PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended October 29, 2017, October 30, 2016 and November 1, 2015
(in thousands, except share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
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 semiconductors and flat panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel
display
substrates during the fabrication of integrated circuits (“ICs” or semiconductors) 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. We have announced plans to construct two manufacturing facilities in China. See Note 19 for additional information.
Consolidation
The accompanying consolidated financial statements include the accounts of Photronics, Inc. and majority-owned subsidiaries that it controls. All intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in them. Estimates are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available at the time they are made. Actual results we report may differ from such estimates. We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.
Fiscal Year
Our fiscal year ends on the Sunday closest to October thirty-first, and, as a result, a 53-week year occurs every 5 to 6 years. Fiscal years 2017, 2016 and 2015 each included 52 weeks.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased with an original maturity of 3 months or less. The carrying values of cash equivalents approximate their fair values, due to the short-term maturities of these instruments.
Accounts Receivable and Allowance for Doubtful Accounts
We generally record our trade accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed during and at the end of every reporting period for collectability. When, in the judgment of management, a loss on the collection of a customer invoice is probable, the amount is charged to
expense and credited to
the allowance for doubtful accounts
. When the amount is determined to be uncollectible, the amount is charged to the allowance for doubtful accounts,
and the related receivable is eliminated.
Inventories
Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or market. Presented below are the components of inventory at the balance sheet dates:
|
|
October 29
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
664
|
|
|
$
|
142
|
|
Work in process
|
|
|
2,957
|
|
|
|
2,987
|
|
Raw materials
|
|
|
20,082
|
|
|
|
18,952
|
|
|
|
$
|
23,703
|
|
|
$
|
22,081
|
|
Property, Plant and Equipment
Property, plant and equipment, except as explained below under “Impairment of Long-Lived Assets,”
is
stated at cost less accumulated depreciation and amortization. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to operations as incurred, while those that improve, or extend the lives of, existing assets are capitalized. Upon sale or other disposition, the cost of the asset and its related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings.
Depreciation and amortization, substantially all of which are included in cost of goods sold, are computed using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are depreciated over 15 to 40 years, machinery and equipment over 3 to 10 years
,
and furniture, fixtures and office equipment over 3 to 5 years. Leasehold improvements are amortized over the life of the lease or the estimated useful life of the improvement, whichever is less. We employ judgment and assumptions when we establish estimated useful lives and depreciation periods, as well as when we periodically review property, plant and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other change in circumstances indicate that their carrying amounts may not be recoverable.
Intangible Assets
Intangible assets consist primarily of a technology license agreement and acquisition-related intangibles. These assets, except as explained below, are stated at fair value as of the date acquired
,
less accumulated amortization. Amortization is calculated based on the estimated useful lives of the assets, which range from 3 to 15 years, using the straight-line method or another method that more fairly represents the utilization of the assets.
We periodically evaluate the remaining useful lives of our intangible assets to determine whether events or circumstances warrant a revision to the remaining periods of amortization. In the event that the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. If it is determined that an intangible asset has an indefinite useful life, that intangible asset would be subject to impairment testing annually or whenever events or circumstances indicate that its carrying value may not, based on future undiscounted cash flows or market factors, be recoverable
;
and an impairment loss would be recorded in the period
where the impairment determination is made.
The
amount
of the impairment loss
recorded
would be based on the fair value of the intangible asset
at the measurement date
.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determinations of recoverability are based upon our judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the assets
determined using a market or income approach compared to the carrying value of the asset.
The carrying values of assets determined to be impaired are reduced to their estimated fair values.
Business Combinations
When acquiring other businesses, or participating in mergers or joint ventures in which we are deemed to be the acquirer, we generally recognize identifiable assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, separately from any goodwill that may be required to be recognized. Goodwill, when recognizable, would be measured as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed.
Accounting for such transactions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those we estimated. When required, we will adjust the values of the assets acquired and liabilities assumed against the acquisition gain or goodwill, as initially recorded, for a period of up to one year after the transaction.
Costs incurred to effect a merger or acquisition, such as legal, accounting, valuation and other third party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred. Costs incurred to issue any debt and equity securities are recognized in accordance with other applicable generally accepted accounting principles.
Investments in Joint Ventures
The financial results of investments in joint ventures of which we have a controlling financial interest are included in our consolidated financial statements. Investments in joint ventures over which we have the ability to exercise significant influence and that, in general, are at least 20 percent owned are accounted for under the equity method. An impairment loss would be recognized whenever a decrease in the fair value of such an investment below its carrying amount is determined to be other than temporary. In judging “other than temporary,” we would consider the length of time and the extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and longer-term operating and financial prospects of the investee, and our longer-term intent of retaining our investment in the investee.
Variable Interest Entities
We account for the investments we make in certain legal entities in which equity investors do not have 1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, 2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, 3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity as “variable interest entities”, or “VIEs”.
We would consolidate the results of any such entity in which we determined that we have a controlling financial interest. We would have a “controlling financial interest” in such an entity when we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, we would reassess whether we have a controlling financial interest in any investments we have in these certain legal entities.
We account for investments we make in VIEs in which we have determined that we do not have a controlling financial interest but have a significant influence over, and hold at least a 20 percent ownership interest in, using the equity method. Any such investment not meeting the parameters to be accounted
for
under the equity method would be accounted for using the cost method, unless the investment had a readily determinable fair value, at which
value
it would then be reported.
Income Taxes
The income tax provision is computed on the basis of the various tax jurisdictions’ income or loss before income taxes. Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and their amounts used for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards. We use judgment and make assumptions to determine if valuation allowances for deferred income tax assets are required, if their realization is not more likely than not, by considering future market growth, operating forecasts, future taxable income, and the mix of earnings among the tax jurisdictions in which we operate. Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowances.
