Notes to Condensed Consolidated Financial Statements
Three Months Ended January 28, 2018 and January 29, 2017
(unaudited)
(in thousands, except share amounts and per share data)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Photronics, Inc. and its subsidiaries ("Photronics", "the Company", "we", “our”, or "us") is one of the world's leading manufacturers of photomasks, which are high precision photographic quartz or glass 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. We currently operate principally from nine manufacturing facilities, two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States. We have commenced construction of two manufacturing facilities in China and anticipate production to begin at these facilities in 2019.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. Our business is typically impacted during the first, and sometimes the second, quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 28, 2018. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 29, 2017.
NOTE 2 - CHANGES IN EQUITY
The following tables set forth our consolidated changes in equity for the three months ended January 28, 2018 and January 29, 2017:
|
|
Three Months Ended January 28, 2018
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2017
|
|
|
68,666
|
|
|
$
|
687
|
|
|
$
|
547,596
|
|
|
$
|
189,390
|
|
|
$
|
6,891
|
|
|
$
|
120,731
|
|
|
$
|
865,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,898
|
|
|
|
-
|
|
|
|
3,583
|
|
|
|
9,481
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,237
|
|
|
|
4,850
|
|
|
|
30,087
|
|
Sale of common stock through employee stock option and purchase plans
|
|
|
116
|
|
|
|
1
|
|
|
|
701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
702
|
|
Restricted stock awards vesting and expense
|
|
|
87
|
|
|
|
1
|
|
|
|
386
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
497
|
|
Contribution from noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,850
|
|
|
|
11,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2018
|
|
|
68,869
|
|
|
$
|
689
|
|
|
$
|
549,328
|
|
|
$
|
195,288
|
|
|
$
|
32,128
|
|
|
$
|
141,014
|
|
|
$
|
918,447
|
|
|
|
Three Months Ended January 29, 2017
|
|
|
|
Photronics, Inc. Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2016
|
|
|
68,080
|
|
|
$
|
681
|
|
|
$
|
541,093
|
|
|
$
|
176,260
|
|
|
$
|
(7,671
|
)
|
|
$
|
115,111
|
|
|
$
|
825,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,946
|
|
|
|
-
|
|
|
|
2,564
|
|
|
|
4,510
|
|
Other comprehensive (loss) income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,859
|
)
|
|
|
1,257
|
|
|
|
(602
|
)
|
Sale of common stock through employee stock option and purchase plans
|
|
|
175
|
|
|
|
1
|
|
|
|
1,087
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,088
|
|
Restricted stock awards vesting and expense
|
|
|
78
|
|
|
|
1
|
|
|
|
297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
640
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2017
|
|
|
68,333
|
|
|
$
|
683
|
|
|
$
|
543,117
|
|
|
$
|
178,206
|
|
|
$
|
(9,530
|
)
|
|
$
|
118,932
|
|
|
$
|
831,408
|
|
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost, determined under the first-in, first-out ("FIFO") method, or net realizable value. Presented below are the components of inventory at the balance sheet dates:
|
|
January 28,
2018
|
|
|
October 29,
2017
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
1,201
|
|
|
$
|
664
|
|
Work in process
|
|
|
3,753
|
|
|
|
2,957
|
|
Raw materials
|
|
|
22,043
|
|
|
|
20,082
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,997
|
|
|
$
|
23,703
|
|
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
|
|
January 28,
2018
|
|
|
October 29,
2017
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
10,301
|
|
|
$
|
9,959
|
|
Buildings and improvements
|
|
|
128,073
|
|
|
|
125,290
|
|
Machinery and equipment
|
|
|
1,614,502
|
|
|
|
1,547,870
|
|
Leasehold improvements
|
|
|
20,826
|
|
|
|
20,050
|
|
Furniture, fixtures and office equipment
|
|
|
13,474
|
|
|
|
12,989
|
|
Construction in progress
|
|
|
74,987
|
|
|
|
72,045
|
|
|
|
|
1,862,163
|
|
|
|
1,788,203
|
|
Accumulated depreciation and amortization
|
|
|
(1,313,856)
|
|
|
|
(1,253,006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
548,307
|
|
|
$
|
535,197
|
|
Equipment under capital leases, included above in property, plant and equipment, are as follows:
|
|
January 28,
2018
|
|
|
October 29,
2017
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,917
|
|
|
$
|
34,917
|
|
Accumulated amortization
|
|
|
(14,717
|
)
|
|
|
(13,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,200
|
|
|
$
|
21,074
|
|
Depreciation and amortization expense for property, plant and equipment was $21.1 million and $19.7 million for the three month periods ended January 28, 2018 and January 29, 2017, respectively.
