of February 2, 2014, there were 294,669 shares of restricted stock outstanding.
NOTE 8 - INCOME TAXES
The effective income tax rates for the three month periods ended February 2, 2014 and January 27, 2013, differ from the rates computed by applying the U.S. statutory rate of 35% to income before income taxes for the periods primarily due to foreign tax rate differences, as well as the existence of valuation allowances in jurisdictions with historical and continuing tax losses.
Unrecognized tax benefits related to uncertain tax positions were $4.9 million at February 2, 2014 and November 3, 2013, of which $1.7 million would favorably impact the Company's effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at February 2, 2014 and November 3, 2013. As of February 2, 2014, the total amount of unrecognized tax benefits is not expected to significantly increase or decrease in the next twelve months.
PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a tax holiday which commenced in 2012 and expires in 2017. The tax holiday had no dollar or per share effect in the three month periods ended February 2, 2014 and January 27, 2013.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
|
|
Three Months Ended
|
|
|
|
February 2,
2014
|
|
|
January 27,
2013
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
1,993
|
|
|
$
|
2,323
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Earnings for diluted earnings per share
|
|
$
|
1,993
|
|
|
$
|
2,323
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
61,200
|
|
|
|
60,277
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
936
|
|
|
|
685
|
|
Common stock warrants
|
|
|
-
|
|
|
|
133
|
|
Potentially dilutive common shares
|
|
|
936
|
|
|
|
818
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
62,136
|
|
|
|
61,095
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
Diluted earnings per share
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
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
|
|
|
|
February 2,
2014
|
|
|
January 27,
2013
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
15,423
|
|
|
|
15,423
|
|
Share-based payment awards
|
|
|
2,158
|
|
|
|
2,943
|
|
Total potentially dilutive shares excluded
|
|
|
17,581
|
|
|
|
18,366
|
|
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following table sets forth the
changes in the Company's accumulated other comprehensive income by component (net of tax of $0)
for the three month period ended February 2, 2014:
|
|
Three Months Ended February 2, 2014
|
|
|
|
Foreign Currency
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
of Cash
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 4, 2013
|
|
$
|
27,797
|
|
|
$
|
(562
|
)
|
|
$
|
(832
|
)
|
|
$
|
26,403
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(8,551
|
)
|
|
|
-
|
|
|
|
27
|
|
|
|
(8,524
|
)
|
Amounts reclassified from other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Net current period other comprehensive income (loss)
|
|
|
(8,551
|
)
|
|
|
32
|
|
|
|
27
|
|
|
|
(8,492
|
)
|
Less: other comprehensive loss attributable to noncontrolling interests
|
|
|
80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80
|
|
Redemption of common stock of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Balance at February 2, 2014
|
|
$
|
19,326
|
|
|
$
|
(530
|
)
|
|
$
|
(816
|
)
|
|
$
|
17,980
|
|
NOTE 11 – GEOGRAPHIC INFORMATION
The Company operates as a single operating segment as a manufacturer of photomasks, which are high precision quartz plates containing microscopic images of electronic circuits for use in the fabrication of ICs and FPDs. Geographic net sales are based primarily on where the Company's manufacturing facility is located.
The Company's net sales by geographic area and for ICs and FPDs for the three month periods ended February 2, 2014 and January 27, 2013, and long-lived assets by geographic area as of February 2, 2014 and November 3, 2013, are presented below.
|
|
Three Months Ended
|
|
|
|
February 2,
2014
|
|
|
January 27,
2013
|
|
Net sales
|
|
|
|
|
|
|
Korea
|
|
$
|
36,816
|
|
|
$
|
33,971
|
|
Taiwan
|
|
|
29,178
|
|
|
|
28,394
|
|
United States
|
|
|
25,153
|
|
|
|
28,220
|
|
Europe
|
|
|
9,876
|
|
|
|
8,600
|
|
All other
|
|
|
519
|
|
|
|
654
|
|
|
|
$
|
101,542
|
|
|
$
|
99,839
|
|
|
|
|
|
|
|
|
|
|
IC
|
|
$
|
76,214
|
|
|
$
|
74,425
|
|
FPD
|
|
|
25,328
|
|
|
|
25,414
|
|
|
|
$
|
101,542
|
|
|
$
|
99,839
|
|
|
|
As of
|
|
|
|
February 2,
2014
|
|
|
November 3,
2013
|
|
Long-lived assets
|
|
|
|
|
|
|
United States
|
|
$
|
192,311
|
|
|
$
|
191,518
|
|
Korea
|
|
|
170,460
|
|
|
|
153,878
|
|
Taiwan
|
|
|
61,358
|
|
|
|
66,836
|
|
Europe
|
|
|
10,042
|
|
|
|
10,471
|
|
All other
|
|
|
30
|
|
|
|
37
|
|
|
|
$
|
434,201
|
|
|
$
|
422,740
|
|
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.