We consider income taxes in each of the tax jurisdictions in which we operate in order to determine our effective income tax rate. Our current income tax
expense
is thus identified, and temporary differences resulting from differing treatments of items for tax and financial reporting purposes are assessed. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We account for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in our tax returns. We include any applicable interest and penalties related to uncertain tax positions in our income tax provision.
Earnings Per Share
Basic earnings per share (“EPS”) is based on the weighted-average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if certain share-based payment awards or financial instruments were exercised, earned or converted.
Share-Based Compensation
We recognize share-based compensation expense over the service period that the awards are expected to vest. Share-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized in the period of change, and will impact the amount of expense to be recognized in future periods. Determining the appropriate option pricing model, calculating the grant date fair value of share-based awards and estimating forfeiture rates requires considerable judgment, including estimations of stock price volatility and the expected term of options granted.
We use the Black-Scholes option pricing model to value employee stock options. We estimate stock price volatility based on daily averages of our common stock’s historical volatility over a term approximately equal to the estimated time period the grant will remain outstanding. The expected term of options and forfeiture rate assumptions are derived from historical data.
Research and Development
Research and development costs are expensed as incurred, and consist primarily of development efforts related to high-end process technologies for advanced sub-wavelength reticle solutions for IC photomask technologies.
Foreign Currency Translation
Our non-US subsidiaries maintain their accounts in their respective local currencies. Assets and liabilities of such subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Foreign currency translation adjustments are accumulated and reported in accumulated other comprehensive income, a component of equity. The effects of changes in exchange rates on foreign currency transactions, which are included in interest
income
and other income (expense
)
were a net gain/(loss) of $(5.2) million, $(0.3) million and $2.5 million in fiscal years 2017, 2016 and 2015, respectively.
Noncontrolling Interests
Noncontrolling interests represents the minority shareholders’ proportionate share in the equity of the Company’s two majority-owned subsidiaries, Photronics DNP Mask Corporation (“PDMC”) in Taiwan, of which noncontrolling interests owned 49.99% as of October 29, 2017 and October 30, 2016, and PK Ltd. (“PKL”) in Korea of which noncontrolling shareholders owned approximately 0.3% as of October 29, 2017 and October 30, 2016.
Revenue Recognition
We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the sales price of the transaction is fixed or determinable, and collectability is reasonably assured. Delivery is determined by the shipping terms of the individual revenue transactions. For transactions with FOB destination or similar shipping terms, delivery occurs when our product reaches its destination and is received by the customer. For transactions with FOB shipping point terms, delivery occurs when our product is received by the common carrier. We use judgment when estimating the effect on revenue of discounts and sales incentives, both of which are accrued when the related revenue is recognized. Our revenue is reported net of any sales taxes billed to customers.
Product Warranty
For a 30-day period, we warrant that items sold will conform to customer specifications. However, our liability is limited to the repair or replacement of the photomasks at our sole option. We inspect photomasks for conformity to customer specifications prior to shipment. Accordingly, customer claims related to items under warranty have historically been insignificant. Our warranty policy includes accepting returns of products with defects, or products that have not been produced to precise customer specifications.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,959
|
|
|
$
|
8,036
|
|
Buildings and improvements
|
|
|
125,290
|
|
|
|
121,873
|
|
Machinery and equipment
|
|
|
1,547,870
|
|
|
|
1,475,755
|
|
Leasehold improvements
|
|
|
20,050
|
|
|
|
19,224
|
|
Furniture, fixtures and office equipment
|
|
|
12,989
|
|
|
|
12,700
|
|
Construction in progress
|
|
|
72,045
|
|
|
|
23,961
|
|
|
|
|
1,788,203
|
|
|
|
1,661,549
|
|
Less: Accumulated depreciation and amortization
|
|
|
1,253,006
|
|
|
|
1,155,115
|
|
|
|
$
|
535,197
|
|
|
$
|
506,434
|
|
Property under capital leases is included in above property, plant and equipment as follows:
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,917
|
|
|
$
|
34,917
|
|
Less accumulated amortization
|
|
|
13,843
|
|
|
|
10,352
|
|
|
|
$
|
21,074
|
|
|
$
|
24,565
|
|
During the three month period ended January 29, 2017
,
we acquired a business comprised of manufacturing assets and certain intellectual property that enables us to expand our 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, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with a fair value of approximately $9.0 million in fiscal year 2017.
NOTE 3 - INTANGIBLE ASSETS
Amortization expense of the Company’s finite
-
lived intangible assets was $4.9 million, $4.8 million and $6.0 million in fiscal years 2017, 2016 and 2015, respectively.
Intangible assets consist of:
As of October 29, 2017
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Technology license agreement
|
|
$
|
59,616
|
|
|
$
|
(45,374
|
)
|
|
$
|
14,242
|
|
Customer relationships
|
|
|
9,375
|
|
|
|
(7,793
|
)
|
|
|
1,582
|
|
Software and other
|
|
|
8,195
|
|
|
|
(6,897
|
)
|
|
|
1,298
|
|
|
|
$
|
77,186
|
|
|
$
|
(60,064
|
)
|
|
$
|
17,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology license agreement
|
|
$
|
59,616
|
|
|
$
|
(41,400
|
)
|
|
$
|
18,216
|
|
Customer relationships
|
|
|
8,657
|
|
|
|
(7,522
|
)
|
|
|
1,135
|
|
Software and other
|
|
|
6,444
|
|
|
|
(5,941
|
)
|
|
|
503
|
|
|
|
$
|
74,717
|
|
|
$
|
(54,863
|
)
|
|
$
|
19,854
|
|
The weighted-average amortization period of intangible assets acquired in fiscal year 2017 was 4.5 years, primarily comprised of acquired customer relationships and technology that has an amortization period of five years, and software that has an amortization period of three years. The weighted-average amortization period of intangible assets acquired in fiscal year 2016, which is comprised of software, is three years.