During the three month periods ended January 28, 2018 and January 29, 2017, we entered into noncash transactions with a customer for the acquisition of equipment with fair values of approximately $6.7 million and $2.1 million, respectively.
NOTE 5 – PDMCX JOINT VENTURE
In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or “Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our recently established IC business in Xiamen, China, which includes the facility currently under construction. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced process technology to our customers.
As of January 28, 2018, Photronics and DNP have each contributed cash of approximately $12 million to the joint venture. We estimate that, over the next several years, per the agreement, DNP and Photronics will each contribute an additional $43 million of cash and additional local borrowings.
Under the PDMCX joint venture operating agreement (“the Agreement”), DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that arise after the initial two year term of the Agreement and cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance.
We recorded a net loss from the operations of the PDMCX joint venture of approximately $0.5 million, in the first quarter of fiscal year 2018. No gain or loss was recorded upon the formation of the joint venture. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum exposure to loss from PDMCX at January 28, 2018, was $11.6 million.
As required by the guidance in Topic 810 - “Consolidation” of the Accounting Codification Standards, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were the primary beneficiary during the current reporting period; thus, as required, the PDMCX financial results should be consolidated with Photronics, Inc. Our conclusion was based on the fact that we held a controlling financial interest in PDMCX, which resulted from our having the power to direct the activities that most significantly impacted its economic performance, the obligation to absorb losses, and the right to receive benefits that could potentially be significant to PDMCX. Our conclusion that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current period was based on our right to appoint the majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX’s management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of PDMCX’s assets. In addition, as a result of the 50.01% variable interest we held during the current period, we had the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX.
The carrying amounts of PDMCX assets and liabilities, included in our condensed consolidated balance sheet, as of January 28, 2018, are presented in the following table, along with our exposure to loss related to these assets and liabilities.
Classification
|
|
Carrying Amount
|
|
|
Photronics Interest
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
13,864
|
|
|
$
|
6,933
|
|
Non-current assets
|
|
|
12,403
|
|
|
|
6,203
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
26,267
|
|
|
|
13,136
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,038
|
|
|
|
1,519
|
|
Non-current liabilities
|
|
|
16
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,054
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
23,213
|
|
|
$
|
11,609
|
|
NOTE 6 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
|
|
January 28,
2018
|
|
|
October 29,
2017
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due in April 2019
|
|
$
|
57,366
|
|
|
$
|
57,337
|
|
|
|
|
|
|
|
|
|
|
2.77% capital lease obligation payable through July 2018
|
|
|
3,259
|
|
|
|
4,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,625
|
|
|
|
61,976
|
|
Current portion
|
|
|
(3,259
|
)
|
|
|
(4,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,366
|
|
|
$
|
57,337
|
|
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 the following financial covenants: minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance financial covenants, with all of which we were in compliance at January 28, 2018. We had no outstanding borrowings against the credit facility at January 28, 2018, and $50 million was available for borrowing. The interest rate on the credit facility (2.82% at January 28, 2018) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
In August 2013, we entered into a $26.4 million principal amount, five year capital lease 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 January 28, 2018, the total amount payable through August 2018 (the end of the lease term) was $3.3 million, substantially all of which represented principal.
NOTE 7 - SHARE-BASED COMPENSATION
In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by 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 $0.9 million in each of the three month periods ended January 28, 2018 and January 29, 2017, and we received cash from option exercises of $0.7 million and $1.0 million during those respective periods. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the 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 our common stock on the dates of grant 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 rates of return used to calculate the grant date fair value of options issued during the three month periods ended January 28, 2018 and January 29, 2017, are presented in the following table.
|
|
Three Months Ended
|
|
|
|
January 28,
2018
|
|
|
January 29,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
31.6%
|
|
|
|
32.2%
|
|
|
|
|
|
|
|
|
|
|
Risk free rate of return
|
|
|
2.2%
|
|
|
|
1.9%
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
Expected term
|
|
5.0 years
|
|
|
5.0 years
|
|
Information on outstanding and exercisable option awards as of January 28, 2018, is presented below.
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 28, 2018
|
|
|
3,304,820
|
|
|
$
|
7.98
|
|
5.1 years
|
|
$
|
4,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 28, 2018
|
|
|
2,421,655
|
|
|
$
|
7.19
|
|
3.8 years
|
|
$
|
4,441
|
|
There were 252,000 share options granted during the three month period ended January 28, 2018, with a weighted-average grant date fair value of $2.74 per share, and there were 338,750 share options granted during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $3.60 per share. As of January 28, 2018, the total unrecognized compensation cost related to unvested option awards was approximately $2.4 million. That cost is expected to be recognized over a weighted-average amortization period of 2.3 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 is determined on the date of grant, based on the closing price of our common stock. There were 280,000 restricted stock awards issued during the three month period ended January 28, 2018, with a weighted-average grant date fair value of $8.63 per share, and there were 260,000 restricted stock awards issued during the three month period ended January 29, 2017, with a weighted-average grant date fair value of $11.35 per share. As of January 28, 2018, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $4.1 million. That cost is expected to be recognized over a weighted-average amortization period of 3.0 years. As of January 28, 2018, there were 488,673 shares of restricted stock outstanding.