NOTE 12 - 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 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 February 2, 2014 or November 3, 2013.
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 variable rate term loan, that was repaid in December 2013, was a Level 2 measurement and approximated its carrying value due to the variable nature of the underlying interest rates. The fair value of the Company's convertible senior notes is a Level 2 measurement that is determined using recent bid prices. The table below presents the fair and carrying values of the Company's convertible senior notes at February 2, 2014 and November 3, 2013.
|
|
February 2, 2014
|
|
|
November 3, 2013
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes
|
|
$
|
124,994
|
|
|
$
|
115,000
|
|
|
$
|
130,330
|
|
|
$
|
115,000
|
|
5.50% convertible senior notes
|
|
$
|
35,571
|
|
|
$
|
22,054
|
|
|
$
|
37,567
|
|
|
$
|
22,054
|
|
NOTE 13 - SUBSIDIARY SHARE REPURCHASE
Since the second quarter of fiscal 2011, the board of directors of PSMC, a subsidiary of the Company based in Taiwan, has authorized several share repurchase programs for PSMC to purchase for retirement shares of its outstanding common stock. The last of these repurchase programs concluded in the first fiscal quarter of 2013 in which PSMC purchased 9.2 million shares at a cost of $4.2 million. These repurchase programs increased the Company's ownership in PSMC from 72.09% at October 28, 2012, to 75.11% at January 27, 2013. During fiscal 2013 the Company increased its ownership interest in PSMC, primarily through a tender offer, to 98.63% by purchasing 51.4 million shares at a cost of $28.1 million. In January 2014 the Company increased its ownership percentage in PSMC to 100% at a cost of $1.7 million for the then remaining 3.0 million shares that were not owned by the Company.
The table below presents the effect of the change in the Company's ownership interest in PSMC on the Company's equity for the first fiscal quarters of 2014 (3.0 million shares of common stock of PSMC acquired) and 2013 (9.2 million shares of PSMC common stock acquired).
|
|
Three Months Ended
|
|
|
|
February 2,
2014
|
|
|
January 27,
2013
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
1,993
|
|
|
$
|
2,323
|
|
|
|
|
|
|
|
|
|
|
Increase in Photronics, Inc.'s additional paid-in capital
|
|
|
36
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
Decrease in Photronics, Inc. shareholders’ accumulated other comprehensive income
|
|
|
(11
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to Photronics, Inc. shareholders and transfer from noncontrolling interest
|
|
$
|
2,018
|
|
|
$
|
2,875
|
|
In November 2013 the Company announced that it had entered into an agreement to merge PSMC with DNP Photomask Technology Taiwan Co., Ltd., a wholly owned subsidiary of Dai Nippon Printing Co., Ltd. (DNP), to form a joint venture which will operate under the name of Photronics DNP Mask Corporation (PDMC). See Note 16 for further discussion.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of February 2, 2014, the Company had commitments outstanding for capital equipment expenditures of approximately $85 million. See Note 16 regarding pending subsidiary merger.
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 15 - RECENT ACCOUNTING PRONOUNCEMENTS
There have been no recent accounting pronouncements whose adoption would affect the Company’s financial statements or related disclosures.
NOTE 16 – PENDING MERGER OF PSMC WITH DNP PHOTOMASK TECHNOLOGY TAIWAN CO., LTD.
In November 2013 the Company announced that it had entered into an agreement to merge PSMC with DNP Photomask Technology Taiwan Co., Ltd., a wholly owned subsidiary of Dai Nippon Printing Co., Ltd. (DNP), to form a joint venture to operate under the name of Photronics DNP Mask Corporation (PDMC). The pending merger, which is a noncash transaction, would result in the Company owning 50.01% and DNP owning 49.99% of PDMC, whose financial results would be included in the Company’s consolidated financial statements. The merger is subject to regulatory approvals and customary closing conditions, and is expected to be completed during the first half of fiscal 2014. In the three month period ended February 2, 2014, the Company incurred $0.4 million in transaction expenses relating to the pending merger.