Intangible asset amortization over the next five years is estimated to be as follows:
Fiscal Years:
|
|
|
|
|
|
|
|
2018
|
|
$
|
4,742
|
|
2019
|
|
|
4,564
|
|
2020
|
|
|
4,510
|
|
2021
|
|
|
2,747
|
|
2022
|
|
|
128
|
|
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 developed and produced photomasks for leading-edge and advanced next generation semiconductors. At the time of the formation of the joint venture, we also entered into an agreement to license photomask technology developed by Micron and certain supply agreements. In May 2016
,
we sold our investment in MP Mask to Micron for $93.1 million and recorded a gain on the sale of $0.1 million, which is included in our 2016 consolidated statement of income in
interest income
and other income (expense
).
On that same date a supply agreement commenced between Photronics 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. However, we have the
unlimited
rights to use technology under the prior technology license agreement.
This joint venture was a variable interest entity (“VIE”) (as that term is defined in ASC 810) because all costs of the joint venture were passed on to Photronics and Micron through purchase agreements they had entered into with the joint venture, and it was dependent upon Photronics and Micron for any additional cash requirements. On a quarterly basis we reassessed whether our interest in MP Mask gave us 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, we 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
purchase of
the majority of products produced by the VIE.
We utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charged its variable interest holders based on their actual usage of its facility and charged separately for any research and development activities it engaged in at the requests of its owners.
MP Mask was governed by a Board of Managers appointed by Micron and Photronics. Since MP Mask’s inception, Micron, as a result of its majority ownership, had held majority voting power on the Board of Managers. The voting power held by each party was subject to change as ownership interests changed. Under the MP Mask joint venture operating agreement, we 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 us. Had we chosen not to make a requested contribution to MP Mask, our ownership percentage may have been reduced. MP Mask did not request, and we did not make, any contributions to MP Mask in fiscal year 2016
,
and we did not receive any distributions (other than upon the sale of our investment to Micron in fiscal year 2016) from MP Mask during 2016.
We recorded losses from operations from our investment in MP Mask of $0.1 million in fiscal years 2016 and 2015. Income (loss) from MP Mask is included in Interest and other income, net, in our consolidated statements of income.
In
fiscal
2016, we recorded $0.4 million of commission revenue earned under the supply agreements with Micron and MP Mask, and amortization of $0.1 million of the related supply agreement intangible asset. In 2016
,
we also recorded cost of goods sold in the amount of $5.7 million for photomasks produced by MP Mask for Photronics customers, and incurred expenses of $0.5 million for research and development activities and other goods and services purchased from MP Mask by Photronics.
In
fiscal
2015, we recorded $0.8 million of commission revenue earned under the supply agreements with Micron and MP Mask, and amortization of $0.2 million of the related supply agreement intangible asset. In 2015
,
we also recorded cost of goods sold in the amount of $4.8 million for photomasks produced by MP Mask for Photronics customers, and incurred expenses of $3.1 million for research and development activities and other goods and services purchased from MP Mask by Photronics.
Summarized financial information of MP Mask is presented below. The financial results of 2016 are through May 5, 2016, the date of the sale of the Joint Venture.
|
|
Fiscal Year
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
49,626
|
|
|
$
|
96,068
|
|
Gross profit
|
|
|
2,736
|
|
|
|
1,215
|
|
Net loss
|
|
|
-
|
|
|
|
(151
|
)
|
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities
at October 29, 2017
included salaries, wages and related benefits of $10.0 million, unearned revenue of $5.7 million, value added and other taxes of $3.1 million, and other accruals
of
$7.5 million. At October 30, 2016, accrued liabilities included salaries, wages and related benefits of $8.2 million, income taxes of $6.2 million, and other accruals
of
$9.8 million.
NOTE 6 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2019
|
|
$
|
57,337
|
|
|
$
|
57,221
|
|
|
|
|
|
|
|
|
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
4,639
|
|
|
|
10,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,976
|
|
|
|
67,288
|
|
Less current portion
|
|
|
4,639
|
|
|
|
5,428
|
|
|
|
$
|
57,337
|
|
|
$
|
61,860
|
|
In April 2016, $57.5 million of our senior convertible notes matured. We repaid $50.1 million to noteholders and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.
In January 2015, we privately exchanged $57.5 million in aggregate principal amount of our 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 we are 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.
Our 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 our assets located in the United States and common stock we own in certain of our 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 we were in compliance with at October 29, 2017. We had no outstanding borrowings against the credit facility at October 29, 2017, and $50 million was available for borrowing. The interest rate on the credit facility (2.49% at October 29, 2017) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility. In May 2017, the credit facility was amended to add certain covenants for our planned IC joint venture and FPD manufacturing facility, both of which are in China. See Note 19 for additional discussion of these new investments.
In August 2013, a $26.4 million principal amount, five year capital lease commenced to fund the purchase of a high-end lithography tool. Payments under the capital lease, which bears interest at 2.77%, are $0.5 million per month through July 2018. The lease is subject to a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated into our credit facility. As of October 29, 2017, the total amount payable through August 2018 (the end of the lease term) was $4.7 million, of which $4.6 million represented principal and $0.1 million represented interest.
Interest payments were $2.1 million, $3.2 million, and $4.4 million in fiscal years 2017, 2016 and 2015.
Adoption of New Accounting Standard
We adopted Accounting Standards Update (“ASU”) 2015-03 – “Simplifying the Presentation of Debt Issuance Costs” in the first quarter of fiscal year
2017
. This ASU requires debt issuance costs related to recognized debt liabilities to be presented in the balance sheet as a direct deduction 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 prior year financial statements and related notes have been adjusted, as necessary, to show its effects on those periods. The effect of adopting ASU 2015-03 on
the
other assets and long-term borrowing line items
in the fiscal 2016 balance sheet
is presented below.