NOTE 8 - INCOME TAXES
The benefit effective tax rate of (23.1%) differs from the post U.S. Tax Reform blended statutory rate of 23.4% in the three month period ended January 28, 2018, primarily due to the benefit from U.S. Tax Reform (as discussed below), earnings being taxed at lower statutory rates in foreign jurisdictions, and the benefit of various investment credits in a foreign jurisdiction.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended, that we expect to have a positive impact on our future after-tax earnings. Under ASC Topic 740 – “Income Taxes” (“ASC 740”), the effects of the new legislation are recognized in the interim and annual accounting periods that include the enactment date, which falls within our interim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under ASC 740 is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose; (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law for where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act.
We continue to analyze the provisions of the Act addressing the net deferred tax asset revaluation and its calculations, the deemed earnings repatriation, including the determination of undistributed non-U.S. earnings, and evaluate potential actions we may consider in light of the Act that could affect our fiscal year of 2018 U.S. taxable income. As such, our accounting for certain elements within the Act is preliminary, and subject to further clarification of the Act by Internal Revenue Service. The following is a discussion of the major provisions of the Act that affect our financial statements, and our preliminary assessment of the impact of such provisions on the statements.
|
·
|
The Act repeals the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provides that existing AMT credit carryforwards are fully refundable over a four year period, starting with the tax year beginning after December 31, 2017. We have approximately $3.9 million of AMT credit carryforwards that we previously determined were not more likely than not going to be realized and, as such, established a valuation allowance for these carryforwards. Accordingly, the Act has changed our determination regarding the realization of the benefit of the carryforwards; therefore, the related valuation allowance has been reversed and the $3.9 million tax benefit has been recorded in our tax provision, excluding any impact of potential future sequestration reductions.
|
|
·
|
As of January 1, 2018, the Act reduces the corporate income tax rate from a maximum 35% to a flat 21%. Our fiscal year 2018 blended statutory tax rate is approximately 23.4%, the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to our 2018 fiscal year prior to the rate change effective January 1, 2018 and the post-enactment U.S. federal statutory tax rate of 21% applicable to the balance of our 2018 fiscal year. The 21% rate will be applicable to fiscal year 2019 and beyond. Under generally accepted accounting principles, we are required to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our preliminary analysis of the two stepped revaluation indicates that our net deferred tax asset will be increased by $2.5 million, with an offsetting change in the related valuation allowance resulting in a provisional net zero impact for our period.
|
|
·
|
The Act imposes a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The transition tax effective rates are 15.5% on accumulated earnings held in cash (as defined by the Act), and 8% on any remaining balance. Our preliminary analysis indicates an estimated deemed repatriation transition tax of $28.4 million. The preliminary analysis also indicates that the entire amount of transition tax will be fully offset by tax credits and/or available loss carryforwards, resulting in a provisional net zero impact on our period, due in part to an offsetting change in the related valuation allowance. We do not expect that future earnings of foreign subsidiaries will be subject to U.S. federal income tax. No change has been or is anticipated to be made with respect to the year-end fiscal year 2017 indefinite reinvestment assertion of foreign subsidiary earnings.
|
|
·
|
Our preliminary analysis of other provisions of the Act, including, but not limited to, 100 percent bonus depreciation and changes to the limitations on the deducibility of meals and entertainment expenses indicate that under our current tax profile there should be limited or no provisional impact for our period.
|
|
·
|
Based on the effective date of certain provisions, we will be subject to additional requirements of tax reform beginning in fiscal year 2019. Those provisions include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion tax benefits (BEAT) from certain payments between a U.S. corporation and foreign subsidiaries, a limitation of certain executive compensation, a deduction for foreign derived intangible income (FDII) and interest expense limitations. We have not completed our analysis of those provisions and the estimated impact.
|
On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17% to 20%. Under generally accepted accounting principles, we are required to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our analysis indicates that our Taiwan deferred tax asset will be increased and, accordingly, a net benefit of $0.2 million is reflected in our period tax provision.
The 19.0% effective tax rate differs from the U.S. statutory rate of 35% in the three month period ended January 29, 2017, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, combined with the benefit of various investment credits in a foreign jurisdiction. Valuation allowances in jurisdictions with historic losses eliminate the tax benefit of these jurisdictions. Two five-year tax holidays in Taiwan, one that expired in 2017 and the other that expires in 2019, reduced foreign taxes by $0.1 million in the three month periods ended January 28, 2018 and January 29, 2017, respectively. These tax holidays had no effect on the earnings per share of either period.