Classification
|
|
Previously
Reported
|
|
|
Change Due
to Adoption
|
|
|
Retrospectively
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
4,071
|
|
|
$
|
(279
|
)
|
|
$
|
3,792
|
|
Long-term borrowings
|
|
|
62,139
|
|
|
|
(279
|
)
|
|
|
61,860
|
|
NOTE 7 - OPERATING LEASES
We lease various real estate and equipment under non-cancelable operating leases, for which rent expense was $3.0 million in 2017 and $2.8 million in each of fiscal years 2016 and 2015.
At October 29, 2017, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as follows:
2018
|
|
$
|
1,051
|
|
2019
|
|
|
684
|
|
2020
|
|
|
439
|
|
2021
|
|
|
380
|
|
2022
|
|
|
371
|
|
Thereafter
|
|
|
1,000
|
|
|
|
$
|
3,925
|
|
See Note 6 for disclosures related to capital lease obligations.
NOTE 8 – 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 us (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 Photronics 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. We incurred total share-based compensation expenses of $3.6 million, $3.8 million, and $3.7 million in fiscal years 2017, 2016, and 2015, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the fiscal years presented.
Stock Options
Option awards generally vest in one-to-four years, and have a ten year contractual term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on the closing price of our common stock on the date of grant, and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair values of stock options issued during fiscal years 2017, 2016 and 2015 are presented in the following
table:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
32.2
|
%
|
|
|
48.4
|
%
|
|
|
53.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
|
1.9 – 2.0
|
%
|
|
|
1.2 – 1.7
|
%
|
|
|
1.3 – 1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
5.0 years
|
|
|
5.1 years
|
|
|
4.7 years
|
|
The table below presents a summary of stock options activity during fiscal year 2017 and information on stock options outstanding at October 29, 2017.
Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual Life
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2016
|
|
|
3,535,335
|
|
|
$
|
7.59
|
|
|
|
|
|
|
Granted
|
|
|
344,750
|
|
|
|
11.33
|
|
|
|
|
|
|
Exercised
|
|
|
(401,750
|
)
|
|
|
6.09
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(133,100
|
)
|
|
|
11.17
|
|
|
|
|
|
|
Outstanding at
October 29, 2017
|
|
|
3,345,235
|
|
|
$
|
8.01
|
|
5.8 years
|
|
$
|
7,108
|
|
Exercisable at
October 29, 2017
|
|
|
2,142,094
|
|
|
$
|
6.60
|
|
4.6 years
|
|
$
|
6,661
|
|
Vested and expected to vest as of
October 29, 2017
|
|
|
3,180,991
|
|
|
$
|
7.87
|
|
5.7 years
|
|
$
|
7,052
|
|
The weighted-average grant date fair value of options granted during fiscal years 2017, 2016 and 2015 were $3.59, $4.51and $3.81, respectively. The total intrinsic value of options exercised during fiscal years 2017, 2016 and 2015 was $1.9 million, $3.5 million and $2.0 million, respectively.
We received cash from option exercises of $2.4 million, $3.1 million and $2.2 million in fiscal years 2017, 2016 and 2015, respectively. As of October 29, 2017, the total unrecognized compensation cost of unvested option awards was approximately $2.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.0 years.
Restricted Stock
We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one-to-four years. The fair value of the awards are determined and fixed on the grant date based on our stock price. The weighted-average grant date fair values of restricted stock awards issued during fiscal years 2017, 2016 and 2015 were $10.
94
, $12.13 and $8.28, respectively. The total fair value of awards for which restrictions lapsed was $1.2 million, $1.7 million and $1.4 million during fiscal years 2017, 2016 and 2015, respectively. As of October 29, 2017, the total compensation cost for restricted stock awards not yet recognized was approximately $2.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.9 years.
A summary of restricted stock award activity during fiscal year 2017 and the status of our outstanding restricted stock awards as of October 29, 2017, is presented below:
Restricted Stock
|
|
Shares
|
|
|
Weighted-Average
Fair Value at
Grant Date
|
|
Outstanding at October 31, 2016
|
|
|
162,375
|
|
|
$
|
9.61
|
|
Granted
|
|
|
317,750
|
|
|
|
10.94
|
|
Vested
|
|
|
(126,869
|
)
|
|
|
9.78
|
|
Cancelled
|
|
|
(14,075
|
)
|
|
|
10.89
|
|
Outstanding at
October 29, 2017
|
|
|
339,181
|
|
|
$
|
10.74
|
|
Vested and expected to vest as of
October 29, 2017
|
|
|
302,898
|
|
|
$
|
10.75
|
|
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan (“ESPP”) permits employees to purchase
Photronics, Inc. common
shares at 85% of the lower of the closing market price at the commencement or ending date of the Plan year (which is approximately one year). We recognize the ESPP expense during that same period. As of October 29, 2017, the maximum number of shares of common stock approved by our shareholders to be purchased under the ESPP was 1.5 million shares
;
approximately 1.4 million shares had been issued through October 29, 2017, and approximately 54,000 shares are subject to outstanding subscriptions. As of October 29, 2017, the total compensation cost related to the ESPP not yet recognized was $0.1 million, which is expected to be recognized in fiscal 2018.
NOTE 9- EMPLOYEE RETIREMENT PLANS
We maintain a 401(k) Savings and Profit Sharing Plan (“401(k) Plan”) which covers all full and certain part time U.S. employees who have completed three months of service and are 18 years of age or older. Under the terms of the 401(k) Plan, employees may contribute up to 50% of their salary, subject to certain maximum amounts, which will be matched by
the Company
at 50% of the employee’s contributions that are not in excess of 4% of the employee’s compensation. Employee and employer contributions vest
immediately
upon contribution.
The total
employer contributions for all of our defined contribution plans were $0.6 million, $0.6 million and $0.7 million in fiscal years 2017, 2016, and 2015, respectively.
NOTE 10 - INCOME TAXES
Income before the income tax provisions consists of the following:
|
|
Year Ended
|
|
|
|
October 29
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(11,544
|
)
|
|
$
|
6,270
|
|
|
$
|
6,646
|
|
Foreign
|
|
|
38,109
|
|
|
|
54,204
|
|
|
|
63,394
|
|
|
|
$
|
26,565
|
|
|
$
|
60,474
|
|
|
$
|
70,040
|
|
The income tax provisions consist of the following:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
173
|
|
|
$
|
492
|
|
|
$
|
160
|
|
State
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(109
|
)
|
Foreign
|
|
|
3,474
|
|
|
|
8,115
|
|
|
|
9,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
15
|
|
|
|
10
|
|
|
|
7
|
|
Foreign
|
|
|
1,618
|
|
|
|
(3,817
|
)
|
|
|
3,394
|
|
Total
|
|
$
|
5,276
|
|
|
$
|
4,798
|
|
|
$
|
13,181
|
|
The income tax provisions differ from the amount computed by applying the statutory U.S. federal income tax rate to income before income taxes as a result of the following:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal income tax at statutory rate
|
|
$
|
9,298
|
|
|
$
|
21,166
|
|
|
$
|
24,514
|
|
Changes in valuation allowances
|
|
|
(3,632
|
)
|
|
|
(9,516
|
)
|
|
|
(11,471
|
)
|
Distributions from foreign subsidiaries
|
|
|
6,471
|
|
|
|
3,438
|
|
|
|
448
|
|
Foreign tax rate differentials
|
|
|
(5,230
|
)
|
|
|
(9,620
|
)
|
|
|
(4,356
|
)
|
Tax credits
|
|
|
(1,925
|
)
|
|
|
(944
|
)
|
|
|
(2,729
|
)
|
Uncertain tax positions, including reserves, settlements and resolutions
|
|
|
(932
|
)
|
|
|
134
|
|
|
|
(175
|
)
|
Income tax holiday
|
|
|
(743
|
)
|
|
|
(507
|
)
|
|
|
(869
|
)
|
Employee stock compensation
|
|
|
512
|
|
|
|
452
|
|
|
|
634
|
|
Tax on foreign subsidiary earnings
|
|
|
1,712
|
|
|
|
225
|
|
|
|
6,589
|
|
Other, net
|
|
|
(255
|
)
|
|
|
(30
|
)
|
|
|
596
|
|
|
|
$
|
5,276
|
|
|
$
|
4,798
|
|
|
$
|
13,181
|
|
The effective tax rates differ from the U.S. statutory rate of 35% in fiscal years 2017, 2016 and 2015 primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, changes in deferred tax asset valuation allowances, including the reversals noted below,
together
with the benefit of various investment credits in a foreign jurisdiction. In addition, the lower rate in fiscal year 2016 was partially driven by a benefit that resulted from the reversal of a previously recorded undistributed earnings tax liability in a foreign jurisdiction for which we are no longer liable. Two five-year tax holidays in Taiwan, one that expired in 2017 and the other that expires in 2019, reduced foreign taxes by $0.7 million, $0.5 million and $0.2 million in fiscal years 2017, 2016 and 2015, respectively. These tax holidays had no per share effect on our financial results of fiscal years 2017, 2016 and 2015.
The net deferred income tax assets consist of the following:
|
|
As of
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
Deferred income tax assets
:
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
40,942
|
|
|
$
|
46,158
|
|
Reserves not currently deductible
|
|
|
4,196
|
|
|
|
5,904
|
|
Alternative minimum tax credits
|
|
|
3,946
|
|
|
|
3,772
|
|
Tax credit carryforwards
|
|
|
10,037
|
|
|
|
8,814
|
|
Share-based compensation
|
|
|
2,335
|
|
|
|
1,972
|
|
Other
|
|
|
1,503
|
|
|
|
1,719
|
|
|
|
|
62,959
|
|
|
|
68,339
|
|
Valuation allowances
|
|
|
(25,590
|
)
|
|
|
(29,315
|
)
|
|
|
|
37,369
|
|
|
|
39,024
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Undistributed earnings of foreign subsidiaries
|
|
|
(4,335
|
)
|
|
|
(3,962
|
)
|
Property, plant and equipment
|
|
|
(19,280
|
)
|
|
|
(19,977
|
)
|
Other
|
|
|
(322
|
)
|
|
|
(254
|
)
|
|
|
|
(23,937
|
)
|
|
|
(24,193
|
)
|
Net deferred income tax assets
|
|
$
|
13,432
|
|
|
$
|
14,831
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
15,481
|
|
|
$
|
16,322
|
|
Deferred income tax liabilities
|
|
|
(2,049
|
)
|
|
|
(1,491
|
)
|
|
|
$
|
13,432
|
|
|
$
|
14,831
|
|
We have established a valuation allowance for a portion of our deferred tax assets because we believe, based on the weight of all available evidence, that it is more likely than not that a portion of our net operating loss carryforwards will expire prior to utilization. During fiscal years 2016 and 2015
,
we determined that sufficient positive evidence existed in certain foreign jurisdictions that it was more likely than not that additional deferred tax assets were realizable and, therefore,
we
reduced the valuation allowance by $4.3 million and $1.5 million, respectively. In addition, the valuation allowance decreased in fiscal years 2017, 2016 and 2015 as a result of loss utilizations and deferred tax liability changes of $3.7 million, $5.2 million and $9.3 million, respectively.