There were unrecognized tax benefits related to uncertain tax positions of $3.7 million at January 28, 2018, and $3.4 million at October 29, 2017, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at January 28, 2018 and October 29, 2017. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, we believe that it is reasonably possible that up to $1.4 million of our 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.
NOTE 9 - EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is presented below.
|
|
Three Months Ended
|
|
|
|
January 28,
2018
|
|
|
January 29,
2017
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
$
|
5,898
|
|
|
$
|
1,946
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Earnings used for diluted earnings per share
|
|
$
|
5,898
|
|
|
$
|
1,946
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares computations:
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for basic earnings per share
|
|
|
68,755
|
|
|
|
68,176
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
617
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
617
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used for diluted earnings per share
|
|
|
69,372
|
|
|
|
69,169
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
Diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
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 be antidilutive.
|
|
Three Months Ended
|
|
|
|
January 28,
2018
|
|
|
January 29,
2017
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
5,542
|
|
|
|
-
|
|
Share-based payment awards
|
|
|
1,583
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares excluded
|
|
|
7,125
|
|
|
|
993
|
|
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables set forth the
changes in our accumulated other comprehensive income by component (net of tax of $0)
for the three month periods ended January 28, 2018 and January 29, 2017.
|
|
Three Months Ended January 28, 2018
|
|
|
|
Foreign Currency
Translation
Adjustments
|
|
|
Amortization
of Cash
Flow Hedge
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2017
|
|
$
|
7,627
|
|
|
$
|
(48
|
)
|
|
$
|
(688
|
)
|
|
$
|
6,891
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
30,087
|
|
|
|
-
|
|
|
|
(32
|
)
|
|
|
30,055
|
|
Amounts reclassified from other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
30,087
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
30,087
|
|
Less: other comprehensive (income)loss attributable to noncontrolling interests
|
|
|
(4,866
|
)
|
|
|
-
|
|
|
|
16
|
|
|
|
(4,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2018
|
|
$
|
32,848
|
|
|
$
|
(16
|
)
|
|
$
|
(704
|
)
|
|
$
|
32,128
|
|
|
|
Three Months Ended January 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 (loss) before reclassifications
|
|
|
(614
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(634
|
)
|
Amounts reclassified from other comprehensive income
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(614
|
)
|
|
|
32
|
|
|
|
(20
|
)
|
|
|
(602
|
)
|
Less: other comprehensive (income)loss attributable to noncontrolling interests
|
|
|
(1,267
|
)
|
|
|
-
|
|
|
|
10
|
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2017
|
|
$
|
(8,448
|
)
|
|
$
|
(145
|
)
|
|
$
|
(937
|
)
|
|
$
|
(9,530
|
)
|
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at January 28, 2018 or October 29, 2017. The assets acquired in connection with our acquisition discussed in Note 4 were recorded at fair value.
Fair Value of Other Financial Instruments
The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of our convertible senior notes is a Level 2 measurement, as 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 January 28, 2018 and October 29, 2017.
|
|
January 28, 2018
|
|
|
October 29, 2017
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% convertible senior notes due 2019
|
|
$
|
64,486
|
|
|
$
|
57,366
|
|
|
$
|
67,396
|
|
|
$
|
57,337
|
|
NOTE 12 - COMMITMENTS AND CONTINGENCIES
As of January 28, 2018, the Company had commitments outstanding for capital equipment expenditures of approximately $190 million.
The Company is subject to various claims that arise in the ordinary course of business. We believe that such claims, individually or in the aggregate, will not have a material effect on the condensed consolidated financial statements.
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where the accounting under ASC Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, and changed existing U.S. tax law. We adopted this guidance in our first quarter of fiscal year 2018. Please see Note 8 for a discussion of the effects of adopting this guidance.
In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for Photronics, Inc. in its first quarter of fiscal year 2019 and should be applied on a retrospective transition basis. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the effect that 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, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for us in our first quarter of fiscal year 2019 and should be applied on a modified retrospective transition basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. 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 inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 is effective for Photronics, Inc. in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2019. We are currently evaluating the effect that 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. Adoption of this guidance in the first quarter of our fiscal year 2018 did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. ASU 2016-02 is to be adopted using a modified retrospective approach, which includes a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. The ASU is effective for Photronics, Inc. in the first quarter of fiscal year 2020, with early application permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
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 Photronics, Inc. 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 accelerated recognition of certain revenue streams as, upon adoption of this Update, some 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 guidance using the modified retrospective approach.