As of October 29, 2017, we have not provided deferred taxes on $170.6 million of undistributed earnings of non-U.S. subsidiaries, as it is our policy to indefinitely reinvest these earnings in non-U.S. operations. During fiscal year 2017
,
the permanently invested assertion was partially changed due to changes in circumstances within one of our non-U.S. subsidiary entities, and a U.S. tax liability was recognized for the related undistributed earnings. Should we elect in the future to repatriate the remaining foreign earnings deemed to be indefinitely reinvested, we may incur additional income tax expense on those foreign earnings, the amount of which is not practicable to compute.
The following tables present our available operating loss and credit carryforwards at October 29, 2017, and their related expiration periods:
Operating Loss Carryforwards
|
|
Amount
|
|
|
Expiration
Periods
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
86,358
|
|
|
|
2025-2033
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
214,532
|
|
|
|
2018-2037
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
15,414
|
|
|
|
2019-2023
|
|
Tax Credit Carryforwards
|
|
Amount
|
|
|
Expiration
Period
|
|
|
|
|
|
|
|
|
Federal research and development
|
|
$
|
5,580
|
|
|
|
2019-2037
|
|
|
|
|
|
|
|
|
|
|
Federal alternative minimum
|
|
|
3,946
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
5,829
|
|
|
|
2018-2031
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
667
|
|
|
|
2022
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,606
|
|
|
$
|
4,029
|
|
|
$
|
4,993
|
|
Additions (reductions) for tax positions in prior years
|
|
|
207
|
|
|
|
744
|
|
|
|
(212
|
)
|
Additions based on current year tax positions
|
|
|
323
|
|
|
|
268
|
|
|
|
318
|
|
Settlements
|
|
|
(922
|
)
|
|
|
(378
|
)
|
|
|
(720
|
)
|
Lapses of statutes of limitations
|
|
|
(830
|
)
|
|
|
(57
|
)
|
|
|
(350
|
)
|
Balance at end of year
|
|
$
|
3,384
|
|
|
$
|
4,606
|
|
|
$
|
4,029
|
|
As
of October 29, 2017, October 30, 2016 and November 1, 2015,
the balance of unrecognized tax benefits includes
$3.4 million, $4.6 million and $4.1 million recorded in other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rate. Included in these amounts in each of fiscal years 2017, 2016 and 2015 were $0.1 million of interest and penalties. We include any applicable interest and penalties related to uncertain tax positions in our income tax provision. The
amounts reflected in the table above for the
fiscal years 2017, 2016 and 2015 include
settlements
of non-U.S. audits.
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. Resolution of these uncertain tax positions may result from either or both
of
the lapses of statutes of limitations and tax settlements.
The Company is
no longer subject to tax authority examinations in the U.S., major foreign, or state tax jurisdictions for years prior to fiscal year
2013
.
Income tax payments were $9.3 million, $11.4 million and $4.9 million in fiscal years 2017, 2016 and 2015, respectively. Cash received as refunds of income taxes paid in prior years amounted to $0.1 million, $0.2 million and $0.1 million in fiscal years 2017, 2016 and 2015, respectively.
Currently, Congress is considering various U.S. corporate tax reform bills, which if enacted could have a material impact on various components of the income taxes including but not limited to, valuation allowances, deferred tax assets and liabilities. If the proposed bills are signed into law we expect a reduction in the recorded deferred tax liability related to foreign earnings and an offsetting reduction in deferred tax assets related to U.S. net operating losses. At this time it is not practical to calculate the potential dollar amount of these potential income tax law changes. The Company will continue to evaluate the potential implications as more information becomes available and the changes are enacted.
NOTE 11 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented as follows:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
13,130
|
|
|
$
|
46,200
|
|
|
$
|
44,625
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on convertible notes, net of related tax effects
|
|
|
-
|
|
|
|
2,938
|
|
|
|
4,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for diluted earnings per share
|
|
$
|
13,130
|
|
|
$
|
49,138
|
|
|
$
|
48,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
68,436
|
|
|
|
67,539
|
|
|
|
66,331
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
852
|
|
|
|
974
|
|
|
|
967
|
|
Convertible notes
|
|
|
-
|
|
|
|
7,841
|
|
|
|
11,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares
|
|
|
852
|
|
|
|
8,815
|
|
|
|
12,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
69,288
|
|
|
|
76,354
|
|
|
|
78,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.68
|
|
|
$
|
0.67
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.64
|
|
|
$
|
0.63
|
|
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 antidilutive. The table also shows convertible notes that, if converted, would have been
antidilutive
.
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
5,542
|
|
|
|
-
|
|
|
|
-
|
|
Share based payment awards
|
|
|
1,308
|
|
|
|
1,635
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares excluded
|
|
|
6,850
|
|
|
|
1,635
|
|
|
|
1,641
|
|
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At October 29, 2017, we had outstanding purchase commitments of $168 million, which included $162 million related to capital expenditures, and had recorded liabilities for the purchase of equipment of $3 million. See Notes 7 and 19, respectively, for information on our operating lease commitments and our plans to construct two facilities in China.
We are subject to various claims that arise in the ordinary course of business. We believe such claims, individually and in the aggregate, will not have a material effect on our consolidated financial statements.
NOTE 13 - GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We operate 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 IC’s and FPDs. Geographic revenues (shown below) are based primarily on where our manufacturing facility is located.
Our 2017, 2016 and 2015 revenue by geographic area and by IC and FPD products, and long-lived assets by geographic area were as follows:
|
|
Year Ended
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
$
|
187,818
|
|
|
$
|
193,216
|
|
|
$
|
205,141
|
|
Korea
|
|
|
122,165
|
|
|
|
141,017
|
|
|
|
147,921
|
|
United States
|
|
|
102,040
|
|
|
|
113,670
|
|
|
|
132,792
|
|
Europe
|
|
|
36,081
|
|
|
|
33,384
|
|
|
|
35,792
|
|
All other Asia
|
|
|
2,574
|
|
|
|
2,169
|
|
|
|
2,560
|
|
|
|
$
|
450,678
|
|
|
$
|
483,456
|
|
|
$
|
524,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IC
|
|
$
|
350,260
|
|
|
$
|
364,531
|
|
|
$
|
420,833
|
|
FPD
|
|
|
100,418
|
|
|
|
118,925
|
|
|
|
103,373
|
|
|
|
$
|
450,678
|
|
|
$
|
483,456
|
|
|
$
|
524,206
|
|
|
|
As of
|
|
|
|
October 29,
2017
|
|
|
October 30,
2016
|
|
|
November 1,
2015
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
$
|
186,192
|
|
|
$
|
176,644
|
|
|
$
|
185,087
|
|
United States
|
|
|
180,095
|
|
|
|
173,658
|
|
|
|
184,282
|
|
Korea
|
|
|
147,265
|
|
|
|
146,515
|
|
|
|
167,618
|
|
Europe
|
|
|
13,372
|
|
|
|
9,617
|
|
|
|
10,287
|
|
All other Asia
|
|
|
8,273
|
|
|
|
-
|
|
|
|
10
|
|
|
|
$
|
535,197
|
|
|
$
|
506,434
|
|
|
$
|
547,284
|
|
One customer accounted for 16%, 19% and 18% of our revenue in fiscal years 2017, 2016 and 2015, respectively, and another customer accounted for 16%, 17%, and 15% of our revenue in fiscal years 2017, 2016 and 2015, respectively.
NOTE 14 - 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 years ended October 29, 2017 and October 30, 2016:
|
|
Year Ended October 29, 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 before reclassifications
|
|
|
19,799
|
|
|
|
-
|
|
|
|
478
|
|
|
|
20,277
|
|
Amounts reclassified from other accumulated comprehensive income
|
|
|
-
|
|
|
|
129
|
|
|
|
-
|
|
|
|
129
|
|
Net current period other comprehensive income
|
|
|
19,799
|
|
|
|
129
|
|
|
|
478
|
|
|
|
20,406
|
|
Less: other comprehensive income attributable to noncontrolling interests
|
|
|
(5,605
|
)
|
|
|
-
|
|
|
|
(239
|
)
|
|
|
(5,844
|
)
|
Balance at October 29, 2017
|
|
$
|
7,627
|
|
|
$
|
(48
|
)
|
|
$
|
(688
|
)
|
|
$
|
6,891
|
|
|
|
Year Ended October 30, 2016
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 1, 2015
|
|
$
|
(9,634
|
)
|
|
$
|
(306
|
)
|
|
$
|
(633
|
)
|
|
$
|
(10,573
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
6,334
|
|
|
|
-
|
|
|
|
(589
|
)
|
|
|
5,745
|
|
Amounts reclassified from other accumulated comprehensive income
|
|
|
-
|
|
|
|
129
|
|
|
|
-
|
|
|
|
129
|
|
Net current period other comprehensive income (loss)
|
|
|
6,334
|
|
|
|
129
|
|
|
|
(589
|
)
|
|
|
5,874
|
|
Less: other comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(3,267
|
)
|
|
|
-
|
|
|
|
295
|
|
|
|
(2,972
|
)
|
Balance at October 30, 2016
|
|
$
|
(6,567
|
)
|
|
$
|
(177
|
)
|
|
$
|
(927
|
)
|
|
$
|
(7,671
|
)
|
Amortization of the cash flow hedge is included in cost of goods sold in the consolidated statements of income in all periods presented.
NOTE 15 – CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to credit risk principally consist of trade accounts receivables and short-term cash investments. We sell our products primarily to semiconductor and FPD manufacturers in Asia, North America, and Europe. We believe that the concentration of credit risk in our trade receivables is substantially mitigated by our ongoing credit evaluation process and relatively short collection terms. We do not generally require collateral from customers. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Our cash and cash equivalents are deposited in several financial institutions, including institutions located within all of the countries in which we manufacture photomasks. Portions of deposits in some of these institutions may exceed the amount of insurance available for such deposits at these institutions. As these deposits are generally redeemable upon demand and are held by high quality, reputable institutions, we consider them to bear minimal credit risk. We further mitigate credit risks related to our cash and cash equivalents by spreading such risk among a number of institutions.
NOTE 16 - RELATED PARTY TRANSACTIONS
Our executive chairman of the board of directors is also a director of an entity that provided secure managed information technology services to Photronics in fiscal years 2016 and 2015. Another member of our board of directors was the chief executive officer and chairman of the board of this entity. We had contracted with this entity since 2002 for services it provided to all of our facilities. In fiscal years 2016 and 2015
,
we incurred expenses for services provided by this entity of $0.2 million and $1.0 million, respectively.
An officer of one of our foreign subsidiaries is related to an individual in a position of authority at one of our largest customers. We recorded revenue from this customer of $73.6 million, $80.5 million, and $77.8 million in fiscal years 2017, 2016 and 2015, respectively. At October 29, 2017 and October 30, 2016, we had accounts receivable of $24.3 million and $23.2 million, respectively, from this customer.
In July 2016, we entered into a contract for information technology services with a parent entity for which a member of our board of directors serves as the executive chairman of the board
and director
of a wholly owned subsidiary of that entity. During fiscal years 2017 and 2016
,
we incurred expenses of $0.5 million and $0.3 million, respectively
with
the parent entity, and had payables outstanding to the parent entity of $0.2 million at October 30, 2016.
We purchase photomask blanks from an entity of which a former officer of ours is a significant shareholder. The Company purchased $4.5 million
of photomask blanks from this entity
during the period
in 2017 when
the former officer was employed by us
, and
$16.3 million and $20.2 million
in
2016 and 2015, respectively, for which the amount owed to this entity was $2.7 million at October 30, 2016 (the last reported date at which this entity was a related party to Photronics).
We believe that the terms of our transactions with the related parties described above were negotiated at arm’s length and were no less favorable to us than terms we could have obtained from unrelated third parties. See Note 4 for additional related party transactions.
NOTE 17 - 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 October 29, 2017 or October 30, 2016.
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 it was 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 October 29, 2017 and October 30, 2016.
|
|
October 29, 2017
|
|
|
October 30, 2016
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due 2019
|
|
$
|
67,396
|
|
|
$
|
57,337
|
|
|
$
|
68,230
|
|
|
$
|
57,221
|
|
NOTE 18 – GAINS ON SALE OF INVESTMENTS
We had a minority interest in a foreign entity. In fiscal year 2016, we sold this investment and recognized a gain of $8.8 million. In addition, as discussed in Note 4, we sold our investment in the MP Mask joint venture in fiscal year 2016.
NOTE 19 – EXPANSION INTO CHINA
Expansion of IC Manufacturing into China
In August 2016, Photronics Singapore Pte, Ltd., a wholly owned subsidiary, signed an investment agreement with the Administrative Committee of Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement, we will build and operate an IC facility to engage in research and development, manufacture and sale of photomasks, in return for which Xiamen Torch will provide certain investment incentives and support. This expansion is also substantially supported by customer commitments for its output. The total investment per the agreement is $160 million to be funded over the next five years in cash, transferred equipment and potential local borrowings. Construction began in 2017 and production is anticipated to start in early 2019.
In the third quarter of fiscal 2017, we agreed to create a joint venture with DNP to encompass the Xiamen project.
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.
Expansion of FPD Manufacturing into China
In August 2017, we announced that Photronics UK, Ltd., a wholly
-
owned subsidiary, 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 began in late 2017 and production is anticipated to commence in early 2019.
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
Fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
109,831
|
|
|
$
|
108,297
|
|
|
$
|
111,579
|
|
|
$
|
120,971
|
|
|
$
|
450,678
|
|
Gross profit
|
|
|
22,999
|
|
|
|
20,157
|
|
|
|
21,717
|
|
|
|
26,442
|
|
|
|
91,315
|
|
Net income
|
|
|
4,510
|
|
|
|
1,484
|
|
|
|
4,799
|
|
|
|
10,496
|
|
|
|
21,289
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
|
1,946
|
|
|
|
1,797
|
|
|
|
4,001
|
|
|
|
5,386
|
|
|
|
13,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
(b)
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)(d)
|
|
Net sales
|
|
$
|
129,956
|
|
|
$
|
122,923
|
|
|
$
|
123,209
|
|
|
$
|
107,368
|
|
|
$
|
483,456
|
|
Gross profit
|
|
|
35,436
|
|
|
|
31,287
|
|
|
|
31,450
|
|
|
|
20,533
|
|
|
|
118,706
|
|
Net income
|
|
|
23,501
|
|
|
|
14,153
|
|
|
|
11,453
|
|
|
|
6,569
|
|
|
|
55,676
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
|
21,002
|
|
|
|
11,854
|
|
|
|
8,088
|
|
|
|
5,256
|
|
|
|
46,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
0.18
|
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.64
|
|
(a)
|
Includes $8.8 million gain on sale of investment in a foreign entity.
|
(b)
|
Includes a tax benefit in Taiwan of $1.8 million related to prior years.
|
(c)
|
Includes a tax benefit in Taiwan of $3.0 million related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary.
|
(d)
|
Includes tax benefits in Taiwan of $4.8 million primarily related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary.
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NOTE 21 - 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 us in the first quarter of our fiscal year 2021, and will be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions that we 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
Photronics
in our first quarter of fiscal year 2019, and will be applied on a prospective basis. The impact of this ASU will depend upon the nature of future acquisitions or dispositions that we 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. This Update is effective for us in the first quarter of our fiscal year 2019, and will be applied on a retrospective transition basis. Early adoption is permitted, including adoption in an interim period 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. We are currently evaluating the effect this ASU will have on our 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, deferred income taxes for intra-entity asset transfers other than inventory. This Update is effective for us in the first quarter of our fiscal year 2019, and will 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. We are currently evaluating the effect this ASU will have on our 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. This Update is effective for us in the first quarter of our fiscal year 2019, and will be applied using a retrospective transition approach. We are currently evaluating the effect this ASU will have on our 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 measure expected credit losses. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for us in the first quarter of our fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. We are currently evaluating the effect this ASU will have on our 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. The Update is effective for us the first quarter of our fiscal year 2018. We do not expect this ASU to have a material impact on our 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. The Update 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 us in the first quarter of our fiscal year 2020, with early application permitted, and we are currently evaluating the effect this ASU will have on our 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. The Update 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 us in the first quarter of our fiscal year 2019. We are currently evaluating the effect this ASU will have on our 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. We adopted this ASU, and applied it on a retrospective basis, in the first quarter of our 2017 fiscal year. See Note 6 for the effects of adoption on our October 30, 2016, 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 us in the first quarter of our fiscal year 2019. This update allows for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amends guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 are the same as those for ASU 2014-09. We anticipate that the adoption of this ASU will result in the acceleration of revenue as, upon adoption of this Update, amounts in our work-in process inventory will be considered to represent promised goods transferred to our customers, requiring us to recognize consideration for those transferred goods in amounts we expect to be entitled to receive in exchange for them. However, we cannot currently quantify with reasonable certainty the effect this anticipated acceleration of revenue will have on our consolidated financial statements. We expect to adopt this Update using the modified retrospective approach.